At the end of October, American Italian Pasta (NYSE:PLB), one of the largest makers of dry pasta in North America, announced that investors should no longer rely on the annual financial statements it filed for the last few years. And while they're at it, they shouldn't bother looking at the quarterly statements for this year, either.
The reports apparently contain errors for production costs and overhead costs, and the company will have to restate earnings going as far back as 2002. The errors were found as a result of an investigation American Italian Pasta launched into its finances in August, and it now expects to post a significant loss for the quarter and the year when it finally does get around to filing its paperwork. Just two weeks before this revelation, the company announced the sudden retirement of its chairman, Horst Schroeder, which was followed two weeks later by the exit of founder and CEO Richard Thomson.
So what's a troubled pasta maker to do after these executive defections and financial problems? Why, reward its chief financial officer with a bonus that could be $290,000, of course!
On Friday, the company filed an announcement with the Securities and Exchange Commission that it was awarding CFO George Shadid a "retention bonus" that would be paid in two installments. The first $145,000 will be paid when the audit committee investigating the apparent financial shenanigans completes its work, with the balance being paid if he is still an employee in June 2006. Well, that's certainly one way to encourage management to stay on. It might also explain why Schroeder has agreed to stay as a "consultant" with American Italian Pasta through September of next year: He got a contract to pay him $4,000 a day for a minimum of 30 days a year, or at least $120,000 for his, um, services.
Pasta makers have had a rough go of it since the Atkins diet and its low-carb mantra swept the country. MontereyGourmet Foods (NASDAQ:PSTA) (formerly Monterey Pasta) was hurt by the losses it posted last year, and former Hershey (NYSE:HSY) division New World Pasta was driven to bankruptcy. I'm sure it offers little solace to those investors that Atkins Nutritionals also found itself in bankruptcy court as the fad diet's popularity waned.
Maybe American Italian Pasta's CFO was the one who discovered the discrepancies in the books and is being rewarded for his sharp eyes (although as CFO, that's his job), or maybe the company doesn't want any more bad press from executives scattering like cockroaches when the lights are turned on. Whatever the reason, shareholders are being shortchanged as the company doles out this largesse while losses are mounting and SEC investigations could be launched.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. The Motley Fool has a disclosure policy.
