-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sez5RSipwK1wGz0yQ5X5SBUUNIKl88V1d7tY8R3ZqeGRJCTdBCcvTzS0WzcsJ736 ifoQbkhj1eEgQcr5rWgp0Q== 0000950124-97-005094.txt : 19971009 0000950124-97-005094.hdr.sgml : 19971009 ACCESSION NUMBER: 0000950124-97-005094 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19971008 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN ITALIAN PASTA CO CENTRAL INDEX KEY: 0000849667 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FOOD PREPARATIONS & KINDRED PRODUCTS [2090] IRS NUMBER: 841032638 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-32827 FILM NUMBER: 97692106 BUSINESS ADDRESS: STREET 1: 1000 ITALIAN WAY CITY: EXCELSIOR SPRINGS STATE: MO ZIP: 64024 BUSINESS PHONE: 8165026000 MAIL ADDRESS: STREET 1: 1000 ITALIAN WAY CITY: EXCELSIOR SPRINGS STATE: MO ZIP: 64024 S-1/A 1 AMENDMENT #4 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1997 REGISTRATION NO. 333-32827 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ AMERICAN ITALIAN PASTA COMPANY (Exact name of registrant as specified in its charter) DELAWARE 2099 84-1032638 (State or other jurisdiction (Primary Standard Industrial (IRS Employer of incorporation or Classification Code Number) Identification No.) organization)
1000 ITALIAN WAY EXCELSIOR SPRINGS, MISSOURI 64024 (816) 502-6000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) TIMOTHY S. WEBSTER PRESIDENT AND CHIEF EXECUTIVE OFFICER AMERICAN ITALIAN PASTA COMPANY 1000 ITALIAN WAY EXCELSIOR SPRINGS, MISSOURI 64024 (816) 502-6000 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ Copies to: JAMES A. HEETER, ESQ. JOHN J. MCCARTHY, JR., ESQ. SONNENSCHEIN NATH & ROSENTHAL DAVIS POLK & WARDWELL 4520 MAIN STREET, SUITE 1100 450 LEXINGTON AVENUE KANSAS CITY, MISSOURI 64111 NEW YORK, NEW YORK 10017 (816) 932-4400 (212) 450-4000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____________ If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE
======================================================================================================================== AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO REGISTERED(1) OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION FEE(3) BE REGISTERED SHARE(2) PRICE(2) - ------------------------------------------------------------------------------------------------------------------------ Class A Convertible Common Stock, $.001 par value................... 9,085,000 shares $17.00 $154,445,000 $46,801.52 ========================================================================================================================
(1) Includes 1,185,000 shares which the U.S. Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933. (3) $34,953.03 of which has been previously paid. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 EXPLANATORY NOTE This Registration Statement contains two forms of prospectus: one to be used in connection with a United States and Canadian offering of the registrant's Class A Common Stock (the "U.S. Prospectus") and one to be used in connection with a concurrent international offering of the Class A Common Stock (the "International Prospectus" and, together with the U.S. Prospectus, the "Prospectuses"). The International Prospectus will be identical to the U.S. Prospectus except that it will have a different front cover page. The U.S. Prospectus is included herein and is followed by the front cover page to be used in the International Prospectus. The front cover page for the International Prospectus included herein has been labeled "Alternate International Cover Page." 3 PROSPECTUS (Subject to Completion) Issued October 8, 1997 7,900,000 Shares AIPC LOGO American Italian Pasta Company CLASS A COMMON STOCK ------------------------ OF THE 7,900,000 SHARES OF CLASS A COMMON STOCK BEING OFFERED HEREBY, 5,310,000 SHARES ARE BEING SOLD BY THE COMPANY AND 2,590,000 SHARES ARE BEING SOLD BY THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES OF CLASS A COMMON STOCK BY SUCH SELLING STOCKHOLDERS. OF THE 7,900,000 SHARES OF CLASS A COMMON STOCK BEING OFFERED HEREBY, 6,320,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND 1,580,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." PRIOR TO THE OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE CLASS A COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE PER SHARE WILL BE BETWEEN $15 AND $17. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. ------------------------ THE COMPANY HAS TWO CLASSES OF AUTHORIZED COMMON STOCK CONSISTING OF THE CLASS A COMMON STOCK OFFERED HEREBY AND CLASS B COMMON STOCK. SEE "DESCRIPTION OF CAPITAL STOCK." HOLDERS OF CLASS A COMMON STOCK ARE ENTITLED TO ONE VOTE PER SHARE ON EACH MATTER SUBMITTED TO A VOTE OF STOCKHOLDERS. THE CLASS B COMMON STOCK IS NON-VOTING EXCEPT UNDER CERTAIN LIMITED CIRCUMSTANCES AND AS REQUIRED BY LAW. ALL HOLDERS OF COMMON STOCK ARE ENTITLED TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS, IF ANY, AS MAY BE DECLARED FROM TIME TO TIME BY THE BOARD OF DIRECTORS. ------------------------ THE CLASS A COMMON STOCK HAS BEEN APPROVED FOR LISTING, SUBJECT TO OFFICIAL NOTICE OF ISSUANCE, ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL "PLB." ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $ A SHARE ------------------------
Underwriting Price to Discounts and Proceeds to Proceeds to Selling Public Commissions(1) Company(2) Stockholders -------- -------------- ----------- ------------------- Per Share............... $ $ $ $ Total(3)................ $ $ $ $
- ------------ (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriters." (2) Before deducting expenses payable by the Company estimated at $1,350,000. (3) The Company and certain stockholders have granted to the U.S. Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 1,185,000 additional Shares of Class A Common Stock at the Price to Public less Underwriting Discounts and Commissions, for the purpose of covering over-allotments, if any. If the U.S. Underwriters exercise such option in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Stockholders will be $ , $ , $ , and $ , respectively. See "Underwriters." ------------------------ The Shares of Class A Common Stock are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein and subject to approval of certain legal matters by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that delivery of the Shares of Class A Common Stock will be made on or about October , 1997 at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in immediately available funds. ------------------------ MORGAN STANLEY DEAN WITTER BT ALEX. BROWN GOLDMAN, SACHS & CO. GEORGE K. BAUM & COMPANY , 1997 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. 4 AIPC'S PASTA LABELLA(R) BRANDED PASTA MUELLER'S(R) IS A REGISTERED TRADEMARK OF CPC INTERNATIONAL INC. PRODUCTS TO BE PRODUCED BY AIPC FOR CPC INTERNATIONAL INC. AIPC'S PRIVATE LABEL AND BRANDED PASTA 2 5 NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY THE SELLING STOCKHOLDERS OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE CLASS A COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------ UNTIL NOVEMBER , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ FOR INVESTORS OUTSIDE THE UNITED STATES: NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY, BY THE SELLING STOCKHOLDERS OR BY ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC OFFERING OF THE CLASS A COMMON STOCK OR POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN ANY JURISDICTION WHERE ACTION FOR THAT PURPOSE IS REQUIRED, OTHER THAN IN THE UNITED STATES. PERSONS INTO WHOSE POSSESSION THIS PROSPECTUS COMES ARE REQUIRED BY THE COMPANY, THE SELLING STOCKHOLDERS AND THE UNDERWRITERS TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THE OFFERING OF THE CLASS A COMMON STOCK AND THE DISTRIBUTION OF THIS PROSPECTUS. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary..................... 4 Risk Factors........................... 10 Use of Proceeds........................ 17 Dividend Policy........................ 17 Capitalization......................... 18 Dilution............................... 19 Selected Financial and Other Data...... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 22 Business............................... 32 Management............................. 43
PAGE ---- Certain Relationships and Related Transactions......................... 53 Principal and Selling Stockholders..... 56 Description of Capital Stock........... 58 Shares Eligible for Future Sale........ 61 Certain United States Federal Income Tax Considerations for Non-U.S. Holders.............................. 63 Underwriters........................... 66 Legal Matters.......................... 69 Experts................................ 70 Additional Information................. 70 Index to Audited Financial Statements........................... F-1
------------------------ This Prospectus contains forward-looking statements and information based on management's beliefs or assumptions made by and information currently available to management that involve risks and uncertainties. If one or more of these risks or uncertainties materialize, or should such assumptions prove incorrect, the Company's actual results may be materially different from those anticipated. Factors that may cause such differences include, but are not limited to, those discussed under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company undertakes no obligation to update any such forward-looking statements to reflect future events or developments. ------------------------ CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF THE CLASS A COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS." 3 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all references in this Prospectus to (i) the "Company" and "AIPC" shall mean American Italian Pasta Company, a Delaware corporation, and its predecessor unless the context otherwise requires; and (ii) "pasta" shall mean dry pasta, including dry pasta used in shelf-stable, frozen and canned pasta products. Unless otherwise indicated, all information in this Prospectus has been adjusted to give effect to the Recapitalization (as defined herein) and assumes the U.S. Underwriters' over-allotment option is not exercised. THE COMPANY OVERVIEW AIPC is the third largest and one of the fastest-growing producers and marketers of pasta in North America. The Company commenced operations in 1988 with the North American introduction of new, highly-efficient durum wheat milling and pasta production technology. Management believes that the Company's singular focus on pasta, vertically-integrated facilities, continued technological improvements and development of a highly-skilled workforce enable AIPC to produce high-quality pasta at costs below those of many of its competitors. Management believes that the combination of the Company's cost structure, the average age of its competitors' North American pasta production equipment and the growing pasta consumption in North America creates significant opportunities for continued growth. The Company's revenue and operating income excluding product introduction costs were $121.6 million and $16.7 million, respectively, for the calendar year ended December 31, 1996, and grew at compound annual growth rates ("CAGR") of 33% and 33%, respectively, over the five-year period ended December 31, 1996. During the nine-month period ended June 30, 1997, the Company had revenue of $93.6 million and an operating margin excluding product introduction costs of 15.9%. The Company has rapidly established a significant market presence in North America by developing strategic customer relationships with food industry leaders that have substantial pasta requirements. North American pasta consumption exceeded 5.0 billion pounds in 1995 and is expected to grow based on industry and trade sources and the Company's own analysis. The Company has a long-term supply agreement with Sysco Corporation ("Sysco"), the nation's largest marketer and distributor of foodservice products. In 1998, AIPC will become the exclusive producer of Mueller's(R), the largest pasta brand in the United States, pursuant to a recent long-term manufacturing and distribution agreement with CPC International Inc. ("CPC"). CPC has announced its intention to close its current pasta production facility by December 1997. AIPC is also the primary supplier of pasta to Sam's Wholesale Club ("Sam's Club"), the largest club store chain in the United States, and supplies private label and branded pasta to six of the 10 largest grocery retailers in the United States, including Wal*Mart, A&P, Publix, Albertsons, American Stores and Winn-Dixie. In addition, AIPC has developed supply relationships with leading food processors, such as Pillsbury, General Mills and Kraft Foods which use the Company's pasta as an ingredient in branded food products. The Company produces more than 80 dry pasta shapes in two vertically-integrated production and distribution facilities, strategically located in Excelsior Springs, Missouri and Columbia, South Carolina. 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 pasta production technology. Management believes that this plant continues to be among the most efficient and highly-automated pasta facilities in North America. The South Carolina plant, which commenced operations in 1995, produces only pasta shapes conducive to high-volume production and employs a highly-skilled, self-managed workforce. Management believes that the South Carolina plant is the most efficient pasta facility in North America in terms of productivity and conversion cost per pound. To meet the significant volume requirements of the CPC agreement and support future growth, the Company commenced a capital expenditure program in 1997 to nearly double the 4 7 Company's annual pasta production capacity and add a highly-automated durum wheat mill to its South Carolina plant, with completion scheduled for 1998. OPERATING STRATEGY The Company's operating strategy is to grow revenues and profitability by offering customers the highest quality pasta products at competitive prices with superior customer service. Key elements of the Company's operating strategy are to: - Continue to Lead the Industry as the Lowest Cost Producer of High Quality Pasta. AIPC has successfully implemented production and capital investment strategies designed to achieve low-cost production of high-quality products. AIPC has distinguished itself from most major pasta producers by vertically integrating the durum wheat milling function with the production process and strategically locating its distribution centers. Management believes that its facilities are among the most efficient pasta production facilities in North America in terms of productivity and conversion cost per pound, and that its vertically-integrated processes produce pasta of superior color, texture, flavor and consistency. The Company expects to realize additional operating efficiencies through the completion of the current expansion program at its South Carolina and Missouri facilities and ongoing improvement programs. - Expand Customer-Driven Strategy. The Company is committed to developing and maintaining strategic relationships with customers who (i) are food industry leaders requiring a significant volume of high-quality pasta; (ii) have committed marketing and sales resources to growing their pasta business; and (iii) pursue long-term supply arrangements. The Company has followed this strategy since commencing operations in 1988, beginning with an agreement with Sysco, and has developed strategic supply relationships with CPC, Sam's Club and leading grocery retailers. Management believes that these strategic relationships increase operating efficiencies, enhance AIPC's investment in new technology, create distribution synergies, and enable closer involvement in its customers' pasta businesses. - Provide Superior Customer Service. The Company develops and enhances customer relationships by providing superior service and technical support to its customers. The Company has invested heavily in the development of a broad range of customer service programs, including electronic data interchange ("EDI") and efficient consumer response ("ECR") which streamline the order, invoicing and inventory management functions. The Company provides marketing, technical and service support to its customers by assisting customers with supply and category management decisions, producing pasta to its customers' specifications and making operational recommendations to its customers using pasta as an ingredient in their food products. GROWTH STRATEGY The Company continues to implement its growth strategy, which builds on the Company's operating strategy and industry trends. Key elements of the Company's growth strategy are to: - Successfully Implement CPC Business Expansion. The Company was recently selected to be the exclusive producer of CPC's Mueller's brand pasta, the largest pasta brand in North America. Upon completion of AIPC's capacity expansion in 1998, management anticipates CPC's annual volume requirements will represent an approximately 60% increase over the Company's fiscal 1997 production run rate. Management believes that the Company's experience in servicing large pasta supply agreements and its current capacity expansion program will enable AIPC to meet the current CPC volume requirements and support potential future growth. - Pursue Strategic Alliances. The Company believes that commercial users and marketers of pasta will continue to require increasing quantities of pasta and that a greater portion of these requirements will be outsourced to more efficient producers of high-quality pasta, such as AIPC. Management has identified additional strategic opportunities with commercial users and marketers of pasta which may result in incremental growth, new product development and cost savings opportunities in the future. 5 8 - Secure Additional Private Label Customers. The Company intends to continue to grow its private label customer base and secure additional private label customers by continuing to offer quality products, competitive pricing, category management and superior customer service. Management believes that AIPC's prospects for growth in the private label market have been enhanced since Borden Foods Holdings Corporation ("Borden"), historically the largest private label supplier in North America, announced its intention to exit the private label pasta business in 1997. - Continue Product Innovation. In 1995, the Company introduced Pasta LaBella(R) flavored pasta, a line of all natural, full-flavored pasta products utilizing patented flavoring technology and AIPC's proprietary production process. In addition to pursuing increased sales with institutional customers, the Company is exploring potential sales and marketing alliances to expand retail distribution of Pasta LaBella flavored pasta. AIPC also intends to continue assisting its customers with innovative products and packaging, and the development of additional value-added products intended to generate higher margins than traditional pasta products. The Company was incorporated under the laws of the State of Delaware in 1991, and is the successor by merger of a Colorado corporation incorporated in 1986. The Company's executive offices are located at 1000 Italian Way, Excelsior Springs, Missouri 64024, and its telephone number is (816) 502-6000. The Company's home page on the World Wide Web is located at http://www.pastalabella.com. Information contained in the Company's home page shall not be deemed to be a part of this Prospectus. RECAPITALIZATION Prior to the Offering, the Company amended and restated its Certificate of Incorporation (as so amended, the "Charter") and effected a recapitalization (the "Recapitalization"), pursuant to which each share of common stock and Class A common stock of the Company outstanding immediately prior to the Recapitalization was converted into 6.132043 shares of Class A Common Stock, par value $.001 per share, of the Company ("Class A Common Stock"). Shares of Class A Common Stock held by the Morgan Stanley Stockholders (as defined herein) and certain related persons are, in certain circumstances, convertible into an equal number of shares of Class B Non-Voting Common Stock, par value $.001 per share, of the Company ("Class B Common Stock") and vice versa. The Company's Charter provides that if at any time after consummation of the Offering, the Morgan Stanley Stockholders own in excess of 49% of the outstanding Class A Common Stock, such excess will be automatically converted on a one-for-one basis into shares of Class B Common Stock. persons other than the Morgan Stanley Stockholders and such related persons are not convertible into Class B Common Stock. Unless otherwise indicated, all references in this Prospectus to "Common Stock" shall mean, collectively, the Class A Common Stock and the Class B Common Stock. See "Description of Capital Stock -- General." OWNERSHIP As of the date of this Prospectus, The Morgan Stanley Leveraged Equity Fund II, L.P. ("MSLEF"), Morgan Stanley Capital Partners III, L.P. and certain affiliated funds (the "MSCP Funds" and with MSLEF, the "Morgan Stanley Stockholders") own approximately 75.1% of the outstanding Common Stock. Upon consummation of the Offering, the Morgan Stanley Stockholders will own approximately 39.6% of the outstanding Common Stock. The Company and certain stockholders may sell up to 1,185,000 shares of Class A Common Stock in connection with the Offering, but only to the extent that the Underwriters exercise their overallotment option. See "Principal and Selling Stockholders" and "Underwriters." 6 9 THE OFFERING Class A Common Stock offered by: The Company........................................ 5,310,000 Shares The Selling Stockholders........................... 2,590,000 Shares(1) ---------------------------------------------- Total......................................... 7,900,000 Shares ============================================== Class A Common Stock offered in: U.S. Offering...................................... 6,320,000 Shares International Offering............................. 1,580,000 Shares ---------------------------------------------- Total......................................... 7,900,000 Shares ============================================== Common Stock outstanding after the Offering.......... 16,776,056 Shares(2) Use of proceeds...................................... The net proceeds to the Company from the Offering will be used to repay existing indebtedness, fund expansion of the Company's facilities and for general corporate purposes. The Company will not receive any proceeds from the sale of Class A Common Stock by any Selling Stockholder. See "Use of Proceeds." New York Stock Exchange Symbol....................... PLB
- ------------------------- (1) Of such shares, 630,000 shares are being offered by Thompson Holdings, L.P. ("Thompson Holdings"), a limited partnership of which Richard C. Thompson, a director of the Company, is the only limited partner, 1,375,893 shares are being offered by MSLEF and 584,107 shares are being offered by Morgan Stanley Capital Partners III, L.P. Thompson Holdings, MSLEF and Morgan Stanley Capital Partners III, L.P. are sometimes referred to herein collectively as the "Selling Stockholders." Such shares do not include up to 1,185,000 shares that may be sold by the Company and certain stockholders pursuant to the exercise of the U.S. Underwriters' over-allotment option. See "Principal and Selling Stockholders." (2) Does not include the U.S. Underwriters' over-allotment option. Excludes (i) 1,132,049 shares, 46,665 shares and 993,391 shares of Class A Common Stock reserved for issuance upon the exercise of outstanding stock options under the Company's 1992 Non-Statutory Stock Option Plan (the "1992 Plan"), 1993 Non-Qualified Stock Option Plan (the "1993 Plan") and 1997 Equity Incentive Plan (the "1997 Plan"), respectively; and (ii) 69,832 shares, 36,118 shares and 1,006,609 shares of Class A Common Stock available for future grants under the 1992 Plan, the 1993 Plan and the 1997 Plan, respectively. See "Management -- Stock Option Plans." RISK FACTORS See "Risk Factors" for a discussion of certain factors that should be considered in evaluating an investment in the Class A Common Stock. 7 10 SUMMARY FINANCIAL AND OPERATING DATA The following summary financial and operating data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Financial Statements of the Company, including the Notes thereto, appearing elsewhere in this Prospectus. In 1996, the Company changed its fiscal year end from December 31 to the last Friday of September or the first Friday of October. This change resulted in a nine-month fiscal period ended September 30, 1996, and will result in a 53-week year for fiscal 1997, and a 52- or 53-week year for all subsequent fiscal years. The Company's first three fiscal quarters end on the Friday last preceding December 31, March 31, and June 30 of each year. For purposes of this Prospectus, the 1996 fiscal year is described as the nine-month fiscal period ended September 30, 1996, and the nine-month 1996 and 1997 interim periods are described as having ended June 30. The statement of operations data of the Company for the calendar year ended December 31, 1996 and the nine-month period ended June 30, 1996 are included herein only for comparison purposes.
NINE-MONTH NINE-MONTH CALENDAR FISCAL PERIOD PERIOD ENDED FISCAL YEAR ENDED DECEMBER 31, YEAR ENDED ENDED JUNE 30, ------------------------------------- DECEMBER 31, SEPTEMBER 30, ---------------------- 1992 1993 1994 1995 1996 1996 1996 1997 ---- ---- ---- ---- ------------ ------------- ---- ---- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES) STATEMENT OF OPERATIONS DATA: Revenues........................ $39,049 $47,872 $69,465 $92,903 $121,621 $92,074 $86,514 $ 93,616 Cost of goods sold.............. 28,750 35,081 54,393 73,851 89,704 68,555 65,697 67,821 Plant expansion costs(1)........ -- 1,171 484 2,065 -- -- 425 -- ------- ------- ------- ------- -------- ------- ------- -------- Gross profit.................... 10,299 11,620 14,588 16,987 31,917 23,519 20,392 25,795 Selling and marketing expense, including product introduction costs(2)...................... 2,888 2,883 3,792 5,303 21,250 16,798 11,236 10,212 General and administrative expense....................... 2,077 2,049 1,951 2,930 3,498 2,805 2,741 2,855 ------- ------- ------- ------- -------- ------- ------- -------- Operating profit................ 5,334 6,688 8,845 8,754 7,169 3,916 6,415 12,728 Interest expense, net........... 5,396 3,210 4,975 8,008 10,575 8,023 8,030 7,800 ------- ------- ------- ------- -------- ------- ------- -------- Income (loss) before income tax and extraordinary loss........ (62) 3,478 3,870 746 (3,406) (4,107) (1,615) 4,928 Income tax...................... -- (3,221) 1,484 270 (1,288) (1,556) (642) 1,878 Extraordinary loss, net of income tax(3)................. 2,639 -- 204 -- 1,647 1,647 1,647 -- ------- ------- ------- ------- -------- ------- ------- -------- Net income (loss)............... $(2,701) $ 6,699 $ 2,182 $ 476 $ (3,765) $(4,198) $(2,620) $ 3,050 ======= ======= ======= ======= ======== ======= ======= ======== Pro forma net income (loss) per common share(4)............... $ (.39) $ .66 $ .21 $ .05 $ (.37) $ (.41) $ (.25) $ .25 Pro forma weighted average common shares outstanding(4)................ 6,943 10,219 10,231 10,275 10,305 10,303 10,296 12,160 OTHER DATA: EBITDA(5)....................... $ 7,993 $ 9,495 $12,408 $13,836 $ 12,460 $ 8,994 $11,395 $ 18,037 EBITDA as a percent of revenues(5)................... 20.5% 19.8% 17.9% 14.9% 10.2% 9.8% 13.2% 19.3% Revenue per employee (end of period)............... $ 209 $ 244 $ 288 $ 361 $ 437 NM NM NM Working capital excluding current maturities of long-term debt (average for the period) as a percent of revenues...................... 17.3% 14.2% 12.0% 4.6% 6.5% NM NM NM Cash flows provided by (used in): Operating activities.......... $ 966 $ 4,787 $ 3,690 $ 5,730 $ (5,013) $(7,477) $(4,155) $ 14,076 Investing activities.......... (1,000) (15,139) (25,431) (38,789) (3,870) (3,041) (6,084) (11,464) Financing activities.......... 2,142 10,382 19,603 33,066 10,543 12,318 11,722 (1,818) Earnings to fixed charges....... .50x 1.87x 1.48x .92x .52x .28x .59x 1.60x
AS OF JUNE 30, 1997 ------------------------- ACTUAL AS ADJUSTED(6) ------ -------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................... $ 2,612 $ 16,443 Working capital............................................. 13,276 29,982 Total assets................................................ 145,462 159,293 Long-term debt, less current maturities..................... 89,500 28,543 Stockholders' equity........................................ 40,977 118,640
(footnotes appear on following page) 8 11 (footnotes from previous page) - ------------------------- (1) Plant expansion costs include incremental direct and indirect manufacturing and distribution costs which are incurred as a result of construction, commissioning and start-up of new capital assets. These costs are expensed as incurred but are unrelated to current production and, therefore, are reported as a separate line item in the statement of operations. (2) Selling and marketing expense includes incremental product introduction costs, including payment of product placement or "slotting" fees, related to the Company's launch of its Pasta LaBella flavored pasta products into the U.S. retail grocery market. The Company did not incur such product introduction costs prior to the calendar year ended December 31, 1996. Product introduction costs were incurred as follows: $9.6 million for the calendar year ended December 31, 1996, $8.1 million for the nine-month period ended September 30, 1996, $4.6 million for the nine-month period ended June 30, 1996 and $2.1 million for the nine-month period June 30, 1997. (3) Represents losses due to early extinguishment of long-term debt, net of income tax. (4) Earnings per share is presented on a pro forma basis giving effect to the consummation of the Recapitalization in connection with the Offering. (5) EBITDA represents earnings before interest, income taxes, depreciation and amortization, thereby removing the effect of certain non-cash charges on income. Management believes that EBITDA is a meaningful measure of operating performance, cash generation and ability to service debt. However, EBITDA should not be considered as an alternative either to: (i) net earnings (determined in accordance with U.S. generally accepted accounting principles ("GAAP")); (ii) operating cash flow (determined in accordance with GAAP); or (iii) liquidity. There can be no assurance that the Company's calculation of EBITDA is comparable to similarly-titled items reported by other companies. (6) Adjusted to give effect to the issuance and sale by the Company of 5,310,000 shares of Class A Common Stock in the Offering at an assumed initial public offering price per share of $16 and the application of the net proceeds to the Company therefrom. See "Use of Proceeds" and "Capitalization." 9 12 RISK FACTORS In addition to the other information in this Prospectus, prospective investors should carefully consider the following risk factors in evaluating an investment in the shares of Class A Common Stock offered hereby. DEPENDENCE ON MAJOR CUSTOMERS Historically, a limited number of customers have accounted for a substantial portion of the Company's revenues. During 1994, 1995, the nine-month fiscal period ended September 30, 1996, and the nine-month period ended June 30, 1997, Sysco accounted for approximately 38%, 33%, 27% and 27%, respectively, and sales to Sam's Club accounted for approximately 12%, 23%, 20% and 21%, respectively, of the Company's revenues. The Company expects it will continue to rely on a limited number of major customers for a substantial portion of its revenues in the future. Management believes that a majority of the Company's fiscal 1998 revenues will be derived from combined sales to Sysco, Sam's Club and CPC. The Company has an exclusive supply contract with Sysco (the "Sysco Agreement") through June 2000, subject to renewal by Sysco for two additional three-year periods. The Company recently entered into a long-term manufacturing and distribution agreement with CPC (the "CPC Agreement") that requires CPC to purchase a minimum of 175 million pounds of pasta annually for nine years. The Company does not have supply contracts with a substantial number of its customers, including Sam's Club. Accordingly, the Company is dependent upon its customers to sell the Company's products and to assist the Company in promoting market acceptance of, and creating demand for, the Company's products. An adverse change in, or termination or expiration without renewal of, the Company's relationships with or the financial viability of one or more of its major customers could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, certain exclusivity provisions of the Sysco Agreement and CPC Agreement prevent AIPC from producing and supplying competitors of Sysco and CPC with certain pasta products. Under the Sysco Agreement, the Company is restricted from supplying pasta products to foodservice businesses other than Sysco. Without CPC's consent, AIPC may not produce branded retail pasta for Borden, Hershey Foods Corporation ("Hershey") or Barilla Alimentare S.p.A. ("Barilla"), and is limited to the production of an aggregate of 12 million pounds of branded pasta products annually for other producers. See "Business -- Production and Supply Agreements." MANAGEMENT OF GROWTH AND IMPLEMENTATION OF CPC BUSINESS The Company has experienced rapid growth and management expects significant additional growth in the future. Successful management of any such future growth will require the Company to continue to invest in and enhance its operational, financial and management information resources and systems, attract and retain management personnel to manage such resources and systems, accurately forecast sales demand and meet such demand, accurately forecast retail sales, control its overhead, and attract, train, motivate and manage its employees effectively. There can be no assurance that the Company will continue to grow, or that it will be effective in managing its future growth. Any failure to effectively manage growth could have a material adverse effect on the Company's business, financial condition and results of operations. During 1998, the Company will be required to produce substantially all of CPC's Mueller's brand pasta, which has averaged approximately 200 million pounds of pasta annually over the last five years. To meet its significant volume and other obligations under the CPC Agreement and provide for future growth, the Company must successfully complete its 1997-1998 capital expansion program to increase its overall milling, production and distribution capacity by approximately 100%. Implementation of the CPC Agreement may also adversely affect the Company's financial, operational and human resources. There can be no assurance that the Company's planned expansion of its production facilities will be completed in a timely and cost-effective manner or at all, or that such expanded facilities will be adequate to meet the CPC volume requirements and any future growth. Failure to complete the Company's planned capital expansion in a timely and cost-effective manner and implement the CPC Agreement could have a material adverse effect on the Company's business, financial condition and results of operations. 10 13 SUBSTANTIAL PLANNED INVESTMENTS IN MILLING AND PRODUCTION FACILITIES The Company has begun a major expansion of its durum wheat milling and pasta production and distribution facilities, budgeted to cost approximately $86 million during the 1997 and 1998 fiscal years, which is planned to increase AIPC's overall milling, production and distribution capacity by approximately 100%. There can be no assurance that the Company will be able to complete this expansion on schedule, within budget or at all, that the expanded facilities will result in the anticipated increase in production capacity or that future revenues from products produced at the expanded facilities will be sufficient to recover the Company's investment in the expansion. In addition, there can be no assurance that the Company will be able to calibrate its production capacity to future changes in demand for its products or that any future additions to, or expansions of, its facilities will be completed on schedule and within budget. Any significant delay or cost overrun in the construction or acquisition of new or expanded facilities could have a material adverse effect on the Company's business, financial condition and results of operations. RAW MATERIALS The principal raw material in the Company's products is durum wheat. Durum wheat is used almost exclusively in pasta production and is a narrowly traded, cash only commodity crop. The Company attempts to minimize the effects of durum wheat cost fluctuations through forward purchase contracts and raw material cost-based pricing agreements with many of its customers. The Company's commodity procurement and pricing practices are intended to reduce the risk of durum wheat cost increases on profitability, but also may temporarily affect the Company's ability to benefit from possible durum wheat cost decreases. The supply and price of durum wheat is subject to market conditions and is influenced by numerous factors beyond the control of the Company, including general economic conditions, natural disasters and weather conditions, competition, and governmental programs and regulations. The supply and cost of durum wheat may also be adversely affected by insects, plant diseases and funguses, including the karnal bunt fungus which infected a portion of the durum wheat produced in the southwestern United States in 1996 and in central Texas in 1997. The Company also relies on the supply of plastic, corrugated and other packaging materials. The costs of durum wheat and packaging materials have varied widely in recent years and future changes in such costs may cause the Company's results of operations and margins to fluctuate significantly. A large, rapid increase in the cost of raw materials could have a material adverse effect on the Company's operating profit and margins unless and until the increased cost can be passed along to customers. Following a period of relatively stable prices during the nine months ended June 30, 1997, the market price of durum wheat increased by approximately 21% from $5.60 per bushel to $6.75 per bushel between June 30, 1997 and October 6, 1997. Historically, changes in prices of the Company's pasta products have lagged changes in the Company's materials costs. Competitive pressures may also limit the ability of the Company to raise prices in response to increased raw material costs in the future. Accordingly, there can be no assurance as to whether, or the extent to which, the Company will be able to offset raw material cost increases with increased product prices. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Raw Materials and Supplies." COMPETITION The Company operates in a highly-competitive environment against numerous well-established national, regional and foreign companies, and many smaller companies in the procurement of raw materials, the development of new pasta products and product lines, the improvement and expansion of previously introduced pasta products and product lines and the production, marketing and distribution of pasta products. Several of these companies have longer operating histories, broader product lines, significantly greater brand recognition and greater production capacity and financial and other resources than the Company. The Company's direct competitors include large multi-national companies such as food industry leader Hershey with brands such as San Giorgio(R) and Ronzoni(R), and Borden with brands such as Prince(R) and Creamette(R), regional U.S. producers of retail and institutional pasta such as Dakota Growers Pasta Company ("Dakota Growers"), a farmer-owned cooperative in North Dakota, Philadelphia Macaroni Co. Inc. ("Philadelphia Macaroni") and A. Zerega's Sons, Inc. ("Zerega's"), each an independent producer, and foreign companies such as Italian pasta producers De Cecco ("De Cecco") and Barilla. 11 14 The Company's competitive environment depends to a significant extent on the aggregate industry capacity relative to aggregate demand for pasta products. Several domestic pasta producers have recently completed production facility additions or announced their intention to increase domestic production capacity. In addition to AIPC's planned capital expansion, management believes that these capacity additions represent more than 200 million pounds in aggregate. Dakota Growers recently increased the capacity of its durum wheat mill and has announced plans to complete a pasta production capacity expansion in excess of 100 million pounds by the end of 1997. Hershey recently added approximately 50 million pounds of pasta capacity to its facility in Winchester, Virginia. In September 1997, Barilla announced plans to build a pasta plant near Ames, Iowa with an estimated annual pasta capacity of over 200 million pounds. Two major pasta producers have also recently announced planned reductions in pasta production capacity. Borden announced that it will close or sell five of its ten North American pasta plants by the end of 1997, and CPC intends to eliminate its capacity of approximately 180 million pounds by the end of 1997. Increases in industry capacity levels above demand for pasta products could have a material adverse effect on the Company's business, financial condition and results of operations. Several foreign producers, based principally in Italy and Turkey, have aggressively targeted the U.S. pasta market in recent years. In 1996, a U.S. Department of Commerce investigation revealed that several Italian and Turkish producers were engaging in unfair trade practices by selling pasta at less than fair value in the U.S. markets and benefitting from subsidies from their respective governments. Effective July 1996, the U.S. International Trade Commission ("ITC"), imposed anti-dumping and countervailing duties on Italian and Turkish imports. While such duties may enable the Company and its domestic competitors to compete more favorably against Italian and Turkish producers in the U.S. pasta market, there can be no assurance that the duties will be maintained for any length of time, or that these or other foreign producers will not sell competing products in the United States at prices less than those of the Company. Such practices, if continued or increased, could have a material adverse effect on the Company's business, financial condition and results of operations. Bulk imported pasta, and pasta produced in the U.S. by foreign firms, are generally not subject to such anti-dumping and countervailing duties. Foreign pasta producers generally may avoid such duties by importing bulk pasta into the United States and repackaging it in U.S. facilities for distribution. A leading branded Italian producer, Barilla, opened a bulk pasta repackaging and distribution facility in Syracuse, New York in 1996 and recently announced plans to build a pasta production plant in Ames, Iowa for completion in mid-1998. In addition, on August 28, 1997, the Department of Commerce announced that it is conducting an administrative review of its anti-dumping and countervailing duty orders of July 1996 relating to three Turkish and 16 Italian pasta producers, including Barilla and De Cecco. The Department of Commerce indicated that it intends to complete its review not later than July 31, 1998. The Company cannot predict the outcome of the Department of Commerce's review. See "Business -- Pasta Industry -- Pasta Production Capacity" and "-- Competition." RELIANCE ON PASTA; PRODUCT LINE CONCENTRATION Since commencing operations in 1988, the Company has focused exclusively on the dry pasta industry. For the foreseeable future, AIPC expects to continue to receive substantially all of its revenues from the sale of pasta and pasta-related products. Because of this product concentration, any decline in the demand or pricing for dry pasta, any shift in consumer preferences away from dry pasta, or any other factor that adversely affects the pasta market, could have a more significant adverse effect on the Company's business, financial condition and results of operations than on pasta producers which also produce other products. In addition, the Company's pasta production equipment is highly specialized and is not adaptable to the production of non-pasta food products. RELIANCE ON KEY PERSONNEL The Company's operations and prospects depend in large part on the performance of its senior management team, including Horst W. Schroeder, Chairman of the Board, Timothy S. Webster, President and Chief Executive Officer, David E. Watson, Executive Vice President and Chief Financial Officer, Norman F. Abreo, Executive Vice President of Operations and David B. Potter, Senior Vice President of Procurement. No assurance can be given that the Company would be able to find qualified replacements for 12 15 any of these individuals if their services were no longer available. The loss of the services of one or more members of the Company's senior management team could have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not maintain key person life insurance on any of its key employees. The Company will enter into employment agreements with Messrs. Schroeder, Webster, Watson, Abreo and Potter effective upon consummation of the Offering. See "Management." TRANSPORTATION Durum wheat is shipped to the Company's production facility in Missouri directly from North Dakota, Montana and Canada under a long-term rail contract with its most significant rail carrier, the Canadian Pacific Rail System. Under such agreement, the Company is obligated to transport specified wheat volumes and, in the event such volumes are not met, the Company must reimburse the carrier for certain of its costs. The Company currently is in compliance with such volume obligations. The Company also has a rail contract to ship semolina, milled and processed at the Missouri facility, to the South Carolina facility. An extended interruption in the Company's ability to ship durum wheat by railroad to the Missouri plant, or semolina to the Company's South Carolina facility, could have a material adverse affect on the Company's business, financial condition and results of operations. The Company experienced a significant interruption in railroad shipments in 1994 due to a railroad strike. While the Company would attempt to transport such materials by alternative means if it were to experience another interruption due to strike, natural disasters or otherwise, there can be no assurance that the Company would be able to do so or be successful in doing so in a timely and cost-effective manner. See "Business -- Milling and Production Processes" and "-- Raw Materials and Supplies." PRODUCTION AND INVENTORY MANAGEMENT Most of the Company's customers use, to some extent, inventory management systems which track sales of particular products and rely on reorders being rapidly filled by suppliers to meet consumer demand rather than on large inventories being maintained by retailers. Although these systems reduce a retailer's investment in inventory, they increase pressure on suppliers like the Company to fill orders promptly and thereby shift a portion of the retailer's inventory management cost to the supplier. The Company's production of excess inventory to meet anticipated retailer demand could result in markdowns and increased inventory carrying costs for the Company. In addition, if the Company underestimates the demand for its products, it may be unable to provide adequate supplies of pasta products to retailers in a timely fashion, and may consequently lose sales. POTENTIAL VOLATILITY OF FUTURE QUARTERLY OPERATING RESULTS The Company's results of operations may fluctuate on a quarterly basis as a result of a number of factors, including total sales volumes, the timing and scope of new customer volumes, the timing and amounts of price adjustments due to durum wheat and other cost changes, the cost of raw materials, including durum wheat (see "Risk Factors -- Raw Materials"), plant expansion costs and interest expenses. In addition, fluctuations in quarterly results could affect the market price of the Class A Common Stock in a manner unrelated to the longer term operating performance of the Company. RISK OF PRODUCT LIABILITY Although the Company has never been involved in a product liability lawsuit, the sale of food products for human consumption involves the risk of injury to consumers as a result of tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, aflatoxin and other agents, or residues introduced during the growing, storage, handling or transportation phases. While the Company is subject to U.S. Food & Drug Administration inspection and regulations and believes its facilities comply in all material respects with all applicable laws and regulations, there can be no assurance that consumption of the Company's products will not cause a health-related illness in the future or that the Company will not be subject to claims or lawsuits relating to such matters. The Company maintains product liability insurance in an amount which the Company believes to be adequate. However, there can be 13 16 no assurance that the Company will not incur claims or liabilities for which it is not insured or that exceed the amount of its insurance coverage. SUBSTANTIAL INFLUENCE OF CURRENT PRINCIPAL STOCKHOLDER Upon consummation of the Offering, the Morgan Stanley Stockholders will own approximately 39.6% of the outstanding Common Stock. The Company's Charter provides that if at any time after consummation of the Offering, the Morgan Stanley Stockholders own in excess of 49% of the outstanding Class A Common Stock, such excess will be automatically converted into an equal number of shares of Class B Common Stock. The Morgan Stanley Stockholders are affiliates of Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD"), an affiliate of Morgan Stanley & Co. Incorporated, a representative of the U.S. Underwriters, and Morgan Stanley & Co. International Limited, a representative of the International Underwriters. Upon consummation of the Offering, three of nine directors of the Company will be employees of a wholly-owned subsidiary of MSDWD. Pursuant to the Stockholders Agreement (as amended and restated effective upon the consummation of the Offering) among the Morgan Stanley Stockholders, the Company, and certain other stockholders of the Company, one of the Morgan Stanley Stockholders, The Morgan Stanley Leveraged Equity Fund II, L.P. ("MSLEF II"), has the right to designate two director nominees so long as it owns at least 25% of the outstanding Common Stock or one director nominee so long as it owns at least 5% but less than 25% of the outstanding Common Stock. In addition, another Morgan Stanley Stockholder, Morgan Stanley Capital Partners III, L.P. ("MSCP"), has the right to designate two director nominees so long as it owns at least 35% of the outstanding Common Stock or one director nominee so long as it owns at least 5% but less than 35% of the outstanding Common Stock. Whenever MSLEF II and MSCP individually own less than 5% of the outstanding Common Stock, they shall jointly be entitled to designate one director nominee as long as the Morgan Stanley Stockholders beneficially own, in the aggregate, at least 5% of the outstanding Common Stock. The number of directors designated by the Morgan Stanley Stockholders will increase proportionately if the size of the Board of Directors is increased in the future. In addition, so long as the Morgan Stanley Stockholders own at least 25% of the outstanding shares of Common Stock, certain significant corporate actions are subject to the approval of the Board of Directors and the Morgan Stanley Stockholders. As a result of their ownership interest in the Company and their rights under the Stockholders Agreement, the Morgan Stanley Stockholders will continue to have a substantial influence over the affairs of the Company following the consummation of the Offering, including with respect to mergers or other business combinations involving the Company and the acquisition or disposition of assets by the Company. Similarly, the Morgan Stanley Stockholders will have the power to prevent or, by selling their Common Stock, cause a change of control of the Company and could take other actions that might be favorable to the Morgan Stanley Stockholders. In such instances or otherwise, various conflicts of interest between the Company and the Morgan Stanley Stockholders could arise. Stockholders may be prevented from receiving a premium for their shares if the Morgan Stanley Stockholders were to act in concert to oppose any takeover attempt. See "Principal and Selling Stockholders," "Anti-takeover Effect of Certain Charter, By-Law and Statutory Provisions" and "Certain Relationships and Related Transactions -- Stockholders Agreement." FINANCIAL LEVERAGE; SENSITIVITY TO INTEREST RATE FLUCTUATIONS; COVENANT RESTRICTIONS The Company will use the net proceeds to the Company from the Offering to reduce its outstanding bank indebtedness as of June 30, 1997 from approximately $86 million to $22 million upon application of the net proceeds of the Offering, after which such debt will represent approximately 15% of the Company's total capitalization. However, the Company intends to substantially increase such indebtedness in the future to finance its capital expenditure plan. The degree to which the Company is financially leveraged following such borrowings and the terms of the Company's indebtedness could have important consequences to stockholders, including: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, and general corporate purposes may be impaired; (ii) a substantial portion of the Company's cash flow from operations may have to be dedicated to the payment of the principal of and interest on its indebtedness; (iii) the terms of such indebtedness may restrict the Company's ability to pay dividends; and (iv) the Company may be more highly leveraged than many of its competitors, which may place the Company 14 17 at a competitive disadvantage. As of June 30, 1997, the outstanding indebtedness under the Company's $162.6 million credit facility (the "Credit Facility") was $85.9 million. See "Use of Proceeds." As of June 30, 1997, the Company's indebtedness had a weighted average interest rate of 9.3% and approximately 92%, or $85.9 million, of the Company's indebtedness bore interest at variable rates. Although the Company will use the net proceeds of the Offering to substantially reduce the amount of such variable-rate indebtedness, the Company may incur additional amounts of variable-rate indebtedness in the future. If this were to occur, and if interest rates were to significantly increase thereafter, the Company's operating results and its ability to satisfy its debt service obligations may be materially and adversely affected. Previously, the Company had relied on an interest rate cap to effectively limit the Company's exposure to variable rates with respect to a portion of the Company's debt. Under the Credit Facility, the Company is required to obtain an interest rate protection agreement by November 15, 1997. There can be no assurance the Company will be able to obtain such interest rate protection agreement on favorable terms. The limitations contained in the agreements relating to the Company's existing Credit Facility, together with the leveraged position of the Company, restrict the Company from paying dividends and could limit the ability of the Company to effect future debt or equity financings and may otherwise restrict corporate activities, including the ability to avoid defaults and to respond to competitive market conditions, to provide for capital expenditures beyond those permitted or to take advantage of business opportunities. See "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER, BY-LAW AND STATUTORY PROVISIONS Charter and Bylaws. Certain provisions of the Company's Charter and By-laws (the "By-laws") could delay or frustrate the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving the Company, even if such events could be beneficial, in the short term, to the interests of the stockholders. For example, the Charter and By-laws allow the Company to issue preferred stock with rights senior to those of the Class A Common Stock without stockholder action, require the Board of Directors to be divided into three classes serving three-year staggered terms, require stockholder actions to be effected only at annual or special stockholder meetings (unless the action to be effected by written consent of stockholders and the taking of such action by written consent have been approved in advance by the Board of Directors or unless the shareholder action involves the removal of a director nominated pursuant to the Stockholders Agreement and the person who nominated such director pursuant to the Stockholders Agreement votes in favor of the removal of such director pursuant to such written consent), require the affirmative vote of holders of two-thirds of the outstanding shares entitled to vote to remove directors (unless the removal of a director has been requested by a shareholder who designated such director as a nominee for election pursuant to the Stockholders Agreement, in which case such director can be removed with or without cause by the affirmative vote of holders of a simple majority of such shares), require the affirmative vote of holders of at least 80% of the outstanding shares to amend certain provisions of the Charter or to repeal or amend the Company's By-laws and impose various other procedural requirements on the taking of certain actions. Pursuant to the Charter, shares of preferred stock and Class A Common Stock may be issued in the future without further stockholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors may determine. The issuance of preferred stock and Class A Common Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate transactions, could have the effect of making it more difficult for a third party to acquire, or effectively preventing a third party from acquiring, a majority of the outstanding Common Stock of the Company. See "Description of Capital Stock -- Delaware Law and Certain Charter and By-Law Provisions." Delaware Corporation Law. The Company also is subject to provisions of the General Corporation Law of the State of Delaware, as amended (the "DGCL"), that prohibit a publicly-held Delaware corporation from engaging in a broad range of business combinations with a person who, together with affiliates and associates, owns 15% of more of the corporation's common stock (an "Interested Stockholder") for three years after the person became an Interested Stockholder, unless the business combination is approved in a 15 18 prescribed manner. Those provisions could discourage or make more difficult a merger, tender offer or similar transaction, even if favorable to the Company's stockholders. See "Description of Capital Stock -- Delaware Law and Certain Charter and By-Law Provisions." Amended Stockholders Agreement. In addition, the amended Stockholders Agreement grants the Morgan Stanley Stockholders the right, depending on their respective ownership percentages, to designate nominees to the Board and to have the right to approve certain significant corporate actions including, but not limited to, mergers, consolidations or other similar transactions. The substantial ownership position of the Morgan Stanley Stockholders could make it more difficult for a third party to acquire, or effectively prevent a third party from acquiring, a majority of the outstanding Common Stock. Dual Class Structure. Tender offers or other non-open market acquisitions of stock are usually made at prices above the prevailing market price of a company's stock. In addition, acquisitions of stock by persons attempting to acquire control through market purchases may cause the market price of the stock to reach levels which are higher than would otherwise prevail. While the Class B Common Stock is non-voting, the ability of the Morgan Stanley Stockholders to convert that stock into Class A Common Stock (so long as such conversion does not increase their aggregate ownership of Class A Common Stock above 49% of the then-outstanding Class A Common Stock) may discourage such acquisitions, particularly those of less than all of the Company's stock, and may thereby deprive shareholders of an opportunity to sell their shares at a premium price. ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Class A Common Stock. Even if the Class A Common Stock is listed on the New York Stock Exchange, there can be no assurance that an active trading market for the Class A Common Stock will develop or be sustained after the Offering, or that purchasers of Class A Common Stock will be able to resell their Class A Common Stock at prices equal to or greater than the initial public offering price. The initial public offering price was determined by negotiations between the Company and the U.S. Representatives based on the factors described in "Underwriters." The trading price of the Class A Common Stock could be subject to wide fluctuations in response to announcements of increases in the cost of raw materials, new products introduced by the Company or its competitors, variations in the Company's quarterly results of operations, or changes in financial estimates by securities analysts and other events or factors. The stock market has experienced extreme price and volume fluctuations in recent years. Stock market volatility unrelated to the operating performance of the Company may adversely affect the market price of the Class A Common Stock. 16 19 SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS Upon consummation of the Offering, the Company will have outstanding an aggregate of 16,776,056 shares of Common Stock, assuming no exercise of outstanding options. Of these shares, all of the shares sold in the Offering will be freely tradeable without restriction or further registration under the Securities Act, unless such shares are purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act ("Affiliates"). The remaining 8,876,056 shares of Common Stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or 701 promulgated under the Securities Act. As a result of the contractual restrictions described below and the provisions of Rules 144 and 701, the Restricted Shares will be available for sale in the public market as follows: (i) no shares will be eligible for immediate sale on the date of this Prospectus; and (ii) 8,260,330 shares will be eligible for sale pursuant to Rule 144, provided the conditions of Rule 144 are met, upon expiration of the lock-up agreements at least 180 days after the date of this Prospectus. All officers, directors and substantially all stockholders and holders of vested options of the Company have agreed not to sell or otherwise transfer any shares of Common Stock or any other securities of the Company for a period of at least 180 days after the date of this Prospectus. Sales, or the possibility of sales, of Common Stock by the Company's existing stockholders, whether in connection with the exercise of registration rights or otherwise, could adversely affect the market price of the Company's Class A Common Stock. The Stockholders Agreement will be amended to provide that the Company will grant the stockholders who are parties to such agreement, including the Morgan Stanley Stockholders, certain "demand" and "piggyback" registration rights with respect to the Common Stock owned by such stockholders. See "Certain Relationships and Related Transactions -- Stockholders Agreement" and "Shares Eligible for Future Sale." ABSENCE OF DIVIDENDS The Company has never declared or paid cash dividends on its Common Stock and currently intends to retain all available funds for use in the operation and expansion of its business. The Company does not anticipate that any cash dividends on the Common Stock will be declared or paid in the foreseeable future. See "Dividend Policy." SUBSTANTIAL AND IMMEDIATE DILUTION Investors in the Offering will incur immediate dilution of $9.35 per share in the pro forma net tangible book value per share of Class A Common Stock (based upon an assumed initial public offering price of $16 per share) as of June 30, 1997. See "Dilution." USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the Class A Common Stock in the Offering are estimated to be approximately $77.7 million, assuming an initial public offering price of $16 per share. The Company will use approximately $63.8 million of the net proceeds from the Offering to repay bank indebtedness (with stated maturities from 2000 through 2004 and bearing interest at a weighted-average interest rate of 9.3% per annum as of June 30, 1997) incurred under the Company's Credit Facility and the balance will be used to fund the expansion of the Company's facilities and for general corporate purposes. The Company will not receive any of the proceeds from the sale of Class A Common Stock by the Selling Stockholders. See "Underwriters." DIVIDEND POLICY The Company has not declared or paid any dividends on its Common Stock to date and does not anticipate paying any such dividends in the foreseeable future. After consummation of the Offering, the Company intends to retain earnings for the foreseeable future to provide funds for the operation and expansion of its business and for the repayment of indebtedness. The borrowing agreements relating to the Company's Credit Facility contain certain provisions which effectively prohibit the payment of dividends. Future borrowing agreements of the Company may also contain limitations on the payment of dividends. Any determination to pay dividends in the future will be at the discretion of the Company's Board of Directors and will depend upon the Company's financial condition, capital requirements, results of operations and other factors, including any contractual or statutory restrictions on the Company's ability to pay dividends. 17 20 CAPITALIZATION The following table sets forth information regarding the short-term debt and capitalization of the Company on a pro forma basis to give effect to the Recapitalization as if it had occurred as of June 30, 1997 and on a pro forma as adjusted basis which reflects the issuance and sale of 5,310,000 shares of Class A Common Stock offered hereby by the Company at an assumed initial public offering price of $16 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Capital Stock -- General." The following table should be read in conjunction with the Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus.
AS OF JUNE 30, 1997 ----------------------- PRO FORMA PRO FORMA AS ADJUSTED --------- ----------- (IN THOUSANDS) Long-term debt and capital lease obligations, current portion................................................... $ 3,685 $ 810 ======== ======== Long-term debt and capital lease obligations, less current portion: Long-term debt............................................ $ 83,063 $ 22,106 Capital lease obligations................................. 6,437 6,437 -------- -------- Total long-term debt and capital lease obligations, less current portion.................................. 89,500 28,543 -------- -------- Stockholders' equity: Preferred stock, $.001 par value, 10,000,000 shares authorized, no shares issued and outstanding pro forma and pro forma as adjusted.............................. -- -- Class A Common Stock, $.001 par value, 75,000,000 shares authorized, 11,466,056 shares issued and outstanding pro forma and 16,776,056 shares issued and outstanding pro forma as adjusted(1)............................... 11 17 Class B Common Stock, $.001 par value, 25,000,000 shares authorized, no shares issued and outstanding pro forma and pro forma as adjusted.............................. -- 1 Additional paid-in capital................................ 55,324 132,980 Notes receivable from officers............................ (298) (298) Accumulated deficit....................................... (14,060) (14,060) -------- -------- Total stockholders' equity........................... 40,977 118,640 -------- -------- Total capitalization........................................ $130,477 $147,183 ======== ========
- ------------------------- (1) Excludes (i) 1,132,049 shares, 46,665 shares and 993,391 shares of Class A Common Stock reserved for issuance upon the exercise of outstanding stock options under the Company's 1992 Plan, 1993 Plan and 1997 Plan, respectively; and (ii) 69,832 shares, 36,118 shares and 1,006,609 shares of Class A Common Stock available for future grants under the 1992 Plan, the 1993 Plan and the 1997 Plan, respectively. See "Management -- Stock Option Plans." 18 21 DILUTION The pro forma net tangible book value of the Company at June 30, 1997 was $33.8 million, or $2.95 per share of Common Stock. Pro forma net tangible book value per share is equal to the Company's total tangible assets less total liabilities, divided by the pro forma total number of shares outstanding. The Company had a pro forma total of 11,466,056 shares of Common Stock outstanding as of June 30, 1997, assuming the Recapitalization had occurred as of that date. After giving effect to the sale by the Company of 5,310,000 shares of Class A Common Stock in the Offering at an assumed initial public offering price of $16.00 per share and deducting underwriting discounts and commissions and estimated offering expenses payable by the Company, the pro forma as adjusted net tangible book value of the Company as of such date would have been approximately $111.5 million, or $6.65 per share, based on 16,776,056 shares of Common Stock to be outstanding after the Offering. This represents an immediate increase in net tangible book value of $3.70 per share to the current holders of the Common Stock and an immediate dilution of $9.35 per share to new investors purchasing shares of Common Stock in the Offering. The following table illustrates this per share dilution: Assumed initial public offering price....................... $16.00 Pro forma net tangible book value per share before the Offering.................................................. 2.95 Increase per share attributable to new investors............ 3.70 ---- Pro forma as adjusted net tangible book value per share after the Offering........................................ 6.65 ------ Dilution per share to new investors......................... $ 9.35 ======
The following table summarizes as of June 30, 1997, on a pro forma basis after giving effect to the Offering, the differences in the total consideration paid and the average price per share paid by the existing stockholders with respect to the outstanding Common Stock and by the purchasers of the shares of Common Stock offered by the Company in the Offering (at an assumed initial public offering price of $16.00 per share and before deducting underwriting discounts and commissions and estimated offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE -------------------- ---------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------ ------- ------ ------- --------- Existing stockholders(1).................. 11,466,056 68.3% $ 55,335,000 39.4% $ 4.83 New investors(2).......................... 5,310,000 31.7 84,960,000 60.6 16.00 ---------- ----- ------------ ----- ------ Total................................ 16,776,056 100.0% $140,295,000 100.0% $ 8.36 ========== ===== ============ ===== ======
- ------------------------- (1) Excludes (i) 1,132,049 shares, 46,665 shares and 993,391 shares of Class A Common Stock reserved for issuance upon the exercise of outstanding stock options under the Company's 1992 Plan, the 1993 Plan and the 1997 Plan, respectively; and (ii) 69,832 shares, 36,118 shares and 1,006,609 shares of Class A Common Stock available for future grants under the 1992 Plan, the 1993 Plan and the 1997 Plan, respectively. See "Management -- Stock Option Plans." (2) Sales of Class A Common Stock by the Selling Stockholders in the Offering will reduce the number of shares of Common Stock held by existing stockholders to 8,876,056, or approximately 52.9% of the total shares of Common Stock outstanding after the Offering, and will increase the number of shares held by new investors to 7,900,000, or approximately 47.1% of the total shares of Common Stock outstanding after the Offering. See "Principal and Selling Stockholders." 19 22 SELECTED FINANCIAL AND OTHER DATA The selected statement of operations data for the years ended December 31, 1994 and 1995, the nine-month fiscal period ended September 30, 1996, and the nine-month period ended June 30, 1997 and the selected balance sheet data as of December 31, 1995, September 30, 1996 and June 30, 1997 are derived from, and are qualified by reference to, the Financial Statements of the Company audited by Ernst & Young LLP, independent auditors, appearing elsewhere in this Prospectus. The selected statement of operations data for the years ended December 31, 1992 and 1993 and the selected balance sheet data as of December 31, 1992, 1993 and 1994 have been derived from audited financial statements of the Company not included herein. The selected statement of operations data for the calendar year ended December 31, 1996 and the nine-month period ended June 30, 1996, and the balance sheet data as of December 31, 1996 and June 30, 1996 have been derived from the Company's unaudited internal financial statements, which in the opinion of management, have been prepared on the same basis as the audited financial statements and reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of operations and financial position of the Company. The statement of operations data of the Company for the calendar year ended December 31, 1996 and the nine-month period ended June 30, 1996 are included herein only for comparison purposes. The Company's results of operations for the nine-month period ended June 30, 1997 are not necessarily indicative of its results for the full fiscal year. The selected other data has been derived from the accounting records of the Company and have not been audited. The selected financial and other data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus.
NINE-MONTH NINE-MONTH CALENDAR FISCAL PERIOD PERIOD ENDED FISCAL YEAR ENDED DECEMBER 31, YEAR ENDED ENDED JUNE 30, -------------------------------------- DECEMBER 31, SEPTEMBER 30, ---------------------- 1992 1993 1994 1995 1996(1) 1996(1) 1996 1997(1) ---- ---- ---- ---- ------------ ------------- ---- ------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES) STATEMENT OF OPERATIONS DATA: Revenues......................... $39,049 $47,872 $69,465 $ 92,903 $121,621 $ 92,074 $ 86,514 $ 93,616 Cost of goods sold............... 28,750 35,081 54,393 73,851 89,704 68,555 65,697 67,821 Plant expansion costs(2)......... -- 1,171 484 2,065 -- -- 425 -- ------- ------- ------- -------- -------- -------- -------- -------- Gross profit..................... 10,299 11,620 14,588 16,987 31,917 23,519 20,392 25,795 Selling and marketing expense, including product introduction costs(3)....................... 2,888 2,883 3,792 5,303 21,250 16,798 11,236 10,212 General and administrative expense........................ 2,077 2,049 1,951 2,930 3,498 2,805 2,741 2,855 ------- ------- ------- -------- -------- -------- -------- -------- Operating profit................. 5,334 6,688 8,845 8,754 7,169 3,916 6,415 12,728 Interest expense, net............ 5,396 3,210 4,975 8,008 10,575 8,023 8,030 7,800 ------- ------- ------- -------- -------- -------- -------- -------- Income (loss) before income tax and extraordinary loss......... (62) 3,478 3,870 746 (3,406) (4,107) (1,615) 4,928 Income tax....................... -- (3,221) 1,484 270 (1,288) (1,556) (642) 1,878 Extraordinary loss, net of income tax(4)......................... 2,639 -- 204 -- 1,647 1,647 1,647 -- ------- ------- ------- -------- -------- -------- -------- -------- Net income (loss)................ $(2,701) $ 6,699 $ 2,182 $ 476 $ (3,765) $ (4,198) $ (2,620) $ 3,050 ======= ======= ======= ======== ======== ======== ======== ======== Pro forma net income (loss) per common share(5)................ $ (.39) $ .66 $ .21 $ .05 $ (.37) $ (.41) $ (.25) $ .25 Pro forma weighted average common shares outstanding(5).......... 6,943 10,219 10,231 10,275 10,305 10,303 10,296 12,160 OTHER DATA: EBITDA(6)........................ $ 7,993 $ 9,495 $12,408 $ 13,836 $ 12,460 $ 8,994 $ 11,395 $ 18,037 EBITDA as a percent of revenues(6).................... 20.5% 19.8% 17.9% 14.9% 10.2% 9.8% 13.2% 19.3% Revenue per employee (end of period)................ $ 209 $ 244 $ 288 $ 361 $ 437 NM NM NM Working capital excluding current maturities of long-term debt (average for the period) as a percent of revenues............ 17.3% 14.2% 12.0% 4.6% 6.5% NM NM NM Cash flows provided by (used in): Operating activities........... $ 966 $ 4,787 $ 3,690 $ 5,730 $ (5,013) $ (7,477) $ (4,155) $ 14,076 Investing activities........... (1,000) (15,139) (25,431) (38,789) (3,870) (3,041) (6,084) (11,464) Financing activities........... 2,142 10,382 19,603 33,066 10,543 12,318 11,722 (1,818) Earnings to fixed charges........ .50x 1.87x 1.48x .92x .52x .28x .59x 1.60x BALANCE SHEET DATA (AT END OF PERIOD): Cash and cash equivalents........ $ 2,119 $ 2,149 $ 11 $ 18 $ 1,678 $ 1,818 $ 707 $ 2,612 Working capital.................. 2,900 3,077 4,830 6,632 (1,965) (1,601) 1,667 13,276 Total assets..................... 48,803 66,337 93,629 135,424 137,974 141,688 141,293 145,462 Long-term debt, less current maturities..................... 31,509 40,024 62,375 97,452 92,143 93,284 94,884 89,500 Stockholders' equity............. 9,994 16,973 19,401 20,067 16,402 15,969 16,716 40,977
(footnotes appear on following page) 20 23 (footnotes from previous page) - ------------------------- (1) The Company adopted a fiscal year ending on the last Friday of September or the first Friday of October, effective beginning with the nine-month fiscal period ended September 27, 1996 and for all subsequent fiscal periods. For purposes of this Prospectus, the 1996 fiscal year and 1997 interim period are shown as having ended on September 30 and June 30, respectively. (2) Plant expansion costs include incremental direct and indirect manufacturing and distribution costs which are incurred as a result of construction, commissioning and start-up of new capital assets. These costs are expensed as incurred but are unrelated to current production and, therefore, are reported as a separate line item in the statement of operations. (3) Selling and marketing expense includes incremental product introduction costs, including payment of product placement or "slotting" fees, related to the Company's launch of its Pasta LaBella flavored pasta products into the U.S. retail grocery market. The Company did not incur such product introduction costs prior to the calendar year ended December 31, 1996. Product introduction costs were incurred as follows: $9.6 million in calendar year ended December 31, 1996, $8.1 million for the nine-month period ended September 30, 1996, $4.6 million for the nine-month period ended June 30, 1996 and $2.1 million for the nine-month period June 30, 1997. (4) Represents losses due to early extinguishment of long-term debt, net of income tax. (5) Earnings per share is presented on a pro forma basis giving effect to the consummation of the Recapitalization in connection with the Offering. (6) EBITDA represents earnings before interest, income taxes, depreciation and amortization, thereby removing the effect of certain non-cash charges on income. Management believes that EBITDA is a meaningful measure of operating performance, cash generation and ability to service debt. However, EBITDA should not be considered as an alternative either to: (i) net earnings (determined in accordance with GAAP); (ii) operating cash flow (determined in accordance with GAAP); or (iii) liquidity. There can be no assurance that the Company's calculation of EBITDA is comparable to similarly-titled items reported by other companies. 21 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus. For a discussion of important factors that could cause actual results to differ materially from the forward-looking statements, see "Risk Factors." The Company changed its fiscal year end from December 31 to the last Friday in September or the first Friday of October. This change resulted in a nine-month fiscal year for 1996, and will result in a 53-week year for fiscal 1997, and a 52- or 53-week year for all subsequent fiscal years. The Company's first three fiscal quarters end on the Friday last preceding December 31, March 31, and June 30. For purposes of this Prospectus, the 1996 fiscal year is described as the nine-month fiscal period ended September 30, 1996, and the nine-month 1996 and 1997 interim periods are described as having ended June 30. The statement of operations data of the Company for the nine-month periods ended September 30, 1995 and June 30, 1996, and the calendar year ended December 31, 1996 are included herein only for comparison purposes. OVERVIEW AIPC is the third largest and one of the fastest-growing producers and marketers of pasta in North America. The Company commenced operations in 1988 with the North American introduction of new, highly-efficient durum wheat milling and pasta production technology. Management believes that the Company's singular focus on pasta, vertically-integrated facilities, continued technological improvements and development of a highly-skilled workforce enable AIPC to produce high-quality pasta at costs below those of many of its competitors. Management believes that the combination of the Company's cost structure, the average age of its competitors' North American pasta production equipment and the growing pasta consumption in North America creates significant opportunities for continued growth. The Company generates its revenues in two customer markets: Retail and Institutional. The Retail market revenues include the revenues from sales of the Company's pasta products to customers who resell the Company's pasta in retail channels. These revenues include sales to club stores and grocery retailers, encompass sales of the Company's private label and branded products, and will include sales to CPC. The Institutional market revenues include the revenues from product sales to Company customers who use the Company's pasta as an ingredient in food products or customers who resell the Company's pasta in the foodservice market such as Sysco. The Institutional market also includes revenues from opportunistic sales to government agencies and other customers which the Company pursues periodically when capacity is available ("Contract Sales") to increase production volumes and thereby lower average unit costs. Average sales prices in the Retail and Institutional markets differ depending on customer-specific packaging and raw material requirements, product manufacturing complexity and other service requirements. Generally, average retail sales prices are higher than institutional sales prices. Average retail and institutional prices vary due to changes in the relative share of customer revenues and item specific sales volumes (i.e., product sales mix). Revenues are reported net of cash discounts, pricing allowances and product returns. The Company seeks to develop strategic customer relationships with food industry leaders that have substantial pasta requirements. The Company has long-term supply agreements with Sysco and CPC and other arrangements with food industry leaders, such as Sam's Club, that provide for the "pass-through" of direct material cost changes as pricing adjustments. The pass-throughs are generally limited to actual changes in cost and, as a result, impact marginal profitability in periods of changing costs and prices. The pass-throughs are generally effective 30 to 90 days following such costs changes and thereby significantly reduce the long-term exposure of the Company's operating results to the volatility of raw material costs. Management estimates that approximately 60% of the Company's revenues in fiscal 1997 will be pursuant to long-term supply agreements and other non-contractual customer arrangements which provide for the pass-through of changes in durum wheat costs. Management believes that this percentage will increase as the Company begins to generate revenue from CPC. See "Risk Factors -- Raw Materials." The Company's Pasta LaBella flavored pasta products are sold at prices which are significantly higher than the Company's non-flavored products as a result of higher product and distribution costs and its premium 22 25 brand position. In the second quarter of calendar 1996, the Company began distribution of Pasta LaBella flavored pasta into the U.S. Retail grocery market. This initiative was supported by a comprehensive trade and consumer product introduction program, including the payment of product placement or "slotting" fees to retailers, and an on-going selling and marketing program required to support branded retail sales. The Company achieved distribution in approximately 40% of the U.S. Retail grocery market and ceased to incur additional product introduction costs in the first quarter of fiscal 1997. The Company did not incur such product introduction costs prior to the calendar year ended December 31, 1996. Product introduction costs included in selling and marketing expense were incurred as follows: $9.6 million for the calendar year ended December 31, 1996, $8.1 million for the nine-month period ended September 30, 1996, $4.6 million for the nine-month period ended June 30, 1996 and $2.1 million for the nine-month period June 30, 1997. The Company's cost of goods sold consists primarily of raw materials, packaging, manufacturing (including depreciation) and distribution costs. A significant portion of the Company's cost of goods sold is durum wheat. The Company purchases durum wheat on the open market and, consequently, is subject to fluctuations in cost. The Company manages its durum cost risk through long-term contracts and other noncontractual arrangements with its customers and advance purchase contracts for durum wheat which are generally less than six months' duration. The price of durum wheat was volatile during the period between January 1, 1994 and September 30, 1996 and the published average monthly market price per bushel fluctuated from $5.18 to $7.49 over this period. In addition, following a period of relatively stable prices during the nine months ended June 30, 1997, the market price per bushel of durum wheat increased by approximately 21% from $5.60 at June 30, 1997 to $6.75 at October 6, 1997. On September 12, 1997, the U.S. Department of Agriculture predicted that the 1997 U.S. durum wheat harvest will be approximately 22% lower than for 1996. The durum cost volatility and the timing and amount of sales price adjustments impacted profit and margins over the 1994-1997 periods and are expected to increase the Company's costs beginning in the first quarter of its 1998 fiscal year. The Company's capital asset strategy is to achieve low-cost production through vertical integration and investment in the most current pasta-making assets and technologies. The manufacturing- and distribution-related capital assets which have been or will be acquired to support this strategy are depreciated over their respective economic lives. Because of the capital intensive nature of the Company's business and its current and future facilities expansion plans, management believes its depreciation expense for production and distribution assets may be higher than that of many of its competitors. Depreciation expense is a component of inventory cost and cost of goods sold. Plant expansion costs include incremental direct and indirect manufacturing and distribution costs which are incurred as a result of construction, commissioning and start-up of new capital assets. These costs are expensed as incurred but are unrelated to current production and, therefore, reported as a separate line item in the statement of operations. The Company has commenced an $86 million capital expansion of its durum wheat milling and pasta production and distribution facilities in Missouri and South Carolina. The capital expansion will increase the Company's overall milling, production and distribution capacity by approximately 100% to meet the significant volume requirements of the CPC agreement. The expansion will be financed with a combination of a portion of the net proceeds to the Company from the Offering and borrowings under either the Company's current Credit Facility or a new $150 million revolving credit facility the Company intends to enter into with its lenders shortly following the Offering. The Company will use a majority of the net proceeds to the Company from the Offering to repay a portion of the outstanding indebtedness under the current Credit Facility. The Company has signed commitments with respect to the construction of the expanded facilities and purchase of Italian pasta production equipment totaling approximately $47 million. The expansion construction is currently on schedule and is planned to be completed in early 1998 in time to implement the CPC Agreement and support future growth opportunities. See "Risk Factors -- Substantial Planned Investments in Milling and Production Facilities." Selling and marketing expense incurred to support retail sales are higher than those for institutional sales, as the Company incurs external broker commissions, and promotional and other marketing expenses in addition to the costs incurred by its internal retail sales force. The Company is not responsible for selling and marketing expense related to the CPC Agreement. Consequently, the Company expects prospective selling 23 26 and marketing expense as a percentage of revenues to decrease relative to historical levels as the Company begins to generate CPC revenues in 1998. At June 30, 1997, the Company had a net operating loss carryforward of approximately $26.7 million for federal income tax purposes. The net operating loss carryforward resulted principally from the Company's significant tax depreciation deductions related to its capital assets. Subject to certain limitations, the Company expects this net operating loss carryforward will be available to offset future taxable income. RESULTS OF OPERATIONS The following table sets forth certain statement of operations data of the Company, expressed as a percentage of revenues, for each of the periods presented. This table should be read in conjunction with the Financial Statements and related Notes thereto appearing elsewhere in this Prospectus:
NINE-MONTH NINE-MONTH FISCAL YEAR ENDED CALENDAR FISCAL PERIOD PERIODS ENDED DECEMBER 31, YEAR ENDED ENDED JUNE 30, ----------------- DECEMBER 31, SEPTEMBER 30, ----------------- 1994 1995 1996 1996 1996 1997 ---- ---- ------------ ------------- ---- ---- Revenues: Retail........................... 44.6% 53.1% 59.6% 60.7% 57.5% 56.3% Institutional.................... 55.4 46.9 40.4 39.3 42.5 43.7 ----- ----- ----- ----- ----- ----- Total revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- ----- Cost of goods sold................. 78.3 79.5 73.7 74.6 75.8 72.5 Gross profit before plant expansion costs............................ 21.7 20.5 26.3 25.4 24.2 27.5 Plant expansion costs.............. 0.7 2.2 -- -- 0.5 -- ----- ----- ----- ----- ----- ----- Gross profit....................... 21.0 18.3 26.3 25.4 23.7 27.5 Selling and marketing expense, including product introduction costs............................ 5.5 5.7 17.5 18.2 13.0 10.9 General and administrative expense.......................... 2.8 3.2 2.9 3.0 3.2 3.0 ----- ----- ----- ----- ----- ----- Operating profit................... 12.7 9.4 5.9 4.2 7.5 13.6 Interest expense, net.............. 7.2 8.6 8.7 8.7 9.3 8.3 Income tax......................... 2.1 0.3 (1.1) (1.7) (0.7) 2.0 Extraordinary loss, net of income tax.............................. 0.3 -- 1.4 1.8 1.9 -- ----- ----- ----- ----- ----- ----- Net income (loss).................. 3.1% 0.5% (3.1)% (4.6)% (3.0)% 3.3% ===== ===== ===== ===== ===== =====
NINE-MONTH PERIOD ENDED JUNE 30, 1997 COMPARED TO THE NINE-MONTH PERIOD ENDED JUNE 30, 1996 Revenues. Revenues increased $7.1 million, or 8.2%, to $93.6 million for the nine-month period ended June 30, 1997, from $86.5 million for the nine-month period ended June 30, 1996. The increase for the nine-month period ended June 30, 1997 was primarily due to higher unit volume which was partially offset by lower unit revenues on Pasta LaBella flavored pasta retail sales and price reductions as a result of the pass-through of lower durum wheat costs. The increase was lower than historical periods as the Company planned for and achieved higher than historical capacity utilization levels which precluded more significant unit production and sales growth. The Company believes the scheduled 1998 increases in production capacities and the start of CPC sales will result in increased revenue growth in 1998. Revenues for the Retail market increased $3.0 million, or 6.0%, to $52.7 million for the nine-month period ended June 30, 1997, from $49.7 million for the nine-month period ended June 30, 1996. This increase was due to higher unit volume, primarily from the private label category. This revenue increase was partially offset by a lower average retail unit price primarily resulting from volume-based price incentives on Pasta LaBella flavored pasta. The lower Pasta LaBella flavored pasta unit price was mitigated by product sales mix improvements in private label and club store sales. 24 27 Revenues for the Institutional market increased $4.1 million, or 11.1%, to $40.9 million for the nine-month period ended June 30, 1997, from $36.8 million for the nine-month period ended June 30, 1996. This was primarily the result of volume gains in ingredient and foodservice markets and Contract Sales which were partially offset by price reductions as a result of decreases in durum wheat costs. Gross Profit. Gross profit increased $5.4 million, or 26.5%, to $25.8 million for the nine-month period ended June 30, 1997, from $20.4 million for the nine-month period ended June 30, 1996. Gross profit as a percentage of revenues increased to 27.6% for the nine-month period ended June 30, 1997 from 23.6% for the nine-month period ended June 30, 1996. These increases were the result of (i) increases in unit volumes; (ii) lower durum wheat and packaging material costs; and (iii) product sales mix improvements. Selling and Marketing Expense. Selling and marketing expense decreased $1.0 million, or 8.9%, to $10.2 million for the nine-month period ended June 30, 1997, from $11.2 million for the nine-month period ended June 30, 1996. Selling and marketing expense as a percentage of revenues decreased to 10.9% for the nine-month period ended June 30, 1997, from 13.0% for the nine-month period ended June 30, 1996. The decrease was primarily due to the Company's incurrence of $2.1 million of product introduction costs for the nine-month period ended June 30, 1997, as compared to $4.6 million for the nine-month period ended June 30, 1996. These costs were primarily related to the payment of product placement fees or "slotting," introductory consumer sampling, couponing, advertising and trade promotions. The decrease in product introduction costs was due to decreased product placement fees and lower introductory selling and marketing expense. The decrease in product introduction costs was partially offset by an increase in other selling and marketing expense incurred to support incremental retail Pasta LaBella flavored pasta volume and increases in private label revenue growth. General and Administrative Expense. General and administrative expense increased $0.2 million, or 7.4%, to $2.9 million for the nine-month period ended June 30, 1997, from $2.7 million for the nine-month period ended June 30, 1996, but decreased as a percentage of revenues from 3.2% to 3.0%. The increase in general and administrative expense was primarily due to higher administrative and other costs needed to support sales growth. Operating Profit. Operating profit increased $6.3 million, or 98.4%, to $12.7 million for the nine-month period ended June 30, 1997, from $6.4 million for the nine-month period ended June 30, 1996. Excluding product introduction costs, operating profit increased $3.9 million, or 35.5%, to $14.9 million for the nine-month period ended June 30, 1997, from $11.0 million for the nine-month period ended June 30, 1996, and increased as a percentage of revenues to 15.9% for the nine-month period ended June 30, 1997, from 12.7% for the nine-month period ended June 30, 1996. Interest Expense. Interest expense decreased $0.2 million, or 2.5%, to $7.8 million for the nine-month period ended June 30, 1997, from $8.0 million for the nine-month period ended June 30, 1996. The decrease was primarily the result of reduced borrowings under the Company's term and revolving credit facilities resulting from the $22.3 million in proceeds realized from the April 1997 private equity financing (the "1997 Private Equity Financing"). See "-- Liquidity and Capital Resources" and "Certain Relationships and Related Transactions." Income Tax. Income tax increased $2.5 million for the nine-month period ended June 30, 1997 to $1.9 million, from $(0.6) for the nine-month period ended June 30, 1996, and reflects an effective income tax rate of approximately 38%. Extraordinary Item. During the nine-month period ended June 30, 1996, the Company incurred a $1.6 million (net of tax) extraordinary loss due to the write-off of deferred debt issuance costs in conjunction with a partial extinguishment and restructuring of the Company's principal bank credit agreement. There was no such item for the nine-month period ended June 30, 1997. Net Income. Net income increased $5.7 million to $3.1 million for the nine-month period ended June 30, 1997, from $(2.6) million for the nine-month period ended June 30, 1996. 25 28 NINE-MONTH FISCAL PERIOD ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995 Revenues. Revenues increased $28.3 million, or 44.4%, to $92.1 million for the nine-month fiscal period ended September 30, 1996, from $63.8 million for the nine-month period ended September 30, 1995. This increase was primarily due to higher unit volume, favorable changes in product sales mix and higher average prices resulting from the introduction of the Company's new, higher-priced Pasta LaBella flavored pasta. Revenues for the Retail market increased $23.1 million, or 70.4%, to $55.9 million for the nine-month fiscal period ended September 30, 1996, from $32.8 million for the nine-month period ended September 30, 1995. This increase was due to (i) higher sales volume, with the largest increases coming from private label and club stores customers; (ii) higher average unit prices due to the introduction of the Company's new, higher-priced Pasta LaBella flavored pasta into the U.S. retail grocery market; (iii) improved product sales mix in the club store category; and (iv) the pass-through of higher durum wheat costs. Revenues for the Institutional market increased $5.2 million, or 16.8%, to $36.2 million for the nine-month fiscal period ended September 30, 1996, from $31.0 million for the nine-month period ended September 30, 1995. The volume gains in ingredient and foodservice categories were partially offset by lower Contract Sales volumes as available production capacity was utilized by retail sales growth. The average 1996 institutional unit price also increased due to the pass-through of higher durum wheat costs. Gross Profit. Gross profit increased $12.9 million, or 121.7%, to $23.5 million for the nine-month fiscal period ended September 30, 1996, from $10.6 million for the nine-month period ended September 30, 1995. Gross profit as a percentage of revenues increased to 25.5% for the nine-month fiscal period ended September 30, 1996, from 16.6% for the nine-month period ended September 30, 1995. These increases were primarily the result of (i) higher sales volumes; (ii) higher average unit prices, primarily as a result of Pasta LaBella flavored pasta sales; (iii) the absence of plant expansion costs; (iv) lower per unit warehousing and distribution costs resulting from outsourcing logistics functions through a new strategic alliance with Lanter Company; and (v) improved plant efficiencies and capacity utilization, including the impact of the new South Carolina production and distribution facilities. Selling and Marketing Expense. Selling and marketing expense increased $13.1 million, or 354.1%, to $16.8 million for the nine-month fiscal period ended September 30, 1996, from $3.7 million for the nine-month period ended September 30, 1995. Selling and marketing expense as a percentage of revenues increased to 18.2% for the nine-month fiscal period ended September 30, 1996 from 5.7% for the nine-month period ended September 30, 1995. These increases in selling and marketing expense were primarily due to the Company's incurrence of $8.1 million of product introduction costs during the nine-month fiscal period ended September 30, 1996 related to the retail introduction of the Company's Pasta LaBella flavored pasta products. These costs included payment of product placement fees or "slotting," introductory consumer sampling, couponing, advertising and trade promotions. There were no comparable 1995 expenditures. Selling and marketing expenses also increased due to Pasta LaBella flavored pasta sales and increases in club store and private label revenues. General and Administrative Expense. General and administrative expense increased $0.8 million, or 40.0%, to $2.8 million for the nine-month fiscal period ended September 30, 1996, from $2.0 million for the nine-month period ended September 30, 1995, but decreased as a percentage of revenues from 3.2% for the nine-month period ended September 30, 1995 to 3.0% for the nine-month fiscal period ended September 30, 1996. The increase in general and administrative expense was primarily due to increases in MIS expenses and communication costs incurred to support sales growth and the commencement of operations in South Carolina. Operating Profit. Operating profit decreased $1.0 million, or 20.4% to $3.9 million for the nine-month fiscal period ended September 30, 1996 from $4.9 million for the nine-month period ended September 30, 1995. Excluding product introduction costs, operating profit increased to $12.0 million, or 144.9%, from $4.9 million and increased as a percentage of revenue to 13.0% for the nine-month fiscal period ended September 30, 1996 from 7.7% for the nine-month period ended September 30, 1995. 26 29 Interest Expense. Interest expense increased $2.7 million, or 50.9%, to $8.0 million for the nine-month fiscal period ended September 30, 1996 from $5.3 million for the nine-month period ended September 30, 1995, due to higher borrowing levels to finance the Company's South Carolina and Missouri capital assets expansion and increases in working capital. Income Tax. Income tax decreased to $(1.6) million for the nine-month fiscal period ended September 30, 1996, from $(0.1) million for the nine-month period ended September 30, 1995 and reflected an effective income tax rate of approximately 38% in both periods. Extraordinary Item. During the nine-month fiscal period ended September 30, 1996, the Company incurred a $1.6 million (net of tax) extraordinary loss due to the write-off of deferred debt issuance costs in conjunction with a partial extinguishment and restructuring of the Company's principal bank credit agreement. There was no such item for the nine-month period ended September 30, 1995. Net Income. Net income decreased $4.0 million to $(4.2) million for the nine-month fiscal period ended September 30, 1996, from $(0.2) million for the nine-month period ended September 30, 1995. CALENDAR YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE FISCAL YEAR ENDED DECEMBER 31, 1995 The calendar year ended December 31, 1996 does not conform to the Company's fiscal year and is discussed below only for purposes of comparison with the Company's fiscal year ended December 31, 1995. Revenues. Revenues increased $28.7 million, or 30.9%, to $121.6 million for the calendar year ended December 31, 1996, from $92.9 million for the fiscal year ended December 31, 1995. This increase was due to higher unit volume, higher average unit price from the mid-1996 introduction of the Company's new higher-priced Pasta LaBella flavored pasta into the U.S. Retail grocery market and improvements in product sales mix. Revenues for the Retail market increased $23.1 million, or 46.9%, to $72.4 million for the calendar year ended December 31, 1996, from $49.3 million for the fiscal year ended December 31, 1995. This increase was due to (i) higher average unit prices associated with the introduction of the Company's new, higher-priced Pasta LaBella flavored pasta into the U.S. retail grocery market in mid-1996; (ii) higher unit volume, with the largest increases coming from the private label and club store customers; (iii) improved product sales mix; and (iv) the pass-through of higher durum wheat costs. Revenues for the Institutional market increased $5.6 million, or 12.8% to $49.2 million for the calendar year ended December 31, 1996 from $43.6 million for the fiscal year ended December 31, 1995. The ingredient and foodservice volume gains were partially offset by lower Contract Sales volumes as available capacities were utilized by retail unit growth. The average 1996 institutional unit price increased due to the pass-through of higher durum wheat costs. Gross Profit. Gross profit increased $14.9 million, or 87.6%, to $31.9 million for the calendar year ended December 31, 1996, from $17.0 million for the fiscal year ended December 31, 1995. Gross profit as a percentage of revenues increased to 26.2% for the calendar year ended December 31, 1996, from 18.3% for the fiscal year ended December 31, 1995. These increases were primarily the result of (i) higher unit volumes; (ii) higher average unit prices, primarily due to Pasta LaBella flavored pasta sales; (iii) lower durum wheat costs; (iv) the absence of plant expansion costs; and (v) lower per unit warehousing and distribution costs resulting from outsourcing logistics functions through a new strategic alliance with Lanter Company. Selling and Marketing Expense. Selling and marketing expense increased $16.0 million, or 301.9%, to $21.3 million for the calendar year ended December 31, 1996, from $5.3 million for the fiscal year ended December 31, 1995. Selling and marketing expense grew as a percentage of revenue to 17.5% for the calendar year ended December 31, 1996, from 5.7% for the fiscal year ended December 31, 1995. This increase was due to the Company's incurrence of $9.6 million of product introduction costs during the calendar year ended December 31, 1996 related to the retail introduction of the Company's Pasta LaBella flavored pasta products. These costs included payment of fees for product placement or "slotting," introductory consumer sampling, couponing, advertising and trade promotions. There were no comparable 1995 expenditures. In addition to 27 30 product introduction costs, selling and marketing expenses also increased due to the larger retail revenues associated with Pasta LaBella flavored pasta and increases in club store private label sales. General and Administrative Expense. General and administrative expense increased $0.6 million, or 20.7%, to $3.5 million for the calendar year ended December 31, 1996 from $2.9 million for the fiscal year ended December 31, 1995, but decreased as a percentage of revenues from 3.2% to 2.9% over the same period. The increase in general and administrative expense was primarily due to increases in MIS expenses and communication costs incurred to support sales growth and the operations in South Carolina. Operating Profit. Operating profit decreased $1.6 million, or 18.2%, to $7.2 million for the calendar year ended December 31, 1996, from $8.8 million for fiscal year ended December 31, 1995 and decreased as a percentage of revenue to 5.9% for the calendar year ended December 31, 1996, from 9.4% for the fiscal year ended December 31, 1995. Excluding product introduction costs, operating profit increased by $8.0 million, or 90.9%, to $16.8 million for the calendar year ended December 31, 1996, from $8.8 million for the fiscal year ended December 31, 1995 and increased as a percentage of revenue to 13.8% for the calendar year ended December 31, 1996 from 9.4% for the fiscal year ended December 31, 1995. Interest Expense. Interest expense increased $2.6 million, or 32.5% to $10.6 million for the calendar year ended December 31, 1996 from $8.0 million for fiscal year ended December 31, 1995, due to higher debt levels resulting from the incremental borrowings required to finance the Company's South Carolina and Missouri capital asset expansion and increases in working capital. Income Tax. Income tax decreased to $(1.3) million for the calendar year ended 1996 from $0.3 million for the fiscal year ended 1995, and reflects an effective income tax rate of approximately 38% in both periods. Extraordinary Item. During calendar year ended December 31, 1996, the Company incurred a $1.6 million (net of tax) extraordinary loss due to the write-off of deferred debt issuance costs in conjunction with a partial extinguishment and restructuring of the Company's principal bank credit agreement. Net Income. Net income decreased $4.3 million to $(3.8) million for the calendar year ended December 31, 1996, from $0.5 million for the fiscal year ended 1995. FISCAL YEAR ENDED DECEMBER 1995 COMPARED TO THE FISCAL YEAR ENDED DECEMBER 1994 Revenues. Revenues increased $23.4 million, or 33.7%, to $92.9 million for the fiscal year ended December 31, 1995, from $69.5 million for the fiscal year ended December 31, 1994. This increase was due primarily to higher unit volume and higher average unit prices resulting from a favorable product sales mix and price increases as a result of increases in durum wheat costs. Revenues for the Retail market increased $18.5 million, or 60.1%, to $49.3 million for the fiscal year ended December 31, 1995, from $30.8 million for the fiscal year ended December 31, 1994. The growth in Retail revenues was primarily due to significant volume increases from the mid-1994 commencement of sales to club stores and private label growth. The average 1995 retail unit price also increased due to price increases as a result of the pass-through of higher durum wheat costs and improved product sales mix. Revenues for the Institutional market increased $5.3 million, or 13.8%, to $43.6 million for the fiscal year ended December 31, 1995, from $38.3 million for the fiscal year ended December 31, 1994. The increased net revenue resulted primarily from (i) increased foodservice unit volume; (ii) an increase in Contract Sales volumes; (iii) price increases made as a result of the pass-through of higher durum wheat costs; and (iv) sales from the foodservice introduction of higher-priced Pasta LaBella flavored pasta in the second half of 1995. Gross Profit. Gross profit increased $2.4 million, or 16.4%, to $17.0 million for the fiscal year ended December 31, 1995, from $14.6 million for the fiscal year ended December 31, 1994. This increase resulted primarily from higher unit volumes. Gross profit as a percentage of revenues decreased to 18.3% for the fiscal year ended December 31, 1995 from 21.0% for the fiscal year ended December 31, 1994. Approximately two-thirds of the gross margin decrease was due to incremental plant expansion costs related to the 1995 28 31 construction, commissioning and start-up of the South Carolina production and distribution facilities and the Missouri distribution facility. The balance of the gross margin decrease was a result of (i) planned short-term increases in average unit manufacturing and logistics costs due to temporarily lower overall capacity and higher production cost due to the opening of the South Carolina plant, and (ii) increases in average unit packaging material costs. Selling and Marketing Expense. Selling and marketing expense increased $1.5 million, or 39.5%, to $5.3 million for the fiscal year ended December 31, 1995, from $3.8 million for the fiscal year ended December 31, 1994. Selling and marketing expense as a percentage of revenues increased from 5.5% in fiscal 1994 to 5.7% in fiscal 1995, primarily as a result of retail revenue growth. General and Administrative Expense. General and administrative expense increased $0.9 million, or 45.0%, to $2.9 million for the fiscal year ended December 31, 1995, from $2.0 million for the fiscal year ended December 31, 1994. General and administrative expense as a percentage of revenues increased from 2.8% in fiscal 1994 to 3.2% in fiscal 1995, primarily due to increases in MIS, communications, travel and other general expenses related to the commencement of operations in South Carolina. Operating Profit. Operating profit was $8.8 million for the fiscal year ended December 31, 1995, unchanged from the prior fiscal year ended December 31, 1994. Excluding plant expansion costs in 1995 and 1994, operating profit increased $1.5 million, or 16.1%, to $10.8 million for the fiscal year ended December 31, 1995, from $9.3 million for fiscal year ended December 31, 1994, and decreased as a percentage of revenue to 11.6% for the fiscal year ended December 31, 1995 from 13.4% for the fiscal year ended December 31, 1994. Interest Expense. Interest expense increased $3.0 million, or 60.0%, to $8.0 million for the fiscal year ended December 31, 1995 from $5.0 million for the fiscal year ended December 31, 1994, primarily due to higher debt levels resulting from increased working capital and the financing of the Company's South Carolina and Missouri capital asset expansion. Income Tax. Income tax decreased $1.2 million to $0.3 million for the fiscal year ended December 31, 1995 from $1.5 million for the fiscal year ended December 31, 1994 and reflects an effective income tax rate of approximately 38% in both periods. Extraordinary Item. During the fiscal year ended December 31, 1994, the Company incurred a $0.2 million (net of tax) extraordinary loss due to the write off of deferred debt issuance costs in connection with a partial extinguishment and restructuring of the Company's principal bank credit agreement. There was no such item in 1995. Net Income. Net income decreased $1.7 million to $0.5 million for the fiscal year ended December 31, 1995 from $2.2 million for the fiscal year ended December 31, 1994. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents totaled $2.6 million and working capital totaled $13.3 million at June 30, 1997. At September 30, 1996, cash and cash equivalents totaled $1.8 million and working capital totaled $(1.6) million. The $14.9 million increase in working capital resulted primarily from the $22.3 million April 15, 1997 private equity financing (the "1997 Private Equity Financing") and improvements in the Company's operating results. The Company's net cash provided by operating activities totaled $14.1 million for the nine-month period ended June 30, 1997 compared to $(7.5) million for the nine-month fiscal period ended September 30, 1996. This increase of $21.6 million was primarily due to higher net income, reductions in net working capital investment and reduced product introduction costs. Net cash provided by operating activities was $5.7 million and $3.7 million for the fiscal years ending December 31, 1995 and 1994, respectively. The $2.0 million increase in net cash provided by operating activities in the fiscal year ending December 31, 1995 was primarily due to lower investment in net working capital. Cash flow used in investing activities principally relates to the Company's investments in manufacturing, distribution, milling and MIS assets. Capital expenditures were $11.5 million and $3.0 million for the nine-month periods ending June 30, 1997 and September 30, 1996, respectively, and were $38.8 million and $25.4 million for the fiscal years ended December 31, 1995 and 1994, respectively. The increase in spending for the 29 32 nine-month period ending June 30, 1997 was a result of the Company's initial expenditures in the $86.0 million capital expansion program targeted for 1998 completion. This expansion is designed to meet the volume requirements of the CPC Agreement and planned future growth opportunities. The increased spending in 1994 and 1995 was primarily the result of the construction of the Company's South Carolina manufacturing and distribution facilities and the Missouri distribution center. Net cash provided by financing activities was $(1.8) million for the nine months ended June 30, 1997 compared to $12.3 million for the nine-month fiscal period ended September 30, 1996. The $14.1 million change is primarily a result of the $22.3 million in net proceeds from the 1997 Private Equity Financing offset by the $25.2 million repayment of short-term and long-term borrowings. Net cash provided by financing activities was $33.1 million and $19.6 million for the fiscal years ending December 31, 1995 and 1994, respectively, as a result of borrowings required to fund the Company's capital asset expansion programs and working capital. In April 1997, the Company entered into an amended and restated credit agreement with Bankers Trust Company, Morgan Stanley Senior Funding, Inc. and various banks named therein (the "Credit Agreement"). The Credit Agreement provides for (i) an $18.0 million term loan maturing on February 26, 2000; (ii) a $19.9 million term loan maturing on February 26, 2002; (iii) a $54.7 million term loan maturing on February 27, 2004; (iv) a $45.0 million term loan maturing on February 27, 2004 to finance a portion of the Company's 1997-1998 capital assets expansion; and (v) a $25.0 million revolving loan maturing on February 29, 2000. At June 30, 1997, $85.9 million was outstanding under the Credit Agreement, and the Company had $45.0 million available to borrow under the $45.0 million term credit facility and $24.5 million available to borrow under the $25.0 million revolving credit facility (subject to borrowing base limitations). As of August 31, 1997, $87.9 million was outstanding under the Credit Agreement. Interest on borrowings is based on the London Interbank Offer Rate (LIBOR), plus a credit margin of 300 to 375 basis points. At June 30, 1997, the three-month LIBOR rate was 5.8%, and the Company's aggregate, weighted average bank debt borrowing rate was 9.3%. The current Credit Agreement contains restrictive covenants that, among other things, limit the Company's ability to incur debt, sell assets, make capital expenditures and pay dividends. Management does not expect these limitations to have a material effect on the Company's business or results of operations. The Company is in compliance with all financial covenants contained in the Credit Agreement and believes it will continue to be in compliance during fiscal 1997. The Company plans to use a majority of its net proceeds from the Offering to repay outstanding indebtedness incurred under the Company's Credit Facility. The balance of such proceeds will be used to fund a portion of the Company's planned $86 million (of which $17 million has been incurred and paid) capital expansion of its milling and production facilities designed to meet the significant volume requirements of the CPC Agreement and planned future growth opportunities. The Company intends to finance the remainder of its capital expansion program and fund future working capital needs with a combination of the balance of the net proceeds to the Company from the Offering and borrowings, either under the existing Credit Facility or under a new credit agreement with its lenders (the "New Credit Agreement") to be entered into following the closing of the Offering. The Company has received from its lenders a commitment letter for a new $150 million unsecured revolving credit facility which will replace the existing Credit Facility. The commitment letter provides that interest on borrowings under the new credit facility will be based on, at the Company's option, either LIBOR plus a credit margin of 37.5 to 175 basis points or Bankers Trust Company's base rate plus a credit margin of 0 to 50 basis points. There can be no assurance as to whether or when such new credit facility will be completed or as to the terms of such facility. The Company expects to incur an extraordinary charge related to the write-off of deferred debt issuance costs in connection with the extinguishment of the existing credit facility and the establishment of the new credit facility. The unamortized balance of deferred debt issuance costs at June 30, 1997 was $3,597,000. The commitment letter contemplates that the New Credit Agreement will contain restrictive covenants similar to those in the current Credit Agreement with respect to limits on the Company's ability to incur debt, sell assets, make capital expenditures and pay dividends. Management does not expect these limitations to have a material effect on the Company's business or results of operations. The Company is in compliance with all financial covenants contained in the current Credit Agreement. 30 33 The Company expects that future cash requirements will principally be for capital expenditures, repayments of indebtedness under the Credit Agreement and working capital requirements. As of June 30, 1997, the Company had commitments to purchase Italian pasta production equipment and expand the milling, production and distribution facilities totaling approximately $49.7 million and durum wheat purchase commitments totaling approximately $6.3 million. Management believes that net cash provided by operating activities, net cash provided by financing activities and the net proceeds of the Offering will be sufficient to meet the Company's expected capital and liquidity needs for the foreseeable future. RECENTLY ISSUED ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share," which is required to be adopted by the Company on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. If SFAS No. 128 had been implemented by the Company at June 30, 1997, the impact on the calculation of earnings per share would not have been material. EFFECT OF INFLATION AND INTEREST RATE FLUCTUATIONS Historically, inflation has not had a material effect on the Company, other than to increase its cost of borrowing. In general, the Company has been able to increase the majority of customer sales prices to recover significant increases in the prices of raw materials. However, changes in prices of the Company's pasta products and the pass-through of higher durum wheat costs to certain customers historically have lagged price increases in the Company's raw material costs. 31 34 BUSINESS OVERVIEW AIPC is the third largest and one of the fastest-growing producers and marketers of pasta in North America. The Company commenced operations in 1988 with the North American introduction of new, highly-efficient durum wheat milling and pasta production technology. Management believes that the Company's singular focus on pasta, vertically-integrated facilities, continued technological improvements and development of a highly-skilled workforce enable AIPC to produce high-quality pasta at costs below those of many of its competitors. Management believes that the combination of the Company's cost structure, the average age of its competitors' North American pasta production equipment and the growing pasta consumption in North America creates significant opportunities for continued growth. The Company's revenue and operating income excluding product introduction costs were $121.6 million and $16.7 million, respectively, for the calendar year ended December 31, 1996, and grew at CAGRs of 33% and 33%, respectively, over the five-year period ended December 31, 1996. During the nine-month period ended June 30, 1997, the Company had revenue of $93.6 million and an operating margin excluding product introduction costs of 15.9%. The Company has rapidly established a significant market presence in North America by developing strategic customer relationships with food industry leaders that have substantial pasta requirements. The Company has a long-term supply agreement with Sysco, the nation's largest marketer and distributor of foodservice products. In 1998, AIPC will become the exclusive producer of Mueller's, the largest pasta brand in the United States, pursuant to a recent long-term manufacturing and distribution agreement with CPC. CPC has announced its intention to close its current pasta production facility by December 1997. AIPC is also the primary supplier of pasta to Sam's Club, the largest club store chain in the United States, and supplies private label and branded pasta to six of the 10 largest grocery retailers in the United States, including Wal*Mart, A&P, Publix, Albertsons, American Stores and Winn-Dixie. In addition, AIPC has developed supply relationships with leading food processors, such as Pillsbury, General Mills and Kraft Foods, which use the Company's pasta as an ingredient in branded food products. The Company produces more than 80 dry pasta shapes in two vertically-integrated production and distribution facilities, strategically located in Excelsior Springs, Missouri and Columbia, South Carolina. 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 pasta production technology. Management believes that this plant continues to be among the most efficient and highly-automated pasta facilities in North America. The South Carolina plant, which commenced operations in 1995, produces only pasta shapes conducive to high-volume production and employs a highly-skilled, self-managed workforce. Management believes that the South Carolina plant is the most efficient pasta facility in North America in terms of productivity and conversion cost per pound. To meet the significant volume requirements of the CPC Agreement and support future growth, the Company commenced a capital expenditure program in 1997 to nearly double the Company's annual pasta production capacity and add a highly-automated durum wheat mill to its South Carolina plant, with completion scheduled for 1998. OPERATING STRATEGY The Company's operating strategy is to grow revenues and profitability by offering customers the highest quality pasta products at competitive prices with superior customer service. Key elements of the Company's operating strategy are to: - Continue to Lead the Industry as the Lowest Cost Producer of High Quality Pasta. AIPC has successfully implemented production and capital investment strategies designed to achieve low-cost production of high-quality products. AIPC has distinguished itself from most major pasta producers by vertically integrating the durum wheat milling function with the production process, thereby allowing the Company to manage the grain procurement process and better control the consistency, quality and cost of its raw materials. The Company has invested in new pasta making technology, process controls and the development of a largely self-managed work force. Management believes that its facilities are among the 32 35 most efficient pasta production facilities in North America in terms of productivity and conversion cost per pound. AIPC actively manages plant capacity utilization to optimize its fixed asset base and profitability through Contract Sales to government agencies and other customers. The Company believes that its vertically-integrated processes and pasta production equipment produces pasta of superior color, texture, flavor and consistency. AIPC's logistics strategy enables the Company to realize significant distribution cost savings through its strategically-located distribution centers. The Company expects to realize additional operating efficiencies through the completion of the current expansion program at its South Carolina and Missouri facilities and ongoing improvement programs. See "-- Facilities and Expansion." - Expand Customer-Driven Strategy. The Company is committed to developing and maintaining strategic relationships with customers who (i) are food industry leaders requiring a significant volume of high-quality pasta; (ii) have committed marketing and sales resources to growing their pasta business; and (iii) pursue long-term supply arrangements. The Company has pursued this strategy since commencing operations in 1988, beginning with an agreement with Sysco. For almost a decade, the Company has been Sysco's primary pasta supplier. In addition, since 1994, the Company has been the primary pasta supplier to Sam's Club. AIPC currently supplies private-label and branded products to over 20 retail grocery customers, including many of the largest U.S. grocery retailers. AIPC also supplies pasta to leading food processors such as Pillsbury, General Mills and Kraft for use as a food ingredient. Starting in 1998, the Company will become the sole producer of Mueller's, the largest pasta brand in the United States, under the CPC Agreement. Management believes that these strategic relationships increase operating efficiencies, enhance AIPC's investment in new technology, create distribution synergies, and enable closer involvement in its customers' pasta businesses. - Provide Superior Customer Service. The Company develops and enhances customer relationships by providing superior service and technical support for its customers. The Company has invested heavily in the development of a broad range of customer service programs, including electronic data interchange (EDI) and efficient consumer response (ECR) programs which streamline the order, invoicing and inventory management functions. AIPC uses its customer response services and category management expertise, based in part on data supplied by A.C. Nielsen Co. ("Nielsen"), to assist customers in their supply management and merchandising decisions. AIPC's inventory management system is designed to optimize customer lead time, order fill rate and inventory turnover. To provide its customers with benefits in both transportation cost and delivery time, the Company has strategically located its distribution centers in Missouri, South Carolina and California. The Company provides marketing, technical and service support to its customers by assisting customers with supply and category management decisions, producing pasta to its customers' specifications and making operational recommendations to its customers using pasta as an ingredient in their food products. AIPC is the only pasta producer to sponsor an annual durum milling and pasta production technology forum, at which industry experts conduct a training and development program for the manufacturing and research and development personnel of food companies. GROWTH STRATEGY The Company continues to implement its growth strategy, which builds on the Company's operating strategy and industry trends. Key elements of the Company's growth strategy are to: - Successfully Implement CPC Business Expansion. The Company was recently selected to be the exclusive producer of CPC's Mueller's brand pasta, the largest pasta brand in North America. Upon completion of AIPC's planned capacity expansion in 1998, management anticipates CPC's annual volume requirements will represent an approximately 60% increase over the Company's fiscal 1997 production run rate. Management believes that the Company's experience in servicing large pasta supply agreements and its current capacity expansion program will enable AIPC to meet the current CPC volume requirements and support potential future growth. - Pursue Strategic Alliances. The Company believes that commercial users and marketers of pasta will continue to require increasing quantities of pasta and that a greater portion of these requirements will 33 36 be outsourced to more efficient producers of high-quality pasta, such as AIPC. Management has identified additional strategic opportunities with commercial users and marketers of pasta which may result in incremental growth, new product development and cost savings opportunities in the future. - Secure Additional Private Label Customers. The Company intends to continue to grow its private label customer base and secure additional private label customers by continuing to offer quality products, competitive pricing, category management and superior customer service. Management believes that AIPC's prospects for growth in the private label market have been enhanced since Borden, historically the largest private label supplier in North America, publicly announced its intention to exit the private label pasta business in 1997. - Continue Product Innovation. In 1995, the Company introduced Pasta LaBella flavored pasta, a line of all natural, full-flavored pasta products utilizing patented flavoring technology and AIPC's proprietary production process. In addition to pursuing increased sales with institutional customers, the Company is exploring potential sales and marketing alliances to expand retail distribution of Pasta LaBella flavored pasta. AIPC also intends to continue assisting its customers with innovative products and packaging, and the development of additional value-added products intended to generate higher margins than traditional pasta products. PASTA INDUSTRY North American pasta consumption exceeded 5.0 billion pounds in 1995 and is expected to grow based on industry and trade sources and the Company's own analysis. The pasta industry consists of two primary customer markets: (i) Retail, which includes grocery stores, club stores and mass merchants that sell branded and private label pasta to consumers; and (ii) Institutional, which includes both foodservice distributors that supply restaurants, hotels, schools and hospitals, as well as food processors that use pasta as a food ingredient. In 1996, the supermarket portion of the Retail market accounted for approximately 1.3 billion pounds, of which branded and private label pasta accounted for 1.0 billion and 0.3 billion pounds, respectively. Foodservice distributors, food processors and the U.S. government in the Institutional market accounted for the remainder of the volume, approximately 3.7 billion pounds, in 1996. The expected increase in North American consumption is primarily attributable to the widespread recognition that pasta is an inexpensive, convenient and nutritious food. The U.S. Department of Agriculture places pasta on the foundation level of its pyramid of recommended food groups. Products such as flavored pasta, prepared sauces, boxed pasta dinners, and both frozen and shelf-stable prepared pasta entrees support consumers' lifestyle demands for convenient at-home meals. Pasta continues to grow in popularity in restaurants as Americans continue to dine away from home more frequently. Customer Markets Retail. Hershey, Borden and CPC together represent a majority of the branded Retail market. Hershey, which primarily competes in the branded Retail market and whose retail brands include Ronzoni, San Giorgio, Skinner and American Beauty, is the industry leader and produced 24.5% of the total pounds sold in the branded Retail market for the 52 weeks ended June 30, 1997. Borden, which produced 21.5% of the total pounds sold in the Retail market for the 52 weeks ended June 30, 1997, has announced its intention to shift its strategy to focus on its branded pasta and sauce products, which include Creamette, Prince, Catelli, Merlino's and Anthony's, and to exit private label pasta production and sales. CPC participates in the Retail market with Mueller's, the oldest and largest pasta brand in the United States. AIPC directly participates in the branded Retail market by producing and distributing Pasta LaBella flavored pasta and will indirectly participate in such market by processing and distributing Mueller's brand pasta for CPC. During 1998, CPC will transfer substantially all of its Mueller's brand pasta production to AIPC. See "-- Production and Supply Agreements." Between the first quarter of 1994 and the second quarter of 1997, sales of private label pasta products increased from 18.6% to 21.5% of the total pounds of pasta sold in the Retail market. Management believes that sales of private label pasta products will continue to grow at a rate in excess of the overall Retail pasta 34 37 market. After Borden's departure from the private label market, AIPC will be one of the leading suppliers in the remaining fragmented market. Management believes that the private label category offers significant growth and profit opportunities to retailers and efficient producers. Retailers often prefer high-quality private label products to branded products because private label products typically enable retailers to generate higher margins and maintain greater control of in-store merchandising. While consumers traditionally have viewed private label products as having lower quality than branded products, management believes that new high-quality private label products have begun to change this perception. Management attributes some of this change in the private label market to the increasingly upscale image, improved packaging, higher product quality and competitive prices of private label products. Institutional. The Institutional market includes both foodservice distributors that supply restaurants, hotels, schools and hospitals, as well as food processors that use pasta as a food ingredient. Traditional foodservice customers include businesses and organizations, such as Sysco and JP Foodservice, Inc., that sell products to restaurants, healthcare facilities, schools, hotels and industrial caterers. Most foodservice distributors obtain their supply of pasta from third party producers such as AIPC. The foodservice market is highly-fragmented and is served by numerous regional and local food distributors, including both "traditional" foodservice customers and chain restaurant customers. Sysco, the nation's largest foodservice marketer and distributor of foodservice products and one of the nation's largest commercial purchasers of pasta products, serves approximately 10% of the foodservice customers in the United States and has more than double the revenues of the next largest foodservice distributor. The Institutional market also includes sales to food processors who use pasta as an ingredient in their food products such as frozen dinner entrees and side dishes, dry side dish mixes, canned soups and single-serve meals. Large food processors that use pasta as a food ingredient include Kraft Foods, American Home Food Products Corporation, Stouffers Corp., Campbell Soup Company, ConAgra, Inc., Pillsbury and General Mills. The consistency and quality of the color, starch release, texture, cooking consistency, and gluten and protein content of pasta produced for food processors is crucial to their products' success. As a result, food processors have stringent specifications for these attributes. The size of the Institutional market is affected by the number of food processors that elect to produce pasta internally rather than outsourcing their production. Historically, most pasta used by food processors was manufactured internally for use in food processors' own products. Management believes, however, that an increasing number of food processors may discontinue the internal production of their own pasta and outsource their production to more efficient producers such as AIPC. Pasta Production Capacity Management believes that pasta producers have historically rationalized their existing production facilities. Within the past several years, however, there has been an increase in some pasta producers' capital reinvestment. Upon completion of the planned expansion, AIPC will have increased its production capacity to 620 million pounds since commencing operations in 1988. Several domestic pasta producers have recently completed production facility additions or announced their intention to increase domestic production capacity. In addition to AIPC's planned capital expansion, management believes that these capacity additions represent more than 200 million pounds in aggregate. Dakota Growers recently increased the capacity of its durum wheat mill and has announced plans to complete a pasta production capacity expansion in excess of 100 million pounds by the end of 1997. Hershey is believed to have recently added approximately 50 million pounds of pasta capacity to its facility in Winchester, Virginia. In September 1997, Barilla announced plans to build a pasta plant near Ames, Iowa with an estimated annual pasta capacity over 200 million pounds. Two major pasta producers have also recently announced planned reductions in pasta production capacity. Borden announced that it will close or sell five of its ten North American pasta plants by the end of 1997, and CPC intends to eliminate its capacity of approximately 180 million pounds by the end of 1997. AIPC and Dakota Growers are currently the only major pasta producers that own vertically-integrated milling and pasta production facilities. Barilla has announced that its new, vertically-integrated Iowa pasta plant will include milling, production and warehouse facilities. 35 38 Management estimates pasta imported from foreign producers during 1996 represented approximately 17% of the U.S. dry pasta market, and that of this amount, approximately two-thirds originated from producers in Italy and Turkey. The primary foreign suppliers of pasta with which the Company competes are Barilla and De Cecco. Pricing pressures from Turkish and Italian pasta producers aggressively targeting the U.S. markets have adversely affected returns and earnings of some U.S. producers in recent years. In 1996, pasta imported from Italy accounted for approximately $140 million in sales, or around 8.0% of the U.S. pasta market. In 1996, a U.S. Department of Commerce investigation revealed that several Italian and Turkish producers were engaging in unfair trade practices by selling pasta at less than fair value in the U.S. markets and benefitting from subsidies from their respective governments. Effective July 1996, the U.S. International Trade Commission imposed anti-dumping duties ranging from 2.8% to 46.7% on Italian imports and from 56.8% to 63.3% on Turkish imports, as well as countervailing duties ranging from 1.2% to 11.2% on Italian imports and from 3.9% to 15.8% on Turkish imports. Although Italian and Turkish importers still participate in the major U.S. customer markets, management believes that these duties have significantly reduced the volume of low-priced pasta from Italy and Turkey. See "Risk Factors -- Competition." Raw Materials Pasta's primary ingredient is semolina, which is extracted from durum wheat through a milling process. Almost all domestic pasta producers purchase semolina from third party milling companies. Durum wheat is used exclusively 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. The Company blends semolina from different wheat varieties as needed to meet customer specifications. Durum wheat used in United States pasta production generally originates from Canada, North Dakota, Montana, Arizona and California. Although durum wheat can be purchased directly from farmers or grower-owned cooperatives, most milling companies purchase durum wheat on a commodity exchange. AIPC and Dakota Growers are the only major producers of pasta in North America that have vertically integrated milling and production facilities. See "Raw Materials and Supplies." PRODUCTS AIPC's product line, comprising over 1,000 stock-keeping units ("SKUs"), includes long goods such as spaghetti, linguine, fettuccine, angel hair and lasagna, and short goods such as elbow macaroni, mostaccioli, rigatoni, rotini, ziti and egg noodles. In many instances, the Company produces pasta to its customers' specifications. AIPC makes over 80 different shapes and sizes of pasta products in over 160 package configurations, including bulk packages for institutional customers and small individually-wrapped packages for retail sale to individual consumers. AIPC contracts with third parties for the production of certain pasta shapes, such as retail lasagna and canneloni, which are specialized products, but which are necessary to offer customers a full range of pasta products. Purchased pasta represented less than 2% of AIPC's total unit volume in fiscal 1996. In fiscal 1995, AIPC introduced a product line of all natural, full-flavored pasta marketed under the Pasta LaBella brand. Pasta LaBella flavored pasta is principally marketed as a branded product to grocery retailers and to Sysco. AIPC's all-natural, full-flavored dry pasta is available in a variety of flavors including tomato basil, lemon pepper, pesto, roasted garlic and herb, roasted bell pepper/roasted garlic, and cracked black pepper. Management believes that AIPC's use of patented flavoring ingredients under an exclusive license and a proprietary manufacturing process allows the Company to provide superior product quality and flavor delivery compared to competitive flavored pasta products. Pasta LaBella flavored pasta was recognized as one of the top 10 new products in the United States in 1996 by Food Processing Magazine. QUALITY The Company believes that its state-of-the-art, Italian pasta production equipment is capable of producing the highest quality pasta. AIPC's products are produced to satisfy the specifications of the Company's customers as well as its own product specifications, which management believes are among the highest in the industry. The Company's pasta is distinguished by a rich, natural "wheaty" taste and a 36 39 consistently smooth and firm ("al dente") texture with a minimum amount of white spots or dark specks. AIPC evaluates the quality of its products through: (i) internal laboratory evaluation of AIPC products against competitive products on physical characteristics, including color, speck count, shape and consistency, and cooking performance, including starch release, protein content and bite; and (ii) competitive product comparisons that AIPC's customers perform on a regular basis. The Company submits its production facilities to semi-annual inspections by the American Institute of Baking ("AIB"), the leading United States baking, food processing and allied industries evaluation agency for sanitation and food safety. The Company consistently has achieved the AIB's highest "Superior" rating. The Company also implemented a comprehensive Hazard Analysis Critical Control Point ("HAACP") program five years ago to continuously monitor and improve the safety, quality and cost-effectiveness of the Company's facilities and products. The Company believes that having an AIB rating of "Superior" and meeting HAACP standards have helped the Company attract new business and strengthen existing customer relationships. PRODUCTION AND SUPPLY AGREEMENTS The Company has established itself as one of the largest producers of dry pasta in North America by establishing strategic production, supply and distribution arrangements with several food industry leaders, including CPC and Sysco. Under the CPC Agreement, CPC will close its current facilities dedicated to the production of Mueller's brand pasta and, beginning in 1998, AIPC will become the exclusive producer of Mueller's, with the exception of two specialty items which CPC currently purchases from another supplier. CPC is a global food company, and its Mueller's pasta line is the oldest and largest pasta brand in the United States with an annual sales volume averaging approximately 200 million pounds over the last five years. AIPC will be paid on a "cost plus" basis in an amount equal to total actual cost of production plus a guaranteed profit per pound of pasta produced. CPC has guaranteed minimum purchase volumes of 175 million pounds annually for nine years. AIPC may also benefit from additional cost savings resulting from improved productivity. The term of the contract is through December 31, 2006 with a three-year renewal term at the option of CPC. Without CPC's consent, AIPC may not produce branded retail pasta for Borden, Hershey or Barilla, and is limited to the production of an aggregate of 12 million pounds of branded pasta products annually for other producers. The CPC Agreement may be terminated by CPC upon certain events, including (i) a failure by AIPC to satisfy certain minimum production requirements for any reason other than the fault of CPC or events demonstrably beyond AIPC's control, or (ii) AIPC's merger with, or sale of substantially all of its assets to, Borden, Hershey or Barilla. Pursuant to the Sysco Agreement, AIPC is the primary supplier of pasta for Sysco and has the exclusive right to supply pasta to Sysco for sale under Sysco's name. Sysco, which operates from approximately 65 operations and distribution facilities nationwide, provides products and services to approximately 230,000 restaurants, hotels, schools, hospitals, and other institutions, as well as the U.S. government. For the nine-month fiscal year ended September 30, 1996, sales attributed to Sysco represented approximately 27% of the Company's net revenues. Sysco recently exercised its option to renew its agreement with AIPC for an additional three years through June 30, 2000, and has options to renew the agreement for additional three-year periods through June 30, 2006. AIPC products are sold to Sysco on a cost-plus basis, with annual adjustments based on the prior year's costs. Under the Sysco Agreement, AIPC may not supply pasta products to any business other than Sysco in the United States, Mexico or Canada that operates as, or sells to, institutions and businesses which provide food for consumption away from home (i.e. foodservice businesses) without Sysco's prior consent. In 1996, Sysco honored the Company as one of the 10 best of its 1,300 suppliers. The Sysco Agreement may be terminated by Sysco upon certain events, including a substantial casualty to or condemnation of AIPC's Missouri plant. RAW MATERIALS AND SUPPLIES AIPC's ability to produce high-quality pasta generally begins with its purchasing durum wheat directly from farmers and grower-owned cooperatives in Canada, North Dakota, Montana, Arizona and California, 37 40 rather than from grain exchanges. This direct purchasing method ensures that the extracted semolina meets AIPC's specifications since each variety of durum wheat has its own unique set of milling and pasta making characteristics. The Company has several sources for durum wheat and is not dependent on any one supplier. As a result, the Company believes that it has adequate sources of supply for durum wheat. The Company occasionally buys and sells semolina to balance its milling and production requirements. Durum wheat is a cash crop whose average monthly market price has fluctuated from a low of $5.18 per bushel to a high of $7.49 per bushel in the last four years. Durum wheat does not have a related futures market to hedge against such price fluctuations. The Company manages its durum wheat cost risk through long-term contracts and other arrangements with its customers and advance purchase contracts for durum wheat which are generally less than six months' duration. Long-term supply agreements and other customer arrangements which allow for the pass-through of durum wheat cost changes in certain circumstances represented approximately 60% of AIPC's total revenue for the nine-month period ended June 30, 1997. Management believes that the Company will significantly increase the percentage of revenues pursuant to contracts which include provisions for sales price adjustments as it begins to generate CPC revenues in 1998. Between June 30, 1997 and October 6, 1997, the market price of durum wheat increased by approximately 21% from $5.60 per bushel to $6.75 per bushel. See "Risk Factors -- Raw Materials" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." AIPC purchases its packaging supplies, including poly-cellophane, paperboard cartons, boxes and totes from third parties. Management believes the Company has adequate sources of packaging supplies. FACILITIES AND EXPANSION Production Facilities. AIPC's pasta production plants are located near Kansas City in Excelsior Springs, Missouri, and in Columbia, South Carolina. The Company's facilities are strategically located to support North American distribution of AIPC's products and benefit from the rail and interstate highway infrastructure. At June 30, 1997, the Company's facilities had combined annual milling and production capacity of approximately 300 million pounds of durum semolina and 330 million pounds of pasta. The Company has pursued a capacity expansion strategy over the past several years. During 1994, the Company completed a $30.0 million expansion of the Missouri plant, increasing production capacity more than 70% to 230 million pounds per year and, at the same time, increased its durum wheat milling capacity over 100% to support pasta production of approximately 300 million pounds per year. In 1995, the Company added approximately 100 million pounds of pasta capacity by constructing its South Carolina plant. AIPC has commenced an $86.0 million capital expenditure program to increase its current pasta production capacity by 90% from 330 million pounds per year to 620 million pounds per year in 1998. The additional capacity at the Missouri facility will combine high-speed, high-output pasta production lines with the ability to produce a full range of products, and will include a distribution center expansion. The capital expenditures program also includes the construction of a durum wheat mill in South Carolina which adjoins the existing plant facility, a 200% increase in the facility's pasta production capacity, and a doubling of the capacity of the South Carolina distribution facility. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Risk Factors -- Substantial Planned Investment in Milling and Production Facilities." The additional capacity will be used to produce Mueller's brand pasta and take advantage of other market opportunities. By the second quarter of fiscal 1998, AIPC will assume production of substantially all of CPC's Mueller's pasta, which management estimates will require a minimum production capacity of 200 million pounds a year. CPC's guaranteed annual minimum purchases of 175 million pounds pursuant to the CPC Agreement will utilize approximately 60% of the Company's newly-added capacity. 38 41 The following chart illustrates the historical and budgeted growth of AIPC's milling and pasta production capacity: [Performance Graph] Each of the Company's major capacity expansion programs has been completed on schedule and within budget, and has delivered the targeted levels of output and efficiency. See "Risk Factors -- Substantial Planned Investments in Milling and Production Facilities" and "Management of Growth and Implementation of CPC Business." Milling and Pasta Production Processes. Durum wheat is currently delivered to AIPC's mill in Missouri by railcar directly from the durum wheat elevators in the northern United States and Canada under a long-term rail contract. The wheat is then unloaded, blended and pre-cleaned. Next, the moisture content of the wheat is raised to the optimal level required for milling (the "tempering process"). The cleaned and tempered wheat is then conveyed to the mill where grinding, sifting, and purifying processes extract the purest possible semolina. The semolina milling is controlled from a central control room located in the mill where a single AIPC team member monitors and directs the mill's entire milling, cleaning and storage process. Semolina is then pneumatically distributed from the mill to AIPC's pasta production facility in Missouri and, through the use of a leased fleet of 33 dedicated railcars, transferred to South Carolina. After being mixed with water, the semolina is extruded into the desired shapes and travels through computer-controlled high-temperature dryers and stabilized at room temperature. The Company's entire pasta production process is controlled by programmable logic controllers which enable all of the production lines to be operated and monitored by minimal staff. The pasta is then packaged in a wide variety of packaging configurations on highly-automated film, carton and bulk packaging systems and forwarded through automated conveyors to the distribution center to be palletized and stored prior to shipment. 39 42 The Company's vertically-integrated milling and pasta production process is depicted in the following chart: AIPC'S MILLING AND PASTA PRODUCTION PROCESS MILLING AND PASTA PRODUCTION PROCESS GRAPH Distribution. The Company's three distribution centers are strategically located in South Carolina, Missouri and Southern California to serve a national market. The Company currently owns the distribution center adjoining its Missouri plant and leases its distribution center in South Carolina as well as space in a public warehouse in Pomona, California. The Company completed construction of the integrated warehousing and distribution facilities at its Missouri and South Carolina facilities during 1995. The warehousing and distribution facilities are integrated with the Company's production facilities which allows cased, finished products to be automatically conveyed via enclosed case conveying systems from the production facilities to the distribution centers for automated palletization and storage until shipping. The combination of integrated facilities and multiple distribution centers enables AIPC to realize significant distribution cost savings and provides lead time, fill rate and inventory management advantages to its customers. The operation of the Missouri and South Carolina distribution centers is outsourced under a long-term agreement with Lanter Company, a firm specializing in warehouse and logistics management services. 40 43 SALES AND MARKETING AIPC actively markets its products through approximately 15 internal sales and marketing staff and approximately 30 independent food brokers and distributors throughout the United States. AIPC's senior management is directly involved in the selling process in all customer markets. The Company's sales and marketing strategy is to provide superior quality, complete product offering, distinctive packaging specifically tailored to customers' needs, competitive pricing and superior customer service to attract new customers and grow existing customers' pasta sales. One of the Company's core strengths has been the development of strong customer relationships and the establishment of a reputation as a technical and service expert in the pasta field. As part of its overall customer service strategy, AIPC uses its category management expertise to assist customers in their supply management decisions regarding pasta and new products. The Company's category management experts use on-line Nielsen's supermarket data to drive pasta category growth by recommending pricing, SKU sets and shelf spacing to both private label and branded customers. AIPC representatives also assist food processors in incorporating AIPC's pasta as an ingredient in its customers' food products. The Company sponsors an annual "Pasta Technology Forum" which is a training and development program for its customers' production and new product personnel. AIPC also produces and distributes a quarterly newsletter, the Pasta Advisor, to its institutional customers which contains recommendations regarding storage, conveying, cooking and ingredient combination. In addition to technical education, the Company provides dedicated technical support to its customers by making recommendations regarding the processing of pasta in their facilities. AIPC believes that these value-added activities provide customers with a better appreciation and awareness of the Company and its products. The Company consistently demonstrates its commitment to customer service through the development of enhanced customer service programs. Examples of these programs include the creation by AIPC of an ECR model which uses EDI and vendor replenishment programs to assist its key retail customers, and category management services for its private label and branded customers. These programs also enable the Company to more accurately forecast production and sales demand, enabling higher utilization of production capacities and lower average unit costs. AIPC has also created a dedicated sales force for Sysco, its largest customer, to provide regional sales support. MANAGEMENT INFORMATION SYSTEMS The Company's production, distribution, sales and marketing operations are supported by an IBM AS400-based computer system. The system utilizes licensed BPCS manufacturing software which has been tailored to the Company's management processes and integrates its production, purchasing, order entry, inventory management, distribution and accounting systems. The Company's MIS were recently upgraded in anticipation of the Company's growth and desire to continue to offer its customers value-added, efficient services. The Company has invested substantial amounts in EDI and ECR to streamline the order, invoicing and inventory management functions. The Company believes that its recent hardware and software upgrades have adequately addressed the systems operations issues relating to the year 2000. COMPETITION The Company operates in a highly competitive environment against numerous well-established national, regional and foreign companies, and many smaller companies. The Company's competitors include both independent pasta producers and pasta divisions and subsidiaries of large food products companies. The Company competes 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 its products. AIPC's products compete with a broad range of food products, both in the retail and institutional customer markets. Competition in these markets generally is based on product quality and taste, pricing, packaging and customer service and logistics capabilities. The Company believes that it currently competes favorably with respect to these factors. See "Risk Factors -- Competition" and "Business -- Pasta Industry." 41 44 AIPC's direct competitors include large multi-national companies such as Hershey and Borden and other competitors such as Dakota Growers, Philadelphia Macaroni and Zerega's. The Company also competes against foreign companies such as Italian pasta producers De Cecco and Barilla and competes, indirectly, against food processors such as Kraft Foods, General Mills, Inc., American Home Food Products Corporation, Campbell Soup Company and Stouffers Corp., that produce pasta internally as an ingredient for use in their food products. See "-- Industry." TRADEMARKS AND PATENTS The Company holds a number of federally registered and common law trademarks which it considers to be of considerable value and importance to its business including: AIPC American Italian Pasta Company, American Italian, and Pasta LaBella. The Company has registered the AIPC American Italian Pasta Company(R), Pasta LaBella(R), Montalcino(R) and other trademarks with the U.S. Patent and Trademark Office. AIPC has filed a registration application with the U.S. Patent and Trademark Office for the Calabria(TM) and Heartland(TM) trademarks. A patent application is currently pending with respect to the proprietary flavoring process for Pasta LaBella flavored pasta. REGULATION The Company is subject to various laws and regulations relating to the operation of its production facilities, the production, packaging, labeling and marketing of its products and pollution control, including air emissions, which are administered by federal, state, and other governmental agencies. The Company's production facilities are subject to inspection by the U.S. Food and Drug Administration and Occupational Safety and Health Administration, the Missouri Department of Natural Resources and the South Carolina Department of Health and Environmental Control. EMPLOYEES As of June 30, 1997, the Company employed 287 full-time persons, of whom 134 were salaried employees and 153 were hourly employees. The Company's employees are not represented by any labor unions. AIPC considers its employee relations to be good. LEGAL PROCEEDINGS The Company currently is not a party to any material litigation nor is it aware of any litigation threatened against it which, if commenced and adversely determined, would likely have a material adverse effect upon the business or financial condition of the Company. 42 45 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information concerning each of the directors and executive officers of the Company as of the date of this Prospectus:
NAME AGE POSITION ---- --- -------- Horst W. Schroeder........................ 56 Chairman of the Board of Directors Timothy S. Webster........................ 35 President and Chief Executive Officer; Director Norman F. Abreo........................... 47 Executive Vice President -- Operations David E. Watson........................... 42 Executive Vice President and Chief Financial Officer David B. Potter........................... 38 Senior Vice President -- Procurement Jonathan E. Baum.......................... 37 Director David Y. Howe............................. 33 Director Robert H. Niehaus......................... 42 Director Amy S. Rosen.............................. 27 Director James A. Schlindwein...................... 68 Director Lawrence B. Sorrel........................ 38 Director Richard C. Thompson....................... 46 Director
Horst W. Schroeder has served as Chairman of the Board of Directors of the Company since June 1991, and as a Director of the Company since August 1990. Since 1990, Mr. Schroeder has been President of HWS & Associates, Inc., a Hilton Head, South Carolina management consulting firm owned by Mr. Schroeder. Prior to founding HWS & Associates, Mr. Schroeder served the Kellogg Company, a manufacturer and marketer of ready-to-eat and other convenience food products, in various capacities for more than 20 years, most recently as President and Chief Operating Officer. He is a manager of PSF Holdings, L.L.C. and has served as Chairman of the Board of its wholly-owned subsidiary, Premium Standard Farms, Inc., a vertically-integrated pork producer, since 1996. Timothy S. Webster has served as President of the Company since June 1991, as President and Chief Executive Officer of the Company since May 1992, and as a Director since June 1989. Mr. Webster joined the Company in April 1989, and served as Chief Financial Officer from May 1989 to December 1990 and as Chief Operating Officer from December 1990 to June 1991. In addition, in August 1997 Mr. Webster assumed responsibility for managing the Company's sales and marketing functions. Prior to joining the Company, Mr. Webster was a manager with the Entrepreneurial Services Group of Arthur Young and Company (a predecessor firm to Ernst & Young LLP) from April 1987 to April 1989. Norman F. Abreo joined the Company in December 1991, serving initially as the Company's Vice President -- Manufacturing. He became Senior Vice President - -- Operations in June 1995, and Executive Vice President -- Operations in June 1997. Prior to joining the Company, he was Plant Manager for the Coca-Cola Enterprises, Inc. plant in New Orleans, Louisiana, from December 1987 to December 1991; Director of Operations for Borden Pasta Group from December 1985 to December 1987; and Plant Manager of the Borden Pasta Group's New Orleans facility from March 1979 to December 1985. David E. Watson joined the Company in June 1994 as its Senior Vice President and Chief Financial Officer. He was promoted to Executive Vice President and Chief Financial Officer in June, 1997. Prior to joining AIPC, Mr. Watson spent 18 years with the accounting firm of Arthur Andersen & Co., most recently as partner-in-charge of its Kansas City and Omaha Business Consulting Group practice. Mr. Watson is a certified public accountant. David B. Potter joined the Company in 1993 as its Director of Procurement. He was named Vice President in 1994 and Senior Vice President -- Procurement in June 1997. Before joining the Company, Mr. Potter had worked in numerous areas of Hallmark Cards and its subsidiary, Graphics International Trading Company, from 1991 to 1993, most recently as Business Logistics Manager. 43 46 Jonathan E. Baum has served as a Director of the Company since 1994. He has been the Chairman and Chief Executive Officer of George K. Baum & Company, an investment banking firm, since 1994. Previously, he had been a Vice President with Salomon Brothers Inc. David Y. Howe has served as a Director of the Company since 1995. He is a Vice President of Citicorp Venture Capital, Ltd., a venture capital firm, where he has been employed since 1993. From 1990 to 1993, he had been employed by Butler Capital, a private investment company. He is also a director of Aetna Industries, Inc., Brake-Pro, Inc., Cable Systems International, Inc., Copes-Vulcan, Inc., Pen-Tab Industries, Inc., Milk Specialties Company and LifeStyle Furnishings, Ltd. Robert H. Niehaus has served as a Director of the Company since 1992. He has been a Managing Director of Morgan Stanley & Co. Incorporated since 1990. He is also Managing Director and a Director of The Morgan Stanley Leveraged Equity Fund II, Inc., the general partner of MSLEF, and Morgan Stanley Capital Partners III, Inc., the general partner of the general partner of the MSCP Funds. He is also a director of Fort James Corporation, Silgan Corporation, Silgan Holdings Inc., Waterford Wedgewood UK, plc, of which he is the Chairman, and Waterford Crystal Ltd. Amy S. Rosen has served as a Director of the Company since April, 1997. She is an Associate of Morgan Stanley & Co. Incorporated, where she has been employed since 1994. Ms. Rosen also is an Associate of Morgan Stanley Capital Partners III, Inc., the general partner of the general partner of the MSCP Funds. Previously, she was employed by The Blackstone Group for two years. James A. Schlindwein has served as a Director of the Company since 1995. Prior to his retirement in September 1994, Mr. Schlindwein served as Executive Vice President-Merchandising Services and Director of Sysco Corporation, a national institutional foodservice distributor, where he had served since 1980. He is also a director of Riser Foods, Inc. Lawrence B. Sorrel has served as a Director of the Company since 1992. He is a Managing Director of Morgan Stanley & Co. Incorporated where he has been employed since 1986. He is also Managing Director and a Director of Morgan Stanley Capital Partners III, Inc., the general partner of the general partner of the MSCP Funds, and The Morgan Stanley Leveraged Equity Fund II, Inc., the general partner of MSLEF. He is also a director of Emmis Broadcasting Corporation, Vanguard Health Systems, Inc., LifeTrust America, Inc., and The Compucare Company. Richard C. Thompson has served as a Director of the Company since 1986. Mr. Thompson is an experienced entrepreneur and, since 1993, has been President and Chief Executive Officer of Thompson's Pet Pasta Products, Inc., a pet food producer. He is the founder of the Company and served as its President from May 1986 to June 1991. COMPOSITION OF BOARD OF DIRECTORS Upon consummation of the Offering, it is anticipated that the Company's Board of Directors will consist of nine directors, divided into three classes, with the members of each class to serve for staggered three-year terms. The initial term of the first class will expire at the annual meeting of stockholders to be held in 1998, the initial term of the second class will expire in 1999 and the initial term of the third class will expire in 2000. Messrs. Schlindwein and Howe and Ms. Rosen will be included in the first class, Messrs. Baum, Niehaus and Thompson will be included in the second class and Messrs. Webster, Schroeder and Sorrel will be included in the third class. Directors will hold office for a term of three years and will serve until their successors are elected and qualified. Officers are elected annually by the Board of Directors and serve until their successors are duly elected and qualified. The Company intends to increase the size of the Board by adding two additional independent directors in the future. COMPENSATION OF DIRECTORS Messrs. Schlindwein and Thompson currently are the only directors who receive fees for serving as directors of the Company. Messrs. Schlindwein and Thompson each receive a fee of $3,000 for attendance at each meeting of the Board of Directors, with no additional amounts payable with respect to separate 44 47 committee meetings. None of the other directors of the Company is paid directors' fees for serving on the Board of Directors or its committees. All directors are reimbursed for out-of-pocket expenses incurred in connection with attendance at meetings of the Board of Directors and meetings of Board committees. COMMITTEES OF THE BOARD Under the Company's By-laws, the Board of Directors may establish one or more committees, appoint one or more members of the Board of Directors to serve on each committee, fix the exact number of committee members, fill vacancies, change the composition of the committee, impose or change the duties of the committee and terminate the committee. The Board of Directors has established an Audit Committee and a Compensation Committee. Each such committee has two or more members who serve at the pleasure of the Board of Directors. The Compensation Committee is responsible for reviewing and making recommendations to the Board of Directors with respect to the salaries, bonuses, and other compensation paid to key employees and officers of the Company, including the terms and conditions of their employment, and administers all stock option and other benefit plans (except with respect to participation by executive officers in stock option and other equity incentive plans of the Company which will be made by the Board of Directors or a committee comprised solely of outside directors, unless otherwise specified in the applicable plan documents) affecting key employees' and officers' direct and indirect remuneration. Currently, Messrs. Niehaus, Schroeder and Sorrel serve on the Compensation Committee. The Audit Committee is responsible for reviewing the Company's financial statements, audit reports, internal financial controls and the services performed by the Company's independent public accountants, and for making recommendations with respect to those matters to the Board of Directors. Messrs. Schlindwein and Baum serve on the Audit Committee. 45 48 EXECUTIVE COMPENSATION The following table summarizes compensation information with respect to the President and Chief Executive Officer ("CEO") of the Company and each of the Company's most highly-compensated executive officers for services rendered during the fiscal year ended September 30, 1997 and the nine-month fiscal year ended September 30, 1996 (collectively, with the CEO, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
LONG-TERM FISCAL PERIOD COMPENSATION COMPENSATION AWARDS -------------------- ------------ FISCAL SECURITIES ALL OTHER NAME AND PRINCIPAL POSITION PERIOD(1) SALARY($) BONUS($) UNDERLYING OPTIONS(#) COMPENSATION --------------------------- --------- --------- -------- --------------------- ------------ Timothy S. Webster................. 1997 $282,596 (2) $ 7,151(3) President and 1996 185,615 $125,000 -- 4,967(3) Chief Executive Officer Horst W. Schroeder................. 1997 183,700 (2) Chairman of the Board 1996 98,047 40,000 -- 330,000(4) David E. Watson.................... 1997 159,931 (2) 5,244(5) Executive Vice President and 1996 119,510 37,500 -- 4,484(5) Chief Financial Officer Norman F. Abreo.................... 1997 137,423 (2) 3,223(5) Executive Vice 1996 99,856 37,500 -- 1,226(5) President--Operations David B. Potter.................... 1997 105,954 (2) 4,872(5) Senior Vice 1996 78,000 29,000 -- 2,777(5) President--Procurement Daniel R. Keller................... 1997 165,923 -- -- 1,462(6) Former Senior Vice President -- Sales and Marketing(6)
- ------------------------- (1) For purposes of the foregoing table, the Company's 1996 fiscal year extended from January 1, 1996 until September 30, 1996 and the Company's 1997 fiscal year extended from October 1, 1996 to September 30, 1997. (2) The Company has not yet determined the amount of bonuses payable for the 1997 fiscal year. (3) Includes payments under the American Italian Pasta Company Retirement Savings Plan and premiums in the amount of $518 paid by the Company on a split-dollar life insurance policy. (4) Represents a bonus which Mr. Schroeder is required to repay to the extent that he provides less than 30 days of service during any calendar year ending on or prior to December 31, 1998. Mr. Schroeder's service during the 1996 and 1997 fiscal years resulted in $82,000 and $110,000, respectively, of such bonus being no longer subject to such contingent repayment obligation. (5) Represents payments under the American Italian Pasta Company Retirement Savings Plan. (6) Mr. Keller served in such capacity from October 1996 to August 1997, when his employment with the Company was terminated. 46 49 The following table sets forth certain information with respect to stock options granted to each of the Named Executive Officers during the fiscal year ended September 30, 1997: OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ----------------------------------- POTENTIAL REALIZABLE VALUE % OF TOTAL AT ASSUMED ANNUAL RATES OPTIONS OF STOCK PRICE SHARES GRANTED TO APPRECIATION FOR OPTION UNDERLYING EMPLOYEES EXERCISE TERM(1) OPTIONS IN FISCAL PRICE EXPIRATION -------------------------- NAME GRANTED 1997 PER SHARE DATE 5% 10% ---- ---------- ---------- --------- ---------- ----------- ----------- Timothy S. Webster............... 84,622 32.9% $ 7.02 4/15/07 $373,593 $946,757 Horst W. Schroeder............... 84,622 32.9 7.02 4/15/07 373,593 946,757 David E. Watson.................. -- -- -- -- -- -- Norman F. Abreo.................. -- -- -- -- -- -- David B. Potter.................. 15,330 6.0 12.23 1/07/07 117,909 298,804 Daniel R. Keller(2).............. 45,990 17.9 12.23 10/25/06 353,727 896,413
- ------------------------- (1) The amounts shown as potential realizable values are based on assumed annualized rates of appreciation in the price of the Common Stock of five percent and ten percent over the term of the options, as set forth in the rules of the Securities and Exchange Commission. Actual gains, if any, on stock option exercises are dependent upon the future performance of the Common Stock. There can be no assurance that the potential realizable values reflected in this table will be achieved. (2) All such options were cancelled in connection with Mr. Keller's termination of employment in August 1997. The following table sets forth certain information with respect to stock options granted to each of the Named Executive Officers that were outstanding at September 30, 1997: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
AT SEPTEMBER 30, 1997 --------------------------------------------------------- NUMBER OF VALUE OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS(1) SHARES ACQUIRED VALUE --------------------------- --------------------------- NAME UPON EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ---------------- -------- ----------- ------------- ----------- ------------- Timothy S. Webster...... -- -- 263,169 136,953 $2,826,565 $1,008,823 Horst W. Schroeder...... -- -- 263,169 136,953 2,826,565 1,008,823 David E. Watson......... -- -- 44,899 44,752 367,469 300,835 Norman F. Abreo......... -- -- 53,937 35,713 467,617 200,688 David B. Potter......... -- -- 9,811 20,849 81,810 78,583 Daniel R. Keller........ -- -- -- -- -- --
- ------------------------- (1) Based on the assumed initial public offering price of $16 per share. EMPLOYMENT AGREEMENTS Mr. Webster. Mr. Webster has entered into an employment agreement with the Company effective upon the consummation of the Offering and terminating September 30, 2002. Under the agreement, Mr. Webster is entitled to an annual base salary of $330,000, subject to annual adjustment by the Board. Mr. Webster is also eligible to receive annual bonuses at the discretion of the Board under the Company's 1996 Salaried Bonus Plan (the "Bonus Plan"). Upon consummation of the Offering, Mr. Webster is to be granted options to purchase shares of Class A Common Stock equal to 3% of the shares of Common Stock outstanding immediately prior to the Offering, on a fully diluted basis, at the initial public offering price. If Mr. Webster's employment is terminated without cause, due to his disability or if he resigns for good reason, he is to receive payments equal to two times his then-current base salary and bonus. Mr. Webster has agreed not to compete with the Company for two years after termination of employment, subject to the receipt by Mr. Webster of certain severence payments, in some cases at the election of the Company. All stock options awarded to Mr. Webster will vest (i) immediately upon a termination of his employment without cause or his resignation for good reason; (ii) if the employment agreement expires and the Company does not offer Mr. Webster a new 47 50 agreement on terms no less favorable than those in the current agreement; or (iii) upon a change of control (as defined in the agreement). The Company has agreed to nominate Mr. Webster for election to its Board of Directors in accordance with the terms of the Shareholders Agreement. Mr. Schroeder. Mr. Schroeder has entered into an employment agreement with the Company effective upon the consummation of the Offering and terminating the third anniversary of the Offering. Under the agreement, Mr. Schroeder will serve as Chairman of the Board and is entitled to receive base compensation of $4,000 per day of service to the Company, subject to a minimum payment of $120,000 per year. Pursuant to a prior agreement, the Company paid to Mr. Schroeder a signing bonus of $330,000 on January 1, 1996. In the event Mr. Schroeder does not render services to the Company through December 31, 1998 because he voluntarily terminates, refuses to provide services under his current agreement, or is terminated for cause, Mr. Schroeder is required to repay the portion of the signing bonus which relates to the period of the original term for which he does not render services. Mr. Schroeder is also eligible to participate in the Company's Bonus Plan. If Mr. Schroeder terminates his agreement for good reason, including a "change of control" as defined in the Shareholders Agreement, dated October 30, 1992 by and among the Company and its shareholders, he is entitled to receive payment of all unpaid amounts due for service rendered, as well as an additional amount equal to the unpaid balance due for the remainder of the term of the agreement and an additional payment equal to $2,000 multiplied by the number of days of service remaining under the term, which in no event shall be more than 30 days during any calendar year. In addition, upon termination of employment for good reason, the unvested portion of Mr. Schroeder's options under the Company's stock option plans will become immediately vested. Upon the closing of the Offering, Mr. Schroeder will be granted options to purchase shares of the Company's Class A Common Stock equal to at least 2% of the Company's outstanding Common Stock, on a fully-diluted basis, at the initial public offering price. Mr. Schroeder has agreed not to compete with the Company for a period of two years after termination of his employment. Messrs. Watson, Abreo and Potter. Messrs. Watson, Abreo and Potter have entered into employment agreements with the Company effective upon the consummation of the Offering and terminating on the third anniversary of the Offering. Such agreements are renewable automatically for successive one-year terms, unless the Company gives the employee at least six months' prior written notice of non-renewal. The agreements entitle Messrs. Watson, Abreo and Potter to annual base salaries of $180,000, $160,000 and $125,000, respectively (subject to annual merit increase reviews by the Board of Directors), and annual bonuses at the discretion of the Board of Directors in accordance with the terms of the Bonus Plan. Upon the consummation of the Offering, Messrs. Watson, Abreo and Potter will each receive options to purchase 61,320, 61,320 and 33,726 shares, respectively, of Class A Common Stock at the initial public offering price. In the event of termination of employment without cause or resignation for good reason, or in the event their employment is terminated by the Company without cause within six months after a change in control, Messrs. Watson, Abreo and Potter are each entitled to the greater of (i) one-year's annual base salary and bonus or (ii) annual base salary and bonus for the remainder of the initial employment term under their respective employment agreements. The employment agreements also contain one-year covenants not to compete after any termination of employment. All stock options awarded to each of Messrs. Watson, Abreo and Potter will vest immediately upon (i) resignation for good reason or (ii) a change in control of the Company. SEVERANCE AGREEMENT In connection with Mr. Daniel Keller's resignation as the Company's Senior Vice President -- Sales and Marketing effective August 29, 1997, the Company and Mr. Keller entered into a severance agreement pursuant to which the Company is to pay Mr. Keller an amount equal to $90,000 and to forgive Mr. Keller's remaining relocation loan balance in the amount of $30,330. In addition, the Company agreed to waive its repurchase option regarding the 3,563 shares of Class A Common Stock owned by Mr. Keller in exchange for his repayment of the remaining balance due under the promissory note relating to his purchase of the shares. 48 51 1996 SALARIED BONUS PLAN The Company maintains the Bonus Plan for certain salaried employees of the Company, including the Named Executive Officers. The Bonus Plan permits these employees to earn cash performance bonus awards of up to a percentage of their respective salaries as determined by the Board of Directors, or by management on the Board's behalf. The amount of any bonus is based upon the Company's performance and the individual performance of such participant. See "Management--Executive Compensation." STOCK OPTION PLANS 1992 NON-STATUTORY STOCK OPTION PLAN On October 29, 1992, the Company's Board of Directors and stockholders adopted the American Italian Pasta Company Non-Statutory Stock Option Plan (the "1992 Plan"). The purpose of the 1992 Plan is to secure for the Company and its stockholders the benefits of the incentive inherent in stock ownership by officers and other key employees of the Company. The 1992 Plan is administered by the Compensation Committee of the Board of Directors. The Compensation Committee has the power and sole discretion to determine the persons to whom options are granted and the number of shares covered by those options, subject in each case to the limitations set forth in the 1992 Plan. Options may be granted under the 1992 Plan only to officers and key employees of the Company. The period during which an option may be exercised (not to exceed 13 years), and the time at which it becomes exercisable, is fixed by the Compensation Committee at the time the option is granted. Options granted under the 1992 Plan are not transferable by the holder other than by will or the laws of descent and distribution. The number of shares which may be issued and sold pursuant to options granted under the 1992 Plan may not exceed 1,201,880 shares (subject to adjustment for stock dividends, stock splits, combinations or reclassifications of shares, or similar transactions). No consideration is paid to the Company by any optionee in exchange for the grant of an option. The per share exercise price for an option granted under the 1992 Plan is determined by the Compensation Committee. Certain provisions of the 1992 Plan may have the effect of discouraging or delaying possible takeover bids. In the event of a "Change of Control," all of the outstanding options automatically become immediately exercisable in full. A "Change of Control" is generally defined to take place when disclosure of such a change would be required by the proxy rules promulgated by the Securities and Exchange Commission or when (i) certain persons acquire beneficial ownership of 25% or more of the combined voting power of the Company's voting securities, (ii) less than a majority of the directors are persons who were either nominated or selected by the Board of Directors, (iii) a merger involving the Company in which the Company's stockholders own less than 80% of the voting stock of the surviving corporation; or (iv) a liquidation of the Company or sale of substantially all the assets of the Company occurs. In the event that the Company is not the surviving corporation of any merger, consolidation, reorganization or acquisition by another corporation, outstanding options under the 1992 Plan may be assumed, or replaced with new options of comparable value, by the surviving corporation. If the surviving corporation does not assume or replace outstanding options, or in the event the Company is liquidated or dissolved, then subject to certain limitations, each holder of outstanding options may exercise all or part of such options (even if the options would not otherwise have been exercisable in full) during the period beginning 30 days before the event triggering the acceleration, and ending on the day before such event. Generally, the exercise price of an option is at least equal to the fair market value of the Common Stock on the date of grant. As of the date of this Prospectus, options to purchase 1,132,049 shares of Common Stock at exercise prices ranging from $2.33 to $12.23 per share (with a weighted average exercise price of $6.68 per share) were issued and outstanding under the 1992 Plan. The outstanding options under the 1992 Plan expire at dates ranging from October 2002 to April 2007. None of the executive officers of the Company have exercised any options prior to the date of this Prospectus. 49 52 1993 NON-QUALIFIED STOCK OPTION PLAN The American Italian Pasta Company 1993 Non-Qualified Stock Option Plan (the "1993 Plan") was adopted by the Board of Directors and approved by the stockholders of the Company effective December 8, 1993. The 1993 Plan was adopted to compensate and provide incentives for mid-level managers of the Company. The 1993 Plan is also administered by the Compensation Committee. The Compensation Committee has full and final authority in its discretion, subject to the provisions of the 1993 Plan and applicable law, to determine the individuals to whom and the time or times at which options shall be granted and the number of shares of Common Stock covered by each option. Options may be granted under the 1993 Plan to mid-level management. The period during which an option may be exercised (not to exceed ten years), and the time at which it becomes exercisable is fixed by the Compensation Committee at the time the option is granted. Options granted under the 1993 Plan are not transferrable by the holder other than by will or the laws of dissent and distribution. The number of shares which may be issued and sold pursuant to options granted under the 1993 Plan may not exceed 82,783 shares (subject to adjustment for stock dividends, stock splits, combinations or reclassifications of shares or similar transactions). No consideration is paid to the Company by any optionee in exchange for the grant of an option. The per share exercise price for an option granted under the 1993 Plan is determined by the Compensation Committee. In the event of any merger, recapitalization, consolidation, split-up, spin-off, repurchase, distribution or similar transaction effecting the Common Stock, the Compensation Committee may take such action as in its sole discretion that deems appropriate. The Compensation Committee may authorize the issuance or assumption of options or similar rights in connection with any such transaction whether or not the Company is a surviving or continuing corporation, and upon such terms and conditions as it may deem appropriate. The exercise price of an option is generally at least equal to the fair market value of the Common Stock on the date of grant. As of the date of this Prospectus, options to purchase 46,665 shares of Common Stock at exercise prices ranging from $4.92 to $12.23 per share (with a weighted average exercise price of $10.28 per share) were issued and outstanding under the 1993 Plan. The outstanding options under the 1993 Plan expire at dates ranging from December 2003 to December 2006. 1997 EQUITY INCENTIVE PLAN The Company has adopted the American Italian Pasta Company 1997 Equity Incentive Plan (the "Equity Incentive Plan" or "1997 Plan"). Under the 1997 Plan, the Board or a committee designated by the Board (the Board or committee, as the case may be, the "Committee") is authorized to grant nonqualified stock options, incentive stock options, reload options, stock appreciation rights ("SARs"), shares of restricted Common Stock ("restricted shares"), performance shares, performance units and shares of Common Stock awarded as a bonus ("bonus shares") (all of the foregoing collectively, "Awards"). There are 2,000,000 shares of Common Stock reserved for issuance under the Equity Incentive Plan. Eligibility and Conditions of Grants. All employees (including officers), directors and consultants of the Company or any subsidiary are eligible to receive Awards at the discretion of the Committee. The Committee is authorized, subject to certain limits specified in the Equity Incentive Plan, to determine to whom and on what terms and conditions Awards shall be made including, but not limited to, the vesting and term of options. Stock Options. The option exercise price must be determined by the Committee at the time of grant and set forth in the award agreement, but such exercise price must be at least 100% of the fair market value of a share of Common Stock on the date of grant. (In the case of options to be granted in connection with the Offering, such fair market value will equal the price at which the Class A Common Stock is offered to the public.) The option exercise price may be paid by any one or more of the following in the discretion of the Committee: (i) cash, (ii) check, (iii) wire transfer, (iv) shares of Common Stock that have been held for at least 6 months or that were purchased on the open market, or (v) a "cashless" exercise pursuant to a sale through a broker of all or a portion of the shares. The Committee also has discretion to have the Company 50 53 make or guarantee loans to the grantees for the exercise price. The Committee will determine the term and vesting schedule for options at the time of grant. Options can be granted as either nonstatutory options (pursuant to which grantees would receive taxable income, and the Company would receive a compensation expense deduction, when options are exercised) or as incentive stock options (ISOs) (which, subject to certain conditions, would offer more favorable tax consequences to grantees, but not the Company). Stock Appreciation Rights. Upon exercise of a stock appreciation right, the grantee shall receive a payment equal to the appreciation in value of the Common Stock between the grant date and the exercise date. The benefit will be payable in cash or Common Stock. Restricted Shares. Restricted shares will be forfeited unless the conditions set by the Committee at the time of grant are satisfied or are waived. The Committee will determine whether or not a grantee shall be required to pay for such restricted shares and, if so, what such price shall be. Performance Shares/Performance Units. To the extent that the performance goals specified by the Committee in a grant of performance shares or performance units have been achieved, then a benefit shall be paid after the end of the performance-measuring period specified by the Committee. The amount of the benefit of performance shares is based on the percentage attainment of the performance goals multiplied by the value of a share of Common Stock at the end of the performance period. The value of performance units is based on the achievement of performance goals multiplied by the unit value stabilized by the Committee at the time of grant. No benefit is payable on either performance shares or performance units if the minimum performance goals have not been met. The benefit will be payable in cash or Common Stock. Bonus Shares. Bonus shares can be granted without cost and without restriction in amounts and subject to such terms and conditions as the Committee may in its discretion determine. Other. Options and stock appreciation rights may have a maximum term of 10 years. The effect of a change of control, the termination of a grantee's employment or the death or permanent disability of a grantee will be determined by the Committee at the time of grant and be set forth in the award agreement. Both Awards and Shares acquired pursuant to the exercise or vesting of Awards are subject to transfer restrictions as set forth in the 1997 Plan. The Plan may be amended by the Board without: (i) stockholder approval except in the event of an increase in the number of shares available for Awards; (ii) the consent of the Award holder unless such amendment would adversely affect such holder; or (iii) as otherwise may be required under stock exchange listing requirements or any other regulatory or legal requirement. The Equity Incentive Plan will terminate when shares available for grant under the plan have been exhausted, except in no event will incentive stock options be granted on or after the 10th anniversary of the earlier of (i) the date the Equity Incentive Plan was adopted; and (ii) the date the Equity Incentive Plan was approved by the Stockholders of the Company. Shares acquired pursuant to the 1997 Plan by persons who are parties to the Stockholders Agreement will be subject to certain restrictions under the Stockholders Agreement. In addition, the Compensation Committee may, in its discretion, condition the grant of any Award under the 1997 Plan on the consent of the recipient of such Award to become bound by the Stockholders Agreement. 401(K) PROFIT SHARING PLAN The Company adopted the American Italian Pasta Company Retirement Savings Plan (the "401(k) Plan") effective January 1, 1992. In general, employees of the Company who have completed one year of service (as defined in the 401(k) Plan) are eligible to participate in the 401(k) Plan. Participants may make contributions to the 401(k) Plan by voluntarily reducing their salary from the Company up to a maximum of 12% of total compensation or $9,500 (or such higher amount as is prescribed by the Secretary of the Treasury for cost of living adjustments), whichever is less, and the Company matches such contributions to the extent of 50% of the first 6% of a participant's salary reduction. The Company's matching contributions vest 25% per year and are 100% vested after 4 years of service. In addition to matching contributions, the Company may contribute additional amounts determined by it in its sole discretion which are allocated to a participant's account in the proportion that such participant's compensation bears to the total compensation of all participants for the plan year. These additional contributions vest in the same manner as the matching 51 54 contributions. Subject to certain conditions and limitations, participants of the 401(k) Plan may elect to invest up to 50% of their matching contribution accounts into shares of Common Stock of the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION All compensation decisions during the fiscal period ended September 30, 1996 for each of the Named Executive Officers were made by the Compensation Committee of the Board of Directors. Mr. Schroeder, Chairman of the Board, is a member of the Compensation Committee. See "Certain Relationships and Related Transactions." Following the consummation of the Offering, decisions with respect to the base salary and cash bonuses paid to executive officers will be made by the Compensation Committee and decisions with respect to the participation of executive officers in stock option and other equity incentive plans of the Company will be made by the Board of Directors or a committee comprised solely of outside directors. 52 55 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS STOCKHOLDERS AGREEMENT Effective upon the consummation of the Offering, the Company, the Morgan Stanley Stockholders, Citicorp Venture Capital, Ltd. and CCT Partners III, L.P. (collectively "Citicorp"), affiliated entities of George K. Baum & Company ("GKB"), and Messrs. Schroeder, Schlindwein, Thompson, Webster, Watson, Abreo and Potter and certain other existing stockholders of the Company (collectively, the "Existing Stockholders") have amended their existing Stockholders Agreement, which sets forth certain rights and obligations of such Existing Stockholders. The amended Stockholders Agreement provides that until December 31, 1998 Existing Stockholders (other than the Morgan Stanley Stockholders and certain management stockholders) may not sell or pledge any shares of Common Stock except through the exercise of their "piggyback" registration rights, to certain permitted transferees, or concurrently with certain private sales of Common Stock by the Morgan Stanley Stockholders. After December 31, 1998, the Existing Stockholders (other than the Morgan Stanley Stockholders and certain employee shareholders) will also be entitled to sell their shares in market transactions and through the exercise of their "demand" registration rights and Citicorp and Mr. Thompson will also be permitted to sell shares of Common Stock in private transactions, subject to the Company's right of first refusal. The amended Stockholders Agreement will not limit sales by the Morgan Stanley Stockholders. The amended Stockholders Agreement grants the Existing Stockholders certain demand registration rights. In addition, the Existing Stockholders are entitled, subject to certain limitations, to register shares of Common Stock in connection with certain registration statements filed by the Company for its own account or the account of its stockholders. The amended Stockholders Agreement will contain customary terms and provisions with respect to, among other things, registration procedures and certain rights to indemnification granted by the parties thereunder in connection with any such registration. Pursuant to the Stockholders Agreement (as amended and restated effective upon the consummation of the Offering), MSLEF II has the right to designate two director nominees so long as its owns at least 25% of the outstanding Common Stock or one director nominee so long as it owns at least 5% but less than 25% of the outstanding Common Stock. In addition, MSCP has the right to designate two director nominees so long as it owns at least 35% of the outstanding Common Stock or one director nominee so long as it owns at least 5% but less than 35% of the outstanding Common Stock. Whenever MSLEF II and MSCP individually own less than 5% of the outstanding Common Stock, they will jointly be entitled to designate one director nominee so long as the Morgan Stanley Stockholders beneficially own, in the aggregate, at least 5% of the outstanding Common Stock. The number of directors designated by the Morgan Stanley Stockholders will increase proportionately if the size of the Board of Directors is increased in the future. In addition, the Stockholders Agreement will provide that the Chairman of the Board and the President and Chief Executive Officer shall also be designated as director nominees. The Existing Stockholders will agree to vote all of their shares of Class A Common Stock in favor of the director nominees designated pursuant to the Stockholders Agreement. At least two members of the Board of Directors will be independent directors. So long as the Morgan Stanley Stockholders own 10% of the outstanding shares of Common Stock, the Morgan Stanley Stockholders may designate one member of each Board committee. The amended Stockholders Agreement provides that so long as the Morgan Stanley Stockholders own at least 25% of the outstanding shares of Common Stock, neither the Company nor its subsidiaries (if any) will take any of the following significant actions without the approval of the Board of Directors and the Morgan Stanley Stockholders: (i) the appointment or removal of the Chairman of the Board; (ii) any merger, consolidation or other similar business combination (except for certain subsidiary-level mergers involving acquisitions valued below $30 million); (iii) any disposition of a majority of the Company's tangible assets; (iv) subject to certain exceptions, any change in the authorized capital or recapitalization, or the creation of any new classes of capital stock, or the sale, distribution, exchange, redemption of capital stock or capital stock equivalents; (v) any amendment to the charter or by-laws or any change in jurisdiction of incorporation; (vi) the approval of any dissolution or plan of liquidation; (vii) any general assignment for the benefit of creditors or the institution of any bankruptcy or insolvency proceeding; (viii) the declaration of any dividend or any redemption or repurchase of any such capital stock (except dividends paid-in-kind and repurchases 53 56 made pursuant to employee benefit plans or employment agreements); (ix) in certain circumstances, the creation, issuance, assumption, guarantee or incurrence of indebtedness that increases the aggregate amount of indebtedness existing on the date of the amended Stockholders Agreement by at least $30 million; (x) the termination of Ernst & Young LLP or the selection of another auditor; (xi) any strategic acquisition of, or investment in the assets or a business of, a third party with a fair market value of $30 million or more; (xii) acquisition or construction of new pasta production facilities with a cost in excess of $30 million; (xiii) any adoption of a shareholder rights plan; or (xiv) any commitment to do any of the foregoing actions. In addition, as long as the Morgan Stanley Stockholders own at least 25% of the outstanding Common Stock, at least one of the directors designated by the Morgan Stanley Stockholders must approve the appointment of the Chief Executive Officer or the Chief Financial Officer. The amended Stockholders Agreement provides that certain transfers of shares by the Existing Stockholders (other than the Morgan Stanley Stockholders) are subject to the approval of the Board of Directors and, for so long as the Morgan Stanley Stockholders own at least 10% of the shares of Common Stock, the Morgan Stanley Stockholders. After giving effect to the Offering, the Morgan Stanley Stockholders will own approximately 51.3% of the Common Stock of the Company. The Morgan Stanley Stockholders have informed the Company that they intend, following the consummation of the Offering, to convert such number of their shares of Class A Common Stock into nonvoting Class B Common Stock so that, following such conversion, the Morgan Stanley Stockholders will own, in the aggregate, 49% of the outstanding voting Class A Common Stock of the Company. 1997 PRIVATE EQUITY FINANCING In April 1997, the Company sold an aggregate of 3,174,528 shares of Old Class A Common Stock (as defined in "Description of Capital Stock -- General") to current stockholders of the Company for an aggregate purchase price of $22,291,947, or $7.02 per share, determined by an independent valuation firm to be fair value for the shares. The MSCP Funds purchased a total of 2,563,323 shares for $18,000,000. Affiliated entities of GKB, including Excelsior Investors, LLC ("Excelsior") in which Mr. Thompson has a minority interest, purchased 427,219 shares for $2,999,861. These shares include 330,952 shares purchased by Excelsior. Mr. Schroeder, a Director of the Company, purchased 49,056 shares for $344,480. Mr. Schlindwein, also a Director of the Company, and his wife purchased 28,483 shares for $200,000, individually and indirectly through JSS Management Company, Ltd., of which each of Mr. and Mrs. Schlindwein are general partners. In addition, a group of executive officers of the Company contributed an aggregate of $729,996 to the Company for 103,957 shares, including $142,159 by Mr. Webster, $298,535 by Mr. Watson, $36,472 by Mr. Abreo and $91,472 by Mr. Potter. In connection with these sales and purchases, the Company loaned an aggregate of $297,513 to these executive officers to finance their stock purchases, including $112,159 to Mr. Webster, $48,535 to Mr. Watson, $36,472 to Mr. Abreo and $21,472 to Mr. Potter. Each of these loans are evidenced by a promissory note made payable to the Company and secured by shares of Old Class A Common Stock. Such loans are to be repaid over a period of three years commencing upon termination of the transfer restrictions applicable to such shares under the Stockholders Agreement. Such loans bear interest at the then applicable federal rate. FINANCIAL ADVISORY SERVICES Messrs. Niehaus and Sorrel and Ms. Rosen, all Directors of the Company, are employed by Morgan Stanley & Co. Incorporated. In 1997, Morgan Stanley Senior Funding, Inc., an affiliate of Morgan Stanley & Co. Incorporated, one of the U.S. Underwriters, served as the documentation agent under the agreements relating to the Company's Credit Facility, and acted as an arranger for the Credit Facility for which it received a fee in the amount of $311,875. Since 1994, the Company has paid fees to George K. Baum & Company's Investment Banking Division for investment banking and financial advisory services and has paid George K. Baum & Company Professional Investment Advisors Division fees for investment advice provided with respect to the 401(k) Plan. 54 57 Jonathan E. Baum, a Director of the Company, owns all voting shares of George K. Baum Holdings, Inc., which owns 100% of George K. Baum & Company, one of the U.S. and International Underwriters. MANAGEMENT INDEBTEDNESS In April 1995 and April 1997, the Company loaned funds to Messrs. Webster, Watson, Abreo and Potter to purchase shares of Old Common Stock and Old Class A Common Stock at prices ranging between $4.92 and $7.02 per share, respectively. Each loan was evidenced by a promissory note bearing interest at the then applicable federal rate and payable in equal installments over three years commencing upon termination of the transfer restrictions applicable to such shares under the Stockholders Agreement. The table below sets forth the aggregate number of shares purchased with funds loaned by the Company, the original aggregate loan amounts, and the aggregate loan balances as of June 30, 1997.
NUMBER OF ORIGINAL LOAN LOAN BALANCE AT EXECUTIVE OFFICER SHARES BALANCE JUNE 30, 1997 - ----------------- --------- ------------- --------------- Timothy S. Webster...................................... 21,339 $138,559 $120,959 David E. Watson......................................... 14,269 84,735 60,602 Norman F. Abreo......................................... 7,217 46,422 39,789 David B. Potter......................................... 5,083 31,422 24,789
CONSULTING AGREEMENT WITH HWS & ASSOCIATES, INC. Pursuant to a consulting agreement between the Company and HWS & Associates, Inc. ("HWS"), a management consulting firm of which Mr. Schroeder, Chairman of the Board of Directors, is the sole owner, the Company paid to HWS $301,197 during fiscal 1994, and $133,359 during fiscal 1995, respectively for management consulting services performed and travel expenses incurred on behalf of the Company. The consulting arrangement terminated January 1, 1996 upon Mr. Schroeder's execution of his employment agreement with the Company. The Company's policy is that all transactions between the Company and its executive officers, directors and principal stockholders be on terms no less favorable than could be obtained from unaffiliated third parties or are subject to the approval of the Company's disinterested directors. PRODUCT SALES The Company sells milling by-products to Thompson's Pet Pasta Products, Inc., of which Richard C. Thompson, a director of the Company, is the President and Chief Executive Officer. Such sales were $357,000 and $529,000 for the nine-month fiscal period ended September 30, 1996 and the nine-month period ended June 30, 1997, respectively. Such sales were on substantially the same terms as the Company sells such products to unaffiliated third parties. 55 58 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of the date of this Prospectus, before and after giving effect to the sale of the shares of Class A Common Stock offered hereby, by (i) each person who is known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) the Selling Stockholders, (iii) each director of the Company, (iv) each of the Named Executive Officers and (v) all directors and executive officers of the Company as a group.
SHARES BENEFICIALLY OWNED PRIOR TO THE SHARES BENEFICIALLY OWNED OFFERING AFTER THE OFFERING ---------------------- ------------------------------------------------------------------ CLASS A CLASS B TOTAL CLASS A CLASS A COMMON STOCK(1)(2) COMMON STOCK(1) COMMON STOCK(1)(5) COMMON STOCK(1) SHARES NAME OF BENEFICIAL ---------------------- BEING ---------------------- ---------------- ---------------------- OWNER NUMBER PERCENT(3) OFFERED(2) NUMBER PERCENT(4) NUMBER PERCENT NUMBER PERCENT(5) - -------------------- --------- ---------- ---------- --------- ---------- ------ ------- --------- ---------- The Morgan Stanley Leveraged Equity Fund II, L.P.(6)... 6,038,027 52.7% 1,375,893 4,662,134 27.8% -- -- 4,662,134 27.8% 1221 Avenue of the Americas New York, NY 10020 Morgan Stanley Capital Partners III, L.P.(6)....... 2,563,322 22.4 584,107 1,979,215 14.6 -- -- 1,979,215 11.8% 1221 Avenue of the Americas New York, NY 10020 Citicorp Venture Capital, Ltd.(7)... 1,047,298 9.1 -- 1,047,298 6.2 -- -- 1,047,297 6.2 399 Park Avenue New York, NY 10043 Richard C. Thompson(8)........ 959,849 8.4 630,000 329,849 2.0 -- -- 329,849 2.2 16 Kansas Avenue Kansas City, KS 66105 Horst W. Schroeder(9)(10)... 422,461 3.6 -- 422,461 2.5 -- -- 422,461 2.5 Jonathan E. Baum(11)........... 427,219 3.7 -- 427,219 2.5 -- -- 427,219 2.5 David Y. Howe....... -- -- -- -- -- -- -- -- -- Robert H. Niehaus... -- -- -- -- -- -- -- -- -- Amy S. Rosen........ -- -- -- -- -- -- -- -- -- James A. Schlindwein(12).... 41,686 * -- 41,686 * -- -- 41,686 * Lawrence B. Sorrel............. -- -- -- -- -- -- -- -- -- Timothy S. Webster(10)(13).... 326,127 2.8 -- 326,127 1.9 -- -- 326,127 1.9 David E. Watson(10)......... 94,771 * -- 94,771 * -- -- 94,771 * Norman F. Abreo(10).......... 70,193 * -- 70,193 * -- -- 70,193 * David B. Potter(10)......... 24,859 * -- 24,859 * -- -- 24,859 * All directors and executive officers as a group (12 persons)(10)....... 2,367,165 20.6 630,000 1,737,165 10.4 -- -- 1,737,165 10.4
- ------------------------- * Less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the Commission. 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 the date of this Prospectus are deemed outstanding. 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 or as to be provided in the Stockholders Agreement (see "Certain Relationships and Related Transactions -- Stockholders Agreement"), 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. Assuming no exercise of the U.S. Underwriters over-allotment option, an aggregate of 8,876,056 shares (52.9% of the shares to be outstanding after the Offering) will be subject to the Stockholders Agreement. (2) The Company and certain stockholders have granted an option to the U.S. Underwriters to purchase up to an aggregate of 1,185,000 shares of Class A Common Stock to cover over-allotments, if any. Such 56 59 shares will not be sold unless the U.S. Underwriters exercise the over-allotment option, and the above table assumes that such over-allotment option will not be exercised. (3) Based upon 11,466,056 shares of Class A Common Stock outstanding, plus shares of Class A Common Stock issuable upon exercise of options, warrants and convertible securities which are included in the number of shares beneficially owned by such person. (4) Based upon 16,776,056 shares of Class A Common Stock to be outstanding upon the consummation of the Offering, plus shares of Class A Common Stock issuable upon exercise of options, warrants and convertible securities which are included in the number of shares beneficially owned by such person. (5) Based upon 16,776,056 shares of Common Stock to be outstanding upon the consummation of the Offering, plus shares of Common Stock issuable upon exercise of options, warrants and convertible securities which are included in the number of shares beneficially owned by such person. (6) The general partner of MSLEF and the general partner of the general partner of the MSCP Funds are wholly owned subsidiaries of MSDWD, the parent of Morgan Stanley & Co. Incorporated. (7) The shares beneficially owned by Citicorp Venture Capital, Ltd. include 157,103 shares held by an affiliate of Citicorp. (8) All of such shares are held by Thompson Holdings, L.P., a limited partnership of which Mr. Thompson is the only limited partner. Mr. Thompson is also the president of the corporation which is the general partner of the limited partnership. (9) The shares beneficially owned by Mr. Schroeder include 49,056 shares held by The Living Trust of Horst W. Schroeder and 11,406 shares held by The Living Trust of Gisela I. Schroeder for the benefit of Mr. and Ms. Schroeder, respectively, and members of their family, as well as 3,066 shares held by each of Bernd Schroeder and Isabel Lange, children of Mr. and Ms. Schroeder. Mr. Schroeder has voting power, but not investment power, with respect to all of these shares. (10) Includes options that are currently exercisable or will become exercisable within 60 days of the date of this Prospectus to purchase shares of Class A Common Stock as follows: Mr. Schroeder (290,358 shares), Mr. Webster (290,358 shares), Mr. Watson (44,899 shares), Mr. Abreo (62,976 shares), Mr. Potter (9,811 shares), and all executive officers and directors as a group (698,402 shares). (11) Includes 90,748 shares held by George K. Baum Capital Partners, L.P., 5,519 shares held by George K. Baum Employee Equity Fund, L.P. and 330,952 shares held by Excelsior Investors, LLC, the managing member of which is George K. Baum Merchant Banc, LLC. As an officer and/or equity owner of the entities holding such shares, Mr. Baum has voting power with respect to such shares. Except to the extent of his equity interest in the entities holding such shares, Mr. Baum disclaims beneficial ownership of such shares. (12) Includes 27,441 shares held by JSS Management Company, Ltd. of which Mr. Schlindwein is an officer and equity owner and has voting power with respect to such shares. (13) Includes 14,435 shares beneficially owned by Mr. Webster which are held in various trusts for the benefit of Mr. Webster's family members, as well as certain members of Mr. Webster's extended family. Mr. Webster has voting power, but not investment power, with respect to all of such shares. 57 60 DESCRIPTION OF CAPITAL STOCK GENERAL Prior to the Recapitalization, the Company's authorized capital stock consisted of 1,600,000 shares of Class A common stock, par value $.01 per share (the "Old Class A Common Stock"), and 2,100,000 shares of common stock, without par value (the "Old Common Stock"). The Old Class A Common Stock had a liquidation preference over the Old Common Stock equal to the greater of the per share purchase price of the Old Class A Common Stock or the amount holders of Old Common Stock are entitled to upon the liquidation. After giving effect to the Company's amendment and restatement of the Charter prior to this Offering, the authorized capital stock of the Company consists of 75,000,000 shares of Class A Common Stock, 25,000,000 shares of Class B Common Stock, and 10,000,000 shares of preferred stock, par value $.001 per share, issuable in series (the "Preferred Stock"). In connection with such amendment and restatement of the Charter, the Company effected the Recapitalization pursuant to which each outstanding share of Old Common Stock and Old Class A Common Stock outstanding immediately prior to the Recapitalization has been converted into 6.132043 shares of Class A Common Stock. From time to time, shares of Class A Common Stock held by the Morgan Stanley Stockholders will automatically be converted pursuant to the amended Charter into shares of Class B Common Stock on a one-for-one basis, pro rata in proportion to the number of shares of Class A Common Stock held by all Morgan Stanley Stockholders, to the extent necessary so that the Morgan Stanley Stockholders do not in the aggregate own more than 49% of the then-outstanding shares of Class A Common Stock. See "-- Common Stock -- Class A Common Stock." This limitation on the ownership of Class A Common Stock is intended to enhance the flexibility of the Company in entering into possible future business combinations on terms favorable to the Company and its stockholders. The following discussion is a summary of the more detailed provisions of the Charter and By-Laws of the Company, forms of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part, and of the applicable provisions of the DGCL. The term "Morgan Stanley Stockholders" as referenced herein under the caption "Description of Capital Stock" shall have the meaning given to it in the Company's Charter. COMMON STOCK After giving effect to the Offering, the Morgan Stanley Stockholders will own, in the aggregate, 39.6% of the outstanding Class A Common Stock of the Company and the Company will have 16,776,056 shares of Class A Common Stock outstanding, assuming no outstanding options are exercised. Class A Common Stock. Holders of Class A Common Stock are entitled to one vote for each share of Class A Common Stock on each matter submitted to a vote of stockholders, including the election of directors. See "Certain Relationships and Related Transactions -- Stockholders Agreement." Holders of Class A Common Stock are not entitled to cumulative voting. Shares of Class A Common Stock have no preemptive or other subscription rights. Shares of Class A Common Stock are convertible only by the Morgan Stanley Stockholders into an equal number of shares of Class B Common Stock; they are not convertible by any other holders. After the consummation of the Offering, shares of Class A Common Stock held by the Morgan Stanley Stockholders will, to the extent necessary so that the Morgan Stanley Stockholders do not own more than 49% of the outstanding shares of Class A Common Stock, be converted automatically into shares of Class B Common Stock on a one-for-one basis, pro rata in proportion to the number of shares of Class A Common Stock held by all Morgan Stanley Stockholders. In addition, shares of Class A Common Stock held by the Morgan Stanley Stockholders are convertible into an equal number of shares of Class B Common Stock, at the option of the holder. 58 61 Class B Common Stock. Under the Charter, as amended, Class B Common Stock may be held only by Morgan Stanley Stockholders. Holders of Class B Common Stock have no right to vote on matters submitted to a vote of stockholders, except (i) as otherwise required by law and (ii) that the holders of Class B Common Stock shall have the right to vote as a class on any amendment, repeal or modification to the Charter that adversely affects the powers, preferences or special rights of the holders of the Class B Common Stock. Shares of Class B Common Stock have no preemptive or other subscription rights and are convertible into an equal number of shares of Class A Common Stock (x) at the option of the holder thereof (but, after the consummation of the Offering, only to the extent that, following such conversion, the Morgan Stanley Stockholders will not, in the aggregate, own more than 49% of the outstanding shares of Class A Common Stock) and (y) automatically upon the transfer of such shares by any Morgan Stanley Stockholder to a person that is not a Morgan Stanley Stockholder. Dividends. All holders of Common Stock are entitled to receive such dividends or other distributions, if any, as may be declared from time to time by the Board of Directors in its discretion out of funds legally available therefor, subject to the prior rights of any Preferred Stock then outstanding, and to share equally, share for share, in such dividends or other distributions as if all shares of Common Stock were a single class. Dividends or other distributions declared or paid in shares of Common Stock, or options, warrants or rights to acquire such stock or securities convertible into or exchangeable for shares of such stock, are payable to all of the holders of Common Stock ratably according to the number of shares held by them, in shares of Class A Common Stock to holders of that class of stock and in shares of Class B Common Stock to holders of that class of stock. Delaware law generally requires that dividends be paid only out of the Company's surplus or current net profits in accordance with the DGCL. See "Dividend Policy." Liquidation. Subject to the rights of any holders of Preferred Stock outstanding, upon the dissolution, liquidation or winding up of the Company, the holders of Common Stock are entitled to share equally and ratably in the assets available for distribution after payments are made to the Company's creditors. Other. Holders of Common Stock have no preemptive, subscription or redemption rights. The outstanding shares of Common Stock are, and the shares of Class A Common Stock offered by the Company hereby will be, when issued and paid for, fully paid and nonassessable. PREFERRED STOCK The Company's Charter provides that the Board of Directors is authorized, subject to certain limitations prescribed by law, without further stockholder approval, to issue from time to time up to an aggregate of 10,000,000 shares of Preferred Stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each such series thereof, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of such series. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. The Company has no present plans to issue any shares of Preferred Stock. DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS The provisions of the Company's Charter, By-Laws and Delaware statutory law described in this section may delay or make more difficult acquisitions or changes in control of the Company that are not approved by the Board of Directors. See "Risk Factors -- Possible Anti-takeover Effect of Certain Charter, By-law and Statutory Provisions." The Company is subject to the provisions of Section 203 of the DGCL. Subject to certain exceptions, Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the interested stockholder attained such status with the approval of 59 62 the Board of Directors or unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. The Charter provides for the division of the Board of Directors into three classes as nearly equal in size as possible with staggered three-year terms. See "Management." Except as may be provided in any class or series of Preferred Stock with respect to any directors elected by the holders of such class or series, any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least two-thirds of the voting power of all of the shares of capital stock of the corporation then entitled to vote generally in the election of directors, voting together as a single class, unless the removal of a director has been requested by a shareholder who designated such director as a nominee for election pursuant to the Stockholders Agreement, in which case such director can be removed with or without cause by the affirmative vote of holders of a simple majority of such shares. The Company's Charter provides that special meetings of the stockholders may be called at any time by resolution of the Board of Directors, the Chairman of the Board, or the Chief Executive Officer, but may not be called by other persons. The Charter also provides that any stockholder action may not be taken by written consent of stockholders without a meeting, unless the action to be effected by written consent of stockholders and the taking of such action by written consent have been approved in advance by the Board of Directors or unless the shareholder action involves the removal of a director nominated pursuant to the Stockholders Agreement and the person who nominated such director pursuant to the Stockholders Agreement votes in favor of the removal of such director pursuant to such written consent. The Charter further provides that stockholders may make, alter, amend, add to or repeal the By-laws only if, in addition to any vote of the holders of any class or series of capital stock of the Corporation required by law or the Charter, such action is approved by the affirmative vote of the holders of at least 80% of the voting power of all of the then outstanding shares of capital stock of the Company entitled to vote generally in the election of directors, voting together as a single class. The affirmative approval of at least 80% of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, is also required to reduce or eliminate the number of authorized shares of any capital stock set forth in the Charter or to amend, repeal or adopt any provision inconsistent with specified provisions of the Charter. As permitted by DGCL, the Charter provides that directors of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director by reason of any act or omission, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, (iv) for any transaction from which the director shall derive an improper personal benefit or (v) to any extent that such liability shall not be limited or eliminated by virtue of the provisions of Section 102(b)(7) of the DGCL or any successor thereof. In addition, the Charter provides that the Company shall, to the fullest extent authorized by the DGCL, as amended from time to time, indemnify and hold harmless all directors and officers against all expense, liability and loss reasonably incurred or suffered by such indemnitee in connection therewith. Such indemnification shall continue as to an indemnitee who has ceased to be a director or officer and shall inure to the benefit of the indemnitee's heirs, executors and administrators. The right to indemnification includes the right to be advanced funds from the Company for expenses incurred in defending any proceeding for which a right to indemnification is applicable. STOCKHOLDERS AGREEMENT Pursuant to the amended Stockholders Agreement, one of the Morgan Stanley Stockholders, MSLEF II, has the right to designate two director nominees so long as it owns at least 25% of the outstanding Common Stock or one director nominee so long as it owns at least 5% but less than 25% of the outstanding Common 60 63 Stock. In addition, another Morgan Stanley Stockholder, MSCP, has the right to designate two director nominees so long as it owns at least 35% of the outstanding Common Stock or one director nominee so long as it owns at least 5% but less than 35% of the outstanding Common Stock. Whenever MSLEF II and MSCP individually own less than 5% of the outstanding Common Stock, they shall jointly be entitled to designate one director nominee as long as the Morgan Stanley Shareholders beneficially own, in the aggregate, at least 5% of the outstanding Common Stock. The number of directors designated by the Morgan Stanley Stockholders will increase proportionately if the size of the Board of Directors is increased in the future. In addition, the amended Stockholders Agreement provides that so long as the Morgan Stanley Stockholders own at least 25% of the outstanding shares of Common Stock, certain significant corporate actions will be subject to their approval in addition to that of the Company's Board of Directors. See "Certain Relationships and Related Transactions -- Stockholders Agreement." LISTING The Class A Common Stock has been approved for listing, subject to official notice of issuance, on the New York Stock Exchange under the symbol "PLB." TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is UMB Bank, N.A. SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offering, there has been no public market for the Common Stock of the Company. Sales of substantial numbers of shares of Common Stock into the public market after the Offering, or the perception that such sales could occur, could materially and adversely affect the market price of the Common Stock prevailing from time to time or could impair the Company's future ability to obtain capital through an offering of equity securities. The Company cannot predict the effect, if any, that sales of shares of Common Stock, or the availability of such shares for future sales, will have on future market prices of the Common Stock. Such sales also may make it more difficult for the Company to sell equity securities in the future at the time and price it deems appropriate. Upon consummation of the Offering, the Company will have outstanding an aggregate of 16,776,056 shares of Common Stock assuming no exercise of the U.S. Underwriters' over-allotment option and no exercise of outstanding stock options. Of these shares, all of the 7,900,000 shares of Common Stock sold in the Offering will be freely tradable without restriction or further registration under the Securities Act by persons other than "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act (the "Affiliates"). The remaining 8,876,056 shares of Common Stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act (the "Restricted Shares"). These Restricted Shares were acquired in transactions exempt from registration under the Securities Act and may not be resold unless they are registered under the Securities Act or are sold pursuant to an applicable exemption from registration, such as Rule 144, Rule 144(k) or Rule 701 promulgated under the Securities Act. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated in accordance with the Rule) who has beneficially owned Restricted Shares for at least one year or any person who may be deemed an affiliate of the Company is entitled, subject to certain conditions, to sell within any three-month period a number of shares of which does not exceed the greater of (i) one percent of the Company's then outstanding shares of Common Stock (approximately 167,761 shares immediately after the Offering, assuming no exercise of the U.S. Underwriters' over-allotment option and no exercise of outstanding stock options) or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain manner-of-sale and notice requirements and the availability of current public information about the Company. A person (or persons whose shares are aggregated in accordance with the Rule) who is not an "affiliate" of the Company at any time during the 90 days preceding a sale and who beneficially owns shares that were not acquired from the Company or an affiliate of the Company within the past two years is entitled to sell such shares under Rule 144(k) without regard to volume limitations, manner of sale provisions, notice requirements or the 61 64 availability of current public information on the Company. In general, under Rule 701 as currently in effect, any employee, consultant or advisor of the Company who purchased shares from the Company in connection with a compensatory stock or option plan or other written agreement is eligible to resell such shares 90 days after the effective date of this Offering in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144. The Commission has proposed an amendment to Rule 144 which may further liberalize the provisions of Rule 144. Beginning 180 days after the date of this Prospectus, 8,260,330 of the Restricted Shares will be eligible for sale on the public market under Rule 144, provided the conditions of that rule have been met. All of such Restricted Shares are subject to lock-up agreements with the Underwriters that prohibit their sale or other disposition for 180 days from the date of this Prospectus without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters (except with respect to shares of Common Stock held by the Morgan Stanley Stockholders, for which prior written consent of all the U.S. Representatives is required). Pursuant to the Stockholders Agreement, the Company has granted the Existing Stockholders certain "demand" registration rights with respect to the shares of Common Stock held by the Existing Stockholders. In addition to such demand rights, the Existing Stockholders will be entitled, subject to certain limitations, to register shares of Common Stock in connection with a registration statement prepared by the Company. See "Certain Relationships and Related Transactions -- Stockholders Agreement." Each of the Existing Stockholders has agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters (except with respect to shares of Common Stock held by the Morgan Stanley Stockholders, without the prior written consent of all the U.S. Representatives), it will not, during the period ending 180 days after the date of this Prospectus, make any demand for, or exercise any right with respect to, the registration of any shares of Class A Common Stock or any security convertible into or exercisable or exchangeable for Class A Common Stock. Existing Stockholders other than the Morgan Stanley Stockholders may not sell or pledge any shares of Common Stock except in the circumstances permitted by the Stockholders Agreement. See "Certain Relationships and Related Transactions." Subject to the lock-up period describe above, the Morgan Stanley Stockholders may choose to dispose of the Common Stock owned by them. The timing of such sales or other dispositions by such stockholders (which could include distributions to the Morgan Stanley Stockholders' limited partners) will depend on market and other conditions, but could occur relatively soon after the lock-up period, including pursuant to the exercise of their registration rights. The Morgan Stanley Stockholders are unable to predict the timing of sales by any of their limited partners in the event of a distribution to them. Such dispositions could be privately negotiated transactions or public sales. 62 65 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS In the opinion of Sonnenschein Nath & Rosenthal, the following is a summary of certain of the material United States federal income and estate tax consequences of the ownership and disposition of Class A Common Stock applicable to "Non-United States Holders." A "Non-United States Holder" is any beneficial owner of Class A Common Stock that, for United States federal income or estate tax purposes, as the case may be, is a non-resident alien individual, a foreign corporation, a foreign partnership or a foreign estate or trust as such terms are defined in the Internal Revenue Code of 1986, as amended (the "Code"). This summary is based on the Code and administrative and judicial interpretations as of the date hereof, all of which are subject to change either retroactively or prospectively. This summary does not address all aspects of United States federal income and estate taxation that may be relevant to Non-United States Holders in light of their particular circumstances (such as certain tax consequences applicable to United States expatriates and pass-through entities) and does not address any tax consequences arising under the laws of any state, local or foreign taxing jurisdiction or the application of a particular tax treaty. Prospective investors are urged to consult their tax advisors regarding the United States federal, state and local income and other tax consequences, and the non-United States tax consequences, of owning and disposing of Class A Common Stock. Proposed United States Treasury Regulations were issued on April 15, 1996 (the "Proposed Regulations") which, if adopted in their present form, could revise in certain respects the rules applicable to Non-United States Holders of Class A Common Stock. The Proposed Regulations are generally proposed to be effective with respect to payments made after December 31, 1997, subject to certain transition rules. It cannot be predicted at this time whether the Proposed Regulations will be adopted as proposed or what modifications, if any, may be made to them. The summary below is not intended to include a complete discussion of the provisions of the Proposed Regulations, and prospective investors are urged to consult their tax advisors with respect to the effect the Proposed Regulations may have if adopted. DIVIDENDS Subject to the discussion below, any dividend paid to a Non-United States Holder generally will be subject to United States withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable tax treaty. For purposes of determining whether tax is to be withheld at a 30% rate, or at a reduced rate as specified by an applicable tax treaty, under current United States Treasury Regulations the Company ordinarily will presume that dividends paid to a holder with an address in a foreign country are paid to a resident of such country absent knowledge that such presumption is not warranted. Under such Regulations, dividends paid to a holder with an address within the United States generally will be presumed to be paid to a holder who is not a Non-United States Holder and will not be subject to the 30% withholding tax, unless the Company has actual knowledge that the holder is a Non-United States Holder. The Proposed Regulations would provide for certain presumptions (which differ from those described above) upon which the Company may generally rely to determine whether, in the absence of certain documentation, a holder should be treated as a Non-United States Holder for purposes of the 30% withholding tax described above. The presumptions would not apply for purposes of granting a reduced rate of withholding under a treaty. Under the Proposed Regulations, to obtain a reduced rate of withholding under a treaty a Non-United States Holder would be required either (i) to provide an Internal Revenue Service Form W-8 certifying such Non-United States Holder's entitlement to benefits under a treaty together with, in certain circumstances, additional information or (ii) satisfy certain other applicable certification requirements. The Proposed Regulations also would provide special rules to determine whether, for purposes of determining the applicability of a tax treaty and for purposes of the 30% withholding tax described above, dividends paid to a Non-United States Holder that is an entity should be treated as paid to the entity or those holding an interest in that entity. 63 66 Dividends received by a Non-United States Holder that are effectively connected with a United States trade or business conducted by such Non-United States Holder are exempt from withholding tax. However, such effectively connected dividends are subject to regular United States income tax in the same manner as if the Non-United States Holder were a United States person for federal income tax purposes. Effectively connected dividends may be subject to a different treatment under an applicable tax treaty depending on whether such dividends are attributable to a permanent establishment of the Non-United States Holder in the United States. A Non-United States Holder may claim exemption from withholding under the effectively connected income exception by filing Internal Revenue Service Form 4224 (Exemption from Withholding of Tax on Income Effectively Connected With the Conduct of a Trade or Business in the United States) each year with the Company or its paying agent prior to the payment of the dividends for such year. The Proposed Regulations would replace Form 4224 with Form W-8 and certain additional information. Effectively connected dividends received by a corporate Non-United States Holder may be subject to an additional "branch profits tax" at a rate of 30% (or such lower rate as may be specified by an applicable tax treaty) of such corporate Non-United States Holder's effectively connected earnings and profits, subject to certain adjustments. A Non-United States Holder eligible for a reduced rate of United States withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts currently withheld by filing an appropriate claim for refund with the United States Internal Revenue Service ("IRS"). GAIN ON DISPOSITION OF CLASS A COMMON STOCK A Non-United States Holder generally will not be subject to United States federal income tax with respect to gain realized upon the sale or other disposition of Class A Common Stock unless (i) such gain is effectively connected with a United States trade or business of the Non-United States Holder; (ii) the Non-United States Holder is a non-resident alien individual who holds the Class A Common Stock as a capital asset, is present in the United States for a period or periods aggregating 183 days or more during the calendar year in which such sale or disposition occurs, and either the non-resident alien individual has a "tax home" in the United States or the sale is attributable to an office or other fixed place of business maintained by the non-resident alien individual in the United States; or (iii) the Company is or has been a "United States real property holding corporation" for federal income tax purposes at any time within the shorter of the five-year period ending on the date of the disposition or such holder's holding period (the "determination period"). The Company has determined that it is not, and does not anticipate becoming a "United States real property holding corporation" for federal income tax purposes. Even if the Company is a United States real property holding corporation for federal income tax purposes at any time during the determination period, the disposition of Class A Common Stock by a Non-United States Holder that did not own more than five percent of the Class A Common Stock during the determination period will not be treated as a disposition of an interest in a United States real property holding corporation if the Class A Common Stock is treated as "regularly traded on an established securities market" during the calendar year. Non-United States Holders should consult applicable tax treaties, which might result in a United States federal income tax treatment on the sale or other disposition of Class A Common Stock different than as described above. BACKUP WITHHOLDING AND INFORMATION REPORTING Generally, the Company must report to the IRS the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld. The information reporting requirements apply regardless of whether withholding was reduced by an applicable tax treaty or if withholding was not required because the dividends were effectively connected with a trade or business in the United States of the Non-United States Holder. A similar report is sent to the holder. Pursuant to tax treaties or other agreements, the IRS may make its reports available to tax authorities in the recipient's country of residence. Under current United States Treasury Regulations, unless the Company has actual knowledge that a holder is a Non-United States Holder, dividends paid to a holder at an address within the United States may be subject to backup withholding at a rate of 31% and additional information reporting if the holder is not an "exempt recipient" as defined in Treasury Regulations (which includes corporations) and fails to provide a 64 67 correct taxpayer identification number and other information to the Company. Backup withholding and such additional information reporting will generally not apply to dividends paid to holders at an address outside the United States (unless the Company has knowledge that the holder is a United States person) or to dividends paid to Non-United States Holders that are either subject to the United States withholding tax (whether at 30% or a reduced rate) or that are exempt from such withholding because such dividends constitute effectively connected income. Under current United States Treasury Regulations, proceeds from the disposition of Class A Common Stock by a Non-United States Holder effected by or through a United States office of a broker will be subject to information reporting and to backup withholding at a rate of 31% of the gross proceeds unless such Non-United States Holder certifies under penalties of perjury as to its name, address and status as a Non-United States Holder or otherwise establishes an exemption. Generally, United States information reporting and backup withholding will not apply to a payment of disposition proceeds if the transaction is effected outside the United States by or through a non-United States office of a broker. However, United States information reporting requirements (but not backup withholding) will apply to a payment of disposition proceeds where the transaction is effected outside the United States if (a) the disposition is made through an office outside the United States of a broker that is either (i) a United States person for United States federal income tax purposes, (ii) a "controlled foreign corporation" for United States federal income tax purposes or (iii) a foreign person which derives 50% or more of its gross income for certain periods from the conduct of a United States trade or business and (b) the broker fails to maintain documentary evidence in its files that the holder is a Non-United States Holder and that certain conditions are met or that the holder otherwise is entitled to an exemption. The Proposed Regulations would, if adopted, alter the foregoing rules applicable to proceeds from Class A Common Stock in certain respects. Among other things, the Proposed Regulations would provide certain presumptions and other rules under which Non-United States Holders may be subject to backup withholding and related information reporting in the absence of required certifications. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If backup withholding results in an overpayment of United States income taxes, a refund may be obtained, provided that the required documents are filed with the IRS. ESTATE TAX An individual Non-United States Holder who is treated as the owner of Class A Common Stock at the time of such individual's death or has made certain lifetime transfers of an interest in Class A Common Stock will be required to include the value of such Class A Common Stock in such individual's gross estate for United States federal estate tax purposes and may be subject to United States federal estate tax, unless an applicable tax treaty provides otherwise. 65 68 UNDERWRITERS Under the terms and subject to the conditions in the Underwriting Agreement dated the date hereof (the "Underwriting Agreement"), the U.S. Underwriters named below for whom Morgan Stanley & Co. Incorporated, BT Alex. Brown, Goldman, Sachs & Co. and George K. Baum & Company are acting as U.S. Representatives, and the International Underwriters named below for whom Morgan Stanley & Co. International Limited, BT Alex. Brown International, a division of Bankers Trust International PLC, Goldman Sachs International and George K. Baum & Company are acting as International Representatives, have severally agreed to purchase, and the Company has agreed to sell to them, severally, the respective numbers of shares of Class A Common Stock set forth opposite the names of such Underwriters below:
NUMBER OF NAME SHARES ---- --------- U.S. Underwriters: Morgan Stanley & Co. Incorporated......................... BT Alex. Brown............................................ Goldman, Sachs & Co. ..................................... George K. Baum & Company.................................. --------- Subtotal............................................... 6,320,000 --------- International Underwriters: Morgan Stanley & Co. International Limited................ BT Alex. Brown International, a division of Bankers Trust International PLC...................................... Goldman Sachs International............................... George K. Baum & Company.................................. --------- Subtotal............................................... 1,580,000 --------- Total.................................................. 7,900,000 =========
The U.S. Underwriters and the International Underwriters, and the U.S. Representatives and the International Representatives, are collectively referred to as the "Underwriters" and the "Representatives," respectively. The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Class A Common Stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all of the shares of Class A Common Stock offered hereby (other than those covered by the U.S. Underwriters' over-allotment option described below) if any such shares are taken. Pursuant to the Agreement between U.S. and International Underwriters, each U.S. Underwriter has represented and agreed that, with certain exceptions: (i) it is not purchasing any Shares (as defined herein) for the account of anyone other than a United States or Canadian Person (as defined herein) and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any Shares or distribute any prospectus relating to the Shares outside the United States or Canada or to anyone other than a United States or Canadian Person. Pursuant to the Agreement between U.S. and International Underwriters, each International Underwriter has represented and agreed that, with certain exceptions: (i) it is not purchasing any Shares for the account of any United States or Canadian Person and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any Shares or distribute any prospectus relating to the Shares in the United States or Canada or to any United States or Canadian Person. With respect to any Underwriter that is a U.S. Underwriter and an International Underwriter, the foregoing representations and agreements (i) made by it in its capacity as a U.S. Underwriter apply only to it in its capacity as a U.S. Underwriter and (ii) made by it in its capacity as an International Underwriter apply only to it in its capacity as an International Underwriter. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the Agreement between U.S. and International Underwriters. As used herein, "United States or Canadian Person" means any national or resident of the United States or Canada, or any corporation, pension, profit-sharing or other trust or other entity organized under the laws of the United States or Canada or of any 66 69 political subdivision thereof (other than a branch located outside the United States and Canada of any United States or Canadian Person), and includes any United States or Canadian branch of a person who is otherwise not a United States or Canadian Person. All shares of Class A Common Stock to be purchased by the Underwriters under the Underwriting Agreement are referred to herein as the "Shares". Pursuant to the Agreement between U.S. and International Underwriters, sales may be made between the U.S. Underwriters and International Underwriters of any number of Shares as may be mutually agreed. The per share price of any Shares so sold shall be the public offering price set forth on the cover page hereof, in United States dollars, less an amount not greater than the per share amount of the concession to dealers set forth below. Pursuant to the Agreement between U.S. and International Underwriters, each U.S. Underwriter has represented that it has not offered or sold, and has agreed not to offer or sell, any Shares, directly or indirectly, in any province or territory of Canada or to, or for the benefit of, any resident of any province or territory of Canada in contravention of the securities laws thereof and has represented that any offer or sale of Shares in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer or sale is made. Each U.S. Underwriter has further agreed to send to any dealer who purchases from it any of the Shares a notice stating in substance that, by purchasing such Shares, such dealer represents and agrees that it has not offered or sold, and will not offer or sell, directly or indirectly, any of such Shares in any province or territory of Canada or to, or for the benefit of, any resident of any province or territory of Canada in contravention of the securities laws thereof and that any offer or sale of Shares in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer or sale is made, and that such dealer will deliver to any other dealer to whom it sells any of such Shares a notice containing substantially the same statement as is contained in this sentence. Pursuant to the Agreement between U.S. and International Underwriters, each International Underwriter has represented and agreed that (i) it has not offered or sold and, prior to the date six months after the closing date for the sale of the Shares to the International Underwriters, will not offer or sell, any Shares to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the Shares in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the offering of the Shares to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom such document may otherwise lawfully be issued or passed on. Pursuant to the Agreement between U.S. and International Underwriters, each International Underwriter has further represented that it has not offered or sold, and has agreed not to offer or sell, directly or indirectly, in Japan or to or for the account of any resident thereof, any of the Shares acquired in connection with the distribution contemplated hereby, except for offers or sales to Japanese International Underwriters or dealers and except pursuant to any exemption from the registration requirements of the Securities and Exchange Law and otherwise in compliance with applicable provisions of Japanese law. Each International Underwriter has further agreed to send to any dealer who purchases from it any of the Shares a notice stating in substance that, by purchasing such Shares, such dealer represents and agrees that it has not offered or sold, and will not offer or sell, any of such Shares, directly or indirectly, in Japan or to or for the account of any resident thereof except for offers or sales to Japanese International Underwriters or dealers and except pursuant to any exemption from the registration requirements of the Securities and Exchange Law and otherwise in compliance with applicable provisions of Japanese law, and that such dealer will send to any other dealer to whom it sells any of such Shares a notice containing substantially the same statement as is contained in this sentence. 67 70 The Underwriters initially propose to offer part of the shares of Class A Common Stock directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. Any Underwriter may allow, and such dealers may reallow, a concession not in excess of $ a share to other Underwriters or to certain other dealers. After the initial offering of the shares of Class A Common Stock, the offering price and other selling terms may from time to time be varied by the Representatives. Certain Selling Stockholders have granted to the U.S. Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an aggregate of 885,000 additional shares of Class A Common Stock at the public offering price set forth on the cover page hereof, less underwriting discounts and commissions. The U.S. Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of Class A Common Stock offered hereby. To the extent such option is exercised, each U.S. Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of Class A Common Stock as the number set forth next to such U.S. Underwriter's name in the preceding table bears to the total number of shares of Class A Common Stock set forth next to the names of all U.S. Underwriters in the preceding table. The Underwriters have informed the Company that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of Class A Common Stock offered by them. Each of the Company and the directors, executive officers and certain other stockholders of the Company has agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters (except with respect to shares of Common Stock held by the Morgan Stanley Stockholders, for which prior written consent of all the U.S. Representatives is required), it will not, during the period ending 180 days after the date of this Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Class A Common Stock or any securities convertible into or exercisable or exchangeable for Class A Common Stock (provided that such shares or securities are either owned on the date of this Prospectus or are hereinafter acquired prior to the Offering) or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Class A Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Class A Common Stock or such other securities, in cash or otherwise. The restrictions described in this paragraph do not apply to (x) the sale of the Shares to the Underwriters, (y) the issuance by the Company of shares of Common Stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this Prospectus or (z) transactions by any person other than the Company relating to shares of Class A Common Stock or other securities acquired in open market transactions after the consummation of the offering of the Shares. In order to facilitate the offering of the Class A Common Stock, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Class A Common Stock. Specifically, the Underwriters may over-allot in connection with the Offering, creating a short position in the Class A Common Stock for their own account. In addition, to cover over-allotments or to stabilize the price of the Class A Common Stock, the Underwriters may bid for, and purchase, shares of Class A Common Stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an Underwriter or a dealer for distributing the Class A Common Stock in the Offering, if the syndicate repurchases previously distributed Class A Common Stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Class A Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. The Company, the Selling Stockholders and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. Upon consummation of the Offering, affiliates of Morgan Stanley & Co. Incorporated and Morgan Stanley & Co. International Limited will own 51.3% of the Common Stock. No affiliates of Morgan Stanley & 68 71 Co. Incorporated and Morgan Stanley & Co. International Limited will be selling shares of Class A Common Stock in the Offering. Currently, affiliates of Morgan Stanley & Co. Incorporated and Morgan Stanley & Co. International Limited have designated three members to the Board of Directors (Messrs. Niehaus and Sorrel and Ms. Rosen). Messrs. Niehaus and Sorrel and Ms. Rosen are employees of Morgan Stanley & Co. Incorporated. See "Management." From time to time, Morgan Stanley & Co. Incorporated and its affiliates have provided, and continue to provide, investment banking and financial advisory services to the Company for which they have received customary fees and commissions. Morgan Stanley Senior Funding, Inc., an affiliate of Morgan Stanley & Co. Incorporated, one of the U.S. Underwriters, is the documentation agent under the agreements relating to the Company's Credit Facility, and acted as arranger for the Credit Facility for which it received a customary fee. Morgan Senior Funding, Inc. also provides other general financing and banking services to the Company and its affiliates from time to time. Bankers Trust Company, an affiliate of BT Alex. Brown (which is one of the U.S. Underwriters) and BT Alex. Brown International (which is one of the International Underwriters), is administrative agent and a lender under the Company's Credit Facility. The Class A Common Stock has been approved for listing, subject to notice of issuance, on the New York Stock Exchange under the symbol "PLB." In order to meet the requirements for listing the Class A Common Stock on the New York Stock Exchange, the Underwriters have undertaken to meet the New York Stock Exchange's minimum distribution, issuance and aggregate market value requirements. Prior to the Offering, there has been no public market for the Class A Common Stock. The initial public offering price will be determined by negotiations between the Company and the U.S. Representatives. Among the factors to be considered in determining the initial public offering price will be the future prospects of the Company and its industry in general, sales, earnings and certain other financial and operating information of the Company in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to those of the Company. The estimated initial public offering price range set forth on the cover page of this Preliminary Prospectus is subject to change as a result of market conditions and other factors. Because the partial repayment of the Credit Facility will cause a substantial portion of the proceeds from the Offering to be paid to affiliates of members of the National Association of Securities Dealers, Inc. ("NASD") which members may participate in the U.S. Offering, the U.S. Offering is being conducted in accordance with the requirements of Rule 2710(c)(8) of the NASD Conduct Rules. The initial public offering price can be no higher than that recommended by a "qualified independent underwriter" meeting certain standards. Accordingly, Goldman, Sachs & Co. will serve in such role. In connection with the U.S. Offering, Goldman, Sachs & Co. in its role as qualified independent underwriter has performed due diligence investigations and reviewed and participated in the preparation of this Prospectus and the Registration Statement of which this Prospectus forms a part. From time to time, George K. Baum & Company has provided, and continues to provide, investment banking and financial advisory services to the Company for which it has received customary fees and commissions. Upon consummation of the Offering, one of the Company's seven directors will be a director of George K. Baum & Company. LEGAL MATTERS The validity of the shares of Class A Common Stock offered hereby and certain other matters will be passed upon for the Company by Sonnenschein Nath & Rosenthal, Kansas City, Missouri. Certain legal matters will be passed upon for the Underwriters by Davis Polk & Wardwell, New York, New York. Davis Polk & Wardwell has performed, and will continue to perform, legal services for the Morgan Stanley Stockholders and has acted as counsel to the Morgan Stanley Stockholders in connection with their investments in the Company. 69 72 EXPERTS The financial statements of the Company at December 31, 1995, September 30, 1996, and June 30, 1997, and for each of the two years in the period ended December 31, 1995, for the nine-month fiscal period ended September 30, 1996 and the nine-month period ended June 30, 1997 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed a Registration Statement with the Securities and Exchange Commission (the "Commission") on Form S-1 under the Securities Act with respect to the shares of Class A Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain items of which are contained in schedules and exhibits to the Registration Statement as permitted by rules of the Commission. For further information with respect to the Company and the Class A Common Stock offered hereby, reference is made to such Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete. With respect to each such contract or other document filed as a part of or otherwise incorporated in the Registration Statement, reference is made to the exhibit for a more complete description of the matters involved, and each such statement shall be deemed qualified in its entirety by such reference. Following the consummation of this Offering, the Company will be subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith will file reports, proxy statements and other information with the Commission. The Registration Statement, including the schedules and exhibits thereto, as well as such reports, proxy statements and other information filed by the Company can be inspected, without charge, and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices maintained by the Commission at Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such materials can also be obtained from the Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, registration statements and certain other filings made with the Commission through its Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly available through the Commission's site on the Internet's World Wide Web, located at http://www.sec.gov. The Registration Statement, including all exhibits thereto and amendments thereof, has been filed with the Commission through EDGAR. Following the consummation of this Offering, the Company intends to furnish to its stockholders annual reports containing financial statements audited by an independent certified public accounting firm and quarterly reports for each of the first three quarters of each fiscal year containing unaudited financial information. 70 73 AMERICAN ITALIAN PASTA COMPANY INDEX TO AUDITED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors.............................. F-2 Balance Sheets at December 31, 1995, September 30, 1996 and June 30, 1997............................................. F-3 Statements of Operations for the years ended December 31, 1994 and 1995, the fiscal nine-months ended September 30, 1996 and the nine-months ended June 30, 1997.............. F-4 Statements of Stockholders' Equity for the years ended December 31, 1994 and 1995, the fiscal nine-months ended September 30, 1996 and the nine-months ended June 30, 1997...................................................... F-5 Statements of Cash Flows for the years ended December 31, 1994 and 1995, the fiscal nine-months ended September 30, 1996 and the nine-months ended June 30, 1997.............. F-6 Notes to Financial Statements............................... F-7
F-1 74 REPORT OF INDEPENDENT AUDITORS The Board of Directors American Italian Pasta Company We have audited the accompanying balance sheets of American Italian Pasta Company (the Company) as of December 31, 1995, September 30, 1996 and June 30, 1997, and the related statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 31, 1995, the nine- month fiscal period ended September 30, 1996 and the nine-month period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 financial position of American Italian Pasta Company at December 31, 1995, September 30, 1996 and June 30, 1997, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1995, the nine-month fiscal period ended September 30, 1996 and the nine-month period ended June 30, 1997 in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Kansas City, Missouri July 25, 1997 except Note 12, as to which the date is October 7, 1997 F-2 75 AMERICAN ITALIAN PASTA COMPANY BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30, JUNE 30, 1995 1996 1997 ------------ ------------- -------- (IN THOUSANDS) ASSETS (Note 2) Current assets: Cash and temporary investments.......................... $ 18 $ 1,818 $ 2,612 Trade and other receivables............................. 10,709 12,494 11,616 Prepaid expenses and deposits........................... 927 1,879 2,201 Inventory............................................... 12,544 14,374 11,619 Deferred income taxes (Note 3).......................... 339 269 213 -------- -------- -------- Total current assets...................................... 24,537 30,834 28,261 Property, plant and equipment: Land and improvements................................... 4,379 4,413 4,540 Buildings............................................... 37,382 37,491 37,491 Plant and mill equipment................................ 78,850 81,461 83,702 Furniture, fixtures and equipment....................... 3,348 3,635 4,477 -------- -------- -------- 123,959 127,000 130,210 Accumulated depreciation................................ (18,580) (23,247) (27,790) -------- -------- -------- 105,379 103,753 102,420 Construction in progress................................ -- -- 7,839 -------- -------- -------- Total property, plant and equipment....................... 105,379 103,753 110,259 Deferred income taxes (Note 3)............................ 1,821 4,479 2,730 Other assets.............................................. 3,687 2,622 4,212 -------- -------- -------- Total assets.............................................. $135,424 $141,688 $145,462 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................ $ 12,102 $ 7,193 $ 6,550 Accrued expenses........................................ 2,694 3,664 4,750 Current maturities of long-term debt (Note 2)........... 3,109 8,078 3,685 Revolving line of credit facility (Note 2).............. -- 13,500 -- -------- -------- -------- Total current liabilities................................. 17,905 32,435 14,985 Long-term debt (Note 2)................................... 97,452 93,284 89,500 Commitments and contingencies (Note 4) Stockholders' equity: Preferred stock, $.001 par value: Authorized shares 10,000,000......................... -- -- -- Class A common stock, $.001 par value: Authorized shares -- 75,000,000...................... 8 8 11 Class B common stock, $.001 par value: Authorized shares -- 25,000,000...................... -- -- -- Additional paid-in capital.............................. 32,971 33,071 55,324 Notes receivable from officers.......................... -- -- (298) Accumulated deficit..................................... (12,912) (17,110) (14,060) -------- -------- -------- Total stockholders' equity................................ 20,067 15,969 40,977 -------- -------- -------- Total liabilities and stockholders' equity................ $135,424 $141,688 $145,462 ======== ======== ========
See accompanying notes to financial statements. F-3 76 AMERICAN ITALIAN PASTA COMPANY STATEMENTS OF OPERATIONS
NINE MONTHS ENDED YEAR ENDED ----------------------------------------------- DECEMBER 31, SEPTEMBER 30, JUNE 30, ------------------ ---------------------- ---------------------- 1994 1995 1995 1996 1996 1997 ---- ---- ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues (Note 5)................... $69,465 $92,903 $63,828 $92,074 $86,514 $93,616 Cost of goods sold.................. 54,393 73,851 51,601 68,555 65,697 67,821 Plant expansion costs (Note 8)...... 484 2,065 1,640 -- 425 -- ------- ------- ------- ------- ------- ------- Gross profit........................ 14,588 16,987 10,587 23,519 20,392 25,795 Selling and marketing expense, including product introduction costs (Note 10)................... 3,792 5,303 3,656 16,798 11,236 10,212 General and administrative expense........................... 1,951 2,930 2,048 2,805 2,741 2,855 ------- ------- ------- ------- ------- ------- Operating profit.................... 8,845 8,754 4,883 3,916 6,415 12,728 Interest expense, net............... 4,975 8,008 5,261 8,023 8,030 7,800 ------- ------- ------- ------- ------- ------- Income (loss) before income tax expense (benefit) and extraordinary item................ 3,870 746 (378) (4,107) (1,615) 4,928 Income tax expense (benefit) (Note 3)................................ 1,484 270 (147) (1,556) (642) 1,878 ------- ------- ------- ------- ------- ------- Income (loss) before extraordinary item.............................. 2,386 476 (231) (2,551) (973) 3,050 Extraordinary item: Loss due to early extinguishment of long-term debt, net of income taxes (Note 2).......... (204) -- -- (1,647) (1,647) -- ------- ------- ------- ------- ------- ------- Net income (loss)................... $ 2,182 $ 476 $ (231) $(4,198) $(2,620) $ 3,050 ======= ======= ======= ======= ======= ======= Net income (loss) per common share: Before extraordinary item........... $ 0.23 $ 0.05 $ (0.25) $ 0.25 Extraordinary item.................. (0.02) -- (0.16) -- ------- ------- ------- ------- Total............................... $ 0.21 $ 0.05 $ (0.41) $ 0.25 ======= ======= ======= ======= Weighted-average common shares outstanding....................... 10,231 10,275 10,303 12,160 ======= ======= ======= =======
See accompanying notes to financial statements. F-4 77 AMERICAN ITALIAN PASTA COMPANY STATEMENTS OF STOCKHOLDERS' EQUITY
NOTES CLASS A CLASS A ADDITIONAL RECEIVABLE TOTAL COMMON COMMON PAID-IN FROM DEFERRED ACCUMULATED STOCKHOLDERS' SHARES STOCK CAPITAL OFFICERS COMPENSATION DEFICIT EQUITY ------- ------- ---------- ---------- ------------ ----------- ------------- (IN THOUSANDS, EXCEPT SHARE DATA) Balance at December 31, 1993... 8,179,832 $ 8 $32,679 $ -- $(144) $(15,570) $16,973 Compensation related to stock options vesting in 1994.... -- -- -- -- 144 -- 144 Issuance of 21,401 shares of Class A Common stock....... 21,401 -- 102 -- -- -- 102 Net income................... -- -- -- -- -- 2,182 2,182 ---------- --- ------- ----- ----- -------- ------- Balance at December 31, 1994... 8,201,233 8 32,781 -- -- (13,388) 19,401 Issuance of 38,767 shares of Class A Common stock....... 38,767 -- 190 -- -- -- 190 Net income................... -- -- -- -- -- 476 476 ---------- --- ------- ----- ----- -------- ------- Balance at December 31, 1995... 8,240,000 8 32,971 -- -- (12,912) 20,067 Issuance of 20,328 shares of Class A Common stock....... 20,328 -- 100 -- -- -- 100 Net loss..................... -- -- -- -- -- (4,198) (4,198) ---------- --- ------- ----- ----- -------- ------- Balance at September 30, 1996......................... 8,260,328 8 33,071 -- -- (17,110) 15,969 Issuance of 3,174,526 shares of Class A Common stock, net of issuance costs ..... 3,174,528 3 22,039 -- -- -- 22,042 Notes received from officers in exchange for stock...... -- -- -- (298) -- -- (298) Issuance of 31,200 shares of Class A Common stock to employee benefit plan...... 31,200 -- 214 -- -- -- 214 Net income................... -- -- -- -- -- 3,050 3,050 ---------- --- ------- ----- ----- -------- ------- Balance at June 30, 1997....... 11,466,056 $11 $55,324 $(298) $ -- $(14,060) $40,977 ========== === ======= ===== ===== ======== =======
See accompanying notes to financial statements. F-5 78 AMERICAN ITALIAN PASTA COMPANY STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED YEAR ENDED -------------------------------------------------- DECEMBER 31 SEPTEMBER 30 JUNE 30 -------------------- ----------------------- ----------------------- 1994 1995 1995 1996 1996 1997 ---- ---- ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) (IN THOUSANDS) Operating activities: Net income (loss).................... $ 2,182 $ 476 $ (231) $ (4,198) $ (2,620) $ 3,050 Adjustments to reconcile net income (loss) to net cash provided by (used in) operations: Depreciation and amortization.... 4,573 6,279 4,485 5,434 5,607 5,784 Deferred income tax expense (benefit)..................... 1,168 264 (147) (1,556) (642) 1,878 Extraordinary loss due to early extinguishment of long-term debt.......................... 204 -- -- 1,647 1,647 -- Compensation related to stock options....................... 144 -- -- -- -- -- Loss on disposal of property, plant and equipment........... -- 439 275 -- 163 -- Changes in operating assets and liabilities: Trade and other receivables... (1,900) (4,586) (1,512) (1,785) (2,898) 942 Prepaid expenses and deposits.................... (317) (364) (1,241) (952) (220) (396) Inventory..................... (4,293) (2,814) (1,889) (1,830) (5,377) 2,755 Accounts payable and accrued expenses.................... 2,167 6,610 3,435 (3,961) 519 443 Other......................... (238) (574) (500) (276) (334) (380) -------- -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities............... 3,690 5,730 2,675 (7,477) (4,155) 14,076 Investing activities: Additions to property, plant and equipment.......................... (25,431) (38,789) (31,365) (3,041) (6,084) (11,464) -------- -------- -------- -------- -------- -------- Net cash used in investing activities......................... (25,431) (38,789) (31,365) (3,041) (6,084) (11,464) Financing activities: Additions to deferred debt issuance costs.............................. (2,004) (71) (71) (2,083) (2,064) (2,099) Proceeds from issuance of debt....... 58,330 40,795 22,274 86,470 106,025 3,543 Net borrowings under revolving line of credit facility................. -- -- 9,408 13,500 -- (13,500) Principal payments on debt and capital lease obligations.......... (36,825) (7,848) (3,875) (85,669) (92,239) (11,720) Proceeds from issuance of common stock, net of issuance costs....... 102 190 167 100 -- 21,958 -------- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities............... 19,603 33,066 27,903 12,318 11,722 (1,818) -------- -------- -------- -------- -------- -------- Net increase (decrease) in cash and temporary investments.............. (2,138) 7 (787) 1,800 1,483 794 Cash and temporary investments at beginning of period................ 2,149 11 11 18 (776) 1,818 -------- -------- -------- -------- -------- -------- Cash and temporary investments at end of period.......................... $ 11 $ 18 $ (776) $ 1,818 $ 707 $ 2,612 ======== ======== ======== ======== ======== ========
See accompanying notes to financial statements. F-6 79 AMERICAN ITALIAN PASTA COMPANY NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS American Italian Pasta Company (the Company) is a Delaware Corporation which began operations in 1988. The Company is the third largest producer and marketer of pasta products in the United States with manufacturing and distribution facilities located in Excelsior Springs, Missouri and Columbia, South Carolina. CHANGE IN FISCAL YEAR Effective for its 1996 fiscal year, the Company changed its fiscal year end from December 31 to the last Friday of September or the first Friday of October in a nine-month fiscal year for 1996, a 53-week year for fiscal 1997, and a 52- or 53-week year for all subsequent fiscal years. The Company's other fiscal quarters end on the Friday last preceding December 31, March 31 and June 30 of each year. For purposes of the financial statements and notes thereto, the 1996 fiscal year is described as having ended on September 30, 1996, and the nine-month 1997 and 1996 interim periods are described as having ended on June 30. INTERIM FINANCIAL STATEMENTS The Company's balance sheet at June 30, 1997 and the statements of operations and stockholders' equity and cash flows for the nine months ended September 30, 1995, June 30, 1996 and June 30, 1997 have been prepared in accordance with generally accepted accounting principles for interim financial statements. The Company has included information for the nine months ended September 30, 1995 and June 30, 1996 in the statements of operations and statements of cash flows for comparative purposes. This information is unaudited. REVENUE RECOGNITION Sales of the Company's products, including pricing terms, are final upon shipment of the goods. Accordingly, revenue is recognized at such time. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RISKS AND UNCERTAINTIES The Company grants credit to certain customers who meet the Company's preestablished credit requirements. Generally, the Company does not require collateral security when trade credit is granted to customers. Credit losses are provided for in the financial statements and consistently have been within management's expectations. The allowance for doubtful accounts at December 31, 1995, September 30, 1996 and June 30, 1997 was $59,000, $60,000 and $198,000, respectively. At December 31, 1995, September 30, 1996 and June 30, 1997, approximately 30%, 34% and 41%, respectively, of accounts receivable were due from two customers. Pasta is made from semolina milled from durum wheat, a class of hard amber wheat grown in certain parts of the world and purchased by the Company from United States and Canadian sources. The Company mills the wheat into semolina at its Excelsior Springs plant. Durum wheat is a narrowly traded, cash only commodity crop. The Company attempts to minimize the effect of durum wheat cost fluctuations through F-7 80 AMERICAN ITALIAN PASTA COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) forward purchase contracts and raw material cost-based pricing agreements with many of its customers. The Company's commodity procurement and pricing practices are intended to reduce the risk of durum wheat cost increases on profitability, but also may temporarily affect the timing of the Company's ability to benefit from possible durum wheat cost decreases for such contracted quantities. FINANCIAL INSTRUMENTS The carrying value of the Company's financial instruments, including cash and temporary investments, accounts receivable, accounts payable and long-term debt, as reported in the accompanying balance sheet at June 30, 1997, approximates fair value. ADVERTISING COSTS The Company amortizes direct response advertising costs over the period in which the future benefits are expected (generally six months or less). Production costs for television advertisement are expensed upon the first showing. Other costs of advertising and promotions are expensed as incurred. CASH AND TEMPORARY INVESTMENTS Cash and temporary investments include cash on hand, amounts due from banks and highly liquid marketable securities with maturities of three months or less at the date of purchase. INVENTORIES Inventories are stated using product specific standard costs which approximate the lower of cost or market determined on a first-in, first-out (FIFO) basis. Inventories consist of the following:
DECEMBER 31, SEPTEMBER 30, JUNE 30, 1995 1996 1997 ------------ ------------- -------- (IN THOUSANDS) Finished goods............................... $ 8,625 $10,809 $ 7,505 Raw materials, packaging materials and work-in-process............................ 3,919 3,565 4,114 ------- ------- ------- $12,544 $14,374 $11,619 ======= ======= =======
PROPERTY, PLANT AND EQUIPMENT Capital additions, improvements and major renewals are classified as property, plant and equipment and are recorded at cost. Depreciation is calculated for financial statement purposes using the straight-line method over the estimated useful life of the related asset for each year as follows:
NUMBER OF YEARS --------- Land improvements........................................... 40 Buildings................................................... 30 Plant and mill equipment.................................... 20 Packaging equipment......................................... 10 Furniture, fixtures and equipment........................... 5
F-8 81 AMERICAN ITALIAN PASTA COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) The Company capitalizes interest costs associated with the construction and installation of plant and equipment. During the fiscal years ended December 31, 1994 and 1995, approximately $871,000 and $1,559,000 of interest cost was capitalized, respectively. There was no interest cost capitalized in fiscal 1996. During the nine months ended June 30, 1997, approximately $136,000 of interest cost was capitalized. OTHER ASSETS Other assets consist of the following:
DECEMBER 31, SEPTEMBER 30, JUNE 30, 1995 1996 1997 ------------ ------------- -------- (IN THOUSANDS) Debt issuance costs (Note 2)............................... $ 5,071 $ 2,143 $ 4,242 Package design costs....................................... 1,274 1,456 1,492 Other...................................................... 1,151 1,150 1,099 ------- ------- ------- 7,496 4,749 6,833 Accumulated amortization................................... (3,809) (2,127) (2,621) ------- ------- ------- $ 3,687 $ 2,622 $ 4,212 ======= ======= =======
Debt issuance costs relate to expenditures incurred in connection with obtaining long-term debt. These costs are being amortized over the life of the related debt using the effective interest rate method. Debt issuance costs, net of accumulated amortization, were $3,597,000 at June 30, 1997. Package design costs relate to certain incremental third party costs to design artwork and produce die plates and negatives necessary to manufacture and print packaging materials according to the Company's and customer's specification. These costs are amortized ratably over a two-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 $449,000 at June 30, 1997. CHANGE IN ACCOUNTING POLICIES In conjunction with its planned initial public offering, the Company elected to expense all start up costs incurred related to the 1995/1996 plant expansion. In addition, the Company has elected to expense all product placement fees incurred related to the 1996/1997 introduction of flavored pasta. The related financial statements have been restated retroactively. INCOME TAXES The Company accounts for income taxes in accordance with the method prescribed by Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. STOCK OPTIONS The Company has elected to follow Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its employee stock options and have adopted the pro forma disclosure requirements under SFAS No. 123 "Accounting for Stock-Based Compensation." Under APB No. 25, because the exercise price of the Company's employee stock options is F-9 82 AMERICAN ITALIAN PASTA COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) equal to or greater than the market price of the underlying stock on the date of grant, no compensation expense is recognized. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share is calculated using the weighted-average number of common shares and common equivalent shares, to the extent dilutive, outstanding during the periods. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, stock issued and common stock options granted by the Company during the 12 months preceding the filing date for its planned initial public offering have been included in the calculation of weighted-average common and common equivalent shares outstanding, using the treasury stock method based on the assumed initial public offering price of $16 per share, as if the stock and options were outstanding for all periods presented. 2. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, SEPTEMBER 30, JUNE 30, 1995 1996 1997 ------------ ------------- -------- (IN THOUSANDS) Term loans................................................. $ 93,750 $ 94,813 $85,938 Capital lease, 15-year term with three, five-year renewal options, at an imputed interest rate of 12.5%............ 3,657 3,586 3,509 Capital lease, eight-year term at an imputed interest rate of 8.5%.................................................. 2,210 2,260 2,124 Other...................................................... 944 703 1,614 -------- -------- ------- 100,561 101,362 93,185 Less current portion....................................... 3,109 8,078 3,685 -------- -------- ------- $ 97,452 $ 93,284 $89,500 ======== ======== =======
In April 1997, the Company amended and restated its principal credit agreement in conjunction with a sale of $22.3 million of the Company's common stock to existing stockholders. With the net proceeds from the common stock sale, the Company repaid then outstanding borrowings under the revolving credit agreement and prepaid scheduled long-term debt payments due through December 31, 1997. The amended and restated credit agreement (i) created a $45 million D term loan which will be used in combination with the proceeds from the common stock sale to finance the Company's expansion of capital assets; (ii) increased the Company's revolving credit facility from $17.5 million to $25 million and (iii) modified certain covenant provisions. At June 30, 1997, the Company had $45 million available to borrow under the D term credit facility. Debt issuance costs of approximately $2.1 million related to the April refinancing were capitalized as deferred debt issuance costs during 1997. In July 1994 and February 1996, the Company refinanced certain of its credit facilities. The unamortized balance of debt issuance costs which related to the previous debt were written off, net of related tax benefits, as an extraordinary loss on debt extinguishment as required by generally accepted accounting principles. These amounts were $329,000 ($204,000 net of taxes) in fiscal 1994 and $2.6 million ($1.6 million net of taxes) in fiscal 1996. F-10 83 AMERICAN ITALIAN PASTA COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1997 2. LONG-TERM DEBT -- (CONTINUED) The interest rates and principal maturity terms of the credit facility are as follows:
FINAL FACILITY AMOUNT INTEREST RATE MATURITY DATE -------- ------ ------------- ------------- (IN THOUSANDS) Term Loan A................ $ 18,000 LIBOR + 3.00% or prime + 2.00% February 2000 Term Loan B................ 19,900 LIBOR + 3.25% or prime + 2.25% February 2002 Term Loan C................ 54,700 LIBOR + 3.75% or prime + 2.75% February 2004 Term Loan D................ 45,000 LIBOR + 3.75% or prime + 2.75% February 2004 -------- 137,600 Maximum Revolving Credit Facility................. 25,000 LIBOR + 3.00% or prime + 2.00% February 2000 -------- $162,600 ========
Debt principal is to be repaid in varying quarterly installments with interest over the terms shown above. The borrowing under the Revolving Credit Facility is limited to the lesser of $25 million or available collateral as defined in the amended credit agreement. At June 30, 1997, the revolving credit line had approximately $24.5 million available for future borrowings, subject to borrowing base limitations and outstanding letters of credit. The following information related to the revolving credit facility is presented for the years ended December 31, 1994 and 1995, the nine-month fiscal period ended September 30, 1996 and the nine months ended June 30, 1997.
1994 1995 1996 1997 ---- ---- ---- ---- Weighted-average interest rate.................. 7.9% 9.0% 8.4% 8.6%
Annual maturities of long-term debt and capital lease obligations for each of the next five years ended June 30, are as follows:
LONG-TERM CAPITAL YEAR DEBT LEASES TOTAL ---- --------- ------- ----- (IN THOUSANDS) 1998............................................. $ 2,875 $ 1,558 1999............................................. 6,000 1,521 2000............................................. 7,300 1,335 2001............................................. 10,150 994 2002............................................. 13,750 994 Thereafter....................................... 45,863 5,460 ------- ------- 85,938 11,862 $97,800 Less imputed interest............................ -- 4,615 4,615 ------- ------- ------- Present value of net minimum payments............ 85,938 7,247 93,185 Less current portion............................. 2,875 810 3,685 ------- ------- ------- Long-term obligations............................ $83,063 $ 6,437 $89,500 ======= ======= =======
The term loans and revolving credit agreement contain various restrictive covenants which include, among other things, financial covenants requiring minimum and cumulative earnings levels and limitations on F-11 84 AMERICAN ITALIAN PASTA COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1997 2. LONG-TERM DEBT -- (CONTINUED) the payment of dividends, stock purchases, and capital spending, and the Company's ability to enter into certain contractual arrangements. In addition to the above scheduled principal maturities, the credit agreement also provides that excess cash flow (as annually defined) will be used to fund future principal maturities. The facilities are secured by substantially all assets of the Company. The Company leases certain assets under capital lease agreements. At December 31, 1995, September 30, 1996 and June 30, 1997, the cost of these assets was $6,987,000, $7,128,000 and $7,949,000, respectively, and related accumulated amortization was $155,000, $642,000 and $556,000, respectively. 3. INCOME TAXES At June 30, 1997, the Company has net operating loss carryforwards for federal income tax purposes that expire as follows: 2003....................................................... $ 958 2004....................................................... 5,253 2005....................................................... 76 2006....................................................... 5 2007....................................................... 1,299 2008....................................................... 195 2009....................................................... 1,248 2010....................................................... 5,121 2011....................................................... 12,584 ------- $26,739 =======
The Company also has state income enterprise zone credits of approximately $1 million that expire in 1997. The Company has established a valuation allowance of $1,031,000 for state enterprise zone credits that are available but are not expected to be realized. Management believes it is more likely than not that remaining deferred tax assets will be realized through the generation of future taxable income and available tax planning strategies. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31, SEPTEMBER 30, JUNE 30, 1995 1996 1997 ------------ ------------- -------- (IN THOUSANDS) Deferred tax assets: Net operating loss carryforward.......................... $ 5,012 $ 9,730 $10,573 State enterprise zone credits............................ 1,031 1,031 1,031 AMT credit carryforward.................................. 561 561 515 Other.................................................... 1,064 1,888 1,084 ------- ------- ------- Total deferred tax assets.................................. 7,668 13,210 13,203 Deferred tax liabilities: Book basis of tangible assets greater than tax........... 4,311 6,721 8,756 Other.................................................... 166 710 473 ------- ------- ------- Total deferred tax liabilities............................. 4,477 7,431 9,229 ------- ------- ------- Net deferred tax assets before allowance................... 3,191 5,779 3,974 Valuation allowance for deferred tax assets................ (1,031) (1,031) (1,031) ------- ------- ------- Net deferred tax assets.................................... $ 2,160 $ 4,748 $ 2,943 ======= ======= =======
F-12 85 AMERICAN ITALIAN PASTA COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1997 3. INCOME TAXES -- (CONTINUED) Significant components of the provision for income taxes are as follows:
YEAR ENDED NINE MONTHS NINE MONTHS DECEMBER 31 ENDED ENDED -------------- SEPTEMBER 30, JUNE 30, 1994 1995 1996 1997 ---- ---- ------------- ----------- (IN THOUSANDS) Current income tax expense............................ $ 316 $ 6 $ -- $ -- Deferred tax expense (benefit)........................ 1,134 264 (1,556) 1,878 Change in valuation allowance......................... 34 -- -- -- ------ ---- ------- ------ Net income tax expense (benefit)...................... $1,484 $270 $(1,556) $1,878 ====== ==== ======= ======
The reconciliation of income tax computed at the U.S. statutory tax rate to income tax expense is as follows:
YEAR ENDED NINE MONTHS NINE MONTHS DECEMBER 31 ENDED ENDED -------------- SEPTEMBER 30, JUNE 30, 1994 1995 1996 1997 ---- ---- ------------- ----------- (IN THOUSANDS) Income (loss) before income taxes..................... $3,870 $746 $(4,107) $4,928 U.S. statutory tax rate............................... x34% x34% x34% x34% ------ ---- ------- ------ Federal income tax expense (benefit) at U.S. statutory rate................................................ 1,316 254 (1,396) 1,676 State income tax expense (benefit), net of federal tax effect.............................................. 155 30 (165) 196 Change in valuation allowance......................... 34 -- -- -- Other, net............................................ (21) (14) 5 6 ------ ---- ------- ------ Net income tax expense (benefit)...................... $1,484 $270 $(1,556) $1,878 ====== ==== ======= ======
4. COMMITMENTS AND CONTINGENCIES In April 1997, the Company entered into a long-term supply arrangement in which the Company is obligated to produce and the customer is obligated to purchase certain minimum annual volumes of pasta products beginning in fiscal 1998. In order to fulfill its obligations under the contract, the Company will be required to expand significantly its available production capacity. The Company has committed approximately $86 million to expand significantly its existing manufacturing, milling and distribution facilities. The expansion assets are anticipated to be placed in service during fiscal 1998. As of June 30, 1997, cumulative expansion expenditures are $7,839,000, including capitalized interest of $136,000. The remaining expansion costs will be funded from a portion of the proceeds from the Company's common stock sale (see Note 12), available bank debt credit facilities and cash provided by operations. The Company had durum wheat purchase commitments totaling approximately $7.9 million, $8.0 million and $6.3 million at December 31, 1995, September 30, 1996 and June 30, 1997, respectively. Under an agreement with its predominant rail carrier, the Company is obligated to transport specified wheat volumes. In the event the specified transportation volumes are not met, the Company is required to reimburse certain rail carrier costs. The Company is in compliance with the volume obligations at June 30, 1997. F-13 86 AMERICAN ITALIAN PASTA COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1997 5. MAJOR CUSTOMERS Sales to a certain customer during the years ended December 31, 1994 and 1995, the fiscal nine-months ended September 30, 1996 and the nine-months ended June 30, 1997 represented 38%, 33%, 27% and 27% of revenues, respectively. Sales to a second customer during the years ended December 31, 1994 and 1995, the fiscal nine-months ended September 30, 1996 and the nine-months ended June 30, 1997 represented 12%, 23%, 19% and 21% of revenues, respectively. 6. STOCK OPTION PLAN 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 no par 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 no par common stock. The stock options expire 10 years from the date of grant and become exercisable over the next five years in varying amounts depending on the terms of the individual option agreements.
WEIGHTED AVERAGE NUMBER OF OPTION PRICE EXERCISE SHARES PER SHARE PRICE EXERCISABLE --------- ------------ -------- ----------- Outstanding at December 31, 1993................ 565,938 $2.33-$4.92 $ 3.90 278,591 Exercised..................................... -- Granted....................................... 116,693 $4.92 $ 4.92 Canceled/Expired.............................. (9,198) $4.92 $ 4.92 --------- Outstanding at December 31, 1994................ 673,433 $2.33-$4.92 $ 4.06 374,447 Exercised..................................... -- Granted....................................... 339,562 $12.23 $12.23 Canceled/Expired.............................. -- --------- Outstanding at December 31, 1995................ 1,012,995 $2.33-$12.23 $ 6.79 455,942 Exercised..................................... -- Granted....................................... 1,226 $12.23 $12.23 Canceled/Expired.............................. (613) $12.23 $12.23 --------- Outstanding at September 30, 1996............... 1,013,608 $2.33-$12.23 $ 6.80 541,471 Exercised..................................... -- Granted....................................... 258,373 $7.02-$12.23 $ 8.82 Canceled/Expired.............................. (48,627) $4.92-$12.23 $11.95 --------- Outstanding at June 30, 1997.................... 1,223,354 $2.33-$12.23 $ 7.02 662,678 =========
The following table summarizes outstanding and exercisable options at June 30, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------ ------------------------------ NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE EXERCISE PRICES OUTSTANDING EXERCISE PRICE EXERCISABLE EXERCISE PRICE --------------- ----------- ---------------- ----------- ---------------- $2.33-$2.38............................... 226,456 $ 2.36 226,456 $ 2.36 $4.92..................................... 445,137 4.92 323,392 4.92 $7.02..................................... 169,244 7.02 56,415 7.02 $12.23.................................... 382,517 12.23 56,415 12.23
Compensation expense totaling $144,000 was recorded during the year ended December 31, 1994 related to the vesting of compensatory stock options. F-14 87 AMERICAN ITALIAN PASTA COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1997 6. STOCK OPTION PLAN -- (CONTINUED) SFAS No. 123 requires the disclosure of pro forma net income and earnings per share for stock-based awards as if the Company had used the fair value method of accounting for such awards. Under SFAS No. 123, the fair value is calculated through the use of option pricing models. These models require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the minimum value method with the following weighted-average assumptions: expected life, 18 months following vesting; no stock volatility; risk free interest rate of 6% and no dividends during the expected term. Based on these calculations, the effect of applying SFAS No. 123's fair value method to the Company's stock-based awards granted subsequent to December 15, 1994 results in pro forma net income of $3,027,000 and earnings per share of $0.25 for the nine months ended June 30, 1997, which are not materially different from amounts reported. 7. EMPLOYEE BENEFIT PLAN 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 will match 50% of the employee contributions up to a maximum employee contribution of 6% of the employee's salary and may contribute additional amounts to the plan as determined annually by the Board of Directors. Employer contributions related to the plan totaled $133,000, $139,000, $124,000 and $140,000 for the years ended December 31, 1994 and 1995, the fiscal nine-months ended September 30, 1996 and the nine-months ended June 30, 1997, respectively. 8. PLANT EXPANSION COSTS Plant expansion costs include incremental direct and indirect manufacturing and distribution costs which are incurred as a result of construction, commissioning and start-up of new capital assets. These costs are expensed as incurred but are unrelated to current production and, therefore, reported as a separate line item in the statement of operations. Plant expansion costs amounted to $484,000 and $2,065,000 for the years ended December 31, 1994 and 1995, respectively. 9. SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS NINE MONTHS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, 1994 1995 1996 1997 ------------ ------------ ------------- ----------- (IN THOUSANDS) Supplemental disclosure of cash flow information: Cash paid for interest..................... $5,110 $9,675 $8,101 $7,520 ====== ====== ====== ====== Cash paid for income taxes................... $ 250 $ 100 $ 50 $ 2 ====== ====== ====== ======
F-15 88 AMERICAN ITALIAN PASTA COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1997 10. PRODUCT INTRODUCTION COSTS During 1996, the Company began distribution of its Pasta LaBella flavored pasta products into the United States' retail grocery trade. Introduction of these products was supported by significant advertising, promotions and other initiatives. The Company's selling and marketing expense includes the following product introduction costs:
NINE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, JUNE 30, 1996 1997 ------------- ----------- (IN THOUSANDS) Introductory advertising.............................. $3,587 $ 137 In-store product demonstrations....................... 692 307 Direct response advertising amortization.............. 166 200 Product placement fees paid........................... 3,113 1,333 Introductory trade incentives......................... 268 -- Other................................................. 296 157 ------ ------ Total product introduction costs...................... $8,122 $2,134 ====== ======
11. NOTES RECEIVABLE FROM OFFICERS In April 1997, certain officers of the Company acquired 42,366 shares of common stock. At the same time, the Company loaned these officers $298,000, all of which remains outstanding at June 30, 1997. The loans which were evidenced by promissory notes are due in three equal installments with the final payment due April 2000. The notes are collateralized by the pledge of shares of common stock of the Company, may be prepaid in part or in full without notice or penalty and bear interest at the applicable federal rate in effect on the first day of each quarter. These loans, evidenced by promissory notes, are classified as a reduction to stockholders equity in the accompanying balance sheet at June 30, 1997. 12. SUBSEQUENT EVENTS PENDING PUBLIC OFFERING OF COMMON STOCK AND RECAPITALIZATION During August 1997, the Company filed a registration statement with the Securities and Exchange Commission for an underwritten initial public offering (the "Offering") of 7,900,000 shares of Class A Common Stock, par value of $.001 per share (the "New Class A Common Stock"), of which 5,310,000 shares are to be offered by the Company and 2,590,000 shares would be sold by certain selling stockholders. Prior to consummation of the Offering, the Company amended and restated its Charter and By-Laws and effected a recapitalization such that (i) the common equity of the Company consists of New Class A Common Stock and Class B Convertible Common Stock, par value $.001 per share (the "New Class B Common Stock") and (ii) each outstanding share of common stock of the Company has converted into 6.132043 shares of New Class A Common Stock. Shares of New Class A Common Stock held by persons other than private equity funds sponsored by Morgan Stanley Dean Witter (the "Morgan Stanley Stockholders") and certain related persons are not convertible into New Class B Common Stock. Holders of New Class B Common Stock will have no right to vote on matters submitted to a vote of stockholders, except in certain circumstances. Shares of the New Class B Common Stock will have no preemptive or other subscription rights and will be convertible into an equal number of shares of New Class A Common Stock (1) at the option of the holder thereof to the extent that, following such conversion, the Morgan Stanley Stockholders will not, in the aggregate, own more than 49% of the outstanding shares of New Class A Common Stock, and (2) automatically upon the transfer of such shares by any Morgan Stanley Stockholder to a person that is not a Morgan Stanley Stockholder. F-16 89 AMERICAN ITALIAN PASTA COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1997 12. SUBSEQUENT EVENTS -- (CONTINUED) In connection with the recapitalization, the Company's Charter was amended to provide that the Board of Directors is authorized, subject to certain limitations prescribed by law, without further stockholder approval, to issue from time to time up to an aggregate of 10,000,000 shares of Preferred Stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each such series thereof, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund provisions) redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of such series. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. The Company has no present plans to issue any shares of Preferred Stock. The financial statements and notes have been retroactively restated to reflect the stock split and new capital structure. 1997 EQUITY INCENTIVE PLAN The Board of Directors has adopted the 1997 Equity Incentive Plan for all employees which is to take effect upon the closing of the Offering. Under the Plan, the Board or a committee designated by the Board is authorized to grant nonqualified stock options, incentive stock options, reload options, stock appreciation rights, shares of restricted Common Stock, performance shares, performance units and shares of Common Stock awarded as a bonus. There are 2,000,000 shares of Common Stock reserved for issuance under the Plan. REVOLVING CREDIT FACILITY In connection with the proposed initial public offering, the Company has received from its lender a commitment letter for a new $150 million unsecured revolving credit facility pending successful completion of the public offering. F-17 90 AMERICAN ITALIAN PASTA COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1997 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table sets forth certain financial data of the Company for each thirteen week period. The financial data for each of these quarters is unaudited but includes all adjustments, consisting of only normal recurring adjustments, which the Company believes to be necessary for a fair presentation. These operating results, however, are not necessarily indicative of results for any future period.
NINE-MONTH PERIOD ENDED DECEMBER 31, MARCH 31, JUNE 30, JUNE 30, 1996 1997 1997 1997 ------------ --------- -------- ------------ (000'S OMITTED EXCEPT PER SHARE DATA) Revenues.......................................... $29,547 $32,117 $31,952 $93,616 Gross profit...................................... 8,398 8,388 9,009 25,795 Operating profit.................................. 3,252 4,376 5,100 12,728 Income (loss) before income tax and extraordinary loss............................................ 700 1,620 2,608 4,928 Net income (loss)................................. 432 1,005 1,613 3,050 Net income per common share....................... 0.04 0.10 0.11 0.25
NINE-MONTH FISCAL PERIOD ENDED MARCH 31, JUNE 30, SEPTEMBER 30, SEPTEMBER 30, 1996 1996 1996 1996 --------- -------- ------------- ------------- Revenues......................................... $24,975 $32,464 $34,635 $92,074 Gross profit..................................... 5,518 8,474 9,527 23,519 Operating profit................................. 1,754 789 1,373 3,916 Income (loss) before income tax and extraordinary loss........................................... (867) (1,873) (1,367) (4,107) Net income (loss)................................ (2,177) (1,150) (871) (4,198) Net loss per common share........................ (0.21) (0.11) (0.09) (0.41)
FISCAL YEAR ENDED MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1995 1995 1995 1995 1995 --------- -------- ------------- ------------ ------------ Revenues.......................... $18,718 $21,676 $23,434 $29,075 $92,903 Gross profit...................... 2,953 4,216 3,418 6,400 16,987 Operating profit.................. 1,200 2,384 1,299 3,871 8,754 Income (loss) before income tax and extraordinary loss.......... (544) 597 (431) 1,124 746 Net income (loss)................. (337) 373 (267) 707 476 Net income (loss) per common share........................... (0.03) 0.04 (0.03) 0.07 0.05
F-18 91 AIPC'S PASTA PRODUCTION FACILITIES PICTURE PICTURE PICTURE PICTURE 92 AIPC LOGO 93 AIPC LOGO PROSPECTUS (Subject to Completion) Issued October 8, 1997 7,900,000 Shares American Italian Pasta Company CLASS A COMMON STOCK ------------------------ OF THE 7,900,000 SHARES OF CLASS A COMMON STOCK BEING OFFERED HEREBY, 5,310,000 SHARES ARE BEING SOLD BY THE COMPANY AND 2,590,000 SHARES ARE BEING SOLD BY THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES OF CLASS A COMMON STOCK BY SUCH SELLING STOCKHOLDERS. OF THE 7,900,000 SHARES OF CLASS A COMMON STOCK BEING OFFERED HEREBY, 1,580,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS AND 6,320,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE "UNDERWRITERS." PRIOR TO THE OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE CLASS A COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE PER SHARE WILL BE BETWEEN $15 AND $17. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. ------------------------ THE COMPANY HAS TWO CLASSES OF AUTHORIZED COMMON STOCK CONSISTING OF THE CLASS A COMMON STOCK OFFERED HEREBY AND CLASS B COMMON STOCK. SEE "DESCRIPTION OF CAPITAL STOCK." HOLDERS OF CLASS A COMMON STOCK ARE ENTITLED TO ONE VOTE PER SHARE ON EACH MATTER SUBMITTED TO A VOTE OF STOCKHOLDERS. THE CLASS B COMMON STOCK IS NON-VOTING EXCEPT UNDER CERTAIN LIMITED CIRCUMSTANCES AND AS REQUIRED BY LAW. ALL HOLDERS OF COMMON STOCK ARE ENTITLED TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS, IF ANY, AS MAY BE DECLARED FROM TIME TO TIME BY THE BOARD OF DIRECTORS. ------------------------ THE CLASS A COMMON STOCK HAS BEEN APPROVED FOR LISTING, SUBJECT TO OFFICIAL NOTICE OF ISSUANCE, ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL "PLB." ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS -------- -------------- ----------- ------------------- Per Share...................... $ $ $ $ Total(3)....................... $ $ $ $
- ------------ (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriters." (2) Before deducting expenses payable by the Company estimated at $1,350,000. (3) The Company and certain stockholders have granted to the U.S. Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 1,185,000 additional Shares of Class A Common Stock at the Price to Public less Underwriting Discounts and Commissions, for the purpose of covering over-allotments, if any. If the U.S. Underwriters exercise such option in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Stockholders will be $ , $ , $ , and $ , respectively. See "Underwriters." ------------------------ The Shares of Class A Common Stock are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein and subject to approval of certain legal matters by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that delivery of the Shares of Class A Common Stock will be made on or about October , 1997 at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in immediately available funds. ------------------------ MORGAN STANLEY DEAN WITTER BT ALEX. BROWN INTERNATIONAL GOLDMAN SACHS INTERNATIONAL GEORGE K. BAUM & COMPANY , 1997 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. 94 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the expenses (other than underwriting discounts and commissions) expected to be incurred in connection with the Offering described in this Amendment to Registration Statement. Securities and Exchange Commission registration fee......... $ 46,802 NASD Examination Fee........................................ 12,000 New York Stock Exchange Listing Fee......................... 125,000 Accounting Fees and Expenses................................ 300,000 Printing and Engraving Expenses............................. 325,000 Legal Fees and Expenses..................................... 485,000 Blue Sky Fees and Expenses.................................. 5,000 Transfer Agent and Registrar Fees and Expenses.............. 15,000 Miscellaneous............................................... 36,198 ---------- Total.................................................. $1,350,000 ==========
The foregoing items, except for the Securities and Exchange Commission, NASD and New York Stock Exchange fees, are estimated. All expenses will be borne by the Company. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law ("DGCL"), empowers a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Similar indemnity is authorized for such persons against expenses (including attorneys' fees) actually and reasonably incurred in connection with the defense or settlement of any such threatened, pending or completed action or suit by or in the right of the corporation if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and provided further that (unless a court of competent jurisdiction otherwise provides) such person shall not have been adjudged liable to the corporation. Any such indemnification may be made only as authorized in each specific case upon a determination by the stockholders or disinterested directors or by independent legal counsel in a written opinion that indemnification is proper because the indemnitee has met the applicable standard of conduct. The Charter and By-laws of the Company provide that directors and officers shall be indemnified as described above in this paragraph to the fullest extent permitted by the DGCL; provided, however, that any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person shall be indemnified only if such proceeding (or part thereof) was authorized by the Board of Directors of the Company. The Charter and By-laws will permit the board of directors to authorize the Company to purchase and obtain insurance against any liability asserted against any director, officer, employee or agent of the Company arising out of his or her capacity as such. Reference is made to Article V of the Company's Charter filed as Exhibit 3.1 hereto and to Article VI of the Company's By-laws filed as Exhibit 3.2 hereto. As permitted by the DGCL, the Company's Charter provides that no director of the Company shall be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a II-1 95 director, except (i) for a breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL (relating to the declaration of dividends and purchase or redemption of shares in violation of the DGCL), or (iv) for any transaction from which the director derived an improper personal benefit. The Underwriting Agreement, filed as Exhibit 1.1 to this Registration Statement, provides for indemnification by the Underwriters of the Registrant's directors, its officers who signed the Registration Statement and its controlling persons and by the Registrant of the Underwriters, directors and their controlling persons against certain liabilities, including liabilities under the Securities Act, under certain circumstances. Reference is also made to the Amended and Restated Stockholders Agreement filed as Exhibit 10.9 hereto, for a description of certain other indemnification arrangements relating to directors and officers of the Company. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In the three years preceding the filing of this Registration Statement, the Company has issued the following securities that were not registered under the Securities Act: (a) On January 14, 1994, the Company issued to Horst W. Schroeder 3,097 Shares of Old Common Stock (as defined under "Description of Capital Stock -- General" in the Prospectus) for an aggregate purchase price of $15,236, or $4.92 per share, in lieu of cash compensation under a consulting agreement between HWS Associates, Inc., an entity owned by Mr. Schroeder, and the Company (the "Schroeder Consulting Agreement"). (b) On March 8, 1995, the Company issued to Mr. Schroeder 21,401 shares of Old Common Stock for an aggregate purchase price of $105,293, or $4.92 per share, in lieu of cash compensation under the Schroeder Consulting Agreement. (c) On December 28, 1995, the Company issued to Mr. Schroeder 11,712 shares of Old Common Stock for a purchase price of $57,625, or $4.92 per share, in lieu of cash compensation under the Schroeder Consulting Agreement. (d) On April 4, 1996, the Company issued to Mr. Schroeder 6,733 shares of Old Common Stock for a purchase price of $33,127, or $4.92 per share, in lieu of cash compensation under the Schroeder Consulting Agreement. Each of the sales of securities referenced in paragraphs (a)-(d) above were made to Mr. Schroeder, Chairman of the Board of Directors, for investment purposes, a restrictive legend was included on the stock certificates, and no underwriters were involved. All of such sales were made in reliance upon an exemption from the registration requirements of the Securities Act set forth in Section 4(2) thereof. (e) On April 13, 1995 the Company issued an aggregate of 20,328 shares of Old Common Stock to certain of the Company's then-executive officers, including Timothy S. Webster, David E. Watson, Norman F. Abreo, David B. Potter and Darrel Bailey, for an aggregate purchase price of $100,014, or $4.92 per share. These shares were purchased with funds loaned by the Company evidenced by promissory notes made payable to the Company over a three year period commencing upon termination of transfer restrictions applicable to such shares under the Stockholders Agreement. Such loans bear interest at the then applicable federal rate. (f) On July 7, 1995, the Company issued to JSS Management Co. Ltd., of which Mr. Schlindwein, a director of the Company, and his wife are the general partner and limited partner, respectively, 20,322 shares of Old Class A Common Stock (as defined under "Description of Capital Stock -- General" in the Prospectus) for a purchase price of $99,983, or $4.92 per share. (g) On April 15, 1997, the Company issued an aggregate of 3,174,528 shares of Old Class A Common Stock at a purchase price of $7.02 per share, aggregating $22,291,947, to all but one of the then-current stockholders of the Company and several members of the Company's management team (the "1997 Private Equity Financing"), all of whom are officers, directors and senior managers II-2 96 or a spouse thereof. In particular, the Company issued 2,563,323 shares to the MSCP Funds (as defined in the Prospectus), 427,219 shares to affiliated investment funds of George K. Baum & Company, an aggregate of 49,056 shares to a trust of which Mr. Schroeder is the trustee and members of his family are the beneficiaries, an aggregate of 28,483 shares to Mr. Schlindwein, his wife and JSS Management Co. Ltd., an aggregate of 20,242 shares to Mr. Webster and trusts for the benefit of members of his family, 42,513 shares to David E. Watson, 5,194 shares to Norman F. Abreo and 13,024 shares to David P. Potter. In each of the sales of securities referenced in paragraphs (e)-(g) above, the purchasers made representations as to their investment intent, a restrictive legend was included on the stock certificates, and no underwriters were involved. All of such sales were made in reliance upon an exemption from the registration requirements of the Securities Act set forth in Section 4(2) thereof. (h) On June 24, 1997, the Company issued 31,200 shares of Old Class A Common Stock to the American Italian Pasta Company Retirement Savings Plan pursuant to an exemption from registration requirements set forth in Section 3(a)(2) of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBIT INDEX The exhibit index is set forth on page II-6 of this Amendment to Registration Statement and is hereby incorporated herein by reference. (B) FINANCIAL STATEMENT SCHEDULES No financial statement schedules are filed as part of this Amendment to Registration Statement for the reason that they are not required or are not applicable, or the required information is shown in the Financial Statements or Notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) It will provide to the Underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-3 97 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 the Registrant has duly caused this Amendment to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Excelsior Springs, State of Missouri, as of the 7th day of October, 1997. AMERICAN ITALIAN PASTA COMPANY By: /s/ TIMOTHY S. WEBSTER ------------------------------------ Timothy S. Webster President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment to Registration Statement has been signed by the following persons in the capacities and on the dates indicated. * Chairman of the Board of Directors October 7, 1997 - --------------------------------------- Horst W. Schroeder /s/ TIMOTHY S. WEBSTER President, Chief Executive Officer and October 7, 1997 - --------------------------------------- Director (Principal Executive Officer) Timothy S. Webster * Executive Vice President and Chief October 7, 1997 - --------------------------------------- Financial Officer, Treasurer and Secretary David E. Watson (Principal Financial and Accounting Officer) * Director October 7, 1997 - --------------------------------------- Jonathan E. Baum * Director October 7, 1997 - --------------------------------------- David Y. Howe * Director October 7, 1997 - --------------------------------------- Robert H. Niehaus * Director October 7, 1997 - --------------------------------------- Amy S. Rosen * Director October 7, 1997 - --------------------------------------- James A. Schlindwein * Director October 7, 1997 - --------------------------------------- Lawrence B. Sorrel * Director October 7, 1997 - --------------------------------------- Richard C. Thompson
*By: /s/ TIMOTHY S. WEBSTER --------------------------------- Timothy S. Webster Attorney-in-Fact II-4 98 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement 3.1 Amended and Restated Certificate of Incorporation of the Company 3.2 Amended and Restated By-Laws of the Company 4.1 Specimen certificate representing the Company's Class A Common Stock 4.2 Specimen certificate representing the Company's Class B Common Stock 5.1 Opinion of Sonnenschein Nath & Rosenthal 8.1* Opinion of Sonnenschein Nath & Rosenthal with respect to certain tax matters 10.1* Credit Agreement among the Company, various banks named therein, Bankers Trust Company and Morgan Stanley Senior Funding, Inc. dated as of October 30, 1992, as amended and restated as of April 11, 1997 10.2** Manufacturing and Distribution Agreement dated as of April 15, 1997 between CPC International Inc. and the Company 10.3** Amended and Restated Supply Agreement dated October 29, 1992, as amended July 1, 1997, between the Company and Sysco Corporation 10.4* Warehouse Lease dated May 23, 1995 between the Company and Lanter Company 10.5 Employment Agreement between the Company and Timothy S. Webster 10.6 Employment Agreement dated September 30, 1997 between the Company and Horst W. Schroeder 10.7 Employment Agreement dated September 30, 1997 between the Company and David E. Watson 10.8 Employment Agreement dated September 30, 1997 between the Company and Norman F. Abreo 10.9 Employment Agreement dated September 30, 1997 between the Company and David B. Potter 10.10 Amended and Restated Shareholders' Agreement dated October 6, 1997 10.11* American Italian Pasta Company 1992 Stock Option Plan 10.12* American Italian Pasta Company 1993 Non-Qualified Stock Option Plan 10.13* 1996 Salaried Bonus Plan 10.14 1997 Equity Incentive Plan 10.15 Custody Agreement and Power of Attorney dated October 7, 1997 between Thompson Holdings, L.P., Timothy S. Webster and David E. Watson, as Attorneys-in-Fact, and Republic New York Securities Corporation, as Custodian. 23.1 Consent of Ernst & Young LLP 23.2 Consent of Sonnenschein Nath & Rosenthal (to be included in Exhibit 5.1 and Exhibit 8.1) 24.1* Powers of Attorney (included on signature page) 27.1* Financial Data Schedule
- ------------------------- * Previously filed. ** To be filed by agreement. + Confidential treatment has been requested for portions of this document. The redacted material has been filed separately with the Commission pursuant to an application for confidential treatment. II-5 EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 7,900,000 SHARES AMERICAN ITALIAN PASTA COMPANY CLASS A COMMON STOCK, $.001 PAR VALUE UNDERWRITING AGREEMENT October __, 1997 2 _____________, 1997 Morgan Stanley & Co. Incorporated BT Alex. Brown Incorporated Goldman, Sachs & Co. George K. Baum & Company c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Morgan Stanley & Co. International Limited BT Alex. Brown International Goldman Sachs International George K. Baum & Company c/o Morgan Stanley & Co. International Limited 25 Cabot Square Canary Wharf London E14 4QA England Dear Sirs and Mesdames: American Italian Pasta Company, a Delaware corporation (the "COMPANY"), proposes to issue and sell to the several Underwriters (as defined below), and certain shareholders of the Company (the "FIRM SELLING SHAREHOLDERS") named in Part A of Schedule I hereto propose to sell to the several Underwriters (as defined below), an aggregate of 7,900,000 shares of Class A Common Stock, par value $.001 per share, of the Company (the "FIRM SHARES"), of which 5,310,000 shares are to be issued and sold by the Company (the "COMPANY SHARES") and 2,590,000 shares (the "FIRM SHAREHOLDERS SHARES") are to be sold by the Firm Selling Shareholders. It is understood that, subject to the conditions hereinafter stated, 6,320,000 Firm Shares (the "U.S. FIRM SHARES"), consisting of [4,248,000] Company Shares (the "U.S. COMPANY SHARES") and [2,072,000] Firm Shareholders Shares, will be sold to the several U.S. Underwriters named in Schedule II hereto (the "U.S. UNDERWRITERS") in connection with the offering and sale of such U.S. Firm Shares in the United States and Canada to United States and Canadian Persons (as such terms are defined in the Agreement Between U.S. and International Underwriters 3 of even date herewith), and 1,580,000 Firm Shares (the "INTERNATIONAL SHARES"), consisting of [1,062,000] Company Shares (the "INTERNATIONAL COMPANY SHARES") and [518,000] Firm Shareholders Shares, will be sold to the several International Underwriters named in Schedule III hereto (the "INTERNATIONAL UNDERWRITERS") in connection with the offering and sale of such International Shares outside the United States and Canada to persons other than United States and Canadian Persons. Morgan Stanley & Co. Incorporated, Alex. Brown & Sons Incorporated, Goldman, Sachs & Co. and George K. Baum & Company shall act as representatives (the "U.S. REPRESENTATIVES") of the several U.S. Underwriters, and Morgan Stanley & Co. International Limited, Alex. Brown & Sons Incorporated, Goldman Sachs International and George K. Baum & Company shall act as representatives (the "INTERNATIONAL REPRESENTATIVES") of the several International Underwriters. The U.S. Underwriters and the International Underwriters are hereinafter collectively referred to as the "UNDERWRITERS." Certain shareholders of the Company named in Part B of Schedule I hereto (the "ADDITIONAL SELLING SHAREHOLDERS," and together with the Firm Selling Shareholders, the "SELLING SHAREHOLDERS") severally propose to sell to the several U.S. Underwriters, not more than an aggregate of 1,185,000 additional shares of Class A Common Stock, par value $.001 per share, of the Company (the "ADDITIONAL SHARES"), each Additional Selling Shareholder selling up to the amount set forth opposite such Additional Selling Shareholder's name in Part B of Schedule I hereto, if and to the extent that the U.S. Representatives shall have determined to exercise, on behalf of the U.S. Underwriters, the right to purchase such shares of Class A Common Stock, par value $.001 per share granted to the U.S. Underwriters in Section hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "SHARES." The shares of Class A Common Stock, par value $.001 per share, of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "COMMON STOCK." The Company and the Selling Shareholders are hereinafter sometimes collectively referred to as the "SELLERS." The Company has filed with the Securities and Exchange Commission (the "COMMISSION") a registration statement on Form S-1 (File No. 333-32827) relating to the Shares. The registration statement contains two prospectuses to be used in connection with the offering and sale of the Shares: the U.S. prospectus, to be used in connection with the offering and sale of Shares in the United States and Canada to United States and Canadian Persons, and the international prospectus, to be used in connection with the offering and sale of Shares outside the United States and Canada to persons other than United States and Canadian Persons. The international prospectus is identical to the U.S. prospectus except for the outside front cover page. The registration statement as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration 2 4 statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter referred to as the "REGISTRATION STATEMENT"; the U.S. prospectus and the international prospectus in the respective forms first used to confirm sales of Shares are hereinafter collectively referred to as the "PROSPECTUS." If the Company has filed an abbreviated registration statement to register additional shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462 Registration Statement. 1. Representations and Warranties of the Company. The Company represents and warrants to and agrees with each of the Underwriters that: (a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. (b) (i)The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder and (iii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (c) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the 3 5 extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company. (d) This Agreement has been duly authorized, executed and delivered by the Company. (e) Upon the closing of the offering of the Shares, the authorized, is sued and outstanding capital stock of the Company will be as set forth in the Prospectus under the caption "Capitalization" in the column entitled "Pro Forma As Adjusted," and the authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. (f) The shares of Common Stock (including the Shares to be sold by the Selling Shareholders) outstanding prior to the issuance of the Shares to be sold by the Company have been duly authorized and are validly issued, fully paid and non-assessable. (g) The Shares to be sold by the Company and the shares of Class B Non-Voting Common Stock, par value $.001 per share, ("CLASS B COMMON STOCK") to be issued in the recapitalization described in the Prospectus under the caption "Prospectus Summary -- Recapitalization" (the "RECAPITALIZATION") have been duly authorized and the Shares, when issued and delivered in accordance with the terms of this Agreement, and such shares of Class B Common Stock when issued in the Recapitalization will be validly issued, fully paid and non-assessable, and the issuance of such Shares and Class B Common Stock will not be subject to any preemptive or similar rights. (h) the issuance of Class B Common Stock in the Recapitalization and the bank refinancing (the "BANK REFINANCING") on the terms set forth in the Commitment Letter from Bankers Trust Company dated July 30, 1997 and as described under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and the execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement and the Amended and Restated Stockholders Agreement dated as of September , 1997 among the Company, Richard C. Thompson, The Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley Capital Partners III, L.P., George K. Baum Group, Inc., Citicorp Venture Capital, Ltd. and the other signatories thereto (the "STOCKHOLDERS AGREEMENT") will not contravene any provision of applicable law or the certificate of incorporation or 4 6 by-laws of the Company or any agreement or other instrument binding upon the Company that is material to the Company, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the issuance of the Class B Common Stock in the Recapitalization, for the Bank Refinancing or for the performance by the Company of its obligations under this Agreement or the Stockholders Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares or the issue of Class B Common Stock in the Recapitalization. (i) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement). (j) There are no legal or governmental proceedings pending or, to the knowledge of the Company, threatened to which the Company is a party or to which any of the properties of the Company is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required. (k) The Company possesses all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct its business, except where the failure to possess such certificates, authorizations, or permits would not have a material adverse effect on the Company, and the Company has not received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse change in the condition, financial or otherwise, or in the earnings, business or operations of the Company, except as described in or contemplated by the Prospectus. (l) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in 5 7 all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder. (m) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (n) The Company (i) is in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its business and (iii) is in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company. (o) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the Company. (p) Except for the Stockholders Agreement, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement. (q) The Company has good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by it which is material to the business of the Company, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not materially interfere with the use made and 6 8 proposed to be made of such property by the Company; and any real property and buildings held under lease by the Company are held by the Company under valid, subsisting and enforceable leases with such exceptions as are not material and do not materially interfere with the use made and proposed to be made of such property and buildings by the Company, except as described in or contemplated by the Prospectus. (r) The Company owns or possesses, or can acquire on reasonable terms, all material patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names currently employed by the Company in connection with the business now operated by the Company, and the Company has not received any notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in any material adverse change in the condition, financial or otherwise, or in the earnings, business or operations of the Company. (s) The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company is engaged; the Company has not been refused any insurance coverage sought or applied for; and the Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company, except as described in or contemplated by the Prospectus. (t) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) the Company has not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (ii) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock other than ordinary and customary dividends; and (iii) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company, except in each case as described in or contemplated by the Prospectus 7 9 (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement). (u) The Company has no subsidiaries. (v) None of the Company's outstanding securities are rated by any "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Securities Act. (w) (i) The Stockholders Agreement has been executed and delivered by the Company and the employment agreements of Horst W. Schroeder, Timothy S. Webster, Norman F. Abreo and David E. Watson (the "EMPLOYMENT AGREEMENTS") as described in the Prospectus have been executed and delivered by such persons and the Company and each such Employment Agreement is in full force and effect. 2. Representations and Warranties of the Selling Shareholders. Each of the Selling Shareholders, severally and not jointly, represents and warrants to and agrees with each of the Underwriters that: (a) This Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Shareholder. (b) The execution and delivery by such Selling Shareholder of, and the performance by such Selling Shareholder of its obligations under, this Agreement, and, if applicable, the Custody Agreement signed by Thompson Holdings, L.P., a Firm Selling Shareholder and Republic New York Securities Corporation as Custodian, relating to the deposit of the Shares to be sold by such Firm Selling Shareholder (the "CUSTODY AGREEMENT"), including the Power of Attorney appointing certain individuals as such Firm Selling Shareholder's attorneys-in-fact to the extent set forth therein, relating to the transactions contemplated hereby and by the Registration Statement (the "POWER OF ATTORNEY") and the Shareholders Agreement will not contravene any provision of applicable law, or the certificate of incorporation or by-laws of such Selling Stockholder (if such Selling Shareholder is a corporation), or any agreement or other instrument binding upon such Selling Shareholder or any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Selling Shareholder, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by such Selling Shareholder of its obligations under this Agreement or, if applicable, the Custody Agreement including the Power of Attorney of such Selling Stockholder or the Shareholders Agreement except such as 8 10 may be required by the securities or Blue Sky laws of the various states and foreign jurisdictions in connection with the offer and sale of the Shares. (c) Such Selling Shareholder has, subject to the proviso of this paragraph (c), and on the Closing Date or, if applicable, on the Option Closing Date will have, valid title to the Shares to be sold by such Selling Shareholder and the legal right and power, and all authorization and approval required by law, to enter into this Agreement and to sell, transfer and deliver the Shares to be sold by such Selling Shareholder; provided that Thompson Holdings, L.P., a Firm Selling Shareholder will have valid title to the Shares to be sold by such Firm Selling Shareholder and the legal right and power, and all authorization and approval required by law, to sell, transfer and deliver the Shares to be sold on the Closing Date upon release of the lien on such Firm Selling Stockholder's Shares established in favor of Republic National Bank of New York ("RNB") on June 30, 1997 when such Firm Selling Shareholder pledged such Shares to RNB as collateral for a personal loan. (d) The Shares to be sold by such Selling Shareholder pursuant to this Agreement have been duly authorized and are validly issued, fully paid and non-assessable. (e) The Stockholders Agreement and, if applicable, the Custody Agreement including the Power of Attorney have been duly authorized, executed and delivered by such Selling Shareholder and are valid and binding agreements of such Selling Shareholder. (f) Delivery of the Shares to be sold by such Selling Shareholder pursuant to this Agreement will pass title to such Shares free and clear of any security interests, claims, liens, equities and other encumbrances. (g) (i) The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph 2(g) apply only to statements or omissions in the Registration Statement or the Prospectus based upon 9 11 information relating to such Selling Shareholder furnished to the Company in writing by such Selling Shareholder for use therein. (h) Such Selling Shareholder has not taken, and will not take, directly or indirectly, any action designed to, or which might reasonably be expected to, cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares pursuant to the distribution contemplated by this Agreement, and other than as permitted by the Securities Act, such Selling Shareholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares. 3. Agreements to Sell and Purchase. Each of the Company and the Firm Selling Shareholders, severally and not jointly, agrees to sell to the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from such Seller at $____ per share (the "PURCHASE PRICE") the number of Firm Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the number of Firm Shares to be sold by such Seller as the number of Firm Shares set forth in Schedule II or Schedule III hereto opposite the name of such Underwriter bears to the total number of Firm Shares. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Additional Selling Shareholders agree to sell to the U.S. Underwriters up to an aggregate of 1,185,000 Additional Shares and the U.S. Underwriters shall have a one-time right to purchase, severally and not jointly, up to 1,185,000 Additional Shares at the Purchase Price. If the U.S. Representatives, on behalf of the U.S. Underwriters, elect to exercise such option, the U.S. Representatives shall so notify the Company in writing not later than 30 days after the date of this Agreement, which notice shall specify the number of Additional Shares to be purchased by the U.S. Underwriters and the date on which such shares are to be purchased. Such date may be the same as the Closing Date (as defined below) but not earlier than the Closing Date nor earlier than the second business day after the giving of the notice hereinafter referred to nor later than ten business days after the date of such notice. Additional Shares may be purchased as provided in Section hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. If any Additional Shares are to be purchased, each U.S. Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as the U.S. Representatives may determine) that bears the same proportion to the total number of Additional Shares to be purchased as the number of U.S. Firm 10 12 Shares set forth in Schedule II hereto opposite the name of such U.S. Underwriter bears to the total number of U.S. Firm Shares. The Additional Shares to be purchased by the U.S. Underwriters hereunder and the U.S. Firm Shares are hereinafter collectively referred to as the "U.S. SHARES." Each Seller hereby agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated (except with respect to the Morgan Stanley Stockholders (as defined in the Registration Statement and Prospectus), a written consent must be received from all the U.S. Representatives) on behalf of the Underwriters, it will not, during the period ending 180 days after the date of the Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (whether such shares or any such securities are now owned by such Seller or are hereafter acquired) or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Shares to be sold hereunder, (B) the issuance by the Company of shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof of which the Underwriters have been advised in writing, (C) the issuance of shares in connection with the Recapitalization, (D) the issuance of shares in connection with the conversion from time to time of Class A Common Stock into Class B Common Stock (and vice versa), (E) the grants of stock options to employees, directors or consultants pursuant to the terms of a plan disclosed in the Registration Statement which first become exercisable more than 180 days after the date of the Prospectus, (F) the issuance by the Company of shares of Common Stock pursuant to any 401(k) plan, (G) bona fide charitable donations or estate planning dispositions, provided that, prior to such transfer, the transferee in any such transaction agrees in writing to be bound by the terms of this paragraph and the form and substance of such writing has received written approval from Morgan Stanley & Co. Incorporated, or (H) transfers due to the death or disability of a seller, provided that the transferee agrees in writing to be bound by the terms of this paragraph and the form and substance of such writing has received written approval from Morgan Stanley & Co. Incorporated. In addition, each Selling Shareholder agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated (except with respect to the Morgan Stanley Stockholders (as defined in the Registration Statement and Prospectus), a written consent must be received from all the U.S. Representatives) on behalf of the Underwriters, it will not, during the period ending 180 days after the date of the Prospectus, make any 11 13 demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. The Company hereby confirms its engagement of Goldman, Sachs & Co. as, and Goldman, Sachs & Co. hereby confirms its agreement with the Company to render services as, a "qualified independent underwriter" within the meaning of Section (b)(15) of Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. (the "NASD") with respect to the offering and sale of the Shares. Goldman, Sachs & Co., in its capacity as qualified independent underwriter and not otherwise, is referred to herein as the "QIU." The Company and Goldman, Sachs & Co. hereby agree that $10,000 of the underwriting discounts to be received by Goldman, Sachs & Co. pursuant to this Section 3 will be compensation for its services as QUI hereunder. The Public Offering Price (as defined in Section hereof) shall not be higher than the maximum price recommended by Goldman, Sachs & Co. acting as QIU. 4. Terms of Public Offering. The Sellers are advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. The Sellers are further advised by you that the Shares are to be offered to the public initially at U.S.$_____ a share (the "PUBLIC OFFERING PRICE") and to certain dealers selected by you at a price that represents a concession not in excess of U.S.$____ a share under the Public Offering Price, and that any Underwriter may allow, and such dealers may reallow, a concession, not in excess of U.S.$____ a share, to any Underwriter or to certain other dealers. 5. Payment and Delivery. Payment for the Firm Shares to be sold by the Company and the Firm Selling Shareholder shall be made to each such Seller in Federal or other funds immediately available in New York City against delivery of such Firm Shares for the respective accounts of the several Underwriters at 10:00 A.M., New York City time, on ____________, 1997, or at such other time on the same or such other date, not later than _________, 1997, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "CLOSING DATE." Payment for any Additional Shares to be sold by Additional Selling Shareholders shall be made to each such Selling Shareholder in Federal or other funds immediately available in New York City against delivery of such Additional Shares for the respective accounts of the several Underwriters at 10:00 A.M., New York City time, on the date specified in the notice described in Section or at such other time on the same or on such other date, in any event not later than 12 14 _______, 1997, as shall be designated in writing by the U.S. Representatives. The time and date of such payment are hereinafter referred to as the "OPTION CLOSING DATE." Certificates for the Firm Shares and Additional Shares shall be in definitive form and registered in such names and in such denominations as you shall request in writing not later than one full business day prior to the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and Additional Shares shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, for the respective accounts of the several Underwriters, with any transfer taxes payable in connection with the transfer of the Shares to the Underwriters duly paid, against payment of the Purchase Price therefor. 6. Conditions to the Underwriters' Obligations. The obligations of the Company and the Selling Shareholders to sell the Shares to the Underwriters and the several obligations of the Underwriters to purchase and pay for the Shares on the Closing Date are subject to the condition that the Registration Statement shall have become effective not later than _______ (New York City time) on the date hereof. The several obligations of the Underwriters are subject to the following further conditions: (a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date, there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement) that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (b) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by an executive officer of the Company, acting in such capacity but not personally, to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date and that the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. 13 15 The officer signing and delivering such certificate may rely upon the best of his or her knowledge as to proceedings threatened. (c) The Underwriters shall have received a certificate from the Attorneys-in-Fact (as defined in the Custody Agreements) on behalf of the Firm Selling Shareholder, dated the Closing Date and signed by such Attorneys-in-Fact, to the effect that the representations and warranties of such Selling Shareholder contained in this Agreement are true and correct as of the Closing Date and that such Selling Shareholder has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. (d) The Underwriters shall have received on the Closing Date an opinion of Sonnenschein Nath & Rosenthal, outside counsel for the Company, dated the Closing Date, to the effect that: (i) the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of Delaware, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification; (ii) upon the closing of the offering of the Shares, the authorized, issued and outstanding capital stock of the Company will be as set forth in the Prospectus under the caption "Capitalization" in the column entitled "Pro Forma As Adjusted," and the authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus; (iii) the shares of Common Stock (including the Shares to be sold by the Selling Shareholders) outstanding prior to the issuance of the Shares to be sold by the Company have been duly authorized and are validly issued, fully paid and non-assessable; (iv) the Shares and the shares of the Class B Common Stock in the Recapitalization have been duly authorized and the shares, when issued and delivered in accordance with the terms of this Agreement, and the shares of the Class B Common Stock when issued and delivered in connection with the recapitalization will be non-assessable, and the issuance of such Shares and Class 14 16 B Common Stock will not be subject to any preemptive rights or rights in the nature of preemptive rights; (v) this Agreement has been duly authorized, executed and delivered by the Company; (vi) the issuance of Class B Common Stock in the Recapitalization and the execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement and the Stockholders Agreement will not contravene any provision of applicable law or the certificate of incorporation or by-laws of the Company or, to the best of such counsel's knowledge, any agreement or other instrument binding upon the Company that is material to the Company, or, to the best of such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the issuance of the Class B Common Stock, for the Bank Refinancing or for the performance by the Company of its obligations under this Agreement and the Stockholders Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares by the U.S. Underwriters or the issue of Class B Common Stock or foreign securities laws or regulations in connection with the offer and sale of the Shares by the International Underwriters; (vii) the statements (A) in the Prospectus under the captions "Risk Factors -- Anti-Takeover Effect of Certain Charter, By-law and Statutory Provisions," "Management -- Employment Agreements," " -- Management Bonus Plan," " -- Stock Option Plans" and " -- 401(k) Profit Sharing Plan," "Certain Relationships and Related Transactions," "Certain United States Federal Income Tax Considerations for non-U.S. Holders," "Description of Capital Stock," "Underwriters" and (B) in the Registration Statement in Items 14 and 15, in each case insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, fairly present in all material respects the information called for with respect to such legal matters, documents and proceedings and fairly summarize the matters referred to therein; 15 17 (viii) to such counsel's knowledge no legal or governmental proceedings are pending or threatened to which the Company is a party or to which any of the properties of the Company is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required; (ix) the Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; and (x) such counsel (A) is of the opinion that the Registration Statement and Prospectus (except for financial statements and schedules and other financial and statistical data included therein as to which such counsel need not express any opinion) comply as to form in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder, (B) has no reason to believe that (except for financial statements and schedules and other financial and statistical data as to which such counsel need not express any belief) the Registration Statement and the prospectus included therein at the time the Registration Statement became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (C) has no reason to believe that (except for financial statements and schedules and other financial and statistical data as to which such counsel need not express any belief) the Prospectus contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (e) the Underwriters shall have received on the Closing Date an opinion of counsel for each of the Selling Shareholders dated the Closing Date, to the effect that: (i) this Agreement has been duly authorized, executed and delivered by or on behalf of each Selling Shareholder; 16 18 (ii) the execution and delivery by each Selling Shareholder of, and the performance by such Selling Shareholder of its obligations under, this Agreement and, if applicable, the Custody Agreement including the Power of Attorney of such Selling Shareholder and the Stockholders Agreement will not contravene any provision of applicable law, or, to the best of such counsel's knowledge, any agreement or other instrument binding upon such Selling Shareholder or, to the best of such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Selling Shareholder, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by such Selling Shareholder of its obligations under this Agreement or, if applicable, the Custody Agreement including the Power of Attorney of such Selling Shareholder or the Stockholders Agreement, except such as may be required by the securities or Blue Sky laws of the various states and foreign jurisdictions in connection with offer and sale of the Shares; (iii) each of the Selling Shareholders has valid title to the Shares to be sold by such Selling Shareholder and the legal right and power, and all authorization and approval required by law, to enter into this Agreement, if applicable, the Custody Agreement including the Power of Attorney of such Selling Shareholder and the Stockholders Agreement and to sell, transfer and deliver the Shares to be sold by such Selling Shareholder; (iv) the Stockholders Agreement and, if applicable, the Custody Agreement including the Power of Attorney of each Selling Shareholder have been duly authorized, executed and delivered by such Selling Shareholder; (v) delivery of the Shares to be sold by each Selling Shareholder pursuant to this Agreement will pass title to such Shares free and clear of any security interests, claims, liens, equities and other encumbrances; and (vi) such counsel (A) has no reason to believe that the Registration Statement and the prospectus included therein at the time the Registration Statement became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the 17 19 statements therein not misleading and (B) has no reason to believe that the Prospectus contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; such opinion shall relate only to information furnished in writing by or on behalf of the Selling Shareholder represented by such counsel expressly for use in the Registration Statement or Prospectus. (f) The Underwriters shall have received on the Closing Date an opinion of Davis Polk & Wardwell, counsel for the Underwriters, dated the Closing Date, covering the matters referred to in Sections 6(d)(iv) (but only with respect to the Shares), 6(d)(v), 6(d)(vii) (but only as to the statements in the Prospectus under "Underwriters") and 6(d)(x) above. With respect to Section 6(d)(x) above, Sonnenschein Nath & Rosenthal and Davis Polk & Wardwell, may state that their opinion and belief are based up on their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification, except as specified. The opinions of Sonnenschein Nath & Rosenthal and counsel for each Selling Shareholder, described in Sections 6(d) and 6(e) above shall be rendered to the Underwriters at the request of the Company or the Selling Shareholders, as the case may be, and shall so state therein. (g) RNB shall have (i) released its lien on all Shares to be sold by the Firm Selling Stockholder and (ii) delivered executed UCC Form 3s evidencing the termination by RNB of all recorded security interests in such Shares. (h) The underwriters shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Underwriters, from Ernst & Young LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus; provided that the letter delivered on the Closing Date shall use a "cut-off date" not earlier than the date hereof. 18 20 (i) The "lock-up" agreements, each substantially in the form of Exhibit A hereto, between you and certain shareholders, officers and directors of the Company relating to sales and certain other dispositions of shares of Common Stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date. (j) The several obligations of the U.S. Underwriters to purchase Additional Shares hereunder are subject to the delivery to the U.S. Representatives on the Option Closing Date of such documents as they may reasonably request with respect to the good standing of the Company, the due authorization and issuance of the Additional Shares and other matters related to the issuance of the Additional Shares. (k) The Company shall have received a bank commitment for a new credit agreement in connection with the Bank Refinancing as described in the Prospectus. 7. Covenants of the Company. In further consideration of the agreements of the Underwriters herein contained, the Company covenants with each Underwriter as follows: (a) To furnish to you, without charge, five signed copies of the Registration Statement (including exhibits thereto) and for delivery to each other Underwriter a conformed copy of the Registration Statement (without exhibits thereto) and to furnish to you in New York City, without charge, prior to 10:00 A.M. New York City time on the business day next succeeding the date of this Agreement and during the period mentioned in Section 7(c) below, as many copies of the Prospectus and any supplements and amendments thereto or to the Registration Statement as you may reasonably request. (b) Before amending or supplementing the Registration Statement or the Prospectus, to furnish to you a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object, and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule. (c) If, during such period after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters the Prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a 19 21 result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses you will furnish to the Company) to which Shares may have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) To endeavor to qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request. (e) To make generally available to the Company's security holders and to you as soon as practicable an earning statement covering the twelve-month period ending , 1998 that satisfies the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder. 8. Expenses. Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, the Company agrees to pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company's counsel and the Company's accountants in connection with the registration and delivery of the Shares under the Securities Act and all other fees or expenses in connection with the preparation and filing of the Registration Statement, any preliminary prospectus, the Prospectus and amendments and supplements to any of the foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriters and dealers, in the quantities hereinabove specified, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) the cost of printing or producing any Blue Sky or Legal Investment memorandum in connection with the offer and sale of the Shares under state securities laws and all expenses in connection with the qualification of the Shares for offer and sale under state securities laws as provided in Section 7(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection 20 22 with such qualification and in connection with the Blue Sky or Legal Investment memorandum, (iv) all filing fees and the reasonable fees and disbursements of counsel to the Underwriters incurred in connection with the review and qualification of the offering of the Shares by the National Association of Securities Dealers, Inc., (v) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to listing the Shares on the New York Stock Exchange, (vi) the cost of printing certificates representing the Shares, (vii) the costs and charges of any transfer agent, registrar or depositary, (viii) the costs and expenses of the Company relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Shares, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives and officers of the Company and any such consultants, and the cost of any aircraft chartered in connection with the road show with the prior approval of the Company, (ix) the fees of the QIU pursuant to Section 3 hereof and (x) all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, each Selling Shareholder agrees to pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement, including the fees, disbursements and expenses of such Selling Shareholder's counsel, but not including any of the expenses payable by the Company as set forth above. It is understood, however, that except as provided in this Section, Section 9 entitled "Indemnity and Contribution," and the last paragraph of Section 11 below, the Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel, stock transfer taxes payable on resale of any of the Shares by them and any advertising expenses connected with any offers they may make and their out-of-pocket costs with respect to any "road show" undertaken in connection with the marketing of the offering of the Shares. The provisions of this Section shall not supersede or otherwise affect any agreement that the Sellers may otherwise have for the allocation of such expenses among themselves. 9. Indemnity and Contribution. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in 21 23 connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (b) Each Selling Shareholder agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, each Underwriter and each person, if any who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and the QIU and each person, if any, who controls any QIU within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to such Selling Shareholder furnished in writing by or on behalf of such Selling Shareholder expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, the Selling Shareholders, the directors of the Company, the officers of the Company who sign the Registration Statement and each person, if any, who controls the Company or any Selling Shareholder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in 22 24 the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through you expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. (d) The Company will indemnify and hold harmless Goldman, Sachs & Co., in its capacity as QIU, against any losses, claims, damages or liabilities, joint or several, to which the QIU may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the QIU for any legal or other expenses reasonably incurred by the QIU in connection with investigating or defending any such action or claim as such expenses are incurred. (e) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 9(a), 9(b), 9(c) or 9(d), such person (the "INDEMNIFIED PARTY") shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party) to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (i) the fees 23 25 and expenses of more than one separate firm (in addition to any local counsel) for all Underwriters and all persons, if any, who controlling any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, (ii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section, (iii) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Selling Shareholders and all persons, if any, who control any Selling Shareholder within the meaning of either such Section and (iv) the fees and expenses of more than one separate firm (in addition to any local counsel) for the QIU and all persons who control the QIU within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters, and such control persons of any Underwriters, such firm shall be designated in writing by Morgan Stanley & Co. Incorporated. In the case of any such separate firm for the Company, and such directors, officers and control persons of the Company, such firm shall be designated in writing by the Company. In the case of any such separate firm for the Selling Shareholders and such control persons of any Selling Shareholders, such firm shall be designated in writing by the Selling Shareholders selling a majority of the amount of shares being sold by the Selling Shareholders under this Agreement. In the case of any such separate firm for the QIU and such control persons of the QIU, such firm shall be designated in writing by the QIU. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 60 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. 24 26 (f) To the extent the indemnification provided for in Section 9(a), 9(b), 9(c) or 9(d) is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 9(f) (i) above is not permitted by applicable law in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 9(f)(i) above but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Sellers, the Underwriters and the QIU shall be deemed to be in the same proportions as the net proceeds from the offering of the Shares (before deducting expenses) received by the Sellers, the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus and the fee payable to Goldman, Sachs & Co. in its capacity as QIU pursuant to Section 3 hereof and not in its capacity as an Underwriter, respectively bear to the sum of the aggregate Public Offering Price of the Shares and the fee payable to Goldman, Sachs & Co. in its capacity as QIU pursuant to Section 3 hereof and not in its capacity as an Underwriter. The relative fault of the Sellers on the one hand and the Underwriters or the QIU on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Sellers or by either of the Underwriters or the QIU and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters' respective obligations to contribute pursuant to this Section 3 are several in proportion to the respective number of Shares they have purchased hereunder, and not joint. (g) The Sellers, the Underwriters and the QIU agree that it would not be just or equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 9(f). The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending 25 27 any such action or claim. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 9, no Selling Shareholder shall be required to contribute any amount in excess of the amount of net proceeds received by such selling Shareholder with respect to the Shares sold by such Selling Shareholder. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 9 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. The indemnity and contribution provisions contained in this Section and the representations, warranties and other statements of the Company and the Selling Shareholders contained in this Agreement shall remain operative and in full force and effect regardless of any termination of this Agreement, any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, any Selling Shareholder or any person controlling any Selling Shareholder, the QIU or any person controlling the QIU, or the Company, the Company's officers or directors or any person controlling the Company and acceptance of and payment for any of the Shares. 10. Termination. This Agreement shall be subject to termination by notice given by you to the Company, if after the execution and delivery of this Agreement and prior to the Closing Date trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the National Association of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, a general moratorium on commercial banking activities in New York shall have been declared by either Federal or New York State authorities or there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in your judgment, is material and adverse and in the case of any of the events specified in clauses 10(a)(i) through 10(a)(iv), such event, singly or together with any other such event, makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. 26 28 11. Effectiveness; Defaulting Underwriters. This Agreement shall become effective upon the execution and delivery hereof by the parties hereto. If, on the Closing Date or the Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Firm Shares set forth opposite their respective names in Schedule II or Schedule III bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 11 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased, and arrangements satisfactory to you, the Company and the Selling Shareholders for the purchase of such Firm Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling Shareholders. In any such case either you or the relevant Sellers shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. If, on the Option Closing Date, any U.S. Underwriter or U.S. Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase Additional Shares or (ii) purchase not less than the number of Additional Shares that such non-defaulting U.S. Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting U.S. Underwriter from liability in respect of any default of such U.S. Underwriter under this Agreement. If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of any Seller to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason any Seller 27 29 shall be unable to perform its obligations under this Agreement, the Sellers will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder. 12. Counterparts. This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 13. Applicable Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. 14. Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement. Very truly yours, AMERICAN ITALIAN PASTA COMPANY By: ------------------------------------- Name: Timothy S. Webster Title: President and Chief Executive Officer THOMPSON HOLDINGS, L.P. By: ------------------------------------- Attorney-in-Fact THE MORGAN STANLEY LEVERAGED EQUITY FUND II, L.P. By: Morgan Stanley Leveraged Equity Holdings, Inc., its general partner By: ------------------------------------- 28 30 Name: Title: MORGAN STANLEY CAPITAL PARTNERS III, L.P. By: MSCP III, L.P., its general partner By: Morgan Stanley Capital Partners III, Inc., its general partner By: -------------------------------------- Name: Title: MORGAN STANLEY CAPITAL INVESTORS, L.P. By: MSCP III, L.P., its general partner By: Morgan Stanley Capital Partners III, Inc., its general partner By: -------------------------------------- Name: Title: MSCP III 892 INVESTORS, L.P. By: MSCP III, L.P., its general partner By: Morgan Stanley Capital Partners III, Inc., its general partner By: -------------------------------------- Name: Title: 29 31 Accepted as of the date hereof MORGAN STANLEY & CO. INCORPORATED BT ALEX. BROWN INCORPORATED GOLDMAN, SACHS & CO. GEORGE K. BAUM & COMPANY Acting severally on behalf of themselves and the several U.S. Underwriters named in Schedule II hereto. By: Morgan Stanley & Co. Incorporated By: ------------------------------------- Name: Title: MORGAN STANLEY & CO. INTERNATIONAL LIMITED BT ALEX. BROWN INTERNATIONAL GOLDMAN SACHS INTERNATIONAL GEORGE K. BAUM & COMPANY Acting severally on behalf of themselves and the several International Underwriters named in Schedule III hereto. By: Morgan Stanley & Co. International Limited By: ------------------------------------- Name: Title: 30 32 SCHEDULE I PART A NUMBER OF FIRM SHARES SELLING SHAREHOLDER TO BE SOLD - ------------------------------------- --------------------- Thompson Holdings, L.P. 630,000 The Morgan Stanley Leveraged Equity Fund II, L.P. 1,375,893 Morgan Stanley Capital Partners III, L.P. 584,107 --------------------- Total............................ 2,590,000 ===================== 33 PART B
NUMBER OF ADDITIONAL SELLING SHAREHOLDER SHARES TO BE SOLD - ---------------------------------------------- -------------------- The Morgan Stanley Leveraged Equity Fund II, L.P. ........................................ Morgan Stanley Capital Partners III, L.P...... Morgan Stanley Capital Investors, L.P......... MSCP III 892 Investors, L.P................... -------------------- Total..................................... 1,185,000 ====================
2 34 SCHEDULE II U.S. UNDERWRITERS
NUMBER OF FIRM SHARES UNDERWRITER TO BE PURCHASED - -------------------------------------------- --------------------- Morgan Stanley & Co. Incorporated........... BT Alex. Brown Incorporated................. Goldman, Sachs & Co......................... George K. Baum & Company.................... --------------------- Total U.S. Firm Shares 6,320,000 =====================
35 SCHEDULE III INTERNATIONAL UNDERWRITERS
NUMBER OF FIRM SHARES UNDERWRITER TO BE PURCHASED - -------------------------------------------- --------------------- Morgan Stanley & Co. Incorporated Limited... BT Alex. Brown International................ Goldman Sachs International................. George K. Baum & Company.................... --------------------- Total International Shares 1,580,000 =====================
36 EXHIBIT A [FORM OF LOCK-UP LETTER] October __, 1997 Morgan Stanley & Co. Incorporated BT Alex. Brown Incorporated Goldman, Sachs & Co. George K. Baum & Company c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, NY 10036 Morgan Stanley & Co. International Limited BT Alex. Brown International Goldman Sachs International George K. Baum & Company c/o Morgan Stanley & Co. International Limited 25 Cabot Square Canary Wharf London E14 4QA England Dear Sirs and Mesdames: The undersigned understands that Morgan Stanley & Co. Incorporated ("MORGAN STANLEY") and Morgan Stanley & Co. International Limited ("MSIL") propose to enter into an Underwriting Agreement (the "UNDERWRITING AGREEMENT") with American Italian Pasta Company, a Delaware corporation (the "COMPANY"), and certain shareholders of the Company providing for the public offering (the "PUBLIC OFFERING") by the several Underwriters, including Morgan Stanley and MSIL (the "UNDERWRITERS") of 5,900,000 shares (the "SHARES") of Class A Common Stock, par value $.001 per share, of the Company (the "COMMON STOCK"). To induce the Underwriters that may participate in the Public Offering to continue their efforts in connection with the Public Offering, the undersigned hereby agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period commencing on the date hereof and ending 180 days after the date of the final prospectus relating to the Public Offering (the "PROSPECTUS"), (1) offer, pledge, sell, contract to sell, sell any option 37 or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (whether such shares or securities are either now owned by the undersigned or are hereafter acquired prior to or in connection with the Public Offering), or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (a) bona fide charitable donations or estate planning dispositions, provided that, prior to such transfer, the transferee in any such transaction agrees in writing to be bound by the terms of this agreement and the form and substance of such writing has received written approval from Morgan Stanley or (b) transfers due to the death or disability of a seller, provided that the transferee agrees in writing to be bound by the terms of this agreement and the form and substance of such writing has received written approval from Morgan Stanley. In addition, the undersigned agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period commencing on the date hereof and ending 180 days after the date of the Prospectus, make any demand for or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. Whether or not the Public Offering actually occurs depends on a number of factors, including market conditions. This letter agreement will terminate in the event that the Public Offering has not been consummated on or prior to March 31, 1998. Any Public Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Underwriters. Very truly yours, ==================================== Name ==================================== Address 2 EX-3.1 3 AMENDED AND RESTATED CERT. OF INCORPORATION 1 EXHIBIT 3.1 _______________________________ AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF AMERICAN ITALIAN PASTA COMPANY ______________________________ American Italian Pasta Company, a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows: 1. The name of the Corporation is American Italian Pasta Company. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on October 9, 1991. 2. Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, as amended (the "DGCL"), this Amended and Restated Certificate of Incorporation restates and further amends the provisions of the Certificate of Incorporation of this Corporation. Pursuant to and in accordance with the provisions of Section 228 of the DGCL, written consent to this Amended and Restated Certificate of Incorporation has been given in lieu of a vote of stockholders at a meeting and written notice of such written consent has been given to all stockholders who have not consented in writing to this Amended and Restated Certificate of Incorporation. 3. The text of the original Certificate of Incorporation as heretofore amended or supplemented is hereby restated and further amended to read in its entirety as follows: ARTICLE I NAME SECTION 1.1 NAME. The name of the Corporation is American Italian Pasta Company. ARTICLE II REGISTERED OFFICE AND REGISTERED AGENT SECTION 2.1 OFFICE AND AGENT. The registered office of the Corporation in the State of Delaware is located at 1209 Orange Street, in the City of Wilmington, in the County of New Castle. The name of its registered agent at that address is The Corporation Trust Company. ARTICLE III CORPORATE PURPOSE SECTION 3.1 PURPOSE. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the DGCL. 2 ARTICLE IV CAPITALIZATION SECTION 4.1 AUTHORIZED CAPITAL. SHARES. (a) The Corporation is authorized to issue three classes of stock to be designated, respectively, "Class A Convertible Common Stock", "Class B Convertible Non-Voting Common Stock" (referred to herein collectively with the Class A Convertible Common Stock as the "Common Stock") and "Preferred Stock." The total number of shares that the Corporation is authorized to issue is 110 million shares, of which 75 million shares shall be Class A Convertible Common Stock, par value $.001 per share, 25 million shares shall be Class B Convertible Non-Voting Common Stock, par value $.001 per share, and 10 million shares shall be Preferred Stock, par value $.001 per share. (b) Concurrently with the effectiveness of this Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation"), each share of common stock, no par value per share, and Class A common stock, par value $.01 per share, of the Corporation outstanding immediately prior to the effectiveness of this Certificate of Incorporation shall be redesignated as 6.132043 shares of Class A Convertible Common Stock. Each share of common stock, no par value per share, and Class A common stock, par value $.01 per share, of the Corporation outstanding immediately prior to the Effective Time shall automatically cease to be outstanding at the Effective Time, and holders of such shares shall have the right to surrender the certificates which represented such shares in exchange for receipt of shares of Class A Convertible Common Stock in accordance with this Section 4.1.(b). Any such certificates presented after the Effective Time for transfer shall be cancelled and exchanged for shares of Class A Convertible Common Stock as provided in this Section 4.1(b). Until so surrendered, each certificate which, prior to the Effective Time, represented issued and outstanding shares of common stock, no par value per share, or Class A common stock, par value $.01 per share, shall be deemed and treated for all corporate purposes to represent the ownership of the number of shares of Class A Convertible Common Stock that would have been issued if such surrender had taken place. (c) No fractional shares of less than one whole share of Class A Convertible Common Stock or scrip representing such fractional shares of Class A Convertible Common Stock shall be issued in connection with such redesignation, and such fractional share interests will not entitle the holder thereof to vote or to any rights of a stockholder of the Company after the effectiveness of this Certificate of Incorporation. All shares of Class A Convertible Common Stock (including fractions thereof) issuable to a holder upon the redesignation pursuant to this subparagraph shall be aggregated for purposes of determining whether the redesignation would result in a fractional share. If after such aggregation, the redesignation would result in the issuance of a fractional share of Class A Convertible Common Stock, such fractional share shall be rounded up or down to the nearest whole share of Class A Convertible Common Stock, and there shall be no cash paid to or from the Corporation in respect of any such fractional interest. SECTION 4.2 COMMON STOCK. The designations and the powers, preferences and rights of the Common Stock are as follows: (a) VOTING RIGHTS. (i) CLASS A CONVERTIBLE COMMON STOCK. Except as set forth herein or as otherwise required by law, each outstanding share of Class A Convertible Common Stock shall be entitled to vote on each matter on which the stockholders of the Corporation shall be entitled to vote, including the election of directors, and each holder of Class A Convertible Common Stock shall be entitled to one vote for each share of such stock held by such holder. (ii) CLASS B CONVERTIBLE NON-VOTING COMMON STOCK. Except as set forth herein or as otherwise required by law, each outstanding share of Class B Convertible Non-Voting Common Stock shall not be entitled to vote on any matter on which the stockholders of the Corporation shall be entitled to vote, and shares of Class B Convertible Non-Voting Common Stock shall not be included in determining the number of shares voting or entitled to vote on any such matters. Notwithstanding the foregoing, holders of shares of the Class B Convertible Non-Voting Common Stock shall be entitled to vote as a separate class on any amendment to this subparagraph (a)(ii) and on any amendment, repeal or modification of any provision of this Certificate of Incorporation that adversely affects the powers, preferences or special rights of holders of the Class B Convertible Non-Voting Common Stock. The number of authorized shares of Class B Convertible Non-Voting Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding plus the -2- 3 number of shares of Class B Convertible Non-Voting Common Stock issuable or exercisable pursuant to any security of the Corporation providing for the issuance or delivery of Class B Convertible Non-Voting Common Stock) by the affirmative vote of the holders of a majority of the outstanding shares of Class A Convertible Common Stock and without any vote or consent of the holders of shares of Class B Convertible Non-Voting Common Stock. (b) DIVIDENDS AND DISTRIBUTIONS. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the Board of Directors of the Corporation (the "Board of Directors") may cause dividends to be paid to the holders of shares of Common Stock out of funds legally available for the payment of dividends by declaring an amount per share as a dividend. When and as dividends or other distributions (including without limitation any grant or distribution of rights to subscribe for or purchase shares of capital stock or securities or indebtedness convertible into capital stock of the Corporation) are declared, whether payable in cash, in property or in shares of stock of the Corporation (other than in shares of Common Stock) the holders of Common Stock shall be entitled to share equally, share for share, in such dividends or other distributions as if all such shares were of a single class. No dividends or other distributions shall be declared or paid in shares of Common Stock, or options, warrants or rights to acquire such stock or securities convertible into or exchangeable for shares of such stock, except dividends or other distributions payable to all of the holders of Common Stock ratably according to the number of shares held by them, in shares of Class A Convertible Common Stock to holders of that class of stock, and in shares of Class B Convertible Non-Voting Common Stock to holders of that class of stock. (c) LIQUIDATION. Subject to the prior rights of holders of all classes of stock outstanding having prior rights with respect to the assets of the Corporation, in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, holders of Common Stock shall be entitled to share ratably according to the number of shares held by them, in all assets of the Corporation available for distribution to its stockholders. (d) CONVERSION. (i) CONVERSION OF CLASS A CONVERTIBLE COMMON STOCK. (A) OPTIONAL CONVERSION. Subject to and upon compliance with the provisions of this subparagraph (d), each Morgan Stanley Stockholder (as hereinafter defined) shall be entitled to convert, at any time and from time to time, any or all of the shares of Class A Convertible Common Stock held by such stockholder into an equal number of shares of Class B Convertible Non-Voting Common Stock; PROVIDED that following receipt of a Deferral Notice (as defined in paragraph (d)(iv) below), the aggregate number of shares of Class A Convertible Common Stock permitted to be converted at the end of the related Deferral Period (as defined in paragraph (d)(iv) below) by each such stockholder (other than a stockholder that requested a conversion and thereby triggered such Deferral Notice, which stockholder shall be entitled to convert all shares such stockholder has requested to convert) in accordance with paragraph (d)(iv) shall -3- 4 be equal to the number of shares of Class A Convertible Common Stock held by such stockholder that are required to be converted so that such stockholder (after giving effect to the proposed redemption, repurchase or other acquisition, if any, and to all other conversions during or upon the expiration of such Deferral Period) holds the same percentage of the total outstanding Class A Convertible Common Stock as such stockholder held immediately prior to the receipt of the relevant Deferral Notice. (B) AUTOMATIC CONVERSION. Notwithstanding anything to the contrary in the immediately preceding clause (A), in the case of any such conversion (including any conversion in accordance with paragraph (d)(iv)) or in the case of any acquisition of additional shares of Class A Convertible Common Stock by any Morgan Stanley Stockholder, shares of Class A Convertible Common Stock held by Morgan Stanley Stockholders shall, pro rata in proportion to the number of shares of Class A Convertible Common Stock held by all Morgan Stanley Stockholders, automatically, without any action on part of the transferor, the transferee or the Corporation, be converted into shares of Class B Convertible Non-Voting Common Stock to the extent necessary so that, after giving effect to all such conversions (and to any other related redemptions, repurchases or other acquisitions), the Morgan Stanley Stockholders shall not own in the aggregate a number of shares of Class A Convertible Common Stock greater than the MS Percentage (as hereinafter defined). (ii) CONVERSION OF CLASS B CONVERTIBLE NON-VOTING COMMON STOCK. (A) OPTIONAL CONVERSION. Subject to and upon compliance with the provisions of this subparagraph (d), each Morgan Stanley Stockholder shall be entitled at any time and from time to time, if at such time the Morgan Stanley Stockholders shall beneficially own, in the aggregate, a number of shares of Class A Convertible Common Stock that is less than the MS Percentage, to convert a number of its shares of Class B Convertible Non-Voting Common Stock held by such Morgan Stanley Stockholder, pro rata in proportion to the number of shares of Class B Convertible Non-Voting Common Stock held by all Morgan Stanley Stockholders, into an equal number of shares of Class A Convertible Common Stock such that, if all Morgan Stanley Stockholders were to concurrently exercise the right to convert as set forth in this subparagraph (d)(ii), the Morgan Stanley Stockholders would, immediately following such conversion, beneficially own in the aggregate a number of shares of Class A Convertible Common Stock no greater than the MS Percentage. (B) AUTOMATIC CONVERSION UPON TRANSFER. Upon a Transfer (as hereinafter defined) by any Morgan Stanley Stockholder of any shares of Class B Convertible Non-Voting Common Stock to a person other than any other Morgan Stanley Stockholder or any Affiliate of any Morgan Stanley Stockholder, any shares of Class B Convertible Non-Voting Common Stock so Transferred -4- 5 shall automatically, without any action on part of the transferor, the transferee or the Corporation, be converted into an equal number of shares of Class A Convertible Common Stock upon the consummation of such Transfer. Each such conversion shall be deemed to have been effected immediately prior to the close of business on the date the share is Transferred. (iii) MECHANICS OF CONVERSION. (A) OPTIONAL CONVERSION. Each optional conversion of shares of any class of Common Stock of the Corporation into shares of another class of Common Stock of the Corporation shall be effected by the surrender of the certificate or certificates representing the shares to be converted (the "Converting Shares") accompanied by instruments of transfer satisfactory to the Corporation and the payment in cash of any amount required pursuant to subparagraph (d)(viii) below and sufficient to transfer the Converting Shares to the Corporation free of any adverse interest, at the principal office of the Corporation or any of the offices or agencies maintained for such purpose by the Corporation ("Transfer Agent") and shall give written notice (by registered or certified mail, overnight courier or hand delivery) to the Corporation at such Transfer Agent that such holder desires to convert the Converting Shares, or a stated number of the shares represented by such certificate or certificates, into an equal number of shares of the class into which such shares may be converted (the "Converted Shares"). Such notice shall also state the name or names (with addresses) and denominations in which the certificate or certificates for Converted Shares are to be issued and shall include instructions for the delivery thereof. The Corporation shall promptly notify each Morgan Stanley Stockholder of its receipt of such notice. As promptly as practicable after the surrender of such Converting Shares as aforesaid, the Corporation will, subject to the terms of subparagraphs (d)(i) and (d)(ii) hereof, issue and deliver in accordance with the surrendering holder's instructions the certificate or certificates evidencing the Converted Shares issuable upon such conversion, and the Corporation will deliver to the converting holder a certificate (which shall contain such legends as were set forth on the surrendered certificate or certificates) representing any shares which were represented by the certificate or certificates that were delivered to the Corporation in connection with such conversion, but which were not converted; PROVIDED, HOWEVER, that if such conversion is subject to subparagraph (d)(iv) below, the Corporation shall not issue such certificate or certificates until the expiration of the Deferral Period referred to therein. Such conversion, to the extent permitted by law, shall be deemed to have been effected as of the close of business on the date on which such surrendered certificate or certificates shall have been received by the Corporation as provided herein, and at such time the rights of the holder of the Converting -5- 6 Shares as such holder shall cease and the person or persons in whose name or names the certificate or certificates for the Converted Shares are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the Converted Shares. Notwithstanding the foregoing, in the case of a conversion subject to subparagraph (d)(iv) below, the conversion shall be deemed effective upon the expiration of the Deferral Period referred to therein. (B) AUTOMATIC CONVERSION. Each automatic conversion of shares of any class of Common Stock of the Corporation into shares of another class of Common Stock of the Corporation shall be deemed to have been effected immediately prior to the close of business on the date the share is automatically converted in accordance with this subparagraph (d). In each such case the person or persons in whose name or names any certificate of certificates for Converted Shares shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the Converted Shares represented thereby at the effective date of such conversion, unless the stock transfer books of the Corporation shall be closed on such date, in which event such conversion shall be deemed to have been effected immediately following the opening of business on the next day on which the stock transfer books of the Corporation shall be open. Following any such automatic conversion, the share or shares of Common Stock so converted shall cease to be outstanding, notwithstanding the fact that the holder or holders may not have surrendered the certificate or certificates representing such Converting Shares for conversion, and such certificate or certificates shall thereafter represent solely the right to receive a certificate or certificates for the Converted Shares Stock issuable upon such automatic conversion, upon surrender of such certificate or certificates to the Corporation or its transfer agent, of the certificate or certificates representing the Converting Shares so converted. (iv) NOTICE OF CONVERSIONS OR OTHER TRANSFERS TO THE MORGAN STANLEY STOCKHOLDERS. The Corporation shall not convert or directly or indirectly redeem, repurchase or otherwise acquire any shares of Class A Convertible Common Stock or any other class of capital stock of the Corporation or take any other action affecting the voting rights of such shares if such action would increase the percentage of any class of outstanding voting securities of the Corporation beneficially owned or controlled by any Morgan Stanley Stockholder (other than any such stockholder which requested that the Corporation take such action, or which otherwise waives in writing its rights under this subparagraph (d)(iv)), unless the Corporation gives written notice (the "Deferral Notice") of such action to each Morgan Stanley Stockholder. The Corporation will defer making any such conversion, redemption, purchase or other acquisition, or taking any such other action, for a period of 10 business days (the "Deferral Period") after giving the Deferral Notice in order to allow each Morgan Stanley Stockholder to determine whether it wishes to convert or take any other action with respect to the Common Stock it beneficially owns, controls or has the power to vote, and if any such Morgan Stanley Stockholder then elects to convert any shares of Class A Convertible Common Stock it shall notify -6- 7 the Corporation in writing within five business days of the issuance of the Deferral Notice, in which case the Corporation shall (i) defer taking the pending action until the end of the Deferral Period, (ii) promptly notify from time to time each Morgan Stanley Stockholder holding shares of each proposed conversion and the proposed transactions, and (iii) effect the conversions requested by all Morgan Stanley Stockholders in response to the notices issued pursuant to this subparagraph (d)(iv) at the end of the Deferral Period. The Corporation shall deliver notice to each Morgan Stanley Stockholder (i) not later than 50 days after the end of each fiscal quarter, of the number of shares of each class of stock outstanding as of a date on or after the end of such fiscal quarter (which requirement may be satisfied by the Corporation by delivering periodic reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act") containing such information) and (ii) within 10 business days of the issuance of any shares of Class A Convertible Common Stock which, together with any other such issuances since the date of the last notice pursuant to clause (i) of this paragraph, results in the number of outstanding shares of Class A Convertible Common Stock increasing by three percent or more since the date of such last prior notice. (v) STOCK SPLITS; ADJUSTMENTS. If the Corporation shall in any manner subdivide (by stock split, stock dividend or otherwise) or combine (by reverse stock split or otherwise) the outstanding shares of any class of Common Stock, the outstanding shares of each other class of Common Stock shall be subdivided or combined, as the case may be, to the same extent, share and share alike, and effective provision shall be made for the protection of the conversion rights hereunder. In case of any reorganization, reclassification or change of shares of any class of Common Stock (other than a change in par value or from par to no par value as a result of a subdivision or combination), or in case of any consolidation of the Corporation with one or more corporations or a merger of the Corporation with another corporation, each holder of a share of Common Stock, irrespective of class, shall have the right at any time thereafter, so long as the conversion right hereunder with respect to such share would exist had such event not occurred, to convert such share into the kind and amount of shares of stock and other securities and properties (including cash) receivable upon such reorganization, reclassification, change, consolidation, merger, sale, lease or other disposition by a holder of the number of shares of the class of Common Stock into which such shares of Common Stock might have been converted immediately prior to such reclassification, change, consolidation, merger, sale, lease or other disposition. In the event of such a reorganization, reclassification, change, consolidation, merger, sale, lease or other disposition, effective provision shall be made in the certificate of incorporation of the resulting or surviving corporation or otherwise for the protection of the conversion rights of the shares of Common Stock of each class that shall be applicable, as nearly as reasonably may be, to any such other shares of stock and other securities and property deliverable upon conversion of shares of Common Stock into which such Common Stock might have been converted immediately prior to such event. -7- 8 (vi) RESERVATION OF SHARES. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of each class of Common Stock or its treasury shares, solely for the purposes of issuance upon the conversion of shares of any class of Common Stock, such number of shares of such class as are then issuable upon the conversion of all outstanding shares of each such class of Common Stock. (vii) PAYMENT OF TRANSFER TAXES. The issuance of certificates for shares of any class of Common Stock upon conversion of shares of any other class of Common Stock shall be made without charge to the holders of such shares for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Common Stock; PROVIDED, HOWEVER, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the Common Stock converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. (e) NO PREEMPTIVE RIGHTS. The holders of shares of Common Stock shall have no preemptive or preferential rights of subscription to any shares of any class of capital stock of the Corporation or any securities convertible into or exchangeable for shares of any class of capital stock of the Corporation. (f) DEFINITIONS. As used herein, the following terms shall have meanings shown below: (i) "AFFILIATE" means with respect to any Person, any other Person, directly or indirectly controlling, controlled by or under common control with such Person, whether through the ownership of voting securities, by contract or otherwise, and shall include, in the case of any Person that is a trust or is acting through a nominee, any successor trust or nominee. (ii) "MORGAN STANLEY STOCKHOLDERS" means Morgan Stanley Capital Investors, L.P., a Delaware limited partnership, Morgan Stanley Capital Partners III, L.P., a Delaware limited partnership, The Morgan Stanley Leveraged Equity Fund II, L.P., a Delaware limited partnership, Morgan Stanley, Dean Witter, Discover & Co., a Delaware corporation, Affiliates of any of the foregoing Persons or any member of the Board of Directors who was nominated for election to the Board of Directors by any Morgan Stanley Stockholder. (iii) "MS PERCENTAGE" means 49% of the outstanding shares of Class A Convertible Common Stock. -8- 9 (iv) "PERSON" means an individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including a government or political subdivision or any agency or instrumentality thereof. (v) "TRANSFER" or "TRANSFERRED" means a transfer, sale, assignment, pledge, gift or other disposition. SECTION 4.3 PREFERRED STOCK. Shares of Preferred Stock of the Corporation may be issued from time to time in one or more classes or series, each of which class or series shall have such distinctive designation or title as shall be fixed by the affirmative vote of a majority of the whole Board of Directors prior to the issuance of any shares thereof. Each such class or series of Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions, including the dividend rate, redemption price and liquidation preference, and may be convertible into, or exchangeable for, at the option of either the holder or the Corporation or upon the happening of a specified event, shares of any other class or classes or any other series of the same or any other class or classes of capital stock, or any debt securities, of the Corporation at such price or prices or at such rate or rates of exchange and with such adjustments as shall be stated and expressed in this Certificate of Incorporation or in any amendment hereto or in such resolution or resolutions providing for the issuance of such class or series of Preferred Stock as may be adopted from time to time by the affirmative vote of a majority of the whole Board of Directors prior to the issuance of any shares thereof pursuant to the authority hereby expressly vested in it, all in accordance with the DGCL. The authority of the Board of Directors with respect to each series shall also include, but not be limited to, the determination of restrictions, if any, on the issue or reissue of any additional shares of Preferred Stock. ARTICLE V INDEMNIFICATION SECTION 5.1 INDEMNIFICATION. (a) RIGHT TO INDEMNIFICATION. Each director and officer of the Corporation who was or is made a party or is threatened to be made a party to or is involved in or called as a witness in any Proceeding (as hereinafter defined) because he or she is an Indemnified Person (as hereinafter defined) shall, and, at the election of the Corporation as determined by the Board of Directors, each employee and agent of the Corporation who was or is made a party or is threatened to be made a party to or is involved in or called as a witness in any Proceeding because he or she is an Indemnified Person may, be indemnified and held harmless by the Corporation to the fullest extent permitted under the DGCL, as the same now exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than the DGCL permitted the Corporation to provide prior to such amendment). Such indemnification shall cover all expenses incurred by an Indemnified Person (including, but not limited to, attorneys' fees and other expenses of litigation) and all liabilities and losses (including, but not -9- 10 limited to, judgments, fines, ERISA or other excise taxes or penalties and amounts paid or to be paid in settlement) incurred by such person in connection therewith. Notwithstanding the foregoing, except with respect to indemnification specified in this Article V, the Corporation shall indemnify an Indemnified Person in connection with a Proceeding (or part thereof) initiated by such person only if such Proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. For purposes of this Article V: (i) a "Proceeding" is an action, suit or proceeding, whether civil, criminal, administrative or investigative, and any appeal therefrom including, without limitation, any such action, suit, proceeding or appeal by or in the right of the Corporation; (ii) a "Delegate" is (A) any employee of the Corporation or a subsidiary of the Corporation serving as a director or officer (or in a substantially similar capacity) of an entity or enterprise (x) in which the Corporation and its subsidiaries collectively own a 10% or greater equity interest or (y) the principal function of which is to service or benefit the Corporation or a subsidiary of the Corporation; (B) any employee of the Corporation or a subsidiary of the Corporation serving as a trustee or fiduciary of an employee benefit plan of the Corporation or any entity or enterprise referred to in clause (A); and (C) any person acting at the request of the Board of Directors of the Corporation in any capacity with any entity or enterprise other than the Corporation; and (iii) the "Corporation" means American Italian Pasta Company, a Delaware corporation, and its successors, but does not include any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger within the meaning of Section 145(h) of the DGCL. (b) EXPENSES. Expenses, including attorneys' fees, incurred by a director or officer of the Corporation indemnified pursuant to Section 5.1(a) in defending or otherwise being involved in a Proceeding shall be paid by the Corporation in advance of the final disposition of such Proceeding, including any appeal therefrom, upon receipt of an undertaking (the "Undertaking") by or on behalf of such person to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation; provided that in connection with a Proceeding (or part thereof) initiated by such person, except a Proceeding authorized by Section 5.1(c), the Corporation shall pay said expenses in advance of final disposition only if such Proceeding (or part thereof) was authorized by the Board of Directors. A person to whom expenses are advanced pursuant hereto shall not be obligated to repay pursuant to the Undertaking until the final determination of any pending Proceeding in a court of competent jurisdiction concerning the right of such person to be indemnified or the obligation of such -10- 11 person to repay pursuant to the Undertaking. Such expenses, including attorneys' fees, incurred by other employees and agents of the Corporation may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. (c) PROTECTION OF RIGHTS. If a claim under Section 5.1(a) is not promptly paid in full by the Corporation after a written claim has been received by the Corporation or if expenses pursuant to Section 5.1(b) of this Article have not been promptly advanced after a written request for such advancement accompanied by the Undertaking has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim or the advancement of expenses. If successful, in whole or in part, in such suit, such claimant shall also be entitled to be paid the reasonable expense thereof (including, without limitation, attorneys' fees). It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any Proceeding in advance of its final disposition where the required Undertaking has been tendered to the Corporation) that indemnification of the claimant is prohibited by law, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination, if required, prior to the commencement of such action that indemnification of the claimant is proper is the circumstances, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that indemnification of the claimant is prohibited, shall be a defense to the action or create a presumption that indemnification of the claimant is prohibited. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendre or its equivalent, shall not, of itself, create a presumption that the person did not act in accordance with any applicable standard of conduct which makes it permissible under the DGCL for the Corporation to indemnify the claimant. (d) MISCELLANEOUS. (i) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by this Article V shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, By-law, agreement, vote of stockholders or disinterested directors or otherwise. The Board of Directors shall have the authority, by resolution, to provide for such indemnification of employees or agents of the Corporation or others and for such other indemnification of directors, officers or Delegates as it shall deem appropriate. (ii) INSURANCE, CONTRACTS AND FUNDING. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee, or agent of, or person serving in any other capacity with, the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expenses, liabilities or losses, whether or not the Corporation would have the power to indemnify such person against such expenses, liabilities or losses under the DGCL. The Corporation may enter into contracts with any director, officer or Delegate of the Corporation in furtherance of the provisions of this Article V and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect the advancing of expenses and indemnification as provided in this Article V. -11- 12 (iii) CONTRACTUAL NATURE. The provisions of this Article V shall be applicable to all Proceedings commenced or continuing after its adoption, whether such arise out of events, acts or omissions which occurred prior or subsequent to such adoption, and shall continue as to a person who has ceased to be a director, officer or Delegate and shall inure to the benefit of the heirs, executors and administrators of such person. This Article V shall be deemed to be a contract between the Corporation and each person who, at any time that this Article V is in effect, serves or agrees to serve in any capacity which entitles him to indemnification hereafter and any repeal or other modification of this Article, the adoption of any provision of the Corporation's Certificate of Incorporation inconsistent with this Article V or any repeal or modification of the DGCL or any other applicable law shall not limit any Indemnified Person's entitlement to the advancement of expenses or indemnification under this Article V for Proceedings then existing or later arising out of events, acts or omissions occurring prior to such repeal or modification, including, without limitation, the right to indemnification for Proceedings commenced after such repeal or modification to enforce this Article V with regard to Proceedings arising out of acts, omissions or events occurring prior to such repeal or modification or adoption of an inconsistent provision. ARTICLE VI LIABILITY OF A DIRECTOR SECTION 6.1 DIRECTOR LIABILITY. (a) A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from which the director derived any improper personal benefit. (b) If the DGCL is amended hereafter to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent authorized by the DGCL, as so amended, without further action by either the Board of Directors or the stockholders of the Corporation. (c) Neither any amendment nor repeal of this Article VI, nor the adoption of any provision of the Corporation's Certificate of Incorporation inconsistent with this Article VI, shall eliminate or reduce the effect of this Article, in respect of any act or omission occurring, or any action or proceeding accruing or arising or that, but for this Article, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. ARTICLE VII MANAGEMENT OF THE AFFAIRS OF THE CORPORATION SECTION 7.1 MANAGEMENT OF THE AFFAIRS OF THE CORPORATION. (a) The business and affairs of the Corporation shall be managed by the Board of Directors, which may exercise all -12- 13 the powers of the Corporation and do all such lawful acts and things that are not conferred upon or reserved to the stockholders by law, by this Certificate of Incorporation or by the by-laws of the Corporation (the "By-Laws"). (b) Election of directors of the Corporation need not be by written ballot, unless required by the By-Laws. (c) The following provisions are inserted for the limitation and regulation of the powers of the Corporation and of its directors and stockholders: (i) AMENDMENT OF BY-LAWS. The By-Laws, or any of them, may be altered, amended or repealed, or new By-Laws may be made, but only to the extent any such alteration, amendment, repeal or new By-Law is not inconsistent with any provision of this Certificate of Incorporation as it may be amended from time to time, either by a majority of the whole Board of Directors or by the stockholders of the Corporation upon the affirmative vote of the holders of at least a 80% of the outstanding capital stock entitled to vote thereon. (ii) BOARD OF DIRECTORS. (A) The number of directors which shall constitute the whole Board of Directors shall be determined in the manner provided in the By-Laws of the Corporation. The Board of Directors shall be divided into three classes, as nearly equal in number as the then total number of directors constituting the entire Board permits, with the term of office of one class expiring each year. The initial division of the Board of Directors shall be made by the decision of a majority of the entire Board of Directors. The initial Class I directors elected by the stockholders of the Corporation shall hold office for a term expiring at the 1998 annual meeting of stockholders and until their successors shall be elected and qualified, subject to prior death, retirement, resignation or removal; the initial Class II directors elected by the stockholders of the Corporation shall hold office for a term expiring at the 1999 annual meeting of stockholders and until their successors shall be elected and qualified, subject to prior death, retirement, resignation or removal; and the initial Class III directors elected by the stockholders of the Corporation shall hold office for a term expiring at the 2000 annual meeting of stockholders and until their successors shall be elected and qualified, subject to prior death, retirement, resignation or removal. At each such annual meeting of stockholders and at each annual meeting thereafter, successors to the class of directors whose term expires at that meeting shall be elected for a term expiring at the third annual meeting following their election and until their successors shall be elected and qualified, subject to prior death, retirement, resignation or removal. (B) Subject to the rights of the holders of any series of preferred stock or any other class of capital stock of the Corporation (other than common -13- 14 stock) then outstanding, any vacancy in the Board of Directors, arising from death, retirement, resignation, removal, an increase in the number of directors or any other cause, may be filled by the Board of Directors, acting by a majority of the remaining directors then in office, although less than a quorum, or by a sole remaining director, the stockholders acting at an annual meeting or, if the vacancy is with respect to a director elected by a voting group, by action of any other directors elected by such voting group or such voting group. Each director chosen to fill a vacancy in the Board of Directors arising from the death, retirement, resignation, removal of a director shall be elected to complete the term of office of the director who is being succeeded. In the event of any increase or decrease in the authorized number of directors, (1) each director then serving as such shall nevertheless continue as director of the class of which he or she is a member until the expiration of such director's current term or his or prior death, retirement, resignation or removal and (2) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors so as to ensure that no one class has more than one director more than any other class, and each director so elected shall hold office for the same term as the other members of the class to which the director is assigned. No decrease in the number of directors constituting the whole Board of Directors shall shorten the term of an incumbent director. (C) Except as may be provided in a resolution or resolutions providing for any class or series of Preferred Stock pursuant to Section 4.3 hereof with respect to any directors elected by the holders of such class or series, any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least two-thirds (66 2/3%) of the voting power of all of the shares of capital stock of the corporation then entitled to vote generally in the election of directors, voting together as a single class. The provisions of this subsection shall be the exclusive method for the removal of directors. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Certificate of Incorporation or the resolution or resolutions adopted by the Board of Directors pursuant to Section 4.3 hereof applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Section 7.1(c) unless expressly provided by such terms. (iii) NOMINATION OF DIRECTORS. Only persons who are selected and recommended by the Board of Directors or the committee of the Board of Directors designated to make nominations, or who are nominated by stockholders in accordance with the procedures set forth in this Section 7.1(c)(iii), shall be eligible for election, or qualified to serve, as -14- 15 directors, except as may be otherwise provided in this Certificate of Incorporation with respect to the right of holders of Preferred Stock of the Corporation to nominate and elect a specified number of directors in certain circumstances. Nominations of individuals for election to the Board of Directors of the Corporation at any annual meeting or any special meeting of stockholders at which directors are to be elected may be made by any stockholder of the Corporation (x) who is a stockholder of record on the date of the giving of the notice provided for in this Section 7.1(c)(iii) and on the record date for the determination of stockholders entitled to vote at such meeting and (y) who complies with the procedures and requirements set forth in Section 7.1(c)(iii)(A) and (B) below. (A) Nominations by stockholders shall be made by written notice (a "Nomination Notice"), which shall set forth the following information: (i) as to each individual nominated, (a) the name, date of birth, business address and residence address of such individual, (b) the business experience during the past five years of such nominee, including his or her principal occupations and employment during such period, the name and principal business of any corporation or other organization in which such occupations and employment were carried on, and such other information as to the nature of his or her responsibilities and level of professional competence as may be sufficient to permit assessment of his or her prior business experience, (c) whether the nominee is or has ever been at any time a director, officer or owner of 5% or more of any class of capital stock, partnership interests or other equity interest of any corporation, partnership or other entity, (d) any directorships held by such nominee in any company with a class of securities registered pursuant to Section 12 of the Exchange Act, or subject to the requirements of Section 15(d) of the Exchange Act or any company registered as an investment company under the Investment Company Act of 1940, as amended, (e) whether, in the last five years, such nominee has been convicted in a criminal proceeding or has been subject to a judgment, order, finding or decree of any federal, state or other governmental entity, concerning any violation of federal, state or other law, or any proceeding in bankruptcy, which conviction, order, finding, decree or proceeding may be material to an evaluation of the ability or integrity of the nominee and (f) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act, and the rules and regulations promulgated thereunder; and (ii) as to the Person submitting the Nomination Notice and any Person acting in concert with such Person, (a) the name and business address of such Person, (b) the name and address of such Person as they appear on the Corporation's books, (c) the class and number of shares of the Corporation that are beneficially owned by such Person, (d) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder and (e) any other information -15- 16 relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. A written consent to being named in a proxy statement as a nominee, and to serve as a director if elected, signed by the nominee, shall be filed with any Nomination Notice. (B) To be timely, Nomination Notices must be delivered to the Secretary and received at the principal executive offices of the Corporation (1) in the case of an annual meeting, not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders; PROVIDED, HOWEVER, that in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, the Nomination Notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting is mailed or such public disclosure of the date of the annual meeting is made, whichever first occurs, or (2) in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the 10th day following the day on which notice of the date of the special meeting is mailed or public disclosure of the date of the special meeting is made, whichever first occurs. (C) No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures and requirements set forth in this Section 7.1(c)(iii). If the chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures and requirements, the chairman of the meeting shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. (iv) ABILITY OF STOCKHOLDERS TO ACT BY WRITTEN CONSENT. Any action required or permitted to be taken at any annual or special meeting of stockholders may be taken only upon the vote of stockholders at an annual or special meeting duly noticed and called in accordance with the DGCL and the By-Laws of the Corporation and may not be taken by written consent of stockholders without a meeting, unless the action to be effected by written consent of stockholders and the taking of such action by such written consent have expressly been approved in advance by the Board of Directors of the Corporation. Notwithstanding the preceding sentence, so long as the Shareholders Agreement remains in effect, ac- tions to remove directors designated in accordance with Section 2.1 of the Shareholders Agreement may be taken by written consent of stock- holders without a meeting if but only if the person who nominated such director pursuant to Section 2.1 of the Shareholders Agreement votes its shares of voting stock in favor of the removal of such director pusuant to such written consent. (v) SPECIAL MEETINGS OF STOCKHOLDERS. Special meetings of the stockholders of the Corporation may be called, for any purpose or purposes, only by (A) the Chairman of the Board of Directors, (B) the Chief Executive Officer or (C) the Board of Directors pursuant to a resolution adopted by a majority of the members of the Board of Directors then in office. Special meetings of the stockholders of the Corporation may not be called by any other person or persons. Special meetings may be held at any place, within or without the State of Delaware, as determined by the person or persons calling such meeting. The only business that may be conducted at such a meeting, other than -16- 17 procedural matters and matters relating to the conduct of the meeting, shall matters relating to the purpose or purposes stated in the notice of meeting. (vi) CERTAIN BUSINESS COMBINATIONS. The Corporation has elected to be governed by Section 203 of the DGCL. ARTICLE VIII AMENDMENTS SECTION 8.1 AMENDMENTS. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, except as otherwise provided in Section 5.1(d)(3) or Section 6.1(c) hereof, in the manner now or hereafter prescribed by the DGCL, and all rights conferred upon stockholders herein are granted subject to this reservation; provided, however, that in addition to any vote of the holders of any class or series of capital stock of the Corporation required by law, this Certificate of Incorporation or a Certificate of Designation with respect to a series of Preferred Stock, the affirmative vote of the holders of shares of voting stock of the Corporation representing at least 80% of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to (i) reduce or eliminate the number of authorized shares of any capital stock set forth in Article IV, (ii) amend, repeal or adopt any provision inconsistent with Article V or Article VI which would diminish the rights of Indemnified Persons pursuant to Article V or the exculpation of directors pursuant to Article VI of this Certificate of Incorporation or (iii) amend or repeal or adopt any provision inconsistent with Section 7.1(c) of Article VII or this Article VIII of this Certificate of Incorporation. ARTICLE IX SEVERABILITY SECTION 9.1 In the event that any of the provisions of this Certificate of Incorporation (including any provision within a single article, section, paragraph or sentence) is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, the remaining provisions are severable and shall remain enforceable to the full extent permitted by law. This Amended and Restated Certificate of Incorporation shall become effective upon its filing with the Secretary of State of the State of Delaware. -17- 18 IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation of American Italian Pasta Company is signed on behalf of the Corporation by its Chairman of the Board of Directors and attested by its Secretary as of the 7th day of October, 1997. AMERICAN ITALIAN PASTA COMPANY By: /s/ Timothy S. Webster ----------------------------- Name: Timothy S. Webster Title: President and Chief Executive Officer ATTEST By: /s/ David E. Watson ---------------------------- Name: David E. Watson Title: Secretary -18- EX-3.2 4 AMENDED AND RESTATED BY-LAWS 1 EXHIBIT 3.2 AMERICAN ITALIAN PASTA COMPANY AMENDED AND RESTATED BY-LAWS ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE IN DELAWARE. The registered office of American Italian Pasta Company (the "Corporation") in the State of Delaware is located at 1209 Orange Street, in the City of Wilmington, in the County of New Castle. The name of its registered agent at that address is The Corporation Trust Company. SECTION 2. OTHER OFFICES. The Corporation may, in addition to its registered office, establish and maintain such an office or offices, at such place or places within or without the State of Delaware, as the Board of Directors may deem necessary, desirable or expedient from time to time. ARTICLE II STOCKHOLDERS SECTION 1. PLACE OF MEETINGS. Each meeting of the stockholders shall be held at the principal office of the Corporation or at such other place, within or without the State of Delaware, as shall be designated by the Board of Directors in the notice of meeting. SECTION 2. ANNUAL MEETING. The annual meeting of the stockholders shall be held pursuant to notice and at such date and time as shall be designated by the Board of Directors in the notice of meeting for the purpose of electing directors and for the transaction of such other business as may come before the meeting. SECTION 3. SPECIAL MEETINGS. Special meetings of the stockholders of the Corporation may be called, for any purpose or purposes, only by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer or (iii) the Board of Directors pursuant to a resolution adopted by a majority of the members of the Board of Directors then in office. Special meetings of the stockholders of the Corporation may not be called by any other person or persons. Special meetings may be held at any place, within or without the State of Delaware, as determined by the person or persons calling such meeting. The only business that may be conducted at such a meeting, other than procedural matters and matters relating to the conduct of the meeting, shall be matters relating to the purpose or purposes stated in the notice of meeting. 2 SECTION 4. NOTICE OF MEETINGS. The Secretary or an Assistant Secretary of the Corporation shall give written notice of every meeting of the stockholders to each stockholder of record entitled to vote at the meeting. Such notice shall be given not less than 10 days, nor more than 60 days, prior to the day named for the meeting, unless a different period of notice is required by law. Such notice shall be given either by regular mail, overnight courier, telegram or facsimile transmission, or by any other means comparable to any of the foregoing, to each stockholder at his address appearing on the books of the Corporation or supplied by him to the Corporation for the purpose of notice. Such notice shall specify the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is held. When a meeting is adjourned to another date, hour or place in accordance with the Delaware General Corporation Law, as amended (the "DGCL"), notice need not be given of the adjourned meeting if the date, hour and place thereof are announced at the meeting at which the adjournment is taken unless otherwise required by the DGCL. SECTION 5. WAIVER OF NOTICE. A waiver of notice in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted nor the purpose of the meeting need be specified in the waiver of notice of such meeting. Attendance of the person either in person or by proxy at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened. SECTION 6. RECORD DATE. In order that the Corporation may determine the stockholders entitled (i) to notice of or to vote at any meeting of stockholders or any adjournments thereof, (ii) to receive payment of any dividend or other distribution, or allotment of any rights, or (iii) to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors, in advance, may fix a date as the record date for any such determination, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 days nor less than 10 days before the date of such meeting, nor more than 60 days prior to the date of any other action. A determination of the stockholders of record entitled to notice of or to vote at a meeting of the stockholders shall apply to any adjournment of the meeting taken pursuant to Article I, Section 8 hereof; provided, however, that the Board of Directors, in its discretion, may fix a new record date for an adjourned meeting in accordance with the DGCL and these By-laws. If the Board of directors fixes a record date in accordance with the DGCL and these By-laws, only stockholders determined to be stockholders of record on the record date so fixed shall be entitled to notice of, or to vote at, such meeting and any adjournment thereof, or to receive payment of such dividend or other distribution, or allotment of rights, or to -2- 3 exercise such rights in respect of such change, conversion or exchange of stock, or to participate in any such other lawful action, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid. SECTION 7. LIST OF STOCKHOLDERS. At least 10 days before any meetings of the stockholders, the officer or transfer agent in charge of the stock transfer books of the Corporation shall prepare and make a complete alphabetical list of the stockholders entitled to vote at such meeting, which list shall show the address of each stockholder and the number of shares registered in the name of each stockholder. The list so prepared shall be maintained at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held, and shall be open for inspection by any stockholder, for any purpose germane to the meeting, during ordinary business hours during a period of not less than 10 days prior to the meeting. The list shall also be produced and kept open at the meeting (during the entire duration thereof) and, except as otherwise provided by law, may be inspected by any stockholder or proxy of a stockholder who is present at such meeting. SECTION 8. QUORUM. The presence in person or by proxy of the holders of a majority of the votes represented by issued and outstanding shares entitled to vote at a stockholders' meeting shall constitute a quorum, except that the presence in person or by proxy of the holders of a majority of the issued and outstanding shares of each class or series of stock which is entitled to vote as a class or series at a stockholders' meeting shall constitute a quorum for any vote in which a vote of such class or series is required. When any meeting is convened the presiding officer, if directed by the Board, may adjourn the meeting if (a) no quorum is present for the transaction of business, or (b) the Board determines that adjournment is necessary or appropriate to enable the stockholders (i) to consider fully information which the Board determines has not been made sufficiently or timely available to stockholders or (ii) otherwise to exercise effectively their voting rights. At any such adjourned meeting at which there is a quorum, any business may be transacted that might have been transacted at the meeting originally called. SECTION 9. STOCKHOLDER PROPOSALS. Proposals for a stockholder vote for consideration at any annual meeting or any special meeting of stockholders of the Corporation may be made by any stockholder of the Corporation (x) who is a stockholder of record on the date of the giving of the notice provided for in this Article II, Section 9 and on the record date for the determination of stockholders entitled to vote -3- 4 at such meeting and (y) who complies with the procedures and requirements set forth in subparagraphs (a) and (b) of this Article II, Section 9. (a) Condition of Submission to Stockholders. No proposal for a stockholder vote shall be submitted by a stockholder (a "Stockholder Proposal") to the Corporation's stockholders unless the stockholder submitting such proposal (the "Proponent") is a stockholder of record on the date of the giving of the notice provided for in this Article II, Section 9 and on the record date for the determination of stockholders entitled to vote at such meeting and has filed a written notice (a "Proposal Notice") setting forth with particularity (i) the names and business addresses of the Proponent and all persons or entities (collectively, the "Persons" and singularly, a "Person") acting in concert with the Proponent; (ii) the name and address of the Proponent and the Persons identified in clause (i), as they appear on the Corporation's books (if they so appear); (iii) the class and number of shares of the Corporation beneficially owned by the Proponent and the Persons identified in clause (i); (iv) a description of the Stockholder Proposal containing all material information relating thereto; and (v) such other information as the Board of Directors reasonably determines is necessary or appropriate to enable the Board of Directors and stockholders of the Corporation to consider the Stockholder Proposal. (b) Stockholder Proposal Notice. To be timely, Proposal Notices must be delivered to the Secretary and received at the principal executive offices of the Corporation (1) in the case of an annual meeting, not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, the Proposal Notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting is mailed or such public disclosure of the date of the annual meeting is made, whichever first occurs, or (2) in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the 10th day following the day on which notice of the date of the special meeting is mailed or public disclosure of the date of the special meeting is made, whichever first occurs. (c) Effect of Noncompliance. The presiding officer at any stockholders' meeting may determine that any Stockholder Proposal was not made in accordance with the procedures prescribed in these By-laws (the "By-laws") or is otherwise not in accordance with law, and if it is so determined, such officer shall so declare at the meeting and the Stockholder Proposal shall be disregarded. SECTION 10. VOTING POWER. Unless otherwise provided in a resolution or resolutions providing for any class or series of Preferred Stock pursuant to Article IV of the Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") or by the DGCL, every stockholder of record of the Corporation (other than holders of Class B Convertible Non-Voting Common Stock, par value $.001 per share, except as set forth in the Certificate of Incorporation or as otherwise -4- 5 required by law) shall be entitled to vote, in person or by proxy, the shares of voting stock of every share of each class or series held of record by such stockholder. All questions shall be decided by the vote of the majority of the votes represented by issued and outstanding shares of capital stock present in person or represented by proxy and entitled to vote at any meeting, or if the voting is by class or series, a majority of the votes of each class or series of capital stock present in person or represented by proxy and entitled to vote at any meeting, unless otherwise specially provided by law or by the Certificate of Incorporation or these By-laws. Abstentions shall not be considered to be votes cast. SECTION 11. PROXIES. Every stockholder may vote either in person or by proxy. Every proxy shall be executed in writing by the stockholder or by his duly authorized attorney-in-fact and filed with the Secretary of the Corporation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until notice thereof has been given to the Secretary of the Corporation. No proxy shall be valid after eleven months from the date of its execution unless a longer time is expressly provided therein, but in no event shall a proxy, unless coupled with an interest, be voted on after three years from the date of its execution. A proxy shall not be revoked by the death or incapacity of the maker unless before the vote is counted or the authority is exercised, written notice of such death or incapacity is given to the Secretary of the Corporation. SECTION 12. INSPECTORS. Elections for directors need not be by ballot, except upon demand made by a stockholder at the election and before the voting begins. In advance of any meeting of stockholders, the Board of Directors shall appoint inspectors, who need not be stockholders, to act at such meeting and make a written report thereof. Such inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives of the Corporation. The number of inspectors shall be one or three. One or more persons may be designated by the Board of Directors as alternate inspectors to replace any inspector who fails to act. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the Board of Directors in advance of the convening of the meeting, or at the meeting by the person or officer acting as chairman. Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall have the duties prescribed by the DGCL. SECTION 13. PRESIDING OFFICERS AND ORDER OF BUSINESS. All meetings of stockholders shall be called to order and presided over by the Chairman of the Board, or in his absence, by the Chief Executive Officer, President or highest ranking Vice President, or in the absence of all of them, by the Chief Financial Officer, or if none of -5- 6 these be present by a chairman designated by the Board of Directors. The Secretary of the Corporation shall act as secretary, but in the absence of the Secretary, the presiding officer may appoint a secretary. SECTION 14. PROCEDURAL MATTERS. At each meeting of stockholders, the chairman of the meeting shall fix and announce the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at the meeting and shall determine the order of business and all other matters of procedure. Except to the extent inconsistent with any such rules and regulations as adopted by the Board of Directors, the chairman of the meeting may establish rules, which need not be in writing, to maintain order for the conduct of the meeting, including, without limitation, restricting attendance to bona fide stockholders of record and their proxies and other persons in attendance at the invitation of the chairman and making rules governing speeches and debates. The chairman of the meeting acts in his or her absolute discretion and his or her rulings are not subject to appeal. SECTION 15. ABILITY OF STOCKHOLDERS TO ACT BY WRITTEN CONSENT. Any action required or permitted to be taken at any annual or special meeting of stockholders may be taken only upon the vote of stockholders at an annual or special meeting duly noticed and called in accordance with the DGCL and these By-Laws of the Corporation and may not be taken by written consent of stockholders without a meeting, unless the action to be effected by written consent of stockholders and the taking of such action by such written consent have expressly been approved in advance by the Board of Directors of the Corporation. Notwithstanding the preceding sentence, so long as the Amended and Restated Shareholders' Agreement dated as of October 6, 1997 (as amended from time to time, the "Shareholders Agreement") remains in effect, actions to remove directors designated in accordance with Section 2.1 of the Shareholders Agreement may be taken by written consent of stockholders without a meeting if but only if the person who nominated such director pursuant to Section 2.1 of the Shareholders Agreement votes its shares of voting stock in favor of the removal of such director pursuant to such written consent. ARTICLE III BOARD OF DIRECTORS SECTION 1. POWERS; QUALIFICATIONS; NUMBER AND TERM. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors of the Corporation. A director need not be a stockholder, a citizen of the United States, or a resident of the State of Delaware. The Board of Directors shall initially consist of eight persons; provided, however, that such number of directors may from time to time be increased and decreased by a duly adopted resolution of the Board of Directors but shall in no event be reduced to less than three. The Board of Directors shall be divided into -6- 7 three classes, as nearly equal in number as the then total number of directors constituting the entire Board permits, with the term of office of one class expiring each year. The initial division of the Board of Directors shall be made by the decision of a majority of the entire Board of Directors. The initial Class I directors elected by the stockholders of the Corporation shall hold office for a term expiring at the 1998 annual meeting of stockholders and until their successors shall be elected and qualified, subject to prior death, retirement, resignation or removal; the initial Class II directors elected by the stockholders of the Corporation shall hold office for a term expiring at the 1999 annual meeting of stockholders and until their successors shall be elected and qualified, subject to prior death, retirement, resignation or removal; and the initial Class III directors elected by the stockholders of the Corporation shall hold office for a term expiring at the 2000 annual meeting of stockholders and until their successors shall be elected and qualified, subject to prior death, retirement, resignation or removal. At each such annual meeting of stockholders and at each annual meeting thereafter, successors to the class of directors whose term expires at that meeting shall be elected for a term expiring at the third annual meeting following their election and until their successors shall be elected and qualified, subject to prior death, retirement, resignation or removal. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of the Certificate of Incorporation or the resolution or resolutions adopted by the Board of Directors pursuant to Section 4.3 of the Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Section unless expressly provided by such terms. SECTION 2. VACANCIES. Subject to the rights of the holders of any series of preferred stock or any other class of capital stock of the Corporation (other than common stock) then outstanding, any vacancy in the Board of Directors, arising from death, retirement, resignation, removal, an increase in the number of directors or any other cause, may be filled by the Board of Directors (excluding for this purpose directors designated by affiliates of Morgan Stanley Dean Witter Discover & Co. pursuant to the Shareholders' Agreement to the extent, but only to the extent, that such directors would constitute a majority of such remaining directors), acting by a majority of the remaining directors then in office, although less than a quorum, or by a sole remaining director, the stockholders acting at an annual meeting or, if the vacancy is with respect to a director elected by a voting group, by action of any other directors elected by such voting group or such voting group. Notwithstanding the preceding sentence, so long as the Shareholders Agreement between the Company and the stockholders specified therein remains in effect, the person who designated any director nominee pursuant to Section 2.1 of the Shareholders Agreement shall be entitled to designate another director nominee to be appointed by the Board of Directors, provided a vacancy occurs as a result of the death, disability, retirement, resignation, removal or otherwise of the director so designated. -7- 8 Each director chosen to fill a vacancy in the Board of Directors arising from the death, retirement, resignation, removal of a director shall be elected to complete the term of office of the director who is being succeeded. In the event of any increase or decrease in the authorized number of directors, (a) each director then serving as such shall nevertheless continue as director of the class of which he or she is a member until the expiration of such director's current term or his or prior death, retirement, resignation or removal and (b) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors so as to ensure that no one class has more than one director more than any other class, and each director so elected shall hold office for the same term as the other members of the class to which the director is assigned. No decrease in the number of directors constituting the whole Board of Directors shall shorten the term of an incumbent director. SECTION 3. REMOVAL OF DIRECTORS. Except as may be provided in a resolution or resolutions providing for any class or series of Preferred Stock pursuant to Article IV of the Certificate of Incorporation with respect to any directors elected by the holders of such class or series, any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least two-thirds (66 2/3%) of the voting power of all of the shares of capital stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class. Notwithstanding the preceding sentence, so long as the Shareholders Agreement between the Company and the stockholders specified therein remains in effect and the person who designated any director nominee pursuant to Section 2.1 of the Shareholders Agreement requests the removal of the director so designated in accordance with Section 2.2 of the Shareholders Agreement, such director may be removed from office at any time with or without cause by the affirmative vote of the holders of at least a majority of the voting power of all of the shares of capital stock of the corporation then entitled to vote generally in the election of directors. The provisions of this subsection shall be the exclusive method for the removal of directors. SECTION 4. NOMINATION OF DIRECTORS. Only persons who are selected and recommended by the Board of Directors or the committee of the Board of Directors designated to make nominations, or who are nominated by stockholders in accordance with the procedures set forth in this Article III, Section 4, shall be eligible for election, or qualified to serve, as directors, except as may be otherwise provided in the Certificate of Incorporation with respect to the right of holders of Preferred Stock of the Corporation to nominate and elect a specified number of directors in certain circumstances. Nominations of individuals for election to the Board of Directors of the Corporation at any annual meeting or any special meeting of stockholders at which directors are to be elected may be made by any stockholder of the Corporation (x) who is a stockholder of record on the date of the giving of the notice provided for in this Section 4 and on the record -8- 9 date for the determination of stockholders entitled to vote at such meeting and (y) who complies with the procedures and requirements set forth in subparagraphs (a) and (b) this Article III, Section 4. (a) Nominations by stockholders shall be made by written notice (a "Nomination Notice"), which shall set forth the following information: (i) as to each individual nominated, (a) the name, date of birth, business address and residence address of such individual, (b) the business experience during the past five years of such nominee, including his or her principal occupations and employment during such period, the name and principal business of any corporation or other organization in which such occupations and employment were carried on, and such other information as to the nature of his or her responsibilities and level of professional competence as may be sufficient to permit assessment of his or her prior business experience, (c) whether the nominee is or has ever been at any time a director, officer or owner of 5% or more of any class of capital stock, partnership interests or other equity interest of any corporation, partnership or other entity, (d) any directorships held by such nominee in any company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act or any company registered as an investment company under the Investment Company Act of 1940, as amended, (e) whether, in the last five years, such nominee has been convicted in a criminal proceeding or has been subject to a judgment, order, finding or decree of any federal, state or other governmental entity, concerning any violation of federal, state or other law, or any proceeding in bankruptcy, which conviction, order, finding, decree or proceeding may be material to an evaluation of the ability or integrity of the nominee and (f) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act, and the rules and regulations promulgated thereunder; and (ii) as to the Person submitting the Nomination Notice and any Person acting in concert with such Person, (a) the name and business address of such Person, (b) the name and address of such Person as they appear on the Corporation's books, (c) the class and number of shares of the Corporation that are beneficially owned by such Person, (d) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder and (e) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. A written consent to being named in a proxy statement as a nominee, and to serve as a director if elected, signed by the nominee, shall be filed with any Nomination Notice. (b) To be timely, Nomination Notices must be delivered to the Secretary and received at the principal executive offices of the Corporation (1) in the case of an annual meeting, not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, the Nomination -9- 10 Notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting is mailed or such public disclosure of the date of the annual meeting is made, whichever first occurs, or (2) in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the 10th day following the day on which notice of the date of the special meeting is mailed or public disclosure of the date of the special meeting is made, whichever first occurs. (c) No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures and requirements set forth in this Section this Article III, Section 4. If the chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures and requirements, the chairman of the meeting shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. SECTION 5. PLACE OF MEETINGS. The Board of Directors may hold annual, regular and special meetings, and have an office or offices, either within or outside the State of Delaware, at such place as the Board of Directors from time to time deems advisable. SECTION 6. ANNUAL AND REGULAR MEETINGS. The Board of Directors shall, without notice, hold an annual meeting immediately after the annual meeting of the stockholders, or after the last adjournment thereof, and shall hold other regular meetings at such time and place as it may determine. No notice to the newly elected directors of such annual meeting shall be necessary for such meeting to be lawful, provided a quorum is present. SECTION 7. SPECIAL MEETINGS. The Board of Directors shall hold such special meetings as shall be called by the Chairman of the Board, Chief Executive Officer, President, or Vice President, or Secretary, or any two directors. Each such meeting shall be held at such time and place as shall be designated in the notice of meeting. SECTION 8. NOTICE OF MEETINGS. Notice of the date, time and place of each meeting, except the annual meeting, of the Board of Directors shall be mailed by regular mail to each director, at his address appearing on the books of the Corporation or supplied by the director to the Corporation for the purpose of notice ("designated address"), at least six days before the meeting; or sent by overnight courier to each director at his designated address at least two days before the meeting (with delivery scheduled to occur no later than the day before the meeting); or given orally by telephone or -10- 11 other means, or by telegraph or facsimile transmission, or by any other means comparable to any of the foregoing, to each director at his designated address not later than the day before the day on which such meeting is to be held or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances; provided, however, that if less than five days' notice is provided and one-third of the directors then in office object in writing prior to or at the commencement of the meeting, such meeting shall be postponed until five days after such notice was given pursuant to this sentence (or such shorter period to which a majority of those who objected in writing agree), provided that notice of such postponed meeting shall be given in accordance with this Article III, Section 8. The notice of the meeting shall state the general purpose of the meeting, but other routine business may be conducted at the meeting without such matter being stated in the notice. SECTION 9. WAIVER OF NOTICE. A waiver of written notice in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Attendance of a person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened, and any such person so states his purpose in attending such meeting and refrains from participation in the business of the meeting. SECTION 10. QUORUM. Except as otherwise provided in the Certificate of Incorporation, these By-laws and the DGCL, a majority of the directors in office shall be necessary at any meeting of the Board in order to constitute a quorum for the transaction of business at such meeting, and the affirmative vote of a majority of those directors present at any such meeting at which a quorum is present shall be necessary for the passage of any resolution or act of the Board. In the absence of a quorum for any such meeting, a majority of the directors present thereat may adjourn such meeting from time to time until a quorum shall be present thereat. Notice of any adjourned meeting need not be given. SECTION 11. PRESIDING OFFICER AND ORDER OF BUSINESS. All meetings of the Board of Directors shall be called to order and presided over by the Chairman of the Board, or in his absence, by a member of the Board of Directors selected by the members present. The Secretary of the Corporation shall act as secretary, but in the absence of the Secretary, the presiding officer may appoint a secretary. SECTION 12. ACTION BY BOARD WITHOUT FORMAL MEETING. Unless otherwise restricted by the Certificate of Incorporation or these By-laws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any -11- 12 committee thereof, may be taken without a meeting if all members of the Board of Directors or of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee, as the case may be. SECTION 13. COMPENSATION. Directors, as such, shall receive such compensation and reimbursement for expenses as the Board of Directors may by resolution allow. Directors shall also be entitled to receive such compensation for services rendered to the Corporation in any capacity other than as directors, as may be provided from time to time by resolution of the Board of Directors. SECTION 14. RESIGNATION. Any director, member of a committee, or other officer may resign at any time by giving written notice to the Board of Directors, the Chairman of the Board or Secretary of the Corporation. Such resignation shall be effective at the time specified therein, or, if no time be specified, at the time of its receipt by the Board of Directors or such officer, and the acceptance of the resignation shall not be necessary to make it effective. Resignations not submitted in writing may be evidenced by a written acknowledgement of receipt thereof signed by the receiving director or officer of the Corporation or by acknowledgement of receipt thereof in the minutes of a subsequent stockholders' or directors' meeting. SECTION 15. TELEPHONIC MEETINGS AND PARTICIPATION. Members of the Board of Directors or any committee designated thereby may participate in any meeting of such Board of Directors or committee by means of conference telephone or similar communications equipment by which all persons participating can hear each other. Participation in a meeting pursuant to this section shall constitute presence in person at such meeting. ARTICLE IV COMMITTEES SECTION 1. COMMITTEES GENERALLY. The Board of Directors may, by resolutions passed by a majority of the members of the Board of Directors then in office, designate members of the Board of Directors to constitute committees that, except as otherwise provided in Sections 2 and 3 of this Article IV, in each case, shall consist of such number of directors, and shall have and may execute such powers, as is permitted by law and specified in the respective resolutions appointing them. Any such committee may fix its rules of procedure, determine its manner of acting and the time and place, whether within or without the State of Delaware, of its meetings and specify what notice thereof, if any, shall be given, unless these By-laws, or the Board of Directors by resolution, shall -12- 13 provide otherwise. Unless otherwise provided by the Board of Directors or such committee, the quorum, voting and other procedures shall be the same as those applicable to actions taken by the Board of Directors. A majority of the members of the Board of Directors then in office shall have the power to change the membership of any such committee at any time, to fill vacancies therein and to discharge any such committee or to remove any member thereof, either with or without cause, at any time. SECTION 2. AUDIT COMMITTEE. The Audit Committee shall consist of such number of directors, who shall not be officers or employees of the Corporation or any of its affiliates, not less than two, as shall from time to time be determined by the Board of Directors. The Audit Committee shall each year make a recommendation, based on a review of qualifications, to the Board of Directors for the appointment of independent public accountants to audit the financial statements of the Corporation and to perform such other duties as the Board of Directors may from time to time prescribe. As part of such review of qualifications, the Audit Committee shall consider management's plans for engaging the independent public accountants for management advisory services to determine whether such services could impair the public accountants' independence. The Audit Committee shall examine and make recommendations to the Board of Directors with respect to the scope of audits conducted by the Corporation's independent public accountants and internal auditors. The Audit Committee shall review all recommendations made by the Corporation's independent public accountants and internal auditors to the Audit Committee or the Board of Directors with respect to the accounting methods and the system of internal control used by the Corporation, and shall advise the Board of Directors with respect thereto. The Audit Committee shall review reports from the Corporation's independent public accountants and internal auditors concerning compliance by management with governmental laws and regulations and with the Corporation's policies relating to ethics, conflicts of interest and disbursements of funds. The Audit Committee shall meet with the Corporation's independent public accountants and/or internal auditors without management present whenever the Audit Committee shall deem it appropriate. SECTION 3. COMPENSATION COMMITTEE. The Compensation Committee shall consist of such number of directors, not less than two, as shall from time to time be determined by the Board of Directors. As authorized by the Board of Directors, the Compensation Committee shall make recommendations to the Board of Directors with respect to the administration of the salaries, bonuses, and other compensation to be paid to key employees and officers of the Corporation, including the terms and conditions of their employment, and shall administer all stock option and other benefit plans (except with respect to participation by executive officers and unless otherwise specified in plan documents) affecting key employees' and officers' direct and indirect remuneration. SECTION 4. STOCK OPTION COMMITTEE. The Stock Option Committee shall consist of such number of directors, who shall not be officers or employees of the corporation or any of its affiliates, not less than two, as shall from time to time be determined by the Board of Directors. As authorized by the Board of Directors, the Stock Option Committee shall -13- 14 administer all stock option and other benefit plans (unless otherwise specified in plan documents) with respect to participation by executive officers of the Corporation. ARTICLE V OFFICERS AND AGENTS SECTION 1. OFFICERS. The officers of the Corporation shall be a Chairman of the Board, a Chief Executive Officer, a President, a Chief Financial Officer and a Secretary, all of whom shall be elected by the Board of Directors. In addition, the Board of Directors may elect one or more Vice Presidents, Assistant Secretaries or Assistant Treasurers, or appoint such other additional officers and agents as they may deem advisable. Any two or more offices may be held by the same person except the offices of President and Secretary. The officers shall be elected each year at the annual meeting of the Board of Directors which shall be held each year pursuant to Article III, Section 6 hereof. The Board of Directors may appoint, or may empower the Chief Executive Officer to appoint, such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these By-laws or as the Board of Directors may from time to time determine. SECTION 2. TERM. Each officer and each agent shall hold office until his successor is elected or appointed and qualified or until his death, resignation or removal by the Board of Directors. SECTION 3. AUTHORITY, DUTIES AND COMPENSATION. All elected or appointed officers and agents shall have such authority and perform such duties as may be provided in the By-laws or as may be determined by the Board of Directors or the Chairman of the Board. They shall receive such compensation for their services as may be determined by the Board of Directors, or by the Chairman of the Board with respect to all officers and agents subordinate to him. Notwithstanding any other provisions of these By-laws, the Board of Directors shall have power from time to time by resolution to prescribe by what officers or agents particular documents or instruments or particular classes of documents or instruments shall be signed, countersigned, endorsed or executed, provided, however, that any person, firm or corporation shall be entitled to accept and to act upon any document or instrument signed, countersigned, endorsed or executed by officers or agents of the company pursuant to the provisions of these By-laws unless prior to receipt of such document or instrument such person, firm or corporation has been furnished with a certified copy of a resolution of the Board of Directors prescribing a different signature, countersignature, endorsement or execution. -14- 15 SECTION 4. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an officer be elected, shall serve as the Corporation's general manager, and shall have general supervision, direction and control of the Corporation's business and its officers, and, if present, preside at meetings of the stockholders and the Board of Directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the Board of Directors or as may be prescribed by these By-laws. If there is no Chief Executive Officer, then the Chairman of the Board shall also be the Chief Executive Officer of the Corporation and shall have the powers and duties prescribed in Article V, Section 5 of these By-laws. The Chairman of the Board shall report to the Board of Directors. SECTION 5. CHIEF EXECUTIVE OFFICER. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the Chief Executive Officer of the Corporation shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the Corporation. He shall preside at all meetings of the stockholders and, in the absence or nonexistence of a Chairman of the Board, at all meetings of the Board of Directors. He shall have the general powers and duties of management usually vested in the chief executive officer of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or these By-laws. SECTION 6. PRESIDENT. The president may assume and perform the duties of the Chief Executive Officer in the absence or disability of the Chief Executive Officer or whenever the office of the Chief Executive Officer is vacant. The president of the Corporation shall exercise and perform such powers and duties as may from time to time be assigned to him by the Board of Directors or as may be prescribed by these By-laws. The president shall have authority to execute in the name of the corporation bonds, contracts, deeds, leases and other written instruments to be executed by the Corporation. In the absence or nonexistence of the Chairman of the Board and Chief Executive Officer, he shall preside at all meetings of the stockholders and, in the absence or nonexistence of a Chairman of the Board and the Chief Executive Officer, at all meetings of the Board of Directors and shall perform such other duties as the Board of Directors may from time to time determine. SECTION 7. CHIEF FINANCIAL OFFICER. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director. -15- 16 The chief financial officer shall deposit all money and other valuables in the name and to the credit of the Corporation with such depositaries as may be designated by the Board of Directors. He or she shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the Chief Executive Officer and directors, whenever they request it, an account of all of his or her transactions as chief financial officer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or these By-laws. SECTION 8. VICE PRESIDENTS. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a vice president designated by the Board of Directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these By-laws, the Chairman of the Board or the Chief Executive Officer. SECTION 9. SECRETARY. The Secretary shall give or cause to be given all required notices of meetings of stockholders and of the Board of Directors, shall attend such meetings when practicable, shall record and keep the minutes and all other proceedings thereof, shall attest such records after every meeting by his signature, shall safely keep all documents and papers which shall come into his possession and shall truly keep the books and accounts of the Corporation appertaining to his office. In the absence or disability of the Secretary, any Assistant Secretary shall have authority and perform the duties of the Secretary. SECTION 10. RESIGNATION AND REMOVAL OF OFFICERS. Any executive officer of the Corporation may be removed, either for cause or without cause, by the affirmative vote of a majority of the full Board of Directors. Other officers and agents may be removed either for cause or without cause by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. Removal of an executive officer or other officer or agent in accordance herewith shall be without prejudice to the contract rights, if any, of the person so removed. Any officer may resign at any time by written notice to the Corporation. Unless otherwise stated in such notice of resignation, the acceptance thereof shall not be necessary to make it effective; and such resignation shall take effect at the time specified therein or, in the absence of such specification, it shall take effect upon the receipt thereof. SECTION 11. VACANCIES. Vacancy in any office or position by reason of death, resignation, removal, disqualification or any other cause shall be filled in the manner provided in Article V, Section 1 -16- 17 hereof for regular appointment to such office. Unless earlier removed pursuant to Article V, Section 10, any officer appointed by the Board to fill any such vacancy shall serve only until such time as the unexpired term of his predecessor expires unless reappointed by the Board. ARTICLE VI INDEMNIFICATION The Corporation shall indemnify, in accordance with Article V of its Certificate of Incorporation, its directors, officers, delegates (as defined in such Article V), agents and employees. ARTICLE VII SHARES OF CAPITAL STOCK SECTION 1. SHARE CERTIFICATES. Every holder of stock in the Corporation shall be entitled to a certificate or certificates, to be in such form as the Board of Directors may from time to time prescribe, signed by the President or a Vice President and by the Secretary or Treasurer or an Assistant Secretary or Assistant Treasurer, and where signed by a transfer agent or an assistant transfer agent by a registrar the signature of such officers of the Corporation may be facsimile. Each such certificate shall exhibit the name of the registered holder thereof, the number and class of shares and the designation of the series, if any, which the certificate represents and the number of shares represented thereby. The Board of Directors may, if it so determines, direct that certificates for shares of stock of the Corporation be signed by a transfer agent and/or registered by a registrar, in which case such certificates shall not be valid until so signed and/or registered. In case any officer of the Corporation who shall have signed, or whose facsimile signature shall have been used on any certificate for shares of stock of the Corporation, shall cease to be such officer, whether because of death, resignation or otherwise, before such certificate shall have been delivered, it may be delivered by the Corporation as though the person who signed such certificate or whose facsimile signature shall have been used thereon had not ceased to be such officer. SECTION 2. TRANSFERS OF SHARES. Transfers of shares of stock of the Corporation shall be made only on the books of the Corporation by the registered holder thereof or by his attorney thereunto authorized by an instrument duly executed and witnessed and filed with the Corporation, and on surrender of the certificate or certificates for such shares properly endorsed and evidence of the payment of all taxes imposed upon such transfer. Every certificate surrendered for transfer shall be cancelled and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so cancelled. -17- 18 SECTION 3. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may appoint any one or more qualified banks, trust companies or other corporations organized under any law of any state of the United States or under the laws of the United States as agent or agents for the Corporation in the transfer of the stock of the Corporation and likewise may appoint any one or more qualified banks, trust companies or other corporations as registrar or registrars of the stock of the Corporation. SECTION 4. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES. New certificates for shares of stock may be issued to replace certificates lost, stolen, destroyed or mutilated upon such terms and conditions, which may but need not include the giving of a satisfactory bond of indemnity, as the Board of Directors may from time to time determine. SECTION 5. HOLDERS OF RECORD. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder and owner in fact thereof and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by the laws of the State of Delaware. SECTION 6. TREASURY SHARES. Shares of the Corporation's stock held in its treasury shall not be voted, directly or indirectly, at any meeting. SECTION 7. STOCKHOLDER AGREEMENTS. Shares of stock of the Corporation may be subject to one or more agreements abridging, limiting or restricting the rights of any one or more stockholders to sell, assign, transfer, mortgage, pledge or hypothecate any or all of the stock of the Corporation held by them, or may be subject to one or more agreements providing a purchase option with respect to any shares of stock of the Corporation. If such agreements exist, all certificates evidencing shares of stock subject to such abridgements, limitations, restrictions or options shall have reference thereto endorsed on such certificate and such stock shall not thereafter be transferred on the books of the Corporation except in accordance with the terms and conditions of such agreement or agreements. Copies of such agreement or agreements shall be maintained at the offices of the Corporation. -18- 19 ARTICLE VIII GENERAL PROVISIONS SECTION 1. CORPORATE SEAL. The Board of Directors shall prescribe the form of a suitable corporate seal, which shall contain the full name of the Corporation and the year and state of incorporation. Such seal may be used by causing it or a facsimile or reproduction thereof to be affixed to or placed upon the document to be sealed. SECTION 2. FISCAL YEAR. The fiscal year of the Corporation shall end on the last Friday in September in each year or shall begin and end on such other days as shall be fixed by resolution of the Board of Directors. SECTION 3. CORPORATE RECORDS. The Corporation may maintain its corporate books and records at such place or places within or without the State of Delaware as the Board of Directors may deem necessary, desirable or expedient from time to time. SECTION 4. CHECKS, DRAFTS AND NOTES. All checks, drafts and other orders for the payment of money, notes and other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers, agent or agents of the Corporation and in such manner as shall be determined, from time to time, by resolution of the Board. SECTION 5. EXECUTION OF PROXIES. The Chairman of the Board or Chief Executive Officer or, in the absence or disability of both of them, any Vice President, may authorize, from time to time, the execution and issuance of proxies to vote shares of stock or other securities of other corporations held of record by the Corporation and the execution of consents to action taken or to be taken by any such corporation. All such proxies and consents, unless otherwise authorized by the Board, shall be signed in the name of the Corporation by either the Chairman of the Board, Chief Executive Officer or any Vice President. SECTION 6. CONSTRUCTION. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the General Corporation Law of Delaware shall govern the construction of these By-laws. Without limiting the generality of this provision, the singular number includes the -19- 20 plural, the plural number includes the singular, and the term "person" includes both an entity and a natural person. ARTICLE IX AMENDMENTS SECTION 1. AMENDMENTS. The Board of Directors shall have power without the assent or vote of the stockholders to make, alter, amend, change, add to or repeal the By-laws of the Corporation. The stockholders shall also have the power to make, alter, amend, change, add to or repeal the Bylaws of the Corporation; provided, however, that in addition to any vote of the holders of any class or series of capital stock of the Corporation required by law or by the Certificate of Incorporation, the affirmative vote of the holders of at least 80% of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to make, alter, amend, change, add to or repeal the By-laws of the Corporation. -20- EX-4.1 5 FORM OF SPECIMEN CERTIFICATE/CLASS A COMMON STOCK 1 EXHIBIT 4.1 INCORPORATED UNDER THE LAWS CLASS A CONVERTIBLE OF THE STATE OF DELAWARE COMMON STOCK PAR VALUE $.001 NUMBER SHARES [LOGO] THIS CERTIFICATE IS TRANSFERABLE IN CUSIP 027070 10 1 KANSAS CITY, MO OR NEW YORK, NY SEE REVERSE FOR CERTAIN DEFINITIONS AMERICAN ITALIAN PASTA COMPANY [STOCK CERTIFICATE] SHARES OF THE CLASS A CONVERTIBLE COMMON STOCK OF [LOGO] SEAL AMERICAN ITALIAN PASTA COMPANY transferable on the books of the Company by the holder hereof or person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile corporate seal and the facsimile signatures of its duly authorized officers. DATED COUNTERSIGNED AND REGISTERED. UMB BANK, N.A. (KANSAS CITY, MISSOURI) [SIG] TRANSFER AGENT PRESIDENT AND REGISTRAR BY [SIG] SECRETARY AUTHORIZED SIGNATURE
2 [AMERICAN ITALIAN PASTA COMPANY LOGO] AMERICAN ITALIAN PASTA COMPANY THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF OF THE COMPANY, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. SUCH REQUESTS SHOULD BE ADDRESSED TO THE SECRETARY OF THE CORPORATION. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM - as tenants in common UNIF GIFT MIN ACT - ___________ CUSTODIAN _________ TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right of survivorship and not as tenants in common under Uniform Gifts to Minors Act _______________________ (State) Additional abbreviations may also be used though no in the above list. For value received,_________________________________________________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _________________________________ | | | | __________________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________________ Pleas print or typewrite name and address including postal zip code of assignee __________________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________________ ___________________________________________________________________________________________________________________________ Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ____________________ __________________________________________________________________________________________________________________________________ Attorney to transfer the said stock on the books of the within-named Company with full power of substitution in the premises. Dated ________________________________________________ X _______________________________________ NOTICE SIGNATURE THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND -------> WITH THE NAME(S) AS WRITTEN UPON THE FACE OF X _______________________________________ THE CERTIFICATE IN EVERY PARTICULAR SIGNATURE WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER _____________________________________________________________ | THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE | | GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND | | LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN | | APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT | | TO SEC RULE 17 AG-15 | |_____________________________________________________________| | SIGNATURE(S) GUARANTEED BY, | | | | | | | | | | | |_____________________________________________________________|
EX-4.2 6 SPECIMEN CERTIFICATE/CLASS B COMMON STOCK 1 EXHIBIT 4.2 INCORPORATED UNDER THE LAWS CLASS B CONVERTIBLE OF THE STATE OF DELAWARE COMMON STOCK PAR VALUE $.001 NUMBER SHARES [LOGO] THIS CERTIFICATE IS TRANSFERABLE IN KANSAS CITY, MO OR NEW YORK, NY AMERICAN ITALIAN PASTA COMPANY, INC. [STOCK CERTIFICATE] SHARES OF THE CLASS B CONVERTIBLE COMMON STOCK OF [LOGO] SEAL AMERICAN ITALIAN PASTA COMPANY, INC. transferable on the books of the Company by the holder hereof or person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile corporate seal and the facsimile signatures of its duly authorized officers. DATED COUNTERSIGNED AND REGISTERED. UMB BANK, N.A. (KANSAS CITY, MISSOURI) [SIG] TRANSFER AGENT PRESIDENT AND REGISTRAR BY [SIG] SECRETARY AUTHORIZED SIGNATURE
2 [AMERICAN ITALIAN PASTA COMPANY LOGO] AMERICAN ITALIAN PASTA COMPANY THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF OF THE COMPANY, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. SUCH REQUESTS SHOULD BE ADDRESSED TO THE SECRETARY OF THE CORPORATION. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM - as tenants in common UNIF GIFT MIN ACT - ___________ CUSTODIAN _________ TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right of survivorship and not as tenants in common under Uniform Gifts to Minors Act _______________________ (State) Additional abbreviations may also be used though no in the above list. For value received,_________________________________________________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _________________________________ | | | | __________________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________________ Pleas print or typewrite name and address including postal zip code of assignee __________________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________________ ___________________________________________________________________________________________________________________________ Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ____________________ __________________________________________________________________________________________________________________________________ Attorney to transfer the said stock on the books of the within-named Company with full power of substitution in the premises. Dated ________________________________________________ X _______________________________________ NOTICE SIGNATURE THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND -------> WITH THE NAME(S) AS WRITTEN UPON THE FACE OF X _______________________________________ THE CERTIFICATE IN EVERY PARTICULAR SIGNATURE WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER _____________________________________________________________ | THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE | | GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND | | LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN | | APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT | | TO SEC RULE 17 AG-15 | |_____________________________________________________________| | SIGNATURE(S) GUARANTEED BY, | | | | | | | | | | | |_____________________________________________________________|
3 ATLAS CORPORATE & NOTARY SUPPLY CO., P.O. BOX 1638, SKOKIE, ILLINOIS 60076 NUMBER SHARES ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AMERICAN ITALIAN PASTA COMPANY AUTHORIZED TO ISSUE TWENTY-FIVE MILLION SHARES OF $.001 CLASS B CONVERTIBLE COMMON STOCK THIS CERTIFIES THAT _______________________________________ is the owner of ________________________________ Shares of the Capital Stock of the above named Corporation, fully paid, non-assessable and transferable only on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of this Certificate properly endorsed. In Witness Whereof, the said Corporation has unused this Certificate to be signed by its duly authorized officers and its Corporate Seal to be hereunto affixed this ____________________________ day of __________________ 19 __________________________ _________________________________ ______________________________ SECRETARY PRESIDENT [SEAL] 4 THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD EXCEPT IN COMPLIANCE THEREWITH. THIS SECURITY IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER, AS SET FORTH IN THE AMENDED AND RESTATED SHAREHOLDERS AGREEMENT DATED AS OF OCTOBER 6, 1997, COPIES OF WHICH MAY BE OBTAINED UPON REQUEST FROM AMERICAN ITALIAN PASTA COMPANY OR ANY SUCCESSOR THERETO. THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. SUCH REQUESTS SHOULD BE ADDRESSED TO THE SECRETARY OF THE CORPORATION. CERTIFICATE FOR SHARES OF AMERICAN ITALIAN PASTA COMPANY ISSUED TO _______________________ DATED _______________________ FOR VALUE RECEIVED ________ HEREBY SELL, ASSIGN AND TRANSFER UNTO ___________________________________________ SHARES OF THE CAPITAL STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT ______________________ ATTORNEY TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES. DATED ___________ 19__ IN PRESENCE OF _______________________ _______________________ EX-5.1 7 OPINION OF SOMENSCHEIN NATH & ROSENTHAL 1 EXHIBIT 5.1 October 6, 1997 American Italian Pasta Company 1000 Italian Way Excelsior Springs, Missouri 64024 Re: American Italian Pasta Company Registration Statement on Form S-1 Reg. No. 333-32827 Ladies and Gentlemen: We have represented American Italian Pasta Company, a Delaware corporation (the "Company"), in connection with the registration of up to 9,085,000 shares of Class A Convertible Common Stock, $.001 par value per share, of the Company, of which 5,900,000 shares are being issued and sold by the Company (the "Primary Shares") and up to 3,185,000 shares are being sold by certain selling stockholders (the "Selling Stockholders")of the Company (the "Secondary Shares"). In connection with our representation, we have examined the corporate records of the Company, including its Amended and Restated Certificate of Incorporation, its Amended and Restated By-laws, and other corporate records and documents and have made such other examinations as we consider necessary to render this opinion. Based upon the foregoing, it is our opinion that: 1. the Company is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware; and 2. the Primary Shares, when issued and sold in the manner contemplated by the registration statement referred to above (the "Registration Statement"), will be legally issued, fully paid and non-assessable; and 3. the Secondary Shares, when sold by the selling stockholders in the manner contemplated by the Registration Statement, will be legally issued, fully paid and non-assessable. We consent to the filing of this opinion as an exhibit to the Registration Statement and to all references to this firm in such Registration Statement. Very truly yours, /s/ Sonnenschein Nath & Rosenthal SONNENSCHEIN NATH & ROSENTHAL EX-10.5 8 EMPLOYMENT AGREEMENT/COMPANY - TIMOTHY S. WEBSTER 1 EXHIBIT 10.5 TIMOTHY S. WEBSTER EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is made effective for all purposes and in all respects as of the Effective Date (as defined below) by and between AMERICAN ITALIAN PASTA COMPANY, a Delaware corporation (hereinafter referred to as "Employer"), and TIMOTHY S. WEBSTER, an individual (hereinafter referred to as "Employee") and supersedes any and all prior oral or written agreements between the parties with respect to the subject matter hereof, including the Employment Agreements dated as of October 30, 1992, June 6, 1991, the Letter Agreement dated August 20, 1991 regarding payments in the event of a sale or a change in control of Employer and the Employment Agreement dated October 30, 1995. For purposes of this Agreement, the term "Effective Date" shall mean the date the Employer's initial public offering (the "Offering") of its common stock ("Common Stock") is consummated. RECITALS A. Employer is engaged in the business of Durum wheat milling and pasta production/marketing and maintains its principal place of business at 1000 Italian Way, Excelsior Springs, Missouri 64024. B. In connection with such business, Employer desires to continue to employ Employee in the capacity of President and Chief Executive Officer. C. Employee desires to be employed by Employer in the aforesaid capacities. D. Employer and Employee desire to set forth, in writing, the terms and conditions of their agreements and understandings. 2 In consideration of the foregoing, the mutual promises herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending legally to be bound, hereby agree as follows: 1. Term of Employment. Employee's term of employment by Employer under this Agreement (the "Employment Term") shall commence on the Effective Date and terminate at midnight on September 30, 2002 (the termination date being hereinafter referred to as the "Normal Termination Date"), unless sooner terminated in accordance with the provisions of Section 7 hereof. Subject to the provisions of Section 7.7, below, upon the Normal Termination Date, Employee shall not become entitled to any severance payments pursuant to Section 7, below, or otherwise. 2. Duties of Employee. (a) In accepting such employment, Employee shall undertake and assume the responsibility of performing for and on behalf of Employer such duties as shall be assigned to Employee by the Board of Directors of Employer (the "Board") at any time and from time to time. It is understood and agreed that Employee's principal duties on behalf of Employer at the date of execution hereof are and shall be direction of overall operations; it is further understood and agreed that any modification in or expansion of Employee's duties hereunder shall not, unless specifically agreed to by Employee in a duly-executed amendment of this Agreement in accordance with Section 8.6 hereof, result in any decrease of Employee's compensation referred to in Section 3 hereof. (b) Employee covenants and agrees that he will, at all times, faithfully, industriously, and to the best of his ability, experience and talents, perform all of the duties that may be required of and from Employee pursuant to the express and implicit terms hereof. 2 3 (c) Employee shall devote substantially all of his professional time, attention, knowledge and skills solely to the business and interests of Employer; provided, however, that Employee shall be entitled annually to twenty-five (25) business days of vacation, and Employer shall be entitled to all of the benefits and profits arising from or incident to all professional work, services and advice of Employee reasonably related to the business of Employer. Up to 10 days of unused vacation may be carried over from one year to the next or, at the option of Employee, may be redeemed by Employer at year end for cash at the per diem amount equal to the Base Salary, defined in Section 3, below, divided by 260. (d) Employer will nominate Employee for election to its Board of Directors in accordance with the terms of the Amended and Restated Shareholders' Agreement to which Employer and Employee are parties (the "Shareholders' Agreement). 3. Compensation. (a) Employer shall pay Employee, and Employee shall accept from Employer, in payment for Employee's services rendered to Employer hereunder an annual base salary ("Base Salary"). The Base Salary as of the Effective Date shall be at the initial annual rate of $330,000.00, payable in equal bi-weekly installments or otherwise in accordance with the payroll and personnel practices of the Employer from time to time. Base Salary shall be reviewed annually by the Board for possible adjustment. In considering any possible adjustment to the Base Salary, the Board will consider the reports and/or methodology of the Hay Group or a similar consultant as reasonably selected by the Board, with the intent that the Base Salary will be competitive with salaries for similar executive officers at comparable companies of similar size and scope of operations to Employer, but no less than the mid-point of the range of salaries indicated by the consultant for such comparable executives. 3 4 3.1. Bonuses. During the term of this Agreement, Employee will be entitled to participate in an equitable manner with other senior executive employees of Employer in discretionary bonuses authorized and declared from time to time by the Board or its Compensation Committee. In addition, Employee will be entitled to participate in Employer's 1996 Salaried Executive Bonus Plan (the "Bonus Plan") attached hereto as Exhibit A, as the same may be amended, modified or terminated. The "norm bonus" under the Bonus Plan will be 50% of Base Salary and the Bonus Plan will have a "target bonus" of up to 75% of Base Salary. 3.2. Reimbursement of Business Expenses. Reasonable travel, entertainment and other business expenses incurred by Employee in the performance of his duties hereunder shall be reimbursed by Employer in accordance with Employer's policies on terms no less favorable than those policies in effect immediately prior to the date hereof. 3.3. Use of Automobile. Employee shall be entitled to the exclusive use of an automobile and Employer shall pay or reimburse Employee for any expense reasonably incurred by him in maintaining and operating such automobile, including without limitation, any lease payments; provided, however, that Employee obtains Employer's reasonable consent as to such automobile and the financing arrangements. Such expenses shall also include insurance, car phone, fuel, lubricants, repairs, tires, and body work. 3.4. Benefits. (a) Employee shall be entitled to participate in an equitable manner with other senior executive employees of Employer in all welfare benefit, incentive compensation or other plans or arrangements authorized and adopted from time to time by Employer, including, without limitation, the following: pension plan, profit sharing plan, medical reimbursement plan, group life insurance plan and long-term disability income plan. In addition, Employer shall provide to Employee at no cost to Employee long-term disability insurance on terms mutually agreeable to Employer and Employee. 4 5 (b) In addition to group life insurance, Employer will maintain split-dollar life insurance policy on the life of the Employee with a death benefit of $3 million; provided Employer can maintain such a policy on the life of Employee without any substantial increase in the standard premiums from those as of the date hereof due to any "rating" of the Employee; and further provided that if there is such a substantial premium increase, Employee will have the right to pay such increase personally and Employer would then maintain such insurance. (c) Employer will also provide to Employee such other perquisites and fringe benefits as necessary to keep the Employee's total compensation package competitive with those of similar executive officers at comparable companies of similar size and scope of operations to Employer. (d) Employer will also reimburse Employee for the costs incurred by Employee in negotiating this Agreement not to exceed $10,000.00 plus up to Five Thousand Dollars ($5,000) annually for the cost of tax preparation and financial and legal consulting services. 3.5 Stock Options. At the Effective Date, Employee shall be granted an option to purchase such number of shares of Common Stock equal to three percent (3%) of the aggregate number of shares of Common Stock outstanding immediately prior to the Offering on a fully diluted basis. The option price will be equal to the per share price at which the Common Stock is sold to the public in the Offering, the shares will vest 20% on each anniversary of the grant date, and the option will terminate no earlier than on the tenth anniversary of the grant date. 5 6 4. Non-Competition. (a) Employee acknowledges and recognizes the highly competitive nature of the business of Employer and its affiliates and accordingly agrees as follows: during the Employment Term and until the date that is two years after Employee ceases employment with Employer (such time period hereinafter referred to as the "Noncompetition Period"), Employee will not, within North America, directly or indirectly, own, manage, operate, control, be employed by or be connected in any matter with the ownership (other than ownership of securities of publicly held corporations of which Employee own less than 1% of any class of outstanding securities), management, operation, or control of any business engaged in the production and/or marketing of dry pasta for human consumption. Notwithstanding any provision of this Agreement to the contrary, if Employee is employed by Employer, any breach of the provisions of this Section 4(a) shall permit Employer to terminate the employment of Employee for Cause, and, whether or not Employee is employed by Employer, from and after any breach by Employee of the provisions of this Section 4(a), Employer shall cease to have any obligations to make payments to Employee under this Agreement. (b) During any period of continued payment provided in Section 7 hereof, Employee will be available, consistent with other responsibilities that he may then have, to answer questions and provide advice to Employer. (c) During the Noncompetition Period, Employee will not directly or indirectly induce any employee of Employer or any of its affiliates to engage in any activity in which Employee is prohibited from engaging by Section 4(a) above or to terminate his employment with Employer or any of its affiliates, will not directly or indirectly assist others in engaging in any of the activities in which Employee is prohibited from engaging by Section 4(a) above, and will not directly or indirectly employ or offer employment to any person who 6 7 was employed by Employer or any of its affiliates unless such person shall have ceased to be employed by Employer or any of its affiliates for a period of at least 12 months. (d) The applicability of the provisions of this Section 4 is in all cases dependent upon the receipt, when due pursuant to the terms hereof, by Employee of the appropriate Elective Payment or portion of the Severance Payment described in Section 7, below. 5. Confidentiality. Employee acknowledges that, in and as a result of his employment by Employer, he has been and will be making use of, acquiring and/or adding to confidential information of a special and unique nature and value relating to such matters as Employer's trade secrets, systems, procedures, manuals, confidential reports and lists of customers and/or other services rendered by Employer, the equipment and methods used and preferred by Employer's customers, and the prices paid by such customers. As a material inducement to Employer to enter into this Agreement, and to pay to Employee the compensation referred to in Section 3 hereof, including any additional benefits referred to in Section 3.4 hereof, Employee covenants and agrees that he shall not, at any time during or after the Employment Term, directly or indirectly, disclose, divulge or use, for his own benefit or purposes or the benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise other than Employer and any of its subsidiaries or affiliates, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, prices, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, or the business and affairs of Employer generally, or of any subsidiary or affiliate of Employer, provided that the foregoing shall not apply to information which is not 7 8 unique to Employer or which is generally known to the industry or the public other than as a result of breach of this covenant. Employee agrees that upon termination of his employment with Employer for any reason, he will return to Employer immediately all memoranda, books, manuals, training materials, records, computer software, papers, plans, information, letters and other data, and all copies thereof or therefrom, in any way relating to the business of Employer and its affiliates, except that he may retain personal notes, notebooks, diaries, and mementoes and may retain copies of (i) documents related directly to the course and scope of his employment relationship, (ii) documents that may relate to the basis for the termination of such relationship, and (iii) all governmental filings signed by Employee or on his behalf under which Employee may incur personal liability pursuant to law in the absence of fraud or other misconduct by Employee. Employee further agrees that he will not retain or use for his account at any time any trade names, trademark or other proprietary business designation used or owned in connection with the business of Employer or its affiliates. 6. Specific Performance. Employee acknowledges and agrees that Employer's remedies at law for a breach or threatened breach of any of the provisions of Section 4 or Section 5 would be inadequate and, in recognition of this fact, Employee agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, Employer, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. 7. Termination and Severance. 7.1 Termination by Employer for Cause or Without Cause. (a) Employer may terminate Employee's employment and (except as provided below) all of Employer's 8 9 obligations hereunder, either for Cause (as defined below) or without Cause. In the event of termination for Cause, Employee shall be entitled to receive his Base Salary earned through the date of termination, and, except as otherwise expressly provided herein, all other rights of Employee shall terminate as of the effective date of termination. Also, in the event of a termination for Cause, the provisions of Sections 4(a) and (c) shall apply only for so long as Employer continues to pay Employee an amount each month equal to one-twelfth of Employee's Base Salary (an "Elective Payment"), but in no event longer than two years. The decision whether to make any such Elective Payment is in the sole discretion of the Employer. For purposes of this Agreement, "Cause" shall mean (i) Employee's willful and continued failure substantially to perform his duties hereunder (other than as a result of Disability, as defined below) which failure is uncorrected for a period of 30 days following receipt by the Employee of written notice thereof from Employer; (ii) Employee's failure to comply with any of the material terms of this Agreement which failure is uncorrected for a period of 30 days following receipt by Employee of written notice of noncompliance from Employer; (iii) an act or acts on Employee's part resulting in a felony conviction of Employee under the laws of the United States or any state thereof; or (iv) any other willful act or omission on Employee's part which is materially injurious to the financial condition or business reputation of Employer or any of its subsidiaries or affiliates. For purposes of this Subsection, no act or failure to act on the part of Employee shall be deemed "willful" unless done, or omitted to be done, by Employee in bad faith and without reasonable belief that the act or omission of Employee was in the best interest of Employer. (b) If Employee's employment is terminated by Employer without Cause or by Employee for "Good Reason" as defined below, (other than due to death), 9 10 Employee, upon the effective date of such termination, shall become entitled to receive, in the manner and at the times described below, an aggregate payment (a "Severance Payment") equal to two times the aggregate of his then current Base Salary plus his bonus for the year in which such termination occurs (calculated as if the Norm Bonus, as defined in the Bonus Plan, for that year is earned) and shall continue to be covered by all health insurance plans of Employer, at Employer's expense, for a period of one year commencing on the date of termination, which shall be in partial satisfaction of the Employer's continuation coverage obligations under Section 601 of the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder, and ending on the first anniversary thereof. As an example, the Severance Payment is calculated as follows: assuming a Base Salary of $330,000.00 and a Norm Bonus of 50%, the total payment would be 2 x ($330,000.00 + $165,000.00) = $990,000.00. The Severance Payment will be paid in equal installments over the 24 month period following such termination of employment in accordance with the standard payroll practices of Employer. The termination of Employee's employment due to the occurrence of the Normal Termination Date shall not entitle Employee to receive any Severance Payment pursuant to this Agreement, except as may be payable pursuant to Section 7.7, below. All other benefits due Employee following Employee's termination of employment by Employer without Cause or for Good Reason shall be determined in accordance with the plans, policies and practices of Employer. For purposes of this Agreement "Good Reason" means any of the following actions taken by Employer without Employee's consent: (i) the failure of Employer to pay compensation due to Employee; (ii) substantial diminishment in the responsibilities or authority of Employee from that set forth in Section 2 hereof, including no longer serving on the Board of Directors, which diminishment in responsibilities or authority is uncorrected for a period of 30 days 10 11 following receipt by the Employer of written notice thereof from the Employee; (iii) Employee no longer retaining his position as Chief Executive Officer (or a position of equivalent title) of the Company (or a successor business); (iv) relocation of Employer's executive offices or of Employee's primary workplace outside of the United States. 7.2 Resignation of Employee. In the event that Employee resigns or otherwise terminates his employment with Employer for any reason (other than due to Disability, death or for Good Reason) during the Employment Term (a "Voluntary Termination"), Employee shall be entitled to receive his Base Salary earned through the date of such Voluntary Termination, and, except as otherwise expressly provided herein, all other rights of Employee hereunder shall terminate as of the date of Employee's resignation. In the event of a Voluntary Termination, the provisions of Sections 4 shall apply only for so long as Employer, in its sole discretion, continues to pay Employee an Elective Payment but in no event longer than two years. 7.3 Employee's Disability. In the event that Employee's employment is terminated by Employer or by Employee due to Employee's "Disability", as defined below, Employee shall be deemed to have been terminated by Employer without Cause. As used herein, "Disability" means any physical or mental ailment which substantially prevents Employee from performing the duties incident to Employee's employment with Employer which has continued for a period of six consecutive months or for an aggregate of six months in any 24-month period. 7.4 Death. (a) In the event that Employee dies during the Employment Term, Employee's estate shall be entitled to receive all salary and incentive bonuses earned and accrued through the date of death (including a pro rata portion of any incentive bonus payable for the year in which Employee's death occurs which shall be payable at the time such bonus would 11 12 have otherwise been payable had Employee not died), as well as any other benefits payable under any then-current life insurance policy provided to Employee pursuant to Section 3.4 hereof, but all other rights of Employee hereunder shall terminate. (b) If at the time of Employee's death, the stock of the Employer is not publicly traded on any nationally recognized exchange, including NASDAQ, then, at the request of Employee's Estate, Employer will redeem all (or such lesser part as may be requested by Employee's estate) of the stock of the Employer then owned by Employee's estate, including stock attributable to the Employee's In the Money Options, in exchange for a cash payment equal to the fair value per share (without any adjustment based on a discount for illiquidity or related to a minority interest) as determined by George K. Baum & Company. For the purposes of this paragraph, "In the Money Options" means the options to acquire Employer stock owned by Employee at the time of his death, if the redemption price per share, as determined above, exceeds the exercise price for such options. Employer will make a payment equal to the net value of those In the Money Options exercised hereunder, in lieu of a payment for the underlying stock. The Employee's estate must exercise the rights set forth in this paragraph within one hundred twenty (120) days from the date of Employee's death, or otherwise Employee's estate waives the right to require the Employer to redeem the Employee's stock and in the Money Options under this paragraph. (c) Nothing in Section 7.4(b) to the contrary, it is understood and agreed that the obligation of the Employer to pay a lump sum to re-purchase stock is subject to the Employer's financial ability to do so. The determination as to the Employer's financial ability to do so shall be determined by the Board, exercising its reasonable business judgment in good faith. If the Board determines that the Employer is not able to pay in a lump sum the 12 13 amount needed to re-purchase the stock options as described above at the time such re-purchase is called for by Section 7.4(b), then the Employer shall act in good faith to re-purchase as many of said shares as possible in a lump sum and, to the fullest extent permissible under other debt instruments of Employer, will deliver a negotiable promissory note for the remaining amount due, which note will bear interest at Kansas City prime rate plus 1% and require monthly payments of principal and interest that will fully amortize the balance of the note over a term of not more than five years. The payee or payees of the note will be required to deliver the shares to be re-purchased by such note only as payments are made. 7.5 Change of Control. (a) For purposes of this Agreement, "Change of Control" means any one of the following (i) any person or group (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act")), other than Morgan Stanley Leverage Equity Fund II, L.P. ("MSLEF") or any of MSLEF's Permitted Transferees (as defined in the Employer's October 30, 1992 Shareholders' Agreement, as amended, (herein the "Shareholders' Agreement")) or any group consisting solely of such persons, acquiring beneficial ownership of 50% or more (30% or more once the ownership of MSLEF and its Permitted Transferees is 10% or less of Employer's outstanding Common Stock) of the Employer's then outstanding Common Stock or 50% or more (30% or more once the ownership of MSLEF and its Permitted Transferees is 10% or less of Employer's outstanding Common Stock) of the combined voting power of the Employer's then outstanding securities entitled generally to vote for the election of the Employer's Directors; (ii) the consummation of the merger or consolidation of the Employer with any other corporation, other than a merger with a wholly-owned subsidiary, the sale of substantially all of the assets of the Employer or the liquidation or dissolution of the 13 14 Employer, unless, in the case of a merger or consolidation, (x) Continuing Directors will constitute at least majority of the Board of Directors 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 Employer outstanding immediately prior thereto represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than a majority of the combined voting power of the voting securities of the Employer 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 Employer immediately prior to the transaction in substantially the same proportions as such holders owned such voting securities immediately prior to the transaction; or (iii) Continuing Directors no longer constitute at least a majority of the Board or a similar body of any successor to the Employer. (b) "Continuing Directors means any individual who either (i) is a member of the Employer's Board of Directors on the Effective Date (the "Incumbent Directors"), (ii) becomes a director after the Effective Date whose election or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the Continuing Directors (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as nominee for director, without objection to such nomination), or (iii) is designated by any party pursuant to its rights under Section 2.1 of the Shareholders' Agreement. 7.6 Stock Options. The Employer has awarded to Employee a number of Options to acquire Common Shares of the Employer under stock option agreements dated October 31, 1992, July 1, 1995, and April 15, 1997 (collectively, the "Webster Option Agreements") which are subject to the American Italian Pasta Company 1992 Stock Option Plan 14 15 (the "Plan"). Employer desires to and does hereby amend the Webster Option Agreements to waive the Employer's rights under (i) each option and Section 6(g)(ii) of the Plan to repurchase the Employee's vested Options following his termination of employment for any reason, other than by the Employer for Cause or due to a Voluntary Termination and (ii) Section 6(h) of the Plan to repurchase all Common Shares acquired by the Employee upon exercise of Options granted under the Plan before a Public Offering, provided the Employee was not terminated by the Employer for Cause or due to a Voluntary Termination, in which case Employer retains all rights to repurchase those Common Shares. Notwithstanding anything to the contrary herein or in the Plan, all of the stock options awarded to Employee under the Webster Option Agreements and subsequent stock option grants immediately vest (i) upon a termination of Employee by the Employer without Cause or by Employee for Good Reason, (ii) if Employer allows the term of this Employment Agreement (or any renewal or extension thereof) to expire without offering Employee a new employment agreement on terms no less favorable to Employee than those in this Agreement, or (iii) upon a Change of Control, at and to the extent of Employee's choice. In addition, notwithstanding anything to the contrary herein, in the Plan, or in any option agreement issued to Employee by Employer, all stock option grants awarded to Employee under the Webster Option Agreements and subsequent stock option grants shall, to the extent vested at the time of any termination of Employee's employment with Employer for any reason whatsoever, not be subject to any forfeiture, lapse or reduction in time to exercise. This Section 7.6. will in all cases be construed as an amendment to the Webster Option Agreements. 7.7 Applicability of Section 4 upon Expiration of Agreement. In the event that on or before March 31, 2002, Employer and Employee have not agreed to an extension of this Agreement or to a new employment agreement to take effect upon the termination of this 15 16 Agreement, Employer shall have a period of 48 hours within which to notify Employee that Employer elects to have the provisions of Section 4 be applicable after the Normal Termination Date. If Employer makes such election, it may do so only for the full two year period and must pay an Elective Payment periodically throughout the full two year period. If Employer does not make such election on a timely basis, the provisions of Section 4 shall be null and void from and after the Normal Termination Date. 8. Miscellaneous. 8.1 Assignment of Employee Benefits. Absent the prior written consent of Employer, and subject to will and the laws of descent and distribution, Employee shall have no right to exchange, convert, encumber, or dispose of the rights of Employee to receive benefits and payments under this Agreement, which payments, benefits, and rights thereto are non-assignable and non-transferable. 8.2 Burden and Benefit. This Agreement shall be binding upon, and shall inure to the benefit of, Employer and Employee, their respective heirs, personal and legal representatives, successors and assigns. 8.3 Governing Law. In view of the fact that the principal office of Employer is located in the State of Missouri, it is understood and agreed that the construction and interpretation of this Agreement shall at all times and in all respects be governed by the laws of the State of Missouri. 8.4 Severability. It is expressly understood and agreed that although Employee and Employer consider the restrictions contained in this Agreement to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against 16 17 Employee, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 8.5 Headings. The headings of the Sections of this Agreement are for reference only and not to limit, expand, or otherwise affect the contents of this Agreement. 8.6 Entire Agreement; Modification. Except as to Employer's applicable Stock Option Plan, any instrument relating to an Option granted thereunder and written agreements signed by both of the parties hereto from time to time after the date hereof, this Agreement contains the entire agreement and understanding by and between Employer and Employee with respect to the employment herein referred to, and any representations, promises, agreements, or understandings, written or oral, not herein contained shall be of no force or effect. It is expressly understood and agreed by the parties hereto that the Letter Agreement dated August 20, 1991 relating to payments in the event of sale or a change in control of Employer has been terminated and shall have no force or effect. No change, waiver or modification of any provision of this Agreement shall be valid or binding unless the same is in writing and duly executed by both parties and no evidence of any waiver or modification shall be offered or received in evidence of any proceeding, arbitration, or litigation between the parties hereto arising out of or affecting this Agreement, or the rights or obligations of the parties hereunder, unless such waiver or modification is in writing, duly executed as aforesaid, and the parties further agree that the provisions of this Section 8.6 may not be waived except as set forth herein. 17 18 8.7 Waiver of Breach. The waiver by Employer of a breach of any provision of this Agreement by Employee shall not operate or be construed as a waiver of any subsequent breach by Employee. 8.8 Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the execution page of this Agreement, provided that all notices to Employer shall be directed to the attention of the Board with a copy to the Secretary of Employer, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 8.9 Withholding Taxes. Employer may withhold from any amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. 8.10 Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 8.11 Mitigation. The Employee shall have no duty to attempt to mitigate the level of benefits payable by the Employer to him hereunder other than as required pursuant to the benefit plans of Employer and Employer shall not be entitled to set off against the amounts payable hereunder any amounts received by the Employee from any other source including any subsequent employer. 18 19 8.12 Enforcement Costs. In the event Employee deems it necessary to seek counsel or to institute legal proceedings to enforce his rights hereunder, Employer shall pay all professional fees and expenses incurred by the Employee related thereto in the event Employee substantially prevails in his claim or litigation and, in any event, Employer shall reimburse Employee for up to $10,000 of such fees and expenses. 8.13 Loan Deferral. So long as Employee is subject to any restrictions on his ability to transfer any shares of Common Stock owned by him pursuant to the Shareholders' Agreement or any "lock-up" or "hold back" agreement entered in connection with the Offering, all payment obligations otherwise existing under any loans to Employee from Employer shall be deferred and shall be added to the principal amount of such loans and the lengths of said loans shall be extended one payment period for each deferred payment. 8.14 Savings Clause. Although the parties do not intend that any payments provided hereunder are to be related to a change in control of Employer, as defined in the Internal Revenue Code of 1986 (the "Code"), nevertheless, if any payment or the receipt of any benefit under this Agreement shall be deemed to constitute an "excess parachute payment" as such term is described in Section 280G of the Code, so as to result in the loss of a deduction to Employer under Code Section 280G or the imposition of an excise tax on Employee under Code Section 4999, or any successor sections thereto, then the amounts payable or the benefits provided under this Agreement shall be reduced to the minimum extent necessary so that no such deduction will be lost by Employer and no such excise tax will be imposed on Employee. 19 20 IN WITNESS WHEREOF, Employer and Employee have duly executed this Agreement as of the day and year first above written. EMPLOYER: AMERICAN ITALIAN PASTA COMPANY, a Delaware Corporation 1000 Italian Way Excelsior Springs, Missouri 64024 By /s/ Horst W. Schroeder --------------------------------------- Horst W. Schroeder Chairman EMPLOYEE: /s/ Timothy S. Webster ---------------------------------------- Timothy S. Webster 2501 West 67th Street Shawnee Mission, KS 66208 20 EX-10.6 9 EMPLOYMENT AGREEMENT/COMPANY - HORST W. SCHROEDER 1 EXHIBIT 10.6 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement"), made and entered into as of September 30, 1997, by and between American Italian Pasta Company, a Delaware corporation (the "Company") and Horst W. Schroeder ("Mr. Schroeder"), will become effective on the date that the Company's initial public offering of common stock is consummated (hereinafter the "Effective Date"). WITNESSETH: WHEREAS, the Company and Mr. Schroeder are parties to an Employment Agreement dated as of January 1, 1996 (the "1996 Employment Agreement") and the parties desire, as of the Effective Date, to terminate and supersede the 1996 Employment Agreement in its entirety; and WHEREAS, prior to the Effective Date the Company desires to continue to employ Mr. Schroeder and he desires to continue to be employed by the Company on the terms set forth in the 1996 Employment Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term. The Company hereby employs Mr. Schroeder for an initial term commencing on the Effective Date, and terminating three (3) years from the Effective Date, but in no event later than December 31, 2000; unless the initial term is extended or renewed by mutual agreement in writing of the parties hereto or this Agreement is earlier terminated pursuant to Section 5 hereof (collectively the "Term"). In the event one of the parties wishes to extend or renew the Term it will so notify the other party at least ninety (90) days prior to the date on which the Agreement would otherwise terminate so that the parties may enter into discussions regarding such renewal or extension. 2. Position and Responsibilities. Mr. Schroeder will serve as a Director and the Chairman of the Board of the Company and render such advice and services to the Company during the Term as may be reasonably required by the Company in accordance with this Agreement, including but not limited to the following: a. Serve on all key committees of the Board of Directors, except as may be prohibited, deemed inadvisable or as may create adverse consequences to the Company or its employees under applicable securities laws, tax laws, stock exchange regulations, or any other applicable law, rule or regulation, as determined by the Company's legal counsel. b. Counsel and assist the Company's management in the development, implementation and control of the Company's business objectives and strategies to further the profitable growth of the Company. 1 2 c. Assist in developing and implementing operational and marketing strategies which will support the Company's business growth plan. d. Assist and counsel the Company's management in all matters related to the implementation of the Company's business plan. The Company agrees to give reasonable advance notice to Mr. Schroeder regarding the anticipated timing and duration of the services needed and understands and agrees that in no event shall Mr. Schroeder's physical presence be required to render services to the Company for more than an aggregate of fifty (50) days in each calendar year during the Term. It is expressly understood and agreed by the parties hereto that any request for services in addition to the foregoing limitations shall be subject to Mr. Schroeder's availability. In rendering his services to the Company, Mr. Schroeder shall report directly to the Company's Board of Directors. 3. Compensation. a. Base Compensation. As base compensation ("Base Compensation"), the Company shall pay Mr. Schroeder $4,000.00 per day ("the Daily Rate") for each day of service rendered to the Company; provided, however, that in the event Mr. Schroeder is willing and able to render services but the Company does not request services which aggregate thirty (30) days for any given calendar year, then, the Company shall pay Mr. Schroeder for a minimum of thirty days in said calendar year. Within a reasonable time after the end of each calendar quarter, Mr. Schroeder will provide the Company a written statement describing the services rendered during the said calendar quarter and within fifteen (15) days after receipt of said written statement, the Company shall pay Mr. Schroeder for said services. In the event the Company does not request at least thirty (30) days of service from Mr. Schroeder during a given calendar year, then, on or before the last business day of said calendar year, the Company shall pay Mr. Schroeder an amount equal to the Daily Rate times the number of days fewer than thirty for which services were not rendered because they were not requested by the Company. b. Signing Bonus. Upon execution of the 1996 Employment Agreement, the Company paid a signing bonus to Mr. Schroeder in the amount of Three Hundred Thirty Thousand Dollars ($330,000). In the event that Mr. Schroeder does not fulfill his obligation to render services to the Company for the full term of the 1996 Employment Agreement, which commenced on January 1, 1996, and would have expired on December 31, 1998 (the "Original Term"), because: (i) he voluntarily terminates this Agreement (for a reason other than those permitted in Section 5(c) hereof) or breaches this Agreement by refusing to provide the services to be rendered hereunder, or (ii) he is terminated for Cause as defined in this Agreement, then he shall repay to the Company that portion of the signing bonus which relates to the period of the Original Term for which he does not render services. The amount of the repayment shall be based on the assumption that Mr. Schroeder will render a minimum of thirty (30) days of services in each calendar year during the Original Term. Therefore, for each day of service rendered less than thirty in each year during the Original Term, Mr. Schroeder will repay $3,666.67 to the Company. As an example and solely for purposes of illustration: If Mr. 2 3 Schroeder is terminated for Cause after rendering ten (10) days of service in 1998, then he would repay the sum of $73,333.40 ($3,666.67 x 20 days for 1998). For purposes of this Section 3(b), the cessation of services by Mr. Schroeder because of his death or Disability (as defined in Section 5(a) below) shall not be deemed to be a voluntary termination of this Agreement or a refusal to provide the services to be rendered hereunder and therefore would not create a repayment obligation by him or his estate. c. Bonuses. During the Term of this Agreement, Mr. Schroeder will be entitled to participate in an equitable manner with other senior executive employees of the Company in discretionary bonuses authorized and declared from time to time by the Board of Directors or its Compensation Committee. In addition, Mr. Schroeder will be entitled to participate in the Company's 1996 Salaried Employee Bonus Plan (the "Bonus Plan") attached hereto as Exhibit A, as the same may be amended, modified or terminated. The "norm bonus" under the Bonus Plan will be in an amount equal to 50% of Mr. Schroeder's Base Compensation and the Bonus Plan will have a "target bonus" equal to up to 75% of Mr. Schroeder's Base Compensation. d. Withholdings. All payments due under this Agreement will be subject to the required and customary employment tax and income tax withholdings. 4. Expense Reimbursement. The Company shall reimburse Mr. Schroeder for necessary and reasonable business expenses incurred in connection with the performance of duties hereunder. Mr. Schroeder shall provide an invoice to the Company for such expenses at the end of the quarter in which such expenses were incurred. The Company shall, subject to its normal review and approval policies and procedures, pay such invoice of Mr. Schroeder not later than on the due date stated therein which date shall not be less than fifteen (15) days after the date such invoice was provided to the Company. 5. Termination. a. Death or Disability. If Mr. Schroeder is prevented from providing the services or performing the assignments herein contemplated due to his illness, incapacity or injury for a period of sixty (60) consecutive days or sixty (60) days in the aggregate in any 6 month period ("Disability") or his death, the Company may terminate this Agreement immediately by giving written notice to such effect. Upon the death or Disability of Mr. Schroeder, the Company shall pay to him or his designated beneficiary or estate all amounts due and unpaid for services rendered prior to his death or Disability. b. Termination of Employment by Company for Cause. The Company may also terminate this Agreement for "Cause" (as defined below). Upon termination for Cause, the Company will pay to Mr. Schroeder all amounts due and unpaid for services rendered prior to termination. The Term shall be terminated effective the date of such termination for Cause and, except as provided in the foregoing sentence, no further amounts shall be payable hereunder. For purposes of this Agreement, "Cause" shall mean (i) Mr. Schroeder's willful and continued failure substantially to perform its or his duties hereunder (other than as a result of Disability 3 4 or death of Mr. Schroeder); (ii) an act or acts on Mr. Schroeder's part constituting a felony under the laws of the United States or any state thereof; (iii) the willful engaging by Mr. Schroeder in conduct that is significantly injurious to the Company, monetarily or otherwise, after a written demand for cessation of such conduct is delivered to him by the Board, which demand specifically identifies the manner the Board believes he has engaged in such conduct and the injury to the Company resulting therefrom; or (iv) the breach by Mr. Schroeder of any of the covenants in Sections 6 and 7 of this Agreement. c. Termination of Employment by Mr. Schroeder for Good Reason. Mr. Schroeder may resign and terminate this Agreement for "Good Reason" by giving written notice to the Company. For purposes of this Agreement, "Good Reason" shall mean any of the following reasons: (i) the Company willfully fails to pay an amount due under this Agreement after Mr. Schroeder has provided written notice to the Company of such failure; (ii) the occurrence without Mr. Schroeder's written consent of a Change of Control (as defined in the October 30, 1992 Shareholders Agreement by and among the Company, Mr. Schroeder, The Morgan Stanley Leveraged Equity Fund, L.P. and the other parties thereto); or (iii) there occurs a significant strategic disagreement between Mr. Schroeder and a majority of the members of the Board of Directors of the Company involving: (a) the CEO position, (b) a Significant Strategic Alliance (as defined below) or other fundamental change in the nature of the Company's business, (c) removal by the Company of Mr. Schroeder as Chairman of Board of Directors other than for Cause, or (d) removal by the Company of Mr. Schroeder from any key committee of the Board of Directors other than for Cause (except as provided in Section 2(a) hereof). If Mr. Schroeder terminates this Agreement for Good Reason, Mr. Schroeder shall no longer be obligated to provide any services to the Company and shall be entitled to receive a prompt payment of all amounts due for service rendered but not yet paid, and an amount equal to: (ii) the unpaid balance due for the remainder of the Term; and (iii) an additional payment equal to $2,000 multiplied by the number of days of service remaining under the Term (but in no event shall such number of days of service exceed thirty (30) days for any calendar year during the Term). As an example and solely for purposes of illustration: If Mr. Schroeder terminates employment for Good Reason after rendering ten (10) days of service in 1998, the Company will pay Mr. Schroeder the additional sum of $120,000 (the sum of $4,000 x 20 days, and $2,000 x 20 days for 1998), plus an additional sum for each additional year remaining under the Term of this Agreement, calculated based upon the formula set forth in this paragraph and based upon a minimum of thirty (30) days of service in each year. Furthermore, upon termination of this Agreement for Good Reason by Mr. Schroeder, the unvested portion of the Options granted pursuant to the Plans shall accelerate and become immediately vested ("Options" and "Plans" are defined in Section 12(b)). For purposes of this Agreement, the parties agree that "Significant Strategic Alliance" shall mean a significant strategic alliance of a magnitude similar to the recently completed long term supply agreement and related financing with CPC International Inc. 4 5 6. Non-Competition. During, and for the two year period following termination of the Term Mr. Schroeder will not, without the prior written consent of the Board, directly or indirectly be or remain employed or retained by, or consult with or render any services for any person, firm, partnership, joint venture, limited liability company, association, corporation or other business organization, entity or enterprise engaged in any business, which is competitive with the business in which the Company or any of its subsidiaries or affiliates is engaged at any time during the Term, it being expressly understood and agreed by the Company that (i) the foregoing limitation shall not prohibit or otherwise constrain or apply to Mr. Schroeder's provision of consulting and other business advisory services to any affiliate of Morgan Stanley, Dean Witter, Discover & Co., and (ii) to the extent consistent with the foregoing, Mr. Schroeder may provide consulting services to other clients which do not compete, directly or through one or more subsidiaries or affiliates, in any way with any business in which the Company or any of its affiliates or subsidiaries is engaged provided such services do not interfere with the services to be provided hereunder. 7. Confidentiality. During and after the Term, Mr. Schroeder will not disclose or use for his own benefit or purposes or the benefit or purposes of any other person, firm, partnership, joint venture, limited liability company, association, corporation or other business organization, entity or enterprise other than the Company and any of its subsidiaries or affiliates, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, or the business and affairs of the Company generally, or of any subsidiary or affiliate of the Company; provided that the foregoing shall not apply to information which is not unique to the Company or which is generally known to the industry or the public other than as a result of Mr. Schroeder's breach of this Agreement. Mr. Schroeder agrees that upon termination of the Term for any reason, he will return to the Company immediately all memoranda, books, manuals, training materials, records, computer software, papers, plans, information, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Company and its affiliates, except that Mr. Schroeder may retain personal notes, notebook and diaries. Mr. Schroeder further agrees that he will not retain or use for his account at any time any trade names, trademark or other proprietary business designation used or owned in connection with the business of the Company or its affiliates. 8. Specific Performance; Other Actions. Mr. Schroeder acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Section 6 or Section 7 would be inadequate and, in recognition of this fact, Mr. Schroeder agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. 9. Employee Benefit. The Company agrees to seek to have Mr. Schroeder included and covered by the Company's medical and other employee benefit plans to the extent he satisfies the eligibility requirements of the applicable plans and insurers. 5 6 10. Indemnity; Fees and Expenses. The Company agrees to hold harmless Mr. Schroeder for all acts or decisions made by him in good faith related to his performance of services hereunder. The Company agrees to pay any and all reasonable legal fees and related expenses incurred by Mr. Schroeder in connection with entering into and performing services under this Agreement. The Company will use its reasonable best efforts to obtain coverage for Mr. Schroeder under any insurance policy now in force or hereinafter obtained during the term of this Agreement covering the Company against liability from claims or causes of action which arise as a result of or with respect to this Agreement; provided, however, it is understood by each of the parties hereto that the Company does not currently have insurance coverage for its directors and officers and is not required to obtain such insurance. If, however, the Company obtains such insurance coverage and Mr. Schroeder serves as a director or officer of the Company, Mr. Schroeder will be included as an insured party in his capacity as such. 11. Stock Options. Upon the Effective Date of this Agreement, the Company shall grant Mr. Schroeder additional Options under the 1997 Plan (as defined in Section 12b) to acquire additional shares of the Company's common stock, said additional shares to be equal to at least 2.0% of the Company's aggregate outstanding common stock (on a fully diluted basis) immediately prior to the public offering (the "Additional Options"). The exercise price of the Additional Options shall be the price at which the Company's common stock is sold to the public in the public offering. Three-fourths (3/4) of the Additional Options will vest on the first anniversary date of the Effective Date of this Agreement; provided that, in no event will such three-fourths (3/4) portion of the Additional Options vest later than December 31, 1998. The remaining one-fourth (1/4) of the Additional Options will vest as follows: One-eighth (1/8) of the Additional Options will vest on the second and third anniversary date of the Effective Date of this Agreement. The Additional Options will be exercisable over a ten-year period following each portion of the Additional Option's respective vesting dates. The Additional Options shall be adjustable for any recapitalization which is a part of the public offering. 12. Miscellaneous. a. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Missouri. b. Entire Agreement; Amendments. This Agreement supersedes any and all prior understandings and agreements between the parties with respect to the subject matter referred to herein, it being understood that all Option Agreements granting Options (the "Option Agreements") to Mr. Schroeder pursuant to the American Italian Pasta Company 1992 Stock Option Plan or the American Italian Pasta Company 1997 Stock Option Plan (the "1997 Plan") (collectively, the "Plans") shall remain in full force and effect. This Agreement contains the entire understanding of the parties with respect to the Company's employment of Mr. Schroeder. Except as provided in the Plans, the Option Agreements, and the Shareholder's Agreement between the Company and the shareholders thereto, dated ____________________________, 1997, there are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth 6 7 herein. This Agreement may not be altered, modified or amended except by written instrument signed by each of the parties hereto. c. No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. d. Severability. If any one or more of the provisions of this Agreement are or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be affected thereby. e. Assignment. This Agreement may not be assigned by Mr. Schroeder except with respect to his rights to receive payments under Section 3 hereof and may be assigned by the Company only with the consent of Mr. Schroeder; provided that no such assignment by the Company shall relieve the Company of any liability hereunder, whether accrued before or after such assignment. f. Arbitration. Any dispute between the parties to this Agreement arising from or relating to the terms of this Agreement or any dispute between the Company and Mr. Schroeder shall be submitted to arbitration in Missouri under the auspices of the American Arbitration Association. g. Successors; Binding Agreement. The Company shall seek to cause any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or the assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, representatives, successors and assigns. h. Notice. For the purposes of this Agreement, notices and all other communications (including invoices) provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the execution page of this Agreement; provided that all notices to the Company shall be directed to the attention of the Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. i. Headings. The headings used in this Agreement are for convenience only and shall not affect the meaning of or be used to interpret any provisions herein. 7 8 j. Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. AMERICAN ITALIAN PASTA COMPANY /s/ T.S. Webster ----------------------------------- Name: Timothy S. Webster Title: President 1000 Italian Way Excelsior Springs, Missouri 64024 HORST W. SCHROEDER /s/ Horst W. Schroeder ----------------------------------- 31 Battery Road Hilton Head, South Carolina 29928 8 EX-10.7 10 EMPLOYMENT AGREEMENT/COMPANY - DAVID E. WATSON 1 EXHIBIT 10.7 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement"), dated September 30, 1997, is made effective for all purposes and in all respects as of the Effective Date (as defined below), by and between AMERICAN ITALIAN PASTA COMPANY, a Delaware corporation (hereinafter referred to as "Employer"), and DAVID E. WATSON, an individual (hereinafter referred to as "Employee") and supersedes any and all prior oral or written agreements between the parties with respect to the subject matter hereof. RECITALS A. Employer is engaged in the business of Durum wheat milling and pasta production/marketing and maintains its principal place of business at 1000 Italian Way, Excelsior Springs, Missouri 64024. B. In connection with such business, Employer desires to continue to employ Employee in the capacity of Executive Vice President and Chief Financial Officer. C. Employee desires to continue to be employed by Employer in the aforesaid capacity. NOW, THEREFORE, based on the Recitals set forth above, which are incorporated herein by this reference, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and based on the mutual promises herein contained, the parties hereby agree as follows: 1. Term of Employment. Subject to the provisions of Section 7 hereof, Employee's term of employment by Employer under this Agreement (the "Initial Employment Term") shall commence on the date Employer's initial public offering (the "Offering") of its Class A Convertible Preferred Common Stock, par value $.001 per share (the "Common Stock") is consummated (the "Effective Date") and terminate on the date that is three years after the Effective Date, provided, however, that the term of Employee's employment shall be extended automatically for successive one-year periods unless not later than six months prior to such automatic extension Employer shall have given written notice to the contrary (each an "Additional Term"). The period of time between the Effective Date and the termination of the Initial Employment Term or the last Additional Term, if any, is referred to herein as the "Employment Term." 2. Duties of Employee. 2.1 In accepting such employment, Employee shall undertake and assume the responsibility of performing for and on behalf of Employer such duties as shall be assigned to Employee by Employer at any time and from time to time. It is understood and agreed that Employee's principal duties on behalf of Employer at the date of execution hereof are and shall 2 be overall direction of financial, administrative, and logistical functions; it is further understood and agreed that any modification in or expansion of Employee's duties hereunder shall not, unless specifically agreed to by Employee in a duly-executed amendment of this Agreement in accordance with Section 10.6 hereof, result in any modification in, increase or decrease of, Employee's compensation referred to in Section 3 hereof. 2.2 Employee will, at all times, faithfully, industriously, and to the best of his ability, experience and talents, perform all of the duties that may be required of and from Employee pursuant to the express and implicit terms hereof, to the reasonable satisfaction of Employer. 2.3 Employee shall devote substantially all of his professional time, attention, knowledge and skills solely to the business and interests of Employer; provided, however, that Employee shall be entitled annually to a vacation, in accordance with Employer's policies then in effect and Employer shall be entitled to all of the benefits, profits and other issues arising from or incident to all professional work, services and advice of Employee. 3. Compensation. Employer shall pay Employee, and Employee shall accept from Employer, in payment for Employee's services rendered to Employer hereunder an annual base salary ("Base Salary") which from the Effective Date through December 31, 1998 shall be equal to One Hundred Eighty Thousand Dollars ($180,000). Such Base Salary shall be subject to merit increase reviews, in the sole discretion of the Board, at least annually by Employer. Such salary shall be paid in equal bi-weekly installments. 3.1 Bonuses. During the term of this Agreement, Employee will be eligible to participate in, and bonuses may be awarded to Employee at the discretion of the Board of Directors in accordance with the terms of Employer's 1996 Salaried Bonus Plan (the "Bonus Plan") attached hereto as Exhibit A, as the same may be amended, modified or terminated from time to time. 3.2 Reimbursement of Business Expenses. Reasonable travel, entertainment and other business expenses incurred by Employee in the performance of his duties hereunder shall be reimbursed by Employer in accordance with Employer's policies on terms no less favorable than those policies in effect immediately prior to the date hereof. 3.3 Automobile Allowance. Employee shall be entitled to an annual automobile allowance of Four Thousand Eight Hundred Dollars ($4,800), payable in monthly installments, to reimburse him for the expenses incurred by him in maintaining and operating an automobile used by him in connection with the performance of his duties hereunder. 3.4 Benefits. Employee shall be entitled to participate in an equitable manner with other senior executive employees of Employer in all welfare benefit, incentive compensation or other plans or arrangements authorized, adopted and maintained from time to time by Employer, including, without limitation, the following: profit sharing plan, medical reimbursement plan, 2 3 group life insurance plan, medical and dental insurance plan, and long-term disability or income plan, if in effect with Employer. In addition, within six months of the Effective Date, Employer shall adopt a group disability insurance plan, pursuant to which Employer shall provide to Employee long-term disability insurance at a cost to Employee not to exceed fifty percent (50%) of his individual premiums payable under such plan. If Employer shall not have adopted a group disability insurance plan within six months of the Effective Date, Employer shall alternatively provide to Employee individual long-term disability insurance on terms mutually agreeable to Employer and Employee at a cost to Employee equal to fifty percent (50%) of the premiums payable under such individual policy; provided Employer can maintain such a policy on the life of Employee without any substantial increase in the standard premiums from those as of the date hereof due to any "rating" of the Employee; and further provided that if there is such a substantial increase, Employee shall have the right to pay such increase personally and Employer would then maintain such insurance. 3.5 Grant of Stock Options. Pursuant to the terms and conditions of the American Italian Pasta Company 1997 Equity Incentive Plan (the "Plan") and the Stock Option Agreement, by and between Employer and Employee dated as of the Effective Date, upon the Effective Date, Employer will grant to Employee an option to purchase 61,320 shares of Common Stock. The option price will be equal to the per share price at which the Common Stock is sold to the public in the Offering. 4. Non-Competition. 4.1 Employee acknowledges and recognizes the highly competitive nature of the business of Employer and its affiliates and accordingly agrees as follows: during the Employment Term and until the date that is one year after the date that Employee ceases employment with Employer (such term period hereinafter referred to as the "Noncompetition Period"), Employee will not, within the United States of America, directly or indirectly, own, manage, operate, control, be employed by or be connected in any manner with the ownership (other than passive investments of not more than one percent of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), management, operation, or control of any business engaged in the production and/or marketing of dry pasta for human consumption. Notwithstanding any provision of this Agreement to the contrary, if Employee is employed by Employer, any breach of the provisions of this Section 4.1 shall permit Employer to terminate the employment of Employee for Cause (as defined below), and, whether or not Employee is employed by Employer, from and after any breach by Employee of the provisions of this Section 4.1, Employer shall cease to have any obligations to make payments to Employee under this Agreement. 4.2 During the Noncompetition Period, Employee will not directly or indirectly induce any employee of Employer or any of its affiliates to engage in any activity in which Employee is prohibited from engaging by Section 4.1 above or to terminate his employment with Employer or any of its affiliates, will not directly or indirectly assist others in engaging in any of the activities in which Employee is prohibited from engaging by Section 4.1 above, and will not 3 4 directly or indirectly employ or offer employment to any person who was employed by Employer or any of its affiliates unless such person shall have ceased to be employed by Employer or any of its affiliates for a period of at least 12 months. 4.3 In addition to any payments Employer is required to make pursuant to Section 7 hereof, Employer and Employee hereby agree that Employer may, in its sole discretion, continue to pay to Employee his Base Salary during the Noncompetition Period. During such period of continued payment, if any, Employee agrees to be available, consistent with other responsibilities that he may then have, to answer questions and provide advice to Employer. 5. Confidentiality. Employee acknowledges that, in and as a result of his employment by Employer, he has been and will be making use of, acquiring and/or adding to confidential information of a special and unique nature and value relating to such matters as Employer's trade secrets, systems, procedures, manuals, confidential reports and lists of customers and/or other services rendered by Employer, the equipment and methods used and preferred by Employer's customers, and the prices paid by such customers. As a material inducement to Employer to enter into this Agreement, and to pay to Employee the compensation referred to in Section 3 hereof, including any additional benefits referred to in Section 3.3 hereof, Employee covenants and agrees that he shall not, at any time during or after the Employment Term, directly or indirectly, disclose, divulge or use, for his own benefit or purposes or the benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise other than Employer and any of its subsidiaries or affiliates, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, prices, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, or the business and affairs of Employer generally, or of any subsidiary or affiliate of Employer, provided, however, that the foregoing shall not apply to information which is not unique to Employer or which is generally known to the industry or the public other than as a result of breach of this covenant. Employee agrees that upon termination of his employment with Employer for any reason, he will return to Employer immediately all memoranda, books, manuals, training materials, records, computer software, papers, plans, information, letters and other data, and all copies thereof or therefrom, in any way relating to the business of Employer and its affiliates, except that he may retain personal notes, notebooks and diaries. Employee further agrees that he will not retain or use for his account at any time any trade names, trademark or other proprietary business designation used or owned in connection with the business of Employer or its affiliates. 6. Specific Performance. Employee acknowledges and agrees that Employer's remedies at law for a breach or threatened breach of any of the provisions of Section 4 or Section 5 would be inadequate and, in recognition of this fact, Employee agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, Employer, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. 4 5 7. Termination of Employment 7.1 Termination without Cause; Resignation for Good Reason. 7.1.1 General. Subject to the provisions of Sections 7.1.2 and 7.1.3, if Employee's employment is terminated by Employer without Cause, as defined in Section 7.3, or if Employee resigns from his employment for Good Reason, as defined in Section 7.4, Employer shall pay Employee his accrued unpaid Base Salary to the date of termination or resignation and any bonus earned but not paid and shall continue to pay Employee the greater of (i) his annual Base Salary as of the date of termination or resignation plus his bonus, if any, for the year in which such termination or resignation occurs (calculated as if the Norm Bonus for that year is earned) for a period of one (1) year following the date of termination or resignation, or (ii) if such termination or resignation occurs during the Initial Employment Term, the remaining portion of Employee's Base Salary plus his bonus, if any, for the year in which such termination or resignation occurs (calculated as if the Norm Bonus for that year is earned) for the Initial Employment Term (such period, as applicable, being referred to hereinafter as the "Severance Period"). The Base Salary shall be payable in bi-weekly payments during the Severance Period and the bonus shall be payable at the conclusion of the Severance Period. During the Severance Period, Employee shall also be eligible to participate on the same terms and conditions as in effect immediately prior to such termination or resignation in all health, medical, supplemental medical and life insurance plans or programs provided to Employee by Employer pursuant to Section 3.3 above ("Employee Welfare Plans") at the time of such termination or resignation and which are provided by Employer to its employees following the date of such termination or resignation; provided, however, that Employee's eligibility to participate in these Employee Welfare Plans shall end at such time as Employee becomes eligible to receive coverage under comparable programs of a subsequent employer. If, during the Severance Period, Employee is precluded from participating in any Employee Welfare Plan by its terms or applicable law, Employer will provide Employee with benefits that are reasonably equivalent to those which Employee would have received under such plan had Employee been eligible to participate therein. Anything to the contrary herein notwithstanding, Employer shall have no obligation to continue to maintain any Employee Welfare Plan during the Severance Period solely as a result of this Agreement. As an example and solely for purposes of illustration: If Employer were to terminate its dental insurance plan prior to or during the Severance Period, then Employer would have no obligation to maintain such plan or provide to Employee individual dental insurance in order to satisfy its obligations under this Section 7.1.1. 7.1.2 Mitigation. Employee will not be required to mitigate the amount of any payment provided for in Section 7.1.1 by seeking other employment, and the amount of any such payment will not be reduced by any compensation earned by Employee as the result of his employment by another employer subsequent to termination of Employee's employment with Employer. 7.1.3 Death During Severance Period. In the event of Employee's death during the Severance Period, the Severance Period shall immediately cease, Employer shall not 5 6 be obligated to make any further payments pursuant to this Section 7, and the provisions of Section 8.1 shall apply as though Employee's death had occurred immediately prior to termination of Employee's employment hereunder. 7.1.4 Date of Termination. The date of termination of employment without Cause shall be the date specified in a written notice of termination to Employee which in no case shall be more than 30 days following the date of notice. The date of resignation for Good Reason shall be the date specified in the written notice of resignation from Employee to Employer which in no case shall be more than 30 days following the date of notice. 7.2 Termination for Cause; Resignation Without Good Reason. 7.2.1 General. If Employee's employment hereunder is terminated by Employer for Cause, or if Employee resigns from his employment hereunder other than for Good Reason (a "Voluntary Termination"), Employee shall be entitled only to payment of his Base Salary earned through and including the date of termination or resignation. Employee shall have no further right to receive any other compensation, or to participate in any other plan, arrangement, or benefit, after such termination for Cause or resignation of employment other than for Good Reason. 7.2.2 Date of Termination. Subject to Section 7.3, the date of termination for Cause shall be the date of receipt by Employee of a written Notice of Termination provided for in Section 7.2.3. The date of resignation without Good Reason shall be the date specified in the written notice of resignation from Employee to Employer, or if no date is specified therein, 10 business days after receipt by Employer of written notice or resignation from Employee. 7.3 Cause. Termination for "Cause" means termination of Employee's employment because of (i) any willful and continued failure substantially to perform his duties hereunder (other than as a result of Permanent Disability, as defined below), (ii) Employee's failure to comply with any of the material terms of this Agreement, (iii) an act or acts on Employee's part constituting a felony under the laws of the United States or any state thereof, (iv) breach by Employee of any of the covenants contained in Sections 4 or 5 of this Agreement, or (v) any other willful act or omission on Employee's part which is materially injurious to the financial condition or business reputation of Employer or any of its subsidiaries of affiliates; provided, however, that if any such Cause relates to Employee's obligations under this Agreement and (x) is susceptible to cure, and (y) does not constitute a repetition of such Cause, Employer shall not terminate Employee's employment hereunder unless Employer first gives Employee a Notice of Termination, and Employee has not, within 15 business days following receipt of the notice, cured such Cause, or in the event such Cause is not susceptible to cure within such 15 business day period, Employee has not taken all reasonable steps within such 15 business day period to cure such Cause as promptly as practicable thereafter. For purposes of this Section 7.3, no act or failure to act on the part of Employee shall be deemed "willful" unless done, or omitted to be done, by Employee in bad faith and without reasonable belief that the act or omission of Employee was in the best interest of Employer. 6 7 7.4 Good Reason. For purposes of this Agreement, "Good Reason" means any of the following actions taken by Employer without Employee's prior written consent: (i) the continued failure of Employer to pay compensation due to Employee under this Agreement, which failure is uncorrected for a period of 15 days following receipt by Employer of written notice thereof from Employee; (ii) a material diminution in Employee's position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by Employer promptly after receipt of written notice thereof given by Employee; provided, however, that a mere change of Employee's title shall not constitute Good Reason so long as Employee continues to perform duties, functions and responsibilities substantially equivalent to those performed by him prior to such change of title; (iii) relocation of Employee's primary workplace to a location outside of the United States of America; and (iv) Employer's material failure or refusal to comply with the provisions of this Agreement, which failure or refusal to comply is uncorrected for a period of 15 days following receipt by Employer of written notice thereof from Employee. It is expressly understood and agreed by the parties hereto that Employer's failure to deliver a notification extending the Initial Employment Term as referred to in Section 1 of this Agreement shall constitute a termination without Cause. 7.5 Stock Options. Employer has awarded to Employee a number of options to acquire Common Shares under the Stock Option Agreements by and between Employer and Employee dated July 31, 1994 and July 1, 1995 (the "Watson Option Agreements") which are subject to the American Italian Pasta Company 1992 Stock Option Plan (the "Plan"). Employer desires to and does hereby amend the Watson Option Agreements to waive Employer's rights under (i) each option and Section 6(g)(ii) of the Plan to repurchase Employee's vested Options following his termination of employment for any reason, other than by the Employer for Cause or due to a Voluntary Termination, and (ii) Section 6(h) of the Plan to repurchase all Common Shares acquired by Employee upon exercise of options granted under the Plan before a Public Offering, provided Employee was not terminated by Employer for Cause or due to a Voluntary Termination, in which case Employer retains all rights to repurchase the Common Shares. Notwithstanding anything to the contrary herein or in the Plan, all of the stock options awarded to Employee under the Watson Option Agreements and subsequent stock option grants immediately vest (i) upon a termination by Employee for Good Reason, or (ii) upon a Change of Control (as defined below), at and to the extent of Employee's choice. 8. Death or Permanent Disability. 8.1 Death. If Employee's employment hereunder is terminated by death, Employer shall, within 90 days of the date of death, make (i) a lump sum payment to Employee's estate (or other beneficiary designated by him in writing) equal to all Base Salary and bonuses, if any, earned and accrued through the date of death, and (ii) any other benefits payable under any then-current life insurance policy provided to Employee pursuant to Section 3.3 hereof payable in accordance with the terms of such policy. Thereafter, Employer shall have no further obligation to Employee under the Agreement. 7 8 8.2 Permanent Disability. In the event Employee shall become physically or mentally disabled while employed by Employer under this Agreement so that Employee is unable to render the services provided for by this Agreement for a period of six consecutive months or for shorter periods aggregating six months during any 24-month period, or so that Employee has a Disability (as defined under Employer's then- current disability policy), Employer may, at any time after the last day of the six consecutive months of disability, the day on which the shorter periods of disability equal an aggregate of six months, or the day on which Employee is determined to have a Disability, terminate Employee's employment hereunder for "Permanent Disability" by written notice to Employee. Following such termination, Employee shall be entitled to received from Employer: (i) all Base Salary and bonuses, if any, accrued through the date of termination; and (ii) any other benefits payable under Employer's then-current disability policy, but all other rights of Employee hereunder shall terminate as of the date of Employee's termination. 9. Change of Control. 9.1 Notwithstanding anything to the contrary contained herein, if Employer terminates Employee without Cause upon or within six months following a Change of Control (as defined below), Employer shall pay Employee his accrued unpaid Base Salary to the date of termination and any bonus earned but not paid and shall continue to pay Employee the greater of (i): his annual Base Salary as of the date such termination occurs (calculated as if the Norm Bonus for that year is earned) for a period of one (1) year following the date of termination, or (ii) if such termination occurs during the Initial Employment Term, the remaining portion of Employee's Base Salary plus his bonus for the Initial Employment Term, if any, for the year in which such termination occurs (calculated as if the Norm Bonus for that year is earned), as severance pay (such period, as applicable, being referred to hereinafter as the "Change of Control Severance Period"). Any severance payable pursuant to this Section 9.1 will be in substitution for and not in addition to any severance that might be payable pursuant to Article 7 hereof. To the extent Employer makes payments pursuant to this Section 9.1, it will have no additional obligations under Article 7. The Base Salary shall be payable in bi-weekly payments during the Change of Control Severance Period and the bonus shall be paid at the conclusion of the Change of Control Severance Period. 9.2 For purposes of this Agreement, "Change of Control" means any one of the following: (a) any person or group (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act")) (other than MS Shareholders (as defined in Employer's Amended and Restated Shareholders' Agreement dated as of October 6, 1997) or any group consisting solely of such persons) acquiring beneficial ownership of more than 50% of Employer's then outstanding Common Stock or 51% or more of the combined voting power of the Employer's then outstanding securities entitled generally to vote for the election of the Employer's Directors; 8 9 (b) the consummation of the merger or consolidation of the Employer with any other corporation, other than a merger with a wholly-owned subsidiary, the sale of substantially all of the assets of the Employer, or the liquidation or dissolution of the Employer, 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 Directors 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 Employer outstanding immediately prior thereto represent (either by remaining outstanding or by 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 Employer 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 Employer immediately prior to the transaction in substantially the same proportions as such holders owned such voting securities immediately prior to the transaction; or (c) Continuing Directors (as defined below) no longer constitute at least a majority of the Board or a similar body of any successor to the Employer. For purposes of this Agreement, "Continuing Directors" means any individual who either (i) is a member of the Employer's Board of Directors on the Effective Date, (ii) who becomes a director after the Effective Date whose election or nomination for election by Employer's shareholders, was approved by a vote of at least a majority of the Continuing Directors (either by a specific vote or by approval of the proxy statement of Employer in which such person is named as nominee for director, without objection to such nomination), or (iii) is designated by any party pursuant to its rights under Section 2.1 of the Amended and Restated Shareholders' Agreement. 9.3 Excess Parachute Payments. If any payment or the receipt of any benefit under this Agreement shall be deemed to constitute an "excess parachute payment" as such term is described in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), so as to result in the loss of a deduction to the Employer under Code Section 280G or in the imposition of an excise tax on the Employee under Code Section 4999, or any successor sections thereto, then the amounts payable or the benefits provided under this Agreement shall be reduced to the minimum extent necessary so that no such deduction will be lost by the Employer and no such excise tax will be imposed on the Employee. The Employer, in its sole discretion, shall determine whether or not an "excess parachute payment" would otherwise occur and shall determine the amount and method of the foregoing reduction. 10. Miscellaneous. 10.1 Assignment of Employee Benefits. Absent the prior written consent of Employer, and subject to will and the laws of descent and distribution, Employee shall have no right to exchange, convert, encumber, or dispose of the rights of Employee to receive benefits and payments under this Agreement, which payments, benefits, and rights thereto are non-assignable and non-transferable. 9 10 10.2 Burden and Benefit. This Agreement shall be binding upon, and shall inure to the benefit of, Employer and Employee, their respective heirs, personal and legal representatives, successors and assigns. 10.3 Governing Law. In view of the fact that the principal office of Employer is located in the State of Missouri, it is understood and agreed that the construction and interpretation of this Agreement shall at all times and in all respects be governed by the laws of the State of Missouri. 10.4 Severability. It is expressly understood and agreed that although Employee and Employer consider the restrictions contained in this Agreement to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against Employee, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 10.5 Headings. The headings of the Sections of this Agreement are for reference only and not to limit, expand, or otherwise affect the contents of this Agreement. 10.6 Entire Agreement; Modification. Except as to the Employer's Stock Option Plans, any instrument relating to an Option granted thereunder and written agreements signed by both of the parties hereto from time to time after the date hereof, this Agreement contains the entire agreement and understanding by and between Employer and Employee with respect to the subject matter hereof, and any representations, promises, agreements, or understandings, written or oral, not herein contained shall be of no force or effect. No change, waiver or modification of any provision of this Agreement shall be valid or binding unless the same is in writing and duly executed by both parties and no evidence of any waiver or modification shall be offered or received in evidence of any proceeding, arbitration, or litigation between the parties hereto arising out of or affecting this Agreement, or the rights or obligations of the parties hereunder, unless such waiver or modification is in writing, duly executed as aforesaid, and the parties further agree that the provisions of this Section 10.6 may not be waived except as set forth herein. 10.7 Waiver of Breach. The waiver by Employer of a breach of any provision of this Agreement by Employee shall not operate or be construed as a waiver of any subsequent breach by Employee. 10.8 Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the execution page 10 11 of this Agreement, provided, however, that all notices to Employer shall be directed to the attention of the Board of Directors of Employer with a copy to the Secretary of Employer, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 10.9 Withholding Taxes. Employer may withhold from any amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. 10.10 Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, Employer and Employee have duly executed this Agreement as of the day and year first above written. EMPLOYER: AMERICAN ITALIAN PASTA COMPANY, a Delaware Corporation 1000 Italian Way Excelsior Springs, Missouri 64024 By: /s/ T.S. Webster ------------------------------ Timothy S. Webster President EMPLOYEE: /s/ David E. Watson --------------------------------- David E. Watson Address: 6708 Monticello Terr. -------------------------------- Kansas City , Missouri 64152 -------------------------------- -------------------------------- 11 EX-10.8 11 EMPLOYMENT AGREEMENT/NORMAN F. ABERO 1 EXHIBIT 10.8 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement"), dated September 30, 1997, is made effective for all purposes and in all respects as of the Effective Date (as defined below), by and between AMERICAN ITALIAN PASTA COMPANY, a Delaware corporation (hereinafter referred to as "Employer"), and NORMAN F. ABREO, an individual (hereinafter referred to as "Employee") and supersedes any and all prior oral or written agreements between the parties with respect to the subject matter hereof. RECITALS A. Employer is engaged in the business of Durum wheat milling and pasta production/marketing and maintains its principal place of business at 1000 Italian Way, Excelsior Springs, Missouri 64024. B. In connection with such business, Employer desires to continue to employ Employee in the capacity of Executive Vice President-Operations. C. Employee desires to continue to be employed by Employer in the aforesaid capacity. NOW, THEREFORE, based on the Recitals set forth above, which are incorporated herein by this reference, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and based on the mutual promises herein contained, the parties hereby agree as follows: 1. Term of Employment. Subject to the provisions of Section 7 hereof, Employee's term of employment by Employer under this Agreement (the "Initial Employment Term") shall commence on the date Employer's initial public offering (the "Offering") of its Class A Convertible Preferred Common Stock, par value $.001 per share (the "Common Stock") is consummated (the "Effective Date") and terminate on the date that is three years after the Effective Date, provided, however, that the term of Employee's employment shall be extended automatically for successive one-year periods unless not later than six months prior to such automatic extension Employer shall have given written notice to the contrary (each an "Additional Term"). The period of time between the Effective Date and the termination of the Initial Employment Term or the last Additional Term, if any, is referred to herein as the "Employment Term." 2. Duties of Employee. 2.1 In accepting such employment, Employee shall undertake and assume the responsibility of performing for and on behalf of Employer such duties as shall be assigned to Employee by Employer at any time and from time to time. It is understood and agreed that Employee's principal duties on behalf of Employer at the date of execution hereof are and shall 2 be overall direction of milling and pasta production operation; it is further understood and agreed that any modification in or expansion of Employee's duties hereunder shall not, unless specifically agreed to by Employee in a duly-executed amendment of this Agreement in accordance with Section 10.6 hereof, result in any modification in, increase or decrease of, Employee's compensation referred to in Section 3 hereof. 2.2 Employee will, at all times, faithfully, industriously, and to the best of his ability, experience and talents, perform all of the duties that may be required of and from Employee pursuant to the express and implicit terms hereof, to the reasonable satisfaction of Employer. 2.3 Employee shall devote substantially all of his professional time, attention, knowledge and skills solely to the business and interests of Employer; provided, however, that Employee shall be entitled annually to a vacation, in accordance with Employer's policies then in effect and Employer shall be entitled to all of the benefits, profits and other issues arising from or incident to all professional work, services and advice of Employee. 3. Compensation. Employer shall pay Employee, and Employee shall accept from Employer, in payment for Employee's services rendered to Employer hereunder an annual base salary ("Base Salary") which from the Effective Date through December 31, 1998 shall be equal to One Hundred Sixty Thousand Dollars ($160,000). Such Base Salary shall be subject to merit increase reviews, in the sole discretion of the Board, at least annually by Employer. Such salary shall be paid in equal bi-weekly installments. 3.1 Bonuses. During the term of this Agreement, Employee will be eligible to participate in, and bonuses may be awarded to Employee at the discretion of the Board of Directors in accordance with the terms of Employer's 1996 Salaried Bonus Plan (the "Bonus Plan") attached hereto as Exhibit A, as the same may be amended, modified or terminated from time to time. 3.2 Reimbursement of Business Expenses. Reasonable travel, entertainment and other business expenses incurred by Employee in the performance of his duties hereunder shall be reimbursed by Employer in accordance with Employer's policies on terms no less favorable than those policies in effect immediately prior to the date hereof. 3.3 Automobile Allowance. Employee shall be entitled to an annual automobile allowance of Four Thousand Eight Hundred Dollars ($4,800), payable in monthly installments, to reimburse him for the expenses incurred by him in maintaining and operating an automobile used by him in connection with the performance of his duties hereunder. 3.4 Benefits. Employee shall be entitled to participate in an equitable manner with other senior executive employees of Employer in all welfare benefit, incentive compensation or other plans or arrangements authorized, adopted and maintained from time to time by Employer, including, without limitation, the following: profit sharing plan, medical reimbursement plan, 2 3 group life insurance plan, medical and dental insurance plan, and long-term disability or income plan, if in effect with Employer. In addition, within six months of the Effective Date, Employer shall adopt a group disability insurance plan, pursuant to which Employer shall provide to Employee long-term disability insurance at a cost to Employee not to exceed fifty percent (50%) of his individual premiums payable under such plan. If Employer shall not have adopted a group disability insurance plan within six months of the Effective Date, Employer shall alternatively provide to Employee individual long-term disability insurance on terms mutually agreeable to Employer and Employee at a cost to Employee equal to fifty percent (50%) of the premiums payable under such individual policy; provided Employer can maintain such a policy on the life of Employee without any substantial increase in the standard premiums from those as of the date hereof due to any "rating" of the Employee; and further provided that if there is such a substantial increase, Employee shall have the right to pay such increase personally and Employer would then maintain such insurance. 3.5 Grant of Stock Options. Pursuant to the terms and conditions of the American Italian Pasta Company 1997 Equity Incentive Plan (the "Plan") and the Stock Option Agreement, by and between Employer and Employee dated as of the Effective Date, upon the Effective Date, Employer will grant to Employee an option to purchase 61,320 shares of Common Stock. The option price will be equal to the per share price at which the Common Stock is sold to the public in the Offering. 4. Non-Competition. 4.1 Employee acknowledges and recognizes the highly competitive nature of the business of Employer and its affiliates and accordingly agrees as follows: during the Employment Term and until the date that is one year after the date that Employee ceases employment with Employer (such term period hereinafter referred to as the "Noncompetition Period"), Employee will not, within the United States of America, directly or indirectly, own, manage, operate, control, be employed by or be connected in any manner with the ownership (other than passive investments of not more than one percent of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), management, operation, or control of any business engaged in the production and/or marketing of dry pasta for human consumption. Notwithstanding any provision of this Agreement to the contrary, if Employee is employed by Employer, any breach of the provisions of this Section 4.1 shall permit Employer to terminate the employment of Employee for Cause (as defined below), and, whether or not Employee is employed by Employer, from and after any breach by Employee of the provisions of this Section 4.1, Employer shall cease to have any obligations to make payments to Employee under this Agreement. 4.2 During the Noncompetition Period, Employee will not directly or indirectly induce any employee of Employer or any of its affiliates to engage in any activity in which Employee is prohibited from engaging by Section 4.1 above or to terminate his employment with Employer or any of its affiliates, will not directly or indirectly assist others in engaging in any of the activities in which Employee is prohibited from engaging by Section 4.1 above, and will not 3 4 directly or indirectly employ or offer employment to any person who was employed by Employer or any of its affiliates unless such person shall have ceased to be employed by Employer or any of its affiliates for a period of at least 12 months. 4.3 In addition to any payments Employer is required to make pursuant to Section 7 hereof, Employer and Employee hereby agree that Employer may, in its sole discretion, continue to pay to Employee his Base Salary during the Noncompetition Period. During such period of continued payment, if any, Employee agrees to be available, consistent with other responsibilities that he may then have, to answer questions and provide advice to Employer. 5. Confidentiality. Employee acknowledges that, in and as a result of his employment by Employer, he has been and will be making use of, acquiring and/or adding to confidential information of a special and unique nature and value relating to such matters as Employer's trade secrets, systems, procedures, manuals, confidential reports and lists of customers and/or other services rendered by Employer, the equipment and methods used and preferred by Employer's customers, and the prices paid by such customers. As a material inducement to Employer to enter into this Agreement, and to pay to Employee the compensation referred to in Section 3 hereof, including any additional benefits referred to in Section 3.3 hereof, Employee covenants and agrees that he shall not, at any time during or after the Employment Term, directly or indirectly, disclose, divulge or use, for his own benefit or purposes or the benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise other than Employer and any of its subsidiaries or affiliates, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, prices, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, or the business and affairs of Employer generally, or of any subsidiary or affiliate of Employer, provided, however, that the foregoing shall not apply to information which is not unique to Employer or which is generally known to the industry or the public other than as a result of breach of this covenant. Employee agrees that upon termination of his employment with Employer for any reason, he will return to Employer immediately all memoranda, books, manuals, training materials, records, computer software, papers, plans, information, letters and other data, and all copies thereof or therefrom, in any way relating to the business of Employer and its affiliates, except that he may retain personal notes, notebooks and diaries. Employee further agrees that he will not retain or use for his account at any time any trade names, trademark or other proprietary business designation used or owned in connection with the business of Employer or its affiliates. 6. Specific Performance. Employee acknowledges and agrees that Employer's remedies at law for a breach or threatened breach of any of the provisions of Section 4 or Section 5 would be inadequate and, in recognition of this fact, Employee agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, Employer, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. 4 5 7. Termination of Employment 7.1 Termination without Cause; Resignation for Good Reason. 7.1.1 General. Subject to the provisions of Sections 7.1.2 and 7.1.3, if Employee's employment is terminated by Employer without Cause, as defined in Section 7.3, or if Employee resigns from his employment for Good Reason, as defined in Section 7.4, Employer shall pay Employee his accrued unpaid Base Salary to the date of termination or resignation and any bonus earned but not paid and shall continue to pay Employee the greater of (i) his annual Base Salary as of the date of termination or resignation plus his bonus, if any, for the year in which such termination or resignation occurs (calculated as if the Norm Bonus for that year is earned) for a period of one (1) year following the date of termination or resignation, or (ii) if such termination or resignation occurs during the Initial Employment Term, the remaining portion of Employee's Base Salary plus his bonus, if any, for the year in which such termination or resignation occurs (calculated as if the Norm Bonus for that year is earned) for the Initial Employment Term (such period, as applicable, being referred to hereinafter as the "Severance Period"). The Base Salary shall be payable in bi-weekly payments during the Severance Period and the bonus shall be payable at the conclusion of the Severance Period. During the Severance Period, Employee shall also be eligible to participate on the same terms and conditions as in effect immediately prior to such termination or resignation in all health, medical, supplemental medical and life insurance plans or programs provided to Employee by Employer pursuant to Section 3.3 above ("Employee Welfare Plans") at the time of such termination or resignation and which are provided by Employer to its employees following the date of such termination or resignation; provided, however, that Employee's eligibility to participate in these Employee Welfare Plans shall end at such time as Employee becomes eligible to receive coverage under comparable programs of a subsequent employer. If, during the Severance Period, Employee is precluded from participating in any Employee Welfare Plan by its terms or applicable law, Employer will provide Employee with benefits that are reasonably equivalent to those which Employee would have received under such plan had Employee been eligible to participate therein. Anything to the contrary herein notwithstanding, Employer shall have no obligation to continue to maintain any Employee Welfare Plan during the Severance Period solely as a result of this Agreement. As an example and solely for purposes of illustration: If Employer were to terminate its dental insurance plan prior to or during the Severance Period, then Employer would have no obligation to maintain such plan or provide to Employee individual dental insurance in order to satisfy its obligations under this Section 7.1.1. 7.1.2 Mitigation. Employee will not be required to mitigate the amount of any payment provided for in Section 7.1.1 by seeking other employment, and the amount of any such payment will not be reduced by any compensation earned by Employee as the result of his employment by another employer subsequent to termination of Employee's employment with Employer. 7.1.3 Death During Severance Period. In the event of Employee's death during the Severance Period, the Severance Period shall immediately cease, Employer shall not 5 6 be obligated to make any further payments pursuant to this Section 7, and the provisions of Section 8.1 shall apply as though Employee's death had occurred immediately prior to termination of Employee's employment hereunder. 7.1.4 Date of Termination. The date of termination of employment without Cause shall be the date specified in a written notice of termination to Employee which in no case shall be more than 30 days following the date of notice. The date of resignation for Good Reason shall be the date specified in the written notice of resignation from Employee to Employer which in no case shall be more than 30 days following the date of notice. 7.2 Termination for Cause; Resignation Without Good Reason. 7.2.1 General. If Employee's employment hereunder is terminated by Employer for Cause, or if Employee resigns from his employment hereunder other than for Good Reason (a "Voluntary Termination"), Employee shall be entitled only to payment of his Base Salary earned through and including the date of termination or resignation. Employee shall have no further right to receive any other compensation, or to participate in any other plan, arrangement, or benefit, after such termination for Cause or resignation of employment other than for Good Reason. 7.2.2 Date of Termination. Subject to Section 7.3, the date of termination for Cause shall be the date of receipt by Employee of a written Notice of Termination provided for in Section 7.2.3. The date of resignation without Good Reason shall be the date specified in the written notice of resignation from Employee to Employer, or if no date is specified therein, 10 business days after receipt by Employer of written notice or resignation from Employee. 7.3 Cause. Termination for "Cause" means termination of Employee's employment because of (i) any willful and continued failure substantially to perform his duties hereunder (other than as a result of Permanent Disability, as defined below), (ii) Employee's failure to comply with any of the material terms of this Agreement, (iii) an act or acts on Employee's part constituting a felony under the laws of the United States or any state thereof, (iv) breach by Employee of any of the covenants contained in Sections 4 or 5 of this Agreement, or (v) any other willful act or omission on Employee's part which is materially injurious to the financial condition or business reputation of Employer or any of its subsidiaries of affiliates; provided, however, that if any such Cause relates to Employee's obligations under this Agreement and (x) is susceptible to cure, and (y) does not constitute a repetition of such Cause, Employer shall not terminate Employee's employment hereunder unless Employer first gives Employee a Notice of Termination, and Employee has not, within 15 business days following receipt of the notice, cured such Cause, or in the event such Cause is not susceptible to cure within such 15 business day period, Employee has not taken all reasonable steps within such 15 business day period to cure such Cause as promptly as practicable thereafter. For purposes of this Section 7.3, no act or failure to act on the part of Employee shall be deemed "willful" unless done, or omitted to be done, by Employee in bad faith and without reasonable belief that the act or omission of Employee was in the best interest of Employer. 6 7 7.4 Good Reason. For purposes of this Agreement, "Good Reason" means any of the following actions taken by Employer without Employee's prior written consent: (i) the continued failure of Employer to pay compensation due to Employee under this Agreement, which failure is uncorrected for a period of 15 days following receipt by Employer of written notice thereof from Employee; (ii) a material diminution in Employee's position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by Employer promptly after receipt of written notice thereof given by Employee; provided, however, that a mere change of Employee's title shall not constitute Good Reason so long as Employee continues to perform duties, functions and responsibilities substantially equivalent to those performed by him prior to such change of title; (iii) relocation of Employee's primary workplace to a location outside of the United States of America; and (iv) Employer's material failure or refusal to comply with the provisions of this Agreement, which failure or refusal to comply is uncorrected for a period of 15 days following receipt by Employer of written notice thereof from Employee. It is expressly understood and agreed by the parties hereto that Employer's failure to deliver a notification extending the Initial Employment Term as referred to in Section 1 of this Agreement shall constitute a termination without Cause. 7.5 Stock Options. Employer has awarded to Employee a number of options to acquire Common Shares under the Stock Option Agreements by and between Employer and Employee dated October 30, 1992 and July 1, 1995 (the "Abreo Option Agreements") which are subject to the American Italian Pasta Company 1992 Stock Option Plan (the "Plan"). Employer desires to and does hereby amend the Abreo Option Agreements to waive Employer's rights under (i) each option and Section 6(g)(ii) of the Plan to repurchase Employee's vested Options following his termination of employment for any reason, other than by the Employer for Cause or due to a Voluntary Termination, and (ii) Section 6(h) of the Plan to repurchase all Common Shares acquired by Employee upon exercise of options granted under the Plan before a Public Offering, provided Employee was not terminated by Employer for Cause or due to a Voluntary Termination, in which case Employer retains all rights to repurchase the Common Shares. Notwithstanding anything to the contrary herein or in the Plan, all of the stock options awarded to Employee under the Abreo Option Agreements and subsequent stock option grants immediately vest (i) upon a termination by Employee for Good Reason, or (ii) upon a Change of Control (as defined below), at and to the extent of Employee's choice. 8. Death or Permanent Disability. 8.1 Death. If Employee's employment hereunder is terminated by death, Employer shall, within 90 days of the date of death, make (i) a lump sum payment to Employee's estate (or other beneficiary designated by him in writing) equal to all Base Salary and bonuses, if any, earned and accrued through the date of death, and (ii) any other benefits payable under any then-current life insurance policy provided to Employee pursuant to Section 3.3 hereof payable in accordance with the terms of such policy. Thereafter, Employer shall have no further obligation to Employee under the Agreement. 7 8 8.2 Permanent Disability. In the event Employee shall become physically or mentally disabled while employed by Employer under this Agreement so that Employee is unable to render the services provided for by this Agreement for a period of six consecutive months or for shorter periods aggregating six months during any 24-month period, or so that Employee has a Disability (as defined under Employer's then-current disability policy), Employer may, at any time after the last day of the six consecutive months of disability, the day on which the shorter periods of disability equal an aggregate of six months, or the day on which Employee is determined to have a Disability, terminate Employee's employment hereunder for "Permanent Disability" by written notice to Employee. Following such termination, Employee shall be entitled to received from Employer: (i) all Base Salary and bonuses, if any, accrued through the date of termination; and (ii) any other benefits payable under Employer's then-current disability policy, but all other rights of Employee hereunder shall terminate as of the date of Employee's termination. 9. Change of Control. 9.1 Notwithstanding anything to the contrary contained herein, if Employer terminates Employee without Cause upon or within six months following a Change of Control (as defined below), Employer shall pay Employee his accrued unpaid Base Salary to the date of termination and any bonus earned but not paid and shall continue to pay Employee the greater of (i): his annual Base Salary as of the date such termination occurs (calculated as if the Norm Bonus for that year is earned) for a period of one (1) year following the date of termination, or (ii) if such termination occurs during the Initial Employment Term, the remaining portion of Employee's Base Salary plus his bonus for the Initial Employment Term, if any, for the year in which such termination occurs (calculated as if the Norm Bonus for that year is earned), as severance pay (such period, as applicable, being referred to hereinafter as the "Change of Control Severance Period"). Any severance payable pursuant to this Section 9.1 will be in substitution for and not in addition to any severance that might be payable pursuant to Article 7 hereof. To the extent Employer makes payments pursuant to this Section 9.1, it will have no additional obligations under Article 7. The Base Salary shall be payable in bi-weekly payments during the Change of Control Severance Period and the bonus shall be paid at the conclusion of the Change of Control Severance Period. 9.2 For purposes of this Agreement, "Change of Control" means any one of the following: (a) any person or group (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act")) (other than MS Shareholders (as defined in Employer's Amended and Restated Shareholders' Agreement dated as of October 6, 1997) or any group consisting solely of such persons) acquiring beneficial ownership of more than 50% of Employer's then outstanding Common Stock or 51% or more of the combined voting power of the Employer's then outstanding securities entitled generally to vote for the election of the Employer's Directors; 8 9 (b) the consummation of the merger or consolidation of the Employer with any other corporation, other than a merger with a wholly-owned subsidiary, the sale of substantially all of the assets of the Employer, or the liquidation or dissolution of the Employer, 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 Directors 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 Employer outstanding immediately prior thereto represent (either by remaining outstanding or by 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 Employer 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 Employer immediately prior to the transaction in substantially the same proportions as such holders owned such voting securities immediately prior to the transaction; or (c) Continuing Directors (as defined below) no longer constitute at least a majority of the Board or a similar body of any successor to the Employer. For purposes of this Agreement, "Continuing Directors" means any individual who either (i) is a member of the Employer's Board of Directors on the Effective Date, (ii) who becomes a director after the Effective Date whose election or nomination for election by Employer's shareholders, was approved by a vote of at least a majority of the Continuing Directors (either by a specific vote or by approval of the proxy statement of Employer in which such person is named as nominee for director, without objection to such nomination), or (iii) is designated by any party pursuant to its rights under Section 2.1 of the Amended and Restated Shareholders' Agreement. 9.3 Excess Parachute Payments. If any payment or the receipt of any benefit under this Agreement shall be deemed to constitute an "excess parachute payment" as such term is described in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), so as to result in the loss of a deduction to the Employer under Code Section 280G or in the imposition of an excise tax on the Employee under Code Section 4999, or any successor sections thereto, then the amounts payable or the benefits provided under this Agreement shall be reduced to the minimum extent necessary so that no such deduction will be lost by the Employer and no such excise tax will be imposed on the Employee. The Employer, in its sole discretion, shall determine whether or not an "excess parachute payment" would otherwise occur and shall determine the amount and method of the foregoing reduction. 10. Miscellaneous. 10.1 Assignment of Employee Benefits. Absent the prior written consent of Employer, and subject to will and the laws of descent and distribution, Employee shall have no right to exchange, convert, encumber, or dispose of the rights of Employee to receive benefits and payments under this Agreement, which payments, benefits, and rights thereto are non-assignable and non-transferable. 9 10 10.2 Burden and Benefit. This Agreement shall be binding upon, and shall inure to the benefit of, Employer and Employee, their respective heirs, personal and legal representatives, successors and assigns. 10.3 Governing Law. In view of the fact that the principal office of Employer is located in the State of Missouri, it is understood and agreed that the construction and interpretation of this Agreement shall at all times and in all respects be governed by the laws of the State of Missouri. 10.4 Severability. It is expressly understood and agreed that although Employee and Employer consider the restrictions contained in this Agreement to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against Employee, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 10.5 Headings. The headings of the Sections of this Agreement are for reference only and not to limit, expand, or otherwise affect the contents of this Agreement. 10.6 Entire Agreement; Modification. Except as to the Employer's Stock Option Plans, any instrument relating to an Option granted thereunder and written agreements signed by both of the parties hereto from time to time after the date hereof, this Agreement contains the entire agreement and understanding by and between Employer and Employee with respect to the subject matter hereof, and any representations, promises, agreements, or understandings, written or oral, not herein contained shall be of no force or effect. No change, waiver or modification of any provision of this Agreement shall be valid or binding unless the same is in writing and duly executed by both parties and no evidence of any waiver or modification shall be offered or received in evidence of any proceeding, arbitration, or litigation between the parties hereto arising out of or affecting this Agreement, or the rights or obligations of the parties hereunder, unless such waiver or modification is in writing, duly executed as aforesaid, and the parties further agree that the provisions of this Section 10.6 may not be waived except as set forth herein. 10.7 Waiver of Breach. The waiver by Employer of a breach of any provision of this Agreement by Employee shall not operate or be construed as a waiver of any subsequent breach by Employee. 10.8 Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the execution page 10 11 of this Agreement, provided, however, that all notices to Employer shall be directed to the attention of the Board of Directors of Employer with a copy to the Secretary of Employer, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 10.9 Withholding Taxes. Employer may withhold from any amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. 10.10 Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, Employer and Employee have duly executed this Agreement as of the day and year first above written. EMPLOYER: AMERICAN ITALIAN PASTA COMPANY, a Delaware Corporation 1000 Italian Way Excelsior Springs, Missouri 64024 By: /s/ T.S. Webster --------------------------------- Timothy S. Webster President EMPLOYEE: /s/ Norman F. Abreo ---------------------------------- Norman F. Abreo Address: 18012 N.E. 79th St. ---------------------------------- Liberty, Missouri 64068 ---------------------------------- ---------------------------------- 11 EX-10.9 12 EMPLOYMENT AGREEMENT/DAVID B. POTTER 1 EXHIBIT 10.9 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement"), dated September 30, 1997, is made effective for all purposes and in all respects as of the Effective Date (as defined below), by and between AMERICAN ITALIAN PASTA COMPANY, a Delaware corporation (hereinafter referred to as "Employer"), and DAVID B. POTTER, an individual (hereinafter referred to as "Employee") and supersedes any and all prior oral or written agreements between the parties with respect to the subject matter hereof. RECITALS A. Employer is engaged in the business of Durum wheat milling and pasta production/marketing and maintains its principal place of business at 1000 Italian Way, Excelsior Springs, Missouri 64024. B. In connection with such business, Employer desires to continue to employ Employee in the capacity of Senior Vice President. C. Employee desires to continue to be employed by Employer in the aforesaid capacity. NOW, THEREFORE, based on the Recitals set forth above, which are incorporated herein by this reference, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and based on the mutual promises herein contained, the parties hereby agree as follows: 1. Term of Employment. Subject to the provisions of Section 7 hereof, Employee's term of employment by Employer under this Agreement (the "Initial Employment Term") shall commence on the date Employer's initial public offering (the "Offering") of its Class A Convertible Preferred Common Stock, par value $.001 per share (the "Common Stock") is consummated (the "Effective Date") and terminate on the date that is three years after the Effective Date, provided, however, that the term of Employee's employment shall be extended automatically for successive one- year periods unless not later than six months prior to such automatic extension Employer shall have given written notice to the contrary (each an "Additional Term"). The period of time between the Effective Date and the termination of the Initial Employment Term or the last Additional Term, if any, is referred to herein as the "Employment Term." 2. Duties of Employee. 2.1 In accepting such employment, Employee shall undertake and assume the responsibility of performing for and on behalf of Employer such duties as shall be assigned to Employee by Employer at any time and from time to time. It is understood and agreed that Employee's principal duties on behalf of Employer at the date of execution hereof are and shall 2 be overall management of procurement functions; it is further understood and agreed that any modification in or expansion of Employee's duties hereunder shall not, unless specifically agreed to by Employee in a duly-executed amendment of this Agreement in accordance with Section 10.6 hereof, result in any modification in, increase or decrease of, Employee's compensation referred to in Section 3 hereof. 2.2 Employee will, at all times, faithfully, industriously, and to the best of his ability, experience and talents, perform all of the duties that may be required of and from Employee pursuant to the express and implicit terms hereof, to the reasonable satisfaction of Employer. 2.3 Employee shall devote substantially all of his professional time, attention, knowledge and skills solely to the business and interests of Employer; provided, however, that Employee shall be entitled annually to a vacation, in accordance with Employer's policies then in effect and Employer shall be entitled to all of the benefits, profits and other issues arising from or incident to all professional work, services and advice of Employee. 3. Compensation. Employer shall pay Employee, and Employee shall accept from Employer, in payment for Employee's services rendered to Employer hereunder an annual base salary ("Base Salary") which from the Effective Date through December 31, 1998 shall be equal to One Hundred Twenty-Five Thousand Dollars ($125,000). Such Base Salary shall be subject to merit increase reviews, in the sole discretion of the Board, at least annually by Employer. Such salary shall be paid in equal bi-weekly installments. 3.1 Bonuses. During the term of this Agreement, Employee will be eligible to participate in, and bonuses may be awarded to Employee at the discretion of the Board of Directors in accordance with the terms of Employer's 1996 Salaried Bonus Plan (the "Bonus Plan") attached hereto as Exhibit A, as the same may be amended, modified or terminated from time to time. 3.2 Reimbursement of Business Expenses. Reasonable travel, entertainment and other business expenses incurred by Employee in the performance of his duties hereunder shall be reimbursed by Employer in accordance with Employer's policies on terms no less favorable than those policies in effect immediately prior to the date hereof. 3.3 Automobile Allowance. Employee shall be entitled to an annual automobile allowance of Four Thousand Eight Hundred Dollars ($4,800), payable in monthly installments, to reimburse him for the expenses incurred by him in maintaining and operating an automobile used by him in connection with the performance of his duties hereunder. 3.4 Benefits. Employee shall be entitled to participate in an equitable manner with other senior executive employees of Employer in all welfare benefit, incentive compensation or other plans or arrangements authorized, adopted and maintained from time to time by Employer, including, without limitation, the following: profit sharing plan, medical reimbursement plan, 2 3 group life insurance plan, medical and dental insurance plan, and long-term disability income plan, if in effect with Employer. In addition, within six months of the Effective Date, Employer shall adopt a group disability insurance plan, pursuant to which Employer shall provide to Employee long-term disability insurance at a cost to Employee not to exceed fifty percent (50%) of his individual premiums payable under such plan. If Employer shall not have adopted a group disability insurance plan within six months of the Effective Date, Employer shall provide to Employee individual long-term disability insurance on terms mutually agreeable to Employer and Employee at a cost to Employee equal to fifty percent (50%) of the premiums payable under such individual policy; provided Employer can maintain such a policy on the life of Employee without any substantial increase in the standard premiums from those as of the date hereof due to any "rating" of the Employee; and further provided that if there is such a substantial increase, Employee shall have the right to pay such increase personally and Employer would then maintain such insurance. 3.5 Grant of Stock Options. Pursuant to the terms and conditions of the American Italian Pasta Company 1997 Equity Incentive Plan (the "Plan") and the Stock Option Agreement, by and between Employer and Employee dated as of the Effective Date, upon the Effective Date, Employer will grant to Employee an option to purchase 33,726 shares of Common Stock. The option price will be equal to the per share price at which the Common Stock is sold to the public in the Offering. 4. Non-Competition. 4.1 Employee acknowledges and recognizes the highly competitive nature of the business of Employer and its affiliates and accordingly agrees as follows: during the Employment Term and until the date that is one year after the date that Employee ceases employment with Employer (such term period hereinafter referred to as the "Noncompetition Period"), Employee will not, within the United States of America, directly or indirectly, own, manage, operate, control, be employed by or be connected in any manner with the ownership (other than passive investments of not more than one percent of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), management, operation, or control of any business engaged in the production and/or marketing of dry pasta for human consumption. Notwithstanding any provision of this Agreement to the contrary, if Employee is employed by Employer, any breach of the provisions of this Section 4.1 shall permit Employer to terminate the employment of Employee for Cause (as defined below), and, whether or not Employee is employed by Employer, from and after any breach by Employee of the provisions of this Section 4.1, Employer shall cease to have any obligations to make payments to Employee under this Agreement. 4.2 During the Noncompetition Period, Employee will not directly or indirectly induce any employee of Employer or any of its affiliates to engage in any activity in which Employee is prohibited from engaging by Section 4.1 above or to terminate his employment with Employer or any of its affiliates, will not directly or indirectly assist others in engaging in any of the activities in which Employee is prohibited from engaging by Section 4.1 above, and will not 3 4 directly or indirectly employ or offer employment to any person who was employed by Employer or any of its affiliates unless such person shall have ceased to be employed by Employer or any of its affiliates for a period of at least 12 months. 4.3 In addition to any payments Employer is required to make pursuant to Section 7 hereof, Employer and Employee hereby agree that Employer may, in its sole discretion, continue to pay to Employee his Base Salary during the Noncompetition Period. During such period of continued payment, if any, Employee agrees to be available, consistent with other responsibilities that he may then have, to answer questions and provide advice to Employer. 5. Confidentiality. Employee acknowledges that, in and as a result of his employment by Employer, he has been and will be making use of, acquiring and/or adding to confidential information of a special and unique nature and value relating to such matters as Employer's trade secrets, systems, procedures, manuals, confidential reports and lists of customers and/or other services rendered by Employer, the equipment and methods used and preferred by Employer's customers, and the prices paid by such customers. As a material inducement to Employer to enter into this Agreement, and to pay to Employee the compensation referred to in Section 3 hereof, including any additional benefits referred to in Section 3.3 hereof, Employee covenants and agrees that he shall not, at any time during or after the Employment Term, directly or indirectly, disclose, divulge or use, for his own benefit or purposes or the benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise other than Employer and any of its subsidiaries or affiliates, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, prices, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, or the business and affairs of Employer generally, or of any subsidiary or affiliate of Employer, provided, however, that the foregoing shall not apply to information which is not unique to Employer or which is generally known to the industry or the public other than as a result of breach of this covenant. Employee agrees that upon termination of his employment with Employer for any reason, he will return to Employer immediately all memoranda, books, manuals, training materials, records, computer software, papers, plans, information, letters and other data, and all copies thereof or therefrom, in any way relating to the business of Employer and its affiliates, except that he may retain personal notes, notebooks and diaries. Employee further agrees that he will not retain or use for his account at any time any trade names, trademark or other proprietary business designation used or owned in connection with the business of Employer or its affiliates. 6. Specific Performance. Employee acknowledges and agrees that Employer's remedies at law for a breach or threatened breach of any of the provisions of Section 4 or Section 5 would be inadequate and, in recognition of this fact, Employee agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, Employer, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. 4 5 7. Termination of Employment 7.1 Termination without Cause; Resignation for Good Reason. 7.1.1 General. Subject to the provisions of Sections 7.1.2 and 7.1.3, if Employee's employment is terminated by Employer without Cause, as defined in Section 7.3, or if Employee resigns from his employment for Good Reason, as defined in Section 7.4, Employer shall pay Employee his accrued unpaid Base Salary to the date of termination or resignation and any bonus earned but not paid and shall continue to pay Employee the greater of (i) his annual Base Salary as of the date of termination or resignation plus his bonus, if any, for the year in which such termination or resignation occurs (calculated as if the Norm Bonus for that year is earned) for a period of one (1) year following the date of termination or resignation, or (ii) if such termination or resignation occurs during the Initial Employment Term, the remaining portion of Employee's Base Salary plus his bonus, if any, for the year in which such termination or resignation occurs (calculated as if the Norm Bonus for that year is earned) for the Initial Employment Term (such period, as applicable, being referred to hereinafter as the "Severance Period"). The Base Salary shall be payable in bi-weekly payments during the Severance Period and the bonus shall be payable at the conclusion of the Severance Period. During the Severance Period, Employee shall also be eligible to participate on the same terms and conditions as in effect immediately prior to such termination or resignation in all health, medical, supplemental medical and life insurance plans or programs provided to Employee by Employer pursuant to Section 3.3 above ("Employee Welfare Plans") at the time of such termination or resignation and which are provided by Employer to its employees following the date of such termination or resignation; provided, however, that Employee's eligibility to participate in these Employee Welfare Plans shall end at such time as Employee becomes eligible to receive coverage under comparable programs of a subsequent employer. If, during the Severance Period, Employee is precluded from participating in any Employee Welfare Plan by its terms or applicable law, Employer will provide Employee with benefits that are reasonably equivalent to those which Employee would have received under such plan had Employee been eligible to participate therein. Anything to the contrary herein notwithstanding, Employer shall have no obligation to continue to maintain any Employee Welfare Plan during the Severance Period solely as a result of this Agreement. As an example and solely for purposes of illustration: If Employer were to terminate its dental insurance plan prior to or during the Severance Period, then Employer would have no obligation to maintain such plan or provide to Employee individual dental insurance in order to satisfy its obligations under this Section 7.1.1. 7.1.2 Mitigation. Employee will not be required to mitigate the amount of any payment provided for in Section 7.1.1 by seeking other employment, and the amount of any such payment will not be reduced by any compensation earned by Employee as the result of his employment by another employer subsequent to termination of Employee's employment with Employer. 7.1.3 Death During Severance Period. In the event of Employee's death during the Severance Period, the Severance Period shall immediately cease, Employer shall not 5 6 be obligated to make any further payments pursuant to this Section 7, and the provisions of Section 8.1 shall apply as though Employee's death had occurred immediately prior to termination of Employee's employment hereunder. 7.1.4 Date of Termination. The date of termination of employment without Cause shall be the date specified in a written notice of termination to Employee which in no case shall be more than 30 days following the date of notice. The date of resignation for Good Reason shall be the date specified in the written notice of resignation from Employee to Employer which in no case shall be more than 30 days following the date of notice. 7.2 Termination for Cause; Resignation Without Good Reason. 7.2.1 General. If Employee's employment hereunder is terminated by Employer for Cause, or if Employee resigns from his employment hereunder other than for Good Reason (a "Voluntary Termination"), Employee shall be entitled only to payment of his Base Salary earned through and including the date of termination or resignation. Employee shall have no further right to receive any other compensation, or to participate in any other plan, arrangement, or benefit, after such termination for Cause or resignation of employment other than for Good Reason. 7.2.2 Date of Termination. Subject to Section 7.3, the date of termination for Cause shall be the date of receipt by Employee of a written Notice of Termination provided for in Section 7.2.3. The date of resignation without Good Reason shall be the date specified in the written notice of resignation from Employee to Employer, or if no date is specified therein, 10 business days after receipt by Employer of written notice or resignation from Employee. 7.3 Cause. Termination for "Cause" means termination of Employee's employment because of (i) any willful and continued failure substantially to perform his duties hereunder (other than as a result of Permanent Disability, as defined below), (ii) Employee's failure to comply with any of the material terms of this Agreement, (iii) an act or acts on Employee's part constituting a felony under the laws of the United States or any state thereof, (iv) breach by Employee of any of the covenants contained in Sections 4 or 5 of this Agreement, or (v) any other willful act or omission on Employee's part which is materially injurious to the financial condition or business reputation of Employer or any of its subsidiaries of affiliates; provided, however, that if any such Cause relates to Employee's obligations under this Agreement and (x) is susceptible to cure, and (y) does not constitute a repetition of such Cause, Employer shall not terminate Employee's employment hereunder unless Employer first gives Employee a Notice of Termination, and Employee has not, within 15 business days following receipt of the notice, cured such Cause, or in the event such Cause is not susceptible to cure within such 15 business day period, Employee has not taken all reasonable steps within such 15 business day period to cure such Cause as promptly as practicable thereafter. For purposes of this Section 7.3, no act or failure to act on the part of Employee shall be deemed "willful" unless done, or omitted to be done, by Employee in bad faith and without reasonable belief that the act or omission of Employee was in the best interest of Employer. 6 7 7.4 Good Reason. For purposes of this Agreement, "Good Reason" means any of the following actions taken by Employer without Employee's prior written consent: (i) the continued failure of Employer to pay compensation due to Employee under this Agreement, which failure is uncorrected for a period of 15 days following receipt by Employer of written notice thereof from Employee; (ii) a material diminution in Employee's position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by Employer promptly after receipt of written notice thereof given by Employee; provided, however, that a mere change of Employee's title shall not constitute Good Reason so long as Employee continues to perform duties, functions and responsibilities substantially equivalent to those performed by him prior to such change of title; (iii) relocation of Employee's primary workplace to a location outside of the United States of America; and (iv) Employer's material failure or refusal to comply with the provisions of this Agreement, which failure or refusal to comply is uncorrected for a period of 15 days following receipt by Employer of written notice thereof from Employee. It is expressly understood and agreed by the parties hereto that Employer's failure to deliver a notification extending the Initial Employment Term as referred to in Section 1 of this Agreement shall constitute a termination without Cause. 7.5 Stock Options. Employer has awarded to Employee a number of options to acquire Common Shares under the Stock Option Agreements by and between Employer and Employee dated July 15, 1994, July 1, 1995 and January 1, 1997 (the "Potter Option Agreements") which are subject to the American Italian Pasta Company 1992 Stock Option Plan (the "Plan"). Employer desires to and does hereby amend the Potter Option Agreements to waive Employer's rights under (i) each option and Section 6(g)(ii) of the Plan to repurchase Employee's vested Options following his termination of employment for any reason, other than by the Employer for Cause or due to a Voluntary Termination, and (ii) Section 6(h) of the Plan to repurchase all Common Shares acquired by Employee upon exercise of options granted under the Plan before a Public Offering, provided Employee was not terminated by Employer for Cause or due to a Voluntary Termination, in which case Employer retains all rights to repurchase the Common Shares. Notwithstanding anything to the contrary herein or in the Plan, all of the stock options awarded to Employee under the Potter Option Agreements and subsequent stock option grants immediately vest (i) upon a termination by Employee for Good Reason, or (ii) upon a Change of Control (as defined below), at and to the extent of Employee's choice. 8. Death or Permanent Disability. 8.1 Death. If Employee's employment hereunder is terminated by death, Employer shall, within 90 days of the date of death, make (i) a lump sum payment to Employee's estate (or other beneficiary designated by him in writing) equal to all Base Salary and bonuses, if any, earned and accrued through the date of death, and (ii) any other benefits payable under any then-current life insurance policy provided to Employee pursuant to Section 3.3 hereof payable in accordance with the terms of such policy. Thereafter, Employer shall have no further obligation to Employee under the Agreement. 7 8 8.2 Permanent Disability. In the event Employee shall become physically or mentally disabled while employed by Employer under this Agreement so that Employee is unable to render the services provided for by this Agreement for a period of six consecutive months or for shorter periods aggregating six months during any 24-month period, or so that Employee has a Disability (as defined under Employer's then- current disability policy), Employer may, at any time after the last day of the six consecutive months of disability, the day on which the shorter periods of disability equal an aggregate of six months, or the day on which Employee is determined to have a Disability, terminate Employee's employment hereunder for "Permanent Disability" by written notice to Employee. Following such termination, Employee shall be entitled to received from Employer: (i) all Base Salary and bonuses, if any, accrued through the date of termination; and (ii) any other benefits payable under Employer's then-current disability policy, but all other rights of Employee hereunder shall terminate as of the date of Employee's termination. 9. Change of Control. 9.1 Notwithstanding anything to the contrary contained herein, if Employer terminates Employee without Cause upon or within six months following a Change of Control (as defined below), Employer shall pay Employee his accrued unpaid Base Salary to the date of termination and any bonus earned but not paid and shall continue to pay Employee the greater of (i): his annual Base Salary as of the date such termination occurs (calculated as if the Norm Bonus for that year is earned) for a period of one (1) year following the date of termination, or (ii) if such termination occurs during the Initial Employment Term, the remaining portion of Employee's Base Salary plus his bonus for the Initial Employment Term, if any, for the year in which such termination occurs (calculated as if the Norm Bonus for that year is earned), as severance pay (such period, as applicable, being referred to hereinafter as the "Change of Control Severance Period"). Any severance payable pursuant to this Section 9.1 will be in substitution for and not in addition to any severance that might be payable pursuant to Article 7 hereof. To the extent Employer makes payments pursuant to this Section 9.1, it will have no additional obligations under Article 7. The Base Salary shall be payable in bi-weekly payments during the Change of Control Severance Period and the bonus shall be paid at the conclusion of the Change of Control Severance Period. 9.2 For purposes of this Agreement, "Change of Control" means any one of the following: (a) any person or group (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act")) (other than MS Shareholders (as defined in Employer's Amended and Restated Shareholders' Agreement dated as of October 6, 1997) or any group consisting solely of such persons) acquiring beneficial ownership of more than 50% of Employer's then outstanding Common Stock or 51% or more of the combined voting power of the Employer's then outstanding securities entitled generally to vote for the election of the Employer's Directors; 8 9 (b) the consummation of the merger or consolidation of the Employer with any other corporation, other than a merger with a wholly-owned subsidiary, the sale of substantially all of the assets of the Employer, or the liquidation or dissolution of the Employer, 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 majority of the Board of Directors 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 Employer outstanding immediately prior thereto represent (either by remaining outstanding or by 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 Employer 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 Employer immediately prior to the transaction in substantially the same proportions as such holders owned such voting securities immediately prior to the transaction; or (c) Continuing Directors (as defined below) no longer constitute at least a majority of the Board or a similar body of any successor to the Employer. For purposes of this Agreement, "Continuing Directors" means any individual who either (i) is a member of the Employer's Board of Directors on the Effective Date, (ii) who becomes a director after the Effective Date whose election or nomination for election by Employer's shareholders, was approved by a vote of at least a majority of the Continuing Directors (either by a specific vote or by approval of the proxy statement of Employer in which such person is named as nominee for director, without objection to such nomination), or (iii) is designated by any party pursuant to its rights under Section 2.1 of the Amended and Restated Shareholders' Agreement. 9.3 Excess Parachute Payments. If any payment or the receipt of any benefit under this Agreement shall be deemed to constitute an "excess parachute payment" as such term is described in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), so as to result in the loss of a deduction to the Employer under Code Section 280G or in the imposition of an excise tax on the Employee under Code Section 4999, or any successor sections thereto, then the amounts payable or the benefits provided under this Agreement shall be reduced to the minimum extent necessary so that no such deduction will be lost by the Employer and no such excise tax will be imposed on the Employee. The Employer, in its sole discretion, shall determine whether or not an "excess parachute payment" would otherwise occur and shall determine the amount and method of the foregoing reduction. 10. Miscellaneous. 10.1 Assignment of Employee Benefits. Absent the prior written consent of Employer, and subject to will and the laws of descent and distribution, Employee shall have no right to exchange, convert, encumber, or dispose of the rights of Employee to receive benefits and payments under this Agreement, which payments, benefits, and rights thereto are non-assignable and non-transferable. 9 10 10.2 Burden and Benefit. This Agreement shall be binding upon, and shall inure to the benefit of, Employer and Employee, their respective heirs, personal and legal representatives, successors and assigns. 10.3 Governing Law. In view of the fact that the principal office of Employer is located in the State of Missouri, it is understood and agreed that the construction and interpretation of this Agreement shall at all times and in all respects be governed by the laws of the State of Missouri. 10.4 Severability. It is expressly understood and agreed that although Employee and Employer consider the restrictions contained in this Agreement to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against Employee, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 10.5 Headings. The headings of the Sections of this Agreement are for reference only and not to limit, expand, or otherwise affect the contents of this Agreement. 10.6 Entire Agreement; Modification. Except as to the Employer's Stock Option Plans, any instrument relating to an Option granted thereunder and written agreements signed by both of the parties hereto from time to time after the date hereof, this Agreement contains the entire agreement and understanding by and between Employer and Employee with respect to the subject matter hereof, and any representations, promises, agreements, or understandings, written or oral, not herein contained shall be of no force or effect. No change, waiver or modification of any provision of this Agreement shall be valid or binding unless the same is in writing and duly executed by both parties and no evidence of any waiver or modification shall be offered or received in evidence of any proceeding, arbitration, or litigation between the parties hereto arising out of or affecting this Agreement, or the rights or obligations of the parties hereunder, unless such waiver or modification is in writing, duly executed as aforesaid, and the parties further agree that the provisions of this Section 10.6 may not be waived except as set forth herein. 10.7 Waiver of Breach. The waiver by Employer of a breach of any provision of this Agreement by Employee shall not operate or be construed as a waiver of any subsequent breach by Employee. 10.8 Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the execution page 10 11 of this Agreement, provided, however, that all notices to Employer shall be directed to the attention of the Board of Directors of Employer with a copy to the Secretary of Employer, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 10.9 Withholding Taxes. Employer may withhold from any amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. 10.10 Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, Employer and Employee have duly executed this Agreement as of the day and year first above written. EMPLOYER: AMERICAN ITALIAN PASTA COMPANY, a Delaware Corporation 1000 Italian Way Excelsior Springs, Missouri 64024 By: /s/ T.S. Webster ---------------------------------- Timothy S. Webster President EMPLOYEE: /s/ David B. Potter ------------------------------------ David B. Potter Address: 8400 Allman ------------------------------------ Lenexa, Kansas 66219 ------------------------------------ (913) 599-2502 ------------------------------------ 11 EX-10.10 13 SHAREHOLDERS' AGREEMENT 1 EXHIBIT 10.10 AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT October 6, 1997 among American Italian Pasta Company and Certain of its Shareholders 2 THIS AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT dated as of October 6, 1997 ("Agreement") is by and among American Italian Pasta Company, a Delaware corporation (the "Company"), and each of the other signatories listed on the signature pages hereof. W I T N E S E T H: WHEREAS, the Company, The Morgan Stanley Leveraged Equity Fund II, L.P., a Delaware limited partnership ("MSLEF II"), Morgan Stanley Capital Partners III, L.P. ("MSCP"), Morgan Stanley Capital Investors, L.P. and MSCP III 892 Investors, L.P., each a Delaware limited partnership (collectively, the "MSCP Funds" and, together with MSLEF II, collectively, the "MS Shareholders"), and each of the other signatories hereto are parties to a Shareholders Agreement dated as of October 30, 1992 (the "Original Agreement"), as amended by Amendment No. 1 to Shareholders Agreement dated as of March 8, 1995, Amendment No. 2 to Shareholders Agreement dated as of April 13, 1995, and Amendment No. 3 to Shareholders Agreement dated as of April 15, 1997 (as so amended, the "Amended Original Agreement"); WHEREAS, the Shareholders (as defined below) presently own the number of shares of Class A common stock, par value $.01 per share (the "Old Class A Common Stock"), and/or shares of common stock, no par value per share (the "Old Common Stock" and with the Old Class A Common Stock collectively, the "Old Stock"), of the Company set forth opposite their respective names on Exhibit A attached to this Agreement; WHEREAS, the Company expects to consummate its IPO (as defined herein) shortly following the date hereof; WHEREAS, prior to its IPO, the Company will amend and restate its Certificate of Incorporation and effect a recapitalization (the "Recapitalization") pursuant to which (i) each outstanding share of Old Class A Common Stock and Old Common Stock will be converted into 6.132043 shares of the Class A Convertible Common Stock, par value $.001 per share, of the Company (the "Class A Common Stock"); WHEREAS, the MS Shareholders have informed the Company that upon the consummation of the IPO they intend to convert such number of their shares of Class A Common Stock into shares of the Class B Convertible Non-Voting Common Stock, par value $.001 per share, of the Company (the "Class B Common Stock" and, together with the Class A Common Stock, the "Common Stock") so that, following such conversion, the MS Shareholders will own, in the aggregate, 49% of the outstanding Class A Common Stock. WHEREAS, in connection with the IPO, the Company and the Shareholders wish to further amend and restate in its entirety the Amended Original Agreement; and WHEREAS, the execution of this Agreement constitutes the consent of the Company and each of the Shareholders to the amendment and restatement of the Amended Original Agreement effective immediately after the IPO Closing (as defined below), thereby binding each 3 Shareholder to this Agreement in accordance with Section 7.4 of the Amended Original Agreement. NOW, THEREFORE, in consideration of the mutual agreements and covenants hereinafter set forth, the parties hereto hereby agree as follows: ARTICLE 1 DEFINITIONS 1.1 Definitions. (a) The following terms, as used in this Agreement, have the following meanings: "Adverse Person" means, as determined in the sole discretion of the Board, (i) any transferee that intends to cause, or is reasonably likely to cause, or whose ownership of Common Stock would cause an adverse impact on the business, interests or prospects of the Company or any Shareholder or (ii) any transferee that is a competitor or supplier of the Company or an Affiliate of any such competitor or supplier. "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such Person, provided that no shareholder of the Company shall be deemed an Affiliate of any other shareholder solely by reason of any investment in the Company. For the purpose of this definition, the term "control" (including with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "Affiliated Employee Benefit Trust" means any trust that is a successor to the assets held by a trust established under an employee benefit plan subject to ERISA or any other trust established directly or indirectly under such plan or any other such plan having the same sponsor. "Baum Fund" means George K. Baum Group, Inc, George K. Baum Capital Partners, L.P., or George K. Baum Employee Equity Fund, L.P. "Baum Affiliate" means any Person included within the definition of "Baum Fund", or any Affiliate of such Person. "Board" means the board of directors of the Company. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Business Plan" has the meaning specified in Section 2.5(b) of this Agreement. -2- 4 "Bylaws" means the bylaws of the Company, as amended from time to time. "Certificate of Incorporation" means the Certificate of Incorporation of the Company, as amended from time to time. "Chairman" means the chairman of the board of directors of the Company. "Chief Executive Officer" means the chief executive officer of the Company. "Citicorp" means Citicorp Venture Capital, Ltd. or CCT III Partners, L.P. "Class A Common Stock" has the meaning specified in the recitals to this Agreement. "Class B Common Stock" has the meaning specified in the recitals to this Agreement. "Code" means the Internal Revenue Code of 1986, as amended. "Common Stock" has the meaning specified in the recitals to this Agreement. "Confidential Information" has the meaning specified in Section 6.1(b) of this Agreement. "Director" means any member of the Board. "Disadvantageous Condition" has the meaning specified in Section 5.1(a) of this Agreement. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Existing Shareholders" means Thompson and Citicorp. "Fully Diluted" means, with respect to Common Stock, all outstanding shares of Common Stock, shares of Common Stock issuable in respect of securities convertible into or exchangeable for Common Stock, and shares of Common Stock issuable upon exercise of stock appreciation rights or options, warrants and other rights to purchase or subscribe for Common Stock or securities convertible into or exchangeable for Common Stock. "IPO" means the Company's first Underwritten Offering. "IPO Closing" means the consummation of the IPO. "IPO Closing Date" means the date of the IPO Closing. "Losses" means any losses, claims, damages, liabilities or expenses. -3- 5 "Major Acquisition" means strategic acquisition of, or investment in the assets or a business of, another Person, which acquisition or investment has a fair market value of at least $30 million. "Maximum Offering Size" has the meaning specified in Section 5.1(f) of this Agreement. "Minority Selling Shareholders" means, with respect to any registration of Registrable Stock under the Securities Act, the Minority Shareholders who exercise their rights under Sections 5.1(a), 5.1(b) or 5.2 of this Agreement to have Registrable Stock included in such registration. "Minority Shareholders" means the Shareholders and their Permitted Transferees, other than the MS Shareholders and the Permitted Transferees of the MS Shareholders. "MS Percentage" means, as of any date, a fraction, the numerator of which equals the aggregate number of shares of Common Stock transferred prior to such date by the MS Shareholders and their Permitted Transferees and the denominator of which equals the number of shares of Common Stock owned on the date hereof by the MS Shareholders and their Permitted Transferees. "MS Selling Shareholders" means, with respect to any registration of Registrable Stock under the Securities Act, the MS Shareholders who exercise their rights under Sections 5.1(a), 5.1(b) or 5.2 of this Agreement to have Registrable Stock included in such registration. "MS Shareholder" has the meaning specified in the recitals to this Agreement. "Old Stock" has the meaning specified in the recitals to this Agreement. "Partial Subsidiary" means any Subsidiary of the Company of which less than 100% of the capital stock is directly or indirectly owned by the Company. "Permitted Transferee" means: (i) in the case of any MS Shareholder, (w) any general or limited partner of any MS Shareholder (a "MS Partner"), and any corporation, partnership, Affiliated Employee Benefit Trust or other entity which is an Affiliate of any MS Partner (collectively, the "MS Affiliates"), (x) any managing director, general partner, director, limited partner, officer or employee of a MS Shareholder or a MS Affiliate (collectively, "MS Associates"), (y) the heirs, executors, administrators, testamentary trustees, legatees or beneficiaries of any MS Associate and (z) a trust, the beneficiaries of which, or a corporation, limited liability company or partnership, the shareholders, members or general or limited partners of which, include only MS Shareholders, MS Affiliates, MS Associates, their spouses or their lineal descendants; -4- 6 (ii) in the case of any Minority Shareholder who is a natural person, (x) a Person to whom Shares are transferred from such Minority Shareholder (A) by will or the laws of descent and distribution or (B) by gift without consideration of any kind; provided that such transferee is the lineal descendant or spouse of a Person who is a signatory to this Agreement, or (y) a trust, each primary beneficiary of which is the spouse or lineal descendant of such Minority Shareholder or his Permitted Transferees under clause (x) above; (iii) in the case of Thompson Holdings, L.P., (x) any Person included in the definition of "Thompson", (y) a Person to whom Shares are transferred by gift without consideration of any kind; provided that such transferee is the lineal descendant or spouse of Richard C. Thompson, or (z) a trust, each primary beneficiary of which is the spouse or lineal descendant of Richard C. Thompson or a Permitted Transferee under clause (y) above; (iv) in the case of any Shareholder, the Company; (v) in the case of any Baum Fund, any Baum Affiliate, and, effective as of any date after December 31, 1998, (x) any partner or member of such Baum Fund; provided that at no time shall the number of Shares transferred pursuant to this clause (x), when added to the aggregate number of Shares transferred pursuant to this clause (x) or sold by all Baum Affiliates during the preceding 90 days, exceed the maximum number of shares of Common Stock that could then be sold by all Baum Affiliates in accordance with the then-applicable volume limitations of Rule 144(e) (or any successor provision) under the Securities Act, if any, or (y) any partner or member of any Baum Fund in connection with any distribution of all or substantially all of the net assets of such Baum Fund to its partners or members, as applicable; (vi) in the case of Excelsior Investors, L.L.C., any Person who is a member thereof on the date of this Agreement; (vii) in the case of Citicorp, a Person that is an Affiliate of Citicorp, it being understood that for purposes of this provision, in the case of Citicorp or its Permitted Transferees, a trust established under ERISA which is an Affiliate of Citicorp or an Affiliated Employee Benefit Trust shall be deemed an Affiliate of Citicorp or its Permitted Transferees; (viii) in the case of CCT III Partners, L.P. ("CCT"), effective as of any date after December 31, 1998, any partner of CCT in connection with any distribution of all or substantially all of the net assets of CCT to its partners; (ix) any Person with respect to which the Board, in its sole discretion, shall have adopted a resolution (whether before or after the date of this Agreement) stating that the Board has no objection if a transfer of Shares is made to such Person; provided, in the case of any such resolution adopted on or after the date of this Agreement, that if the MS -5- 7 Shareholders shall at the time of such adoption beneficially own, in the aggregate, shares of Common Stock representing at least 10% of the shares of Common Stock then outstanding (on a Fully Diluted basis), the MS Shareholders shall in their sole discretion have approved such resolution; or (x) in the case of JSS Management Company, Ltd., (x) James A. Schlindwein, or (y) any general or limited partner of JSS who is a spouse or lineal descendant of James A. Schlindwein. "Person" means an individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Principal Subsidiary" has the meaning specified in Section 2.1(a) of this Agreement. "Recapitalization" has the meaning specified in the recitals to this Agreement. "Registrable Stock" means any Shares until the first to occur of (i) a registration statement covering such Shares has been declared effective by the SEC and such Shares have been disposed of pursuant to such effective registration statement, (ii) such Shares have been sold in compliance with all of the applicable conditions of Rule 144, (iii) such shares are eligible to be sold pursuant to Rule 144(k), or (iv) such Shares have otherwise been transferred, the Company has delivered a new certificate or certificates for such Shares not bearing the legend required pursuant to this Agreement and such Shares may be resold without registration under the Securities Act. "Registration Expenses" means (i) all SEC, stock exchange or NASDAQ registration and filing fees, (ii) fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Shares), (iii) printing expenses, (iv) internal expenses of the Company (including without limitation all salaries and expenses of its officers and employees performing legal or accounting duties), (v) reasonable fees and disbursements of counsel for the Company and customary fees and expenses for independent certified public accountants retained by the Company (including any costs associated with the delivery by independent certified public accountants of a comfort letter or letters requested pursuant to Section 5.4(h) hereof), (vi) the reasonable fees and expenses of any special experts retained by the Company in connection with such registration, (vii) reasonable fees and expenses of no more than one counsel for all of the Selling Shareholders, (viii) fees payable to the National Association of Securities Dealers, Inc and (ix) fees and disbursements of underwriters customarily paid by issuers or sellers of securities in firm-commitment underwritings; provided, however, that the term "Registration Expenses" shall not include any (w) underwriting or brokerage fees, discounts or commissions, (x) transfer taxes, (y) out-of-pocket expenses of the Selling Shareholders (or of the agents who manage their accounts) or (z) any fees and expenses of underwriters' counsel (other than pursuant to clause (ii) of this paragraph); provided, further, that the counsel for the Selling Shareholders contemplated by clause (vii) of this definition shall be selected by the Selling Shareholders -6- 8 beneficially owning a majority of the Shares to be sold for the account of all Selling Shareholders, but in any event shall be reasonably acceptable to the Company. "Registration statement" means a registration statement under the Securities Act. "Representatives" has the meaning specified in Section 6.1(b) of this Agreement. "Rule 144" means Rule 144 (or any successor provision) under the Securities Act. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Selling Shareholders" means the Minority Selling Shareholders and the MS Selling Shareholders. "Schroeder" means Horst W. Schroeder and each of his Permitted Transferees in respect of Shares transferred before or after the date hereof. "Schroeder Allotment" means, subject to adjustment from time to time pursuant to Section 7.1, (i) with respect to calendar year 1997, 28,323 shares of Common Stock; (ii) with respect to calendar year 1998, 35,000 shares of Common Stock minus the number of shares of Common Stock transferred by Schroeder in 1997; (iii) with respect to calendar year 1999, 58,494 shares of Common Stock minus the aggregate number of shares of Common Stock transferred by Schroeder in 1997 and 1998 and (iv) with respect to the calendar year 2000, 79,544 shares of Common Stock, minus the aggregate number of shares of Common Stock transferred by Schroeder in 1997, 1998 and 1999. "Schroeder Percentage" means, as of any date, a fraction, the numerator of which shall equal the aggregate number of shares of Common Stock transferred prior to such date by Schroeder and the denominator of which shall equal the number of shares of Common Stock owned on the date hereof by Schroeder. "Shareholder" means each Person (other than the Company) who shall be a party to this Agreement, whether in connection with the execution and delivery hereof as of the date hereof, pursuant to Section 7.4 or otherwise, so long as such Person shall beneficially own any Shares. "Shares" means, with respect to a Shareholder, all shares of Common Stock held by such Shareholder, whether acquired before, on or after the date of this Agreement, including without limitation all shares of Common Stock issued upon the conversion of shares of Old Stock owned by such Shareholder pursuant to the Recapitalization. In the event of a stock dividend or distribution, or any change in the Common Stock by reason of any stock dividend, split-up, recapitalization, combination, conversion, exchange of shares or the like, the term "Shares" shall from and after the record date for such dividend, distribution, split-up, recapitalization, combination, conversion, exchange or the like, also include any and all such stock dividends and -7- 9 distributions and any and all shares into which or for which any or all of the Shares may be changed or exchanged. "Significant Action" means: (i) the appointment or removal, with or without cause, of the Chairman of the Board; (ii) any merger, consolidation or other similar business combination to which the Company or any of its Subsidiaries is a party; except for any such merger, consolidation or business combination which both (x) involves a Subsidiary of the Company as a party and (y) would be a Major Acquisition but for the failure of such merger, consolidation or business combination, as applicable, to equal or exceed the monetary threshold specified in the definition of "Major Acquisition". (iii) any sale, lease, exchange, transfer or other disposition, directly or indirectly, in a single transaction or series of related transactions, of a majority of the tangible assets of the Company and its Subsidiaries taken as a whole; (iv) except for (A) the exercise or grant of stock options, restricted stock, phantom stock, stock appreciation rights or similar rights or interests pursuant to employee or director benefit plans of the Company or any of its Subsidiaries or (B) the conversion, exchange or exercise of any securities outstanding on the date hereof that are convertible into, exchangeable for or exercisable for capital stock of the Company, any increase or reduction in the authorized capital of the Company or any Partial Subsidiary, or any recapitalization of the Company or any Partial Subsidiary, or the creation of any additional class of capital stock of the Company or any Partial Subsidiary, or the sale, issuance, distribution, exchange, purchase or redemption of shares of capital stock of the Company or any Partial Subsidiary, or phantom equity, stock appreciation and similar interests and rights (or any securities convertible into or exchangeable for capital stock of the Company or any Partial Subsidiary or phantom equity, stock appreciation and similar interests and rights) or any rights, warrants or options to purchase, subscribe for or acquire any such capital stock or convertible or exchangeable securities or phantom equity, stock appreciation and similar interests and rights of the Company or any Partial Subsidiary; (v) any amendment, modification or repeal of any provision of the certificate of incorporation or bylaws of the Company or any of its Subsidiaries or any change in the jurisdiction of incorporation of the Company or any of its Subsidiaries; (vi) the approval of any dissolution or plan of liquidation of the Company or any of its Subsidiaries; (vii) the authorization of any general assignment by the Company or any of its Subsidiaries for the benefit of creditors or of the institution by the Company or any of -8- 10 its Subsidiaries of any proceeding to adjudicate it as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, dissolution, protection, relief, or composition of the Company or any of its Subsidiaries or their respective debts under any existing or future law of any jurisdiction relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for the Company, any of its Subsidiaries or for any substantial part of their respective properties; (viii) the declaration or making of any provision for payment of, or the setting aside of assets with respect to, any dividend or other distribution (in cash, securities or other property) by the Company or any Partial Subsidiary with respect to any capital stock of the Company or Partial Subsidiary or any redemption or repurchase of any such capital stock, except for (A) dividends on Common Stock payable in the form of Common Stock and (B) repurchases of capital stock of the Company or any Partial Subsidiary pursuant to the terms of employee or director benefit plans or employment agreements; (ix) the creation, issuance, assumption, guarantee or incurrence by the Company in any one transaction or series of related transactions of any indebtedness or the making of any advance or loan to any Person, that increases the aggregate amount of indebtedness, loans, advances and guarantees of the Company to an amount that is at least $30 million greater than the sum of (A) aggregate amount of such indebtedness, loans, advances and guarantees outstanding on the date of this Agreement and (B) the aggregate amount of availability remaining under all credit facilities of the Company as of the date of this Agreement; (x) the termination of the engagement of Ernst & Young LLP as the independent auditors for the Company and its Subsidiaries or the selection of any other public accounting firm as the independent auditors for the Company and its Subsidiaries; (xi) any Major Acquisition; (xii) any acquisition or construction of a new pasta production facility by the Company or any of its Subsidiaries with an aggregate cost of at least $30 million; (xiii) any adoption of a shareholder rights plan; or (xiv) any commitment to do any of the foregoing actions. "Subsidiary" means any entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions are at the time directly or indirectly owned by a company. "Subsidiary Board" means the board of directors of any Principal Subsidiary. -9- 11 "Subsidiary Director" shall have the meaning set forth in Section 2.1(a) of this Agreement. "Third Party" means a prospective purchaser of Shares in an arm's-length transaction from a Shareholder where such purchaser is not a Permitted Transferee of such Shareholder. "Thompson" means Richard C. Thompson, Thompson Holdings, Inc., Thompson Holdings, L.P., and each of their respective Permitted Transferees in respect of Shares transferred before or after the date hereof. "Transfer" has the meaning set forth in Section 3.1(a) of this Agreement. "Underwritten Offering" means a firm-commitment underwritten public offering of Registrable Stock pursuant to an effective registration statement. "Webster" means Timothy S. Webster and each of his Permitted Transferees in respect of Shares transferred before or after the date hereof. "Webster Allotment", subject to adjustment from time to time pursuant to Section 7.1, means (i) with respect to the Company's fiscal year ending December 31, 1998, no shares of Common Stock, (ii) with respect to the Company's fiscal year ending December 31, 1999, 15,000 shares of Common Stock, (iii) with respect to the Company's fiscal year ending December 31, 2000, 30,000 shares of Common Stock, minus the aggregate number of shares of Common Stock transferred by Webster in fiscal year 1999, (iv) with respect to the Company's fiscal year ending December 31, 2001, 45,000 shares of Common stock, minus the aggregate number of shares of Common Stock transferred by Webster in fiscal years 1999 and 2000 and (v) with respect to the Company's fiscal year ending December 31, 2002, 60,000 shares of Common Stock, minus the aggregate number of shares of Common Stock transferred by Webster in fiscal years 1999, 2000 and 2001. (b) The term "MS Shareholder", to the extent an MS Shareholder shall have transferred any of its Shares to one or more Permitted Transferees, shall mean such MS Shareholder and such Permitted Transferees, taken together and any right or action that may be taken at the election of such MS Shareholder may be taken at the election of such MS Shareholder and all such Permitted Transferees. ARTICLE 2 CORPORATE GOVERNANCE 2.1 Composition of the Board. (a) The Board shall initially consist of nine directors, to be nominated to the Board as follows: (i) one Director nominee shall be the Chairman of the Board (initially Horst W. Schroeder); -10- 12 (ii) one Director nominee shall be the Chief Executive Officer (initially Timothy S. Webster); (iii) MSLEF II shall be entitled to designate (a) two Director nominees for so long as it owns at least 25% of the outstanding Common Stock (one of whom initially shall be Richard C. Thompson) or (b) one Director nominee for so long as it owns at least 5% but less than 25% of the outstanding Shares; (iv) MSCP shall be entitled to designate (a) two Director nominees for so long as it owns at least 35% of the outstanding Common Stock or (b) one Director nominee for so long as it owns at least 5% but less than 35% of the outstanding Shares; (v) If neither MSLEF II nor MSCP shall beneficially own at least 5% of the outstanding Common Stock, then one of MSLEF II or MSCP (as shall be determined by MSLEF II and MSCP in their sole discretion) shall be entitled to designate one Director nominee for as long as the MS Shareholders shall beneficially own, in the aggregate, at least 5% of the outstanding Common Stock; (vi) Citicorp shall be entitled to designate one Director nominee for so long as it shall beneficially own at least 6.4% of the outstanding Common Stock (on a Fully Diluted basis); and (vii) The remaining Directors shall be nominated in the manner provided for in the Bylaws; provided that at least two of such Directors shall be independent Directors within the meaning of the rules promulgated by the national securities exchange or national market system on which the Common Stock is then listed or traded. At their request, each of MSLEF and MSCP shall be entitled to designate the same number of nominees to be elected as directors ("Subsidiary Directors") of any Subsidiary or Subsidiaries of the Company (any such Subsidiary so long as such a designation is in effect, a "Principal Subsidiary") as shall from time to time be applicable pursuant to clauses (iii) through (v) above. So long as Subsidiary Directors designated by MSLEF or MSCP shall continue to serve on a Subsidiary Board pursuant to such designation, such Subsidiary Board shall consist of nine directors, subject to adjustment from time to time pursuant to Section 2.1(b). If and for so long as MSLEF or MSCP shall have exercised their right pursuant to this Section 2.1 to designate one or more Subsidiary Director nominees, the Chairman of the Board and the Chief Executive Officer shall each have the right to designate one Subsidiary Director nominee. (b) The size of the Board and any Subsidiary Board may not be decreased, but may be increased in the manner set forth in the Bylaws or in the bylaws of such Principal Subsidiary, as applicable. In the event of any such increase, each of MSCP and MSLEF II shall have the right to designate an additional number of Director nominees or Subsidiary Director nominees, as applicable, pursuant to Section 2.1(a) hereof, so that the total number of Director nominees -11- 13 or Subsidiary Director nominees, as applicable, permitted to be designated by MSCP and MSLEF II shall represent the same percentages, as nearly as may be, of the increased Board or the increased Subsidiary Board, as applicable, as may be designated by them pursuant to Section 2.1(a) hereof in the case of a Board or a Subsidiary Board, as applicable, consisting of nine members. (c) In the event that the Board is classified such that Directors serve staggered terms, then (i) the Director nominees designated by the MS Shareholders shall be allocated among such classes of Directors in as equal proportions as is practicable and (ii) at any meeting of the Company's shareholders at which Directors are elected, the MS Shareholders shall have the right to designate nominees for election at such meeting such that the number of nominees so designated which, together with incumbent Directors who had previously been nominated by the MS Shareholders, does not exceed the maximum number of nominees for Director that the MS Shareholders may designate pursuant to Section 2.1(a) or (b) hereof, as applicable. (d) Each Shareholder then entitled to vote for the election of Directors agrees (i) to vote at any special or annual meeting of the shareholders of the Company at which Directors are to be elected or (ii) to execute a written consent, as the case may be, so as to ensure that the Board consists of the Director nominees designated in accordance with this Section 2.1. The Company agrees to vote, or execute a written consent, as applicable, so as to ensure that each Subsidiary Board includes the Subsidiary Director nominees designated in accordance with this Section 2.1. (e) The Shareholders shall take all actions necessary so that, notwithstanding any other provision of this Agreement, at no time persons who are nominees of the MS Shareholders shall constitute more than one-half of the Directors. The Company shall take all actions necessary so that, notwithstanding any other provision of this Agreement, at no time persons who are nominees of the MS Shareholders shall constitute more than one-half of the directors of any Principal Subsidiary. 2.2 Removal. Each Shareholder agrees that, if, at any time, it is then entitled to vote for the removal of Directors, it (a) will not vote any of its Shares in favor of the removal of any Director who shall have been designated or nominated pursuant to Section 2.1 unless such removal shall be for Cause or the Persons entitled to designate or nominate such Director shall have consented to such removal in writing and (b) will, upon the written request of a Person entitled to designate a Director pursuant to Section 2.1 hereof, take such action by vote or consent as may be necessary to remove or replace such Director. The Company (i) will not vote any of its shares of the capital stock of any Principal Subsidiary in favor of the removal of any Subsidiary Director who shall have been designated or nominated pursuant to Section 2.1 unless such removal shall be for Cause or the MS Shareholder entitled to designate or nominate such Subsidiary Director shall have consented to such removal in writing and (ii) will, upon the written request of the MS Shareholder entitled to designate a Subsidiary Director pursuant to Section 2.1 hereof, take such action by vote or consent as may be necessary to remove or replace such Subsidiary Director. Removal for "Cause" shall mean removal of a Director or a Subsidiary Director, as applicable, because of such Director's or Subsidiary Director's, as applicable, (v) willful and continued failure to substantially perform his duties with the Company -12- 14 or Principal Subsidiary, as applicable, in his position as a director, (w) willful conduct which is significantly injurious to the Company and its Subsidiaries taken as a whole, monetarily or otherwise, (x) conviction for, or guilty plea to, a felony or a crime involving moral turpitude, (y) abuse of illegal drugs or other controlled substances or habitual intoxication, or (z) willful breach of this Agreement. Upon the written request of any Person entitled to designate a Director nominee pursuant to Section 2.1 hereof, each Shareholder shall vote, or execute a written consent, to remove or replace such Director. Upon the written request of any MS Shareholder entitled to designate a Subsidiary Director nominee pursuant to Section 2.1 hereof, the Company shall vote, or execute a written consent, to remove or replace such Subsidiary Director nominee. 2.3 Vacancies. (a) If, as a result of death, disability, retirement, resignation, removal (with or without Cause) or otherwise, there shall exist or occur any vacancy of the Board or a Subsidiary Board: (i) the Person entitled to designate the nomination of such Director or Subsidiary Director, as applicable, whose death, disability, retirement, resignation or removal resulted in such vacancy may designate another individual nominee (the "Nominee") to be appointed by the Board or such Subsidiary Board, as applicable, to fill such capacity and serve as a Director or Subsidiary Director, as applicable; (ii) in the case of a vacancy on the Board, each Shareholder then entitled to vote for the election of the Nominee as a Director agrees that it will vote its shares, or execute a written consent, as the case may be, in order to ensure that the Nominee be elected to the Board; and (iii) in the case of a vacancy on a Subsidiary Board, the Company agrees that it will vote, or execute a written consent in respect of, its shares of the capital stock of such Principal Subsidiary in order to ensure that the Nominee be elected to such Subsidiary Board. (b) Any vacancy on the Board or any Subsidiary Board resulting from the termination of the right of a Shareholder to designate a Director nominee or Subsidiary Director nominee, as applicable, pursuant to Section 2.1 hereof shall be filled in the manner set forth in the Bylaws or the bylaws of the applicable Principal Subsidiary. 2.4 Meeting. The Board and any Subsidiary Board shall hold a regularly scheduled meeting at least once every calendar quarter. 2.5 Action by Board. (a) A quorum of the Board or any Subsidiary Board shall consist of a majority of the Directors or the Subsidiary Directors, as applicable. All actions of the Board and any Subsidiary Board shall require the affirmative vote of at least a majority of the Directors or the Subsidiary Directors, as applicable, at a duly convened meeting of the Board or such Subsidiary Board, as applicable, at which a quorum is present or the unanimous written consent of the Board or such Subsidiary Board, as applicable; provided that, in the event there -13- 15 is a vacancy on the Board or such Subsidiary Board, as applicable and an individual has been nominated to fill such vacancy, the first order of business shall be to fill such vacancy. (b) The Chief Executive Officer shall submit to the Board, and obtain its approval of, prior to the start of each fiscal year of the Company, a business plan (the "Business Plan") setting forth the annual budget and operating plan of the Company and its Subsidiaries for such fiscal year. The Board shall receive monthly, quarterly and annual financial statements and other appropriate reports concerning operations of the Company and its Subsidiaries and other matters submitted to the Board. (c) So long as the MS Shareholders shall beneficially own, in the aggregate, shares of Common Stock representing at least 10% of the then-outstanding shares of Common Stock, the Board and each Subsidiary Board shall appoint to each committee of the Board or such Subsidiary Board, as applicable, one Director or Subsidiary Director, as applicable, who has been designated for service on such committee by the MS Shareholders. Each such committee of the Board or such Subsidiary Board, as applicable, shall be comprised of at least two Directors or Subsidiary Directors, as applicable, except that the audit committee of the Board shall be comprised of at least three Directors. (d) So long as the MS Shareholders shall hold, in the aggregate, shares of Common Stock representing at least 25% of the Common Stock then outstanding on a Fully Diluted basis, the Company shall not, and shall cause its Subsidiaries not to: (i) take any Significant Action or any other action that would constitute or result in the creation of any obligation (contingent or otherwise) on the part of the Company with respect to a Significant Action without the prior written approval of such Significant Action or other action by the Board and the MS Shareholders, or (ii) appoint a new Chief Executive Officer or a new chief financial officer of the Company, without the prior approval of Board, which approval shall reflect the affirmative vote of at least one of the directors designated by MSLEF or MSCP pursuant to Section 2.1 hereof. 2.6 Conflicting Charter or Bylaw Provisions. Each Shareholder shall vote its Shares, and shall take all other actions necessary, to ensure that the Company's Certificate of Incorporation and Bylaws facilitate and do not at any time conflict with any provision of this Agreement. ARTICLE 3 RESTRICTIONS ON TRANSFER 3.1 General. (a) Except as otherwise provided in Section 3.1(c), (d) or (e) below, no Minority Shareholder will before December 31, 1998, directly or indirectly, offer, sell, assign, transfer, grant a participation in, pledge or otherwise dispose of ("transfer") any Shares (or -14- 16 solicit any offers to buy or otherwise acquire, or to take a pledge of any Shares), except as permitted by Sections 3.3, 4.2, 5.1(b)(ii) or 5.2(a) of this Agreement and in compliance with the Securities Act. (b) Thereafter, and subject to Section 3.1(c), (d) and (e), any Minority Shareholder may transfer Shares (i) in compliance with the Securities Act and as permitted by Section 3.3 or 4.2 of this Agreement, (ii) in an Underwritten Offering pursuant to Section 5.1 or 5.2, (iii) in an open market sale pursuant to Rule 144, or (iv) in the case of Thompson or Citicorp, in a private transaction for cash subject to Section 4.1; provided that no transfer may knowingly be made to any Person who, based on information supplied to such Minority Shareholder by the Company or otherwise known to such Minority Shareholder, is an Adverse Person (or an Affiliate of an Adverse Person) or would, together with the Affiliates of such Person, beneficially own in excess of 10% of the outstanding Common Stock immediately after giving effect to such transfer. (c) Notwithstanding anything herein to the contrary, the aggregate number of shares of Common Stock transferred by Schroeder during any calendar year pursuant to Section 3.1(a) or 3.1(b) may not exceed the greater of (i) the Schroeder Allotment applicable to such calendar year and (ii) the number of shares of Common Stock owned by Schroeder that, when added to the aggregate number of shares of Common Stock previously transferred by Schroeder to other Persons, would cause the Schroeder Percentage to equal the MS Percentage. The provisions of this Section 3.1(c) will terminate on the earlier to occur of (i) January 1, 2001, (ii) the date on which the MS Shareholders cease to own at least 5% of the outstanding shares of Common Stock (calculated on a Fully Diluted basis) or (iii) the termination of Horst W. Schroeder's employment by the Company by reason of the Disability (as defined in the Employment Agreement between Horst W. Schroeder and the Company as in effect from time to time) or death of Horst W. Schroeder. (d) Notwithstanding anything herein to the contrary, the aggregate number of shares of Common Stock transferred by Webster during any fiscal year pursuant to Section 3.1(a) or 3.1(b) (other than shares of Common Stock (i) transferred to Permitted Transferees of Webster or (ii) that are transferred to the extent that all of the proceeds of such transfer are used to purchase shares of Common Stock upon the exercise of stock options granted to Webster) may not exceed the Webster Allotment for such fiscal year. The provisions of this Section 3.1(d) shall terminate on the earliest to occur of (i) the date prior to the third anniversary of the IPO Closing Date on which the MS Shareholders cease to own at least 5% of the outstanding shares of Common Stock (calculated on a Fully Diluted basis), (ii) the date on or after the third anniversary of the IPO Closing Date on which the MS Shareholders cease to own at least 10% of the outstanding shares of Common Stock (calculated on a Fully Diluted basis), (iii) the second anniversary of (x) the termination of employment of Timothy S. Webster by the Company for Cause or (y) his resignation other than for Good Reason (each, as defined in the Employment Agreement between Timothy S. Webster and the Company), (iv) the first anniversary of (x) the termination of employment of Timothy S. Webster by the Company other than for Cause or (y) his resignation for Good Reason, (v) the Disability of Timothy S. Webster (as defined in the -15- 17 Employment Agreement between Timothy S. Webster and the Company) or the death of Timothy S. Webster or (vi) the first day of the Company's 2003 fiscal year. (e) Notwithstanding anything herein to the contrary, no individual (other than Horst W. Schroeder or Timothy S. Webster) who on the date hereof is an officer or employee of the Company may transfer any of his Shares so long as such individual remains an officer or employee of the Company or any of its Subsidiaries, except as follows: (i) pursuant to clause (ii) of the definition of "Permitted Transferee", (ii) as permitted by Section 4.2, (iii) as may be permitted on a case-by-case basis by the compensation (or equivalent) committee of the Board in its absolute discretion, or (iv) commencing on the second anniversary of this Agreement, any Shares purchased by such individual at any time (other than Shares (A) purchased with proceeds of a loan from the Company, (B) acquired upon the exercise of a stock option, or (C) otherwise received pursuant to any employee benefit plan of the Company), in each case pursuant to this clause (iv), to the extent that such Shares are transferred in accordance with Section 3.1(b). (f) Notwithstanding anything herein to the contrary, but subject to the approval of managing underwriters of the IPO and of the Company in their discretion, Thompson Holdings, L.P. may sell up to 65% of its Shares in the IPO. This Section 3.1(f) shall be effective from and after the date of this Agreement. 3.2 Legend on Share Certificates. (a) In addition to any other legend that may be required by applicable law, each certificate for Shares that is issued to any Shareholder shall bear a legend in substantially the following form: "THIS SECURITY IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AS SET FORTH IN THE AMENDED AND RESTATED SHAREHOLDERS AGREEMENT DATED AS OF OCTOBER 6, 1997, COPIES OF WHICH MAY BE OBTAINED UPON REQUEST FROM AMERICAN ITALIAN PASTA COMPANY OR ANY SUCCESSOR THERETO." (b) If any shares of Common Stock cease to be subject to any restrictions on transfer set forth in this Agreement, the Company shall, upon the written request of the holder thereof, issue to such holder a new certificate evidencing such shares without the legend required by Section 3.2(a) endorsed thereon. 3.3 Permitted Transferees. Notwithstanding anything in this Agreement to the contrary, any Shareholder to which Section 3.1 and 3.2 is then applicable may at any time transfer any or all of its Shares to any one or more of its Permitted Transferees without the consent of the Board or any other Shareholder or group of Shareholders (except as provided in clause (ix) of the definition of "Permitted Transferee") so long as (a) such Permitted Transferee shall have agreed in writing to be subject to the terms of this Agreement (unless such Permitted Transferee qualifies as such solely by reason of clause (v) or (viii) of the definition of "Permitted Transferee", in which case such Permitted Transferee shall neither be required nor permitted to -16- 18 be subject to the terms of this Agreement) and (b) the transfer to such Permitted Transferee is not in violation of the applicable federal or state or foreign securities laws. 3.4 Improper Transfer. Any attempt to sell, assign, transfer, grant a participation in, pledge or otherwise dispose of any Shares not in compliance with this Agreement shall be null and void and neither the Company nor any transfer agent shall give any effect in the Company's stock records to such attempted sale, assignment, transfer, grant of a participation in, pledge or other disposition. ARTICLE 4 RIGHTS OF FIRST REFUSAL; RIGHTS TO PARTICIPATE IN A SALE 4.1 Right of First Refusal. (a) If any Existing Shareholder receives from or otherwise negotiates with a Third Party in a private transaction a bona fide offer to purchase any or all of the Shares beneficially owned by such Existing Shareholder for cash (a "Section 4.1 Offer") and such Shareholder intends to pursue a transfer of such Shares to such Third Party, such Shareholder shall provide the Company written notice of such Section 4.1 Offer (a "Section 4.1 Offer Notice"). The Section 4.1 Offer Notice shall identify the Third Party making the Section 4.1 Offer, the number and class (or classes) of Shares subject to the Offer, the cash price per share of Shares at which a sale is proposed to be made (the "Section 4.1 Offer Price") and all other material terms and conditions of the Section 4.1 Offer. Each Existing Shareholder agrees that it will not enter into any discussions or negotiations with any Third Party concerning a transaction that might constitute or result in a Section 4.1 Offer, except (i) with the prior written consent of the Board, following a Board determination that such Third Party is not an Adverse Person, and (ii) in full compliance with Sections 3.1 and 6.1. (b) The receipt of a Section 4.1 Offer Notice by the Company from an Existing Shareholder shall constitute an offer by such Existing Shareholder to sell to the Company for cash the Shares subject to the Section 4.1 Offer at the Section 4.1 Offer Price. Such offer shall be irrevocable for 10 calendar days after receipt of such Section 4.1 Offer Notice by the Company. During such 10-day period, the Company shall have the right to accept such offer as to all (but not less than all) of such Shares by giving a written notice of acceptance to the Existing Shareholder prior to the expiration of such 10-day period. (c) The Company shall purchase and pay for all Shares it accepts within a 20-calendar day period of its acceptance of the offer; provided that, if the purchase and sale of such Shares is subject to any prior regulatory approval, the time period during which such purchase and sale of accepted Shares must be consummated shall be extended until the expiration of five Business Days after all such approvals shall have been received. (d) Upon the full or partial rejection or deemed rejection of the Section 4.1 Offer by the Company or the failure to obtain any consent required of the Company for the purchase of the Shares subject thereto within 120 days after receipt of such Section 4.1 Offer Notice by the -17- 19 Company, there shall commence a 10 day period during which the Existing Shareholder shall have the right to enter into an agreement with the Third Party making the Section 4.1 Offer for the sale of any or all of the Shares subject to the Section 4.1 Offer at a price in cash not less than the price indicated in the Section 4.1 Offer; provided that such Third Party shall have agreed in writing to be bound by the terms of this Agreement and the transfer to such Third Party is not in violation of applicable federal or state or foreign securities laws. The Existing Shareholder shall have 20 days from the execution of such agreement to consummate the sale; provided that if the purchase and sale of such Shares is subject to any prior regulatory approval, the time period during which such purchase and sale may be consummated shall be extended until the expiration of five Business Days after all such approvals shall have been received; provided, further, that such time period shall not exceed 120 days without the consent of the Company. If the Existing Shareholder does not consummate the sale of any Shares subject to the Section 4.1 Offer in accordance with the foregoing time limitations, the Existing Shareholder may not sell such Shares during the 12-month period immediately following the expiration of the foregoing time limitations and thereafter may not sell any Shares without repeating the foregoing procedures. (e) Notwithstanding anything in this Section to the contrary, the provisions of this Section will not be applicable to transfers made pursuant to and in compliance with Sections 3.3 or 4.2. 4.2 Right to Participate in a Sale. (a) If at any time after the MS Shareholders have sold (other than to their respective Permitted Transferees), in one or more transactions, an aggregate of 25% of the shares of Common Stock beneficially owned by them on the date hereof (taking into account any stock dividend, stock split or reverse stock split), the MS Shareholders propose to transfer any of their respective Shares to a Third Party other than in an Underwritten Offering or an open market sale pursuant to Rule 144 (a "Section 4.2 Sale"), the MS Shareholders shall provide written notice of such proposed Section 4.2 Sale to the Minority Shareholders ("Section 4.2 Notice"). The Section 4.2 Notice shall identify the number and class (or classes) of Shares subject to the Section 4.2 Sale (the "Number of Shares"), the per Share consideration for which a sale is proposed to be made (the "Section 4.2 Sale Price) and all other material terms and conditions of the proposed Section 4.2 Sale. Each Minority Shareholder shall, as to Shares beneficially owned by it, have the right and option, exercisable as set forth below, to participate in the Section 4.2 Sale for up to the number of Shares as constitutes its Section 4.2 Pro Rata Portion of the Number of Shares, and the amount of Shares to be sold by the MS Shareholders in the Section 4.2 Sale shall be reduced to the extent the Minority Shareholders elect to participate. "Section 4.2 Pro Rata Portion" means, with respect to each Minority Shareholder at the time of the Section 4.2 Sale, the proportion (expressed as a percentage) that its beneficial ownership of Shares bears to all outstanding Shares at such time. Each Minority Shareholder that desires to exercise such option shall, within five Business Days after the date the Section 4.2 Notice is given (the Section 4.2 Notice Period"), deliver to the MS Shareholders (i) written irrevocable notice of such exercise, (ii) the certificate or certificates representing the Shares to be sold or otherwise disposed of pursuant to such sale by such Minority Shareholder, and (iii) a limited power-of-attorney authorizing the MS Shareholders to sell or otherwise dispose of such Shares pursuant to the terms of the Section 4.2 Sale. Delivery -18- 20 to the MS Shareholders of such notice, certificate or certificates, and the limited power-of- attorney shall constitute an irrevocable acceptance of the Section 4.2 Sale by the Minority Shareholder. Such Minority Shareholder shall simultaneously provide a copy of such notice to the Company and the other Minority Shareholders. (b) The per share consideration to be paid to the MS Shareholders and each Minority Shareholder participating in the Section 4.2 Sale shall be the Section 4.2 Sale Price, as reduced by the per share amount of expenses reasonably incurred by the MS Shareholders in connection with the Section 4.2 Sale. (c) Promptly after the consummation of the sale or other disposition of the Shares of the MS Shareholders and the Minority Shareholders pursuant to the Section 4.2 Sale, the MS Shareholders shall notify the Minority Shareholders thereof, shall remit to each of the Minority Shareholders the total consideration for the Shares of such Minority Shareholder sold or otherwise disposed of pursuant thereto as computed pursuant to Section 4.2(b) hereof, and shall furnish such other evidence of the completion and time of completion of such sale or other disposition and the terms and expenses thereof as may be reasonably requested by the Minority Shareholders. (d) If at the termination of the Section 4.2 Notice Period any Minority Shareholder shall not have elected to participate in the Section 4.2 Sale, such Minority Shareholder will be deemed to have waived any of and all of its rights under this Section 4.2 with respect to the sale or other disposition of its Shares pursuant to such Section 4.2 Sale. The MS Shareholders shall have 90 days in which to sell the applicable Shares at a price not higher than that contained in the Section 4.2 Notice and on terms not more favorable to the MS Shareholders than were contained in the Section 4.2 Notice; provided that if such Section 4.2 Sale is subject to any prior regulatory approval, the time period during which such Section 4.2 Sale may be consummated shall be extended until the expiration of five Business Days after all such approvals shall have been received. Promptly after any sale pursuant to this Section 4.2, the MS Shareholders shall notify the Company of the consummation thereof and shall furnish such evidence of the completion thereof (including time of completion) of such sale and of the terms thereof as the Company may request. If, at the end of such 90-day period, the MS Shareholders have not completed the sale of all such Shares, the MS Shareholders shall return to such Minority Shareholders all certificates representing the Shares which such Minority Shareholders delivered for sale or other disposition pursuant to this Section 4.2, and all the restrictions on sale or other disposition contained in this Agreement with respect to Shares beneficially owned by the Minority Shareholders shall again be in effect. (e) Notwithstanding anything contained in this Section 4.2, there shall be no liability on the part of the MS Shareholders to any Minority Shareholder if the sale of Shares pursuant to this Section 4.2 is not consummated for whatever reason. Any decision as to whether to sell Shares shall be at the MS Shareholders' sole and absolute discretion. -19- 21 ARTICLE 5 REGISTRATION RIGHTS 5.1 Demand Registration. (a) At any time after December 31, 1998, upon the written request of Minority Shareholders owning not less than 60% of the Registrable Stock then owned by the Minority Shareholders to the effect that the Company effect the registration under the Securities Act of such Registrable Stock, and specifying the intended method of disposition thereof, the Company will promptly give written notice of such requested registration to all other Shareholders, and thereupon will use all commercially reasonable efforts to effect, as expeditiously as possible, the registration under the Securities Act of: (i) the Registrable Stock which the Company has been so requested to register by the Minority Selling Shareholders, and (ii) all other Registrable Stock which the Company has been requested to register by any other Shareholder by written request received by the Company within 10 Business Days after the giving of such written notice by the Company (which request shall specify the intended method of disposition of such Registrable Stock), all to the extent necessary to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Stock so to be registered; provided that (x) the Company shall not be obligated to file a registration statement relating to a registration request under this Section 5.1(a): (A) within a period of six months after the effective date of any other registration statement filed pursuant to Section 5.1(a) or (b) hereof, or in connection with an acquisition by the Company of another company (or the financing thereof) and (B) unless the aggregate fair market value of the Registrable Stock which the Company has been so requested to register by the Selling Shareholders constitutes, as of the date of the Company's receipt of the last of such timely requests, at least $15 million (based on the closing price of the Class A Common Stock on such date); (y) with respect to any registration statement filed, or to be filed, pursuant to this Section 5.1(a), if the Company shall furnish to the Selling Shareholders a certified resolution of the Board stating that in the Board's good faith judgment it would (because of the existence of, or in anticipation of, any acquisition or financing activity, or the unavailability for reasons beyond the Company's control of any required financial statements, or any other event or condition of similar significance to the Company) be significantly disadvantageous (a "Disadvantageous Condition") to the Company or its shareholders for such a registration statement to be maintained effective, or to be filed and become effective, and setting forth the general reasons for such judgment, the Company shall be entitled to cause the Selling Shareholders to discontinue the use of such registration statement or, in the event no registration statement has yet been filed, -20- 22 shall be entitled not to file any such registration statement, until such Disadvantageous Condition no longer exists (notice of which the Company shall promptly deliver to the Selling Shareholders) and upon receipt of any such notice of a Disadvantageous Condition such Selling Shareholders will forthwith discontinue use of the prospectus contained in such registration statement and, if so directed by the Company, each such Selling Shareholder will deliver to the Company all copies, other than permanent file copies then in such Selling Shareholder's possession, of the prospectus then covering such Registrable Stock current at the time of receipt of such notice, and, in the event no registration statement has yet been filed, all drafts of the prospectus covering such Registrable Stock; provided, however, that the Company shall not be entitled to invoke a Disadvantageous Condition pursuant to this Section 5.1(a) more than twice during any calendar year; the duration of any single Disadvantageous Condition shall not exceed 90 days; the aggregate duration of all such Disadvantageous Conditions shall not exceed 180 days during any calendar year; and at least 90 days shall elapse between the termination of a Disadvantageous Condition and the invocation of a subsequent Disadvantageous Condition by the Company; and (z) subject to Section 5.1(g) hereof, the Company shall not be obligated to effect more than one registration pursuant to this Section 5.1(a). Promptly after the expiration of the 10-Business Day period referred to in Section 5.1(a)(ii) hereof, the Company will notify all the Selling Shareholders to be included in the registration of the other Selling Shareholders and the number of shares of Registrable Stock requested to be included therein. The Minority Selling Shareholders owning a majority of the Registrable Stock requested to be registered by all Minority Selling Shareholders pursuant to this Section 5.1(a) may, at any time (A) prior to the filing of the registration statement relating to such registration, or (B) after filing but prior to the effective date of such registration statement, revoke such request, without liability to the Company or any of the other Selling Shareholders, by providing a written notice to the Company revoking such request, provided that the Company shall be deemed to have satisfied its obligations in respect of one registration for purposes of clause (z) above. In the event that the Company shall give any notice of the withdrawal of a registration statement contemplated by clause (y) above, the Company shall at such time as it in good faith deems appropriate file a new registration statement covering the Registrable Stock that was covered by such withdrawn registration statement, and such registration statement shall be maintained effective for such time as may be necessary so that the period of effectiveness of such new registration statement, when aggregated with the period during which such initial registration statement was effective, shall be such time as may be otherwise required by Section 5.1(d) or 5.5 of this Agreement. Notwithstanding anything contained in this Agreement to the contrary, nothing herein shall be construed as requiring the Company to register any of its securities other than Common Stock. (b) At any time following the IPO Closing Date (subject to any restrictions imposed by any underwriting agreement executed in connection therewith), upon the written request of MS Shareholders owning not less than 60% of the Registrable Stock then owned by -21- 23 the MS Shareholders to the effect that the Company effect the registration under the Securities Act of such Registrable Stock, and specifying the intended method of disposition thereof, the Company will promptly give written notice of such requested registration to all other Shareholders, and thereupon will use all commercially reasonable efforts to effect, as expeditiously as possible, the registration under the Securities Act of: (i) the Registrable Stock which the Company has been so requested to register by the MS Selling Shareholders; and (ii) all other Registrable Stock which the Company has been requested to register by any other Shareholder by written request received by the Company within 10 Business Days after the giving of such written notice by the Company (which request shall specify the intended method of disposition of such Registrable Stock), all to the extent necessary to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Stock so to be registered; provided that (x) the Company shall not be obligated to file a registration statement relating to a registration request under this Section 5.1(b): (A) within a period of six months after the effective date of any other registration statement filed pursuant to Section 5.1(a) or (b) hereof and (B) unless the Registrable Stock which the Company has been so requested to register by the MS Selling Shareholders constitutes at such time at least 15% (on a Fully Diluted basis) of the Registrable Stock owned by all of the MS Shareholders; (y) with respect to any registration statement filed, or to be filed, pursuant to this Section 5.1(b), if the Company shall furnish to the MS Selling Shareholders a certified resolution of the Board stating that in the Board's good faith judgment it would result in a Disadvantageous Condition to the Company or its shareholders for such a registration statement to be maintained effective, or to be filed and become effective, and setting forth the general reasons for such judgment, the Company shall be entitled to cause the Selling Shareholders to discontinue the use of such registration statement, or, in the event no registration statement has yet been filed, shall be entitled not to file any such registration statement, until such Disadvantageous Condition no longer exists (notice of which the Company shall promptly deliver to the Selling Shareholders) and upon receipt of any such notice of a Disadvantageous Condition such Selling Shareholders will forthwith discontinue use of the prospectus contained in such registration statement and, if so directed by the Company, each such Selling Shareholder will deliver to the Company all copies, other than permanent file copies then in such Selling Shareholder's possession, of the prospectus then covering such Registrable Stock current at the time of receipt of such notice, and, in the event no registration statement has yet been filed, all drafts of the prospectus covering such Registrable Stock; provided, however, that the Company shall not be entitled to -22- 24 invoke and declare a Disadvantageous Condition pursuant to this Section 5.1(b) more than twice during any calendar year; the duration of any single Disadvantageous Condition shall not exceed 90 days; the aggregate duration of all such Disadvantageous Conditions shall not exceed 180 days during any calendar year; and at least 90 days shall elapse between the termination of a Disadvantageous Condition and the invocation of a subsequent Disadvantageous Condition by the Company; and (z) subject to Section 5.1(h) hereof, the Company shall not be obligated to effect more than three registrations pursuant to this Section 5.1(b) and shall not be obliged to effect more than one of such three registrations prior to the first anniversary of the IPO Closing Date. Promptly after the expiration of the 10-Business Day period referred to in Section 5.1(b)(ii) hereof, the Company will notify all the Selling Shareholders to be included in the registration of the other Selling Shareholders and the number of shares of Registrable Stock requested to be included therein. The MS Selling Shareholders owning a majority of the Registrable Stock requested to be registered by all MS Selling Shareholders pursuant to this Section 5.1(b) may, at any time prior to the filing of, or after the filing but prior to the effective date of, the registration statement relating to such registration, revoke such request, without liability to the Company or any of the other Selling Shareholders, by providing a written notice to the Company revoking such request, but the Company shall be deemed to have satisfied its obligations in respect of one registration for purposes of clause (z) above. In the event that the Company shall give any notice of the withdrawal of a registration statement contemplated by clause (y) above, the Company shall at such time as it in good faith deems appropriate file a new registration statement covering the Registrable Stock that was covered by such withdrawn registration statement, and such registration statement shall be maintained effective for such time as may be necessary so that the period of effectiveness of such new registration statement, when aggregated with the period during which such initial registration statement was effective, shall be such time as may be otherwise required by Section 5.1(d) or 5.5 of this Agreement. Notwithstanding anything contained in this Agreement to the contrary, nothing herein shall be construed as requiring the Company to register any of its securities other than Common Stock. (c) The Company will pay all Registration Expenses in connection with any registration which is requested pursuant to this Section 5.1. (d) A registration requested pursuant to this Section 5.1 shall not be deemed to have been effected unless the registration statement relating thereto (i) has become effective under the Securities Act and (ii) has remained effective for a period of at least 90 days (if declared effective before the first anniversary of the IPO Closing Date), 180 days (if declared effective on or after such first anniversary), or such shorter period in which all Registrable Stock of the Selling Shareholders and their respective Permitted Transferees included in such registration have actually been sold thereunder; provided that if any effective registration statement requested pursuant to this Section 5.1 is discontinued in connection with a Disadvantageous Condition, such registration statement shall not be counted as a registration -23- 25 requested for purposes of Section 5.1 hereof; and provided, further, that if after any registration statement requested pursuant to this Section 5.1 becomes effective both (i) such registration statement is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court solely due to the actions or omissions to act of the Company and (ii) less than 75% of the Registrable Stock included in such registration has been sold thereunder, such shall not be counted as a registration requested pursuant to Section 5.1 hereof. (e) If any requested registration pursuant to this Section 5.1 is in the form of an Underwritten Offering, the Selling Shareholders owning a majority of the Registrable Stock included in such registration shall have the right to select the managing underwriter or underwriters of such Underwritten Offering; provided that (i) any such managing underwriter may be an Affiliate of a Shareholder and (ii) such managing underwriter or underwriters shall be reasonably acceptable to the Company. The Company may require the offering pursuant to any registration requested pursuant to Section 5.1 to be in the form of an Underwritten Offering. In that event, all Registrable Stock to be registered in such registration shall be registered for sale only in such Underwritten Offering. (f) If the managing underwriter of an Underwritten Offering requested pursuant to Section 5.1(a) or (b) shall advise the Company that, in its view, the number of shares of Common Stock requested to be included in such registration (including shares requested to be included pursuant to clause (i) or (ii) of Section 5.1(a) or (b) and shares which the Company requests to be included which are not Registrable Stock) exceeds the largest number of shares of Common Stock which can be sold without having an adverse effect on such Underwritten Offering, including the price at which such shares can be sold (the "Maximum Offering Size"), the Company will include in such registration, in the priority listed below, up to the Maximum Offering Size: (i) first, all Registrable Stock requested to be included in such registration pursuant to Section 5.1, pro rata among the Selling Shareholders requesting such inclusion on the basis of the relative number of Shares owned by them, and (ii) second, any Common Stock proposed to be registered by the Company for its own account, and (iii) third, any other Common Stock. (g) If Registrable Stock representing at least 75% of the number of Shares requested to be registered by the Minority Selling Shareholders is not included in any registration requested pursuant to Section 5.1(a) (other than by reason of a cancellation of such request), then the Minority Selling Shareholders may request that the Company effect an additional registration under the Securities Act of all or part of the Minority Selling Shareholders' Registrable Stock in accordance with the provisions of this Section 5.1 and the Company shall pay the Registration Expenses in connection with such additional registration. -24- 26 (h) If Registrable Stock representing at least 50% of the number of Shares requested to be registered by the MS Selling Shareholders is not included in any registration requested pursuant to Section 5.1(b) (other than by reason of a cancellation of such request), then the MS Selling Shareholders may request that the Company effect an additional registration under the Securities Act of all or part of the MS Selling Shareholders' Registrable Stock in accordance with the provisions of this Section 5.1 and the Company shall pay the Registration Expenses in connection with such additional registration. 5.2 Incidental Registration. (a) If the Company proposes to register any of its Common Stock under the Securities Act (other than a registration (A) on Form S-8 or S-4 or any successor or similar forms, (B) relating to Common Stock issuable upon exercise of employee or director stock options or in connection with any employee or director benefit or similar plan of the Company, (C) in connection with a direct or indirect acquisition by the Company of another company or the financing of such acquisition, or (D) pursuant to Section 5.1 hereof), whether or not for sale for its own account, in a manner which would permit registration of Registrable Stock for sale to the public under the Securities Act it will each such time, subject to the provisions of Section 5.2(b) hereof, give prompt written notice to the Shareholders of its intention to do so and of such Shareholders' rights under this Section 5.2, at least 20 days prior to the anticipated filing date of the registration statement relating to such registration. Any such notice shall offer each Shareholder the opportunity to include in such registration statement such number of shares of Registrable Stock as each such Shareholder may request (an "Incidental Registration"). Upon the written request of any such Shareholder made within ten days after the receipt of notice from the Company (which request shall specify the number of shares of Registrable Stock intended to be disposed of by such Shareholder), the Company will use all commercially reasonable efforts to effect the registration under the Securities Act of all Registrable Stock which the Company has been so requested to register by the Shareholders, to the extent requisite to permit the disposition of the Registrable Stock so to be registered; provided that (i) if such registration involves an Underwritten Offering, all Shareholders requesting to be included in the Company's registration must sell their Registrable Stock to the underwriters selected by the Company on the same terms and conditions as apply to the Company and (ii) if, at any time after giving written notice of its intention to register any stock pursuant to this Section 5.2(a) and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such stock, the Company shall give written notice to all Shareholders and, thereupon, shall be relieved of its obligation to register any Registrable Stock in connection with such registration (without prejudice, however, to rights of Shareholders under Section 5.1 hereof). No registration effected under this Section 5.2 shall relieve the Company of its obligations to effect a registration upon request to the extent required by Section 5.1 hereof. The Company will pay all Registration Expenses in connection with each registration of Registrable Stock requested pursuant to this Section 5.2. (b) If a registration pursuant to this Section 5.2 involves an Underwritten Offering and the managing underwriter advises the Company that, in its view, the number of shares of Common Stock which the Company, the Shareholders and any other Persons intend -25- 27 to include in such registration exceeds the Maximum Offering Size, the Company will include in such registration, in the following priority, up to the Maximum Offering Size: (i) first, if the registration was initiated by the Company for the sale of Common Stock for its own account, any such Common Stock, (ii) second, all (x) Registrable Stock requested to be included in such registration by any Shareholders that have rights pursuant to Section 5.2 hereof and (y) all Common Stock requested to be included in such registration by any other shareholders that hold demand registration rights, pro rata among such Shareholders and other shareholders on the basis of the relative number of shares of Registrable Stock or Common Stock, respectively, owned by them, (iii) third, all Common Stock held by other shareholders of the Company who exercise "piggyback" registration rights in connection with such registration, pro rata among such shareholders on the basis of the relative number of shares of Common Stock owned by them, and (iv) fourth, any other Common Stock. 5.3 Holdback Agreements. Upon the request of the underwriters of any Underwritten Offering, each Shareholder agrees not to effect any public sale or distribution, including any sale pursuant to Rule 144, or any successor provision, under the Securities Act, of any Registrable Stock, and not to effect any such public sale or distribution of any other Common Stock of the Company or of any security convertible into or exchangeable or exercisable for any Common Stock of the Company (in each case, other than as part of such Underwritten Offering) during the seven-day period prior to, and during the 180-day period which begins on, the effective date of such registration statement (except as part of such registration), provided that this Section 5.3 shall not be applicable to any Shareholder until two Business Days after such Shareholder has received written notice of the anticipated or actual beginning of the seven-day period referred to above. (b) The Company agrees, if so requested by the managing underwriters of an Underwritten Offering of Registrable Stock pursuant to Section 5.1, not to effect any public sale or distribution of any Common Stock or securities convertible into or exchangeable or exercisable for Common Stock during the seven-day period prior to and the 180-day period after the effective date of any registration statement with respect to such Underwritten Offering, except as part of such Underwritten Offering or except in connection with any dividend reinvestment, stock option, stock purchase or other benefit plan, or an acquisition, merger or exchange offer (or the financing thereof). 5.4 Registration Procedures--General. Whenever Shareholders request that any Registrable Stock be registered pursuant to Section 5.1 or 5.2 hereof, the Company will do each of the following: -26- 28 (a) The Company will, if requested, prior to filing a registration statement or prospectus or any amendment or supplement thereto, furnish to each Selling Shareholder and each underwriter, if any, of the Registrable Stock covered by such registration statement copies of such registration statement as proposed to be filed, and thereafter the Company will furnish to such Selling Shareholder and underwriter, if any, such number of copies of such registration statement, each amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference in this Agreement), the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such Selling Shareholder or underwriter may reasonably request in order to facilitate the disposition of the Registrable Stock owned by such Selling Shareholder. (b) The Company will promptly notify each Selling Shareholder of any stop order issued or threatened by the SEC and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered. (c) The Company will use all commercially reasonable efforts to (i) register or qualify the Registrable Stock under such other securities or blue sky laws of such jurisdictions in the United States as any Selling Shareholder reasonably (in light of such Selling Shareholder's intended plan of distribution) requests and (ii) cause such Registrable Stock to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company and do any and all other acts and things that may be reasonably necessary or advisable to enable such Selling Shareholder to consummate the disposition of the Registrable Stock owned by such Selling Shareholder; provided that the Company will not be required to (A) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (c), (B) subject itself to taxation in any such jurisdiction or (C) consent to general service of process in any such jurisdiction. (d) The Company will immediately notify each Selling Shareholder, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the occurrence of an event requiring the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Stock, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and promptly prepare and make available to each Selling Shareholder any such supplement or amendment. (e) Upon the execution of confidentiality agreements in form and substance satisfactory to the Company, the Company will make available for inspection by any Selling Shareholder, any managing underwriter participating in any Underwritten Offering and any attorney, accountant or other professional retained by any such Selling Shareholder or managing underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, Directors and employees to supply all information reasonably requested by -27- 29 any Inspectors in connection with such registration statement. Records which the Company determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such registration statement or (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction. Each Selling Shareholder agrees that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company or its Affiliates unless and until such is made generally available to the public. Each Selling Shareholder further agrees that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential. (f) The Company will otherwise use all commercially reasonable efforts to comply with all applicable rules and regulations of the SEC, and make available to its securityholders, as soon as reasonably practicable, an earnings statement covering a period of 12 months, beginning within three months after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act. (g) The Company will use its best efforts to list such shares of Registrable Stock on each securities exchange on which the Common Stock is then listed, if such shares of Registrable Stock are not already so listed and if such listing is then permitted under the rules of such exchange, and will provide a transfer agent and registrar for such Registrable Securities not later than the effective date of such registration statement. (h) The Company will, in connection with any Underwritten Offering, furnish to each Selling Shareholder and to each underwriter, if any, a signed counterpart, addressed to such underwriter, of (i) an opinion or opinions of counsel to the Company and (ii) a comfort letter or comfort letters from the Company's independent public accountants, each in customary form and covering such matters of the type customarily covered by opinions or comfort letters, as the case may be, as the Selling Shareholders owning a majority of the Registrable Stock to be included in such registration or the managing underwriter therefor reasonably requests. (i) The Company will prepare and file with the SEC such amendments (including post-effective amendments) and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Stock covered by such registration statement until the end of the period specified in Section 5.1(d) or 5.5 hereof, as applicable. The Company may require each Selling Shareholder to promptly furnish in writing to the Company such information regarding the distribution of the Registrable Stock as the Company may from time to time reasonably request and such other information as may be required by law or rule or regulation of the SEC in connection with such registration. -28- 30 Each Selling Shareholder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 5.4(d) hereof, such Selling Shareholder will forthwith discontinue disposition of Registrable Stock pursuant to the registration statement covering such Registrable Stock until such Selling Shareholder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 5.4(d) hereof, and, if so directed by the Company, such Selling Shareholder will deliver to the Company all copies, other than any permanent file copies then in such Selling Shareholder's possession, of the most recent prospectus covering such Registrable Stock at the time of receipt of such notice. In the event that the Company shall give such notice, the Company shall extend the period during which such registration statement shall be maintained effective by the number of days during the period from and including the date of the giving of notice pursuant to Section 5.4(d) hereof to the date when the Company shall make available to the Selling Shareholders a prospectus supplemented or amended to conform with the requirements of Section 5.4(d) hereof. 5.5 Registration Procedures--Demand. Whenever Shareholders request that any Registrable Stock be registered pursuant to Section 5.1 hereof, the Company will, subject to the provisions of such Section, use all commercially reasonable efforts to effect the registration of such Registrable Stock in accordance with the intended method of disposition thereof as quickly as practicable, and in connection with any such request, as expeditiously as possible, prepare and file with the SEC a registration statement on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate and which form shall be available for the sale of the Registrable Stock to be registered thereunder in accordance with the intended method of distribution thereof, and use all commercially reasonable efforts to cause such filed registration statement to become and remain effective for a period of not less than 90 days (if declared effective before the first anniversary of the IPO Closing Date) or 180 days (if declared effective on or after such first anniversary). 5.6 Indemnification by the Company. The Company agrees to indemnify and hold harmless each Selling Shareholder, each officer, director, limited or general partner (together with each officer, director or partner thereof), agent or investment adviser of such Selling Shareholder, and each Person, if any, who controls such Selling Shareholder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all Losses caused by any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus relating to the Registrable Stock (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such Losses are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information furnished in writing to the Company by such Selling Shareholder or on such Selling Shareholder's behalf expressly for use therein; provided that with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus, or in any prospectus, as the case may be, the indemnity agreement contained in this paragraph shall not apply to the extent that any such Loss results from the fact that a current copy of the prospectus (if amended or supplemented, as so amended or supplemented) was not sent or given to the Person asserting any -29- 31 such Loss at or prior to the written confirmation of the sale of the Registrable Stock to such Person if it is determined that the Company has provided such prospectus to such Selling Shareholder and it was the responsibility of such Selling Shareholder to provide such Person with a current copy of the prospectus (or such amended or supplemented prospectus, as the case may be) and such current copy of the prospectus (or such amended or supplemented prospectus, as the case may be) would have cured the defect giving rise to such Loss. The Company also agrees to indemnify each underwriter of the Registrable Stock, its officers, directors and partners and each Person who controls such underwriter on substantially the same basis as that of the indemnification of the Selling Shareholders provided in this Section 5.6. 5.7 Indemnification by Selling Shareholders. Each Selling Shareholder owning Registrable Stock included in any registration statement agrees, severally but not jointly, to indemnify and hold harmless the Company, its officers, Directors and agents and each Person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such Shareholder, but only (i) with respect to information furnished in writing by such Shareholder or on such Shareholder's behalf expressly for use in any registration statement or prospectus relating to the Registrable Stock, or any amendment or supplement thereto, or any preliminary prospectus or (ii) to the extent that any Loss described in Section 5.6 results from the fact that a current copy of the prospectus (if amended or supplemented, as so amended or supplemented) was not sent or given to the Person asserting any such Loss at or prior to the written confirmation of the sale of the Registrable Stock concerned to such Person if it is determined that it was the responsibility of such Shareholder to provide such Person with a current copy of the prospectus (or such amended or supplemented prospectus, as the case may be) and such current copy of the prospectus (or such amended or supplemented prospectus, as the case may be) would have cured the defect giving rise to such Loss. Each such Selling Shareholder also agrees to indemnify and hold harmless each underwriter of the Registrable Stock, each of their respective officers, directors and partners and each Person who controls any such underwriter on substantially the same basis as that of the indemnification of the Company provided in this Section 5.7. As a condition to including Registrable Stock in any registration statement filed in accordance with Article 5 hereof, the Company may require that it shall have received an undertaking reasonably satisfactory to it from any underwriter to indemnify and hold it harmless to the extent customarily provided by underwriters with respect to similar securities. 5.8 Conduct of Indemnification Proceedings. In case any action or proceeding (including any governmental investigation) shall be instituted involving any Person in respect of which indemnity may be sought pursuant to Section 5.6 or 5.7, such Person (an "Indemnified Party") shall promptly notify the Person against whom such indemnity may be sought (the "Indemnifying Party") in writing and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party, and shall assume the payment of all fees and expenses; provided that the failure of any Indemnified Party so to notify the Indemnifying Party shall not relieve the Indemnifying Party of its obligations hereunder except to the extent that the Indemnifying Party is materially prejudiced by such failure to notify. In any such action or proceeding, any Indemnified Party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of -30- 32 such Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel or (ii) in the reasonable judgment of such Indemnified Party representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the Indemnifying Party shall not, in connection with any action or proceeding or related actions or proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for all such Indemnified Parties, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Indemnified Parties, such firm shall be designated in writing by the Indemnified Parties. The Indemnifying Party shall not be liable for any settlement of any action proceeding effected without its written consent, but if settled with such consent, or if there be a final judgment for the plaintiff, the Indemnifying Party shall indemnify and hold harmless such Indemnified Parties from and against any Loss (to the extent stated above) by reason of such settlement or judgment. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending or threatened action or proceeding in respect of which any Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such settlement includes an unconditional release of such Indemnified Party from all liability arising out of such action or proceeding. 5.9 Contribution. If the indemnification provided for in this Article 5 is unavailable to the Indemnified Parties in respect of any Losses referred to in this Agreement, then each such Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, (i) as between the Company and the Selling Shareholders owning Registrable Stock covered by a registration statement on the one hand and the underwriters on the other, in such proportion as is appropriate to reflect the relative benefits received by the Company and such Shareholders on the one hand and the underwriters on the other, from the offering of the Registrable Stock, or if such allocation is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits but also the relative fault of the Company and such Shareholders on the one hand and of the underwriters on the other in connection with the statements or omissions which resulted in such Losses, as well as any other relevant equitable considerations and (ii) as between the Company on the one hand and each such Shareholder on the other, in such proportion as is appropriate to reflect the relative fault of the Company and of each such Shareholder in connection with such statements or omissions, as well as any other relevant equitable considerations. The relative benefits received by the Company and such Shareholders on the one hand and the underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and such Shareholders bear to the total underwriting discounts and commissions received by the underwriters, in each case as set forth in the table on the cover page of the prospectus. The relative fault of the Company and each such Selling Shareholders, on the one hand, and of the underwriters, on the other, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and such Selling Shareholder or by the -31- 33 underwriters. The relative fault of the Company on the one hand and of each such Shareholder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Shareholders agree that it would not be just and equitable if contribution pursuant to this Section 5.9 were determined by pro rata allocation (even if the underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the Losses referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5.9, no underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Stock underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and no Shareholder shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Stock of such Shareholder were offered to the public exceeds the amount of any damages which such Shareholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Each Shareholder's obligation to contribute pursuant to this Section 5.9, if any, is several in the proportion that the proceeds of the offering received by such Shareholder bears to the total proceeds of the offering received by all the Shareholders and not joint. 5.10 Participation in Underwritten Offering. No Person may participate in any Underwritten Offering hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and this Agreement. 5.11 No Inconsistent Agreements. From and after the date of this Agreement, the Company will not enter into, or cause or permit any of its Subsidiaries to enter into, any agreement which is inconsistent with the rights granted to the Shareholders in this Agreement or otherwise conflicts with the provisions hereof. -32- 34 ARTICLE 6 CONFIDENTIALITY 6.1 Confidentiality. (a) Each Shareholder hereby agrees that the Confidential Information (as defined below) that has been furnished to it or him was made available in connection with such Shareholder's investment in the Company. Each Shareholder agrees that he or it will not use any Confidential Information, including without limitation any Confidential Information that may be received after the date hereof, in any way to the competitive disadvantage of the Company or in violation of any applicable Federal or state securities laws. Each Shareholder further acknowledges and agrees that he or it will not disclose any Confidential Information to any Person; provided that Confidential Information may be disclosed as follows: (i) to such Shareholder's Representatives (as defined below) in the normal course of the performance of their duties, provided that such Representatives have been advised of the confidential nature of such information, (ii) to the extent required by applicable law, rule or regulation (including complying with any oral or written questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process to which a Shareholder is subject), (iii) to any Person to whom such Shareholder is contemplating a transfer of his or its Shares, provided that (x) such transfer would not be in violation of the provisions hereof or any applicable federal or state securities laws and (y) such Person is advised of the confidential nature of such information and agrees to be bound by a confidentiality agreement in form and substance satisfactory to the Company and by the provisions of this Agreement, and (iv) to any Person, if the prior written consent of the Board shall have been obtained. Nothing contained herein shall prevent the use of Confidential Information in connection with the assertion or defense of any claim by or against the Company or any Shareholder. (b) "Confidential Information" means any information concerning the Company, its financial condition, business, operations or prospects in the possession of or to be furnished to any Shareholder in his or its capacity as a shareholder of the Company or by virtue of his or its present or former position as, or right to designate, a Director; provided that the term "Confidential Information" does not include information which (i) was or becomes generally available publicly other than as a result of a disclosure by a Shareholder or his or its partners, directors, officers, employees, agents, counsel, investment advisers or representatives (all such Persons being collectively referred to as "Representatives") in violation of this Agreement or any confidentiality agreement executed in accordance with Section 4.1, Section 5.4(e) or Section 6.1(a) or (ii) becomes available to a Shareholder on a nonconfidential basis -33- 35 from a source other than the Company or another Shareholder or his or its Representatives, provided that such source is not, to the best of such Shareholder's knowledge, bound by a confidentiality agreement with the Company or another Person. ARTICLE 7 MISCELLANEOUS 7.1 Adjustments. In the event that any shares of Common Stock are changed into or exchanged for a different number or kind of shares or other securities of the Company or of another company by reason of merger, consolidation, other reorganization, recapitalization or reclassification, or in the event of any combination of shares, stock split or stock dividend, then the number and kind of shares of Common Stock subject to any provision of this Agreement shall be adjusted appropriately so that the Company and Shareholders will retain substantially the same rights and obligations as existed prior to such change. 7.2 Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto and supersedes all prior agreements and understandings, oral and written, among the parties hereto with respect to the subject matter hereof. 7.3 Binding Effect; Benefit. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, legal representatives and permitted assigns. Nothing in this Agreement, expressed or implied, is intended to confer on any Person other than the parties hereto, and their respective heirs, successors, legal representatives and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. 7.4 Assignability. This Agreement shall not be assignable by any party hereto, except that any Person acquiring Shares who is required by the terms of this Agreement to become a party hereto shall execute and deliver to the Company an agreement to be bound hereby and shall thenceforth be a Shareholder, and any Shareholder who ceases to own, directly or indirectly, beneficially or of record, any Shares shall cease to be bound by the terms hereof. 7.5 Amendment; Waiver. (a) No provision of this Agreement may be waived except by an instrument in writing executed by the party against whom the waiver is to be effective. No provision of Article 5 may be amended or otherwise modified except by an instrument in writing executed by the Company with the approval of the Board and Shareholders who own at least 80% of the Registrable Stock then outstanding and in compliance with Section 7.5(b) or (c), if applicable. No other provision of this Agreement may be amended or otherwise modified except by an instrument in writing executed by the Company with the approval of (i) the Board (in the case of an amendment the sole effect of which is to add one or more Persons as parties to this Agreement) or (ii) the Board and Shareholders who own at least 80% of the Shares then outstanding (in the case of any other amendment or modification) and in compliance with Section 7.5(b) or (c), if applicable. -34- 36 (b) In addition, no provision of this Agreement that is specifically applicable to any MS Shareholder may be amended or otherwise modified or terminated except with the consent of such MS Shareholder. (c) None of the following provisions of this Agreement may be amended or modified in any manner which adversely affects the Minority Shareholder indicated below without the consent of such Minority Shareholder: (i) Baum: the definitions of "Baum Fund" and "Baum Affiliate" and clauses (v) and (vi) of the definition of "Permitted Transferee;" (ii) Citicorp: the definition of "Citicorp," Section 4.1 (insofar as it relates to Citicorp), clause (iv) of Section 3.1(b) (insofar as it relates to Citicorp), clause (vii) and (viii) of the definition of "Permitted Transferee," and clause (vi) of Section 2.1(a); (iii) JSS Management Company, Ltd.: clause (x) of the definition of "Permitted Transferee;" (iv) Schroeder: the definitions of "Schroeder" and "Schroeder Allotment" or Section 3.1(c); (v) Thompson: clauses (iii) and (vi) of the definition of "Permitted Transferee", the definition of "Thompson," Section 4.1 (insofar as it relates to Thompson), and clause (iv) of Section 3.1(b) (insofar as it relates to Thompson); and (vi) Webster: the definitions of "Webster" and "Webster Allotment" and Section 3.1(d). 7.6 Notices. All notices and other communications given or made pursuant hereto or pursuant to any other agreement among the parties, unless otherwise specified, shall be in writing and shall be deemed to have been duly given or made if (i) sent by fax, (ii) delivered personally, (iii) sent by registered or certified mail (postage prepaid, return receipt requested) or (iv) sent by nationally-recognized courier service guaranteeing overnight delivery to the parties at the fax number or address set forth on Exhibit B hereto or at such other addresses as shall be furnished by the parties by like notice, and such notice or communication shall be deemed to have been given or made upon receipt. Any Person who becomes a Shareholder shall provide its address and fax number to the Company, which shall promptly provide such information to each other Shareholder. 7.7 Headings. The headings contained in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. -35- 37 7.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. 7.9 Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE CONFLICTS OF LAW RULES OF SUCH STATE. 7.10 Specific Enforcement. Each of the Company and the Shareholders agrees that money damages would not be a sufficient remedy for any breach of this Agreement by the Company or such Shareholder, as applicable, and that, in addition to all other remedies which may be available, the Shareholders (in the event of a breach by the Company) or the Company (in the event of a breach by a Shareholder) shall be entitled to specific performance and injunctive or other equitable relief as a remedy for any such breach. 7.11 No Waiver. No failure or delay by the Company or any Shareholder in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any right, power or privilege hereunder. 7.12 Consent to Jurisdiction. Each party hereto irrevocably submits to the non-exclusive jurisdiction of any State or Federal court sitting in Delaware over any suit, action or proceeding arising out of or relating to this Agreement and waives, to the fullest extent permitted by law, any objection it may now or hereafter have to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in such a court has been brought in any inconvenient forum. 7.13 Effective Date. Except as otherwise expressly provided herein, this Agreement shall become effective immediately after the IPO Closing and the Amended Original Agreement shall continue in full force and effect until the IPO Closing. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement in their individual capacity or caused it to be duly executed by their respective authorized signatories thereunto duly authorized as of the day and year first above written. AMERICAN ITALIAN PASTA COMPANY By: /s/ Timothy S. Webster ------------------------------------- Timothy S. Webster, President and Chief Executive Officer 10/1/97 5:00 p.m. -36- 38 THE MORGAN STANLEY LEVERAGED EQUITY FUND II, L.P. BY: MORGAN STANLEY LEVERAGED EQUITY FUND II, INC., AS GENERAL PARTNER By: ------------------------------ Its: ----------------------------- MORGAN STANLEY CAPITAL PARTNERS III, L.P. BY: MSCP III, L.P., AS GENERAL PARTNER BY: MORGAN STANLEY CAPITAL PARTNERS III, INC., AS GENERAL PARTNER By: ------------------------------ Its: ------------------------------ MSCP III 892 INVESTORS, L.P. BY: MSCP III, L.P., AS GENERAL PARTNER BY: MORGAN STANLEY CAPITAL PARTNERS III, INC. AS GENERAL PARTNER By: ------------------------------ Its: ------------------------------ MORGAN STANLEY CAPITAL INVESTORS, L.P. BY: MSCP III, L.P., AS GENERAL PARTNER BY: MORGAN STANLEY CAPITAL PARTNERS III, INC., AS GENERAL PARTNER By: ------------------------------ Its: ------------------------------ -37- 39 GEORGE K. BAUM GROUP, INC. By: /s/ William D. Thomas ------------------------------ Its: President ------------------------------ AMERICAN ITALIAN PASTA COMPANY RETIREMENT SAVINGS PLAN BY GEORGE K. BAUM TRUST COMPANY, AS TRUSTEE By: ------------------------------ Its: ------------------------------ GKB PRIVATE INVESTMENT PARTNERS, L.L.C., AS NOMINEE FOR: GEORGE K. BAUM CAPITAL PARTNERS, L.P. By: /s/ William D. Thomas -------------------------------------- William D. Thomas, Senior Managing Director GKB PRIVATE INVESTMENT PARTNERS, L.L.C., AS NOMINEE FOR: GEORGE K. BAUM EMPLOYEE EQUITY FUND, L.P. By: /s/ William D. Thomas -------------------------------------- William D. Thomas, Senior Managing Director EXCELSIOR INVESTORS, L.L.C. BY: GEORGE K. BAUM MERCHANT BANC, LLC, ITS MANAGER By: /s/ William D. Thomas -------------------------------------- William D. Thomas, Senior Managing Director -38- 40 CITICORP VENTURE CAPITAL, LTD. By: -------------------------------------- Its: ------------------------------------- CCT III PARTNERS, L.P. By: CCT III CORPORATION, AS GENERAL PARTNER By: ------------------------------------- Its: ------------------------------------- Horst W. Schroeder HORST W. SCHROEDER, TRUSTEE OF THE LIVING TRUST OF HORST W. SCHROEDER, DATED MAY 24, 1985, OR SUCCESSOR TRUSTEE By: /s/ Horst W. Schroeder ------------------------------------- Horst W. Schroeder, Trustee /s/ Isabel A. Lange ----------------------------------------- Isabel A. Lange /s/ Bernd H. Schroeder ----------------------------------------- Bernd H. Schroeder /s/ Gisela I. Schroeder ----------------------------------------- Gisela I. Schroeder, Trustee of the Living Trust of Gisela I. Schroeder U/T/I Dated May 24, 1985 -39- 41 WILLIAM T. WEBSTER, AS CUSTODIAN FOR WILLIAM T. WEBSTER, JR. UNDER THE MISSOURI UNIFORM TRANSFERS TO MINORS LAW By: /s/ Timothy S. Webster ------------------------------------- Timothy S. Webster, Attorney-in-Fact WILLIAM T. WEBSTER, AS CUSTODIAN FOR AUBREY A. WEBSTER, JR. UNDER THE MISSOURI UNIFORM TRANSFERS TO MINORS LAW By: /s/ Timothy S. Webster ------------------------------------- Timothy S. Webster, Attorney-in-Fact WILLIAM T. WEBSTER, AS CUSTODIAN FOR SAMUEL TIMOTHY WEBSTER UNDER THE MISSOURI UNIFORM TRANSFERS TO MINORS LAW By: /s/ Timothy S. Webster ------------------------------------- Timothy S. Webster, Attorney-in-Fact KIRSTIN D. WEBSTER AND JAMES A. HEETER, CO- TRUSTEES UNDER THE TIMOTHY S. WEBSTER FAMILY GIFT TRUST OF 1996, DATED SEPTEMBER 27, 1996 By: /s/ Timothy S. Webster ------------------------------------- Timothy S. Webster, Attorney-in-Fact WILLIAM T. WEBSTER By: /s/ Timothy S. Webster ------------------------------------- Timothy S. Webster, Attorney-in-Fact JULIE D. WEBSTER By: /s/ Timothy S. Webster ------------------------------------- Timothy S. Webster, Attorney-in-Fact -40- 42 ANNA CATHERINE WEBSTER By: /s/ Timothy S. Webster ------------------------------------- Timothy S. Webster, Attorney-in-Fact ERNEST JACK WEBSTER, JR. By: /s/ Timothy S. Webster ------------------------------------- Timothy S. Webster, Attorney-in-Fact PHILLIP A. DIBBLE By: /s/ Timothy S. Webster ------------------------------------- Timothy S. Webster, Attorney-in-Fact PHYLLIS KRUSE DIBBLE By: /s/ Timothy S. Webster ------------------------------------- Timothy S. Webster, Attorney-in-Fact /s/ Timothy S. Webster ----------------------------------------- Timothy S. Webster THOMPSON HOLDINGS, L.P. By: THOMPSON HOLDINGS, INC., AS GENERAL PARTNER By: /s/ Richard C. Thompson ------------------------------------- Richard C. Thompson, President /s/ Richard C. Thompson ----------------------------------------- Richard C. Thompson (effective from and after the date of a receipt of Shares in connection with any distribution by Excelsior Investors, L.L.C.) -41- 43 /s/ Jerry Dear ----------------------------------------- Jerry Dear /s/ Daniel Keller ----------------------------------------- Daniel Keller /s/ Mike Willhoite ----------------------------------------- Mike Willhoite /s/ David E. Watson ----------------------------------------- David E. Watson /s/ Darrel Bailey ----------------------------------------- Darrel Bailey /s/ Norman F. Abreo ----------------------------------------- Norman F. Abreo /s/ David B. Potter ----------------------------------------- David B. Potter JSS MANAGEMENT COMPANY LTD. By: -------------------------------------- Its: -------------------------------------- /s/ James A. Schlindwein ----------------------------------------- James A. Schlindwein /s/ Suzanne S. Schlindwein ----------------------------------------- Suzanne S. Schlindwein -42- 44 EXHIBIT A CURRENT SHAREHOLDERS
- ------------------------------------------------------------------------------------------------------------------------ CLASS A COMMON COMMON SHAREHOLDER STOCK STOCK TOTAL - ------------------------------------------------------------------------------------------------------------------------ Morgan Stanley Leveraged Equity Fund II, L.P.................. 984,668 0 984,668 - ------------------------------------------------------------------------------------------------------------------------ Morgan Stanley Capital Partners III, L.P...................... 369,765 0 369,765 - ------------------------------------------------------------------------------------------------------------------------ MSCP III 892 Investors, L.P................................... 37,857 0 37,857 - ------------------------------------------------------------------------------------------------------------------------ Morgan Stanley Capital Investors, L.P......................... 10,399 0 10,399 - ------------------------------------------------------------------------------------------------------------------------ Horst W. Schroeder............................................ 3,314 7,369 10,683 - ------------------------------------------------------------------------------------------------------------------------ George K. Baum Group, Inc..................................... 13,258 0 13,258 - ------------------------------------------------------------------------------------------------------------------------ George K. Baum Capital Partners, L.P.......................... 14,799 0 14,799 - ------------------------------------------------------------------------------------------------------------------------ George K. Baum Employee Equity Fund, L.P...................... 900 0 900 - ------------------------------------------------------------------------------------------------------------------------ Excelsior Investors, L.L.C.................................... 53,971 0 53,971 - ------------------------------------------------------------------------------------------------------------------------ Citicorp Venture Capital, Ltd................................. 25,355 119,816 145,171 - ------------------------------------------------------------------------------------------------------------------------ CCT III Partners, L.P......................................... 4,476 21,144 25,620 - ------------------------------------------------------------------------------------------------------------------------ JSS Management Company, Ltd................................... 4,475 0 4,475 - ------------------------------------------------------------------------------------------------------------------------ James A. Schlindwein.......................................... 2,323 0 2,323 - ------------------------------------------------------------------------------------------------------------------------ Suzanne S. Schlindwein........................................ 1,161 0 1,161 - ------------------------------------------------------------------------------------------------------------------------ Jerry Dear.................................................... 174 0 174 - ------------------------------------------------------------------------------------------------------------------------ Daniel Keller................................................. 581 0 581 - ------------------------------------------------------------------------------------------------------------------------ Mike Willhoite................................................ 232 0 232 - ------------------------------------------------------------------------------------------------------------------------ Timothy S. Webster............................................ 2,604 875 3,479 - ------------------------------------------------------------------------------------------------------------------------ William Thomas Webster, as Custodian for Samuel Timothy Webster under the Missouri Uniform Transfers to Minors Law........................... 50 0 50 - ------------------------------------------------------------------------------------------------------------------------ Anna Catherine Webster........................................ 50 0 50 - ------------------------------------------------------------------------------------------------------------------------ Phillip A. Dibble............................................. 50 0 50 - ------------------------------------------------------------------------------------------------------------------------ Phyllis Kruse Dibble.......................................... 50 0 50 - ------------------------------------------------------------------------------------------------------------------------ Ernest Jack Webster, Jr....................................... 50 0 50
A-1 45
- ------------------------------------------------------------------------------------------------------------------------ CLASS A COMMON COMMON SHAREHOLDER STOCK STOCK TOTAL - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ David E. Watson............................................... 6,933 1,200 8,133 - ------------------------------------------------------------------------------------------------------------------------ Darrel Bailey ................................................ 3,167 580 3,747 - ------------------------------------------------------------------------------------------------------------------------ Norman F. Abreo............................................... 847 330 1,177 - ------------------------------------------------------------------------------------------------------------------------ David B. Potter............................................... 2,124 330 2,454 - ------------------------------------------------------------------------------------------------------------------------ Isabel A. Lange............................................... 0 500 500 - ------------------------------------------------------------------------------------------------------------------------ Bernd H. Schroeder............................................ 0 500 500 - ------------------------------------------------------------------------------------------------------------------------ William T. Webster, as Custodian for William T. Webster, Jr. under the Missouri Uniform Transfers to Minors Law................................... 50 0 50 - ------------------------------------------------------------------------------------------------------------------------ William T. Webster, as Custodian for Aubrey A. Webster under the Missouri Uniform Transfers to Minors Law................................... 50 0 50 - ------------------------------------------------------------------------------------------------------------------------ Kristen D. Webster and James A. Heeter, Co- Trustees under the Timothy S. Webster Family Gift Trust of 1996, Dated September 17, 1996.................................................. 1,904 0 1,904 - ------------------------------------------------------------------------------------------------------------------------ William T. Webster............................................ 50 0 50 - ------------------------------------------------------------------------------------------------------------------------ Julie D. Webster.............................................. 50 0 50 - ------------------------------------------------------------------------------------------------------------------------ Thompson Holdings, L.P........................................ 0 156,530 156,530 - ------------------------------------------------------------------------------------------------------------------------ Horst W. Schroeder, Trustee of the Living Trust of Horst W. Schroeder, Dated May 24, 1985...................................................... 8,000 0 8,000 - ------------------------------------------------------------------------------------------------------------------------ Gisela I. Schroeder, Trustee of the Living Trust of Gisela J. Schroeder U/T/I Dated May 24, 1985...................................................... 0 1,860 1,860 - ------------------------------------------------------------------------------------------------------------------------ American Italian Pasta Company Retirement Savings Plan.............................................. 5,088 0 5,088 ----- - ----- - ------------------------------------------------------------------------------------------------------------------------ 1,558,825 311,034 1,869,859 ========= ======= ========= ========================================================================================================================
A-2 46 EXHIBIT B American Italian Pasta Company 1000 Italian Way Excelsior Springs, Missouri 64024 Attention: Timothy S. Webster Fax: (816) 502-6090 with a copy to: Sonnenschein Nath & Rosenthal 4520 Main Street, Suite 1100 Kansas City, Missouri 64111 Attention: James A. Heeter, Esq. Fax: (816) 531-7545 The Morgan Stanley Leveraged Equity Fund II, L.P. Morgan Stanley Capital Partners III, L.P. MSCP III 892 Investors, L.P. Morgan Stanley Capital Investors, L.P. c/o Morgan Stanley Capital Partners Attention: Lawrence B. Sorrel 1221 Avenue of the Americas New York, New York 10020 Facsimile No. (212) 762-7951 with a copy to: Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 Attention: Carole Schiffman, Esq. Fax: (212) 450-4800 B-1 47 Thompson Holdings, L.P. c/o Richard C. Thompson Thompson's Pet Pasta Products, Inc. 16 Kansas Avenue Kansas City, Kansas 66105 Fax: (954) 767-6046 with a copy to: Dufford & Brown, P.C. 1700 Broadway Suite 1700 Denver, Colorado 80290-1701 Attn: Edward D. White, Esq. Fax: (303) 832-3804 Citicorp Venture Capital, Ltd. CCT III Partners, L.P. 399 Park Avenue - 14th Floor New York, New York 10043 Attention: David Y. Howe Fax: (212) 888-2940 Horst W. Schroeder, Trustee of the Living Trust of Horst W. Schroeder, U/T/A 5/24/85 Bernd H. Schroeder Isabel A. Lange c/o Horst W. Schroeder 31 Battery Road Hilton Head, South Carolina 29928 Facsimile No. (803) 671-4832 Timothy S. Webster William T. Webster, as Custodian for William T. Webster, Jr. William T. Webster, as Custodian for Aubrey A. Webster, Jr. Kirstin D. Webster and James A. Heeter, Co-Trustees Under the Timothy S. Webster Family Gift Trust of 1996, Dated September 27, 1996 William T. Webster Julie D. Webster Anna Catherine Webster Ernest Jack Webster, Jr. Phillip A. Dibble Phyllis Kruse Dibble c/o Timothy S. Webster American Italian Pasta Company 1000 Italian Way Excelsior Springs, Missouri 64024 Facsimile No. (816) 502-6090 B-2 48 with a copy to: James M. Ash, Esq. Blackwell Sanders Weary Matheny & Lombardi L.C. Suite 1100 Two Pershing Square, 2300 Main Street Kansas City, Missouri 64108 Facsimile No. (816) 983-8080 Daniel Keller 8805 W. 131st Terrace Leawood, Kansas 66209 Norman F. Abreo Darrel Bailey Jerry Dear David B. Potter David E. Watson Mike Willhoite c/o American Italian Pasta Company 1000 Italian Way Excelsior Springs, Missouri 64024 Facsimile No. (816) 502-6090 James A. Schlindwein 9165 Briar Forest Houston, Texas 77024 Facsimile No. (713) 789-1557 Suzanne S. Schlindwein JSS Management Company, Ltd. c/o James A. Schlindwein 9165 Briar Forest Houston, Texas 77024-7222 Facsimile No. (713) 789-1557 George K. Baum Group, Inc. George K. Baum Capital Partners, L.P. George K. Baum Employee Equity Fund, L.P. Excelsior Investors, L.L.C. c/o Mr. Jonathan Baum George K. Baum Merchant Banc, LLC 120 West 12th Street Suite 800 Kansas City, Missouri 64105 B-3 49 The American Italian Pasta Company Retirement Savings Plan c/o George K. Baum Trust Company Attn: David Black 120 West 12th Street Suite 800 Kansas City, Missouri 64105 B-4 EX-10.14 14 1997 EQUITY INCENTIVE PLAN 1 EXHIBIT 10.14 American Italian Pasta Company 1997 Equity Incentive Plan 2 Article 1. Establishment, Effective Date, Objectives, and Duration....... 1 Article 2. Definitions................................................... 1 Article 3. Administration................................................ 6 Article 4. Shares Subject to the Plan and Maximum Awards................. 7 Article 5. Eligibility and General Conditions of Awards.................. 8 Article 6. Stock Options.................................................10 Article 7. Stock Appreciation Rights.....................................14 Article 8. Restricted Shares.............................................15 Article 9. Performance Units and Performance Shares......................16 Article 10. Bonus Shares.................................................18 Article 11. Beneficiary Designation......................................18 Article 12. Deferrals....................................................18 Article 13. Rights of Employees/Directors................................18 Article 14. Change in Control............................................18 Article 15. Amendment, Modification, and Termination.....................19 Article 16. Withholding..................................................20 Article 17. Successors...................................................21 Article 18. Additional Provisions........................................21
3 AMERICAN ITALIAN PASTA COMPANY 1997 EQUITY INCENTIVE PLAN ARTICLE 1. ESTABLISHMENT, EFFECTIVE DATE, OBJECTIVES, AND DURATION 1.1 Establishment of the Plan. American Italian Pasta Company, a Delaware corporation (the "Company"), hereby establishes an incentive compensation plan to be known as the "American Italian Pasta Company 1997 Equity Incentive Plan" (the "Plan"). The Plan has been adopted by the Board of Directors of the Company (the "Board") and the stockholders of the Company. The Plan shall be effective as of September __, 1997 (the "Effective Date"). 1.2 Objectives of the Plan. The Plan is intended to allow selected employees, directors and consultants of the Company and its Subsidiaries to acquire or increase equity ownership in the Company, thereby strengthening their commitment to the success of the Company and stimulating their efforts on behalf of the Company, and to assist the Company and its Subsidiaries in attracting new employees, directors and consultants and retaining existing employees, directors, and consultants. The Plan is also intended to optimize the profitability and growth of the Company through incentives which are consistent with the Company's goals; to provide employees and directors with an incentive for excellence in individual performance; and to promote teamwork among employees, directors, and consultants. 1.3 Duration of the Plan. The Plan shall commence on the Effective Date and shall remain in effect, subject to the right of the Board to amend or terminate the Plan at any time pursuant to Article 15 hereof, until all Shares subject to it shall have been purchased or acquired according to the Plan's provisions. However, in no event may an Incentive Stock Option be granted under the Plan on or after the date 10 years following the earlier of (i) the date the Plan was adopted and (ii) the date the Plan was approved by the stockholders of the Company. ARTICLE 2. DEFINITIONS Whenever used in the Plan, the following terms shall have the meanings set forth below: 2.1 "Article" an Article of the Plan. 2.2 "Award" means Options (including Incentive Stock Options), Restricted Shares, Bonus Shares, stock appreciation rights (SARs), performance units or performance shares granted under the Plan. 2.3 "Award Agreement" means the written agreement by which an Award shall be evidenced. 2.4 "Board" -- see Section 1.1. 2.5 "Bonus Shares" means Shares that are awarded to a Grantee without cost and without restrictions in recognition of past performance (whether determined by reference to another 4 employee benefit plan of the Company or otherwise) or as an incentive to become an employee, director or consultant of the Company or a Subsidiary. 2.6 "Cause" means, unless otherwise defined in any Employment Agreement or Award Agreement, any one or more of the following: (A) a Grantee's commission of a crime which, in the judgment of the Committee, is likely to result in injury to the Company or a Subsidiary; (B) the material violation by the Grantee of written policies of the Company or a Subsidiary; (C) the habitual neglect by the Grantee in the performance of his or her duties to the Company or a Subsidiary; (D) action or inaction by the Grantee in connection with his or her duties to the Company or a Subsidiary resulting, in the judgment of the Committee, in a material injury to the Company or a Subsidiary; (E) the rendering of services by the Grantee for any organization or engaging directly or indirectly in any business which is or becomes competitive with the Company or a Subsidiary or which organization or business, or the rendering of services to such organization or business, is or becomes otherwise prejudicial to or in conflict with the interests of the Company or a Subsidiary; (F) any attempt by the Grantee directly or indirectly to induce any employee of the Company or a Subsidiary to be employed or perform services elsewhere or any attempt directly or indirectly to solicit (other than for the account of the Company or a Subsidiary) the trade or business of any current or prospective customer, supplier, or partner of the Company or a Subsidiary; or (G) any other conduct or act determined by the Committee to be injurious, detrimental, or prejudicial to any interest of the Company or a Subsidiary. 2.7 "Code" means the Internal Revenue Code of 1986, as amended from time to time, and regulations and rulings thereunder. References to a particular section of the Code include references to successor provisions. 2.8 "Committee" has the meaning set forth in Article 3. 2.9 "Common Stock" means the Class A Convertible Common Stock, $.001 par value, of the Company. 2.10 "Company" -- see Section 1.1. -2- 5 2.11 "Covered Employee" means a Grantee who, as of the date of the value of an Award is recognizable as income, is one of the group of "covered employees," within the meaning of Code Section 162(m). 2.12 "Disability" means, unless otherwise defined in an Employment Agreement or Award Agreement, for purposes of the exercise of an Incentive Stock Option after Termination of Affiliation, a disability within the meaning of Section 22(e)(3) of the Code, and for all other purposes, a mental or physical condition which, in the judgment of the Committee, renders a Grantee unable to perform any of the principal job responsibilities which such Grantee held or the tasks to which such Grantee was assigned at the time the disability was incurred, and which condition is expected to be permanent or for an indefinite duration exceeding two years. 2.13 "Disqualifying Disposition" -- see Section 6.4. 2.13 "Effective Date" -- see Section 1.1. 2.14 "Eligible Person" means (i) any employee (including any officer) of the Company or any Subsidiary, including any such employee who is on an approved leave of absence, layoff, or has been subject to a disability which does not qualify as a Disability; (ii) any director of the Company or any Subsidiary; and (iii) any person performing services for the Company or a Subsidiary in the capacity of a consultant. 2.15 "Employment Agreement" means, with respect to any Grantee, any employment agreement by and between the Company and such Grantee. 2.16 "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. References to a particular section of the Exchange Act include references to successor provisions. 2.17 "Fair Market Value" means (A) with respect to any property other than Shares, the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee, and (B) with respect to Shares, unless otherwise determined in the good faith discretion of the Committee, as of any date, (i) the closing price on the date of determination on the New York Stock Exchange (or, if no sale of Shares was reported for such date, on the next preceding date on which a sale of Shares was reported), (ii) if the Shares are not listed on the New York Stock Exchange, the closing price of the Shares on such other national exchange on which the Shares are principally traded or as reported by the National Market System, or similar organization, or if no such quotations are available, the average of the high bid and low asked quotations in the over-the-counter market as reported by the National Quotation Bureau Incorporated or similar organizations; or (iii) in the event that there shall be no public market for the Shares, the fair market value of the Shares as determined (which determination shall be conclusive) in good faith by the Committee, based upon the value of the Company as a going concern, as if such Shares were publicly owned stock, but without any discount with respect to minority ownership. Notwithstanding the foregoing, Fair Market -3- 6 Value for Awards made on the effective date of the initial public offering of the Company shall mean the price to the public pursuant to the form of final prospectus used in connection with the initial public offering, as indicated on the cover page of such prospectus or otherwise. 2.18 "Freestanding SAR" means an SAR that is granted independently of any other Award. 2.19 "Grant Date" -- see Section 5.2. 2.20 "Grantee" means an individual who has been granted an Award. 2.21 "Incentive Stock Option" means an option granted under Article 6 of the Plan that is intended to meet the requirements of Section 422 of the Code or any successor provisions thereto. 2.22 "including" or "includes" means "including, without limitation," or "includes, without limitation", respectively. 2.23 "Mature Shares" means Shares for which the holder thereof has good title, free and clear of all liens and encumbrances, and which such holder either (i) has held for at least six months or (ii) has purchased on the open market. 2.24 "Minimum Consideration" means $.001 per Share or such other amount that is from time to time considered to be capital for purposes of Section 154 of the Delaware General Corporation Law. 2.25 "Option" means an option granted under Article 6 of the Plan. 2.26 "Option Price" means the price at which a Share may be purchased by a Grantee pursuant to an Option. 2.27 "Option Term" means the period beginning on the Grant Date of an Option and ending on the expiration date of such Option, as specified in the Award Agreement for such Option and as may, in the discretion of the Committee and consistent with the provisions of the Plan, be extended from time to time prior to the expiration date of such Option then in effect. 2.28 "Performance-Based Exception" means the performance-based exception from the tax deductibility limitations of Code Section 162(m). 2.29 "Performance Period" -- see Section 9.2. 2.30 "Period of Restriction" means the period during which the transfer of Restricted Shares is limited in some way (the length of the period being based on the passage of time, the -4- 7 achievement of performance goals, or upon the occurrence of other events as determined by the Committee, in its discretion), and the Shares are subject to a substantial risk of forfeiture, as provided in Article 8. 2.31 "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) thereof. 2.32 "Plan" -- see the introductory paragraph. 2.33 "Reload Option" -- see Section 6.5. 2.34 "Required Withholding" -- see Article 16. 2.35 "Restricted Shares" means Shares that are subject to forfeiture if the Grantee does not satisfy the conditions specified in the Award Agreement applicable to such Shares. 2.36 "Rule 16b-3" means Rule 16b-3 promulgated by the SEC under the Exchange Act, as amended from time to time, together with any successor rule, as in effect from time to time. 2.37 "Retirement" means for any Grantee who is an employee, a Termination of Affiliation by the Grantee upon attaining age 65 with at least five years of service as an employee of the Company or a Subsidiary. 2.38 "SAR" means a stock appreciation right. 2.39 "SEC" means the United States Securities and Exchange Commission, or any successor thereto. 2.40 "Section" means, unless the context otherwise requires, a Section of the Plan. 2.41 "Share" means a share of Common Stock. 2.42 "Strike Price" of any SAR shall equal, for any Tandem SAR that is identified with an option, the Option Price of such option, or for any other SAR, 100% of the Fair Market Value of a Share on the Grant Date of such SAR; provided that the Committee may specify a higher Strike Price in the Award Agreement. 2.43 "Subsidiary" means, for purposes of grants of Incentive Stock Options, a corporation as defined in Section 424(f) of the Code (with the Company being treated as the employer corporation for purposes of this definition) and, for all other purposes, a United States or foreign corporation with respect to which the Company owns, directly or indirectly, 50% or more of the then-outstanding common stock. -5- 8 2.44 "Tandem SAR" means an SAR that is granted in connection with a related Award, the exercise of which shall require cancellation of the right to purchase a Share under the related Award (and when a Share is purchased under the related Award, the Tandem SAR shall similarly be canceled). 2.45 "Termination of Affiliation" occurs on the first day on which an individual is for any reason no longer providing services to the Company or any Subsidiary in the capacity of an employee, director or consultant, or with respect to an individual who is an employee or director of, or consultant to, a Subsidiary, the first day on which the Company no longer owns, directly or indirectly, voting securities possessing at least 50% of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors of such Subsidiary. ARTICLE 3. ADMINISTRATION 3.1 Committee. Subject to Article 15, and to Section 3.2, the Plan shall be administered by the Board, or a committee appointed by the Board to administer the Plan. Any references herein to "Committee" are references to the Board, or a committee established by the Board, as applicable. To the extent the Board considers it desirable to comply with or qualify under Rule 16b-3 or meet the Performance-Based Exception, the Committee shall consist of two or more directors of the Company, all of whom qualify as "outside directors "as defined for purposes of the regulations under Code Section 162(m) and "non- employee directors" within the meaning of Rule 16b-3. The number of members of the Committee shall from time to time be increased or decreased, and shall be subject to such conditions, in each case as the Board deems appropriate to permit transactions in Shares pursuant to the Plan to satisfy such conditions of Rule 16b-3 as then in effect. 3.2 Powers of Committee. Subject to the express provisions of the Plan, the Committee has full and final authority and sole discretion as follows: (i) to determine when, to whom and in what types and amounts Awards should be granted and the terms and conditions applicable to each Award, including the benefit payable under any SAR, performance unit or performance share, and whether or not specific Awards shall be granted in connection with other specific Awards, and if so whether they shall be exercisable cumulatively with, or alternatively to, such other specific Awards; (ii) to determine the amount, if any, that a Grantee shall pay for Restricted Shares, whether to permit or require the payment of cash dividends thereon to be deferred and the terms related thereto, when Restricted Shares (including Restricted Shares acquired upon the exercise of an option) shall be forfeited and whether such shares shall be held in escrow; (iii) to construe and interpret the Plan and to make all determinations necessary or advisable for the administration of the Plan; -6- 9 (iv) to make, amend, and rescind rules relating to the Plan, including rules with respect to the exercisability and nonforfeitability of Awards upon the Termination of Affiliation of a Grantee; (v) to determine the terms and conditions of all Award Agreements (which need not be identical) and, with the consent of the Grantee, to amend any such Award Agreement at any time, among other things, to permit transfers of such Awards to the extent permitted by the Plan; provided that the consent of the Grantee shall not be required for any amendment which (A) does not adversely affect the rights of the Grantee, or (B) is necessary or advisable (as determined by the Committee) to carry out the purpose of the Award as a result of any new or change in existing applicable law; (vi) to cancel, with the consent of the Grantee, outstanding Awards and to grant new Awards in substitution therefor; (vii) to accelerate the exercisability (including exercisability within a period of less than six months after the Grant Date) of, and to accelerate or waive any or all of the terms and conditions applicable to, any Award or any group of Awards for any reason and at any time, including in connection with a Termination of Affiliation (other than for Cause); (viii) subject to Sections 1.3 and 5.3, to extend the time during which any Award or group of Awards may be exercised; (ix) to make such adjustments or modifications to Awards to Grantees working outside the United States as are advisable to fulfill the purposes of the Plan; (x) to impose such additional terms and conditions upon the grant, exercise or retention of Awards as the Committee may, before or concurrently with the grant thereof, deem appropriate, including limiting the percentage of Awards which may from time to time be exercised by a Grantee; and (xi) to take any other action with respect to any matters relating to the Plan for which it is responsible. The determination of the Committee on all matters relating to the Plan or any Award Agreement shall be final, conclusive and binding on all Persons. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Award. ARTICLE 4. SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS 4.1 Number of Shares Available for Grants. Subject to adjustment as provided in Section 4.2, the number of Shares hereby reserved for issuance under the Plan shall be 2,000,000. If any Shares subject to an Award granted hereunder are forfeited or such Award otherwise -7- 10 terminates without the issuance of such Shares or of other consideration in lieu of such Shares, the Shares subject to such Award, to the extent of any such forfeiture or termination shall again be available for grant under the Plan. The Committee shall from time to time determine the appropriate methodology for calculating the number of shares issued pursuant to the Plan. Shares issued pursuant to the Plan may be treasury shares or newly-issued Shares. (a) Options: The maximum aggregate number of Shares that may be granted in the form of options, pursuant to any Award granted in any one calendar year to any one Grantee shall be 500,000. (b) SARs: The maximum aggregate number of SARs available under the Plan shall be 500,000, and the maximum aggregate number of SARs that may be granted in any one calendar year to any one Grantee shall be 500,000. (c) Restricted Shares: The maximum aggregate number of Shares that may be granted as Restricted Shares under the Plan shall be 500,000, and the maximum aggregate grant with respect to Awards of Restricted Shares granted in any one calendar year to any one Grantee shall be 500,000. (d) Bonus Shares: The maximum number of Shares that may be granted as Bonus Shares under the Plan shall be 500,000. (e) Performance Shares/Performance Units: The maximum aggregate payout (determined as of the end of the applicable performance period) with respect to Awards of performance shares or performance units granted in any one calendar year to any one Grantee shall be equal to the value of 250,000 Shares. 4.2 Adjustments in Authorized Shares. In the event that the Committee determines that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, subdivision, consolidation or reduction of capital, reorganization, merger, scheme of arrangement, split-up, spin-off or combination involving the Company or repurchase or exchange of Shares or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that any adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Shares (or other securities or property) with respect to which Awards may be granted, (ii) the number and type of Shares (or other securities or property) subject to outstanding Awards, and (iii) the grant or exercise price with respect to any Award or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided, in each case that with respect to Awards of Incentive Stock Options no such adjustment shall be authorized to the extent that such authority would cause the Plan to violate Section 422(b)(1) of the Code or any successor provision thereto; and provided further, that the number of Shares subject to any Award denominated in Shares shall always be a whole number. -8- 11 ARTICLE 5. ELIGIBILITY AND GENERAL CONDITIONS OF AWARDS 5.1 Eligibility. The Committee may in its discretion grant Awards to any Eligible Person, whether or not he or she has previously received an Award. 5.2 Grant Date. The Grant Date of an Award shall be the date on which the Committee grants the Award or such later date as specified in advance by the Committee. 5.3 Maximum Term. Any provision of the Plan to the contrary notwithstanding, the Option Term or other period during which an Award may be outstanding shall under no circumstances extend more than 10 years after the Grant Date, and shall be subject to earlier termination as herein provided. 5.4 Award Agreement. To the extent not set forth in the Plan, the terms and conditions of each Award (which need not be the same for each grant or for each Grantee) shall be set forth in an Award Agreement. 5.5 Restrictions on Share Transferability. The Committee may impose such restrictions on any Shares acquired pursuant to the exercise or vesting of an Award as it may deem advisable, including restrictions under applicable federal securities laws. 5.6 Termination of Affiliation. Each Grantee's Award Agreement shall set forth the extent to which the Grantee shall have the right to exercise the option following Termination of Affiliation. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement, need not be uniform among all options granted under the Plan, and may reflect distinctions based on the reasons for Termination of Affiliation. 5.7 Nontransferability of Awards. (a) Each Award, and each right under any Award, shall be exercisable only by the Grantee during the Grantee's lifetime, or, if permissible under applicable law, by the Grantee's guardian or legal representative or by a transferee receiving such Award pursuant to a qualified domestic relations order (a "QDRO") as defined in the Code or Title I of the U.S. Employee Retirement Income Security Act of 1974 ("ERISA"), or the rule thereunder, or any analogous order in any other relevant jurisdiction. (b) No Award (prior to the time, if applicable, Shares are issued in respect of such Award), and no right under any Award, may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Grantee otherwise than by will or by the laws of descent or distribution (or in the case of Restricted Shares, to the Company) or pursuant to a QDRO, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Subsidiary; provided, that the designation of a beneficiary shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance. -9- 12 5.8 Cancellation and Rescission of Awards. (a) Unless the Award Agreement specifies otherwise, the Committee may cancel, rescind, suspend, withhold, or otherwise limit or restrict any unexercised Award at any time if the Grantee is not in compliance with all applicable provisions of the Award Agreement and the Plan or if the Grantee has a Termination of Affiliation for Cause. (b) Upon exercise, payment, or delivery pursuant to an option, the Grantee shall certify in a manner acceptable to the Company that he or she is in compliance with the terms and conditions of the Plan. In the event a Grantee fails to comply with the provisions of this Section 5.8 prior to, or during the six months after, any exercise, payment, or delivery pursuant to an Award, such exercise, payment, or delivery may be rescinded by the Company within two years thereafter. In the event of any such rescission, the Grantee shall pay to the Company the amount of any gain realized or payment received as a result of the rescinded exercise, payment, or delivery in such manner and on such terms and conditions as may be required, and the Company shall be entitled to set-off against the amount of any such gain any amount owed to the Grantee by the Company. 5.9 Loans and Guarantees. The Committee may in its discretion allow a Grantee to defer payment to the Company of all or any portion of (i) the Option Price of an option, (ii) the purchase price of Restricted Shares, or (iii) subject to applicable law, any taxes associated with the exercise, nonforfeitability of, or payment of benefits in connection with, an Award, or cause the Company to guarantee a loan from a third party to the Grantee, in an amount equal to all or any portion of such Option Price, or any related taxes. Any such payment deferral or guarantee by the Company shall be on such terms and conditions as the Committee may determine. ARTICLE 6. STOCK OPTIONS 6.1 Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to any Eligible Person in such number, and upon such terms, and at any time and from time to time as shall be determined by the Committee. 6.2 Award Agreement. Each Option grant shall be evidenced by an Award Agreement that shall specify the Option Price, the Option Term, the number of shares to which the Option pertains, the time or times at which such Option shall be exercisable and such other provisions as the Committee shall determine. 6.3 Option Price. The Option Price of an option under this Plan shall be determined in the sole discretion of the Committee, but shall be at least equal to 100% of the Fair Market Value of a Share on the Grant Date. -10- 13 6.4 Grant of Incentive Stock Options. At the time of the grant of any Option, the Committee may in its discretion designate that such Option shall be made subject to additional restrictions to permit it to qualify as an "incentive stock option" under the requirements of Section 422 of the Code. Any Option designated as an Incentive Stock Option: (i) shall, if granted to a 10% Owner, have an Option Price not less than 110% of the Fair Market Value of a Share on its Grant Date; (ii) shall be for a period of not more than 10 years (five years in the case of an Incentive Stock Option granted to a 10% Owner) from its Grant Date, and shall be subject to earlier termination as provided herein or in the applicable Award Agreement; (iii) shall not have an aggregate Fair Market Value (as of the Grant Date of each Incentive Stock Option) of the Shares with respect to which Incentive Stock Options (whether granted under the Plan or any other stock option plan of the Grantee's employer or any parent or Subsidiary thereof ("Other Plans")) are exercisable for the first time by such Grantee during any calendar year, determined in accordance with the provisions of Section 422 of the Code, which exceeds $100,000 (the "$100,000 Limit"); (iv) shall, if the aggregate Fair Market Value of the Shares (determined on the Grant Date) with respect to the portion of such grant which is exercisable for the first time during any calendar year ("Current Grant") and all Incentive Stock Options previously granted under the Plan and any Other Plans which are exercisable for the first time during a calendar year ("Prior Grants") would exceed the $100,000 Limit, be exercisable as follows: (A) the portion of the Current Grant which would, when added to any Prior Grants, be exercisable with respect to Shares which would have an aggregate Fair Market Value (determined as of the respective Grant Date for such options) in excess of the $100,000 Limit shall, notwithstanding the terms of the Current Grant, be exercisable for the first time by the Grantee in the first subsequent calendar year or years in which it could be exercisable for the first time by the Grantee when added to all Prior Grants without exceeding the $100,000 Limit; and (B) if, viewed as of the date of the Current Grant, any portion of a Current Grant could not be exercised under the preceding provisions of this Section during any calendar year commencing with the calendar year in which it is first exercisable through and including the last calendar year in which it may by its terms be exercised, such portion of the Current Grant shall not be an Incentive Stock Option, but shall be exercisable as a separate option at such date or dates as are provided in the Current Grant; (v) shall be granted within 10 years from the earlier of the date the Plan is adopted or the date the Plan is approved by the stockholders of the Company; -11- 14 (vi) shall require the Grantee to notify the Committee of any disposition of any Shares issued pursuant to the exercise of the Incentive Stock Option under the circumstances described in Section 421(b) of the Code (relating to certain disqualifying dispositions) (any such circumstance, a "Disqualifying Disposition"), within 10 days of such Disqualifying Disposition; and (vii) shall by its terms not be assignable or transferable other than by will or the laws of descent and distribution and may be exercised, during the Grantee's lifetime, only by the Grantee; provided, however, that the Grantee may, to the extent provided in the Plan in any manner specified by the Committee, designate in writing a beneficiary to exercise his or her Incentive Stock Option after the Grantee's death. Notwithstanding the foregoing, the Committee may, without the consent of the Grantee, at any time before the exercise of an option (whether or not an Incentive Stock Option), take any action necessary to prevent such option from being treated as an Incentive Stock Option. 6.5 Grant of Reload Options. The Committee may in connection with the grant of an option or thereafter provide that a Grantee who (i) is an Eligible Person when he or she exercises an Option, (ii) exercises such option for Shares which have a Fair Market Value equal to not less than 120% of the Option Price for such option ("Exercised Option") and (iii) satisfies the Option Price or Required Withholding applicable thereto with Shares shall automatically be granted, subject to Article 3, an additional option ("Reload Option") in an amount equal to the sum ("Reload Number") of the number of Shares tendered to exercise the Exercised Option plus, if so provided by the Committee, the number of Shares, if any, retained by the Company in connection with the exercise of the Exercised Option to satisfy any federal, state or local tax withholding requirements; provided that no Reload Option shall be granted in connection with the exercise of an Option that has been transferred by the initial Grantee thereof. 6.6 Conditions on Reload Options. Reload Options shall be subject to the following terms and conditions: (a) the Grant Date for each Reload Option shall be the date of exercise of the Exercised Option to which it relates; (b) subject to Article 5, the Reload Option may be exercised at any time during the Option Term of the Exercised Option (subject to earlier termination thereof as provided in the Plan or in the applicable Award Agreement); and (c) the terms of the Reload Option shall be the same as the terms of the Exercised Option to which it relates, except that the Option Price for the Reload Option shall be 100% of the Fair Market Value of a Share on the Grant Date of the Reload Option. 6.7 Payment. Options granted under this Article 6 shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of Shares with respect to -12- 15 which the option is to be exercised, accompanied by full payment for the Shares made by any one or more of the following means subject to the approval of the Committee: (A) cash, personal check or wire transfer; (B) Mature Shares, valued at their Fair Market Value on the date of exercise; (C) with the approval of the Committee, Restricted Shares held by the Grantee for at least six months prior to the exercise of the option, each such share valued at the Fair Market Value of a Share on the date of exercise; (D) subject to applicable law, pursuant to procedures previously approved by the Company, through the sale of the Shares acquired on exercise of the Option through a broker-dealer to whom the Grantee has submitted an irrevocable notice of exercise and irrevocable instructions to deliver promptly to the Company the amount of sale or loan proceeds sufficient to pay for such Shares, together with, if requested by the Company, the amount of federal, state, local or foreign withholding taxes payable by Grantee by reason of such exercise; or (E) in the discretion of the Committee, payment may also be made in accordance with Section 5.9. The Committee may in its discretion specify that, if any Restricted Shares ("Tendered Restricted Shares") are used to pay the Option Price, (x) all the Shares acquired on exercise of the option shall be subject to the same restrictions as the Tendered Restricted Shares, determined as of the date of exercise of the option, or (y) a number of Shares acquired on exercise of the option equal to the number of Tendered Restricted Shares shall be subject to the same restrictions as the Tendered Restricted Shares, determined as of the date of exercise of the option. ARTICLE 7. STOCK APPRECIATION RIGHTS 7.1 Grant of SARs. Subject to the terms and conditions of the Plan, SARs may be granted to any Eligible Person at any time and from time to time as shall be determined by the Committee. The Committee may grant Freestanding SARs, Tandem SARs, or any combination thereof. Except as provided in Section 7.2, the Committee shall have complete discretion in determining the number of SARs granted to each Grantee (subject to Article 4), the Strike Price thereof, and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such SARs. 7.2 Exercise of Tandem SAR. Tandem SARs may be exercised for all or part of the Shares subject to the related Award upon the surrender of the right to exercise the equivalent -13- 16 portion of the related Award. A Tandem SAR may be exercised only with respect to the Shares for which its related Award is then exercisable. Notwithstanding any other provision of this Plan to the contrary, with respect to a Tandem SAR granted in connection with a related option; (i) the Tandem SAR will expire no later than the expiration of the underlying option; (ii) the value of the payout with respect to the Tandem SAR may be for no more than 100% of the difference between the Option Price of the underlying option and the Fair Market Value of the Shares subject to the underlying option at the time the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only when the Fair Market Value of the Shares subject to the option exceeds the Option Price of the option. 7.3 Payment of SAR Amount. Upon exercise of an SAR, the Grantee shall be entitled to receive payment from the Company in an amount determined by multiplying: (a) the excess of the Fair Market Value of a Share on the date of exercise over the Strike Price; by (b) the number of Shares with respect to which the SAR is exercised; provided that the Committee may provide that the Committee may provide that the benefit payable on exercise of any SAR shall not exceed such percentage of the Fair Market Value of a Share on the Grant Date as the Committee shall specify. At the discretion of the Committee, the payment upon SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof, as set forth in the Award Agreement. ARTICLE 8. RESTRICTED SHARES 8.1 Grant of Restricted Shares. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Restricted Shares to any Eligible Person in such amounts as the Committee shall determine. 8.2 Award Agreement. Each grant of Restricted Shares shall be evidenced by an Award Agreement that shall specify the Period(s) of Restriction, the number of Restricted Shares granted, and such other provisions as the Committee shall determine. Subject to Article 11, the Committee shall impose such other conditions and/or restrictions on any Restricted Shares granted pursuant to the Plan as it may deem advisable, including restrictions based upon the achievement of specific performance goals (Company-wide, divisional, and/or individual), time-based restrictions on vesting following the attainment of the performance goals, and/or restrictions under applicable securities laws. 8.3 Other Restrictions. The Committee shall determine the amount, if any, that a Grantee shall pay for Restricted Shares, subject to the following sentence. Except with respect to Restricted Shares that are treasury shares, for which no payment need be required, the -14- 17 Committee shall require the Grantee to pay at least the Minimum Consideration for each Restricted Share. Such payment shall be made in full by the Grantee before the delivery of the shares and in any event no later than 10 business days after the Grant Date for such shares. 8.4 Effect of Forfeiture. If Restricted Shares are forfeited, then if the Grantee was required to pay for such shares or acquired such Restricted Shares upon the exercise of an option, the Grantee shall be deemed to have resold such Restricted Shares to the Company at a price equal to the lesser of (x) the amount paid by the Grantee for such Restricted Shares, or (y) the Fair Market Value of a Share on the date of such forfeiture. The Company shall pay to the Grantee the required amount as soon as is administratively practical. Such Restricted Shares shall cease to be outstanding, and shall no longer confer on the Grantee thereof any rights as a stockholder of the Company, from and after the date of the event causing the forfeiture, whether or not the Grantee accepts the Company's tender of payment for such Restricted Shares. 8.5 Escrow; Legends. The Committee may provide that the certificates for any Restricted Shares (x) shall be held (together with a stock power executed in blank by the Grantee) in escrow by the Secretary of the Company until such Restricted Shares become nonforfeitable or are forfeited or (y) shall bear an appropriate legend restricting the transfer of such Restricted Shares. If any Restricted Shares become nonforfeitable, the Company shall cause certificates for such shares to be issued without such legend. 8.6 Termination of Affiliation. Each Restricted Shares Award Agreement shall set forth the extent to which the Participant shall have the right to receive unvested Restricted Shares following his or her Termination of Affiliation. Such provision shall be determined in the sole discretion of the Board, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Restricted Shares issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination. ARTICLE 9. PERFORMANCE UNITS AND PERFORMANCE SHARES 9.1 Grant of Performance Units/Shares. Subject to the terms of the Plan, performance units or performance shares may be granted to any Eligible Person in such amounts and upon such terms, and at any time and from time to time as shall be determined by the Committee. 9.2 Value of Performance Units/Shares. Each performance unit shall have an initial value that is established by the Committee at the time of grant. Each performance share shall have an initial value equal to the Fair Market Value of a Share on the date of grant. The Committee shall set performance goals in its discretion which, depending on the extent to which they are met, will determine the number or value of performance units or performance shares, as applicable, that will be paid out to the Grantee. For purposes of this Article 9, the time period during which the performance goals must be met shall be called a "Performance Period." 9.3 Earning of Performance Units/Shares. Subject to the terms of this Plan, after the applicable Performance Period has ended, the holder of performance units or performance shares -15- 18 shall be entitled to receive payout on the number and value of performance units or performance shares earned by the Grantee over the Performance Period, to be determined as a function of the extent to which the corresponding performance goals have been achieved. If a Grantee is promoted, demoted or transferred to a different business unit of the Company during a Performance Period, then, to the extent the Committee determines the performance goals or Performance Period are no longer appropriate, the Committee may adjust, change or eliminate the performance goals or the applicable Performance Period as it deems appropriate in order to make them appropriate and comparable to the initial performance goals or Performance Period. 9.4 Form and Timing of Payment of Performance Units/Shares. Payment of earned performance units or performance shares shall be made in a lump sum following the close of the applicable Performance Period. Subject to the terms of this Plan, the Committee, in its sole discretion, may pay earned performance units or performance shares in the form of cash or in Shares (or in a combination thereof) which have an aggregate Fair Market Value equal to the value of the earned performance units or performance shares at the close of the applicable Performance Period. Such Shares may be granted subject to any restrictions deemed appropriate by the Committee. The form of payout of such Awards shall be set forth in the Award Agreement pertaining to the grant of the Award. At the discretion of the Committee, a Grantee may be entitled to receive any dividends declared with respect to Shares which have been earned in connection with grants of performance units or performance shares which have been earned, but not yet distributed to the Grantee. In addition, a Grantee may, at the discretion of the Committee, be entitled to exercise his or her voting rights with respect to such Shares. 9.5 Performance Measures. Unless and until the Committee proposes for stockholder vote and stockholders approve a change in the general performance measures set forth in this Article 9, the attainment of which may determine the degree of payout and/or vesting with respect to Awards designed to qualify for the Performance-Based Exception, the performance measure(s) to be used for purposes of such Awards shall be chosen from among the following: (a) Earnings (either in the aggregate or on a per-share basis); (b) Net income (before or after taxes); (c) Operating income; (d) Cash flow; (e) Return measures (including return on assets, equity, or sales); (f) Earnings before or after taxes, and before or after depreciation and amortization; -16- 19 (g) Gross revenues; (h) Share price (including growth measures and total stockholder return or attainment by the Shares of a specified value for a specified period of time); (i) Reductions in expense levels in each case where applicable determined either in a Company-wide basis or in respect of any one or more business units; (l) Net economic value; or (m) Market share. The Committee shall have the discretion to adjust the determinations of the degree of attainment of the preestablished performance goals; provided, however, that Awards which are designed to qualify for the Performance-Based Exception, may not be adjusted upward (the Committee shall retain the discretion to adjust such Awards downward). In the event that applicable tax and/or securities laws change to permit Committee discretion to alter the governing performance measures without obtaining stockholder approval of such changes, and still qualify for the Performance-Based Exception, the Committee shall have sole discretion to make such changes without obtaining stockholder approval. ARTICLE 10. BONUS SHARES. 10.1 Grant of Bonus Shares. Subject to the terms of the Plan, the Committee may grant Bonus Shares to any Eligible Person, in such amount and upon such terms and at any time and from time to time as shall be determined by the Committee. The terms of such Bonus Shares shall be set forth in the form of the Award Agreement. ARTICLE 11. BENEFICIARY DESIGNATION Each Grantee under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Grantee, shall be in a form prescribed by the Company, and will be effective only when filed by the Grantee in writing with the Company during the Grantee's lifetime. In the absence of any such designation, benefits remaining unpaid at the Grantee's death shall be paid to the Grantee's estate. -17- 20 ARTICLE 12. DEFERRALS The Committee may permit or require a Grantee to defer receipt of the payment of cash or the delivery of Shares that would otherwise be due by virtue of the exercise of an Option or SAR, the lapse or waiver of restrictions with respect to Restricted Shares, or the satisfaction of any requirements or goals with respect to performance units or performance shares. If any such deferral is required or permitted, the Committee shall, in its sole discretion, establish rules and procedures for such payment deferrals. ARTICLE 13. RIGHTS OF EMPLOYEES/DIRECTORS 13.1 Employment. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Grantee's employment at any time, nor confer upon any Grantee's right to continue in the employ of the Company. 13.2 Participation. No Employee or Director shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award. ARTICLE 14. CHANGE IN CONTROL 14.1 Treatment of Outstanding Awards. The Committee may provide in an Award Agreement for different terms and conditions to apply prior to and after a Change in Control of the Company or a Subsidiary. 14.2 Occurrence of Change of Control. The Committee may set rules for determining when a Change of Control of the Company or a Subsidiary has occurred. 14.3 Pooling of Interests Accounting. Notwithstanding any other provision of the Plan to the contrary, (a) in the event that the consummation of a Change in Control is contingent on using pooling of interests accounting methodology the Committee may take any action necessary to preserve the use of pooling of interests accounting; and (b) if the Committee determines, in its discretion exercised prior to a sale or merger of the Company that in the Committee's judgment is reasonably likely to occur, that the exercise of SARs would preclude the use of pooling-of-interests accounting ("pooling") after the consummation of such sale or merger and that such preclusion of pooling would have a material adverse effect on such sale or merger, the Committee may either unilaterally cancel such SARs prior to the sale or merger or cause the Company to pay the benefit attributable to such SARs in the form of Shares if the Committee determines that such payment would not cause the transaction to become ineligible for pooling. ARTICLE 15. AMENDMENT, MODIFICATION, AND TERMINATION 15.1 Amendment, Modification, and Termination. Subject to the terms of the Plan, the Board may at any time and from time to time, alter, amend, suspend or terminate the Plan in whole or in part without the approval of the Company's stockholders, except to the extent that -18- 21 such stockholder approval may be required under the listing requirements of any securities exchange or national market system on which are listed the Company's equity securities or pursuant to any other regulatory or legal requirement; provided that shareholder approval is required to increase the number of Shares available under the Plan (except as provided in Section 4.2). 15.2 Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee may make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including the events described in Section 4.3) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan; provided that no such adjustment shall be authorized to the extent that such authority would be inconsistent with the Plan's meeting the requirements of Section 162(m) of the Code. 15.3 Awards Previously Granted. Notwithstanding any other provision of the Plan to the contrary (but subject to Section 14.3), no termination, amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Grantee of such Award. ARTICLE 16. WITHHOLDING (a) Mandatory Tax Withholding. (1) Whenever under the Plan, Shares are to be delivered upon exercise or payment of an Award or upon Restricted Shares becoming nonforfeitable, or any other event with respect to rights and benefits hereunder, the Company shall be entitled to require (i) that the Grantee remit an amount in cash, or in the Company's discretion, Mature Shares, sufficient to satisfy all federal, state, and local tax withholding requirements related thereto ("Required Withholding"), (ii) the withholding of such Required Withholding from compensation otherwise due to the Grantee or from any Shares due to the Grantee under the Plan or (iii) any combination of the foregoing. (2) Any Grantee who makes a Disqualifying Disposition or an election under Section 83(b) of the Code shall remit to the Company an amount sufficient to satisfy all resulting Required Withholding; provided that, in lieu of or in addition to the foregoing, the Company shall have the right to withhold such Required Withholding from compensation otherwise due to the Grantee or from any Shares or other payment due to the Grantee under the Plan. (b) Elective Share Withholding. -19- 22 (1) Subject to the following subsection, a Grantee may elect the withholding ("Share Withholding") by the Company of a portion of the Shares otherwise deliverable to such Grantee upon the exercise of an Award or upon Restricted Shares becoming non-forfeitable (each, a "Taxable Event") having a Fair Market Value equal to (i) the minimum amount necessary to satisfy Required Withholding liability attributable to the Taxable Event; or (ii) with the Committee's prior approval, a greater amount, not to exceed the estimated total amount of such Grantee's tax liability with respect to the Taxable Event. (2) Each Share Withholding election shall be subject to the following conditions: (i) any Grantee's election shall be subject to the Committee's discretion to revoke the Grantee's right to elect Share Withholding at any time before the Grantee's election if the Committee has reserved the right to do so in the Award Agreement; (ii) the Grantee's election must be made before the date (the "Tax Date") on which the amount of tax to be withheld is determined; and (iii) the Grantee's election shall be irrevocable. 16.1. Notification under Code Section 83(b). If the Grantee, in connection with the exercise of any option, or the grant of Restricted Shares, makes the election permitted under Section 83(b) of the Code to include in such Grantee's gross income in the year of transfer the amounts specified in Section 83(b) of the Code, then such Grantee shall notify the Company of such election within 10 days of filing the notice of the election with the Internal Revenue Service, in addition to any filing and notification required pursuant to regulations issued under Section 83(b) of the Code. The Committee may, in connection with the grant of an Award or at any time thereafter, prohibit a Grantee from making the election described above. ARTICLE 17. SUCCESSORS All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise of all or substantially all of the business and/or assets of the Company. ARTICLE 18. ADDITIONAL PROVISIONS 18.1 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. -20- 23 18.2 Severability. If any part of the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any other part of the Plan. Any Section or part of a Section so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid. 18.3 Requirements of Law. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. Notwithstanding any provision of the Plan or any Award, Grantees shall not be entitled to exercise, or receive benefits under, any Award, and the Company shall not be obligated to deliver any Shares or deliver benefits to a Grantee, if such exercise or delivery would constitute a violation by the Grantee or the Company of any applicable law or regulation. 18.4 Securities Law Compliance. (a) If the Committee deems it necessary to comply with any applicable securities law, or the requirements of any stock exchange upon which Shares may be listed, the Committee may impose any restriction on Shares acquired pursuant to Awards under the Plan as it may deem advisable. All certificates for Shares delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the SEC, any stock exchange upon which Shares are then listed, any applicable securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. If so requested by the Company, the Grantee shall make a written representation to the Company that he or she will not sell or offer to sell any Shares unless a registration statement shall be in effect with respect to such Shares under the Securities Act of 1993, as amended, and any applicable state securities law or unless he or she shall have furnished to the Company, in form and substance satisfactory to the Company, that such registration is not required. (b) If the Committee determines that the exercise or nonforfeitability of, or delivery of benefits pursuant to, any Award would violate any applicable provision of securities laws or the listing requirements of any national securities exchange or national market system on which are listed any of the Company's equity securities, then the Committee may postpone any such exercise, nonforfeitability or delivery, as applicable, but the Company shall use all reasonable efforts to cause such exercise, nonforfeitability or delivery to comply with all such provisions at the earliest practicable date. 18.5 No Rights as a Stockholder. A Grantee shall not have any rights as a stockholder of the Company with respect to the Shares (other than Restricted Shares) which may be deliverable upon exercise or payment of such Award until such shares have been delivered to him or her. Restricted Shares, whether held by a Grantee or in escrow by the Secretary of the Company, shall confer on the Grantee all rights of a stockholder of the Company, except as otherwise provided in the Plan or Award Agreement. At the time of a grant of Restricted Shares, the Committee may require the payment of cash dividends thereon to be deferred and, if the -21- 24 Committee so determines, reinvested in additional Restricted Shares. Stock dividends and deferred cash dividends issued with respect to Restricted Shares shall be subject to the same restrictions and other terms as apply to the Restricted Shares with respect to which such dividends are issued. The Committee may in its discretion provide for payment of interest on deferred cash dividends. 18.6 Parties to Stockholders Agreement. Prior to the delivery of Shares to a Grantee pursuant to an Award, the Committee, in its discretion, may require such Grantee to become party to, and such Shares to become subject to, the Stockholders' Agreement dated as of the September ___, 1997 among the Company and the stockholders thereto (the "Stockholders' Agreement"), provided that any Shares delivered pursuant to an Award granted under this Plan to any Grantee who is a party to the Stockholders Agreement as of the date hereof shall automatically be subject to the terms of the Stockholders Agreement. 18.7 Nature of Payments. Awards shall be special incentive payments to the Grantee and shall not be taken into account in computing the amount of salary or compensation of the Grantee for purposes of determining any pension, retirement, death or other benefit under (a) any pension, retirement, profit-sharing, bonus, insurance or other employee benefit plan of the Company or any Subsidiary or (b) any agreement between (i) the Company or any Subsidiary and (ii) the Grantee, except as such plan or agreement shall otherwise expressly provide. 18.8 Governing Law. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Delaware, other than its laws respecting choice of law. -22- EX-10.15 15 CUSTODY AGREEMENT & POWER OF ATTORNEY 1 EXHIBIT 10.15 SN&R DRAFT 10/7/97 1:40 A.M. THOMPSON HOLDINGS, L.P. (Name of Selling Stockholder) CUSTODY AGREEMENT AND POWER OF ATTORNEY FOR SALE OF CLASS A COMMON STOCK OF AMERICAN ITALIAN PASTA COMPANY October 7, 1997 Mr. Timothy S. Webster Mr. David E. Watson as Attorneys-in-Fact c/o American Italian Pasta Company 1000 Italian Way Excelsior Springs, Missouri 64024 Republic New York Securities Corporation as Custodian c/o Ms. Carmen Terrana 452 Fifth Avenue New York, New York 10018 Ladies and Gentlemen: After the conversion of all outstanding shares of the common stock, no par value per share (the "Old Common"), of American Italian Pasta Company, a Delaware corporation (the "Company"), and the Class A common stock, par value $.01 per share of the Company (with the Old Common collectively, the "Old Common Stock") into shares of the Class A Convertible Common Stock, par value $.001 per share (the "New Common Stock") of the Company pursuant to a proposed recapitalization (the "Recapitalization"), the Company proposes to issue and sell, and the undersigned and certain other stockholders of the Company (the undersigned and such other stockholders hereinafter collectively referred to as the "Selling Stockholders") propose to sell, shares of New Common Stock to a group of U.S. underwriters (the "U.S. Underwriters"), for whom Morgan Stanley & Co. Incorporated, BT Alex. Brown Incorporated, Goldman, Sachs & Co. and George K. Baum & Company are acting as representatives (the "U.S. Representatives") and to a group of international underwriters (the "International Underwriters, together with the U.S. Underwriters, the "Underwriters") for whom Morgan Stanley & Co. International Limited, BT Alex. Brown International, Goldman Sachs International and George K. Baum & Company are acting as representatives (the "International Representatives," together with the U.S. Representatives, the "Representatives"), for distribution to the public in an initial public offering (the "Offering") as contemplated by a registration statement on Form S-1, File No. 333-32827 (the "Registration Statement"), in amounts, at a price and on terms to be set forth in an underwriting agreement (the "Underwriting Agreement") to be executed by and among the Company, the Selling Stockholders and the Representatives. In addition, solely for the purpose of covering over-allotments, if any, the Company and/or certain Selling Stockholders propose 2 to sell to the Underwriters, in amounts, at a price and upon terms to be set forth in the Underwriting Agreement, additional shares of New Common Stock. It is understood that at this time there is no commitment on the part of the Underwriters to purchase any shares of New Common Stock and there are no assurances that the Offering will take place or that the undersigned will be offered an opportunity to sell any shares of New Common Stock even if the Offering does take place. The undersigned, by executing and delivering this irrevocable Custody Agreement and Power of Attorney (this "Agreement"), confirms its willingness to sell the maximum number of shares of New Common Stock (collectively, the "New Shares") as set forth on Schedule I hereto (and subject to any conditions set forth therein) to the Underwriters. The undersigned acknowledges receipt of (i) a draft dated October 7, 1997 of the Underwriting Agreement (such draft, the "Draft Underwriting Agreement"); and (ii) a conformed copy (without exhibits) of the Registration Statement and all amendments thereto through the date of execution hereof. The undersigned understands that the Underwriting Agreement is subject to revision prior to execution, with such changes as the Attorneys-in-Fact deem appropriate (including with respect to the number of New Shares to be sold by the undersigned), and that the Registration Statement has not yet become effective under the Securities Act of 1933 (the "Securities Act") and is subject to amendment. 1. Appointment and Powers of Attorneys-in-Fact a. The undersigned irrevocably constitutes and appoints Timothy S. Webster and David E. Watson (the "Attorneys-in-Fact"), and each of them, its agent and attorney-in-fact, with full power of substitution, with respect to all matters arising in connection with the offering and sale of the New Shares (subject to the limitations set forth below) including, but not limited to, the power and authority on behalf of the undersigned to do or cause to be done any of the following: i. negotiate, determine and agree upon (a) the price at which the New Shares will be initially offered to the public by the Underwriters pursuant to the Underwriting Agreement; (b) the underwriting discount with respect to the New Shares, not to exceed 7%; and (c) the price at which the New Shares will be sold to the Underwriters by the undersigned pursuant to the Underwriting Agreement; provided that any such underwriting discount and price at which the New Shares will be sold to the Underwriters will be the same as the price at which shares of New Common Stock are sold to the Underwriters by the Company; ii. negotiate, execute and deliver the Underwriting Agreement, substantially in the form of the Draft Underwriting Agreement, which provides for, among other things, indemnification of the Underwriters by the undersigned for certain liabilities and including such insertions, changes, additions or deletions as the Attorneys-in-Fact in their sole discretion deem appropriate, such approval to be conclusively evidenced by - 2 - 3 the execution and delivery of the Underwriting Agreement by an Attorney-in-Fact, including the making of all representations and agreements provided in the Underwriting Agreement to be made by, and the exercise of all authority thereunder vested in, the undersigned; provided, however, that the provisions of the Underwriting Agreement corresponding to Sections 2, 6 and 9 of the Draft Underwriting Agreement shall not in any material respect be less favorable to the undersigned or its counsel than such provisions of the Draft Underwriting Agreement; iii. sell, assign, transfer and deliver the New Shares to the Underwriters pursuant to the Underwriting Agreement and deliver to the Underwriters or instruct the Custodian (as defined below) to deliver certificates for the New Shares so sold; iv. take any and all steps deemed necessary or desirable by the Attorneys-in-Fact in connection with the registration of the New Shares under the Securities Act, the Securities Exchange Act of 1934 (the "Exchange Act"), and under the securities or "blue sky" laws of various states and jurisdictions, including, without limitation, the giving or making of such undertakings, representations and agreements and the taking of such other steps as the Attorneys-in-Fact may deem necessary or advisable; v. instruct the Company and the Custodian on all matters pertaining to the sale of the New Shares and delivery of certificates therefor; vi. provide, in accordance with the Underwriting Agreement, for the payment of underwriting discounts and commissions and transfer taxes, if any, and any other costs or expenses allocable to or payable by the undersigned in connection with the offering and sale of the undersigned's New Shares, in each case as directed in writing by the Attorneys-in-Fact; provided that this Agreement shall not create any obligation to pay any such other costs or expenses; and further provided that this clause (vi) shall not affect any agreement which the Company and the undersigned may make for the allocation or sharing of such costs or expenses; vii. otherwise take all actions and do all things deemed necessary or advisable or desirable by the Attorneys-in-Fact in their discretion in connection with the registration of the New Shares, including the execution and delivery of any documents, and generally act for and in the name of the undersigned with respect to the sale of the New Shares to the Underwriters and the reoffering of the New Shares by the Underwriters as fully as could the undersigned if then personally present and acting; viii. to accept payment for the New Shares being sold by the undersigned, to give receipt for such payment, and to remit such payment to Republic National Bank of New York ("RNB") in accordance with its written instructions; and ix. to return to RNB in accordance with its written instructions any certificates for any shares of New Common Stock issued in respect of the Old Shares - 3 - 4 (as defined below) pursuant to the Recapitalization, but not sold or to be sold to the Underwriters pursuant to the Underwriting Agrement. b. Each Attorney-in-Fact may act alone in exercising the rights and powers conferred on the Attorneys-in-Fact by this Agreement, and the act of any Attorney-in-Fact shall be the act of the Attorneys-in-Fact. Each Attorney-in-Fact may determine, in his sole and absolute discretion, the time or times when, the purposes for which, and the manner in which, any power herein conferred upon the Attorneys-in-Fact shall be exercised. c. The Custodian, the Representatives, the Company and all other persons dealing with the Attorneys-in-Fact as such may rely and act upon any writing believed in good faith to be signed by one or more of the Attorneys-in-Fact. d. The Attorneys-in-Fact shall not receive any compensation for their services rendered hereunder. e. The undersigned acknowledges that the powers of attorney granted pursuant to this Agreement are granted to secure the undersigned's performance of this Agreement and the Underwriting Agreement and therefore are coupled with an interest and are irrevocable. 2. Appointment of Custodian; Deposit of Shares a. In connection with and to facilitate the sale of the New Shares to the Underwriters, the undersigned appoints Republic New York Securities Corporation as custodian (the "Custodian"), and authorizes RNB to deposit with the Custodian one or more certificates for shares of Old Common Stock as set forth on Schedule II hereto (such shares collectively, the "Old Shares") which, after giving effect to the Recapitalization, will represent not less than the maximum number of New Shares to be sold by the undersigned to the Underwriters as set forth on Schedule I hereto. Each such certificate so deposited is in negotiable and proper deliverable form accompanied by two or more duly executed stock powers in blank, bearing the signature of the undersigned thereon and a medallion guarantee of such signature by an Eligible Guarantor Institution, as defined by Exchange Act Rule 17Ad-15. The undersigned authorizes and directs the Custodian, subject to the instructions of the Attorneys-in-Fact, (a) to hold in custody the certificate or certificates for the Old Shares deposited herewith and any related stock powers; (b) to deliver such certificate or certificates and related stock powers to or at the direction of the Attorneys-in-Fact in accordance with the terms of the Underwriting Agreement; (c) to instruct UMB Bank, n.a., in its capacity as Transfer Agent and Registrar for the New Common Stock, to issue certificates for all of the New Shares and to deliver such certificates to the Custodian in exchange for all of such Old Shares; and (d) to return to RNB one or more new certificates for the shares of New Common Stock issuable pursuant to the Recapitalization in respect of the Old Shares but which are not sold or to be sold pursuant to the Underwriting Agreement. - 4 - 5 b. Until the New Shares have been delivered to the Underwriters against payment therefor in accordance with the Underwriting Agreement, the undersigned will retain all rights of ownership with respect to the Old Shares deposited hereunder (together with any shares of New Common Stock issuable in respect thereof pursuant to the Recapitalization), including the right to vote and to receive all dividends and payment thereon, except the right to retain custody of or dispose of such shares, which right is subject to this Agreement and, from and after its execution, the Underwriting Agreement. c. In taking any action requested or directed by the Representatives under the terms of this Agreement, the Custodian will be entitled to rely upon a writing which it believes in good faith to have been signed by a representative of Morgan Stanley & Co. Incorporated, with evidence of authority reasonably satisfactory to the Custodian. d. The Custodian may consult with legal counsel in the event of any dispute or questions as to the construction of any of the provisions hereof or its duties hereunder, and it shall incur no liability and shall be fully protected in acting in accordance with the opinion and instructions of such counsel. e. In the event of any disagreement between the undersigned or the person or persons named in the instructions in this Agreement, or any other person, resulting in adverse claims and demands being made in connection with or for any certificates, papers, money or property involved herein, or affected hereby, the Custodian shall be entitled to refuse to comply with any demand or claim (and in so refusing to make any delivery or other disposition of any money, papers or property involved or affected hereby, the Custodian shall not be or become liable to the Company, the undersigned, the Underwriters or to any person named in such instructions for its refusal to comply with such conflicting or adverse demands) until: (i) The rights of all of the adverse claimants shall have been fully and finally adjudicated by a court assuming and having jurisdiction of the parties and money, certificates, papers and property involved herein or affected hereby and the Custodian shall have received a copy of all orders, decrees and judgments relating to such adjudication from counsel to one or more of such adverse claimants and shall have been advised in writing by such counsel of the finality of such orders, decrees or judgments, or (ii) The Custodian shall have received from counsel to one or more of such adverse claimants a copy of a written agreement executed by all adverse claimants and providing for the resolution of all such disagreements. f. No party to this Agreement shall on or after the date hereof grant a security interest in any monies, securities or other property deposited with the Custodian under this Agreement, or otherwise create a lien, encumbrance or other claim against such monies or securities, or borrow against the same. - 5 - 6 g. The Custodian may rely upon and shall be fully protected in relying and acting upon this Agreement and any assignment, instruction, certificate, instrument, opinion, notice, letter, facsimile, transmission, telex, holder list, mailing label or other instrument, or any security delivered to it hereunder. h. The Custodian may rely and shall be fully protected in relying and acting upon written instruction which it believes in good faith to have been signed by the Attorneys-in-Fact, or any one of them, with respect to any matter (including incomplete or defective documents submitted hereunder). i. The Custodian shall keep such records as are reasonably necessary to document the date of its receipt of the Old Shares, the amount and date of payments in respect thereof, and the date of delivery of any unsold shares of New Common Stock to RNB. j. The Custodian shall retain this Agreement and related documents delivered to it hereunder until the Termination Date (as hereinafter defined) and following the Termination Date shall deliver (i) to RNB, any Old Shares and New Shares then outstanding and not previously delivered to RNB or sold to the Underwriters pursuant to the Underwriting Agreement and (ii) to the Company, this Agreement and any other related documents. k. The Custodian shall have no duties or obligations other than those specifically set forth in this Agreement and no provision hereof shall be interpreted to impose on the Custodian any additional duty or obligation. 3. Sale of Shares and Remitting Net Proceeds The undersigned authorizes and directs the Attorneys-in-Fact to deliver or cause the Custodian to deliver certificates for the New Shares being sold in the Offering by the undersigned to the Representatives as provided in the Underwriting Agreement, against delivery to or at the direction of the Attorneys-in-Fact for the account of RNB of the purchase price of the New Shares, at the time or times and in the funds specified in the Underwriting Agreement. The undersigned authorizes and directs the Attorneys-in-Fact, acting on its behalf, to accept and acknowledge receipt of the payment of the purchase price for the New Shares and to remit promptly such proceeds to RNB in accordance with written instructions provided by the Custodian after reserving an amount of such proceeds for transfer taxes, if any, and any other costs or expenses allocable to or payable by the undersigned. 4. Representations, Warranties and Agreements The undersigned represents and warrants to, and agrees with, the other Selling Stockholders, the Company, the Attorneys-in-Fact, the Custodian, and the Underwriters as follows: - 6 - 7 a. The undersigned has full legal right, power and authority to enter into and perform this Agreement and the Underwriting Agreement. b. The undersigned has read the Draft Underwriting Agreement and understands the same, and agrees that the representations and warranties to be made by or on behalf of such Selling Stockholder as set forth in Section 2 of the Underwriting Agreement are incorporated by reference herein, and the undersigned represents, warrants and covenants as to itself that each of such representations and warranties is true and correct as of the date hereof and, except as the undersigned shall have notified the Attorneys-in-Fact pursuant to paragraph F of the attached instructions, will be true and correct at all times from the date hereof through and including the time of the closing of the sale of the New Shares to the Underwriters on the Closing Date or the Option Closing Date (each as defined in the Underwriting Agreement), as the case may be. The undersigned will promptly notify the Attorneys-in-Fact of any development that would make any such representation and warranty untrue, and of any default under or breach of this Agreement (or of any event which, with notice or the lapse of time or both, would constitute such a default or breach). The undersigned authorizes the Attorneys-in-Fact, acting on behalf of the undersigned, to affirm the truth and accuracy of such representations and warranties in connection with the consummation or implementation of the transactions contemplated by the Underwriting Agreement and this Agreement. c. Subject to the security interest of RNB to be released at a closing of the Offering on the Closing Date or the Option Closing Date, as the case may be (in each case solely as to Shares then being sold by the undersigned pursuant to the Underwriting Agreement), the undersigned has good and marketable title to all of the Old Shares and will on the Closing Date or the Option Closing Date, as the case may be, have such title to all New Shares, in each case free and clear of all liens, encumbrances, equities and claims whatsoever, including, without limitation, any claim or interest other persons may have in such shares, and the undersigned now has, and at the time of execution of the Underwriting Agreement and on the Closing Date and the Option Closing Date, as the case may be, will have, full right, power and authority to enter into the Underwriting Agreement and to sell, assign, transfer and deliver thereunder the New Shares then being sold on such Closing Date and the Option Closing Date, as the case may be; the undersigned has no knowledge of any fact that would impair the validity of the certificates; and upon sale and delivery of such New Shares under the Underwriting Agreement and payment therefor pursuant thereto, the Underwriters will acquire good and marketable title to such New Shares free and clear of any liens, encumbrances, equities and claims whatsoever, including, without limitation, any claim or interest that RNB or any other persons may have in such New Shares. d. The information contained in the Registration Statement with respect to the undersigned is true and correct. - 7 - 8 e. The undersigned will carefully review each amendment to the Registration Statement to determine that the information with respect to the undersigned is true and correct. f. The undersigned will promptly notify the Company in writing of any material adverse information with regard to the current or prospective operations of the Company or its subsidiaries of which the undersigned learns after the date hereof and which is not disclosed in the Registration Statement or the most recent amendment thereto received by the undersigned. g. The undersigned has completed the information called for in Schedule I hereto and such information with respect to the undersigned is complete and correct. h. Except as otherwise disclosed in Schedule III hereto, the undersigned is not a member of or directly or indirectly an affiliate of or associated with any member of the National Association of Securities Dealers, Inc. i. Each of the undersigned and RNB acknowledges the "lock-up" agreements addressed to the Representatives executed (or to be executed) by the undersigned and by RNB in connection with the Offering. j. The undersigned has not taken and will not take, directly or indirectly, any action intended to constitute or which has constituted, or which might reasonably be expected to cause or result in, stabilization or manipulation of the price of the New Common Stock; and, to assure compliance with Regulation M as promulgated by the Securities and Exchange Commission (the "SEC"), the undersigned will not make bids for or purchases of, or induce bids for or purchases of, directly or indirectly, any shares of New Common Stock until the distribution of all shares being sold in the Offering has been completed. k. The undersigned has not distributed and will not distribute any prospectus or other offering material in connection with the Offering other than a preliminary prospectus and the Prospectus or other material permitted by the Securities Act, in each case in a form approved for such use by the Company and Morgan Stanley & Co. Incorporated. l. Upon execution and delivery of the Underwriting Agreement by any of the Attorneys-in-Fact on behalf of the undersigned, the undersigned agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter or the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and to contribute to amounts paid as a result of losses, claims, damages, liabilities and expenses, to the full extent provided in, and shall have the rights and duties provided in the Underwriting Agreement. The undersigned understands that the information set forth in Schedules I and II hereto is being provided for use in the Registration Statement, any preliminary prospectus and the Prospectus. - 8 - 9 m. Upon execution and delivery of the Underwriting Agreement by the Attorneys-in-Fact on behalf of the undersigned in accordance with this Agreement, the undersigned agrees to be bound by and to perform each of the covenants and agreements of the undersigned as a Selling Stockholder in the Underwriting Agreement including without limitation, the indemnification and contribution obligations thereunder. n. The undersigned agrees to deliver to the Attorneys-in-Fact such documentation as the Attorneys-in-Fact, the Company or the Underwriters or any of their respective counsel may reasonably request in order to effectuate any of the provisions hereof or of the Underwriting Agreement, all of the foregoing to be in form and substance satisfactory in all respects to the Attorneys-in-Fact. The foregoing representations, warranties and agreements are made for the benefit of, and may be relied upon by, the other Selling Stockholders, the Attorneys-in-Fact, the Company, the Custodian, the Underwriters and their respective representatives, agents and counsel and are in addition to, and not in limitation of, the representations, warranties and agreements of the Selling Stockholders in the Underwriting Agreement. 5. Irrevocability of Instruments; Termination of this Agreement a. This Agreement, the deposit of Old Shares pursuant hereto and all authority hereby conferred, is granted, made and conferred subject to and in consideration of (i) the interests of the Attorneys-in-Fact, the Underwriters, the Company and the other Selling Stockholders who may become parties to the Underwriting Agreement in and for the purpose of completing the transactions contemplated hereunder and by the Underwriting Agreement and (ii) the completion of the registration of certain shares of New Common Stock pursuant to the Registration Statement and the other acts of the above-mentioned parties from the date thereof to and including the execution and delivery of the Underwriting Agreement in anticipation of the sale of such shares of New Common Stock, including the New Shares, to the Underwriters; and the Attorneys-in-Fact are hereby further vested with a right and interest in and to the Old Shares, together with any New Shares issuable in respect thereof pursuant to the Recapitalization, in each case for the purpose of irrevocably empowering and securing to them authority sufficient to consummate said transactions. Accordingly, this Agreement shall be irrevocable prior to December 31, 1997, and shall remain in full force and effect until such date. The undersigned further agrees that this Agreement shall not be terminated by operation of law or upon the occurrence of any event whatsoever, including the death, disability or incompetence of any controlling person of the undersigned or of any other Selling Stockholder or upon any dissolution, winding up, distribution of assets or other event affecting the legal existence of the undersigned or of any other Selling Stockholder that is not a natural person. This Agreement shall inure to the benefit of, and shall be binding upon, the undersigned and the heirs, executors, administrators, successors and assigns of the undersigned, as the case may be. If any event referred to in the second preceding sentence shall occur, whether with or without notice thereof to the Attorneys-in-Fact or the Custodian, any of the Underwriters or any other person, the Attorneys-in-Fact and the - 9 - 10 Custodian shall nevertheless be authorized and empowered to deliver the New Shares in accordance with the terms and provisions of the Underwriting Agreement and this Agreement and provide for the distribution of the proceeds therefrom as if such event had not occurred. b. Notwithstanding anything to the contrary contained in Section 5(a) above, if the sale of all of the New Shares contemplated by this Agreement is not completed by December 31, 1997 or if, prior to that date, the Custodian receives written notice from the Company or Morgan Stanley & Co. Incorporated of the termination or abandonment of the Offering, this Agreement shall terminate as of the earlier of such date or of the date of the Custodian's receipt of such written notice (the earlier of such dates, the "Termination Date"); subject, however, (i) to Section 6 hereof and (ii) to all lawful action of the Attorneys-in-Fact and the Custodian done or performed pursuant hereto prior to the Termination Date, and thereafter the Attorneys-in-Fact and the Custodian shall have no further responsibilities or liabilities to the undersigned except to return promptly to RNB all certificates for Old Shares or shares of New Common Stock issued in respect thereof pursuant to the Recapitalization, as applicable, not purchased by the Underwriters on or prior to the Termination Date. 6. Liability and Indemnification of the Attorneys-in-Fact and Custodian a. The Attorneys-in-Fact assume no responsibility or liability to the undersigned or to any other person, other than to advise the Custodian as to the amount of the net proceeds from the sale of the New Shares to be remitted to RNB. b. The Custodian assumes no responsibility or liability to the undersigned or to any other person, other than to hold the Old Shares, together with any shares of New Common Stock issuable in respect thereof pursuant to the Recapitalization, and to remit promptly to RNB the proceeds from the sale of the New Shares and to return to RNB in accordance with the provisions hereof any other shares deposited with the Custodian pursuant to the terms of this Agreement or issued in respect thereof pursuant to the Recapitalization. c. The undersigned agrees to indemnify and hold harmless the Attorneys-in-Fact and the Custodian, and their respective officers, agents, successors, assigns and personal representatives with respect to any act or omission of or by any of them in good faith and any cost, expense, suit, liability or claim that may arise in connection with any and all matters contemplated by this Agreement or the Underwriting Agreement. d. This Section 6 shall survive termination of this Agreement. - 10 - 11 7. Interpretation a. The representations, warranties and agreements of the undersigned contained herein and in the Underwriting Agreement shall survive the sale and delivery of the New Shares and the termination of this Agreement. b. This Agreement shall be governed by and construed in accordance with the laws of the State of Missouri, without giving effect to any choice of law or conflict of laws rules that would cause the application of laws of other jurisdictions other than Missouri, and the corporate law of the State of Delaware shall govern all issues and questions concerning the relative rights of the Company and its stockholders, in their capacity as stockholders. c. Wherever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any such provision shall be prohibited by or invalid under applicable law, it shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. d. The use of the masculine gender in this Agreement includes the feminine and neuter, and the use of the singular includes the plural (as well as the converse), wherever appropriate. e. This Agreement may be executed in separate counterparts, each of which shall constitute an original, but all of which together shall constitute one instrument. 8. Agreement Drafted by Company's Counsel The undersigned acknowledges that the Company's counsel, Sonnenschein Nath & Rosenthal, drafted this Agreement on behalf of and in the course of its representation of the Company, and that: a. A conflict may exist between its interests and those of the Company and the other Selling Stockholders. b. The undersigned has been advised by the Company's counsel to obtain the advice of independent counsel. c. The undersigned has obtained the advice of independent counsel. d. The undersigned has not relied on any representations from the Company's counsel regarding the consequences of this Agreement, except to the extent expressly set forth in writing by the Company's counsel to the undersigned. - 11 - 12 9. Notices Any notice required to be given pursuant to this Agreement shall be deemed given if in writing and delivered in person, or if given by facsimile receipt confirmed by telephone and if subsequently confirmed by letter, (i) to either Timothy S. Webster or David Watson, as Attorneys-in-Fact, c/o American Italian Pasta Company, 1000 Italian Way, Excelsior Springs, Missouri 64024 (fax: (816) 502-6080); (ii) to Republic New York Securities Corporation, as Custodian, 452 Fifth Avenue, New York, New York 10018, c/o Ms. Carmen Terrana (facsimile: (212) 525-6958), or to such other address as the Custodian shall have specified in a written notice duly given to the undersigned; or (iii) to the undersigned at the address set forth below. * * * * * IN WITNESS WHEREOF, the undersigned has executed this Custody Agreement and Power of Attorney as of the date first above written. Signature of Selling Stockholder THOMPSON HOLDINGS, L.P. guaranteed by: By: THOMPSON HOLDINGS, INC., its general partner - -------------------------------- By: /s/ Richard C. Thompson --------------------------------- Richard C. Thompson, President Name and address to which notices shall be sent: Thompson Holdings, L.P. c/o Richard C. Thompson Thompson's Pet Pasta Products, Inc. 16 Kansas Avenue Kansas City, Kansas 66105 Fax: (954) 767-6046 with a copy to: Dufford & Brown, P.C. 1700 Broadway Suite 1700 Denver, Colorado 80290-1701 Attn: Edward D. White, Esq. Fax: (303) 832-3804 (NOTE: The signature must bear a medallion guarantee by an Eligible Guarantor Institution, as defined by SEC Rule 17Ad-15.) - 12 - 13 ACCEPTED by the Attorneys-in-Fact ACCEPTED by the Custodian as of the as of the date first above set forth: date above set forth: REPUBLIC NEW YORK SECURITIES /s/ Timothy S. Webster CORPORATION, as Custodian - ----------------------------- c/o Carmen Terrana Timothy S. Webster 452 Fifth Avenue New York, New York 10018 /s/ David E. Watson By: - ----------------------------- ------------------------------------- David E. Watson Its: ------------------------------------- ACKNOWLEDGED as to Sections 1(e), 2(a), 3, 4(c),4(i) and 6 as of the date first above set forth: REPUBLIC NATIONAL BANK OF NEW YORK 452 Fifth Avenue New York, New York 10018 By: ------------------------------------- Its: ------------------------------------- SEE THE ATTACHED INSTRUCTIONS - 13 - 14 INSTRUCTIONS (For completing the Custody Agreement and Power of Attorney) A. You have been sent seven copies of the Custody Agreement and Power of Attorney (the "Agreement"). Please complete and return six copies of the Agreement and stock power(s) as set forth in paragraph D below. One completed copy of the Agreement and your stock powers will be retained by the Custodian and one completed copy of the Agreement will be delivered to each of the Attorneys-in-Fact, the Representatives, and you. B. Complete the information required by Schedules I, II and III attached hereto. C. Each copy of the Agreement and each stock power deposited hereunder must be executed by you with your signature on the Agreement and the accompanying stock power(s) and such signature must bear a medallion guarantee by an Eligible Guarantor Institution. Please sign the stock powers and the Agreement exactly as your name appears on your stock certificate(s). D. Please promptly return (i) at least two stock powers for each stock certificate listed on Schedule II and (ii) all six executed copies of the completed Agreement by hand delivery or mail to: Republic New York Securities Corporation, as Custodian c/o Ms. Carmen Terrana 452 Fifth Avenue New York, New York 10018 If any stock certificates are sent by mail, registered mail should be used and the executed stock powers should be sent under separate cover from the stock certificate(s). E. If any stock certificate that Republic National Bank of New York ("RNB") submits on your behalf represents (after giving effect to the Recapitalization) a greater number than the number of New Shares to be sold by you, the Custodian will cause to be delivered to RNB, as pledgee, a stock certificate for the excess number of shares of New Common Stock as soon as practicable after Closing, such certificate to be registered in the same name as the deposited stock certificate. F. Please contact Timothy S. Webster or David E. Watson if any information or representation included in the foregoing Agreement should change at any time prior to termination of a 30-day period commencing on the date of the final Prospectus relating to the Offering. - 14 - 15 SCHEDULE I THOMPSON HOLDINGS, L.P. (Name of Selling Stockholder) Indicate the nature of any position, office or other material relationship which you have had with the Company or any of its predecessors or affiliates during the past three years (if none, please so indicate): Richard C. Thompson, the president of the corporate general partner of the Selling Stockholder and the limited partner of the Selling Stockholder, has been a director of the Company for more than the past three years. Number of shares of Old Common Stock beneficially owned ( before giving effect to the Recapitalization): 156,530 Maximum number of shares of New Common Stock proposed to be offered by you (after giving effect to the Recapitalization): 590,000 --------------- Initials 16 SCHEDULE II THOMPSON HOLDINGS, L.P. (Name of Selling Stockholder) Certificate(s) for Shares of Old Common Stock of American Italian Pasta Company deposited under Custody Agreement and Power of Attorney
NUMBER OF SHARES OF OLD COMMON STOCK NUMBER OF SHARES FROM THE CERTIFICATE NUMBER REPRESENTED BY CERTIFICATE CERTIFICATE TO BE SOLD 26 154,965 --------------------------- 27 1,565 --------------------------- Total: ---------------------------
*If no indication is made as to the certificates from which securities to be sold shall be allocated, then selection will be made at the Custodian's discretion. The Attorneys-in-fact do not have the power to sell a greater number of securities than is listed in this column, although they may sell a lesser number. --------------- Initials 17 SCHEDULE III THOMPSON HOLDINGS, L.P. (Name of Selling Stockholder) Please describe below any direct or indirect affiliation or association with any member of the National Association of Securities Dealers, Inc. ------------------------------------------------------------------------ ------------------------------------------------------------------------ --------------- Initials EX-23.1 16 CONSENT OF ERNST & YOUNG L.L.P. 1 EXHIBIT 23.1 We consent to the references to our firm under the captions "Experts" and "Selected Financial Data" and to the use of our report dated July 25, 1997 except Note 12, as to which the date is October 7, 1997, in Amendment No. 3 to the Registration Statement (Form S-1 No. 333-32827) and related Prospectus of American Italian Pasta Company for the registration of 5,900,000 shares of its common stock. /s/ Ernst & Young LLP Kansas City, Missouri October 7, 1997 -----END PRIVACY-ENHANCED MESSAGE-----