-----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, TWYyzm0jQ0ghUSISI6SuTgwt1BM5ZZsOuoYtosyqoP8ji8c7EnsYrOI91+8DqQMr EJciCT5G/kiI3Y4wNVJjSQ== 0000950124-97-004697.txt : 19970918 0000950124-97-004697.hdr.sgml : 19970918 ACCESSION NUMBER: 0000950124-97-004697 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19970912 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: 97679235 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 #2 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 1997 REGISTRATION NO. 333-32827 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 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
============================================================================================================== PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE(2) - -------------------------------------------------------------------------------------------------------------- Class A Convertible Common Stock, $.001 par value........... $115,000,000 $34,848.49 ==============================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. (2) 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 September , 1997 Shares AIPC LOGO American Italian Pasta Company CLASS A COMMON STOCK ------------------------ OF THE SHARES OF CLASS A COMMON STOCK BEING OFFERED HEREBY, SHARES ARE BEING SOLD BY THE COMPANY AND SHARES ARE BEING SOLD BY THE SELLING STOCKHOLDER. 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 THE SELLING STOCKHOLDER. OF THE SHARES OF CLASS A COMMON STOCK BEING OFFERED HEREBY, SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND 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 $ AND $ . 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. ------------------------ APPLICATION HAS BEEN MADE FOR LISTING OF THE CLASS A COMMON STOCK 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) Stockholder -------- -------------- ----------- ------------------- Per Share............... $ $ $ $ Total(3)................ $ $ $ $
- ------------ (1) The Company and the Selling Stockholder 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 $ . (3) The Company and the Selling Stockholder have granted to the U.S. Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 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 Stockholder 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 , 1997 at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in immediately available funds. ------------------------ MORGAN STANLEY DEAN WITTER ALEX. BROWN & SONS INCORPORATED 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 [Picture of Branded Pasta Products] AIPC'S PASTA LABELLA(R) BRANDED PASTA [Picture of Private Label and Branded Pasta Products] AIPC'S PRIVATE LABEL AND BRANDED PASTA [Picture of CPC Products to be produced by AIPC] MUELLER'S(R) IS A REGISTERED TRADEMARK OF CPC INTERNATIONAL INC. PRODUCTS TO BE PRODUCED BY AIPC FOR CPC INTERNATIONAL INC. 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 STOCKHOLDER 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 , 1997 (25 DAYS AFTER THE DATE 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 STOCKHOLDER 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 STOCKHOLDER 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......................... 50 Principal and Selling Stockholders..... 53 Description of Capital Stock........... 55 Shares Eligible for Future Sale........ 58 Certain United States Federal Income Tax Considerations for Non-U.S. Holders.............................. 60 Underwriters........................... 63 Legal Matters.......................... 66 Experts................................ 67 Additional Information................. 67 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 THE 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 technology leadership and development of a highly-skilled workforce enable AIPC to produce high-quality pasta at costs significantly below those of most of its competitors. Management believes that the combination of the Company's favorable cost structure, the higher 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 projected to grow to approximately 5.8 billion pounds by 2002 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, 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: - 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: - 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 On September , 1997, 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 shares of Class A Convertible Common Stock, par value $.001 per share, of the Company ("Class A Common Stock"). Upon the consummation of the Offering, certain of the shares of Class A Common Stock held by the Morgan Stanley Stockholders (as defined herein) will be converted into Class B Convertible Non-Voting Common Stock, par value $.001 per share, of the Company ("Class B Common Stock"). Shares of Class A Common Stock held by the Morgan Stanley Stockholders and certain related persons are, in certain circumstances, convertible into Class B Common Stock and vice versa. The Morgan Stanley Stockholders have informed the Company that upon the consummation of the Offering they intend to convert such number of their shares of Class A Common Stock into Class B Common Stock so that, following such conversion, the Morgan Stanley Stockholders will own, in the aggregate, 49% of the outstanding Class A Common Stock. Shares of Class A Common Stock held by 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 % of the outstanding Common Stock. Upon consummation of the Offering, the Morgan Stanley Stockholders will own approximately % of the outstanding Common Stock (approximately % of the outstanding Common Stock if the U.S. Underwriters' over-allotment option is exercised in full). The Morgan Stanley Stockholders may sell up to 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........................................ Shares The Selling Stockholder............................ Shares -------- Total......................................... Shares ======== Class A Common Stock offered in: U.S. Offering...................................... Shares International Offering............................. Shares -------- Total......................................... Shares ======== Common Stock outstanding after the Offering.......... Shares(1) 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 the Selling Stockholder. See "Use of Proceeds." Proposed New York Stock Exchange Symbol.............. PLB
- ------------------------- (1) Does not include the U.S. Underwriters' over-allotment option. Includes shares of Class B Common Stock. Excludes (i) shares, shares and shares, respectively, 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") and 1993 Non-Qualified Stock Option Plan (the "1993 Plan") and 1997 Equity Incentive Plan (the "1997 Plan"); and (ii) shares, shares and shares, respectively, 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. 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, excluding product introduction costs........... 2,888 2,883 3,792 5,303 11,682 8,676 6,625 8,078 General and administrative expense...................... 2,077 2,049 1,951 2,930 3,498 2,805 2,741 2,855 Product introduction costs(2)..................... -- -- -- -- 9,568 8,122 4,611 2,134 ------- ------- ------- ------- -------- ------- ------- -------- 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).............. Pro forma weighted average common shares outstanding(4)............... 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...... 0.50 1.87 1.48 0.92 0.52 0.28 0.59 1.60
AS OF JUNE 30, 1997 ------------------------- ACTUAL AS ADJUSTED(6) ------ -------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................... $ 2,612 $ Working capital............................................. 13,276 Total assets................................................ 145,462 Long-term debt, less current maturities..................... 89,500 Stockholders' equity........................................ 40,977
(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) Product introduction costs include the incremental selling and marketing expenses, 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. (3) Represents losses due to early extinguishment of long-term debt, net of income taxes. (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, each 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 Offering of shares of Class A Common Stock at an assumed initial public offering price per share of $ 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") to supply it with 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 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. 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. 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 in the future. 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. 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 11 14 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. 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 is not subject to such anti-dumping and countervailing duties. A leading branded Italian producer, Barilla, opened a repackaging and distribution facility in Syracuse, New York in 1996 for bulk imported pasta. 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 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. Messrs. Schroeder and Webster currently have employment agreements with the Company, which agreements will be amended or replaced prior to consummation of the Offering. The Company does not maintain key person life insurance on any of its key employees. The Company intends to enter into employment agreements with Messrs. Watson and Abreo in August 1997. See "Management." 12 15 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, 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 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 % of the outstanding Common Stock (approximately % of the outstanding Common Stock if the U.S. 13 16 Underwriters' over-allotment option is exercised in full). The Morgan Stanley Stockholders have informed the Company that they intend to convert, from time to time, such number of their shares of Class B Common Stock into shares of Class A Common Stock (or vice versa) so that, following any such conversion, the Morgan Stanley Stockholders and certain related persons will own, in the aggregate, 49% of the outstanding Class A Common Stock (which is voting common stock) of the Company. 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 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 $ million upon application of the net proceeds of the Offering, after which such debt will represent approximately % 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 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 14 17 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 is effected by written consent of stockholders and the taking of such action by written consent has been approved in advance by the Board of Directors), 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 holders of a simple majority of the outstanding shares of Class A Common Stock can remove such director), 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 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 will grant 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 15 18 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. DILUTION OF VOTING POWER UPON CONVERSION OF CLASS B COMMON STOCK INTO CLASS A COMMON STOCK After giving effect to the Offering and the Morgan Stanley Stockholders' intended conversion of shares of Class A Common Stock into Class B Common Stock such 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, there will be shares of Class B Common Stock outstanding, representing, in the aggregate, approximately % of the total outstanding Common Stock ( shares of Class B Common Stock, representing, in the aggregate, approximately % of the total outstanding Common Stock if the U.S. Underwriters' over-allotment option is exercised in full). Conversion of shares of Class B Common Stock into shares of Class A Common Stock would result in a decrease in the aggregate voting power of the holders in the Class A Common Stock offered hereby. Upon any disposition by the Morgan Stanley Stockholders of any of their Class B Common Stock, such shares of Class B Common Stock will be automatically converted into shares of Class A Common Stock. According to the terms of the Charter, the Morgan Stanley Stockholders and certain related persons may not, in the aggregate, own more than 49% of the outstanding shares of Class A Common Stock after consummation of the Offering. See "Principal and Selling Stockholders" and "Description of Capital Stock." SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS Upon consummation of the Offering (based on shares outstanding at , 1997), the Company will have outstanding an aggregate of shares of Common Stock, assuming no exercise of the U.S. Underwriters' over-allotment option and 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 shares of Common Stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act 16 19 ("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, 144(k) or 701 promulgated under the Securities Act. As a result of the contractual restrictions described below and the provisions of Rules 144, 144(k) and 701, the Restricted Shares will be available for sale in the public market as follows: (i) shares will be eligible for immediate sale on the date of this Prospectus; and (ii) shares will be eligible for sale upon expiration of the lock-up agreements at least 180 days after the date of this Prospectus. All officers, directors and option holders and substantially all stockholders 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 $ 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 $ 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 shares of Class A Common Stock in the Offering are estimated to be approximately $ million (approximately $ million if the U.S. Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $ per share. The Company will use approximately $ 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 Stockholder. 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 (i) the issuance and sale of shares of Class A Common Stock offered hereby by the Company at an assumed initial public offering price of $ per share and the application of the estimated net proceeds therefrom and (ii) the Morgan Stanley Stockholders' intended conversion of shares of Class B Common Stock into Class A Common Stock following the consummation of the Offering. 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 $ ======== ======== Long-term debt and capital lease obligations, less current portion: Long-term debt............................................ $ 83,063 $ Capital lease obligations................................. 6,437 -------- -------- Total long-term debt and capital lease obligations, less current portion.................................. 93,185 -------- -------- Stockholders' equity: Preferred stock, $.001 par value, shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted.............................. -- Class A Common Stock, $.001 par value, shares authorized, shares issued and outstanding pro forma and shares issued and outstanding pro forma as adjusted(1)................................... Class B Common Stock, $.001 par value, shares authorized, shares issued and outstanding pro forma and shares issued and outstanding pro forma as adjusted...................................... Additional paid-in capital................................ Accumulated deficit....................................... (14,060) -------- -------- Total stockholders' equity........................... -------- -------- Total capitalization........................................ $ $ ======== ========
- ------------------------- (1) Excludes (i) shares, shares and shares, respectively, 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) shares, shares and shares, respectively, 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 $34.0 million, or $ per share of Common Stock. Pro forma net tangible book value per share is equal to the Company's total assets less total liabilities, divided by the pro forma total number of shares outstanding. The Company had a pro forma total of 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 shares of Class A Common Stock in the Offering at an assumed initial public offering price of $ 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 $ , or $ per share, based on shares of Common Stock to be outstanding after the Offering. This represents an immediate increase in net tangible book value of $ per share to the current holders of the Common Stock and an immediate dilution of $ 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...................... $ ------- Pro forma net tangible book value per share before the Offering................................................. ------- Increase per share attributable to new investors........... ------- Pro forma as adjusted net tangible book value per share after the Offering....................................... ------- Dilution per share to new investors(2)..................... $ =======
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 $ 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).................... $55,335,000 $ New investors(2)............................ ----------- ------- Total.................................. $ $ =========== =======
- ------------------------- (1) Includes shares of Class B Common Stock. Excludes (i) shares, shares and shares, respectively, 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; and (ii) shares, shares and shares, respectively, of Class A Common Stock available for future grants under the 1992 Plan, the 1993 Plan and the 1997 Plan. See "Management -- Stock Option Plans." (2) Sales of Class A Common Stock by the Selling Stockholder in the Offering will reduce the number of shares of Common Stock held by existing stockholders to , or approximately % of the total shares of Common Stock outstanding after the Offering ( shares, or approximately % if the U.S. Underwriters' over-allotment option is exercised in full), and will increase the number of shares held by new investors to , or approximately % of the total shares of Common Stock outstanding after the Offering ( shares, or approximately % if the U.S. Underwriters' over-allotment option is exercised in full). 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, excluding product introduction costs.......................... 2,888 2,883 3,792 5,303 11,682 8,676 6,625 8,078 General and administrative expense........................ 2,077 2,049 1,951 2,930 3,498 2,805 2,741 2,855 Product introduction costs(3).... -- -- -- -- 9,568 8,122 4,611 2,134 ------- ------- ------- -------- -------- -------- -------- -------- 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)................ Pro forma weighted average common shares outstanding(5).......... 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........ 0.50 1.87 1.48 0.92 0.52 0.28 0.59 1.60 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, 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) Product introduction costs include the incremental selling and marketing expenses, 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. (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. 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 technology leadership and development of a highly-skilled workforce enable AIPC to produce high-quality pasta at costs significantly below those of most of its competitors. Management believes that the combination of the Company's favorable cost structure, the higher 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. 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. Product introduction costs totalled $8.1 million for the nine-month fiscal period ended September 30, 1996 and $2.1 million for the nine-month period ended June 30, 1997. The Company's cost of goods sold consist 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 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 June 30, 1997 and the published average monthly market price per bushel fluctuated from $5.18 to $7.49 over this period. The durum cost volatility and the timing and amount of sales price adjustments impacted profit and margins over the 1994-1997 periods. 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 borrowings under the Company's current Credit Facility and a new $150 million revolving credit facility to be entered into with the Company's lenders shortly following the Offering. The Company will use a majority of the net proceeds to the Company from the Offering to repay 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. 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 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 $26.6 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. 23 26 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 73.8 74.5 75.9 72.4 Gross profit before plant expansion costs............................ 21.7 20.5 26.2 25.5 24.1 27.6 Plant expansion costs.............. 0.7 2.2 -- -- 0.5 -- ----- ----- ----- ----- ----- ----- Gross profit....................... 21.0 18.3 26.2 25.5 23.6 27.6 Selling and marketing expense...... 5.5 5.7 9.6 9.4 7.7 8.6 General and administrative expense.......................... 2.8 3.2 2.9 3.0 3.2 3.0 Product introduction costs......... -- -- 7.9 8.8 5.3 2.3 ----- ----- ----- ----- ----- ----- Operating profit................... 12.7 9.4 5.8 4.3 7.4 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% (3.2)% (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 net 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 the private label and club store customers. 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 24 27 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 increased $1.5 million, or 22.7%, to $8.1 million for the nine-month period ended June 30, 1997, from $6.6 million for the nine-month period ended June 30, 1996. Selling and marketing expense as a percentage of revenues increased to 8.6% for the nine-month period ended June 30, 1997, from 7.7% for the nine-month period ended June 30, 1996. These increases were due to selling and marketing expense incurred to support incremental retail Pasta LaBella flavored pasta volume and increases in private label revenue growth. Product Introduction Costs. The Company incurred $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 was due to decreased product placement fees and lower introductory selling and marketing expense. 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 MIS expenses and communication 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 16.0% 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. 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. 25 28 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 $5.0 million, or 135.1%, to $8.7 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 9.4% 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 Pasta LaBella flavored pasta sales and increases in club store and private label revenues. Product Introduction Costs. The Company incurred $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. 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 13.1% for the nine-month fiscal period ended September 30, 1996 from 7.7% for the nine-month period ended September 30, 1995. 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. 26 29 Income Tax. Income tax decreased to $(1.6) million for the nine-month fiscal period ended September 30, 1996, from $(0.6) million for the nine-month period ended September 30, 1995 and reflect 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 $6.4 million, or 120.8%, to $11.7 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, excluding product introduction costs, grew as a percentage of revenue to 9.6% for the calendar year ended December 31, 1996, from 5.7% for the fiscal year ended December 31, 1995. The increase in selling and marketing expense was due primarily to larger retail revenues associated with Pasta LaBella flavored pasta and increases in club store and private label sales. Product Introduction Cost. The Company incurred $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 paid for product placement or "slotting," introductory consumer sampling, couponing, advertising and trade promotions. There were no comparable 1995 expenditures. 27 30 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 3.1% 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 5.8% 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 13.7% 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 $18.1 million, or 58.0%, to $49.3 million for the fiscal year ended December 31, 1995, from $31.2 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 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 28 31 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 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 29 32 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 July 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 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 principally with borrowings under an amended Credit Agreement with its lenders (the "Amended 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. Management anticipates the Company's creditworthiness and interest rate level of debt outstanding will be significantly improved upon receipt of the net proceeds from the Offering. The Company will incur an extraordinary charge related to the write-off of deferred debt issuance costs relating to the extinguishment and restructuring of the existing credit facility. The commitment letter contemplates that the Amended 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. 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 $47.2 million and durum wheat purchase commitments totaling approximately $6.3 million. Management believes that net cash provided by operating activities, net cash provided by refinancing 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. 30 33 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 technology leadership and development of a highly-skilled workforce enable AIPC to produce high-quality pasta at costs significantly below those of most of its competitors. Management believes that the combination of the Company's favorable cost structure, the higher 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, 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: - 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: - 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 projected to grow to approximately 5.8 billion pounds by 2002 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 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, 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 recently added approximately 50 million pounds of pasta capacity to its facility in Winchester, Virginia. 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 production facilities. 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 originates from producers in Italy and Turkey. The primary foreign suppliers of pasta with which the Company competes are Barilla and De Cecco. 35 38 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 Turkish and Italian 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 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 36 39 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. 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. 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, 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 37 40 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. See "Risk Factors -- Raw Materials." 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: 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 "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, General Foods, 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. The Company believes that the cost of its compliance with existing laws and regulations will not have a material effect on its results of operations or financial condition. 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........................... 41 Executive Vice President and Chief Financial Officer David B. Potter........................... 38 Senior Vice President -- Procurement Jonathan E. Baum.......................... 36 Director David Y. Howe............................. 33 Director Robert H. Niehaus......................... 41 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. 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 Howard 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. The Company is currently seeking a vice president of sales and marketing. 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. , and will be included in the first class, Messrs. , and will be included in the second class and Messrs. Webster, Schroeder and 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. 44 47 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 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 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................. 1996 $185,615 $125,000 -- $ 4,967(2) President and Chief Executive Officer Horst W. Schroeder................. 1996 98,047 40,000 -- 330,000(3) Chairman of the Board David E. Watson.................... 1996 119,510 37,500 -- 4,484(4) Executive Vice President and Chief Financial Officer Norman F. Abreo.................... 1996 99,856 37,500 -- 1,226(4) Executive Vice President--Operations David B. Potter.................... 1996 78,000 29,000 -- 2,777(4) Senior Vice President--Procurement
- ------------------------- (1) The Company's 1996 fiscal year extended from January 1, 1996 until September 30, 1996. Subsequent fiscal years will cover a 52- or 53-week period ending on the last Friday of September. (2) Includes payments in the amount of $4,449 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. (3) 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 fiscal year resulted in $82,000 of such bonus being no longer subject to such contingent repayment obligation. (4) Represents payments under the American Italian Pasta Company Retirement Savings Plan. No stock options were granted to any of the Named Executive Officers during the nine-month fiscal year ended September 30, 1996. 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, 1996: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
AT SEPTEMBER 30, 1996 --------------------------------------------------------- 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...... -- -- Horst W. Schroeder...... -- -- David E. Watson......... -- -- Norman F. Abreo......... -- -- David B. Potter......... -- --
- ------------------------- (1) Based on the assumed initial public offering price of $ per share. 46 49 EMPLOYMENT AGREEMENTS Each of Horst W. Schroeder and Timothy S. Webster currently has an employment agreement with the Company. Such agreements will be amended or replaced prior to consummation of the Offering. The Company intends to enter into employment agreements with Messrs. Watson and Abreo in August 1997. MANAGEMENT BONUS PLAN The Company maintains a management bonus plan for certain salaried employees of the Company, including the Named Executive Officers. The 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 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 shares of Common Stock at 47 50 exercise prices ranging from $ to $ per share (with a weighted average exercise price of $ per stock) 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. 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 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 shares of Common Stock at exercise prices ranging from $ to $ per share (with a weighted average exercise price of $ 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 and the stockholders of the Company have approved, the American Italian Pasta Company 1997 Equity Incentive Plan (the "Equity Incentive Plan" or "Plan"), effective as of September , 1997. Under the Plan, the Board or a committee designated by the Board (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 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 48 51 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 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). The Plan also allows for "reload" options. 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. The Plan may be amended by the Board without stockholder approval except in the event of an increase in the number of shares available for Awards or as otherwise may be required under stock exchange listing requirements. 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. 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 49 52 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. 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 CCI 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) 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 will grant the Existing Stockholders certain demand registration rights. In addition, the Existing Stockholders will be 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 50 53 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 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 % of the Common Stock of the Company ( % if the U.S. Underwriters' over-allotment option is exercised in full). 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 517,695 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 $43.06 per share, determined by an independent valuation firm to be fair value for the shares. The MSCP Funds purchased a total of 418,021 shares for $18,000,000. Affiliated entities of GKB, including Excelsior Investors, LLC ("Excelsior") in which Mr. Thompson has a minority interest, purchased 69,670 shares for $2,999,861. These shares include 53,971 shares purchased by Excelsior. Mr. Schroeder, a Director of the Company, purchased 8,000 shares for $344,480. Mr. Schlindwein, also a Director of the Company, and his wife purchased 4,645 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 16,953 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 51 54 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 from the effective date of the loan and bear interest at the 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. 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 $30.17 and $43.06 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. 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...................................... 3,480 $138,559 $120,959 David E. Watson......................................... 2,327 84,735 60,602 Norman F. Abreo......................................... 1,177 46,422 39,789 David B. Potter......................................... 829 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 $292,000 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. 52 55 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of July 31, 1997, 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 Stockholder, (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 SHARES BENEFICIALLY OWNED PRIOR TO THE OFFERING AFTER THE OFFERING ------------------------------------------- ------------------------------------------- CLASS A TOTAL CLASS A CLASS B CLASS A COMMON COMMON COMMON STOCK(1) COMMON STOCK(1) SHARES STOCK(1)(2) STOCK(1)(6) -------------------- -------------------- BEING -------------------- -------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT(3) NUMBER PERCENT(4) OFFERED NUMBER PERCENT(5) NUMBER PERCENT(6) ------------------------ ------ ---------- ------ ---------- ------- ------ ---------- ------ ---------- The Morgan Stanley Leveraged Equity Fund II, L.P.(7)... 34.4% 70.2% -- % % 1221 Avenue of the Americas New York, NY 10020 Morgan Stanley Capital Partners III, L.P.(7)..... 14.6 29.8 -- 1221 Avenue of the Americas New York, NY 10020 Citicorp Venture Capital, Ltd.(8).......... 18.6 -- -- -- 399 Park Avenue New York, NY 10043 Richard C. Thompson(9)...... 17.1 -- -- 16 Kansas Avenue Kansas City, KS 66105 Horst W. Schroeder(10)(11)......... 7.5 -- -- -- Jonathan E. Baum(12)........ 9.1 -- -- -- David Y. Howe............... -- -- -- -- -- -- -- -- -- Robert H. Niehaus........... -- -- -- -- -- -- -- -- -- Amy S. Rosen................ -- -- -- -- -- -- -- -- -- James A. Schlindwein(13).... * -- -- -- * * Lawrence B. Sorrel.......... -- -- -- -- -- -- -- -- -- Timothy S. Webster(11)(14)........... 5.8 -- -- -- David E. Watson(11)......... 1.5 -- -- -- Norman F. Abreo(11)......... 1.2 -- -- -- David B. Potter(11)......... * -- -- -- * * All directors and executive officers as a group (13 persons)(11).............. 31.6 -- -- --
- ------------------------- * 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. 53 56 (2) The Company and the Selling Stockholder have granted an option to the U.S. Underwriters to purchase shares of Common Stock to cover over-allotments, if any. Such 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. If the over-allotment option is exercised in full, the Company and Mr. Thompson will sell and , respectively, additional shares of Common Stock. (3) Based upon 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 shares of Class B Common Stock outstanding, plus shares of Class B 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 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. (6) Based upon shares of Class A Common Stock to be outstanding upon the consummation of the Offering and shares of Class B Common Stock outstanding, 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. (7) 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. (8) The shares beneficially owned by Citicorp Venture Capital, Ltd. include shares held by certain affiliates of Citicorp. (9) All of such shares are held by a limited partnership of which Mr. Thompson is the only limited partner and the president of the corporation which is the general partner of the limited partnership. (10) The shares beneficially owned by Mr. Schroeder include shares held by The Living Trust of Horst W. Schroeder and 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 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. (11) 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 ( shares), Mr. Webster ( shares), Mr. Watson ( shares), Mr. Abreo ( shares), Mr. Potter ( shares), and all executive officers and directors as a group ( shares). (12) Includes shares held by George K. Baum Group, Inc., shares held by George K. Baum Capital Partners, L.P., shares held by George K. Baum Employee Equity Fund, L.P. and 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. (13) Includes 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. (14) Includes of the shares beneficially owned by Mr. Webster are held in various trusts for the benefit of Mr. Webster's family members, as well as by certain members of Mr. Webster's extended family. Mr. Webster has voting power, but not investment power, with respect to all of such shares. 54 57 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 shares of Class A Common Stock, shares of Class B Common Stock, and 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 shares of Class A Common Stock. The Morgan Stanley Stockholders have informed the Company that following the issuance of shares of Class A Common Stock in connection with the consummation of the Offering, they intend to convert such number of their shares of Class A Common Stock into Class B Common Stock so that, following such conversion, the Morgan Stanley Stockholders will own, in the aggregate, 49% of the outstanding Class A Common Stock. From time to time thereafter, shares of Class A Common Stock held by the Morgan Stanley Stockholders and certain related persons will automatically be converted pursuant to the amended Charter into shares of Class B Common Stock, pro rata in proportion to the number of shares of Class A Common Stock held by all Morgan Stanley Stockholders and such related persons, to the extent necessary so that the Morgan Stanley Stockholders and such related persons do not in the aggregate own more than 49% of the then-outstanding shares of Class A Common Stock. 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. COMMON STOCK After giving effect to the Offering and the Morgan Stanley Stockholders' intended conversion of shares of Class A Common Stock into Class B Common Stock such that, following such conversion, the Morgan Stanley Stockholders will own, in the aggregate, 49% of the outstanding voting Common Stock of the Company, the Company will have shares of Class A Common Stock and shares of Class B 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 and certain related persons 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 and certain related persons will from time to time be converted automatically into shares of Class B Common Stock, pro rata in proportion to the number of shares of Class A Common Stock held by all Morgan Stanley Stockholders and such related persons, to the extent necessary so that the Morgan Stanley Stockholders and such related persons do not own more than 49% of the outstanding shares of Class A Common Stock. In addition, shares of Class A Common Stock held by the Morgan Stanley Stockholders and certain related persons are convertible into an equal number of shares of Class B Common Stock, at the option of the holder. 55 58 Class B Common Stock. Under the Charter, as amended, Class B Common Stock may be held only by Morgan Stanley Stockholders and certain related persons. 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 and certain related persons 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 or related person to a person that is not a Morgan Stanley Stockholder or a related person. 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 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 56 59 became an interested stockholder, unless the interested stockholder attained such status with the approval of 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 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 Shareholders Agreement and the person who nominated such director pursuant to the Shareholders 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 57 60 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, 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 Application has been made to have the Class A Common Stock listed on the New York Stock Exchange. 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 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 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 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 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 58 61 Rule 144(k) without regard to volume limitations, manner of sale provisions, notice requirements or the 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 90 days after the date of this Prospectus, 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. A total of of the 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). Of these Restricted Shares, shares will become eligible for sale under Rule 144 after expiration of the 180-day period. 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. 59 62 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. 60 63 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 61 64 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. 62 65 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, Alex. Brown & Sons Incorporated, 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, Alex. Brown & Sons Incorporated, 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......................... Alex. Brown & Sons Incorporated........................... Goldman, Sachs & Co. ..................................... George K. Baum & Company.................................. ---------- Subtotal............................................... ---------- International Underwriters: Morgan Stanley & Co. International Limited................ Alex. Brown & Sons Incorporated........................... Goldman Sachs International............................... George K. Baum & Company.................................. ---------- Subtotal............................................... ---------- Total.................................................. ==========
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 63 66 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. 64 67 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. The Company and the Selling Stockholder 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 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 Stockholder 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 % of the Common Stock ( % if the Underwriters' 65 68 over-allotment option is exercised in full). No affiliates of Morgan Stanley & 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 Stanley Senior Funding, Inc. also provides other general financing and banking services to the Company and its affiliates from time to time. Application has been made to list the Class A Common Stock on the New York Stock Exchange under the symbol "PLB." 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 and will receive compensation from the Company in the amount of $ for serving in such capacity. 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. 66 69 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. 67 70 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 71 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. ERNST & YOUNG LLP Kansas City, Missouri July 25, 1997 except Note 12, as to which the date is , 1997 - -------------------------------------------------------------------------------- The foregoing report is in the form that will be signed upon the completion of the recapitalization and restatement of capital accounts and the calculation of earnings per share amounts as described in Note 12 to the financial statements. /s/ ERNST & YOUNG LLP Kansas City, Missouri September 10, 1997 F-2 72 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: Common stock, no par value: Authorized shares 2,100,000.......................... -- -- -- Class A common stock, $.01 par value: Authorized shares -- 1,600,000....................... 10 10 15 Additional paid-in capital.............................. 32,969 33,069 55,320 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 73 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, excluding product introduction costs........................... 3,792 5,303 3,656 8,676 6,625 8,078 Product introduction costs (Note 10)............................. -- -- -- 8,122 4,611 2,134 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......... $ $ $ $ Extraordinary item................ ------- ------- ------- ------- Total............................. $ $ $ $ ======= ======= ======= ======= Weighted-average common shares outstanding..................... ======= ======= ======= =======
See accompanying notes to financial statements. F-4 74 AMERICAN ITALIAN PASTA COMPANY STATEMENTS OF STOCKHOLDERS' EQUITY
NOTES CLASS A CLASS A ADDITIONAL RECEIVABLE TOTAL COMMON COMMON COMMON PAID-IN FROM DEFERRED ACCUMULATED STOCKHOLDERS' SHARES SHARES STOCK CAPITAL OFFICERS COMPENSATION DEFICIT EQUITY ------ ------- ------- ---------- ---------- ------------ ----------- ------------- (IN THOUSANDS, EXCEPT SHARE DATA) Balance at December 31, 1993.................. 301,221 1,032,728 $10 $32,677 $ -- $(144) $(15,570) $16,973 Compensation related to stock options vesting in 1994..... -- -- -- -- -- 144 -- 144 Issuance of 3,490 shares of no par Common stock........ 3,490 -- -- 102 -- -- -- 102 Net income............ -- -- -- -- -- -- 2,182 2,182 ------- --------- --- ------- ----- ----- -------- ------- Balance at December 31, 1994.................. 304,711 1,032,728 10 32,779 -- -- (13,388) 19,401 Issuance of 3,008 shares of no par Common stock and 3,314 shares of Class A Common stock............... 3,008 3,314 -- 190 -- -- -- 190 Net income............ -- -- -- -- -- -- 476 476 ------- --------- --- ------- ----- ----- -------- ------- Balance at December 31, 1995.................. 307,719 1,036,042 10 32,969 -- -- (12,912) 20,067 Issuance of 3,315 shares of no par Common stock........ 3,315 -- -- 100 -- -- -- 100 Net loss.............. -- -- -- -- -- -- (4,198) (4,198) Balance at September 30, 1996.................. 311,034 1,036,042 10 33,069 -- -- (17,110) 15,969 Issuance of 517,695 shares of Class A Common stock, net of issuance costs...... -- 517,695 5 22,037 -- -- -- 22,042 Notes received from officers in exchange for stock........... -- -- -- -- (298) -- -- (298) Issuance of 5,088 shares of Class A Common stock to employee benefit plan................ -- 5,088 -- 214 -- -- -- 214 Net income............ -- -- -- -- -- -- 3,050 3,050 ------- --------- --- ------- ----- ----- -------- ------- Balance at June 30, 1997.................. 311,034 1,558,825 $15 $55,320 $(298) $ -- $(14,060) $40,977
See accompanying notes to financial statements. F-5 75 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 76 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 Friday last preceding September 30, resulting 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 77 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 78 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 79 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 $ , 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 80 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 81 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 of $26.6 million for federal income tax purposes that expire in varying amounts through the year 2010. 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 82 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 83 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 196,000 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 13,500 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................. 92,292 $14.27-$30.17 $23.89 45,432 Exercised...................................... -- Granted........................................ 19,030 $30.17 $30.17 Canceled/Expired............................... (1,500) $30.17 $30.17 ------- Outstanding at December 31, 1994................. 109,822 $14.27-$30.17 $24.89 61,064 Exercised...................................... -- Granted........................................ 55,375 $75.00 $75.00 Canceled/Expired............................... -- ------- Outstanding at December 31, 1995................. 165,197 $14.27-$75.00 $41.64 74,354 Exercised...................................... -- Granted........................................ 200 $75.00 $75.00 Canceled/Expired............................... (100) $75.00 $75.00 ------- Outstanding at September 30, 1996................ 165,297 $14.27-$75.00 $41.71 88,302 Exercised...................................... -- Granted........................................ 42,135 $43.06-$75.00 $54.08 Canceled/Expired............................... (7,930) $30.17-$75.00 $73.30 ------- Outstanding at June 30, 1997..................... 199,502 $14.27-$75.00 $43.06 108,068 =======
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 --------------- ----------- ---------------- ----------- ---------------- $14.27-$14.61............................. 36,930 $14.47 36,930 $14.47 $30.17.................................... 72,592 30.17 52,738 30.17 $43.06.................................... 27,600 43.06 9,200 43.06 $75.00.................................... 62,380 75.00 9,200 75.00
Compensation expense totaling $144,000 was recorded during the year ended December 31, 1994 related to the vesting of compensatory stock options. F-14 84 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 $ 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 85 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 results include the following product introduction expenses for the following periods:
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 6,909 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 Prior to the consummation of the Company's initial public offering, the Company will amend and restate its certificate of incorporation and effect a recapitalization, pursuant to which each share of common stock and Class A common stock of the Company outstanding immediately prior to the recapitalization will be converted into shares of Class A common stock. 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-16 86 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 Earnings per share................................
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) Earnings per share...............................
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 Earnings per share................
F-17 87 AIPC PASTA PRODUCTION FACILITIES [Photographs of the equipment contained in the Company's pasta production facilities.] 88 AIPC LOGO 89 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. AIPC LOGO [ALTERNATE INTERNATIONAL COVER PAGE] PROSPECTUS (Subject to Completion) Issued September , 1997 Shares American Italian Pasta Company CLASS A COMMON STOCK ------------------------ OF THE SHARES OF CLASS A COMMON STOCK BEING OFFERED HEREBY, SHARES ARE BEING SOLD BY THE COMPANY AND SHARES ARE BEING SOLD BY THE SELLING STOCKHOLDER. 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 THE SELLING STOCKHOLDER. OF THE SHARES OF CLASS A COMMON STOCK BEING OFFERED HEREBY, SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS AND 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 $ AND $ . 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. ------------------------ APPLICATION HAS BEEN MADE FOR LISTING OF THE CLASS A COMMON STOCK 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 PUBLIC COMMISSIONS(1) COMPANY(2) SELLING STOCKHOLDER -------- -------------- ----------- ------------------- Per Share...................... $ $ $ $ Total(3)....................... $ $ $ $
- ------------ (1) The Company and the Selling Stockholder 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 $ . (3) The Company and the Selling Stockholder have granted to the U.S. Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 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 Stockholder 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 , 1997 at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in immediately available funds. ------------------------ MORGAN STANLEY DEAN WITTER ALEX. BROWN & SONS INTERNATIONAL GOLDMAN SACHS INTERNATIONAL GEORGE K. BAUM & COMPANY , 1997 90 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......... $ 34,849 NASD Examination Fee........................................ 12,000 New York Stock Exchange Listing Fee......................... * Accounting Fees and Expenses................................ * Printing and Engraving Expenses............................. * Legal Fees and Expenses..................................... * Blue Sky Fees and Expenses.................................. * Transfer Agent and Registrar Fees and Expenses.............. * Miscellaneous............................................... * ---------- Total.................................................. $ * ==========
- ------------------------- * To be completed by amendment. 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. II-1 91 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 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 505 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 $30.17 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 3,490 shares of Old Common Stock for an aggregate purchase price of $105,293, or $30.17 per share, in lieu of cash compensation under the Schroeder Consulting Agreement. (c) On December 28, 1995, the Company issued to Mr. Schroeder 1,910 shares of Old Common Stock for a purchase price of $57,625, or $30.17 per share, in lieu of cash compensation under the Schroeder Consulting Agreement. (d) On April 4, 1996, the Company issued to Mr. Schroeder 1,098 shares of Old Common Stock for a purchase price of $33,127, or $30.17 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 3,315 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 $30.17 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 with 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, 3,314 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 $30.17 per share. (g) On April 15, 1997, the Company issued an aggregate of 517,695 shares of Old Class A Common Stock at a purchase price of $43.06 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 II-2 92 (the "1997 Private Equity Financing"), all of whom are officers, directors and senior managers or a spouse thereof. In particular, the Company issued 418,021 shares to the MSCP Funds (as defined in the Prospectus), 69,670 shares to affiliated investment funds of George K. Baum & Company, an aggregate of 8,000 shares to a trust of which Mr. Schroeder is the trustee and members of his family are the beneficiaries, an aggregate of 4,645 shares to Mr. Schlindwein, his wife and JSS Management Co. Ltd., an aggregate of 3,301 shares to Mr. Webster and trusts for the benefit of members of his family, 6,933 shares to David E. Watson, 847 shares to Norman F. Abreo and 2,124 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 5,088 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-5 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 93 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 12th day of September, 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 September 12, 1997 - --------------------------------------- Horst W. Schroeder /s/ TIMOTHY S. WEBSTER President, Chief Executive Officer and September 12, 1997 - --------------------------------------- Director (Principal Executive Officer) Timothy S. Webster * Executive Vice President and Chief September 12, 1997 - --------------------------------------- Financial Officer, Treasurer and David E. Watson Secretary (Principal Financial and Accounting Officer) * Director September 12, 1997 - --------------------------------------- Jonathan E. Baum * Director September 12, 1997 - --------------------------------------- David Y. Howe * Director September 12, 1997 - --------------------------------------- Robert H. Niehaus * Director September 12, 1997 - --------------------------------------- Amy S. Rosen * Director September 12, 1997 - --------------------------------------- James A. Schlindwein * Director September 12, 1997 - --------------------------------------- Lawrence B. Sorrel * Director September 12, 1997 - --------------------------------------- Richard C. Thompson
*By: /s/ TIMOTHY S. WEBSTER --------------------------------- Timothy S. Webster Attorney-in-Fact II-4 94 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1* Form of Underwriting Agreement 3.1** Form of Amended and Restated Certificate of Incorporation of the Company 3.2** Form of Amended and Restated By-Laws of the Company 4.1* Form of specimen certificate representing the Company's Class A Common Stock 4.2* Form of 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 dated , 1997 between the Company and Timothy S. Webster 10.6* Employment Agreement dated , 1997 between the Company and Horst W. Schroeder 10.7* Employment Agreement dated , 1997 between the Company and David E. Watson 10.8* Employment Agreement dated , 1997 between the Company and Norman F. Abreo 10.9 Form of Amended and Restated Stockholders Agreement dated , 1997 10.10** American Italian Pasta Company 1992 Stock Option Plan 10.11** American Italian Pasta Company 1993 Non-Qualified Stock Option Plan 10.12 1996 Salaried Bonus Plan 10.13* 1997 Equity Incentive Plan 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
- ------------------------- * To be filed by amendment ** Previously filed + Confidential treatment has been requested for portions of this document. The redacted material has been filed separately with the Commission pursuant to a pending application for confidential treatment. II-5 EX-8.1 2 OPINION OF SONNENSCHEIN NATH & ROSENTHAL 1 EXHIBIT 8.1 ----------- September ___, 1997 American Italian Pasta Company 1000 Italian Way Excelsior Springs, Missouri 64024 Ladies and Gentlemen: We have acted as special counsel for American Italian Pasta Company, a Delaware corporation (the "Company"), in connection with the Registration Statement on Form S-1 (the "Registration Statement") filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Securities Act"), relating to the issuance by the Company of shares of Class A Convertible Common Stock, $.001 par value per share. We have examined the Registration Statement which has been filed with the Commission. In addition, we have examined, and have relied as to matters of fact upon, the originals or copies, certified or otherwise identified to our satisfaction, of such corporate records, agreements, documents and other instruments and such certificates or comparable documents of public officials and of officers and representatives of the Company, and have made such other and further investigations, as we have deemed relevant and necessary as a basis for the opinion hereinafter set forth. In addition, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals and the conformity to original documents of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such latter documents. Based upon the foregoing, and subject to the qualifications and limitations stated herein, we are of the opinion that the statements made in the Registration Statement under the caption "Certain United States Federal Income Tax Considerations For Non-U.S. Holders" insofar as they purport to constitute summaries of matters of United States federal income tax law and regulations or legal conclusions with respect thereto, constitute accurate summaries of the matters described therein in all material respects. We do not express any opinion herein concerning any law other than the federal law of the United States. This opinion is rendered to you solely in connection with the above-described transaction and may not be relied upon for any other purpose without our prior written consent. 2 American Italian Pasta Company September ___, 1997 Page 2 We hereby consent to the use of this opinion as an Exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" in the Prospectus included therein. Very truly yours, SONNENSCHEIN NATH & ROSENTHAL EX-10.9 3 AMENDED & RESTATED STOCKHOLDERS AGREEMENT 1 EXHIBIT 10.9 AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT September __, 1997 among American Italian Pasta Company and Certain of its Shareholders 2 THIS AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT dated as of September __, 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 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, in connection with its IPO, the Company will amend and restate its Certificate of Incorporation and effect a recapitalization pursuant to which (i) each outstanding share of Old Class A Common Stock and Old Common Stock will be converted into one share of the Class A Convertible Common Stock, par value $.001 per share, of the Company (the "Class A Common Stock"); (ii) the MS Shareholders will convert certain 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"); and (iii) each outstanding share of Common Stock will be split into ___ shares; 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 all the Shareholders to this Agreement in accordance with Section 7.4 of the Amended Original Agreement; 3 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. "Allotment" means (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. "Baum" means George K. Baum Group, Inc, George K. Baum Capital Partners, L.P., George K. Baum Employee Equity Fund, L.P., or Excelsior Investors, L.L.C. "Baum Affiliate" means any Person included within the definition of "Baum", or any Affiliate of such Person. "Board" means the board of directors of the Company. -2- 4 "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. "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 Partners III, 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. -3- 5 "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. "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 -4- 6 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; (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 any Shareholder, the Company; (iv) in the case of Baum, [any Baum Affiliate, and, effective after December 31, 1998, (x) any partner or member of such Baum Affiliate; 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 such Baum Affiliate during the preceding 90 days, exceed the maximum number of shares of Common Stock that could then be sold by such Baum Affiliate in accordance with thevolume limitations of Rule 144(e) (or any successor provision) under the Securities Act, or (y) any partner or member any Baum Affiliate in connection with any distribution of all or substantially all of the net assets such Baum Affiliate to its partners or members, as applicable]; (v) in the case of Excelsior Investors, L.L.C., any Person who is a member thereof on the date of this Agreement; (vi) 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; (vii) 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 that, if the MS Shareholders shall at the time of the proposed transfer 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 (viii) 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. -5- 7 "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. "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 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. -6- 8 "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 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 7.3 or otherwise, so long as such Person shall beneficially own any Shares. "Shares" means, with respect to a Shareholder, all shares of Common Stock issued upon the conversion of shares of Old Stock owned by such Shareholder on the date hereof. "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 -7- 9 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 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; -8- 10 (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 grant or award to any one Person under any stock option, equity incentive or other benefit plan of the Company that involves or relates to more than [5,000] shares of Common Stock[confirm that 5,000 share amount reflects a pre-split concept]; (xiv) any adoption of a shareholder rights plan; or (xv) 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. "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 S. 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 Allotment" means (i) with respect to fiscal year 1998, no shares of Common Stock, (ii) with respect to fiscal year 1999, 15,000 shares of Common Stock, (iii) with respect to fiscal year 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 fiscal year 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 fiscal year 2002, -9- 11 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); (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 S. 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. -10- 12 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 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 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 -11- 13 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 an 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 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 -12- 14 (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 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 -13- 15 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 the MSLEF or MSCAP 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) or (d) 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 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 or 5.2(a) of this Agreement and in compliance with the Securities Act. (b) Thereafter, and subject to Section 3.1(c), the Minority Shareholders 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, or in an open market sale pursuant to Rule 144(f) or (iii) in the case of Thompson or Citicorp, in a private transaction for cash subject to Section 4.1; provided that no transfer may be made to an Adverse Person or to any Person that, together with its Affiliates, would beneficially own in excess of 10% of the outstanding Common Stock as a result of 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 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. -14- 16 (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(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 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 [(other than clause (ii) of the definition of "Permitted Transferee"], and except as may be permitted on a case-by-case basis by the compensation (or equivalent) committee of the Board in its absolute discretion, no individual (other than Horst W. Schroeder or Timothy S. Webster) who is, or on the date of his acquisition of shares of Old Stock was, an officer or employee of the Company may transfer any of his Shares before the second anniversary of this Agreement. (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 may sell up to 50% of his 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, each certificate for Shares that is issued to any Shareholder shall bear a legend in substantially the following form: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD EXCEPT IN COMPLIANCE THEREWITH. THIS SECURITY IS ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AS SET FORTH IN THE AMENDED AND RESTATED SHAREHOLDERS AGREEMENT DATED AS OF SEPTEMBER __, 1997, COPIES OF WHICH MAY BE OBTAINED UPON REQUEST FROM AMERICAN ITALIAN PASTA COMPANY OR ANY SUCCESSOR THERETO." -15- 17 (b) If any shares of Common Stock shall cease to be Registrable Stock, the Company shall, upon the written request of the holder thereof, issue to such holder a new certificate evidencing such shares without the first sentence of the legend required by Section 3.2(a) endorsed thereon. 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 second sentence of the legend required by Section 3.2(a) endorsed thereon. 3.3 Permitted Transferees. Notwithstanding anything in this Agreement to the contrary, any Shareholder 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 (v) of the definition of "Permitted Transferee") so long as (a) such Permitted Transferee shall have agreed in writing to be bound by 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; provided, however, any transferee of Shares approved by the Board, in its sole discretion, shall be deemed a "Permitted Transferee" for all purposes of this Agreement. 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 [30] days after receipt of such Section 4.1 Offer Notice by the Company. During such [30]-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 [30]-day period. -16- 18 (c) The Company shall purchase and pay for all Shares it accepts within a 60-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 Company, there shall commence a 30-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 60 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 -17- 19 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 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 -18- 20 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. 4.3 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 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 -19- 21 the Company's receipt of the last of such timely requests, at least [$25] 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, 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 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 -20- 22 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 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 -21- 23 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 invoke 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 -22- 24 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 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: -23- 25 (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 [50%] 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. (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 -24- 26 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 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 -25- 27 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: (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. -26- 28 (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 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) -27- 29 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. 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). -28- 30 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 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 -29- 31 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 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 -30- 32 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 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 -31- 33 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. 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 -32- 34 (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 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 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. 7.2 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. 7.3 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. 7.4 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 -33- 35 who own at least 80% of the Registrable Stock then outstanding. 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 the Board and Shareholders who own at least 80% of the Shares then outstanding. (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. 7.5 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. 7.6 Headings. The headings contained in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. 7.7 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. 7.8 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. 7.9 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. 7.10 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. -34- 36 7.11 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. 7.12 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:_________________________________________ Timothy S. Webster, President and Chief Executive Officer -35- 37 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:_______________________________________ -36- 38 GEORGE K. BAUM GROUP, INC. By:_________________________________________________ Its:________________________________________________ AMERICAN ITALIAN PASTA COMPANY RETIREMENT SAVINGS PLAN 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:________________________________________________ Ben D. Trevathan, Managing Director GKB PRIVATE INVESTMENT PARTNERS, L.L.C., AS NOMINEE FOR: GEORGE K. BAUM EMPLOYEE EQUITY FUND, L.P. By:________________________________________________ Ben D. Trevathan, Managing Director EXCELSIOR INVESTORS, L.L.C. BY: GEORGE K. BAUM MERCHANT BANC, LLC, ITS MANAGER By:________________________________________________ Ben D. Trevathan, Managing Director -37- 39 CITICORP VENTURE CAPITAL, LTD. By:_________________________________________ Its:________________________________________ CCT PARTNERS III, L.P. By:_________________________________________ 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:_________________________________________ Horst W. Schroeder, Trustee ____________________________________________ Isabel A. Lange ____________________________________________ Bernd H. Schroeder ____________________________________________ Gisela I. Schroeder, Trustee of the Living Trust of Gisela I. Schroeder U/T/I Dated May 24, 1985 -38- 40 WILLIAM T. WEBSTER, AS CUSTODIAN FOR WILLIAM T. WEBSTER, JR. UNDER THE MISSOURI UNIFORM TRANSFERS TO MINORS LAW By:____________________________________________________ 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:____________________________________________________ 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:____________________________________________________ Timothy S. Webster, Attorney-in-Fact WILLIAM T. WEBSTER By:____________________________________________________ Timothy S. Webster, Attorney-in-Fact JULIE D. WEBSTER By:____________________________________________________ Timothy S. Webster, Attorney-in-Fact -39- 41 ANNA CATHERINE WEBSTER By:____________________________________________________ Timothy S. Webster, Attorney-in-Fact ERNEST JACK WEBSTER, JR. By:____________________________________________________ Timothy S. Webster, Attorney-in-Fact _______________________________________________________ Timothy S. Webster THOMPSON HOLDINGS, INC. By:____________________________________________________ Richard C. Thompson THOMPSON HOLDINGS, L.P. By:____________________________________________________ Richard C. Thompson JSS MANAGEMENT COMPANY LTD. By:____________________________________________________ Its:___________________________________________________ _______________________________________________________ James A. Schlindwein _______________________________________________________ Suzanne S. Schlindwein -40- 42 ____________________________________________ Jerry Dear ____________________________________________ Daniel Keller ____________________________________________ Mike Willhoite ____________________________________________ David E. Watson ____________________________________________ Darrel Bailey ____________________________________________ Norman F. Abreo ____________________________________________ David B. Potter -41- 43 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 Partners III, 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 Guardian 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
A-1 44
Class A Common Common Shareholder Stock Stock Total ---------------------------------------- --------- --------- ------- Ernest Jack Webster, Jr. . . . . . . . . . . . . . . . . 50 0 50 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 45 EXHIBIT B American Italian Pasta Company 1000 Italian Way Excelsior Springs, Missouri 64024 Attention: Timothy S. Webster Fax: (816) 637-8358 with a copy to: Sonnenschein Nath & Rosenthal 4520 Main Street, Suite 1100 Kansas City, Missouri 64111 Attention: James A. Heeter Fax: (816) 932-4452 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 Fax: (212) 450-4800 B-1 46 Thompson Holdings, Inc. Thompson Holdings, L.P. Richard C. Thompson c/o Thompson's Pet Pasta Products, Inc. 16 Kansas Avenue Kansas City, Kansas 66105 Fax: (954) 767-6046 with a copy to: Welborn, Dufford, Brown & Tooley, P.C. 1700 Broadway Suite 1700 Denver, Colorado 80290-1701 Attn: Thomas G. Brown, Esq. Fax: (303) 832-3804 Citicorp Venture Capital, Ltd. CCT Partners III, L.P. 399 Park Avenue - 14th Floor New York, New York 10043 Attention: David Y. Howe Fax: (212) 888-2940 Norman F. Abreo Darrel Bailey Jerry Dear Daniel Keller 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 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 B-2 47 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. c/o Timothy S. Webster American Italian Pasta Company 1000 Italian Way Excelsior Springs, Missouri 64024 Facsimile No. (816) 502-6090 with a copy to: James M. Ash Blackwell Sanders Weary Matheny & Lombardi L.C. Suite 1100 Two Pershing Square, 2300 Main Street Kansas City, Missouri 64108 Facsimile No. (816) 983-8080 Norman F. Abreo Darrel Bailey Jerry Dear Daniel Keller 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 B-3 48 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 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-10.12 4 1997-1998 SALARIED BONUS PLAN 1 EXHIBIT 10.12 AMERICAN ITALIAN PASTA COMPANY 1996 SALARIED BONUS PLAN* Consistent with the AIPC philosophy of pay for performance, an annual cash bonus program has been established. Provisions of the plan include the following: 1. The basic bonus opportunity, "Norm Bonus," reflects the degree of potential contribution by specific levels of salaried Team Members to the overall performance of the company. 2. The actual amount of bonus awarded will depend on the personal performance of the incumbent and the overall company performance. The "Norm Bonus" will be weighted for personal performance as follows: Outstanding Performance 110 - 150% of Norm Bonus Above Average Performance 80 - 110% of Norm Bonus Average Performance 0 - 80% of Norm Bonus Unsatisfactory Performance 0% of Norm Bonus The performance rating must be documented on a written performance review which appraises achievements against specific targets and accountabilities as established by the Board approved business plan and the incumbent's job description, goals and objectives. Performance ratings include the following categories: 1) Outstanding Performance Substantially exceeds key results as determined from job description accountabilities and mutually agreed-upon goals. 2) Above-Average Performance Exceeds key results as determined from job description accountabilities and mutually agreed-upon goals. 3) Average Performance Minimally meets key results as determined from job description accountabilities and mutually agreed-upon goals. (An overall 3 job rating is acceptable for employees learning a new job). 4) Unsatisfactory Performance Does not achieve key results as determined from job description accountabilities and mutually agreed-upon goals. (An overall 4 job rating requires immediate improvement or employees will be terminated). 2 American Italian Pasta Company 1996 Salaried Bonus Plan Page 2 The level of company performance versus approved business plan and established targets will generate a Corporate Performance Multiplier. The multiplier ranges from 0% to 100% with 100% representing substantial accomplishment of the established targets/business plan and is assessed by the Board of Directors in the year-end Board meeting. Bonus structure and payments are at the sole discretion of the Board of Directors and will be determined on an annual basis. As a result of the transition from a calendar year fiscal year to an October 1 through September 30 fiscal year, the 1996 bonus plan is a nine month (January 1 to September 30). As a result, the Corporate Performance Multiplier will be prorated by 75%. 1996 Formula: Base Salary (X) Norm Bonus Potential (X) Personal Performance Rating (X) Corporate Performance Multiplier x 75% (9 month plan year) equals Bonus Payment. Example: The bonus for a salaried Team Member with a $20,000 base salary as of December, a performance rating of 2 and a 6% Norm Bonus potential would be calculated as follows when the Corporate Performance Multiplier is approved at 100%. $20,000 Annual Salary X 6% Norm Bonus Potential ---------- $1,200 Norm Bonus Dollars X 100% Personal performance rated Above Average (2) with 100% ---------- weighting (80% - 110% eligibility) $1,200 X 100% Corporate Multiplier (Company objectives met) ---------- $1,200 Annualized Payout X 75% Prorated 9 Month Plan Year ---------- $ 900 1996 Payout /s/ Horst W. Schroeder - --------------------------------------- Horst W. Schroeder Chairman 3 AMERICAN ITALIAN PASTA COMPANY 1996-1997 SALARIED TEAM MEMBER BONUS RANGES MAXIMUM TARGET BONUS % JOB CATEGORY BONUS % (150% OF TARGET) - ------------ ------- ---------------- CEO 50% 75% SENIOR MANAGEMENT 20 - 40% 30 - 60% UPPER/MIDDLE MANAGEMENT 12.5 - 25% 18.75 - 37.5% MIDDLE MANAGEMENT 7.5% - 18% 11.25 - 27% SUPERVISORY & EXEMPT 5 - 10% 7.5 - 15% NON-EXEMPT 3 - 5% 4.5 - 7.5% EX-23.1 5 CONSENT OF ERNST & YOUNG LLP 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, in Amendment No. 2 to the Registration Statement (Form S-1 No. 333- ) and related Prospectus of American Italian Pasta Company for the registration of shares of its common stock. Ernst & Young LLP Kansas City, Missouri ______________________________________________________________________________ The foregoing consent is in the form that will be signed upon the completion of the recapitalization and restatement of capital accounts and the calculation of earnings per share amounts as described in Note 12 to the financial statements. /s/ Ernst & Young LLP Kansas City, Missouri Septemeber 10, 1997 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 This schedule contains summary information extracted from the balance sheet and statement of operations and is qualified in its entirety by reference to such financial statements. 9-MOS 9-MOS SEP-30-1996 JUN-30-1997 SEP-30-1996 JUN-30-1997 1,818 2,612 0 0 12,494 11,616 0 0 14,374 11,619 30,834 28,261 127,000 138,049 23,247 27,790 141,688 145,461 32,435 14,985 0 0 0 0 0 0 10 15 15,959 40,961 141,688 145,461 92,074 93,616 92,074 93,616 68,555 67,821 85,353 78,033 0 0 0 0 8,023 7,800 (4,107) 4,928 (1,556) 1,878 (2,551) 3,050 0 0 (1,647) 0 0 0 (4,198) 3,050 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----