-----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, JmdOiIVA0h2rNSaZYCL8uz5nyuLEjWugeS/NoCBZyVUJQGg9YHinQ92KpYQ6kPS4 g/wzjVFoELyWO60GbIzM0Q== 0000948830-98-000060.txt : 19980401 0000948830-98-000060.hdr.sgml : 19980401 ACCESSION NUMBER: 0000948830-98-000060 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 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: SEC FILE NUMBER: 000-18200 FILM NUMBER: 98579854 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, 1997 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 24, 1998, 11,246,399 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 $9,333,000. 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 21, 1998. 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 frozen food products, including primarily pesto and other Italian-style sauces, stuffed and flat pasta products, focaccia, meatballs and an Italian line of entree products. 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. The Company determined to discontinue operations of Focaccia Di Genova on February 17, 1997. As a result, AFDI, Inc. has become a dormant subsidiary of the Company. In May 1996, the Company acquired all of the issued and outstanding shares of Alborough, Inc., dba Emilia Romagna, for the purpose of expanding its product line to include highly specialized upscale frozen pasta products for the foodservice and industrial markets. As of December 31, 1997, Alborough, Inc. was merged into 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 frozen products presently includes pesto sauces, stuffed and flat pastas to include value-added specialty Italian pastas, focaccia, meatballs and an Italian line of entree products. These products are marketed through a network of food brokers and sold to retail and foodservice distributors, club type stores and industrial accounts. Several of these products are sold under separate labels, including the Armanino label, and the 2 Italian Holiday and Pasta Regina labels which services the mass type feeding demands of certain foodservice 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 and Dried Tomato Garlic pesto sauces are available to the Company's retail, foodservice and industrial customers; the Red Bell Pepper pesto is available to its foodservice and industrial customers and Cilantro pesto to foodservice customers only. The Company also markets one other frozen sauce. This is a Pepperonata sauce, which is available to its foodservice customers. The Company markets several lines of frozen pastas, namely stuffed and flat pastas and pasta sheets, cooked and uncooked. The Company's line of frozen stuffed pastas, both cooked and uncooked, includes meat, cheese, vegetable, spicy turkey, seafood and mushroom ravioli; tri-color raviolini; meat and cheese tortellini and tri-color tortellini/capelleti style, meat and cheese tortelloni, manicotti and stuffed shells. The meat and cheese ravioli and meat and cheese tortellini are available to the Company's retail and foodservice customers. The remaining pastas sold by the Company are available to its foodservice customers only, as follows: (a) all other stuffed pastas named above; (b) gnocchi in two varieties -- Potato and Red Bell Pepper; (c) flat pasta (strands) consisting of fettucini in four flavors (Red Bell Pepper, Black Pepper, Spinach and Plain), Angel Hair, Linguini in three flavors (Plain, Tri-Color and Squid Ink); and (d) pasta sheets (used for lasagna). The Company also markets six of its existing 10 pound frozen stuffed pasta products (meat and cheese ravioli, meat and cheese tortellini, manicotti and stuffed shells) under the Italian Holiday Brand label in order to satisfy a specific sector of the Company's foodservice customers. The Company additionally has marketed four of its existing 10 pound frozen stuffed pastas, namely raviolis and tortellini (meat and cheese varieties of each) under the Pasta Regina Brand label in order to satisfy certain customer needs. The Company's line of frozen meatballs presently includes beef meatballs and turkey, beef, pesto meatballs. The beef meatball line is available to its retail and clubstore customers under the Armanino label; and the Turkey, Beef, Pesto meatball line is available to its retail and foodservice (general) customers under the Armanino label as well as to foodservice (specific) customers under the Italian Holiday label. The Company's line of frozen foccacia presently includes two varieties, plain 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 sold to foodservice customers. 3 NEW PRODUCTS The Company continues to research potential Italian entree line opportunities. The Company plans to introduce a number of new Italian entree products to its foodservice and in-store deli customers during 1998. The Company is also continuing to research and develop additional frozen sauces for the foodservice and retail market. During the first quarter of 1998, the Company re-introduced its Dried Tomato Garlic Pesto sauce to its retail customers emphasizing a new packaging design. Additionally, the Company plans to introduce the Roasted Red Bell Pepper sauce to its retail customers during the second quarter of 1998. With respect to the Company's foodservice line, the Company is currently researching the addition of new sauces to its line during 1998. 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, 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. Shortly following completion of its move to the Hayward location, the Company began in-house production of its ravioli line of products. In Fall of 1997, the Company moved its then subsidiary's (Emilia Romagna) operations to the Company's facilities consolidating its manufacturing operations under one roof. Most of the products, including certain tortellini products, that were previously manufactured by Emilia Romagna will continue to be manufactured by the Company. Also during the third quarter of 1997, the Company completed expansion of its manufacturing operations to include multi-purpose manufacturing and assembly equipment for entree line items including lasagne, cannelloni, manicotti; pasta sheets and specialty pastas such as tortellini and tortelloni, as well as other entree line items. To complement this line further, kettles were also purchased to manufacture sauces for this line as well as a refrigeration system for quick cooling of product and new packaging equipment. The annual production rate of products varies as does the capacity of the equipment, depending on the type of product being produced. The Company believes that its equipment has sufficient capacity to meet its production needs for at least the next twelve months. 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. Certain tortellini products are manufactured for the Company 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 4 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 1998. The Company's cooked sauce, namely Pepperonata, is being manufactured and packaged by Home Maid Ravioli Company ("Home Maid") of San Mateo, California. The Company intended to bring the manufacturing of this item in- house during 1997. However, until the Company is able to determine the feasibility and potential sales of this sauce, the Company will continue to utilize Home Maid for the manufacture of this sauce. The Company has entered into an agreement with Home Maid pursuant to which Home Maid has agreed to manufacture and package this sauce item based upon the Company's proprietary formulas at a set price. Home Maid has agreed to keep the Company's recipes confidential. Certain frozen stuffed pasta items are manufactured for the Company 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. The Company's focaccia products are manufactured for the Company by Maggiora Bakery ("Maggiora") in Richmond, California. The Company entered into an agreement with Maggiora pursuant to which that Company will manufacture and package these products based on the Company's proprietary formulas at a set price. Maggiora has agreed to keep the Company's recipes confidential. In September 1997, the Company entered into a manufacturing and packaging agreement with Wolfgang Puck Foods Company (WPFCO) pursuant to which the Company has agreed to manufacture and package certain proprietary products of WPFCO under their label to their retail customers. The Company has agreed to keep WPFCO's recipes confidential. 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. 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, pasta and Italian line of entree 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 personnel 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. The Company is in the process of developing its Hazard Analysis and Critical Control Points program, required by USDA regulations, which will be implemented in 1999. 5 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, foodservice, club-type stores, and industrial accounts. For the year ended December 31, 1997, one independent broker, Kelley- Clarke, Inc., accounted for approximately 13% of the sales of the Company. 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. 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 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. As a result, AFDI, Inc. is a dormant subsidiary of the Company. ACQUISITION OF EMILIA ROMAGNA FOODS In May 1996, the Company acquired all of the issued and outstanding shares of Alborough, Inc. which conducted business under the trade name "Emilia Romagna Foods". Emilia Romagna Foods manufactured highly specialized upscale pasta products for the industrial and foodservice markets which 6 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 the former Alborough shareholders over a three year period based on certain performance criteria established. The purchase price could have increased significantly depending upon the attainment of earnings performance criteria over the three year period, however, at the present time, it does not appear that the Company will be obligated to make any additional purchase price payments. The earning performance criteria are based on a percentage of gross margin attributable to sales made of specific products to specified customers. The sales must be made during a specified period of time and subject to certain minimum sales levels being achieved. Emilia Romagna's product line consisted 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 gnocchi. Approximately 300 different products had been produced over the years at Emilia Romagna. Capacities of the equipment varied depending on the items produced (per orders) on a given day. RAW MATERIALS The Company primarily uses basil, vegetables, olive oil, canola oil, eggs, dairy products, cheeses, cooked meat, spinach, bread crumbs, flour, cilantro, dried tomatoes, garlic, red and green bell peppers, tomato puree and sauce (concentrated), 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 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. 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 nationally with emphasis in the West Coast Region. EMPLOYEES As of March 18, 1998, the Company employed 61 persons on a full-time basis and two on a part-time basis. The Company also presently uses two to three persons on a full-time basis, as needed, from a temporary employment service. 7 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 intends to use this mark on certain of its flat and filled pastas, including ravioli and tortellini sold to foodservice industrial and retail accounts. This application is pending. As a result of its acquisition of Emilia Romagna, the Company has the "Emilia Romagna" trademark registered with the State of California. This trademark was used by the Company on certain of its frozen pasta and pasta products and will be retained for future use. 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- 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, 1998. 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 8 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. 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. As a result of the acquisition of Alborough, Inc., dba Emilia Romagna, the Company assumed all lease obligations on a manufacturing facility which consisted of approximately 7,320 square feet located at 20275 Mack Road in Hayward, California. The base rent was $3,899 per month. In July 1997, a Lease Termination Agreement was entered into relieving the Company of all its obligations under this lease. ITEM 3. LEGAL PROCEEDINGS. On June 11, 1997, Mass Marketing Services filed a lawsuit in Superior Court of San Diego County, California against the Company seeking damages for breach of contract, open book account and reasonable value of services rendered. The lawsuit arose after the Company terminated it sales representation agreement with Mass Marketing. Mass Marketing asserted that it is entitled to an additional ten months of commissions (approximately $100,000) and attorneys fees under the agreement. The parties agreed to arbitrate the dispute in San Mateo County, California. No date has been set for the arbitration. Management cannot reasonably predict the ultimate outcome, but believes that it will not have a material effect on the Company's financial position. The Company intends to vigorously defend their position. 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, 1997. 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 The Nasdaq Stock Market. 9 QUARTER ENDED HIGH LOW ------------------ ------- ------- 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 March 31, 1997 $1.46875 $1.0625 June 30, 1997 $1.3125 $0.9375 September 30, 1997 $1.4375 $1.0625 December 31, 1997 $1.75 $0.84375 APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of holders of record of the Company's no par value common stock at March 18, 1998, was 3,341. 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. The Company did not sell any securities which were not registered under the Securities Act of 1933, as amended, during the quarter ended December 31, 1997. 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: BALANCE SHEET DATA: At December 31, 1997 1996 1995 1994 1993 ----------- ----------- ---------- ---------- ---------- Total Assets $12,935,625 $11,926,101 $9,054,289 $8,047,228 $7,129,575 Long-Term Debt 203,384 45,850 71,599 95,120 -0- Cash Dividends Per Share -0- -0- -0- -0- -0- STATEMENT OF OPERATIONS DATA: For the Years Ended December 31, 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ---------- Net Sales $15,347,165 $15,305,029 $13,504,429 $10,451,956 $8,719,939 Net Income From Con- tinuing Operations $ 717,287 $ 1,055,122 $ 1,092,740 $ 470,252 $ 343,997 Net Income From Con- tinuing Operations Per Common Share $.06 $.09 $.10 $.05 $.03 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996 Net sales for the year ended December 31, 1997, were $15,347,165 compared to $15,305,029 for the year ended December 31, 1996. Although sales were flat overall, specific product lines and divisions experienced increases and offsetting decreases. Pesto product line sales increased by 8%. Most of this increase was driven by the foodservice area. The pasta product line, excluding club store sales, showed a strong increase of 26%, primarily in the foodservice area and a co-pack contract. Due to the loss of club store business for the Company's pasta products in 1996, the overall pasta business experienced a net decrease in sales of 9%. Meatballs experienced good increases in both the foodservice and retail area. These increases were offset by the loss of meatball sales to a club store customer. The increased sales in some of the areas mentioned were the result of the Company's focus on the expansion of the foodservice market giving the Company a more diversified customer base. The Company continues to support its sales through promotional programs, advertising and demonstrations. Cost of goods sold as a percentage of net sales increased to 70.7% for the year ended December 31, 1997, compared to 69.2% for the year ended December 31, 1996. The increase in the cost of goods sold percentage was impacted by several factors. Lower pasta sales to a club store impacted the percentage of pasta fixed manufacturing costs related to total pasta sales. Increase in sales from a co-pack situation changed the product mix to include higher manufacturing cost/lower margin products associated with a co-pack situation. Additionally, the start-up of the Company's new state-of-the-art entree line and the inefficiencies associated with a start-up impacted the cost of goods sold percentage. Operating expenses as a percentage of net sales increased to 24.8% for the year ended December 31, 1997 compared to 20.61% for the year ended December 31, 1996. The increase in operating expenses was the result of adding personnel to assist in the management of the Company's expanded manufacturing capacity and new product lines. Expenses associated with additional personnel increased as well. Furthermore, the Company incurred higher expenses to outside consultants, a full year of public relations expense and more participation in conventions and shows by the sales personnel to introduce the Company's products. Interest and other income decreased from $264,835 for the year ended December 31, 1996 to $200,933 for the year ended December 31, 1997. The decrease resulted from lower cash reserves earning interest due to the use of cash for the purchase of the new entree line. Additionally, lower operating income and cash flows, impacted the cash reserves for 1997 as compared to 1996. Net income from continuing operations before income taxes was $842,103 for the year ended December 31, 1997, compared to $1,807,437 for the year ended December 31, 1996. The decrease was due to the combination of factors described above. Loss of club store business, the costs and expenses associated with the start-up of the entree processing line and increases in operating expenses associated with the expansion of the Company's operations, all impacted the net income from operations. 11 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 disposed of the business 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 1997 and 1996 were $20,975 and $125,429, 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 $717,287 for the year ended December 31, 1997, as compared to net income of $446,967 in the prior year. 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. 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 12 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 disposed of the business 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 foodservice 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 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. 13 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. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company had working capital of $5,724,787, a decrease of $1,405,887 from December 31, 1996. The decrease is primarily attributable to the utilization of cash reserves for the purchase of the new state-of-the-art sauced entree line. Current assets included $4,877,099 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, 1997, cash provided by operating activities of the Company amounted to $855,635. This was primarily a result of net income from continuing operations, the realization of deferred tax assets, and non-cash depreciation and amortization expense. For the years ended December 31, 1996 and 1995, the Company's operating activities generated $896,171 and $1,911,187 in cash, respectively. This was primarily a result of the net income from continuing operations experienced during these years. During 1997 and 1996, the Company expended approximately $2,300,000 on equipment and leasehold improvements for a new sauced entree line. The Company placed this equipment and leasehold improvements in service in September of 1997. All of the expenditures for this line were made from the Company's cash reserves. As of December 31, 1997, the Company has invested $2,975,403 in U.S. treasury bills. On September 10, 1997, the Company renewed its $500,000 business loan line of credit with Wells Fargo Bank in San Francisco, California. This loan provides for interest at prime plus .75% with a maturity date of September 10, 1998. At December 31, 1997, the Company had $287,439 outstanding under this line. The purpose of obtaining this line of credit is to afford the Company greater cash liquidity and management of its cash investments. On May 20, 1996, the Company purchased all of the outstanding stock of Alborough, Inc. (d/b/a 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 a "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 have increased significantly depending upon the attainment of certain earning performance criteria over the three year period, however, at the present time it does not appear that the Company will be obligated to make any additional purchase price payments. The earnings performance criteria are based on a percentage of gross margin attributable to sales made of specific products 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, 1997. The Company presently has no 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-21 hereto. 14 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL DISCLOSURE. Not applicable. 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 21, 1998. 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, 1997 and 1996.. F-2 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 ....................... F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 ......... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 ....................... F-7 Notes to Consolidated Financial Statements ................... F-9 (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 Exhibit and Bylaws No. 3 to Registrant's Form S-18 Reg- istration Statement (No. 33-14130-D) 3.1 Articles of Amendment Incorporated by reference to Exhibit to the Articles of Incor- No. 3.1 to Registrant's Form S-18 poration Registration Statement (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) 15 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 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 10.3 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 10.4 Business Loan Agreement, Incorporated by reference to Promissory Notes and Com- Exhibit 10.14 to the Registrant's mercial Security Agreement Report on Form 10-K for the fiscal with Wells Fargo Bank Year ended December 31, 1994 10.5 Renewal Notice from Wells Filed herewith electronically Fargo, Inc. 10.6 Promissory Note dated Incorporated by reference to Exhibit May 8, 1995, to Wells 10.16 to the Registrant's Form S-1 Fargo Bank Registration Statement (File No. 33-40098) 10.7 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) 10.8 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 10.9 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 10.10 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 10.11 Employment Agreement with Incorporated by reference to Robert H. Anderson Exhibit 10.15 to the Registrant's Form 10-K for the year ended December 31, 1996 10.12 Employment Agreement with Filed herewith electronically Robert P. Kraemer 10.13 Consulting Agreement with Filed herewith electronically Robert H. Anderson 16 21 Subsidiaries of the Filed herewith electronically Registrant 23 Consent of Pritchett, Filed herewith electronically Siler & Hardy, P.C. 27 Financial Data Schedule Filed herewith electronically (b) The Company filed no Reports on Form 8-K during the last quarter of the period covered by this Report. 17 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, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1997, 1996 and 1995. 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, 1997 and 1996 and the results of their operations and their cash flows for the years ended December 31, 1997, 1996 and 1995, in conformity with generally accepted accounting principles. /s/ Pritchett, Siler & Hardy, P.C. January 12, 1998, except for Note 11 as to which the Date is March 11, 1998 F-1 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS DECEMBER 31, 1997 1996 CURRENT ASSETS: ---------- ---------- Cash and cash equivalents $ 181,013 $ 742,856 Treasury bills, held to maturity 2,975,403 3,990,912 Accounts receivable 1,720,683 1,698,339 Inventory 1,574,858 1,066,904 Prepaid expenses 237,673 108,106 Current deferred tax asset 619,000 656,000 ----------- ----------- Total Current Assets 7,308,630 8,263,117 ----------- ----------- PROPERTY AND EQUIPMENT, net 5,070,557 2,599,936 ----------- ----------- OTHER ASSETS: Deposits 13,000 477,610 Goodwill, net 543,438 585,438 ----------- ----------- Total Other Assets 556,438 1,063,048 ----------- ----------- $12,935,625 $11,926,101 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit $ 287,439 $ - Accounts payable 1,154,037 933,235 Accrued expenses 74,570 66,241 Note payable - 32,073 Current portion long-term debt 67,797 25,749 Net liabilities of discontinued operations - 75,145 ----------- ----------- Total Current Liabilities 1,583,843 1,132,443 PREFERRED TAX LIABILITY 203,000 126,000 LONG-TERM DEBT, less current portion 203,384 45,850 ----------- ----------- Total Liabilities 1,990,227 1,304,293 ----------- ----------- 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, 11,246,399 and 11,584,099 shares issued and outstanding at December 31, 1997 and 1996 respectively 11,136,042 11,529,739 Additional paid-in-capital 22,311 22,311 Accumulated deficit (212,955) (930,242) ----------- ----------- Total Stockholders' Equity 10,945,398 10,621,808 ----------- ----------- $12,935,625 $11,926,101 =========== =========== The accompanying notes are an integral part of these financial statements. F-2 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995 ----------- ----------- ----------- SALES, net of returns and discounts $15,347,165 $15,305,029 $13,504,429 COST OF GOODS SOLD 10,855,162 10,594,464 8,866,667 ----------- ----------- ----------- GROSS PROFIT 4,492,003 4,710,565 4,637,762 ----------- ----------- ----------- OPERATING EXPENSES: General and administrative 1,425,013 1,017,990 976,340 Salaries, wages and related payroll taxes 1,197,928 923,739 993,085 Commissions 333,516 400,311 310,244 Advertising, demonstrations, promo tions and trade allowances 854,908 813,051 763,413 ----------- ----------- ----------- Total Operating Expenses 3,811,365 3,155,091 3,043,082 ----------- ----------- ----------- INCOME FROM OPERATIONS 680,638 1,555,474 1,594,680 ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest expense (23,834) (7,791) (8,579) Interest and other income 200,933 264,835 134,147 Gain (loss) on sale of fixed assets (15,634) (5,081) (5,924) ----------- ----------- ----------- Total Other Income 161,465 251,963 119,644 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 842,103 1,807,437 1,714,324 CURRENT TAX EXPENSE 10,816 126,911 106,584 DEFERRED TAX EXPENSE 114,000 625,414 515,000 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS BEFORE DISCONTINUED OPERATIONS 717,287 1,055,112 1,092,740 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) - NET INCOME $ 717,287 $ 446,967 $ 1,092,740 ----------- ----------- ----------- (Continued) F-3 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Continued) FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995 ----------- ----------- ----------- EARNINGS PER COMMON AND EQUIVALENT SHARES: BASIC EARNINGS PER SHARE: Income from continuing operations $ .06 $ .09 $ .11 Loss from discontinued operations of AFDI, Inc. - (.03) - Loss on disposal of AFDI, Inc. - (.02) - ----------- ----------- ----------- BASIC EARNINGS PER SHARE $ .06 $ .04 $ .11 ----------- ----------- ----------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,241,892 11,168,231 10,089,090 ----------- ----------- ----------- DILUTED EARNINGS PER SHARE: Income from continuing operations $ .06 $ .09 $ .10 Loss from discontinued operations of AFDI, Inc. - (.03) - Loss on disposal of AFDI, Inc. - (.02) - ----------- ----------- ----------- DILUTED EARNINGS PER SHARE $ .06 $ .04 $ .10 ----------- ----------- ----------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - ASSUMING DILUTION 11,496,208 12,158,539 10,532,307 ----------- ----------- ----------- The accompanying notes are an integral part of these financial statements. F-4 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 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 exer- cised 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 exer- cised 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 exer- cised at $1.5 per share net of deferred offering costs of $1,702, January - March, 1996 1,712,682 2,567,321 - - Shares of common stock issued for underwriter units exercised at $1.89 per unit, February, 1996 43,124 81,504 - - Shares of common stock issued for options exer- cised at prices ranging from $.925 to $1.281, April - June, 1996 50,000 46,250 - - Shares of restricted stock issued for services ren- dered at $1.12 to $1.28 per share, June - Septem- ber, 1996 30,000 36,790 - - (Continued) F-5 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (Continued) COMMON STOCK ADDITIONAL ----------------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT ---------- ----------- ---------- ---------- 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) Shares of restricted common stock issued for services rendered at $.821 per share, January, 1997 5,000 4,106 - - Shares of common stock issued for options exer- cised at $.925 per share, February, 1997 10,000 9,250 - - Shares of common stock repurchased and canceled at $1.09 - $1.16 per share, May to August, 1997 (352,700) (407,053) - - Net income for the year ended December 31, 1997 - - - 717,287 ---------- ----------- ------- ----------- BALANCE, December 31, 1997 11,246,399 $11,136,042 $22,311 $ (212,955) The accompanying notes are an integral part of this financial statement. F-6 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, 1997 1996 1995 ----------- ----------- ----------- Cash Flows from Operating Activities: Net income $ 717,287 $ 446,967 $1,092,740 ----------- ----------- ----------- Adjustments to reconcile net income to net cash used by operations: Depreciation and amortization 489,688 386,838 332,251 Non-cash expenses 40,539 5,081 5,924 Changes in assets and liabilities: (Increase) decrease in accounts receivable (22,344) (443,470) 329,200 (Increase) decrease in inventory (507,954) (109,104) (22,652) (Increase) decrease in prepaid expenses (129,567) (39,289) 16,602 Change in deferred tax assets/ liability 114,000 217,000 515,000 Increase (decrease) in accounts payable and accrued expenses 229,131 187,335 (228,734) (Increase) decrease in net assets from discontinued operations - 169,668 (129,144) Increase (decrease) in net liabili- ties of discontinued operations (75,145) 75,145 - ----------- ----------- ----------- Total Adjustments 138,348 449,204 818,447 ----------- ----------- ----------- Net Cash Provided by Operating Activities 855,635 896,171 1,911,187 ----------- ----------- ----------- Cash Flows from Investing Activities: Purchases of property and equipment (2,281,583) (429,158) (397,501) Proceeds from sale of property and equipment 17,104 2,800 1,600 (Increase) decrease in deposits 4,916 (464,610) 8,550 Purchase of US treasury bills, net 1,015,509 (1,532,759) (999,392) Goodwill in purchase of subsidiary - (609,938) - ----------- ----------- ----------- Net Cash Used by Investing Activities (1,244,054) (3,033,665) (1,386,743) ----------- ----------- ----------- Cash Flows from Financing Activities: Proceeds from borrowing on line of credit 287,439 - 323,000 Payments on line of credit - - (323,000) Proceeds from notes payable - 72,426 - Payments on note payable (32,073) (40,353) - Payments on capital lease obligations (35,093) (23,521) (21,486) Proceeds from common stock Issuances 13,356 2,731,865 54,541 Purchase of treasury stock (407,053) (594,052) - ----------- ----------- ----------- Net Cash Provided (Used) by Financing Activities (173,424) 2,146,365 33,055 ----------- ----------- ----------- F-7 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (Continued) Net Increase (Decrease) in Cash and Cash Equivalents (561,843) 8,871 557,499 Cash and Cash Equivalents at Beginning of Period 742,856 733,985 176,486 ----------- ----------- ---------- Cash and Cash Equivalents at End of Period $ 181,013 $ 742,856 $ 733,985 ----------- ----------- ---------- Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ 23,834 $ 7,791 $ 9,714 Income taxes $ 105,859 $ 201,864 $ 44,632 Supplemental Disclosures of Non-Cash Investing and Financing Activities: For the year ended December 31, 1997: The Company entered into a capital lease for equipment valued at $234,675. The Company issued a total of 5,000 shares of restricted common stock in exchange for services rendered of $4,106. The Company applied deposits of $459,694 to equipment purchases. 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 of $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. The accompanying notes are an integral part of this financial statement. F-8 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 other frozen Italian entrees, and it's wholly-owned dormant subsidiary AFDI, Inc. [Subsidiary] incorporated in May 1995. CONSOLIDATION - All significant intercompany transactions between Parent and Subsidiary 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 $59,159 and $592,298 in excess of federally insured amounts in its bank accounts at December 31, 1997 and 1996, 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 twenty years. For federal income tax purposes, depreciation is computed under the modified accelerated cost recovery system. EARNINGS PER SHARE - In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share," which requires the Company to present basic and diluted earnings per share, instead of the primary and fully diluted earning per share. The computation of basic earning per share is based on the weighted average number of shares outstanding during the periods presented. The computation of diluted earnings per shares is based on the weighted average number of outstanding common shares during the year 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. Prior period earnings per share and weighted average shares have been restated to reflect the adoption of SFAS No. 128. F-9 GOODWILL - Goodwill represents the excess of the cost of purchasing Alborough, Inc. 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 1997 and 1996 was $42,000 and $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, 1997 and 1996 are $45,363 and $32,443 of research and development costs associated with the development of new products. RECLASSIFICATION - The financial statements presented for the year ended December 31, 1995 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, 1997 1996 1995 Accounting fees paid to a company ----------- ----------- ----------- controlled by a shareholder and a director $ 26,450 $ 20,757 $ 29,399 Consulting and other fees paid or accrued to individuals who are directors, officers or shareholders of the Company $ - $ 750 $ 29,100 AMOUNTS PAYABLE TO RELATED PARTIES - Included in the Company's accounts payable at December 31, 1997 and 1996 are amounts owing to shareholders, officers and directors in the amount of $4,234 and $3,500, respectively. NOTE 3 - TREASURY BILLS At December 31, 1997, US treasury bills consisted of the following investments which are carried at their amortized cost: AMORTIZED MARKET MATURITY DATE ACQUIRED MATURITY DATE COST VALUE VALUE - ------------- ------------- ----------- ----------- ----------- 7/10/97 1/8/98 $ 1,498,548 $ 1,498,170 $ 1,500,000 10/23/97 4/23/98 1,476,855 1,475,655 1,500,000 ----------- ----------- ----------- $ 2,975,403 $ 2,973,825 $ 3,000,000 ----------- ----------- ----------- F-10 NOTE 4 - INVENTORY Inventory consists of the following at December 31, 1997 and 1996: 1997 1996 ----------- ----------- Raw materials and supplies $ 666,007 $ 275,472 Finished goods 908,851 791,432 ---------- ---------- $1,574,858 $1,066,904 ---------- ---------- The Company's inventory is pledged as collateral on a business line of credit. [See Note 6] 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, 1997 and 1996: 1997 1996 ----------- ----------- Office equipment $ 263,913 $ 224,968 Machinery and equipment 4,469,322 2,096,048 Leasehold improvements 1,873,381 1,389,223 ----------- ----------- 6,606,616 3,710,239 Less Accumulated depreciation and amortization (1,536,059) (1,110,303) ----------- ----------- $ 5,070,557 $ 2,599,936 ----------- ----------- Depreciation expense amounted to $447,688, $362,338 and $332,251 for the years ended December 31, 1997, 1996 and 1995, respectively. The Company's property, plant and equipment is pledged as collateral on a business line of credit. [See Note 6] NOTE 6 - LINE OF CREDIT / NOTE PAYABLE As of December 31, 1997, the Company had $287,439 outstanding on a $500,000 business line of credit. The line of credit accrues interest at prime plus .75%, which was 9.25% at December 31, 1997. The line of credit matures in September 1998, and is secured by the Company's accounts receivables, inventory and equipment. 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 principal and interest at an annual rate of 10%. The note was paid off during June 1997. NOTE 7 - LEASES CAPITAL LEASES - The Company is the lessee of equipment under two capital leases expiring in 1999 and 2002. The assets and liabilities under the capital leases were recorded at the lower of the present value of the minimum lease payments or the fair value of the assets at the time of purchase. The asset is amortized F-11 over its related lease term. Amortization expense of $36,734 and $25,000 for the asset under capital leases and have been included in depreciation expense for 1997 and 1996. Equipment at December 31, 1997 and 1996 under capital lease obligations is as follows: 1997 1996 ----------- ----------- Equipment $ 375,000 $ 125,000 Less Accumulated amortization (95,067) (58,333) ----------- ----------- $ 279,933 $ 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 ------------------------ -------------- 1998 90,000 1999 77,000 2000 58,800 2001 58,800 2002 44,100 -------- Total future minimum lease payments $328,700 Less amounts representing interest and executory costs (57,519) -------- Present value of the future minimum lease payments 271,181 Lease current portion (67,797) -------- Capital lease obligations - long term $203,384 -------- 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. The future minimum lease payments for non-cancelable operating leases having remaining terms in excess of one year as of December 31, 1997 are as follows: YEAR ENDING DECEMBER 31, LEASE PAYMENTS ------------------------ -------------- 1998 87,256 1999 88,894 2000 90,112 2001 86,480 2002 87,741 Thereafter 52,212 -------- Total Minimum Lease Payments $492,695 -------- F-12 Lease expense charged to operations was $128,865, $118,508 and $78,070 for the years ended December 31, 1997, 1996 and 1995. The Company received $47,923 in sublease rentals during the year ended December 31, 1995. NOTE 8 - AGREEMENTS AND COMMITMENTS 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, 1997, 1996, and 1995 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. 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 1997, 1996 and 1995 contributions to the plan charged to operations were $8,515, $9,065 and $6,837, respectively. EMPLOYMENT AGREEMENTS - The Company has entered into employment agreements, with the president and a key employee of the Company. The agreements include a base salary, plus stock options [See Note 11]. Additionally, other benefits are provided including participation in the Company's incentive compensation plans. The current agreements cover three year periods ending December 31, 1998 and September 14, 2000. INCENTIVE COMPENSATION PLANS - For the years ending December 31, 1996 and 1995, the Company approved a management and an employee compensation plans to compensate those individuals who contribute to the financial success of the Company. The plans were funded based on predetermined levels of pretax income from the Company's operations. For 1995, the management and employee plans were funded as pretax earnings from operations, not including expenses attributable to acquisition activities, exceeded the predetermined level of $1,700,000 and $1,400,000, prior to the accrual of the incentive bonus expenses, respectively. Management and employee incentive compensation of $74,616 and $67,419, respectively was paid or accrued during 1995. For 1996 the plans were not funded as pretax earnings from operations did not exceed the predetermined levels. For 1997, the Board of Directors established a combined incentive compensation plan for management and employees, which is funded based on the individual achieving specific personal objectives and upon the Company meeting predetermined sales revenues and pretax income from operations. For 1997 the plan was not funded as the individual's objectives and predetermined sales and earnings levels were not achieved. F-13 NOTE 9 - 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, 1997 and 1996, the total of all deferred tax assets was $619,000 and $656,000 and the total of the deferred tax liabilities was $203,000 and $126,000. 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. The components of income tax expense from continuing operations for the years ended December 31, 1997, 1996 and 1995 consist of the following: 1997 1996 1995 ----------- ----------- ---------- Current income tax expense: Federal $ - $ 25,479 $ 37,442 State 10,816 101,432 69,142 ----------- ----------- ---------- Net tax expense 10,816 126,911 106,584 ----------- ----------- ---------- Deferred tax expense (benefit) arising from: Excess of tax over financial accounting depreciation $ 77,000 $ 16,169 $ 54,154 Carryforward of excess contributions - - 5,200 Use of federal NOL carryforwards 203,799 614,946 515,442 Use of state NOL carryforwards (1,941) - 67,897 Federal alternative minimum tax credit - (25,479) (37,442) State alternative minimum tax credit (10,816) - (68,342) Inventory 263A adjustment (8,112) (1,771) (360) State investment tax credits (145,930) 21,549 (21,549) ----------- ----------- ---------- Net deferred tax expense $ 114,000 $ 625,414 $ 515,000 ----------- ----------- ---------- 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: 1997 1996 1995 ----------- ----------- ---------- Computed tax at the expected statutory rate $ 286,315 $ 614,500 $ 582,900 ----------- ----------- ---------- State and local income taxes, net of federal benefit 51,688 110,940 105,226 Non-deductible expenses 18,923 11,792 9,734 Goodwill amortization 16,855 9,832 - State tax credits (145,930) 7,237 - F-14 Effect of alternative minimum taxes 7,139 2,022 (22,708) Other Items (110,174) (3,998) (53,568) ----------- ----------- ---------- Income tax expense $ 124,816 $ 752,325 $ 621,584 ----------- ----------- ---------- As of December 31, 1997 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 $823,000 that expire in 2006 and 2012. The temporary differences and carryforwards gave rise to the following deferred tax asset (liability) at December 31, 1997 and 1996: 1997 1996 ----------- ----------- Excess of tax over book accounting depreciation $ (203,000) $ (126,000) Inventory 263A adjustment 15,610 7,498 State alternative minimum tax credits 82,338 71,522 Federal alternative minimum tax credits 93,903 93,903 State Investment Tax Credits 145,930 - Benefit of future losses from discon- tinued operations - 231,277 Federal NOL carryforwards 279,278 251,800 State NOL carry forwards 1,941 - 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 tax credits are from the purchase of manufacturing equipment and expire in March 2008. As of December 31, 1997 and 1996 the deferred tax asset (liability) consisted of the following: 1997 1996 ----------- ----------- Current deferred tax assets $ 619,000 $ 656,000 Deferred tax assets (liabilities) (203,000) (126,000) ----------- ----------- $ 416,000 $ 530,000 ----------- ----------- 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. NOTE 10 - EARNINGS PER SHARE The following data shows the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of potential dilutive common stock for the years ended December 31, 1997, 1996 and 1995: F-15 FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995 ----------- ----------- ----------- Income from continuing operations avail- able to common stockholders $ 717,287 $ 446,967 $ 1,092,740 ----------- ----------- ----------- Weighted average number of common shares outstanding used in basic earnings per share for the years ending 11,241,892 11,168,231 9,143,720 Effect of dilutive securities: Stock options 254,316 650,906 443,217 Stock warrants - 339,402 - Weighted number of common shares and potential dilutive common shares outstanding used in dilutive earning per share 11,496,208 12,158,539 10,532,307 ----------- ----------- ----------- The Company had at December 31, 1997, 1996 and 1995 options and warrants to purchase 1,019,995, 360,000 and 3,013,705 shares of common stock , respectively, at prices ranging from $1.34 to $2.10 per share, that were not included in the computation of diluted earnings per share because their effect was anti-dilutive (the options exercise price was greater than the average market price of the common shares). The Company subsequent to the year ending December 31, 1997, issued options to employees, directors and a consultant to purchase 1,177,350 common shares at $1.015 to $1.14 per share, expiring on April 30, 2005 through March 25, 2008. In connection with the subsequent grant of options, 649,996 options held by directors either expired were canceled by the Company. The Company also subsequently issued 3,000 shares of restricted common stock to a consultant for services valued at $2,565. NOTE 11 - STOCKHOLDERS' EQUITY TREASURY STOCK - During 1997 and 1996 the Company purchased 352,700 and 396,035 shares of common stock for $407,053 and $594,053, respectively, on the open market to be retired by the Company. 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. The exercise period of the warrants was extended to March 18, 1996. 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 F-16 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 remaining 128,438 units and the 21,562 warrants issued on the exercise of the option expired, during 1996 COMMON STOCK ISSUANCES - During 1997 and 1996, the Company issued 5,000 and 30,000 shares of restricted common stock valued at $4,106 and $36,790, respectively, in exchange for services rendered. The Company issued during 1997 and 1996, 10,000 and 50,000 shares of stock, respectively, in connection with options exercised, under the 1993 stock option plan. 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. The restricted stock issued during the years ended December 31, 1997, 1996 and 1995 for non-cash consideration were valued at the mean between the closing bid as less 25%-35% attributable to the transferability restrictions of the stock. The Company, subsequent to the year ended December 31, 1997, issued 3,000 restricted shares of common stock to a consultant for services valued at $2,565. 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, 1997 and 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 1997, 1996 and 1995 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: 1997 1996 1995 ----------- ----------- ----------- Net Income As reported $ 717,287 $ 446,967 $ 1,092,740 Proforma $ 714,407 $ 443,278 $ 1,091,907 Basic earnings per share As reported $ .06 $ .04 $ .11 Proforma $ .06 $ .04 $ .11 Diluted earnings per As reported $ .06 $ .04 $ .10 share Proforma $ .06 $ .04 $ .10 F-17 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, 1997, 1996 and 1995 risk-free interest rates of 6.3%, 6.3% and 6.2% expected dividend yields of zero, expected life of 5.6, 8.1 and 8.3 years, and expected volatility 45%, 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, 1997 and 1996, total options available to be granted under the Plan amounted to 1,310,005 and 1,110,005. A summary of the status of the options granted under the Company's stock option plan and other agreements at December 31, 1997, 1996 and 1995, and changes during the years then ended is presented below: DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------- ------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- -------- --------- -------- ---------- -------- Outstanding at beginning of period 2,041,495 $1.35 2,026,495 $1.22 1,479,995 $1.10 Granted 172,000 $1.24 400,000 $1.88 625,000 $1.50 Exercised (10,000) $ .93 (50,000) $ .93 (48,500) $ .93 Forfeited (302,000) $1.78 (315,000) $1.30 - - Expired (70,000) $1.27 (20,000) $ .93 (30,000) $ .93 --------- -------- --------- -------- ---------- -------- Outstanding at end of Period 1,831,495 $1.28 2,041,495 $1.35 2,026,495 $1.23 --------- -------- --------- -------- ---------- -------- Weighted average fair value of options granted during the year 172,000 $.03 400,000 $.05 625,000 $.04 --------- -------- --------- -------- ---------- -------- A summary of the status of the options outstanding under the Company's stock option plans and employment agreements at December 31, 1997 is presented below: F-18 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 2 months $ .75 200,000 $ .75 $0.93 (b) 581,500 7 years $ .93 570,388 $ .93 $1.50 (c) 499,995 2 months $ 1.50 499,995 $ 1.50 $1.50 (d) 200,000 3 years $ 1.50 133,332 $ 1.50 $2.00 (e) 50,000 8 years $ 2.00 40,278 $ 2.00 $1.87 (f) 70,000 3 years $ 1.87 30,000 $ 1.87 $1.34 (g) 100,000 6 years - - - $2.03 (h) 100,000 8 years $ 2.03 40,000 $ 2.03 $1.10 (i) 30,000 4 years $ 1.10 30,000 $ 1.10 --------- --------- 1,831,495 1,543,993 (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. The options subsequently expired as of March 11, 1998. (b) In December 1994, the Board of Directors granted stock options exercisable at $.93 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 and expire on March 11, 1998. As of January 29, 1998, 399,994 options were canceled with the remaining 99,999 options 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. The options subsequently were canceled as of January 29, 1998. (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. The Options were subsequently canceled as of January 29, 1998. 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 1997 and 1996, the predetermined levels of profitability were not achieved and a total of 80,000 options were forfeited. The 70,000 remaining options exercise price was subsequently changed to $1.015 per share on January 29, 1998. The vesting provisions for the 40,000 options vesting December 31, 1998 was also changed to exclude the Company attaining certain levels of profitability. F-19 (g) Incentive stock options to purchase 100,000 shares of common stock at $1.34 per share granted in September 1997, to the Chief Operating Officer. The options vest as to 16,667 on March 15, 1998 and the remaining 1/36th of the remaining 83,333 each month commencing April 15, 1998 through April 15, 2000, with all options expiring on September 14, 2003. The options exercise price was subsequently changed to $1.015 per share on January 29, 1998. (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 for the 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. The options exercise price was subsequently changed to $1.015 per share on January 29, 1998. (i) During May 1996, the Board on Directors granted incentive stock options to a consultant to purchase 72,000 shares of the common stock at $1.095 per share. The options vest as to 6,000 per month commencing March 22, 1997, with all options expiring on May 20, 2002. On July 31, 1997 42,000 of the options expired upon termination of the consultant's services. The Company subsequent to the year ending December 31, 1997, issued options to employees, directors and a consultant to purchase 1,177,350 common shares at $1.015 to $1.14 per share, expiring on April 30, 2005 through March 25, 2008. 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, ------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Broker A $ - $ 5,191,525 $ 5,731,106 Broker B 1,940,461 1,851,824 1,852,410 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, 1997, 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 the former shareholders of Alborough, Inc. as minimum F-20 sales to the specified customers had not been achieved during the year ended December 31, 1997. As of December 31,1997 Alborough, Inc. had been merged into the Parent. 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 business was disposed of during the second quarter of 1997. AFDI, Inc. is reported as a discontinued operation for the year ended December 31, 1996 and 1995. 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. At December 31, 1997 AFDI, Inc is a dormant subsidiary of the Company. 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) (3,043,082) Other income (expense) 251,967 119,644 Provision for taxes (575,817) (621,584) ------------ ------------ Net income $ 791,779 $ 1,092,740 ------------ ------------ 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 ------------ ------------ NOTE 15 - LITIGATION On June 11, 1997, Mass Marketing Services filed a lawsuit in Superior Court of San Diego County, California against the Company seeking damages for breach of contract, open book account and reasonable value of services rendered. The lawsuit arose after the Company terminated its sales representation agreement with Mass Marketing. Mass Marketing asserted that it is entitled to an additional ten months of commissions (approximately $100,000) and attorneys fees under the agreement. The parties agreed to arbitrate the dispute in San F-21 Mateo County, California. No date has been set for the arbitration. Management cannot reasonably predict the ultimate outcome, but believes that it will not have a material effect on the Company's financial position. The Company intends to vigorously defend their position. 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: March 30, 1998 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, March 30, 1998 William J. Armanino Chief Executive Officer, Chief Financial Officer, Chairman of the Board /s/ Deborah Armanino-LeBlanc Vice President, Secretary March 30, 1998 Deborah Armanino-LeBlanc and Director /s/ John J. Micek, III Director March 30, 1998 John J. Micek, III /s/ David Scatena Director March 30, 1998 David Scatena /s/ Robert M. Geller Director March 30, 1998 Robert M. Geller /s/ Tino Barzie Director March 30, 1998 Tino Barzie /s/ Henry W. Poett, III Director March 30, 1998 Henry W. Poett, III /s/ Soren Svenningsen Director March 30, 1998 Soren Svenningsen EX-10.5 2 WELLS FARGO RENEWAL NOTICE P.O. Box 1060 San Jose, CA 95108 September 8, 1997 Armanino Foods of Distinction, Inc. 30588 San Antonio Street Hayward, CA 94544-7102 RE: Renewal of Business PrimeLine Application # 04285351 Customer # 0335257639 Dear Armanino Foods: Wells Fargo Bank is pleased to inform you that your Business PrimeLine #0335257639, in the amount of $500,000.00, was renewed on September 8, 1997. The new maturity date is September 10, 1998. Your PrimeLine remains subject to all terms and conditions of the Business Loan Agreement, as modified by this Renewal Notice. The interest rate to be applied to the unpaid principal balance of the Note will be at a rate of 0.75% over the Index. A non-refundable renewal fee of $1,500.00 will be charged to your account #0295087449. If you have any questions, please do not hesitate to call us at our toll free number 1-800-372-8242 press 1, press 3. We appreciate your business and look forward to continuing to serve as your business bank. Sincerely, /s/ Liela Alemania Liela Alemania Documentation Representative EX-10.12 3 EMPLOYMENT AGREEMENT ROBERT F. KRAEMER THIS EMPLOYMENT AGREEMENT is made and entered into as of September 15, 1997, by and between ARMANINO FOODS OF DISTINCTION, INC., a Colorado corporation ("Corporation"), and ROBERT P. KRAEMER ("Employee") under the following circumstances: A. Corporation desires to employ Employee as its 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: 1. Employment. Corporation shall employ Employee as the Chief Operating Officer of Corporation pursuant to the terms and conditions hereinafter set forth, and Employee shall perform the duties of such position. 2. Terms of Employment. Subject to the provisions of paragraph 7, the initial term of employment shall be three (3) years, commencing as of September 15, 1997, and terminating on September 14, 2000. 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. 3. 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. All current employees, other than the President and Chief Executive Officer, shall report to Employee. Such reporting requirements may be changed by the President and Chief Executive Officer from time to time in the exercise of his reasonable business judgment. The guidelines for many of the specific duties and responsibilities of such position are set forth on the position description attached hereto as Exhibit A. It is anticipated that Employee's duties and responsibilities as manager of all day-to-day operational activities of Corporation shall include immediate, short-term, mid-term and long-term goals and objectives established by the President and Chief Executive Officer in conjunction with members of the Corporation's Board of Directors. Such goals may be modified from time to time consistent with Employee's duties as the Chief Operating Officer of Corporation. Employee agrees to perform his services conscientiously, effectively and to the best of his ability. 4. 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 Thirty Thousand Dollars ($130,000.00), from the effective date of this Agreement payable in accordance with Corporation's normal payroll practices. Such base salary shall be reviewed no later than March 15,1998 and at least annually thereafter for increases by the Board of Directors at the same time the officers of Corporation are reviewed. 5. Incentive Bonus Compensation. As further consideration for Employee's services under this Agreement, Corporation shall pay Employee such incentive bonus compensation to which Employee may be entitled pursuant to Corporation's Employee Incentive Compensation Plan as may be adopted by the Board of Directors of Corporation for the years 1998, 1999 and 2000. Employee shall be entitled to a pro-rata distribution, if any, of Corporation's Employee Incentive Compensation Plan as in effect for the year 1997. Employee acknowledges that he has received a copy of the Employee Incentive Compensation Plan as in effect for the year 1997. 6. Benefits. In consideration for Employee's accepting the employment provided for herein, Corporation agrees to provide the following benefits: a. After ninety (90) days of employment, all the standard benefits normally provided to the employees of Corporation and described in Corporation's employee handbook, 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's standard ninety (90) day eligibility period applicable to vacation and sick leave accrual and holiday pay shall not apply to Employee. Employee hereby waives coverage under Corporation's health and dental insurance plan until March 15, 1998 without reimbursement from the Corporation. b. During 1997, Employee shall accrue vacation days on a prorated basis at the annual rate of three (3) weeks per year. Employee shall be entitled to three (3) weeks paid vacation days per calendar year thereafter and in accordance with Corporation's standard policies. 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 100,000 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. 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. f. Corporation shall reimburse Employee for automobile expenses incurred by Employee in carrying out his duties hereunder in an amount up to $600 per month. Such reimbursement shall include, but not be limited to, seventy-five percent (75%) of gas, oil, maintenance, lease payments, automobile loan or similar payments and insurance expenses; provided, however, that if Employee owns 2 his own vehicle, and does not incur automobile lease or loan payments, Employee shall be reimbursed for such automobile use at the applicable federal income tax mileage reimbursement rate. Subject to the submission by Employee of the documentary evidence as required below, Employee's business use an automobile shall be assumed to be seventy-five percent (75%) of its total use. Employee shall furnish to Corporation adequate records and other documentary evidence required by federal and state statutes and regulations for the s~stant-aticn of such payments as deductible business expenses of Corporation and not as deductible compensation to Employee. g. Corporation shall provide Employee with the use of, or reimburse Employee for the cost of, an apartment, or other suitable housing, within close proximity to Corporation's offices, to enable Employee to more effectively fulfill his obligations under this Agreement. The parties agree that the initial budgeted cost for such required local housing shall be one thousand dollars ($1,000) per month. In the event Corporation is required to commit to a lease term for such apartment, rather than a month to month tenancy, and Employee terminates his employment hereunder pursuant to Section 7(b) hereof prior to the end of the term of such tenancy, Employee shall indemnify Corporation for fifty percent (50%) of any costs, expenses or damages incurred as a result of such early termination. In addition, in the event Employee moves his permanent residence to a location which provides Employee with more convenient access to Corporation's offices, Corporation shall assist Employee in defraying the cost of such relocation in an amount mutually agreeable to the parties. 7. 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 one month of base pay for each month subsequent to September 15, 1997 in which the effective date of termination occurs, up to a maximum of twelve (12) months' base 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" if: (I) it is by reason of Employee's commission of acts of neglect, dishonesty, fraud or other acts involving moral turpitude as determined in the good faith judgment of the Board of Directors of Corporation; (ii) failure to follow lawful directives of Corporation's Board of Directors, (iii) material breach of any of the provisions of this Agreement by Employee, (iv) the habitual neglect by Employee of his duties hereunder, or (vi) continued unsatisfactory performance of Employee's duties hereunder as determined in the good faith judgment of the Board of Directors of Corporation. 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 small cease, including Employee's right to his base salary and incentive bonus compensation benefits. c. Survival of Severance Rights. In the event Employee's employment is terminated by Corporation after the expiration of the term of this Agreement for any reason other than "just cause", including the failure to renew or extend this Agreement or negotiate a new agreement with Employee, then all of the rights, duties and obligations of the parties to each other shall cease upon 3 the effective date of termination, except that Corporation shall pay to Employee a sum equal to twelve (12) months' base pay. 8. Confidentiality and Non-Disclosure. Employee agrees to execute and comply with the terms and conditions of Corporation's Employee Confidentiality and Rights Agreement, a copy of which has been provided to Employee. 9. 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 Falr 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. 10. 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 Attention: William J. Armanino To Employee: Robert P. Kraemer 2568 Butch Drive Gilroy, CA 95020 4 11. 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, 1nducements, 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. f. Employee shall have the right to rescind this Agreement if the board of directors of Corporation shall fail to approve or ratify the Stock Option Agreement attached hereto as Exhibit B at its next regularly scheduled board of directors meeting. 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 P. Kraemer ROBERT P. KREAMER "Employee" 5 EX-10.13 4 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT ("Agreement") is made effective as of the 1st day of June, 1997, by and between ROBERT H. ANDERSON ("Anderson") and ARMANINO FOODS OF DISTINCTION, INC., a Colorado corporation (the "Company"), under the following circumstances: A. Anderson is the former Chief Operating Officer of the Company having resigned his positions with the Company. B. Because of the knowledge of the Company's business and customers which Anderson has acquired over the past nine (9) months, the Company desires to retain Anderson as a consultant to the Company during the next nine (9) month period. C. Anderson is willing to render to the Company consulting services in connection with its business and customers upon the terms and conditions hereinafter set forth. NOW, THEREFORE, the parties hereto agree as follows: 1. Consulting. The Company hereby retains Anderson to perform independent consulting services for a period commencing as of June 1, 1997 the date hereof and terminating on February 28, 1998. Anderson hereby accepts the Company's retainer as independent consultant. 2. Consulting Services. When requested by the Company, Anderson shall provide the Company with advice and counsel regarding the Company's business matters. Anderson shall provide such services at such times (up to two days equivalent per month on a non-cumulative basis) and locations as are reasonably requested by the Company, provided, however, that such services do not conflict, with respect to either times or duties, with any employment duties of Anderson to any new employer, any consulting assignment or self- employment duties. Additional time requested of Anderson by the Company shall be compensated at a mutually agreeable rate. The Company and Anderson agree that in the event Anderson fails to provide such services to the Company when requested and continues to do so for a period of thirty (30) days after notified in writing by the Company of such failure, the consulting payment required to be paid hereunder shall be suspended until Anderson complies with the Company's request. Anderson shall exercise good faith and best efforts in providing such consulting services to the Company. All of Anderson's services performed hereunder shall be for the exclusive benefit of the Company. Anderson shall be reimbursed for all reasonable business expenses incurred by him in performance of any services hereunder, as approved in advance by the Company. 3. Consulting Fee. The Company shall pay a quarterly consulting fee (the "Consulting Fee") to Anderson of thirty-nine thousand dollars ($39,000.00) payable in three (3) installments of thirty-nine thousand dollars each on July 1, 1997, October 1, 1997 and January 2, 1998. 4. Relationship of the Parties. The relationship of Anderson to the Company shall be that of an independent contractor. Anderson shall not be deemed to be employee or an agent of the Company for any purpose. Anderson agrees not to represent or warrant to any other person that he has any authority to bind or commit the Company to any obligation. 5. Benefits. Anderson shall not have any claim under this Agreement or otherwise against the Company for compensation other than as set forth in paragraph 3 above. 6. Assignment and Acceleration. Anderson shall not assign, sell, transfer or delegate any of his duties pursuant to this Agreement. In the event a sale, merger or other change in control of the Company, any unpaid portion of the Consulting Fee shall be paid immediately in advance. 7. Amendment. This Agreement may be modified or amended only by a writing signed by both parties hereto. 8. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter of this Agreement and any and all written or oral agreements heretofore existing between the parties hereto are expressly canceled. 9. Inurement and Death Benefit. This Agreement shall inure to the benefit of and be binding upon the parties, their heirs, legal representatives, successors and assigns. In the event of the death of Anderson during the term of this Agreement, the unpaid portion of the Consulting Fee shall be paid to Anderson's heirs. 10. Governing Law. This Agreement shall be governed and interpreted by the laws of the State of California. IN WITNESS WHEREOF, the parties hereto above have executed this Agreement on the day and year first written above. /s/ Robert H. Anderson ROBERT H. ANDERSON "Anderson" ARMANINO FOODS OF DISTINCTION, INC. By: /s/ William J. Armanino William J. Armanino Chairman, President and CEO EX-21 5 SUBSIDIARIES OF THE REGISTRANT Name State of Incorporation Other Names Used in Business - --------------- ---------------------- ---------------------------- AFDI, Inc. California None EX-23 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We hereby consent to the incorporation of our report dated January 12, 1998, except for Notes 10 and 11 as to which the date is March 11, 1998, appearing in the Annual Report on form 10-K of Armanino Foods of Distinction, Inc. for the year ended December 31, 1997, 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 27, 1998 EX-27 7
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, 1997, and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1997 DEC-31-1997 181,013 2,975,403 1,720,683 0 1,574,858 7,308,630 5,070,557 0 12,935,625 1,583,843 0 0 0 11,136,042 (190,644) 12,935,625 15,347,165 15,347,165 10,855,162 10,855,162 3,811,365 0 23,834 842,103 124,816 717,287 0 0 0 717,287 .06 .06
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