-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DxDq6rZj0ePj6+HJVtGF0yegsYTg3yDSW9wFA5yBPTPyTB0H8Z81ggxPy0dfeBKv /1lqvBNr5MRCHtL6/dt7bQ== 0000948830-97-000096.txt : 19970410 0000948830-97-000096.hdr.sgml : 19970410 ACCESSION NUMBER: 0000948830-97-000096 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970409 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARMANINO FOODS OF DISTINCTION INC /CO/ CENTRAL INDEX KEY: 0000814339 STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FROZEN & PRESERVED FRUIT, VEG & FOOD SPECIALTIES [2030] IRS NUMBER: 841041418 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18200 FILM NUMBER: 97577207 BUSINESS ADDRESS: STREET 1: 30588 SAN ANTONIO ST CITY: HAYWARD STATE: CA ZIP: 94544 BUSINESS PHONE: 5104419300 MAIL ADDRESS: STREET 1: 30588 SAN ANTONIO STREET CITY: HAYWARD STATE: CA ZIP: 94544 FORMER COMPANY: FORMER CONFORMED NAME: FALCON FUND INC /CO/ DATE OF NAME CHANGE: 19890118 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal Year ended: December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ___________ to ___________ Commission File No. 0-18200 ARMANINO FOODS OF DISTINCTION, INC. (Exact Name of Registrant as Specified in its Charter) Colorado 84-1041418 (State or Other Jurisdiction of (I.R.S. Employer Identi- Incorporation or Organization) fication Number) 30588 San Antonio Street, Hayward, California 94544 (Address of Principal Executive Offices, Including Zip Code) Registrant's telephone number, including area code: (510) 441-9300 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: No Par Value Common Stock Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of March 20, 1997, 11,594,099 Shares of the Registrant's Common Stock were outstanding. The aggregate market value of voting stock of the Registrant held by non-affiliates was approximately $11,268,000. Documents incorporated by reference: Part III is incorporated by reference to the Registrant's Proxy Statement relating to the Annual Meeting of Shareholders to be held May 22, 1997. Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 228,495 of this chapter) is not contained in this and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] PART I ITEM 1. BUSINESS. THE COMPANY Armanino Foods of Distinction, Inc. (the "Company") is engaged in the production and marketing of upscale and innovative food products, including primarily frozen pesto and other Italian-style frozen sauces, frozen stuffed and flat pasta products, frozen focaccia and frozen meatballs. The Company's business began in 1978 as Armanino Frozen Foods, a division of Armanino Marketing Corp., which started producing frozen pesto sauce and eventually developed most of the Company s present line of products. In January 1987, substantially all of the business conducted by Armanino Frozen Foods division was transferred to Armanino Foods of Distinction, Inc., a Delaware corporation ("Armanino-Delaware"). In February 1988, Armanino- Delaware was acquired by the Company in a stock exchange transaction in which Armanino-Delaware became a wholly-owned subsidiary of the Company. In December 1990, Armanino-Delaware was merged into the Company. In May 1995, the Company formed AFDI, Inc., a California corporation, as a wholly-owned subsidiary for the purpose of operating the Company's new Italian quick service restaurants. In February 1997, the Company determined that this concept was not meeting the Company's performance criteria and that it would be more beneficial to concentrate management's time and effort to the Company's ongoing business and Emilia Romagna. The Company determined to discontinue operations of Focaccia Di Genova on February 17, 1997. In May 1996, the Company acquired all of the issued and outstanding shares of Alborough, Inc., dba Emilia Romagna, a wholly owned subsidiary for the purpose of expanding its product line to include highly specialized upscale frozen pasta products for the foodservice and industrial markets. Unless the context otherwise requires, the Company, AFDI, Inc., and Alborough, Inc., are referred to herein together as the "Company." The Company is a Colorado corporation incorporated in October 1986, under the name "Falcon Fund, Inc." for the purpose of creating a corporate vehicle to seek and acquire a business opportunity. Following the acquisition of its present business, the Company changed its name to "Armanino Foods of Distinction, Inc." in November 1988. In April 1990, the Company effected a one for six reverse split of the shares of the Company's Common Stock outstanding and in April 1991, the Company effected a one for fifteen reverse split of the shares of the Company's Common Stock outstanding. All financial and share data in this Prospectus gives retroactive effect to the reverse splits. The Company's offices are presently located at 30588 San Antonio Street, Hayward, California 94544, and its telephone number is (510)441-9300. PRODUCTS The Company's line of products presently includes frozen pesto sauces, frozen stuffed and flat pastas to include value-added specialty frozen Italian pastas, frozen focaccia, and frozen meatballs. These products are marketed through a network of food brokers and sold to retail and food service distributors, club type stores and industrial accounts. Several of these -2- products are sold under separate labels, including the Armanino label, and the Italian Holiday and Pasta Regina labels which services the mass type feeding demands of certain food service customers. The products and the labels they bear are identified as such in each product's category described below. The Company presently markets a line of pesto sauces which are available in four varieties, Basil, Cilantro, Dried Tomato-Garlic and Roasted Red Bell Pepper based sauces under the Armanino label. The basil pesto comes in pack sizes from 4 to 7 oz. containers with 12 packs per case (retail), 30 to 152 oz. containers with 4 to 6 packs per case (food service) and one 640 oz. container (industrial). The Dried Tomato-Garlic is currently available in 30 to 152 oz. containers with 4 to 6 per case (food service) size and one 8-pound container (industrial). The Dried Tomato-Garlic Pesto is also available to the retail customers in 7 oz. containers, with 12 containers per case. The Cilantro Pesto and Roasted Red Bell Pepper are currently only available in the 6/30 oz. containers per case (food service) size. Additionally, during 1996 the Company introduced two other frozen sauces. These are an Alfredo sauce and a Pepperonata sauce, both of which are available in five pound plastic pouches four per case (food service size). The Company's line of frozen stuffed pastas, both uncooked and pre-cooked, includes meat and cheese ravioli; meat, cheese and rainbow tortellini; manicotti and stuffed shells. The ravioli products are packaged in four sizes, 4-pound ziplock bags, 10 per case (club stores), 1- and 2-pound, 12 per case (retail) and 10-pound bulk in plastic bags (food service) under the Armanino label. The Company added a new pack size to this line in the second quarter of 1995 which consists of the ravioli and tortellini products which were made available in a 1-pound bag, 12 bags per case and is sold under the Armanino label. Also during 1995, the Company introduced six of its existing 10-pound frozen stuffed pasta products (Meat & Cheese Ravioli, Meat & Cheese Tortellini, Manicotti and Stuffed Shells) under the Italian Holiday Brand label in order to satisfy a specific sector of the Company's food service customers. During 1996, the Company introduced four of its existing ten pound frozen stuffed pastas, namely raviolis and tortellinis (meat and cheese varieties of each) under the Pasta Regina label in order to satisfy certain customer needs. The Company also introduced two new ravioli products, vegetable and turkey, and six new gnocchi products, namely Potato, Red Bell Pepper, Black Pepper, Basil Pesto, Dried Tomato & Garlic and Chestnut. The ravioli products are available in 10-pound packs for its food service customers. The gnocchi products are available in 5-pound plastic bags, two per case to its foodservice customers. As a result of its acquisition of Emilia Romagna, the Company's new line of frozen pastas, under the Armanino label, were made available in January 1997. They are as follows: A. Four varieties of ravioli: seafood, turkey half-moon, mushroom, and tri-color raviolini. They are available in 10 pound packs and sold to foodservice customers. B. Tri-color tortellini, capelletti style, 10 pound - foodservice only. C. Flat pastas (strands) consisting of Fettucini in four flavors - Red Bell Pepper, Black Pepper, Spinach and Plain; Angel Hair; Linguine - -3- Plain, Tri-color and Squid Ink. These products are available in five pound bags two per case, to its foodservice customers. D. Pasta sheets (used for Lasagna, etc.) are available in single five pound boxes and sold to foodservice customers. The Company's line of frozen meatballs presently includes beef meatballs and turkey, beef, pesto meatballs. The beef meatball line includes two sizes, regular and cocktail size. The cocktail size is packaged in 5-pound bags, 8 bags per case (club stores) and regular size in 3-pound ziplock bags, 12 per case (retail) under the Armanino label. The precooked turkey, beef, and pesto meatball line includes three sizes ranging from .5 ounce to 1.5 ounces. The 1/2 ounce is available in 1-pound bags under the Armanino label (retail), 1/2 ounce size in 10-pound plastic bags under the Armanino label (food service-general) and .5 ounce to 1.5 ounce size, under the Italian Holiday label (food service-specific). The Company's line of frozen foccacia presently includes two varieties, plan and plain topped with green and black olives. The focaccia is available in 1/4 sheets (1/4 sheet is approximately eight inches by twelve inches), precooked frozen and packaged in plastic bags, 8-1/4 sheets per case and sold to foodservice customers. NEW PRODUCTS The Company had intended to make sauced polenta products available during 1996. However, upon further evaluation, the Company determined to conduct additional market analysis to determine potential sales and feasibility to proceed with this product. With respect to lasagna products, the Company plans to introduce four varieties during the third quarter of 1997. The lasagna will be available in six pound aluminum trays four per case, for its foodservice customers. During the fourth quarter of 1997, the Company plans to introduce 2.5 pound microwaveable trays for its retail and club store customers. During 1997, the Company intends to add specialty filled pastas (supplied by Emilia Romagna, under the Armanino label) to its line of products. They will be available in a ten pound pack to its foodservice customers. During the third quarter of 1997, the Company plans to introduce one new pesto sauce, which will be available in 30 ounce containers, six per case, to its foodservice customers. Additionally, the Company intends to introduce two new cooked sauces, which will be available in five pound packs, two per case to its foodservice customers. All three new sauces are currently in research and development. The Company believes its products are distinguishable from those of most commercial food manufacturers. There are no additives, preservatives, or artificial flavoring in any of the products currently manufactured by or for the Company. MANUFACTURING OPERATIONS Beginning in January, 1991, the Company manufactured frozen pesto sauce at its facilities in South San Francisco, California. In August 1994, the operation was transferred to the Company's new facilities in Hayward, -4- California. Prior to 1991, an independent company manufactured and packaged this product for the Company. The Company made the decision to begin its own manufacturing operations based on its need to gain control of its production costs, production quality and its production schedule in order to better meet the needs of its customers. The Company is presently producing its pesto product at an annual rate of approximately 2.9 million pounds. The Company's current equipment has the capacity to process approximately 3.0 to 3.5 million pounds, depending on pack size, of product annually on a single shift basis. The Company believes that through modification of this equipment, production capacity can be expanded, if needed, or an additional shift could be used to increase production. In addition, the Company is always in the process of researching and analyzing new equipment, equipment modifications, new accessories, etc., in an effort to increase its production capacity in lieu of extra shifts and to increase production efficiency. In September 1994, the Company began producing its line of ravioli products. The current capacity of this line is approximately 2 million pounds per year, per shift, utilizing the Company's existing equipment. The Company believes that through modification of this equipment, production capacity can be expanded, if needed, or an additional shift could be used to increase production. In July 1995, the Company began to test run production of focaccia, an Italian specialty flat bread. In August 1996, the Company determined to phase out the Bakery Production Department in order to accommodate expansion of the Company's pasta operation. This product is now baked for the Company under an agreement with Maggiora Bakery in Richmond, California. The Company's specialty filled pasta products are manufactured by Alborough, Inc., d/b/a Emilia Romagna ("Emilia Romagna"), which is now a subsidiary of the Company, located in Hayward, California. These products are packaged under the Armanino and Emilia Romagna labels. The Company's line of frozen meatballs is manufactured by Pan Ready (formerly Spun Steak) of South San Francisco, California. The Company has an agreement with Pan Ready pursuant to which that company manufactures these products based on the Company's proprietary formulas at a set price, as well as Pan Ready's products on a "private label" basis at a set price. Pan Ready has agreed to keep the Company's proprietary recipes confidential. The Company's line of tortellini products is manufactured by the San Francisco Pasta Company ("S.F. Pasta") of Hayward, California. The Company has an agreement with S.F. Pasta pursuant to which that company manufactures and packages these products based on the Company's proprietary formulas at a set price. At present, the Company purchases this product based on S.F. Pasta's proprietary formulas, on a private label basis at a set price. S.F. Pasta has agreed to keep the Company's recipes confidential. The Company intends to manufacture and package these products in-house beginning in the third quarter of 1997. The Company entered into a second agreement with San Francisco Pasta pursuant to which the Company has agreed to perform blanching and packing services to San Francisco Pasta, at a set price. The Company's line of cooked sauces, namely Alfredo and Pepperonata, were being manufactured and packaged for test market studies only by Home Maid -5- Ravioli Company ("Home Maid") of San Mateo, California. The Company intended to bring the manufacturing of these items in-house during 1996. However, until the Company is able to begin such production, these sauces will be manufactured for full production runs by another company, and the Company will continue to utilize Home Maid for purposes of research and development of cooked sauces, again until such time as the entire process can be brought in- house. The Company has entered into an agreement with Home Maid pursuant to which Home Maid has agreed to manufacture and package these sauce items based upon the Company's proprietary formulas at a set price. Home Maid has agreed to keep the Company's recipes confidential. The Company's line of cooked sauces, namely the Alfredo and Pepperonata sauces, are currently being manufactured and packaged by H & M Food Systems of Fort Worth, Texas. The Company has an agreement with H & M Food Systems pursuant to which that company will manufacture and package these products based on the Company's proprietary formulas at a set price. H & M Food Systems has agreed to keep the Company's recipes confidential. The Company's line of certain frozen stuffed pasta items are manufactured by Flagship Foods of San Jose, California. The Company has an agreement with Flagship Foods pursuant to which that company will manufacture and package these products based on the Company's proprietary formulas at a set price. Flagship Foods has agreed to keep the Company's recipes confidential. In late 1996 and early 1997, the Company has been expanding its manufacturing operations to include multi-purpose pack equipment for lasagna, cannelloni, manicotti - pasta sheets and specialty pastas (such as tortellini). Kettles have also been purchased to manufacture sauces for this line and a refrigeration system for quick cooling of product is being installed. To complement this line, a packaging line has also been purchased from a supplier in Europe which can be utilized for a variety of different sizes of trays and lids or film. The Company anticipates that construction and equipment installation will be completed during the second quarter of 1997. The Company plans to move Emilia Romagna's production to the Company's facilities during the second quarter of 1997. The Company anticipates several areas of savings by the consolidation of the two production operations. Some of the synergies the Company anticipates being improved include: consolidation of purchasing; improved and more stringent quality control procedures; reduction of overhead; consolidation of equipment usage; cross training production line staff to reduce overtime and the need for temporary workers; research and development control; managerial consolidation; and the ability to use one USDA number in labeling products. The Company is currently looking to sublease Emilia Romagna's leased premises on Mack Road in Hayward, California. The landlord has indicated that he would agree to cancel the lease once a new tenant is approved. All products that are currently manufactured at Emilia Romagna will continue to be manufactured at Armanino Foods with greater equipment and staff support (i.e., large freezers, cooler, quality control, etc.). All products manufactured by outside sources are produced on a "co-pack" or "completed-cost" basis, except for the cost of branded packaging and labeling which are borne by the Company. The manufacturer makes all arrangements to purchase and inspect raw materials, schedule actual production, and initiate movement of all finished goods to a warehouse designated by the Company. -6- Quality assurance is monitored continually by the manufacturer during processing for temperature, color, flavor, consistency, net weight and integrity of packaging. Periodic inspections are made by the Company in processing and sanitation compliance. With regard to the production of frozen pesto sauces and ravioli products at the Company's own facilities, the Company is responsible for the supervision of the above-mentioned quality assurance measures and has employed its own in-house quality control person to assure that the Company's processing and sanitation compliances are met. The Company also performs process analysis as well as microbiological and nutritional analysis of all its in-house production, and uses a Hayward, California laboratory firm to assist in this testing. All raw materials are purchased from approved suppliers by manufacturers on contract where specific requirements on quality, size, and packing medium must be met, or on a spot market basis where prior specifications have been met or qualified by testing. DISTRIBUTION AND MARKETING The Company's products are marketed primarily through a network of food brokers and sold to retail, food service, club-type stores, and industrial accounts. For the year ended December 31, 1996, two independent brokers, Mass Marketing Services, Inc. and Kelley-Clarke, Inc. (previously Ibbotson, Berri and DeNola), accounted for approximately 34% and 12%, respectively, of the sales of the Company. For the year ended December 31, 1995, two independent brokers, Mass Marketing Services, Inc. and Ibbotson, Berri and DeNola, accounted for approximately 42% and 14%, respectively, of the sales of the Company. For the year ended December 31, 1994, two independent brokers, Mass Marketing Services, Inc. and Ibbotson, Berri and DeNola, accounted for approximately 43% and 15%, respectively, of the sales of the Company. The loss of brokers who represent a significant amount of sales could have a materially adverse effect on the business of the Company. However, the Company believes that once brokers have established accounts with customers such as supermarket chains, the termination of a broker will not generally affect sales to such customers when another broker serving the area is available, or the Company is able to take over marketing responsibilities. QUICK SERVICE RESTAURANTS In 1995, the Company developed a concept for quick service Italian restaurants. In June 1996, the Company opened its first restaurant in Burlingame, California under the name Focaccia di Genova which specialized in manufacturing and selling focaccia bread as a specialty item. The restaurant also served Italian style salads, sandwiches and soups. In addition, LaVazza brand coffee and coffee-related items were merchandised pursuant to a strategic alliance with Lavazza Premium Coffees Corporation, an international coffee company. It was the Company's original intention to open restaurants both in Burlingame, California and Mountain View, California on a test basis. After operating the Burlingame restaurant for several months, and analyzing the investment required to open an additional restaurant and fund its ongoing operations, the Company decided to abandon the Mountain View location and -7- focus on determining whether the Burlingame location would meet the Company's performance criteria. In February 1997, after analyzing the restaurant's performance, and the allocation of management's time and efforts into other areas of the Company's business which management determined to be more beneficial for the Company, the Company decided to abandon the restaurant concept. ACQUISITION OF EMILIA ROMAGNA FOODS In May 1996, the Company acquired all of the issued and outstanding shares of Alborough, Inc. which conducts business under the trade name "Emilia Romagna Foods". Emilia Romagna Foods is a manufacturer of highly specialized upscale pasta products for the industrial and food service markets which utilizes state-of-the-art manufacturing equipment and techniques. The total cost of the acquisition was $738,779 including professional fees paid in relation to the acquisition. Additionally, the terms of the agreement include an "earn-out" formula which provides for payments to Alborough shareholders over a three year period based on certain performance criteria established. The purchase price could increase significantly depending upon Alborough, Inc. meeting certain earnings performance criteria over the next three years. The agreement between the parties provides that additional payments may be earned by Alborough, Inc. shareholders based on a percentage of gross margin attributable to sales made to specified customers. The sales must be made during a specified period of time and subject to certain minimum sales levels being achieved. At the present time, it does not appear that the Company will be obligated to make any additional purchase price payments for the first twelve months of the three-year period. Emilia Romagna's current product line consists of the three categories, they being frozen filled pastas (e.g. seafood ravioli, lobster ravioli, tri-color cappelletti, smoked chicken ravioli) frozen flat pastas and gnochi. The equipment used to manufacture these items are European made with small capacities to achieve flexibility and supply small volume custom orders. Approximately 300 different products have been produced over the years at Emilia Romagna. Capacities of the equipment varies depending on the items produced (per orders) on a given day. One other production operation performed at Emilia Romagna is portion packing of semi-dried pasta. RAW MATERIALS The Company primarily uses basil, vegetables, olive oil, canola oil, eggs, cheeses, cooked meat, spinach, bread crumbs, flour, cilantro, dried tomatoes, garlic, red and green bell peppers, tomato puree, herbs and spices in packaging its products. There are ample supplies of these raw materials and the Company anticipates no raw material supply shortages in the foreseeable future. COMPETITION The Company faces substantial competition in its business. Because many of the Company's products are sold frozen and do not contain artificial preservatives, they have a relatively shorter shelf life and are more expensive than many competing dried products, and products packed in cans or jars. Although these types of competing products are marketed by some companies which have significantly greater financial and other resources than those of the Company, including advertising budgets, the Company markets its products on the basis of quality and natural ingredients rather than price. -8- With respect to other frozen food manufacturers, the Company believes that its products are highly competitive with other frozen products in pricing and quality. However, the Company faces stiff competition in the area of on- going promotional support, and the Company has found it difficult to convince new accounts to change their established suppliers. The Company may also face competition from future entrants into the industry. There is no assurance that the Company's products will meet with public acceptance in new markets. The Company believes that the Company has achieved name recognition in the West Coast Region. EMPLOYEES As of March 31, 1997, the Company employed 37 persons on a full-time basis and 12 on a part-time basis. The Company also presently uses one to two persons on a full-time basis, as needed, from a temporary employment service. PATENTS AND TRADEMARKS Although the Company's formulas and recipes are not subject to patent protection, the Company treats these as proprietary and uses confidentiality agreements as appropriate in an attempt to protect such formulas and recipes. To date, the Company has not encountered any difficulties in keeping its formulas and recipes confidential, and has not been required to enforce its confidentiality agreements. The Company uses the name "Armanino" as trademark for its products. However, no trademark application has been filed for Armanino. In November 1995, the Company received trademark protection for the mark Italian Holiday from the U.S. Patent and Trademark office. This trademark is used by the Company on certain of its frozen stuffed pasta products and meatball products. In December 1996, the Company filed a trademark application with the U.S. Patent & Trademark office to register the name Pasta Regina as a trademark. The company uses this mark on certain of its flat and filled pastas, including ravioli and tortellini sold to food service industrial and retail accounts. As a result of its acquisition of Emilia Romagna, the Company uses the "Emilia Romagna" trademark registered with the State of California. This trademark is used by the Company on certain of its frozen pasta and pasta products. GOVERNMENT REGULATION The Company's current manufacturing operations are regulated by the United States Department of Agriculture ("USDA") as well as state and local authorities. The Company is subject to various regulations with respect to cleanliness, maintenance of food production equipment, food handling and storage, and is subject to on-site inspections. The Company, as a distributor of food items, is also subject to regulation by government agencies, including, specifically, the USDA. Under various statues and regulations, the regulatory agencies prescribe requirements and establish standards for quality, purity and labeling. The finding of a failure to comply with one or more regulatory requirements can result in a variety of sanctions, including stopping production, monetary fines and/or the compulsory withdrawal of products from the supermarket shelves. However, the Company believes that in the event any such violations were found to exist, the Company could seek compensation from the manufacturer of the cited product on products not manufactured by the Company since the manufacturer is responsible for processing, manufacturing, packaging and labeling such products. Neverthe -9- less, there can be no assurance that the Company would be successful in recovering such compensation. ITEM 2. PROPERTIES. The Company leases approximately 24,375 square feet of office, production and warehouse space located at 30588 San Antonio Street, Hayward, California, 94544. The base rent is $7,207 per month through July 31, 1996. The monthly rental will increase effective on August 1, 1998, August 1, 2000 and August 1, 2002 based upon the increase in the Consumer Price Index on those dates with a minimum of 3.5% cumulative annual increase and a maximum of a 7% cumulative annual increase. The lease expires on August 9, 2003 with an option to extend the term for two periods of five years each. In addition to the base rent the Company is required to pay all utilities, expenses, maintain insurance on the property and pay any increases in real estate taxes on the property. In 1995, the Company entered into a lease of approximately 2,000 square feet of retail space located at 1420 Burlingame Avenue in Burlingame, California, as the location for its first quick service restaurant. The base rent under the lease was $5,000 per month through October 31, 1996. In March 1997, a Lease Termination Agreement was entered into relieving the Company of all of the obligations under this lease with the only consideration being a cost of three months rent, two months being paid and for the third month rent the security deposit was forfeited in lieu of cash payment. In 1996, the Company entered into a lease for a second restaurant location which consists of approximately 2200 square feet located in the San Antonio Shopping Center, 2550 West El Camino Real, Mountain View, California. The base rent was $4,260 per month through October 31, 1996. In March 1997, a Lease Termination Agreement was entered into which relieved the Company of all of its obligations under this lease with the only consideration being that the Company paid rent for the month of February, forfeited the security deposit for the month of March 1997, and paid one-week's rent for the month of April 1997 upon the Lease Termination Agreement being executed. As a result of the acquisition of Alborough, Inc., dba Emilia Romagna, the Company assumed all lease obligations on a manufacturing facility which consists of approximately 7,320 square feet located at 20275 Mack Road in Hayward, California. The base rent is currently $3,899 per month. The lease provides for annual increases based on changes in the CPI, with a minimum increase of 3% and a maximum increase of 7% per year. The lease is to expire on August 31, 1998. In addition to the base rent, the Company is required to pay its pro rata share of property taxes, insurance and common area expenses as well as to pay directly all utility expenses directly attributable to the space and to maintain normal and customary insurance coverages. ITEM 3. LEGAL PROCEEDINGS. The Company is not a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of the Company's shareholders during the fourth quarter of the year ended December 31, 1996. -10- PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. PRINCIPAL MARKET OR MARKETS. The Company's Common Stock is traded in the over-the-counter market and, since April 27, 1990, has been traded on the NASDAQ Small-Cap Market under the symbol "ARMF". The following table sets forth the closing high and low trading prices of the Common Stock for the periods indicated, as reported by NASDAQ. QUARTER ENDED HIGH LOW March 31, 1995 $1.53125 $0.96875 June 30, 1995 $1.625 $1.21875 September 30, 1995 $1.65625 $1.3125 December 31, 1995 $2.5625 $1.40625 March 31, 1996 $2.6875 $1.625 June 30, 1996 $2.3125 $1.50 September 30, 1996 $1.875 $1.375 December 31, 1996 $1.875 $1.15625 APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of holders of record of the Company's no par value common stock at March 19, 1997, was 3,435. DIVIDENDS. Holders of common stock are entitled to receive such dividends as may be declared by the Company's Board of Directors. No dividends have been paid with respect to the Company's common stock and no dividends are anticipated to be paid in the foreseeable future. PRIVATE SALES OF SECURITIES. During the year ended December 31, 1996, the Company sold shares of its Common Stock which were not registered under the Securities Act of 1933, as amended, as follows: (a) In October 1996, the Company issued 10,000 shares of its Common Stock to Robert H. Anderson, an Executive Officer of the Company, in exchange for services valued at $11,180. (b) In December 1996, the Company issued 20,000 shares of its Common Stock to Anthony Scafine, a consultant to the Company, in exchange for services valued at $25,610. In connection with these issuances, the Company relied on Section 4(2) of the Securities Act of 1933, as amended. The shares were offered for investment only to sophisticated investors and not for the purpose of resale or distribution, and the transfer thereof was appropriately restricted by the Company. ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth certain selected financial data with respect to the Company, and is qualified in its entirety by reference to the financial statements and notes thereto filed herewith: -11- BALANCE SHEET DATA: At December 31, 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- Total Assets $11,926,101 $9,054,289 $8,047,228 $7,129,575 $4,754,400 Long-Term Debt 45,850 71,599 95,120 -0- -0- Cash Dividends Per Share -0- -0- -0- -0- -0- STATEMENT OF OPERATIONS DATA: For the Years Ended December 31, 1996 1995 1994 1993 1992 ----------- ----------- ----------- ---------- ---------- Net Sales $15,305,029 $13,504,429 $10,451,956 $8,719,939 $6,559,636 Net Income From Con- tinuing Operations $ 1,055,122 $ 1,092,740 $ 470,252 $ 343,997 $ 279,434 Net Income From Con- tinuing Operations Per Common Share $.09 $.10 $.05 $.03 $.03 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995 Total net sales for the year ended December 31, 1996, were $15,305,029 as compared to $13,504,429 for the year ended December 31, 1995. The 13% increase included strong increases leading to record sales in both the pesto and meatball product lines. Additionally, sales of new specialty pastas being manufactured by Alborough, Inc. (subsidiary acquired during year) contributed to this increase. The pesto product line showed the strongest gains in the foodservice area. Continuing expansion of the customer base in the East Coast market and a new distributor in the Pacific Rim market facilitated this growth. The meatball product line had strong increases in sales in both the retail and club store area. The Company continued to support these sales through its promotional programs. Cost of goods sold as a percentage of sales increased from 65.6% for the year ended December 31, 1995, to 69.2% for the year ended December 31, 1996. This increase is primarily due to the change in the Company's overall product mix. The change in the product mix was partially due to the acquisition of a new subsidiary (Alborough, Inc.) and the shift in the mix of the Company's original products. The pasta products of this subsidiary currently have lower margins than that of the pasta products the Company was previously manufacturing. Additionally, higher meatball sales and lower pasta sales from the Company's original product line shifted the product mix toward the lower margin products. -12- Operating expenses as a percentage of net sales were 20.6% for the year ended December 31, 1996, compared to 22.5% for the year ended December 31, 1995. The decrease in this percentage is primarily attributable to higher sales. The dollar amount of operating expenses increased to $3,155,091 for 1996 compared to $3,043,082 for 1995. The increase in the dollar amount of operating expenses was primarily due to increases in commissions and advertising, demonstrations, promotions and trade allowances, which management believes led to increased sales. These expenses were partially offset by lower salary expense due to the fact that no incentive bonuses were distributed to Officers of the Company for 1996. Interest and other income increased from $134,147 for the year ended December 31, 1995, to $264,835 for the year ended December 31, 1996. This was primarily the result of the receipt of funds in the first quarter of 1996 from warrant exercises, which enabled the Company to earn interest on these additional cash reserves. Net income from continuing operations was $1,055,112 for the year ended December 31, 1996, compared to $1,092,740 for the year ended December 31, 1995. The decrease in net income from continuing operations was a result of losses incurred from the operations of the Alborough, Inc. subsidiary purchased during 1996. The losses incurred by this subsidiary and included in the consolidated net income from continuing operations amounted to approximately $200,000. During the first quarter of 1997, the Company adopted a plan to discontinue the quick service Italian restaurant locations and operations of its AFDI, Inc. subsidiary. The Company anticipates that the business will be disposed of during the second quarter of 1997. The operations of AFDI, Inc. are reported as discontinued operations for the year ended December 31, 1996. Net sales related to AFDI, Inc. for 1996 and 1995 were $125,429 and $0, respectively. These amounts have been reclassified to an estimated loss from operations of AFDI, Inc. in the statement of operations. As a result of these discontinued operations, the Company had net income of $446,967 for the year ended December 31, 1996, as compared to net income of $1,092,740 in the prior year. YEAR ENDED DECEMBER 31, 1995 VS. YEAR ENDED DECEMBER 31, 1994 Total net sales for the year ended December 31,1995, were $13,504,429 as compared to $10,451,956 for the year ended December 31, 1994. The 29% increase in overall sales included strong increases in all three of the Company's main product lines. Pesto sales increased mainly in the foodservice area. Expansion of the customer base to the East Coast market and continuing strength in the West Coast sales facilitated this growth. Strong pasta line sales were evident in retail, club store and foodservice areas. The increases were the result of an improved product being sold for the full year and from increased support through demonstration and promotional programs for the club stores. Meatball sales increased due to a full year of new club store sales and increased support through demonstration programs. The Company is continuing to focus on the introduction of new products to the retail and food service markets, and the expansion of its customer base for its current products. Cost of goods sold as a percentage of net sales decreased from 70% for the year ended December 31, 1994, to 66% for the year ended December 31, 1995. This is primarily due to three factors. Sales increased which in turn improved gross margins as production overhead costs were absorbed by more -13- output. The product mix during 1995 shifted slightly to more profitable items. Additionally, the efficiencies and control available through in-house production, for the entire year, contributed to the decline in the cost of goods sold as a percentage of net sales. Operating expenses as a percentage of sales for the year ended December 31, 1995, were 22.5% as compared to 23% for the year ended December 31, 1994. The increase in the dollar amount of operating expenses is primarily due to an increase in the advertising, demonstrations, promotions and slotting allowances expense. These programs were used to support sales by increasing customer awareness for the Company's products and expanding the customer base. General and administrative expenses increased primarily due to an increase in research and development expenses. This included research and development of new items for the Company and the development of the focaccia product for the Company's quick service restaurants which are expected to open in 1996. Additionally, general and administrative expenses increased due to an increase in sales travel expenses as they related to developing new areas and expanding the customer base. Interest and other income increased from $82,542 for the year ended December 31, 1994 to $134,147 for the year ended December 31, 1995. This increase was primarily the result of the increase in the interest rates and additional accumulated cash reserves from the net income experienced for the year. Income from continuing operations was $1,092,740 for the year ended December 31, 1995, as compared to $470,252 for the year ended December 31, 1994. The increase for the year is due to higher sales and production improvements. YEAR ENDED DECEMBER 31, 1994 VS. YEAR ENDED DECEMBER 31, 1993 Total net sales for the year ended December 31, 1994, were $10,451,956 as compared to $8,719,939 for the year ended December 31, 1993, a 20% increase. Most of the increase is attributed to increased sales of the Company's pesto products and meatballs. Basil pesto experienced strong growth as a result of the foodservice customer base expansion, both on the West and East Coasts. Dried Tomato Garlic pesto, a new item introduced in 1993, showed strong growth as introduction of this item continued in both the retail and foodservice markets. Ongoing support through demonstration and promotional programs in the club store market facilitated strong growth of both the ravioli and meatball products. Additionally, attendance by the sales personnel at various foodservice shows aided the introduction and acceptance of the Company's products into the foodservice market. The Company continues to focus on the introduction of new products to the retail and foodservice markets, and the expansion of its customer base for its current products. Cost of goods sold as a percentage of sales decreased from 70.8% for the year ended December 31, 1993 to 70.0% for the year ended December 31, 1994. This small decrease resulted from a slight shift of the product mix to more profitable product lines and the commencement of the Company's in-house production of its ravioli line during the last quarter of 1994. The Company continues its efforts to improve efficiencies in the production of its pesto and ravioli product lines. Operating expenses increased from $2,075,717 for the year ended December 31, 1993 to $2,407,736 for the year ended December 31, 1994. As a percentage of net sales, operating expenses decreased from 23.8% for the year ended -14- December 31, 1993 to 23.0% for the year ended December 31, 1994. The increase in the dollar amount of the operating expenses includes increased salaries and advertising, promotional and slotting expenses. Salaries increased during the year due to an increase primarily in the sales force. This increase enabled the Company to continue with the introduction of new products and to expand its customer base. Promotional and demonstration programs continued to support the sales of existing products. Slotting expense facilitated the introduction of the Company's new products into the retail establishments. Interest and other income decreased from $94,329 for the year ended December 31, 1993 to $82,542 for the year ended December 31, 1994. The decrease is mostly attributed to lower cash reserves due to the investment in pasta manufacturing equipment and leasehold improvements for the establishment of the Company's new production facility in Hayward, California. Net income from continuing operations before provision for income taxes increased from $564,447 for the year ended December 31, 1993 to $810,564 for the year ended December 31, 1994. The increase is attributable to the increased sales experienced with a slight shift in the product mix to the Company's higher margin products. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1996, the Company had working capital of $7,130,674, an increase of $1,635,712 from December 31, 1995. The increase is primarily attributable to the net income experienced during the year ended December 31, 1996, and the receipt of net proceeds of $2,567,321 from the exercise of warrants during the year. Current assets included $6,432,107 in cash, U.S. treasury bills and accounts receivable. Management believes that this level of working capital is adequate to meet anticipated needs for liquidity. During the year ended December 31, 1996, cash provided by operating activities of the Company amounted to $896,171. This was primarily a result of the net income from continuing operations, the realization of deferred tax assets, and non-cash depreciation and amortization expense. For the years ended December 31, 1995, and December 31, 1994, the Company's operating activities generated $1,911,187 and $455,831 in cash, respectively. This was primarily a result of the net income from continuing operations experienced during these years. During the year ended December 31, 1996, the Company expended $280,328 on equipment and leasehold improvements for its facility in Hayward, California. In addition, the Company made deposits of $460,000 on future equipment purchases and on leasehold improvements. The Company expects to spend an additional $1,600,000 in the first two quarters of 1997 for the purchase and installation of a new pasta line. This new pasta line will enable the Company to manufacture a wider variety of pasta products. Management intends to finance this out of the Company's cash reserves. As of December 31, 1996, the Company has invested $3,990,912 in U.S. treasury bills. In September 1994, the Company obtained two lines of credit totaling $1,250,000 with Wells Fargo Bank in San Francisco, California. These two lines consisted of a $500,000 business loan line of credit and a $750,000 equipment loan line of credit. The $500,000 business loan provides for interest at prime plus .75% with a maturity date of September 10, 1997. At December 31, 1996, there were no amounts borrowed against this line. The $750,000 equipment loan line of credit provided for interest at prime plus .75% with a conversion date of September 15, 1997, to an installment equipment loan. At December 31, 1996, there were no amounts borrowed against this line. The purpose for obtaining both lines of credit was to afford the Company greater cash liquidity and management of its cash investments. -15- On May 20, 1996, the Company purchased all of the outstanding stock of Alborough, Inc. (dba Emilia Romagna). The total cost of the acquisition was $738,779 including professional fees paid in relation to the acquisition. Additionally, the terms of the agreement include an "earn-out" formula which provides for payments to Alborough shareholders over a three year period based on certain performance criteria established. The purchase price could increase significantly depending upon Alborough, Inc. meeting certain earnings performance criteria over the next three years. The agreement between the parties provides that additional payments may be earned by Alborough, Inc. shareholders based on a percentage of gross margin attributable to sales made to specified customers. The sales must be made during a specified period of time and subject to certain minimum sales levels being achieved. No additional payments were made to Alborough, Inc.'s former shareholders as minimum sales to the specified customers had not been achieved during the year ended December 31, 1996. Except as described above, the Company presently has no other material commitments for capital expenditures. ITEM 8. FINANCIAL STATEMENTS. The financial statements and financial statement schedules are set forth on pages F-1 through F-24 hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL DISCLOSURE. Not applicable. -16- PART III ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by these Items is incorporated herein by reference to the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held May 22, 1997. -17- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. The following financial statements are filed as part of this Report: PAGE Independent Auditors' Report ................................. F-1 Consolidated Balance Sheets as of December 31, 1996 and 1995 ..................................................... F-2 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 ....................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 ......... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 ....................... F-8 Notes to Consolidated Financial Statements ................... F-10 (a) 2. All schedules have been omitted, as the required information is inapplicable or the information is presented in the financial statements or the notes thereto. (a) 3. Exhibits. Exhibit Number Description Location 3 Articles of Incorporation Incorporated by reference to and Bylaws Exhibit No. 3 to Registrant's Form S-18 Registration State- ment (No. 33-14130-D) 3.1 Articles of Amendment Incorporated by reference to to the Articles of Incor- Exhibit No. 3.1 to Registrant's poration Form S-18 Registration State- ment (No. 33-14130-D) 3.2 Articles of Amendment Incorporated by reference to to the Articles of Incor- Exhibit No. 3.3 to Registrant's poration filed on April Form S-1 Registration State- 16, 1991 ment (No. 33-40098) 10.1 1993 Stock Option Plan Incorporated by reference to Exhibit No. 1 to Registrant's Report on Form 10-K for the year ended December 31, 1992 10.2 Employment Agreement with Incorporated by reference to William Armanino Exhibit No. 10.6 to Registrant's Report on Form 10-K for the year ended December 31, 1992 -18- 10.3 Amended and Restated Incorporated by reference to Lease for 30588 San Exhibit No. 10.5 to Registrant's Antonio Street, Hayward Report on Form 10-K for the fiscal California year ended December 31, 1993 10.4 Manufacturing and Pack- Incorporated by reference to aging Agreement with San Exhibit 10.12 to the Registrant's Francisco Pasta Company Report on Form 10-K for the fiscal year ended December 31, 1994 10.5 Business Loan Agreement, Incorporated by reference to Promissory Notes and Exhibit 10.14 to the Registrant's Commercial Security Report on Form 10-K for the fiscal Agreement with Wells Year ended December 31, 1994 Fargo Bank 10.6 Renewal Notice from Wells Incorporated by reference to Fargo, Inc. Exhibit 10.15 to the Registrant's Form S-1 Registration Statement (File No. 33-40098) 10.7 Promissory Note dated Incorporated by reference to May 8, 1995, to Wells Exhibit 10.16 to the Registrant's Fargo Bank Form S-1 Registration Statement (File No. 33-40098) 10.8 Manufacturing and Pack- Incorporated by reference to ing Agreement with Pan Exhibit 10.17 to the Registrant's Ready Foods, Inc. Form S-1 Registration Statement (File No. 33-40098) 10.9 Lease Agreement with San Incorporated by reference to Antonio Center Associates Exhibit 10.18 to the Registrant's For Mountain View, Cali- Form S-1 Registration Statement fornia restaurant facility (File No. 33-40098) 10.10 Lease Agreement with Incorporated by reference to Boardwalk Properties Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the year ended December 1, 1995 10.11 Manufacturing and Packag- Incorporated by reference to ing Agreement with San Exhibit 10.16 to the Registrant's Francisco Pasta, Inc. Annual Report on Form 10-K for the (Second Agreement) year ended December 1, 1995 10.12 Manufacturing and Packag- Incorporated by reference to ing Agreement with Home Exhibit 10.17 to the Registrant's Made Ravioli Company Annual Report on Form 10-K for the year ended December 1, 1995 10.13 Employment Agreement dated Incorporated by reference to January 1, 1996, with Exhibit 10.18 to the Registrant's William J. Armanino Form 10-K for the year ended December 31, 1995 -19- 10.14 1996 Management Incentive Incorporated by reference to Compensation Plan Exhibit 10.19 to the Registrant's William J. Armanino Form 10-K for the year ended December 31, 1995 10.15 Employment Agreement with Filed herewith electronically Robert H. Anderson 21 Subsidiaries of the Filed herewith electronically Registrant 23 Consent of Pritchett, Filed herewith electronically Siler & Hardy, P.C. (b) The Company filed no Reports on Form 8-K during the last quarter of the period covered by this Report. -20- PRITCHETT, SILER & HARDY, P.C. CERTIFIED PUBLIC ACCOUNTANTS 430 East 400 South Salt Lake City, Utah 84111 (801) 328-2727 - FAX (801) 328-1123 INDEPENDENT AUDITORS' REPORT Board of Directors ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY Hayward, California We have audited the accompanying consolidated balance sheets of Armanino Foods of Distinction, Inc. and Subsidiary at December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1996, 1995 and 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements audited by us present fairly, in all material respects, the financial position of Armanino Foods of Distinction, Inc. and Subsidiary as of December 31, 1996 and 1995 and the results of their operations and their cash flows for the years ended December 31, 1996, 1995 and 1994, in conformity with generally accepted accounting principles. /s/ Pritchett, Siler & Hardy, P.C. PRITCHETT, SILER & HARDY, P.C. January 27, 1997, except for Notes 7 and 14 as to which the date is March 4, 1997 F-1 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS December 31, _______________________ 1996 1995 ___________ ___________ CURRENT ASSETS: Cash and cash equivalents $ 742,856 $ 733,985 Treasury bills, held to maturity 3,990,912 2,458,153 Accounts receivable 1,698,339 1,254,869 Inventory 1,066,904 957,800 Prepaid expenses 108,106 68,817 Current deferred tax asset 656,000 857,000 ___________ ___________ Total Current Assets 8,263,117 6,330,624 ___________ ___________ PROPERTY AND EQUIPMENT, net 2,599,936 2,540,997 ___________ ___________ OTHER ASSETS: Deposits 477,610 13,000 Goodwill, net 585,438 - Net assets of discontinued operations - 169,668 ___________ ___________ Total Other Assets 1,063,048 182,668 ___________ ___________ $11,926,101 $9,054,289 ___________ ___________ The accompanying notes are an integral part of these financial statements. F-2 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY December 31, _______________________ 1996 1995 ___________ ___________ CURRENT LIABILITIES: Accounts payable $ 933,235 $ 642,439 Accrued Expenses 66,241 169,702 Note payable 32,073 - Current portion long-term debt 25,749 23,521 Net liabilities of discontinued operations 75,145 - ___________ ___________ Total Current Liabilities 1,132,443 835,662 DEFERRED TAX LIABILITY 126,000 110,000 LONG-TERM DEBT, less current portion 45,850 71,599 ___________ ___________ Total Liabilities 1,304,293 1,017,261 ___________ ___________ STOCKHOLDERS' EQUITY: Preferred stock; no par value, 10,000,000 shares authorized, no shares issued and outstanding - - Common stock; no par value, 40,000,000 shares authorized, 11,584,099 and 10,144,328 shares issued and outstanding at December 31,1996 and 1995 respectively 11,529,739 9,391,926 Additional paid-in-capital 22,311 22,311 Accumulated deficit (930,242) (1,377,209) ___________ __________ Total Stockholders' Equity 10,621,808 8,037,028 ___________ __________ $11,926,101 $9,054,289 ___________ __________ The accompanying notes are an integral part of these financial statements. F-3 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS For the years Ended December 31, ____________________________________ 1996 1995 1994 ____________________________________ SALES, net of returns and discounts $15,305,029 $13,504,429 $10,451,956 COST OF GOODS SOLD 10,594,464 8,866,667 7,311,484 ____________________________________ GROSS PROFIT 4,710,565 4,637,762 3,140,472 ____________________________________ OPERATING EXPENSES: General and administrative 1,017,990 976,340 899,859 Salaries, wages and related payroll taxes 923,739 993,085 833,548 Commissions 400,311 310,244 219,846 Advertising, demonstrations, promotions and trade allowances 813,051 763,413 454,483 ____________________________________ Total Operating Expenses 3,155,091 3,043,082 2,407,736 ____________________________________ INCOME FROM OPERATIONS 1,555,474 1,594,680 732,736 ____________________________________ OTHER INCOME (EXPENSE): Interest expense (7,791) (8,579) (4,714) Interest and other income 264,835 134,147 82,542 Gain (loss) on sale of fixed assets (5,081) (5,924) - ____________________________________ Total Other Income 251,963 119,644 77,828 ____________________________________ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,807,437 1,714,324 810,564 CURRENT TAX EXPENSE 126,911 106,584 22,312 DEFERRED TAX EXPENSE 625,414 515,000 318,000 ____________________________________ INCOME FROM CONTINUING OPERATIONS BEFORE DISCONTINUED OPERATIONS 1,055,112 1,092,740 470,252 DISCONTINUED OPERATIONS: Estimated loss from operations of AFDI, Inc. to be disposed of (net of income taxes of $210,168 at December 31, 1996) (313,550) - - Estimated loss on disposal of AFDI, Inc.(net of income taxes of $197,464 at December 31, 1996) (294,595) - - ___________________________________ LOSS FROM DISCONTINUED OPERATIONS (608,145) - - (Continued) F-4 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Continued) For the years Ended December 31, ________________________________ 1996 1995 1994 ________________________________ NET INCOME $ 446,967 $1,092,740 $470,252 ________________________________ EARNINGS PER COMMON AND EQUIVALENT SHARES: PRIMARY EARNINGS PER SHARE: Income from continuing operations $ .09 $ .10 $ .05 Loss from discontinued operations (.03) - - Loss on disposal of AFDI, Inc. (.02) - - __________________________________ PRIMARY EARNINGS PER SHARE $ .04 $ .10 $ .05 __________________________________ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,683,294 10,497,720 10,085,228 __________________________________ FULLY DILUTED EARNINGS PER SHARE: Income from continuing operations $ N/A $ .09 $ .05 __________________________________ FULLY DILUTED EARNINGS PER SHARE $ N/A $ .09 $ .05 __________________________________ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING N/A 12,296,477 10,097,700 __________________________________ The accompanying notes are an integral part of these financial statements. F-5 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 Common Stock Additional ________________________ Paid-in Accumulated Shares Amount Capital Deficit ___________ __________ _________ ___________ BALANCE,December 31, 1994 10,083,538 $9,337,385 $ 22,311 $(2,469,949) Shares of restricted common stock issued for services rendered at $.774 per share, January, 1995 1,000 774 - - Shares of common stock issued for warrants exercised at $1.50 per share,net of deferred offering cost of $8,031, November - December, 1995 11,290 8,904 - - Shares of common stock issued for options exercised at $.925 per share, November - December, 1995 48,500 44,863 - - Net income for the year ended December 31, 1995 - - - 1,092,740 __________ __________ ________ ___________ BALANCE, December 31, 1995 10,144,328 $9,391,926 $ 22,311 $(1,377,209) Shares of common stock issued for warrants exercised at $1.5 per share net of deferred offering costs of $1,702, January - March, 199 61,712,682 2,567,321 - - Shares of common stock issued for underwriter units exercised at $1.89 per unit, February, 1996 43,124 81,504 - - (Continued) F-6 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (Continued) Common Stock Additional ________________________ Paid-in Accumulated Shares Amount Capital Deficit ___________ __________ _________ ___________ Shares of common stock issued for options exercised at prices ranging from $.925 to $1.281, April - June, 1996 50,000 46,250 - - Shares of restricted stock issued for services rendered at $1.12 to $1.28 per share, June - September, 1996 30,000 36,790 - - Shares of common stock repurchased and canceled at $1.50 per share, December, 1996 (396,035) (594,052) - - Net income for the year ended December 31, 1996 - - - 446,967 ___________ ___________ ________ __________ BALANCE, December 31, 1996 11,584,099 $11,529,739 $ 22,311 $ (930,242) ___________ ___________ ________ __________ F-7 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents For the years Ended December 31, _____________________________________ 1996 1995 1994 _____________________________________ Cash Flows from Operating Activities: Net income $ 446,967 $1,092,740 $470,252 _____________________________________ Adjustments to reconcile net income to net cash used by operations: Depreciation and amortization 386,838 332,251 167,802 Non-cash expenses 5,081 5,924 13,802 Changes in assets and liabilities: (Increase) decrease in accounts receivable (443,470) 329,200 (905,407) (Increase) decrease in inventory (109,104) (22,652) 51,822 (Increase) decrease in prepaid expenses (39,289) 16,602 22,567 Change in deferred tax assets / liability 217,000 515,000 318,000 (Increase) decrease in accounts payable and accrued expenses 187,335 (228,734) 358,405 (Increase) decrease in net assets from discontinued operations 169,668 (129,144) - Increase (decrease) in net liabilities of discontinued operations 75,145 - (41,412) _____________________________________ Total Adjustments 449,204 818,447 (14,421) _____________________________________ Net Cash Provided by Operating Activities 896,171 1,911,187 455,831 _____________________________________ Cash Flows from Investing Activities: Purchases of property and equipment (429,158) (397,501) (2,091,731) Proceeds from sale of property and equipment 2,800 1,600 - (Increase) decrease in deposits (464,610) 8,550 370,760 Purchase of US treasury bills, net (1,532,759) (999,392) (1,458,761) Goodwill in purchase of subsidiary (609,938) - - _____________________________________ Net Cash Used by Investing Activities (3,033,665) (1,386,743) (3,179,732) _____________________________________ (Continued) F-8 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (Continued) For the years Ended December 31, _______________________________________ 1996 1995 1994 _______________________________________ Cash Flows from Financing Activities: Proceeds from borrowing on line of credit - 323,000 - Payments on line of credit - (323,000) - Proceeds from notes payable 72,426 - - Payments on note payable (40,353) - - Payments on capital lease obligations (23,521) (21,486) (8,394) Proceeds from common stock Issuances 2,731,865 54,541 - Purchase of treasury stock (594,052) - - _______________________________________ Net Cash Provided (Used) by Financing Activities 2,146,365 33,055 (8,394) _______________________________________ Net Increase (Decrease) in Cash and Cash Equivalents 8,871 557,499 (2,732,295) Cash and Cash Equivalents at Beginning of Period 733,985 176,486 2,908,781 _______________________________________ Cash and Cash Equivalents at End of Period $ 742,856 $ 733,985 $ 176,486 ___________________________________________ Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ 7,791 $ 9,714 $ 4,714 Income taxes $ 201,864 $ 44,632 $ 22,060 Supplemental Disclosures of Non-Cash Investing and Financing Activities: For the year ended December 31, 1996: The Company issued a total of 30,000 shares of restricted common stock in exchange for services rendered at $36,790 For the year ended December 31, 1995: The Company issued a total of 1,000 shares of stock in exchange for services rendered valued at $774 For the year ended December 31, 1994: The Company issued a total of 30,000 shares of stock in exchange for services rendered valued at $13,802. The Company purchased equipment through a capital lease obligation with an equipment cost of $125,000. The accompanying notes are an integral part of this financial statement. F-9 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS AND BASIS OF PRESENTATION - The consolidated financial statements include the accounts of Armanino Foods of Distinction, Inc. [Parent], which is engaged in the production and marketing of upscale and innovative food products, including primarily frozen pesto sauces, frozen pasta products, frozen meatballs and focaccia, and its wholly-owned subsidiaries Alborough Inc. dba Emilia Romagna [Subsidiary] which produces and distributes pasta products for the industrial and food service markets, and AFDI, Inc. [Subsidiary] incorporated in May 1995, which operated quick service Italian restaurants selling Italian-style products, including some of those produced by the Parent. CONSOLIDATION - All significant intercompany transactions between Parent and Subsidiaries have been eliminated in consolidation. CASH AND CASH EQUIVALENTS - For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company had $592,298 and $69,292 in excess of federally insured amounts in its bank accounts at December 31, 1996 and 1995, respectively. TREASURY BILLS - The Company accounts for investments in debt and equity securities in accordance with Statement of Financial Accounting Standard (SFAS) 115, "Accounting for Certain Investments in Debt and Equity Securities,". Under SFAS 115 the Company's treasury bills (debt securities) have been classified as held-to-maturity and are recorded at amortized cost. Held-to-maturity securities represent those securities that the Company has both the positive intent and ability to hold until maturity. ACCOUNTS RECEIVABLE - Accounts receivable consist of trade receivables arising in the normal course of business. Management believes all amounts are fully collectible and thus no allowance for doubtful accounts has been established. Amounts written off for the years presented are insignificant for disclosure. INVENTORY - Inventory is carried at the lower of cost or market, as determined on the first-in, first-out method. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized, upon being placed in service. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed for financial statement purposes on a straight-line basis over the estimated useful lives of the assets which range from three to fifteen years. For federal income tax purposes, depreciation is computed under the modified accelerated cost recovery system. EARNINGS PER SHARE - The computation of primary and fully diluted earnings per shares is based on the weighted average number of outstanding common shares during the period plus, when their effect is dilutive, additional shares assuming the exercise of certain vested and non-vested stock options and warrants, reduced by the number of shares which could be purchased from the proceeds. The fully diluted earnings per share for the year ended December 31, 1996 are not presented as their effect was anti-dilutive. F-10 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued] GOODWILL - Goodwill represents the excess of the cost of purchasing the subsidiary over the fair market value of the assets at the date of acquisition, and is being amortized on the straight-line method over 15 years. Amortization expense charged to operations for 1996 was $24,500. INCOME TAXES - The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." This statement requires an asset and liability approach for accounting for income taxes. ACCOUNTING ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimated. RESEARCH AND DEVELOPMENT COST - The Company expenses the cost of developing new products as incurred as research and product development costs. Included in general and administrative expense at December 31, 1996 and 1995 are $32,443 and $61,547 of research and development costs associated with the development of new products. RECLASSIFICATION - The financial statements presented for the year ended December 31, 1995 and 1994 have been reclassified to conform to the titles and headings used in the presentation of the December 31, 1996 financial statements. NOTE 2 - RELATED PARTY TRANSACTIONS Fees paid to related parties - Amounts paid to related parties are as follows: For the years Ended December 31, _________________________________________ 1996 1995 1994 _________________________________________ Accounting fees paid to a company controlled by a shareholder and a director 20,757 29,399 24,267 Consulting and other fees paid or accrued to individuals who are directors, officers or shareholders of the Company 750 29,100 22,750 AMOUNTS PAYABLE TO RELATED PARTIES - Included in the Company's accounts payable at December 31, 1996 and 1995 are amounts owing to shareholders, officers and directors in the amount of $3,500 and $5,535, respectively. Also at December 31, 1995, there was $15,257 in accrued expenses payable to the president of the Company under a former employment agreement. F-11 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - TREASURY BILLS At December 31, 1996, US treasury bills consisted of the following investments which are carried at their amortized cost: Date Maturity Amortized Market Maturity Acquired Date Cost Value Value ________ _______ __________ __________ __________ 7/2/96 1/9/97 $1,997,493 $1,997,493 $2,000,000 7/25/96 1/23/97 1,993,419 1,993,419 2,000,000 __________ __________ __________ 3,990,912 3,990,912 4,000,000 __________ __________ __________ NOTE 4 - INVENTORY Inventory consists of the following at December 31, 1996 and 1995: 1996 1995 ______________________ Raw materials and supplies $ 275,472 $ 423,560 Finished goods 791,432 534,240 ______________________ $ 1,066,904 $ 957,800 ______________________ NOTE 5 - PROPERTY AND EQUIPMENT Property and equipment (including capitalized leases and the assets and related accumulated depreciation acquired in the purchase of Alborough Inc. [See Note 13]) consists of the following at December 31, 1996 and 1995: 1996 1995 _______________________ Office equipment $ 224,968 $ 165,771 Machinery and equipment 2,096,048 1,749,633 Leasehold improvements 1,389,223 1,230,793 _______________________ 3,710,239 3,146,197 Less Accumulated depreciation and amortization (1,110,303) (599,129) _______________________ $ 2,599,936 $2,547,068 _______________________ Depreciation expense amounted to $362,338, $332,251 and $167,802 for the years ended December 31, 1996, 1995 and 1994, respectively. NOTE 6 - NOTE PAYABLE At December 31, 1996, the Company's subsidiary Alborough, Inc. was obligated to pay a note in the amount of $32,073. The note provides for monthly payments of principle and interest at an annual rate of 10%. The final payment is due June 30, 1997. F-12 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - LEASES CAPITAL LEASES - The Company is the lessee of equipment under a capital lease expiring in 1999. The asset and liability under the capital lease were recorded at the lower of the present value of the minimum lease payments or the fair value of the asset at the time of purchase. The asset is amortized over its related lease term. Amortization expense of $25,000 and $25,000 for the asset under capital lease is included in depreciation expense for 1996 and 1995. Equipment under capital lease obligations is as follows: December 31, ____________________ 1996 1995 ____________________ Equipment $ 125,000 $ 125,000 Less Accumulated amortization (58,333) (33,333) ____________________ $ 66,667 $ 91,667 ____________________ Total future minimum lease payments, executory costs and current portion of capital lease obligations are as follows: Future minimum lease payments for the years ended December 31, Year Ending December 31, Lease Payments 1997 31,200 1998 31,200 1999 18,200 2000 - 2001 - __________ Total future minimum lease payments $ 80,600 Less amounts representing interest and executory costs (9,001) __________ Present value of the future minimum lease payments 71,599 Lease current portion (25,749) __________ Capital lease obligations - long term $ 45,850 __________ OPERATING LEASES - The Company leases its office and production facility under an operating lease expiring in August 2003, with options to extend through August 2013 at fair market rates. During 1996, Emilia Romagna maintained a separate production and office facility. The lease for the facility calls for monthly lease payments of $3,899 and expires in August 1998. F-13 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - LEASES (Continued) During 1995 AFDI, Inc. entered into two lease agreements for quick service Italian restaurant locations. The Mountain View lease expires in October 2000, with options to extend through October 2015 at fair market rates. The Mountain View lease also calls for contingent rental payments of 5% of sales for the location in excess of $1,250,000 per year. The Burlingame lease expires in November 2005 with an option to extend through November 2010 at fair market rates. Subsequent to the year ended December 31, 1996 the Company discontinued the operations of AFDI, Inc. [See Note 12] and terminated the two lease agreements. During September 1994, the Company moved to its new office and production facility. At the time of the move, the Company had a remaining lease commitment on the old office and production facility expiring in September, 1995. The Company subleased the property for the term remaining on the master lease. As a requirement of the lease, the subleasee established a $50,000 irrevocable standby letter of credit in the name of the Company. During September 1995 the lease and the letter of credit expired. During the years ended December 31, 1995 and 1994 the Company did not make any draws against this letter of credit. The future minimum lease payments for non-cancelable operating leases having remaining terms in excess of one year as of December 31, 1996 are as follows: Year ending December 31 Lease Payments 1997 132,284 1998 118,437 1999 88,894 2000 90,112 2001 86,480 Thereafter 139,954 __________ Total Minimum Lease Payments $ 656,161 __________ Lease expense charged to operations was $118,508, $78,070 and $136,501 for the years ended December 31, 1996, 1995 and 1994. The Company received $47,923 and $6,863 in sublease rentals during the year ended December 31, 1995 and 1994, respectively. NOTE 8 - SHORT-TERM NOTES PAYABLE In September 1994, the Company obtained two lines of credit totaling $1,250,000. These two lines consists of a $500,000 business loan and a $750,000 equipment loan, which provide for interest at prime plus .75%. The lines of credit are secured by the Company's accounts receivables, inventory and equipment. The business line matures at September 10, 1997 and had no amounts outstanding as of December 31, 1996. The equipment line has a conversion date of September 15, 1997 to an installment equipment loan. On November 15, 1995 the Company borrowed $323,000 against the line, which amount was repaid as of December 31, 1995. As of December 31, 1996 there were no amounts outstanding. F-14 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - AGREEMENTS AND COMMITMENTS EMPLOYMENT AGREEMENTS - The Company has entered into employment agreements, with the president and other key employees of the Company. The agreements include a base salary, plus stock options [See Note 11]. Additionally, other benefits are provided including participation in the Management Incentive Compensation Plan. The current agreements cover three year periods ending December 31, 1998 and August 25, 1999. MANAGEMENT INCENTIVE COMPENSATION PLAN - During March 1993, the Company created a plan to compensate management personnel who contribute to the financial success of the Company. The plan is to be reviewed and revised annually. The plan funds a pool based on a predetermined level of pretax income from operations. Participants are to be determined by the Board of Directors and must be employed in an eligible position on July 1 and December 31 of the same year. For 1996 the plan was not funded, as pretax earnings from operations did not exceed the predetermined level of $2,300,000. For 1995, and 1994, the plan was funded because pretax earnings from operations not including expenses attributable to acquisition activities exceeded the predetermined levels of $1,700,000, and $899,001, respectively, prior to the accrual of the incentive bonus expense. Management incentive compensation of $74,616, and $56,524 was paid or accrued during 1995, and 1994, respectively. At December 31, 1995 there is a remaining accrued liability under this incentive compensation plan of $47,116. Employee Incentive Compensation Plan - During 1993 the Company approved a plan to compensate non management personnel who contribute to the financial success of the Company. The plan was effective as of January 1, 1993 and is to be reviewed and revised annually. This plan is funded based on a predetermined level of pretax income of the Company's operations and the funds have been set aside for distribution to the Company's employees based on recommendation of management under the guidance of the compensation committee of the board of directors. For 1996 the plan was not funded as pretax earnings from operations did not exceed the predetermined level of $2,150,000. For 1995 and 1994, the plan was funded because pretax earnings from operations not including expenses attributable to acquisition activities exceeded the predetermined levels of $1,400,000, and $899,001, respectively, prior to the accrual of the incentive bonus expenses. Employee incentive compensation of $67,419, and $37,262 was paid or accrued during 1995 and 1994, respectively. At December 31, 1995, there is a remaining accrued liability under this incentive compensation plan of $31,124. F-15 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - AGREEMENTS AND COMMITMENTS [Continued] 401(k) profit sharing plan - The Company has a 401(K) profit sharing plan and trust that covers all non-union employees. Any non-union employees who have completed 1,000 hours of service within twelve consecutive months and have reached age 21 are eligible to participate in the plan. The plan became effective January 1, 1993 and has a plan year of January 1 through December 31. During 1996, 1995 and 1994 contributions to the plan charged to operations were $9,065, $6,837 and $4,599, respectively. MANUFACTURING - Certain of the Company's products are manufactured and packaged on a "co-pack" or "toll-pack" basis by third parties at agreed upon prices. The agreements with the co-packers have terms of one year and allow for periodic price adjustments. These agreements allow for either party to give a two months cancellation notice. SALES - During the year ended December 31, 1994, the Company agreed to issue 30,000 shares of common stock to a distributor in the future provided that the distributor's portion of the Company's annual net sales exceed various levels ranging from $500,000 to $1,500,000. During the years ended December 31, 1996, 1995 and 1994 the distributor's portion of the Company's sales did not exceed the predetermined levels, therefor no shares of common stock were issued under the agreement. NOTE 10 - INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 Accounting for Income taxes [FASB 109]. FASB 109 requires the Company to provide a net deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and tax accounting and any available operating loss or tax credit carryforwards. At December 31, 1996 and 1995, the total of all deferred tax assets was $656,000 and $857,000 and the total of the deferred tax liabilities was $126,000 and $110,000. The amount of and ultimate realization of the benefits from the deferred tax assets for income tax purposes is dependent, in part, upon the tax laws in effect, the Company's future earnings, and other future events, the effects of which cannot be determined. F-16 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - INCOME TAXES [Continued] The components of income tax expense from continuing operations for the years ended December 31, 1996, 1995 and 1994 consist of the following: 1996 1995 1994 __________________________________ Current income tax expense: Federal $ 25,479 $ 37,442 $ 18,920 State 101,432 69,142 3,392 __________________________________ Net tax expense 126,911 106,584 22,312 __________________________________ Deferred tax expense (benefit) arising from: Excess of tax over financial accounting depreciation $ 16,169 $ 54,154 $ 34,851 Carryforward of excess contributions - 5,200 14,691 Use of federal NOL carryforwards 614,946 515,442 248,195 Use of state NOL carryforwards - 67,897 47,142 Federal alternative minimum tax credit (25,479) (37,442) (18,920) State alternative minimum tax credit - (68,342) (2,592) Inventory 263A adjustment (1,771) (360) (5,367) State investment tax credits 21,549 (21,549) - __________________________________ Net deferred tax expense $625,414 $515,000 $318,000 __________________________________ Deferred income tax expense results primarily from the reversal of temporary timing differences between tax and financial statement income. A reconciliation of income tax expense at the federal statutory rate to income tax expense at the company's effective rate is as follows: 1996 1995 1994 __________________________________ Computed tax at the expected statutory rate $614,500 $582,900 $275,600 __________________________________ State and local income taxes, net of federal benefit 110,940 105,226 49,744 Non-deductible expenses 11,792 9,734 7,271 Goodwill amortization 9,832 - - State tax credits 7,237 - - Effect of alternative minimum taxes 2,022 (22,708) 800 Other Items (3,998) (53,568) 6,897 __________________________________ Income tax expense $752,325 $621,584 $340,312 __________________________________ F-17 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - INCOME TAXES [Continued] As of December 31, 1996 the Company has net tax operating loss (NOL) carryforwards available to offset its future income tax liability. The NOL carryforwards have been used to offset deferred taxes for financial reporting purposes. The Company has federal NOL carryforwards of $740,600 that expire in 2006. The temporary differences and carryforwards gave rise to the following deferred tax asset (liability) at December 31, 1996 and 1995: 1996 1995 __________________________ Excess of tax over book accounting depreciation $ (126,000) $ (110,000) Inventory 263A adjustment 7,498 5,727 State alternative minimum tax credits 71,522 71,522 Federal alternative minimum tax credits 93,903 68,424 State Investment Tax Credits - 21,549 Benefit of future losses from discontinued operations 231,277 - Federal NOL carryforwards 251,800 689,778 The alternative minimum tax credits have no date of expiration and are available to offset the Company's future income tax liability. The state investment taxcredits are from the purchase of manufacturing equipment and were offset against state taxes during 1996. As of December 31, 1996 and 1995 the deferred tax asset (liability) consisted of the following: 1996 1995 _________________________ Current deferred tax assets $656,000 $ 857,000 Deferred tax assets (liabilities) (126,000) (110,000) _________________________ $530,000 $ 747,000 _________________________ Management estimates that the Company will generate adequate net profits to offset net operating loss carryforwards prior to the expiration of the net operating loss carryforwards. Consequently, a deferred tax asset valuation allowance has not been accrued. F-18 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - STOCKHOLDERS' EQUITY TREASURY STOCK - During December 1996 the Company purchased 396,035 shares of common stock for $594,053 on the open market to be retired by the Company. During the year ended December 31, 1992, the Company purchased 60,000 shares of common stock for $34,718 on the open market to be retired by the Company. The treasury stock was recorded at the cost of the shares purchased. During 1995, the Company canceled all outstanding shares of treasury stock. The cost of the retired stock was offset against common stock. SECONDARY OFFERING OF THE COMPANY'S UNITS - In September 1991 the Company completed a sale of 1,725,000 units. Each unit sold for $3.15 and consisted of 2 shares of common stock and one common stock purchase warrant. Gross proceeds from the sale of these units amounted to $5,433,750 and offering costs incurred were $913,113 (including $34,878 paid to related parties) for net proceeds of $4,520,637. Each warrant entitled the holder to purchase, at a price of $3.15, subject to adjustment, one share of common stock until September 18, 1993. In February 1993, the board approved lowering the exercise price to $1.50 per warrant. On September 6, 1993, the exercise period of the warrants was extended to September 18, 1995. On July 28, 1995, the exercise period of the warrants was extended to March 18, 1996. At any time during the period the warrants are exercisable, the Company may redeem the warrants at $.05 per warrant upon 45 days prior written notice in the event that the closing bid price of the common stock exceeds $3.75 for 20 of 30 consecutive trading days ending not more than five days prior to the mailing of the notice of redemption. As of December 31, 1996 and 1995, 1,712,682 and 11,290 of the warrants had been exercised with the remaining 1,028 warrants expiring. In connection with the offering, the Company issued to the underwriter and its designees, for $100, an option to purchase from the Company up to 150,000 units. Each unit consists of two shares of common stock and one warrant. The option was exercisable during a four year period commencing September 18, 1992 at an exercise price of $3.78 per unit. The terms of the underwriter's common stock purchase warrants are identical to the warrants described above. As of December 31, 1996, 43,124 shares of common stock and 21,562 warrants had been issued upon the exercise of the option. The option as to the remaining 128,438 units and the 21,562 warrants issued on the exercise of the option expired. COMMON STOCK ISSUANCES - During 1996, the Company issued 30,000 shares of restricted common stock valued at $36,790, in exchange for services rendered. The Company issued 50,000 shares of stock in connection with options exercised, under the 1993 stock option plan. Also during 1996, 1,712,682 warrants and 21,562 underwriter option units were exercised and 1,755,806 shares of common stock were issued. The warrants and underwriters options were issued in the Company's 1991 secondary offering. During 1995, the Company issued 1,000 shares of restricted common stock valued at $744, in exchange for services rendered. The Company issued 48,500 shares of stock in connection with options exercised, under the 1993 stock option plan. Also during 1995, 11,290 warrants were exercised and 11,290 shares of common stock issued. The warrants were issued in the Company's 1991 secondary offering. F-19 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - STOCKHOLDERS' EQUITY [Continued] During 1994, the Company issued 30,000 shares of restricted common stock, in two separate transactions, in exchange for services rendered. The stock was valued at $13,803. The restricted stock issued during the years ended December 31, 1996, 1995 and 1994 were valued at the mean between the closing bid and ask prices for the stock as reported by NASDAQ on the business day immediately preceding the date on which the stock was to be issued, less a discount of 35% attributable to the transferability restrictions of the stock. PREFERRED STOCK - The Company is authorized to issue 10,000,000 shares of no par value preferred stock with such rights and preferences and in such series as determined by the Board of Directors at the time of issuance. No shares are issued or outstanding as of December 31, 1996. STOCK OPTIONS - During the periods presented in the accompanying financial statements the Company has granted options under the 1993 Stock Options Plan (the Plan) and executive and other employment agreements. The Corporation has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans or other agreements. Had compensation cost for the Company's stock option plan and agreements been determined based on the fair value at the grant date for awards in 1995 and 1996 consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: 1996 1995 _____________________ Net Income As reported $446,967 $1,092,740 Proforma $443,278 $1,091,907 Primary earnings per Share As reported $ .04 $ .10 Proforma $ .04 $ .10 Fully Diluted Earnings per Share As reported $ N/A $ .09 Proforma $ N/A $ .09 The fair value of each option granted is estimated on the date granted using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants during the period ended December 31, 1996 and 1995 risk-free interest rates of 6.3% and 6.2% expected dividend yields of zero, expected life of 8.1 and 8.3 years, and expected volatility 48% and 50%. 1993 STOCK OPTION PLAN - During 1993 and later amended in 1995 and 1996, the Board of Directors adopted a Stock Option Plan (the Plan). Under the terms and conditions of the Plan, the board is empowered to grant stock options to employees, officers, directors and consultants of the Company. Additionally, the Board will determine at the time of granting the vesting provisions and whether the options will qualify as Incentive Stock Options under Section 422 of the Internal Revenue Code (Section 422 provides certain tax advantages to the employee recipients). The Plan was approved by the shareholders of the Company at its 1993 annual shareholder meeting. The total number of shares of common stock available under the Plan may not exceed 3,250,000. At December 31, 1996, total options granted under the Plan amounted to 2,041,495. F-20 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - STOCKHOLDERS' EQUITY [Continued] A summary of the status of the options granted under the Company's stock option plan and other agreements at December 31, 1996, 1995 and 1994, and changes during the years then ended is presented below: December 31, 1996 December 31, 1995 December 31, 1994 ________________________________________________________ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ________________________________________________________ Outstanding at beginning of period 2,026,495 $1.22 1,479,995 $1.10 749,995 $1.25 Granted 400,000 $1.88 625,000 $1.50 780,000 $ .93 Exercised (50,000) $ .93 (48,500) $ .93 - - Forfeited (315,000) $1.30 - - - - Expired (20,000) $ .93 (30,000) $ .93 (50,000) $ .75 _______________________________________________________ Outstanding at end of Period 2,041,495 $1.35 2,026,495 $1.23 1,479,995 $1.10 _______________________________________________________ Weighted aver- age fair value of options granted during the year 400,000 $ .05 625,000 $ .04 N/A N/A _______________________________________________________ A summary of the status of the options outstanding under the Company's stock option plans and employment agreements at December 31, 1996 is presented below: Options Outstanding Options Exercisable __________________________________ _______________________ Weighted- Average Weighted- Weighted- Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ________ _________________________________ ________________________ $0.75 (a)200,000 1 year $ .75 200,000 $ .75 $0.93 (b)631,500 8 years $ .93 531,500 $ .93 $1.50 (c)499,995 1 year $1.50 499,995 $1.50 $1.50 (d)200,000 7 years $1.50 55,556 $1.50 $2.00 (e) 50,000 9 years $2.00 23,610 $2.00 $1.87 (f)110,000 4 years $1.87 30,000 $1.87 $1.74 (g)150,000 9 years $1.74 5,000 $1.74 $2.03 (h)100,000 9 years $2.03 20,000 $2.03 $2.10 (I)100,000 9 years $2.10 - - _____ _________________________________ _______________________ 2,041,495 1,365,661 F-21 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - STOCKHOLDERS' EQUITY [Continued] (a)Non-qualified stock options granted to non-employee Directors of the Company, which are exercisable at $.75 per share, have a vesting provision which requires both the participation of the recipient directors and a certain level of earnings. (b)In December 1994, the Board of Directors granted stock options exercisable at $.92 per share to management, employees and directors amounting to 840,000 shares, consisting of 300,000 shares granted as non-statutory options and 540,000 shares granted as incentive stock options. The options contain vesting requirements relating to time and net profits. (c)Non-qualified stock options granted to non-employee Directors of the Company, which are exercisable at $1.50 per share expiring on March 11, 1998. (d)Non-qualified options granted in July 1995, to two directors of the Company. Each director received options to purchase up to 100,000 shares of Common Stock at $1.50 per share, which vest as to one-third of the total number of shares at the end of each year following the date of grant and expire on July 27, 2000 (e)Non-qualified options granted in July 1995, to two directors of the Company. Each director received options to purchase up to 25,000 shares at $2.00 per share which vest as to 1/36th of the total number of shares each month commencing August 1, 1995 and expire on July 27, 2005. (f)Incentive stock options granted in March 1996, to the president of the Company in connection with an employment agreement, 30,000 of which vest upon execution of the agreement and 40,000 which vest on each year ending December 31, 1996, 1997 and 1998 in the event the Company attains certain levels of profitability for the respective years. These options expire March 14, 2001. During 1996, the predetermined level of profitability was not achieved and the 40,000 options were forfeited. (g)Incentive stock options to purchase 150,000 shares of common stock at $1.735 per share granted in September 1996, to the Chief Operating Officer. The options vest as to 5,000 and 20,000 on December 31, 1996 and 1997 and 1/30th of the remaining 125,000 each month commencing January 1, 1997 through June 30, 1999, with all options expiring on September 11, 2006. (h)Incentive stock options to purchase 100,000 shares of common stock at $2.03 per share granted in December 1995, to the Director of Sales and Marketing Company in connection with an employment agreement. The options vest as to one-fifth of the total number of shares as of each December 31, 1996 through 2000, and expire on December 8, 2005. (i)During May 1996, the Board on Directors granted incentive stock options to the Assistant Vice President of Productions to purchase 100,000 shares of the common stock at $2.10 per share. Subsequent to the year ended December 31, 1996, the Assistant Vice President of Productions was no longer employed, therefor the options were forfeited. F-22 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - STOCKHOLDERS' EQUITY [Continued] Non-qualified stock options to purchase 275,000 shares of common stock at $1.22 per share granted in March 1995, to a consultant in connection with the Company's new Italian quick service restaurant concept. During 1996 the options were forfeited as the consultant resigned. NOTE 12 - SIGNIFICANT CUSTOMERS The Company sells its products through a network of independent food brokers who are paid commissions ranging from 3% to 5% of sales depending on products sold and selling price. A significant percentage of the Company's total sales is sold through 2 or fewer brokers. The following table lists, the total sales from continuing operations through brokers that accounted for 10% or more of total sales: December 31, ______________________________________ 1996 1995 1994 ______________________________________ Broker A $ 5,191,525 $5,731,106 $ 4,508,816 Broker B 1,851,824 1,852,410 1,558,529 NOTE 13 - ACQUISITION OF SUBSIDIARY On May 20, 1996, the Company acquired all of the outstanding common stock of Alborough, Inc., (dba Emilia Romagna), in a business combination accounted for as a purchase. Alborough, Inc. is primarily engaged in the manufacturing of gourmet Italian foods. The results of operations of Alborough, Inc. is included in the accompanying financial statements since the date of acquisition. The total cost of the acquisition was $738,779, which exceeded the fair market value of the net assets of Alborough, Inc. by $609,938. The excess is recorded as goodwill and is being amortized over 15 years. The purchase price could increase significantly depending upon Alborough, Inc. meeting certain earnings performance criteria over the next 3 years. As of December 31, 1996 the purchase price had not increased as the earnings performance criteria had not been attained. The agreement between the parties provides that additional payments may be earned by Alborough, Inc.'s previous shareholders based on a percentage of gross margin attributable to sales made to specified customers. The sales must be made during a specified period of time and subject to certain minimum sales levels being achieved. No additional payments were made to Alborough, Inc. former shareholders as minimum sales to the specified customers had not been achieved during the year ended December 31, 1996. NOTE 14 - DISCONTINUED OPERATIONS During the first quarter of 1997 the Company adopted a plan to discontinue the quick service Italian restaurant locations and operations of AFDI, Inc. The Company anticipates that the business will be disposed of during the second quarter of 1997. AFDI, Inc. is reported as a discontinued operation for the year ended December 31, 1996. Net sales related to AFDI, Inc. for 1996 and 1995 were $125,429 and $0 respectively. These amounts have been reclassified to estimated loss from operations of AFDI, Inc. in the accompanying statement of operations. F-23 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - DISCONTINUED OPERATIONS [Continued] The following is a condensed proforma statement of operations that reflects what the presentation would have been for the years ended December 31, 1996 and 1995 without the reclassifications required by "discontinued operations" accounting principles: 1996 1995 ___________________________ Net Sales $15,430,458 $13,504,429 Cost of goods sold (10,691,428) (8,866,667) Other operating expenses (3,623,401) (3,043,680) Other income (expense) 251,967 119,644 Provision for taxes (575,817) (621,584) ___________________________ Net income $ 791,779 $ 1,092,142 ___________________________ Earnings per share $ .07 $ .10 ___________________________ Net Assets/(liabilities) of AFDI, Inc. consisted of the following and have been reclassified in the accompanying financial statements at December 31: 1996 1995 ________________________ Cash $ 17,303 $ 12,265 Inventories 19,404 - Property and equipment 431,469 6,071 Other assets 54,034 151,332 Current liabilities (21,418) - Loss on disposal of discontinued segment (492,060) - Loss from operations of discontinued operations (83,877) - ________________________ Net asset/(liability) of discontinued operations $(75,145) $169,668 ________________________ F-24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. ARMANINO FOODS OF DISTINCTION, INC. Dated: April 9, 1997 By/s/ William J. Armanino William J. Armanino, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature Capacity Date /s/ William J. Armanino President, Treasurer, April 9, 1997 William J. Armanino Chief Executive Officer, Chief Financial Officer, Chairman of the Board /s/ Deborah Armanino-LeBlanc Vice President, Secretary April 9, 1997 Deborah Armanino-LeBlanc and Director /s/ John J. Micek, III Vice President and Director April 9, 1997 John J. Micek, III /s/ David Scatena Director April 9, 1997 David Scatena /s/ Robert M. Geller Director April 9, 1997 Robert M. Geller /s/ Tino Barzie Director April 9, 1997 Tino Barzie /s/ Henry W. Poett, III Director April 9, 1997 Henry W. Poett, III /s/ Soren Svenningsen Director April 9, 1997 Soren Svenningsen EX-10.18 2 EMPLOYMENT AGREEMENT WITH ROBERT H. ANDERSON EMPLOYMENT AGREEMENT ROBERT H. ANDERSON THIS EMPLOYMENT AGREEMENT is made and entered into as of August 26, 1996, by and between ARMANINO FOODS OF DISTINCTION, INC., a Colorado corporation ("Corporation"), and ROBERT H. ANDERSON ("Employee") under the following circumstances: A. Corporation desires to employ Employee as its Vice President and Chief Operating Officer because of his knowledge, experience and expertise. B. Employee desires to become employed by Corporation in such capacity. C. The parties hereto desire to set forth in writing the terms and conditions of the employment relationship to be established. NOW, THEREFORE, the parties hereto agree as follows: A. EMPLOYMENT. Corporation shall employ Employee as the Vice President and Chief Operating Officer of Corporation pursuant to the terms and conditions hereinafter set forth, and Employee shall perform the duties of such position. 1. TERMS OF EMPLOYMENT. Subject to the provisions of paragraph 7, the initial term of employment shall be three (3) years, commencing as of August 26, 1996, and terminating on August 25, 1999. If, upon expiration of the term of this Agreement a new written agreement has not been negotiated and executed, Employee shall continue to be employed by Corporation on at-will basis, subject to his resigning or Corporation terminating his employment for any reason or no reason at all, at anytime, with or without notice, in the Corporation's sole discretion. 2. DUTIES AND RESPONSIBILITIES. a. Subject to the directives of the President and Chief Executive Officer, Employee shall be responsible for all day-to-day operational activities of Corporation. The duties and responsibilities of such position are specifically set forth on the job description attached hereto as Exhibit A. It is anticipated that Employee's duties and responsibilities as set forth in such job description may be modified from time to time consistent with Employee's duties as the Chief Operating Officer of Corporation in which case an updated job description shall replace Exhibit A. Employee agrees to perform his services conscientiously, effectively and to the best of his ability. 3. BASE SALARY. In consideration of Employee's services under this Agreement to Corporation, Employee's base salary shall be fixed at an annual rate of One Hundred Forty Thousand Dollars ($140,000.00), from the effective date of this Agreement through February 28, 1997 and at the annual rate of One Hundred Fifty Thousand Dollars ($150,000.00) thereafter, payable in accordance with Corporation's normal payroll practices. Such base salary shall be reviewed annually for increases by the Board of Directors at the same time the senior management group of employees of Corporation is reviewed. 4. INCENTIVE COMPENSATION. As further consideration for Employee's services under this Agreement, Corporation shall pay Employee such incentive compensation to which Employee may be entitled pursuant to Corporation's Management Incentive Compensation Plan as may be adopted by the Board of Directors of Corporation for the years 1996, 1997 and 1998. Employee shall be entitled to a pro-rata distribution, if any, of Corporation's Management Incentive Compensation Plan as in effect for the year 1996. Employee acknowledges that he has received a copy of the Management Incentive Compensation Plan as in effect for the year 1996. 5. BENEFITS. In consideration for Employee's accepting the employment provided for herein, Corporation agrees to provide the following benefits: a. All the standard benefits normally provided to the employees of Corporation, including, but not limited to, social security benefits, workers' compensation, 401(k) plan participation, long-term disability insurance, health insurance of various kinds and similar benefits. Corporation shall reimburse Employee for Employee's COBRA payments until Employee's health insurance coverage is effective under Corporation's plan. Corporation's standard ninety (90) day probation period applicable to vacation and sick leave accrual, holiday pay and health insurance coverage, shall not apply to Employee. b. During 1996 Employee shall accrue vacation days at the rate prescribed by Corporation's standard policies. Employee shall be entitled to three (3) weeks paid vacation days for the first year and four (4) weeks paid vacation per year thereafter. c. Corporation shall reimburse Employee for reasonable and necessary expenses incurred by him in the performance of his duties hereunder upon presentation of vouchers in accordance with Corporation's policies. d. Subject to board of director's approval, Employee shall be granted 150,000 incentive stock options of Corporation, which shall vest in accordance with the vesting schedule set forth in the Stock Option Agreement attached hereto as Exhibit B. The exercise price shall be the mean between the bid and asking price of Corporation's common stock on the date such options are ratified by the Board of Directors. Such options shall be granted as incentive stock options pursuant to the terms and conditions set forth in the form of Stock Option Agreement attached hereto as Exhibit B and the 1993 Stock Option Plan of Corporation, as amended. e. Subject to board of director's approval, Employee shall be granted 10,000 shares of common stock pursuant to the terms of a Restricted Stock Agreement attached hereto as Exhibit C. f. Such other flexible executive perquisites that may be approved by the Board of Directors of Corporation for the senior management group of employees of Corporation. g. Corporation shall reimburse Employee for automobile expenses incurred by Employee in carrying out his duties hereunder in an amount up to $750 per month. Such reimbursement shall include, but not be limited to, gas, oil, maintenance and insurance expenses. Employee shall furnish to Corporation adequate records and other documentary evidence required by federal and state statutes and regulations for the substantiation of such payments as deductible business expenses of Corporation and not as deductible compensation to Employee. 6. EARLY TERMINATION AND SEVERANCE. a. BY CORPORATION. Corporation, acting through its President or Board of Directors, may terminate this Agreement at any time for "just cause". If such termination is for any reason other than "just cause", then all of the rights, duties and obligations of the parties under this Agreement shall cease upon the effective date of termination, except that Corporation shall pay to Employee a sum equal to six (6) months' base salary if the effective date of such termination is prior to March 1, 1997. If the effective date of such termination is subsequent to March 1, 1997, Corporation shall pay to Employee a sum equal to six (6) month's base pay plus one additional month of base pay for each month subsequent to February 1997 in which the effective date of termination occurs, up to a maximum of twelve (12) months' bonus pay. If such termination is for "just cause," then all of the rights, duties and obligations of the parties under this Agreement shall cease upon the effective date of termination. For purposes of this Agreement, such termination shall be deemed for "just cause" only if it is by reason of Employee's commission of willful and material acts of neglect, dishonesty, fraud or other acts involving moral turpitude which materially and adversely affect the business or affairs of Corporation, such as: possession of weapons on Corporation premises; actual or threatened physical violence to another employee or customer or anyone else with whom the Corporation maintains a business relationship; possession or use of illegal drugs, controlled substances, or abuse of legal drugs or alcoholic beverages on Corporation premises or time as set forth in the Corporation handbook; deliberate destruction or theft of Corporation or employee owned property and illegal harassment of any form. b. BY EMPLOYEE. Employee may terminate this Agreement in his sole discretion for any reason upon thirty (30) days prior written notice to the President of Corporation. Upon the effective date of such termination by Employee, all of the rights, duties, and obligations of the parties under this Agreement shall cease, including Employee's right to his base salary and incentive compensation benefits. 7. CONFIDENTIALITY AND NON-DISCLOSURE: By reason of Employee's duties, he shall become acquainted with confidential and proprietary information belonging to Corporation, including but not limited to, (a) processes, techniques, know-how and data; (b) plans for development, marketing and selling, information regarding business plans, budgets and unpublished financial statements; prices and costs; information concerning advertisers and customers; and information regarding the skills and compensation of other employees of Corporation; and (c) any other information designated by Corporation as confidential. Employee shall not disclose any of the aforesaid trade secrets and confidential information, directly or indirectly, or use them in any way, either during his employment or at any time thereafter, except as required in the course of his employment with Corporation. The rights and remedies of Corporation under this section shall be in addition to any, not in lieu of any, rights and remedies prescribed by law, including the Uniform Trade Secrets Act. 8. ARBITRATION: Any dispute arising out of the termination of Employee's employment (including, but not limited to, purported violations of statute, claims based on any alleged breach of duty arising out of contract or tort) or any other alleged violation of a statutory, contractual or common law right(s) (but excluding workers' compensation, unemployment insurance claims and wage and hour matters within the jurisdiction of the State Labor Commissioner) or any claim for discrimination or harassment arising out of Employee's employment, which cannot be resolved through either discussion or mediation, shall be submitted to final and binding arbitration before a neutral arbitrator pursuant to the American Arbitration Association Employment Dispute Resolution Rules, as may be amended from time to time. Statutes and laws covered by this Agreement, include, but are not limited to, equal employment opportunity laws (which include claims for age, race, color, disability, medical condition, marital status, religion, ancestry, national origin, sexual harassment and discrimination, and sexual orientation), the Federal Civil Rights Acts of 1964 and 1991, as amended, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the California Fair Employment and Housing Act and California wrongful discharge law. Employee may be represented by counsel of his choice, at his own expense. Arbitration will be the exclusive means of resolving any dispute described above. No other action will be brought by the Employee in any court or other forum except those claims specifically excluded in the arbitration procedures, or as otherwise provided by law. If any dispute should arise, Employee agrees to deliver a written Request for Arbitration to the President of Corporation within one (1) year of the date the dispute occurred. The request for arbitration shall describe the dispute in sufficient detail to advise the Corporation of the nature of the dispute, the date when the dispute first arose, and the remedies sought. Employee agrees to respond within ten (10) calendar days to each communication regarding the selection of an arbitrator and scheduling of the hearing. If Employee does not file a written Request for Arbitration within one year of the date of said occurrence or does not respond to any communication about the arbitration proceeding within ten (10) calendar days, such claims will be untimely and therefore barred. The limitations period set forth herein shall not be subject to tolling. Employee shall not have the right to raise any claims, in any forum, arising out of any controversy that is subject to arbitration. 9. NOTICES. Notices required or permitted by this Agreement shall be effective upon mailing, postage prepaid, or upon personal delivery, to the following address: To Corporation:Armanino Foods of Distinction, Inc 30588 San Antonio Street Hayward, CA 94544 To Employee: Robert H. Anderson 651 Logan Lane Danville, CA 94526 10. MISCELLANEOUS PROVISIONS. a. The law of the State of California shall govern the interpretation and enforcement of this Agreement. b. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue in full force and effect without being impaired or invalidated in any way. c. This Agreement contains all of the covenants and agreements between the parties on the matter stated herein. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein, and that no other agreement, statement, or promise on the subject matter stated herein not contained in this Agreement shall be valid or binding. d. Any modification of this Agreement shall be effective only if it is in writing and executed by the party or parties to be charged. e. This Agreement shall be binding upon and inure to the benefit of the parties and their spouses, successors, assigns, personal representatives, heirs and legal representatives. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the date first hereinabove written. ARMANINO FOODS OF DISTINCTION, INC., a Colorado corporation By:/s/ William J. Armanino WILLIAM J. ARMANINO Its: President "Corporation" /s/ Robert H. Anderson ROBERT H. ANDERSON "Employee" EXHIBIT A JOB DESCRIPTION EXHIBIT B STOCK OPTION AGREEMENT ARMANINO FOODS OF DISTINCTION, INC., a Colorado corporation ("Corporation") grants to ROBERT H. ANDERSON ("Employee"), effective as of September 12, 1996, the date of approval by the Board of Directors of Corporation (the "Effective Date"), a stock option ("Option") to purchase up to an aggregate of 150,000 Shares of the par value common stock of Corporation for a purchase price of $1.735 per Share. This Option may be exercised as follows: (a) Up to 5,000 of the Shares may be purchased on or after December 31, 1996 and up to an additional 20,000 of the Shares may be purchased on or after March 1, 1997 and up to an additional 1/36th of the Shares may be purchased for each additional month on or after April 1, 1997, if Employee is still employed by Corporation on such dates; provided, however, and notwithstanding the above, that upon "change in control" of Corporation, as defined below, all Shares subject to the Option may be purchased by Employee. This Option shall expire on September 11, 2006. For purposes of this Agreement, a "change in control" shall mean (i) consolidation or merger of Corporation in which Corporation is not the surviving entity or in which there is a change in the ownership of more than fifty percent (50%) of the outstanding capital stock of Corporation in one transaction or a series of related transactions, (ii) the sale of substantially all of the assets of Corporation, or (iii) a change in more than fifty percent (50%) of the directors of Corporation which occurs as a result of a contested election for the board of directors. The purchase price of the Shares as to which this Option is exercised shall be paid in full in cash or certified funds at the time of exercise. When this Option or a portion of the Option is exercised, Corporation is authorized to deduct from any payment of any kind owed to Employee any federal, state, local or other taxes required by law to be withheld with respect to the Shares being purchased upon exercise of this Option. Alternatively, Employee may remit to Corporation an amount necessary to satisfy any federal, state, local or other withholding tax requirements prior to the delivery of any certificate or certificates for the Shares purchased upon exercise of this Option or portion of this Option. The grant and exercise of this Option shall be governed by Corporation's 1993 Stock Option Plan, as amended, as it relates to Incentive Stock Options, which is incorporated by reference into this Option. Employee by his signature below, agrees to abide by the applicable provisions of Corporation's 1993 Stock Option Plan, as amended. Dated this ____ of ________, 1996. ARMANINO FOODS OF DISTINCTION, INC. By:_____________________________________ William J. Armanino, President "Corporation" ________________________________________ ROBERT H. ANDERSON "Employee" EXHIBIT C RESTRICTED STOCK AGREEMENT THIS RESTRICTED STOCK AGREEMENT is made and entered into as of the 12th day of September, 1996, by and between ARMANINO FOODS OF DISTINCTION, INC. a Colorado corporation ("Armanino"), and ROBERT H. ANDERSON ("Employee") under the following circumstances: RECITALS: A. Armanino and Employee have entered into an Employment Agreement (the "Agreement") pursuant to which Employee shall serve as the Vice President and Chief Operating Officer of Armanino. B. In consideration of Employee's services under the Agreement, Armanino desires to issue to Employee shares of restricted common stock of Armanino pursuant to the terms of this Agreement. Employee agrees to receive such shares upon the terms and conditions of this Agreement. AGREEMENT: In consideration of the mutual covenants and representations herein set forth, Armanino and Employee agree as follows: 1. ISSUANCE OF STOCK. a. Subject to the terms and conditions of this Agreement, Armanino hereby agrees to issue to Employee and Employee agrees to receive from Armanino Ten Thousand (10,000) shares of Armanino common stock upon execution of this Agreement. The foregoing shares of Armanino's common stock shall be referred to herein as the "Stock". b. Employee agrees that for purposes of this Agreement, the Stock shall be valued at the mean between the closing bid and ask prices for the Stock as reported by NASDAQ on the business day immediately preceding the date of this Agreement, less a discount of 35% attributable to the transferability restrictions of the Stock as set forth herein and as imposed under federal and state securities laws the (the "Issue Price"). 2. DELIVERY OF STOCK. The delivery of the certificates representing the Stock shall occur within thirty (30) business days after the Stock is required to be issued, or as promptly thereafter as is practicable. 3. PURCHASE OPTION. a. All of the Stock shall be subject to the right and option of Armanino to repurchase the Stock (the "Purchase Option") (as set forth in this Section 3) in the event (i) Employee terminates the Agreement prior to the expiration of its term or (ii) the Agreement is terminated by Armanino for just cause prior to the expiration of its term (collectively, a "Termination"). The Purchase Option shall come into effect immediately upon a Termination as follows: (1) If a Termination giving rise to the right to exercise the Purchase Option occurs on or prior to March 1, 1997 (the "Vesting Commencement Date"), the Purchase Option shall apply to 100% of the Stock. i. If a Termination giving rise to the right to exercise the Purchase Option occurs after the Vesting Commencement Date, the Purchase Option shall apply to that portion of the Stock which is a fraction of 100% of the Stock, the numerator of which shall be a number equal to 36 minus the total number of full calendar months elapsed from September 1, 1996 to the date of Termination, and the denominator of which shall be 36. b. The Purchase Option shall be exercisable at the Issue Price (the "Option Price"). c. Within 90 days following a Termination, the Armanino shall notify Employee by written notice delivered or mailed as provided in subparagraph 8.c, as to whether it wishes to purchase the Stock pursuant to exercise of the Purchase Option. If Armanino (or its assignee) elects to purchase the Stock hereunder, it shall set a date for the closing of the transaction at a place and time specified by Armanino, which date shall not be more than 30 days after the date of such notice. At such closing, Armanino (or its assignee) shall tender payment for the Stock and Employee shall duly endorse to Armanino (or its assignee) the certificate or certificates representing the Stock, and the certificates representing the Stock so purchased shall be cancelled. d. Notwithstanding the above, upon "change in control" of Corporation, as defined below, the Purchase Option shall immediately terminate. For purposes of this Agreement, a "change in control" shall mean (i) consolidation or merger of Corporation in which Corporation is not the surviving entity or in which there is a change in the ownership of more than fifty percent (50%) of the outstanding capital stock of Corporation in one transaction or a series of related transactions, (ii) the sale of substantially all of the assets of Corporation, or (iii) a change in more than fifty percent (50%) of the directors of Corporation which occurs as a result of a contested election for the board of directors. 4. STOCK SPLITS, ETC. If, from time to time during the term of this Agreement: a. There is any stock dividend or liquidating dividend of cash and/or property, stock split or other change in the character or amount of any of the outstanding securities of Armanino; or b. There is any consolidation, merger or sale of all, or substantially all, of the assets of Armanino; then, in such event, any and all new, substituted or additional securities or other property to which Employee is entitled by reason of his ownership of Stock shall be immediately subject to this Agreement and be included in the word "Stock" for all purposes with the same force and effect as the shares of Stock presently subject to the Purchase Option, right of first refusal and other terms of this Agreement. While the aggregate Option Price shall remain the same after each such event, the Option Price per share of Stock upon execution of the Purchase Option shall be appropriately adjusted. 5. RESTRICTION ON TRANSFER; RIGHT OF FIRST REFUSAL. a. Employee shall not sell, transfer, pledge, hypothecate or otherwise dispose of any shares of the Stock during the initial term of the Agreement or as long as the Stock remains subject to the Purchase Option. b. During the term of the Agreement, before any shares of Stock registered in the name of and subject to the Purchase Option may be sold or transferred (including a transfer by operation of law), such shares shall first be offered to Armanino in accordance with the following terms and conditions: (i) Employee shall deliver a notice ("Notice") to Armanino stating (A) his bona fide intention to sell or transfer such shares, (B) the number of shares to be sold or transferred, (C) the price for which he proposed to sell or transfer such shares, and (D) the name of the proposed purchaser or transferee; (ii) Within thirty (30) days after receipt of the Notice, Armanino or its assignee may elect to purchase any or all shares to which the Notice refers, at the price per share specified in the Notice; (iii) if all of the shares to which the Notice refers are not elected to be purchased as provided in subparagraph 5.b(2) hereof, Employee may sell the remaining shares to any person named in the Notice at the price specified in the Notice or at a higher price, provided that such sale or transfer is consummated within 60 days of the date of said Notice to Armanino, and, provided, further, that any such sale is in accordance with all the terms and conditions hereof. Armanino shall not be required (i) to transfer on its books any shares of Stock which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement, or (ii) to treat such shares as owned by any transferee to whom such shares shall have been so transferred. 6. LEGENDS. All certificates representing any of the shares of Stock subject to the provisions of this Agreement shall have endorsed thereon the following legends: a. "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AND RIGHTS OF FIRST REFUSAL AS SET FORTH IN AN AGREEMENT BETWEEN ARMANINO AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF ARMANINO." b. "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO ARMANINO THAT SUCH REGISTRATION IS NOT REQUIRED." c. Any legend required to be placed thereon by applicable securities laws of any state. 7. EMPLOYEE'S REPRESENTATIONS. In connection with the purchase of the Stock, Employee hereby represents and warrants to Armanino as follows: a. INVESTMENT INTENT; CAPACITY TO PROTECT INTERESTS. Employee is receiving the Stock solely for his own account for investment and not with a view to or for sale in connection with any distribution of the Stock or any portion thereof and not with any present intention of selling, offering to sell or otherwise disposing of or distributing the Stock or any portion thereof in any transaction other than a transaction exempt from registration under the Act. Employee also represents that the entire legal and beneficial interest of the Stock is being purchased, and will be held, for Employee's account only, and neither in whole or in part for any other person. Employee either has a pre-existing business or personal relationship with Armanino or any of the its officers, directors or controlling persons or by reason of Employee's business or financial experience or the business or financial experience of Employee's professional advisors who are unaffiliated with and who are not compensated by Armanino or any affiliate or selling agent of Armanino, directly or indirectly, could be reasonably assumed to have the capacity to evaluate the merits and risks of an investment in Armanino and to protect Employee's own interests in connection with this transaction. b. INFORMATION CONCERNING ARMANINO. Employee has received all such information as Employee has deemed necessary and appropriate to enable Employee to evaluate the financial risk inherent in making an investment in the Stock, and Employee has received satisfactory and complete information concerning the business and financial condition of Armanino in response to all inquiries in respect thereof. c. RESTRICTED SECURITIES. Employee understands and acknowledges that: (i) the issuance of the Stock has not been registered under the Act, and the Stock must be held indefinitely unless subsequently registered under the Act or an exemption from such registration is available and Armanino is under no obligation to register the Stock; (ii) the share certificate representing the Stock will be stamped with the legends specified in Section 6 hereof; and (iii) Armanino will make a notation in its records of the aforementioned restrictions on transfer and legends. d. DISPOSITION OF THE STOCK. Employee is familiar with the provisions of Rule 144 promulgated under the Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly from the issuer thereof, in a non-public offering, subject to the satisfaction of certain conditions. Employee understands that the securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires among other things: (1) the resale occurring not less than two years after the party has been issued the securities and, in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, (2) the availability of certain public information about Armanino, (3) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as that term is defined under the Securities Exchange Act of 1934), and (4) the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. e. FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting his representations set forth above, Employee further agrees that he shall in no event make any disposition of all or any portion of the Stock, other than to Armanino as set forth herein, unless and until: (i) there is then in effect a Registration Statement under the Act covering such proposed disposition and such disposition is made in accordance with said Registration Statement; or (ii) Employee shall have notified Armanino of the proposed disposition and shall have furnished Armanino with a detailed statement of the circumstances surrounding the proposed disposition, (2) Employee shall have furnished Armanino with an opinion of Employee's counsel to have the effect that such disposition will not require registration of such shares under the Act, and (3) such opinion of Employee's counsel shall have been concurred in by counsel for Armanino and Armanino shall have advised Employee of such concurrence. 8. OTHER PROVISIONS. a. VALUATION OF SHARES. Employee understands that the Stock have been valued by the board of directors for the purpose of this sale, and that Armanino believes this valuation represents a fair attempt at reaching an accurate appraisal of its worth. Employee also understands, however, that Armanino can give no assurances that such price is in fact the fair market value of the Stock. Employee acknowledges that the Issue Price will be treated as compensation paid to Employee for services rendered to Employee. b. SECTION 83(b) ELECTION. Employee understands that Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary income the difference between the amount paid for the Stock and the fair market value of the Stock as of the date any restrictions on the Stock lapse. In this context, "restriction" means the right of Armanino to buy back the unvested Stock pursuant to the Purchase Option. Employee understands that he may elect to be taxed at the time the Stock are issued rather than when and as the Stock become "vested" by filing an election under Section 83(b) of the Code with the Internal Revenue Service within thirty (30) days after the date of purchase. Employee understands that failure to make this filing in a timely manner will result in the recognition of ordinary income by employee, as the Shares become "vested" on any difference between the purchase price and the fair market value of the Shares at the time such restrictions lapse. EMPLOYEE ACKNOWLEDGES THAT IT IS EMPLOYEE'S SOLE RESPONSIBILITY AND NOT ARMANINO'S TO TIMELY FILE THE ELECTION UNDER SECTION 83(b), EVEN IF EMPLOYEE REQUESTS ARMANINO OR ITS REPRESENTATIVES TO MAKE THIS FILING ON EMPLOYEE'S BEHALF. c. NOTICE OF TAX ELECTION. If Employee makes any tax election relating to the treatment of the Stock under the Code, at the time of such election Employee shall promptly notify Armanino of such election. 9. MISCELLANEOUS. a. Subject to the provisions and limitations hereof, Employee may, during the term of this Agreement, exercise all rights and privileges of a stockholder of Armanino with respect to the Stock. b. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. c. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to Employee at its address shown on Armanino's records and to Armanino at the address of its principal corporate offices (attention: President) or at such other address as such party may designate by ten days' advance written notice to the other party hereto. d. Armanino may assign its rights and delegate its duties under this Agreement, including paragraphs 3 and 5 hereof. If any such assignment or delegation requires consent of any state securities authorities, the parties agree to cooperate in requesting such consent. This Agreement shall inure to the benefit of the successors and assigns of Armanino and, subject to the restrictions on transfer herein set forth, be binding upon Employee, successors and assigns. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. ARMANINO FOODS OF DISTINCTION, INC. a Colorado corporation Date: ________________ By: ______________________________________ William J. Armanino, President Date: ________________ By:______________________________________ Robert H. Anderson EX-21 3 SUBSIDIARIES OF THE REGISTRANT SUBSIDIARIES OF THE REGISTRANT Name State of Incorporation Other Names Used in Business - --------------- ---------------------- ---------------------------- AFDI, Inc. California Foccacia di Genova Alborough, Inc. California Emilia Romagna EX-23 4 CONSENT OF PRITCHETT, SILER & HARDY, P.C. CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We hereby consent to the incorporation of our report dated January 27, 1997, except for Notes 7 and 14 as to which the date is March 4, 1997, appearing in the Annual Report on Form 10-K of Armanino Foods of Distinction, Inc. for the year ended December 31, 1996, in the Company's Registration Statement on Form S-8, SEC File No. 33-94196. /s/ Pritchett, Siler & Hardy, P.C. PRITCHETT, SILER & HARDY, P.C. Salt Lake City, Utah March 28, 1997 EX-27 5
5 This schedule contains summary financial information extracted from the consolidated balance sheets and consolidated statements of operations found on pages F-2 through F-5 of the Company's Form 10-K for the fiscal year ended December 31, 1996, and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1996 DEC-31-1996 742,856 3,990,912 1,698,339 0 1,066,904 8,263,117 2,599,936 0 11,926,101 1,132,443 0 0 0 11,529,739 (907,931) 11,926,101 15,305,029 15,305,029 10,594,464 10,594,464 3,155,091 0 7,791 1,807,437 752,325 1,055,112 608,145 0 0 446,967 .04 .04
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