American Italian Pasta Company Announces Settlement of Federal Securities Class Action Lawsuit

31/10/07 American Italian Pasta Company, announced that it has entered into a Stipulation of Settlement with lead plaintiff in the pending federal securities class action lawsuit. The Company also addressed current durum wheat market conditions and announced the additional retirement of debt under its credit facility.

Settlement of Federal Securities Class Action

The settlement resolves federal securities law claims asserted in the consolidated class action pending in federal court in Kansas City styled In re American Italian Pasta Company Securities Litigation (Case No. 05-CV-0725-W-ODS). The federal securities law claims will be settled for approximately $25 million, comprised of $11 million in cash, all of which will be contributed by the Company's insurers, and $14 million in the Company's common shares. Claims asserted against the Company's independent registered public accounting firm, Ernst & Young, LLP, are not part of the settlement. In addition, derivative claims asserted in separate lawsuits against the Company and certain of its former and current officers and directors are not part of the settlement and remain pending.

The Company, with the approval of its Board of Directors, determined that the settlement is in its best interests and that of its shareholders because it halts the substantial expense, uncertainty, inconvenience and distraction of continued litigation. The settlement applies to the Company and all of the individual defendants including several current and former directors and officers of the Company, and involves no admission of fault or wrongdoing by the Company or any individual defendant.

The Stipulation must be approved by the Court before it will become effective. The Court's approval process has several steps. The Stipulation is first presented to the Court for preliminary approval. If the Court grants preliminary approval of the Stipulation, then there will follow a period in which notice of the settlement terms and claims administration process is provided to all potential class members of the settlement. A fairness hearing will be held at which the Court will judge the fairness, reasonableness and adequacy of the settlement, including payment of lead plaintiff counsel's fees and expenses, and at which any objections will be heard. If the Court then grants final approval of the settlement, it will enter an order dismissing the claims in the lawsuit with prejudice. The Court's decision can be appealed. If the settlement becomes effective, the settlement fund, less various costs of administration and plaintiff's costs and attorney's fees, will be distributed to class members who have filed an approved claim.

The Stipulation applies to a class consisting of all persons who purchased the Company's common shares on or after January 23, 2002 and who continued to hold such shares on August 9, 2005 and all persons who purchased the Company's common shares on or after August 10, 2005 who continued to hold such shares as of August 17, 2005. Under the settlement, the Company's common shares will be part of both the proposed fee award to plaintiff's counsel and consideration to be distributed to the class.

The Company's settlement includes $14 million in common shares, with the number of shares distributed in accordance with the Stipulation. If the share price, at the time the Court authorizes distribution is less than $9.60 but equal to or greater than $6.50, the Company will be required to issue the number of shares to maintain the $14 million value as adjusted for plaintiff counsel's fee award. If the share price at the time the Court authorizes distribution is less than $6.50, the Company will be required to issue the number of shares that would be needed to maintain the $14 million value based on a share price of $6.50, as adjusted for counsel fees. However, if the share price falls below $6.50 prior to the Court's final approval, lead plaintiff has the right to terminate the settlement, but the Company will have the option to maintain the settlement by issuing the number of shares to provide for the $14 million value. If after final approval, but before the Court approves the distribution to the class, the share price falls below $7.00 per share, lead plaintiff has the right to demand early issuance of the shares for the benefit of the class. Alternatively, should the share price increase above $9.60, the Stipulation provides for an allocation of the increase such that total value of the securities issued could result in as much as, but not more than $17.7 million.

At the closing share price of $9.00 on October 26, 2007, the Company would be required to issue approximately 1,556,000 common shares to satisfy the $14 million portion of the settlement had the Stipulation been approved and distribution made to the class and its counsel at this time. The Company currently has approximately 18.7 million common shares outstanding. The Company has recorded the $25 million settlement in its fiscal year ending September 30, 2005, which will result in a $14 million pre-tax charge to expense, net of an $11 million recovery from insurers. The $14 million non-cash charge represents the estimated fair value of the common shares to be issued. The Company has recorded a related receivable from its insurers in the amount of $11 million, as well as a liability in the amount of $25 million representing the aggregate value of the securities to be issued by the Company and the cash to be paid by the insurers. The provision for settlement costs will be adjusted to reflect changes in the fair value of the securities until they are issued to plaintiff's counsel and the class as provided in the Stipulation.

"The settlement of the federal securities class action lawsuit is an important step in the Company's continued turnaround," said Jim Fogarty, CEO of AIPC. "We are pleased to move this matter toward final conclusion as we continue to focus on serving our customers and improving our business."

The Company will file a Current Report on Form 8-K with the SEC that contains a copy of the Stipulation of Settlement filed with the Court.

Durum Wheat Market Conditions

As the Company previously noted, the current market outlook for durum wheat, which is a significant component of its overall production costs, has been negatively impacted by a variety of factors that has lead to increasing demands on supplies of U.S. and Canadian durum. The lower than anticipated stocks of durum available to supply European and North African markets has continued to pressure supplies in the U.S. and Canada. Durum production in North American growing regions has not been sufficient to offset this increasing demand. On a global basis, inventory of durum wheat is at its lowest level in recent history. The result has been escalating durum costs for the industry at levels not previously experienced. The Company will continue to seek to offset this cost inflation through price increases and improved efficiencies; however, the potential impact on margins and earnings is currently difficult to predict and dependent on, among other things, the competitive environment in which the Company operates.

Retirement of Debt

The Company also noted that on September 28, 2007, the Company used a portion of its excess liquidity to voluntarily retire $2.5 million of debt under its credit facility. With this payment, gross debt under the credit facility was reduced from $242.5 million to $240.0 million. During fiscal year 2007, the Company reduced its debt under its credit facility by $20.5 million from $260.5 million to $240.0 million.