Auditing

Pasta Maker Dishes Out $25 Million

American Italian Pasta settles its investor class-action suit; meanwhile the company plans to take a goodwill charge for brand value lost in 2005 a...
Stephen TaubOctober 30, 2007

American Italian Pasta Company said it will pay $25 million to settle a class action lawsuit related to alleged securities law violations. The settlement is comprised of $11 million in cash, all of which will be contributed by the company’s insurers, and $14 million in company stock.

The settlement still has to be approved the a federal district court in Kansas City. However, the pasta maker contended that the agreement brings to a close “the substantial expense, uncertainty, inconvenience and distraction of continued litigation.” AIPC also said that the agreement involves no admission of fault or wrongdoing by the company or individual defendants.

Officials pointed out, however, that the settlement does not include the suit’s claims against AIPC’s independent auditor Ernst & Young LLP. In addition, the agreement does not cover derivative claims related to separate lawsuits against the company and former and current officers and directors.

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The alleged securities laws violations stem from the company’s announcement in August 2005 that it would delay filing its financial results and would also restate a number of previous filings, according to The Kansas City Star.

In early September, the company announced that it was recording an impairment charge related to its pasta brands in the fourth quarter of its fiscal year ending September 30, 2005, and for its fiscal year ending September 29, 2006. The decision was made after an audit committee investigation determined that its brands, which include R&F, Ronco, Meuller’s, Pennsylvania Dutch, and Heartland, lost value after declines in sales volume and related revenues resulted in corresponding decreases in market share and profitability as of the third quarter of fiscal 2005.

Under the accounting rule known as FAS 142, Goodwill and Other Intangible Assets, the company was required to write-down the value of its brands for that period. As a result, AIPC plans to take a pre-tax impairment charge of $89.2 million recorded in fiscal 2005, which includes a $35.1 million charge previously announced as of the third quarter of fiscal 2005. The company also said that since determining the 2005 impairment, the expected future performance of its brands has improved.

Nevertheless, the pasta company will record a $1 million, non-cash impairment charge in fiscal 2006 related to one of its brands. The company did not identify the brand in its press statements, and could not be immediately reached by CFO.com.

Last month, the company also announced that it had completed its internal preparation of its restated financial statements for 2004 and earlier periods, as well as of its financial statements and annual report for its 2005 and 2006 fiscal years. Although the reports were delivered to Ernst & Young, AIPC noted that it could not predict when the auditor would complete its review and audit.

In December 2006, the New York Stock Exchange suspended trading in shares of AIPC for not filing its financial reports on time after having given the company a six-month extension on June 23, 2006. Back in May, the company had said it would file its annual reports for the 2005 and 2006 fiscal years, in the last half of August.