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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