PLB American Italian Pasta

Audit Committee Investigation Underway KANSAS CITY, Mo., Aug. 9 /PRNewswire-FirstCall/ -- American Italian Pasta Company (NYSE:PLB) announced today that it is delaying the release of its full financial results for the third fiscal quarter ended July 1, 2005, and is also delaying the filing of its third quarter Form 10-Q with the Securities and Exchange Commission (SEC). The Company stated that its Audit Committee is conducting an internal investigation of certain accounting procedures and practices and certain other matters. The Company also outlined impairment charges and other financial statement adjustments that will be recorded and provided an overview of its business results for the third quarter. EARNINGS RELEASE AND FILING OF FORM 10-Q The Company's third quarter Form 10-Q, due on August 10, 2005, and the Company's previously planned August 10, 2005 earnings release are being delayed until the Audit Committee has completed its review of the matters that are the subject of its internal investigation. The Company will file its Form 10-Q as soon as is practicable but does not currently expect that it will be able to file within the five day extension period provided for under SEC Rule 12b-25. The conference call originally scheduled for August 10, 2005 has been cancelled. While the Company's core operations (financial results exclusive of the charges outlined below in "Financial Statement Adjustments") were profitable in the third quarter, such operations did not meet internal expectations and were not consistent with the third quarter results contemplated in the full- year earnings guidance outlined earlier by the Company. Combined with the charges outlined below, the Company expects to record a significant net loss for the third quarter ended July 1, 2005, leading to a net loss for the 2005 fiscal year. While the Company expects to operate profitably in the fourth quarter and generate positive free cash flow (operating cash flow less capital expenditures), it will not achieve in fiscal year 2005 the expected range of margin performance, overall profitability and free cash flow as set forth in the Company's earnings release on April 27, 2005. AUDIT COMMITTEE INTERNAL INVESTIGATION The Company's Audit Committee has recently commenced an internal investigation, undertaken at the Committee's own initiative, of certain matters including: certain accounting procedures and practices including those relating to material weaknesses in internal controls identified by the Company (as described below); financial statement adjustments (as outlined later in this release) and the circumstances surrounding such adjustments; and, certain transactions and possible past accounting errors and their causes. The Audit Committee has retained outside counsel to assist with its investigation and outside counsel has engaged forensic accountants. The Company's external auditors, Ernst & Young LLP, have been notified of the internal investigation. The Company indicated that the investigation relates to transactions and other matters occurring as early as the Company's 2000 fiscal year. The internal investigation has not yet been completed and the Company indicated that financial statement adjustments might be necessary in addition to those outlined in this release. Until the internal investigation is completed by the Audit Committee and any financial statement adjustments and their causes are determined, the Company's third quarter results and any impact on prior period results cannot be finalized. The Company also stated that in late 2004 and early 2005, it received inquiries from the Philadelphia and New York Stock Exchanges concerning trading activity in the Company's stock, by persons outside of the Company, during time periods surrounding certain of the Company's public announcements. As is the routine practice of the exchanges, the staff of the SEC was advised of the inquiries. In March 2005, the Company initiated contact with the SEC staff and began discussions with the staff regarding information relating to the exchange inquiries. The Company has had ongoing discussions with and has voluntarily been providing relevant information to the SEC staff. These discussions and disclosures are in keeping with the Company's policy to assist and cooperate with inquiries by an exchange or government regulatory authority. Some of the issues under discussion with the SEC staff relate to certain of the subjects addressed below. The SEC staff's review is ongoing and the Company is continuing to cooperate with the staff's efforts. FINANCIAL STATEMENT ADJUSTMENTS The Company intends to record adjustments totaling $60.7 million in its financial statements that are primarily non-cash charges (all but $3.7 million are non-cash items). The adjustments, described below, are summarized as follows (in millions): Impairment charges $36.7 Low and reduced carb inventory write-downs 5.2 Other financial statement adjustments 18.8 Total $60.7 Impairment Charges The Company expects impairment charges (non-cash) will be recorded in the third quarter aggregating $36.7 million on a pre-tax basis. The charges include impairments of intangible assets and property, plant and equipment as follows: Intangibles - Brands and Trademarks: Certain of the Company's pasta brands have experienced declines in sales volume and related revenues over recent months resulting in corresponding declines in market share and profitability (primarily the Golden Grain-Mission and R&F brands). The recent operating trends and the currently forecasted future performance for these brands differ significantly from the Company's earlier expectations. In accordance with SFAS No. 142 - "Goodwill and Other Intangible Assets", the recoverability of these intangible assets has been evaluated and the Company has determined that impairments now exist. Accordingly, pre-tax impairment charges of $35.1 million will be recorded in the third quarter. Long Lived Assets - Property, Plant and Equipment: During the third quarter, the Company identified certain manufacturing equipment that will not be utilized in the Company's future operations. In accordance with SFAS No. 144 - "Accounting for the Impairment or Disposal of Long Lived Assets", the Company will record in the third quarter a write-down of the asset-carrying values to estimated net realizable value, that will result in a pre-tax impairment charge of $1.6 million. Low and Reduced Carb Inventory Write-downs Sales trends of the Company's low and reduced carb products have declined in recent months and the sales outlook has continued to diminish. The Company now expects that certain inventories related to these product lines are in excess of levels that will ultimately be sold and the carrying value will not otherwise be recovered. Accordingly, third quarter results will include non- cash inventory write-downs of $5.2 million on a pre-tax basis. Material Weaknesses in Internal Controls As previously disclosed in the Company's second quarter 10-Q, the Company identified certain material weaknesses in internal controls in conjunction with its preparation to fulfill the requirements of Section 404 of the Sarbanes-Oxley Act. During the third quarter the Company identified additional material weaknesses in internal controls relating to certain fixed asset accounting. The Company has commenced the development and implementation of procedures designed to remediate the identified weaknesses. The Company's Audit Committee will oversee the remediation efforts. Other Financial Statement Adjustments Related to the material weaknesses identified, as well as other market and business conditions, it is expected that the financial statements will be adjusted by recording charges aggregating $18.8 million. These financial statement adjustments are comprised primarily of the following: Promotional allowances and related customer deduction receivables - $6.6 million of additional expense will be recorded and is comprised of increases in accrued promotional liabilities of $3.7 million (resulting from updated estimates of prior periods promotional expenses incurred but not yet paid) and write-downs of $2.9 million related to customer receivables determined to be uncollectible. Spare parts inventory - Write-downs totaling $5.4 million will be recorded related to physical inventory shortages, valuation adjustments and the adjustment of obsolescence reserves for spare parts to reflect the Company's anticipated recoverability on the disposition of certain excess or obsolete parts. Inventory valuation - The Company's reserves for slow moving, damaged and discontinued inventories will be increased by $4.1 million (exclusive of the write-downs related to low and reduced carb inventories, as noted above) to reflect the anticipated recoverability of certain inventories in excess of identified requirements. In addition, the carrying value of inventory will be reduced by $600,000, consisting of adjustments to the allocation of overhead expenses relating to production costs. Dispositions of fixed assets - It was determined that certain fixed asset retirements occurring in prior periods were not recorded by the Company. Accordingly, losses on dispositions of fixed assets totaling $1.9 million will be recorded in the financial statements. CONTINUING FINANCIAL REVIEW The Company and the Audit Committee are currently assessing the extent to which the above adjustments discussed in "Other Financial Statement Adjustments" correct errors in prior reporting periods or are changes in estimates. In addition, the Company is evaluating certain other financial statement adjustments, aggregating up to approximately $4.2 million, that may be recorded to correct errors in the prior reporting periods of fiscal years 2000 through 2004 and that were considered immaterial at the time. The Audit Committee is also investigating certain transactions unrelated to the adjustments otherwise discussed above that are currently estimated to total less than $1.0 million. Accordingly, the impact these financial statement adjustments will have on the third quarter results or on prior period financial statements, if any, has not yet been determined. The Company's and the Audit Committee's reviews are ongoing and could result in additional or revised adjustments. THIRD QUARTER BUSINESS OVERVIEW An overview of the significant items affecting the third quarter results for the Company's core operations (financial results exclusive of the charges outlined above in "Financial Statement Adjustments") and the Company's bank credit agreement follows: Core Operations Performance The third quarter contribution to consolidated operating profit by the Company's core operations is expected to be as follows (in millions): Revenues $ 90.2 Operating profit $ 7.1 as a percentage of revenues 7.9% Revenues: Revenues were lower than the prior year, in part, as contemplated in the Company's business plan for 2005 that targets a smaller base of more profitable volume. As expected, significant price increases implemented throughout the year and the elimination of certain branded promotional events resulted in lower sales volume. In the third quarter, however, revenues were lower than expected primarily due to negative sales mix, lower volume and incremental branded trade promotion spending. The Company's third quarter revenues from core operations were $90.2 million, down 13% from the prior year's quarter as follows: Retail revenues: In the quarter, the Company's retail revenues from core operations were $64.1 million, a decrease of $9.7 million or 13% as compared to the prior year's quarter. The decrease resulted primarily from lower branded sales and $3.9 million less in sales of low and reduced carb products. These revenue decreases were offset, in part, by slightly higher private label revenues during the third quarter resulting from recent price increases. During the third quarter, the Company's retail volume declined by approximately 13% as compared to the prior year's quarter (including a 21% reduction in branded volume and a 7% decrease in private label/club volume). Branded volume reductions were driven primarily by Golden Grain- Mission brand declines of 55%, a reduction in unprofitable promotional events and lower reduced carb sales. Industry-wide retail consumption of dry pasta (as measured by ACNielsen) increased in volume by 1.6% for the 13-week period ended July 9, 2005 as compared to a year ago. Private label volume decreased, as anticipated, due to the loss of certain lower margin volume resulting from recent price increases. Institutional revenues: In the third quarter, the Company's institutional revenues were $26.1 million, a decrease of $3.2 million or 11% as compared to the prior year's quarter. Volume declined during the quarter by 16% in certain high volume, low margin ingredient business, due in part to planned reductions. Cost of goods sold: Product costs were higher than expected during the third quarter due to continued unfavorable trends in transportation costs, energy-related expenses, by-product sales prices and production volume, all of which contributed to an increase in per unit costs. General and administrative costs: G&A costs were significantly higher than expected and increased from last year's quarter primarily due to expenses associated with Sarbanes-Oxley Section 404 compliance and higher professional fees. Kenosha plant operations: The Kenosha plant has been operating in a limited mode over the last nine months in response to industrial customer demand and to re-balance production, inventory and the supply chain. Consistent with the Company's original restructuring strategy, the Kenosha facility was recently placed back into idle mode. The Company will continue to evaluate the future strategy for the facility and, in the meantime, it will be available as needed to meet future production requirements. Bank Credit Agreement On July 19, 2005, the Company received a waiver from its bank group for non-compliance with certain covenants contained in its bank credit agreement for the third quarter of fiscal year 2005. During the waiver period, which expires on September 16, 2005, the Company will continue discussions with the bank group regarding an amendment to certain financial covenants and other terms for the third quarter and the remaining term of the credit agreement, which expires on October 2, 2006. If the amendment is not completed by the end of the initial waiver period, the Company will seek a waiver allowing for additional time to complete an amendment to the bank credit agreement. As part of the waiver agreement, the Company agreed to accelerate by approximately 21/2- months the annual reduction in the revolving credit facility set forth in the credit agreement. The $30 million reduction, originally scheduled for October 1, 2005, results in the Company's credit facility becoming $290 million (comprised of a $190 million revolving credit facility and a $100 million term loan). In addition, the Company has informed its lenders that it does not intend to declare or pay dividends during the waiver period. The Company will evaluate its future dividend policy in connection with future borrowing arrangements. Until the Company's amendment process is completed and the covenants are revised going-forward, generally accepted accounting principles require that the Company reclassify its bank debt from long-term to a short-term liability on its balance sheet. Accordingly, if the July 1, 2005 balance sheet is issued before an amendment to the credit facility is finalized, long-term debt related to the credit facility of $276.8 million will be classified as a current liability. The Company believes that net cash flow expected to be generated from operations, combined with available borrowings under its credit facilities and current cash on hand will be sufficient to fully meet its expected capital and liquidity needs for the foreseeable future, assuming the Company obtains an amended credit agreement not requiring significant principal reduction in the coming year. At the end of the third quarter, the Company had cash balances of $13.7 million and $12.3 million was available under its revolving credit facility (as adjusted by the waiver agreement discussed above). Founded in 1988 and based in Kansas City, Missouri, American Italian Pasta Company is the largest producer and marketer of dry pasta in North America. The Company has five plants that are located in Excelsior Springs, Missouri; Columbia, South Carolina; Tolleson, Arizona; Kenosha, Wisconsin and Verolanuova, Italy. The Company has approximately 600 employees located in the United States and Italy. In this press release, the Company has provided information about the Company's "core operations". Revenues from core operations is a non-GAAP financial measure which is useful to investors to understand, in part, the Company's sales levels and performance. The amount shown is greater than the total reported revenues under GAAP because of the impact of certain adjustments discussed in this release totaling $3.8 million. Operating profit from core operations is also a non-GAAP financial measure which is useful to investors to understand, in part, the Company's profitability and operating performance. The amount shown differs from the total operating profit under GAAP because of the impact of certain adjustments discussed in this release (the amounts of which are not yet finalized). The Company has provided information about the Company's "free cash flow" which management believes provides useful information about the Company's cash generation. Also, these measures are used internally by management and the Board of Directors to evaluate business performance. These measures may not be comparable to a similarly titled measure of another company. When used in this release and documents referenced, the words "anticipate," "believe," "estimate," and "expect" and similar expressions, as they relate to the Company or its management are intended to identify forward-looking statements, but are not the exclusive means of identifying these statements. The statements by the Company regarding the expected third quarter, fourth quarter and full fiscal year 2005 financial results, the adjustments expected to be made to the Company's financial statements, the expected level of adjustments resulting from the internal investigation by the Audit Committee, the SEC staff review and the timing of the finalization of the Company's bank credit agreement amendment are all forward-looking and based on current expectations. Actual future results or events could differ materially from those anticipated by such forward-looking statements. The differences could be caused by a number of factors, including, but not limited to, the completion and findings of the Audit Committee internal investigation, the SEC staff review, and the timing of the finalization of financial statement adjustments and the conclusions reached regarding financial reporting and the willingness of the Company's lenders to amend the terms of the credit agreement. In addition, future operating results are impacted by a number of factors, including but not limited to, our dependence on a limited number of customers for a substantial portion of our revenue, our ability to fully implement our restructuring program, our ability to obtain necessary raw materials and minimize fluctuations in raw material prices, the impact of the highly competitive environment in which we operate, our reliance exclusively on a single product category, our ability to attract and retain key personnel, and our ability to cost-effectively transport our products. For additional discussion of the principal factors that could cause actual results to be materially different, refer to our report on Form 10-K dated December 10, 2004 filed by the Company with the Securities and Exchange Commission. The Company will not update any forward-looking statements in this press release to reflect future events. DATASOURCE: American Italian Pasta Company CONTACT: George Shadid - EVP & Chief Financial Officer of American Italian Pasta Company, +1-816-584-5621, Web site: http://www.aipc.com/

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