-----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, MxsRoi5NJrtnDC4Jwfvu6F/DK1rO9on5p1+z+fCzf0pruw0bOFd+TNdEpjlzjTHT R40b2Hm51Qg2oGxJpPPXYg== 0000948830-99-000145.txt : 19990331 0000948830-99-000145.hdr.sgml : 19990331 ACCESSION NUMBER: 0000948830-99-000145 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: 99578759 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 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, 1998 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, 1999, 1,945,081 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 $3,262,000. 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 20, 1999. 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 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; in April 1991, the Company effected a one for fifteen reverse split of the shares of the Company's Common Stock outstanding; in June 1998, the Company effected a one for 300 reverse split immediately followed by a 300 for one forward split of the shares of the Company's Common Stock outstanding; and in January 1999, the Company effected a one for five reverse split of the shares of the Company's Common Stock outstanding. All financial and share data in this Report 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. 2 PRODUCTS The Company's line of frozen products presently includes pesto sauces, stuffed pastas and pasta sheets as well as value-added specialty Italian pastas, focaccia, meatballs and 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 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. Basil, Dried Tomato Garlic and Roasted Red Bell Pepper pesto sauces are available to the Company's retail, foodservice and industrial customers, and the Cilantro pesto is available 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 pastas and pasta sheets, cooked and uncooked. The Company's line of frozen stuffed pastas, both cooked and uncooked, includes meat and cheese ravioli; cheese and tri-color raviolini; meat and cheese tortellini and tri-color tortellini/capelleti style, 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 -- Potato; and (c) 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 frozen meatballs presently include two varieties -- beef meatballs and turkey, beef, pesto meatballs. The beef meatball line is available to its retail customers under the Armanino label; and the Turkey, Beef, Pesto meatball line is available to its retail customers under the Armanino label as well as to foodservice customers under the Italian Holiday label. The Company presently markets a plain frozen foccacia. 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 1999. The Company is also continuing to research and develop additional frozen sauces for the foodservice and retail market. During the first quarter of 1999, the Company introduced "S.F." (specially formulated) Pesto for Pizza to its foodservice customers. Additionally, the Company plans to introduce chicken ravioli and tortellini to its retail customers during the second quarter of 1999. With respect to the Company's foodservice line, the Company is currently researching the addition of new sauces, stuffed pastas and entree products to its line during 1999. 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 lasagna, 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. In 1998, the Company streamlined the pasta special product line (such as tortellini and raviolini) by moving the production of these products from the entree line to the ravioli line. The move increased manufacturing capacity and efficiency of both lines. 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 4 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 were 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 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 began manufacturing and packaging these products in-house during the third quarter of 1998 and utilizes S.F. Pasta on an emergency basis only. 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. 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 Modesto, California laboratory firm to assist in this testing. The Company completed its Hazard Analysis and Critical Control Points program, required by USDA regulations. The Company implemented this program subsequent to receiving approval of the program by the U.S.D.A. in January 1999. 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. 5 DISTRIBUTION AND MARKETING The Company's products are marketed through a network of food brokers and sold to retail, foodservice, club-type stores, and industrial accounts. During the third quarter of 1998, the Company appointed DOT Foods to distribute the Company's line of products to new and existing customers on a non-exclusive national basis. DOT Foods is a master distributor servicing both regional and national distributors. Approximately 30% of the Company's sales are currently handled by DOT Foods. For the year ended December 31, 1998, three independent brokers, Progressive Marketing, Herspring and Kelley-Clarke, Inc. accounted for approximately 18%, 16% and 14%, respectively, of the sales of the Company. 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. The loss of brokers or distributors 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 or distributors have established accounts with customers such as supermarket chains, the termination of a broker or distributor will not generally affect sales to such customers when another broker or distributor 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, vegetable oil, eggs, dairy products, cooked meat, bread crumbs, flour, garlic, 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, they have a relatively shorter shelf life and are more expensive than many competing dried products and products packed in cans or jars. Although these types of competing products are marketed by some companies which have significantly greater financial and other resources than those of the Company, including advertising budgets, the Company markets its products on the basis of quality and natural ingredients rather than price. 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 10, 1999, the Company employed 35 persons on a full-time basis and two on a part-time basis. The Company also presently uses one to two persons on a full-time basis, as needed, from a temporary employment service. 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 a trademark registration 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 August 1998, the Company received a trademark registration for the mark Pasta Regina from the U.S. Patent & Trademark Office. The Company uses this mark on certain of its flat and filled pastas, including ravioli and tortellini sold to foodservice, industrial and retail accounts. 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 $7,720 per month through July 31, 2000. The monthly rental will increase effective on August 1, 2000 and August 1, 2002 based upon the increase in the Consumer Price Index on those dates with a minimum of 3.5% cumulative annual increase and a maximum of a 7% cumulative annual increase. The lease expires on August 9, 2003 with an option to extend the term for two periods of five years each. In addition to the base rent the Company is required to pay all utilities, expenses, maintain insurance on the property and pay any increases in real estate taxes on the property. 8 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. The Company is not a party to any material legal proceeding. 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, 1998. 9 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. The prices shown give retroactive effect to a 1 for 5 reverse stock split which became effective at the close of business on January 29, 1999. QUARTER ENDED HIGH LOW ------------------ ------- ------- March 31, 1997 $7.34 $5.31 June 30, 1997 $6.56 $4.69 September 30, 1997 $7.19 $5.31 December 31, 1997 $8.75 $4.23 March 31, 1998 $6.09 $4.69 June 30, 1998 $6.09 $3.75 September 30, 1998 $5.00 $2.34 December 31, 1998 $5.00 $2.50 APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of holders of record of the Company's no par value common stock at March 9, 1999, was 448. DIVIDENDS. Holders of common stock are entitled to receive such dividends as may be declared by the Company's Board of Directors. No dividends have been paid with respect to the Company's common stock and no dividends are anticipated to be paid in the foreseeable future. PRIVATE SALES OF SECURITIES. During the quarter ended December 31, 1998, the Company sold 3,000 shares of its Common Stock which were not registered under the Securities Act of 1933, as amended, to Paul Irwin, a consultant to the Company, in exchange for services valued at $2,578. In connection with this issuance, the Company relied on Section 4(2) of the Securities Act of 1933, as amended. The shares were offered for investment only to a sophisticated investor and not for the purpose of resale or distribution, and the transfer thereof was appropriately restricted by the Company. ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth certain selected financial data with respect to the Company, and is qualified in its entirety by reference to the financial statements and notes thereto filed herewith: BALANCE SHEET DATA: At December 31, 1998 1997 1996 1995 1994 ----------- ----------- ---------- ---------- ---------- Total Assets $11,042,613 $12,935,625 $11,926,101 $9,054,289 $8,047,228 Long-Term Debt 142,291 203,384 45,850 71,599 95,120 Cash Dividends Per Share -0- -0- -0- -0- -0- 10 STATEMENT OF OPERATIONS DATA: For the Years Ended December 31, 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- Net Sales $13,512,172 $15,347,165 $15,305,029 $13,504,429 $10,451,956 Net Income From Con- tinuing Operations 337,921 $ 717,287 $ 1,055,122 $ 1,092,740 $ 470,252 Net Income From Con- tinuing Operations Per Common Share $.15 $.31 $.43 $.50 $.25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 VS. YEAR ENDED DECEMBER 31, 1997 Net sales for the year ended December 31, 1998 were $13,512,172 compared to $15,347,165 for the year ended December 31, 1997. The decrease in sales for the year ended December 31, 1998 is attributable to lower sales of the Company's meatball product line to a club-store customer. The lower meatball sales were partially offset by five months of entree product sales to a co- pack customer. Additionally, the pesto product line experienced increased sales during the year and helped offset some of the meatball sales decreases. The increases in pesto sales were the result of the Company's continuing focus on expansion of the customer base for this product line. During the year ended December 31, 1998, the Company had not obtained significant sales of the entree product that were anticipated, other than to its co-pack customer during the five months ended May 31, 1998. Cost of goods sold as a percentage of net sales decreased from 70.7% for the year ended December 31, 1997 to 70.2% for the year ended December 31, 1998. The decrease in this percentage is due to the shift in the product mix due to the lower meatball product line sales, which carried lower margins than both the pesto and pasta product lines. The decrease in this percentage due to the product mix was partially offset by higher entree production costs for a co-pack customer. Operating expenses as a percentage of net sales increased to 26.8% for the year ended December 31, 1998 compared to 24.8% for the year ended December 31, 1997. The increase in the percentage is due to the decrease in net sales. Total dollar amount of these expenses decreased by approximately $195,000 for the year ended December 31, 1998, as compared to the year ended December 31, 1997. The decreases were primarily in salary expense due to vacancies in some management positions for a portion of the year. Additionally, advertising, demonstrations and promotions showed a decrease for the year, primarily due to lower demonstrations at club-stores due to lower club-store meatball sales. Interest and other income decreased for the year ended December 31, 1998 compared to year ended December 31, 1997. This decrease was due to the combination of lower cash reserves and lower interest rates on Treasury Bills during 1998 as compared to 1997. 11 Income from continuing operations was $337,921 for the year ended December 31, 1998 compared to $717,287 for the year ended December 31, 1997. The decrease in net income is primarily attributed to lower sales and higher costs attributable to the manufacture of the entree products for a co-pack customer. Tax expense in 1997 was lower compared to 1998 due to manufacturing credits gained on machinery purchases which were taken in 1997. Net income was $218,461 for the year ended December 31, 1998, compared to $717,287 for the year ended December 31, 1997. The net income in 1998 was impacted by lower sales, higher manufacturing costs and a return to normal tax levels. Additionally, 1998 net income was impacted by an extraordinary charge of $119,460 net of tax effect, as a result of a settlement of a lawsuit involving the termination of a sales representation contract with the Company's former club-store broker. 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 12 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. 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. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the Company had working capital of $4,982,662, a decrease of $742,125 from December 31, 1997. The decrease is primarily attributable to the utilization of cash reserves for the purchase of the Company's stock on the open market. Current assets included cash, U.S. treasury bills, and accounts receivable which totaled $3,673,603. Management believes that this level of working capital is adequate to meet anticipated needs for liquidity. During the year ended December 31, 1998, cash provided by operating activities of the Company amounted to $1,287,557. This was primarily a result of non-cash depreciation and amortization expense, decrease in accounts receivable and decrease in inventory. For the years ended December 31, 1997, and December 31, 1996, the Company's operating activities generated $855,635 and $896,171 in cash, respectively. This was primarily a result of 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 the 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 1, 1998, the Company has invested $1,768,283 in U.S. treasury bills. On September 8, 1998, 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, 1999. At December 31, 1998 and December 31, 1997, the Company had $0 and $287,439 outstanding, respectively, under this line. The purpose of obtaining the line of credit is to afford the Company greater cash liquidity and management of its cash investments. During 1998, the Company's Board of Directors approved two stock buy-back plans to purchase Company stock totaling $1,250,000. As of December 31, 1998, the Company paid $1,137,280 for common stock purchased on the open market. The Company paid an additional $113,500 subsequent to December 31, 1998, to purchase common stock on the open market. 13 The Company presently has no material commitments for capital expenditures. YEAR 2000 COMPLIANCE In 1998, the Company began assessing the various issues relating to the year 2000. During 1998 the Company has upgraded its accounting application software which has been certified by the manufacturer to be year 2000 compliant. The accounting software includes sales order, inventory, accounts receivable, accounts payable, general ledger as well as other modules. The Company utilized an outside firm to evaluate its information technology systems. This outside firm performed the initial evaluation and testing of the Company's internal network of LAN's, the payroll processing system and production related processing equipment. The outside firm is in the process of compiling a report on these systems. The report will contain recommendations on any modifications the Company will need to make in order to be year 2000 compliant. The Company has incurred approximately $2,000 on upgrading software. Approximately $4,000 has been spent on evaluating and testing current systems during the fourth quarter of 1998. Additional costs would involve purchasing new computer equipment or converting parts in processing equipment. The Company will have estimates for these additional costs by April 30, 1999. The Company is planning to review its external relationships in order to determine the impact which may arise from its dealings with customers, suppliers and service providers. The Company sells to approximately 250 customers. One customer accounts for approximately 22% of total sales. The Company is in the process of analyzing systems in order to implement Electronic Data Interchange. At the present time this customer would be the only trading partner with E.D.I. transactions. This customer has notified the Company that they will be year 2000 compliant. Surveys will be sent to the remaining customers by May 31, 1999 to attempt to determine the extent of their compliance with the year 2000 issues. The Company does not expect a material adverse affect from any single customer in this group. However, if a large number of customers in this group ceased operations, the Company would be negatively impacted. Management is unable to quantify this risk at this time. The Company has not yet initiated formal contingency planning processes to mitigate the risk to the Company if any vendors or customers are not prepared for the year 2000. The Company intends to complete this process by June 30, 1999. The Company anticipates completion of the year 2000 project by the end of the second quarter of 1999. There is considerable work remaining and unforeseen difficulties may adversely affect the Company's ability to complete its systems modifications correctly, completely, on time or within its cost estimates. Additionally, there can be no assurance that third parties that the Company deals with will resolve their year 2000 issues completely and timely. Failure to complete the year 2000 project on time could have a material adverse affect on future operating results and financial condition. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not Applicable. 14 ITEM 8. FINANCIAL STATEMENTS. The financial statements and financial statement schedules are set forth on pages F-1 through F-22 hereto. 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 20, 1999. 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, December 31, 1998 and 1997 ....... F-2 Consolidated Statements of Operations, for the years ended December 31, 1998, 1997 and 1996 .............................. F-4 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 .................. F-6 Consolidated Statements of Cash Flows, for the years ended December 31, 1998, 1997 and 1996 .............................. F-8 Notes to Consolidated Financial Statements .................... F-10 (b) 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. 15 (c) 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) 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 Exhibit 10.14 to the Registrant's Commercial Security Report on Form 10-K for the fiscal Agreement with Wells Year ended December 31, 1994 Fargo Bank 10.5 Renewal Notice from Wells Filed herewith electronically Fargo, Inc. 10.6 Promissory Note dated Incorporated by reference to May 8, 1995, to Wells Exhibit 10.16 to the Registrant's Fargo Bank Form S-1 Registration Statement (File No. 33-40098) 10.7 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 16 10.9 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 10.10 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 10.11 Employment Agreement with Incorporated by reference to Robert P. Kraemer Exhibit 10.12 to the Registrant's Form 10-K for the year ended December 31, 1997 10.12 Consulting Agreemen with Incorporated by reference to Robert H. Anderson Exhibit 10.13 to the Registrant's Form 10-K for the year ended December 31, 1997 10.13 Consulting Agreement with Filed herewith electronically Robert P. Kraemer 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 as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1998, 1997 and 1996. 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, 1998 and 1997 and the results of their operations and their cash flows for the years ended December 31, 1998, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ Pritchett, Siler & Hardy, P.C. PRITCHETT, SILER & HARDY, P.C. January 19, 1999, except for Notes 10, 11 & 16 as to which the date is February 11, 1999 Salt Lake City, Utah F-1 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS December 31, 1998 1997 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 633,580 $ 181,013 Treasury bills, held to maturity 1,768,283 2,975,403 Accounts receivable, net 1,271,740 1,720,683 Inventory 1,183,370 1,574,858 Prepaid expenses 197,523 237,673 Current deferred tax asset 606,000 619,000 ----------- ----------- Total Current Assets 5,660,496 7,308,630 ----------- ----------- PROPERTY AND EQUIPMENT, net 4,867,679 5,070,557 ----------- ----------- OTHER ASSETS: Deposits 13,000 13,000 Goodwill, net 501,438 543,438 ----------- ----------- Total Other Assets 514,438 556,438 ----------- ----------- $11,042,613 $12,935,625 =========== =========== The accompanying notes are an integral part of these financial statements. F-2 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY December 31, 1998 1997 ----------- ----------- CURRENT LIABILITIES: Line of credit $ - $ 287,439 Accounts payable 539,905 1,154,037 Accrued expenses 76,837 74,570 Current portion capital lease obligation 61,092 67,797 ----------- ----------- Total Current Liabilities 677,834 1,583,843 DEFERRED TAX LIABILITY 321,000 203,000 CAPITAL LEASE OBLIGATION, less current portion 142,291 203,384 ----------- ----------- Total Liabilities 1,141,125 1,990,227 ----------- ----------- 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, 1,982,381 and 2,249,280 shares issued and outstanding at December 31,1998 and 1997, respectively 9,873,671 11,136,042 Additional paid-in-capital 22,311 22,311 Retained earnings (deficit) 5,506 (212,955) ----------- ----------- Total Stockholders' Equity 9,901,488 10,945,398 ----------- ----------- $11,042,613 $12,935,625 =========== =========== The accompanying notes are an integral part of these financial statements. F-3 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998 1997 1996 ----------- ----------- ----------- SALES, net of returns and discounts $13,512,172 $15,347,165 $15,305,029 COST OF GOODS SOLD 9,485,636 10,855,162 10,594,464 ----------- ----------- ----------- GROSS PROFIT 4,026,536 4,492,003 4,710,565 ----------- ----------- ----------- OPERATING EXPENSES: General and administrative 1,417,252 1,425,013 1,017,990 Salaries, wages and related payroll taxes 1,059,305 1,197,928 923,739 Commissions 384,613 333,516 400,311 Advertising, demonstrations, promotions and trade allowances 755,521 854,908 813,051 ----------- ----------- ----------- Total Operating Expenses 3,616,691 3,811,365 3,155,091 ----------- ----------- ----------- INCOME FROM OPERATIONS 409,845 680,638 1,555,474 ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest expense (11,630) (23,834) (7,791) Interest and other income 158,596 200,933 264,835 Loss on sale of fixed assets (542) (15,634) (5,081) ----------- ----------- ----------- Total Other Income 146,424 161,465 251,963 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 556,269 842,103 1,807,437 CURRENT TAX EXPENSE 25,808 10,816 126,911 DEFERRED TAX EXPENSE 192,540 114,000 625,414 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEMS AND DISCONTINUED OPERATIONS 337,921 717,287 1,055,112 EXTRAORDINARY ITEM: Loss on settlement of lawsuit (net of income taxes of $61,540 at December 31, 1998) (119,460) - - DISCONTINUED OPERATIONS: Loss from operations of AFDI, Inc. (net of income taxes of $210,168 at December 31, 1996) - - (313,550) Loss on disposal of AFDI, Inc. (net of income taxes of $197,464 at December 31, 1996) - - (294,595) ----------- ----------- ----------- [Continued] F-4 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS [CONTINUED] For the Years Ended December 31, 1998 1997 1996 ----------- ----------- ----------- LOSS FROM EXTRAORDINARY ITEM AND DISCONTINUED OPERATIONS (119,460) - (608,145) ----------- ----------- ----------- NET INCOME $ 218,461 $ 717,287 $ 446,967 ----------- ----------- ----------- EARNINGS PER COMMON AND EQUIVALENT SHARES: BASIC EARNINGS PER SHARE: Income from continuing operations $ .15 $ .32 $ .47 Extraordinary Item (.05) - - Loss from discontinued operations of AFDI, Inc. - - (.14) Loss on disposal of AFDI, Inc. - - (.13) ----------- ----------- ----------- BASIC EARNINGS PER SHARE $ .10 $ .32 $ .20 ----------- ----------- ----------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,185,423 2,248,375 2,233,646 ----------- ----------- ----------- DILUTED EARNINGS PER SHARE: Income from continuing operations $ .15 $ .31 $ .43 Extraordinary Item (.05) - - Loss from discontinued operations of AFDI, Inc. - - (.13) Loss on disposal of AFDI, Inc. - - (.12) ----------- ----------- ----------- DILUTED EARNINGS PER SHARE $ .10 $ .31 $ .18 ----------- ----------- ----------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - ASSUMING DILUTION 2,191,883 2,299,242 2,431,708 ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. F-5 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 [RESTATED]
Additional Retained Common Stock Paid-in Earnings Shares Amount Capital (Deficit) --------- ----------- ---------- ----------- BALANCE, December 31, 1995 2,028,865 $ 9,391,926 $22,311 $(1,377,209) [Restated] Shares of common stock issued for warrants exercised at $7.5 per share net of deferred offering costs of $1,702, January - March, 1996 342,536 2,567,321 - - Shares of common stock issued for underwriter units exercised at $9.45. per unit, February, 1996 8,625 81,504 - - Shares of common stock issued for options exercised at prices ranging from $4.63 to $6.41, April - June, 1996 10,000 46,250 - - Shares of restricted stock issued for services rendered at $5.60 to $6.40 per share, June - September, 1996 6,000 36,790 - - Shares of common stock repurchased and canceled at $7.50 per share, December, 1996 (79,207) (594,052) - - Net income for the year ended December 31, 1996 - - - 446,967 --------- ----------- ------- ----------- BALANCE, December 31, 1996 2,316,819 11,529,739 22,311 (930,242) Shares of restricted common stock issued for services rendered at $4.11 per share, January, 1997 1,000 4,106 - - Shares of common stock issued for options exercised at $4.63 per share, February, 1997 2,000 9,250 - - Shares of common stock repurchased and canceled at $5.45 - $5.80 per share, May to August, 1997 (70,540) (407,053) - - Net income for the year ended December 31, 1997 - - - 717,287 --------- ----------- ------- ----------- [Continued] F-6 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 [RESTATED] [CONTINUED] Additional Retained Common Stock Paid-in Earnings Shares Amount Capital (Deficit) --------- ----------- ---------- ----------- BALANCE, December 31, 1997 2,249,279 11,136,042 22,311 (212,955) Shares of restricted common stock issued for services rendered at $4.30 per share, October, 1998 600 2,578 - - Shares of common stock repurchased and canceled in connection with the 1 for 300 reverse stock split and 300 for 1 forward stock split at $4.75 per share July, 1998 (26,851) (127,669) - - Shares of common stock repurchased and canceled at $3.00 - $5.00 per share, September to December, 1998 (240,855) (1,137,280) - - Net income for the year ended December 31, 1998 - - - 218,461 Fractional share adjustment in connection with 1 for 5 reverse stock split 208 - - - --------- ----------- ------- ----------- BALANCE, December 31, 1998 1,982,381 $ 9,873,671 $22,311 $ 5,506 ========= =========== ======= ===========
The accompanying notes are an integral part of this financial statement. F-7 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents
For the Years Ended December 31, 1998 1997 1996 ----------- ----------- ----------- Cash Flows from Operating Activities: Net income $ 218,461 $ 717,287 $ 446,967 ----------- ----------- ----------- Adjustments to reconcile net income to net cash used by operations: Depreciation and amortization 666,260 489,688 386,838 Non-cash expenses 3,120 40,539 5,081 Changes in assets and liabilities: (Increase) decrease in accounts receivable 448,943 (22,344) (443,470) (Increase) decrease in inventory 391,488 (507,954) (109,104) (Increase) decrease in prepaid expenses 40,150 (129,567) (39,289) Change in deferred tax asset/liability 131,000 114,000 217,000 Increase (decrease) in accounts payable and accrued expenses (611,865) 229,131 187,335 (Increase) decrease in net assets from discontinued operations - - 169,668 Increase (decrease) in net liabilities of discontinued operations - (75,145) 75,145 ----------- ----------- ----------- Total Adjustments 1,069,096 138,348 449,204 ----------- ----------- ----------- Net Cash Provided by Operating Activities 1,287,557 855,635 896,171 ----------- ----------- ----------- Cash Flows from Investing Activities: Purchases of property and equipment (421,924) (2,281,583) (429,158) Proceeds from sale of property and equipment - 17,104 2,800 (Increase) decrease in deposits - 4,916 (464,610) (Purchase) redemption of US treasury bills, net 1,206,687 1,015,509 (1,532,759) Goodwill in purchase of subsidiary - - (609,938) ----------- ----------- ----------- Net Cash Provided (Used) by Investing Activities 784,763 (1,244,054) (3,033,665) ----------- ----------- ----------- Cash Flows from Financing Activities: Proceeds from borrowing on line of credit 287,439 - Payments on line of credit (287,439) - - Proceeds from notes payable - - 72,426 Payments on note payable - (32,073) (40,353) Payments on capital lease obligations (67,798) (35,093) (23,521) Proceeds from common stock Issuances - 13,356 2,731,865 Purchase of treasury stock (1,264,949) (407,053) (594,052) ----------- ----------- ----------- Net Cash Provided (Used) by Financing Activities (1,620,186) (173,424) 2,146,365 ----------- ----------- ----------- [Continued] F-8 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents [CONTINUED] For the Years Ended December 31, 1998 1997 1996 ----------- ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents 452,134 (561,843) 8,871 Cash and Cash Equivalents at Beginning of Period 181,013 742,856 733,985 ----------- ----------- ----------- Cash and Cash Equivalents at End of Period $ 633,147 $ 181,013 $ 742,856 ----------- ----------- ----------- Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ 11,630 $ 23,834 $ 7,791 Income taxes $ - $ 105,859 $ 201,864 Supplemental Disclosures of Non-Cash Investing and Financing Activities: For the year ended December 31, 1998: The Company issued a total of 600 shares of stock in exchange for services rendered valued at $2,578. 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 1,000 shares of restricted common stock in exchange for services rendered of $4,106. The Company applied deposits of $459,694 against equipment purchases. For the year ended December 31, 1996: The Company issued a total of 6,000 shares of restricted common stock in exchange for services rendered of $36,790.
The accompanying notes are an integral part of these financial statements. F-9 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business and Basis of Presentation - The consolidated financial statements include the accounts of Armanino Foods of Distinction, Inc. [Parent], which is engaged in the production and marketing of upscale and innovative food products, including primarily frozen pesto sauces, frozen pasta products, frozen meatballs and 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 $167,554 and $59,159 in excess of federally insured amounts in its bank accounts at December 31, 1998 and 1997, 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. At December 31, 1998 and 1997 the Company has established an allowance for doubtful accounts of $10,000 and $0, respectively. Amounts written off for the years presented are insignificant for disclosure. The Company's accounts receivable are pledged as collateral for a line of credit (See Note 6). 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 share 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-10 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued] Goodwill - Goodwill represents the excess of the cost of purchasing 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 1998 and 1997 was $42,000 and $42,000. 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, 1998, 1997 and 1996 are $70,734, $45,363 and $32,443, respectively, of research and development costs associated with the development of new products. Restatement - The financial statements of the Company have been restated to reflect the 1 for 300 reverse stock split followed by the 300 for 1 forward stock split during July 1998. The financial statements have also been restated to reflect the 1 for 5 reverse stock split effective January 29, 1999. Recently Enacted Accounting Standards SFAS No. 130, "Reporting Comprehensive Income", SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" SFAS No. 132, "Employer's Disclosure about Pensions and Other Postretirement Benefits", SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 134, "Accounting for Mortgage-Backed Securities " were recently issued. SFAS No. 130, 131, 132, 133 and 134 have no current applicability to the Company or their effect on the financial statements would not have been significant. NOTE 2 - RELATED PARTY TRANSACTIONS Fees paid to related parties - Amounts paid to related parties are as follows: For the Years Ended December 31, 1998 1997 1996 ------- ------- ------- Accounting fees paid to a company controlled by a shareholder and a director $32,495 $26,450 $20,757 F-11 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - RELATED PARTY TRANSACTIONS [Continued] Amounts Payable To Related Parties - Included in the Company's accounts payable at December 31, 1998 and 1997 are amounts owing to shareholders, officers and directors in the amount of $363 and $4,234, respectively. NOTE 3 - TREASURY BILLS At December 31, 1998, US treasury bills consisted of the following investments which are carried at their amortized cost: Date Maturity Amortized Market Maturity Acquired Date Cost Value Value -------- -------- --------- ---------- ---------- 7/9/98 6/24/99 $ 976,076 $ 978,750 $1,000,000 9/18/98 3/18/99 792,207 792,000 800,000 ---------- ---------- ---------- $1,768,283 $1,770,750 $1,800,000 ---------- ---------- ---------- NOTE 4 - INVENTORY Inventory consists of the following at December 31, 1998 and 1997: 1998 1997 ---------- ---------- Raw materials and supplies $ 481,226 $ 666,007 Finished goods 702,144 908,851 ---------- ---------- $1,183,370 $1,574,858 ---------- ---------- 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 with related accumulated depreciation acquired in the purchase of Alborough Inc. [See Note 13]) consists of the following at December 31, 1998 and 1997: 1998 1997 ---------- ---------- Office equipment $ 299,822 $ 263,913 Machinery and equipment 4,814,842 4,469,322 Leasehold improvements 1,906,876 1,873,381 ---------- ---------- 7,021,540 6,606,616 Less: Accumulated depreciation and amortization (2,153,861) (1,536,059) ---------- ---------- $4,867,679 $5,070,557 ---------- ---------- F-12 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - PROPERTY AND EQUIPMENT [CONTINUED] Depreciation expense amounted to $624,260, $447,688 and $362,338 for the years ended December 31, 1998, 1997 and 1996, 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, 1998 and 1997, the Company had $0 and $287,439 outstanding on a $500,000 business line of credit. The line of credit accrues interest at prime plus .75%, which was 8.5% and 9.25% at December 31, 1998 and 1997. The line of credit matures in September 1999, and is secured by the Company's accounts receivables, inventory and equipment. 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 over its related lease term. Amortization expense of $75,000 and $36,734 for the assets under capital leases and have been included in depreciation expense for 1998 and 1997. Equipment at December 31, 1998 and 1997 under capital lease obligations is as follows: 1998 1997 ---------- ---------- Equipment $ 375,000 $ 375,000 Less: Accumulated amortization (170,067) (95,067) ---------- ---------- $ 204,933 $ 279,933 ---------- ---------- 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 ------------------------ -------------- 1999 77,000 2000 58,800 2001 58,800 2002 44,100 -------- Total future minimum lease payments $238,700 Less: amounts representing interest and executory costs (35,317) -------- Present value of the future minimum lease payments 203,383 Less: Lease current portion (61,092) -------- Capital lease obligations - long term $142,291 -------- F-13 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - LEASES [Continued] 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, 1998 are as follows: Year ending December 31, Lease Payments ------------------------ -------------- 1999 97,978 2000 99,329 2001 95,882 2002 97,280 2003 57,888 Thereafter - -------- Total Minimum Lease Payments $448,357 -------- Lease expense charged to operations was $89,046, $128,865 and $118,508 for the years ended December 31, 1998, 1997 and 1996. 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 generally agreements allow for either party to give a two months cancellation notice. 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 1998, 1997 and 1996 contributions to the plan charged to operations were $10,678. $8,515 and $9,065, respectively. Incentive Compensation Plans For the year ending December 31, 1996, 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 1996 the plans were not funded, because pretax earnings from operations did not exceed the predetermined levels. F-14 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - AGREEMENTS AND COMMITMENTS [Continued] For 1998 and 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 1998 and 1997 the plan was not funded as the individual's objectives and predetermined sales and earnings levels were not achieved. 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, 1998 and 1997, the total of all deferred tax assets was $606,000 and $619,000 and the total of the deferred tax liabilities was $321,000 and $203,000. 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, 1998, 1997 and 1996 consist of the following:
1998 1997 1996 ----------- ----------- ----------- Current income tax expense: Federal $ 4,561 $ - $ 25,479 State 21,247 10,816 101,432 ----------- ----------- ----------- Net tax expense 25,808 10,816 126,911 ----------- ----------- ----------- Deferred tax expense (benefit) arising from: Excess of tax over financial accounting depreciation $ 118,000 $ 77,000 $ 16,169 Carryforward of excess contributions - - - Use of federal NOL carryforwards 103,679 203,799 614,946 Use of state NOL carryforwards 1,941 (1,941) - Federal alternative minimum tax credit (4,561) - (25,479) State alternative minimum tax credit (21,247) (10,816) - Inventory 263A adjustment 2,297 (8,112) (1,771) State investment tax credits (7,569) (145,930) 21,549 ----------- ----------- ----------- Net deferred tax expense $ 192,540 $ 114,000 $ 625,414 ----------- ----------- -----------
F-15 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - INCOME TAXES [Continued] 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:
1998 1997 1996 ----------- ----------- ----------- Computed tax at the expected statutory rate $ 189,607 $ 286,315 $ 614,500 ----------- ----------- ----------- State and local income taxes, net of federal benefit 34,230 51,688 110,940 Non-deductible expenses 12,509 18,923 11,792 Goodwill amortization 16,855 16,855 9,832 State tax credits (7,569) (145,930) 7,237 Effect of alternative minimum taxes - 7,139 2,022 Other Items (27,284) (110,174) (3,998) ----------- ----------- ----------- Income tax expense $ 218,348 $ 124,816 $ 752,325 ----------- ----------- -----------
As of December 31, 1998 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 $696,000 that expire in 2006 and 2012. The temporary differences and carryforwards gave rise to the following deferred tax asset (liability) at December 31, 1998 and 1997: 1998 1997 ---------- ---------- Excess of tax over book accounting depreciation $ (321,000) $ (203,000) Inventory 263A adjustment 13,313 15,610 State alternative minimum tax credits 103,584 82,338 Federal alternative minimum tax credits 98,464 93,903 State Investment Tax Credits 153,499 145,930 Federal NOL carryforwards 237,140 279,278 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. F-16 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - INCOME TAXES [Continued] As of December 31, 1998 and 1997 the deferred tax asset (liability) consisted of the following: 1998 1997 ---------- ---------- Current deferred tax assets $ 606,000 $ 619,000 Deferred tax assets (liabilities) (321,000) (203,000) ---------- ---------- $ 285,000 $ 416,000 ---------- ---------- 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, 1998, 1997 and 1996:
For the Years Ended December 31, 1998 1997 1996 ----------- ----------- ----------- Income from continuing operations available to common stockholders $ 337,921 $ 717,287 $ 1,055,112 ----------- ----------- ----------- Weighted average number of common shares outstanding used in basic earnings per share 2,185,423 2,248,375 2,233,646 Effect of dilutive securities: Stock options 6,460 50,867 130,181 Stock warrants - - 67,881 Weighted number of common shares and potential dilutive common shares outstanding used in dilutive earnings per share 2,191,883 2,299,242 2,431,708 ----------- ----------- -----------
The Company had at December 31, 1998, 1997 and 1996 options and warrants to purchase 357,190, 203,999 and 72,000 shares of common stock , respectively, at prices ranging from $4.63 to $10.50 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, 1998, repurchased 37,300 shares of the Company's common stock for approximately $113,500. F-17 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - STOCKHOLDERS' EQUITY Common Stock - During 1998 and 1997 the Company purchased 267,706 and 70,540 shares of common stock for $1,264,949 and $407,053, respectively, on the open market. These shares were retired by the Company. The Company subsequent to the year ending December 31, 1998, repurchased and retired 37,300 shares of the Company's common stock for approximately $113,500. Restatement - During May 1998, the Company's shareholders approved a 1 for 300 reverse stock split followed by the 300 for 1 forward stock split of all its previously issued outstanding common shares with 26,851 shares being repurchased for approximately $127,669. During January 1999, the Company approved a 1 for 5 reverse stock split of all its previously issued outstanding common stock. The split was accomplished effective January 29, 1999, with 208 fractional shares being issued. The effect of these common stock splits have been reflected in these financials statements. Common Stock Issuances - During 1998, 1997 and 1996, the Company issued 600, 1,000 and 6,000 shares of restricted common stock valued at $2,578, $4,106, and $36,790, respectively, in exchange for services rendered. The Company issued during 1997 and 1996, 2,000 and 10,000 shares of stock, respectively, in connection with options exercised, under the 1993 stock option plan. During 1996, 342,536 warrants and 4,312 underwriter option units were exercised and 351,161 shares of common stock were issued. The warrants and underwriters options were issued in the Company's 1991 secondary offering. The restricted stock issued during the years ended December 31, 1998, 1997 and 1996 for non-cash consideration were valued at the mean between the closing bid less 25%-35% attributable to the transferability restrictions of the stock. Preferred Stock - The Company is authorized to issue 10,000,000 shares of no par value preferred stock with such rights and preferences and in such series as determined by the Board of Directors at the time of issuance. No shares are issued or outstanding as of December 31, 1998, 1997 and 1996. F-18 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - STOCKHOLDERS' EQUITY [Continued] 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 1998, 1997 and 1996 consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 ----------- ----------- ----------- Net Income As reported $ 218,461 $ 717,287 $ 446,967 Proforma $ 196,126 $ 714,407 $ 443,278 Basic earnings per share As reported $ .10 $ .32 $ .20 Proforma $ .09 $ .32 $ .20 Diluted earnings per share As reported $ .10 $ .31 $ .18 Proforma $ .09 $ .31 $ .18
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, 1998, 1997 and 1996 risk-free interest rates of 5.5%, 6.3% and 6.3% expected dividend yields of zero, expected life of 7.5, 5.6 and 8.1 years, and expected volatility 46%, 45% and 48%. 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 650,000. At December 31, 1998 and 1997, total options available to be granted under the Plan amounted to and 269,510 and 262, 001. F-19 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - STOCKHOLDERS' EQUITY [Continued] A summary of the status of the options granted under the Company's stock option plan and other agreements at December 31, 1998, 1997 and 1996, and changes during the years then ended is presented below:
December 31, 1998 December 31, 1997 December 31, 1996 -------------------- -------------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- -------- --------- -------- --------- -------- Outstanding at beginning of period 366,299 $6.40 408,299 $6.78 405,299 $6.10 Granted 316,070 $5.07 34,400 $6.20 80,000 $9.40 Exercised - - (2,000) $4.65 (10,000) $4.65 Forfeited (263,579) $7.10 (60,400) $8.90 (63,000) $6.50 Expired (60,000) $5.00 (14,000) $6.35 (4,000) $4.65 -------- ----- ------- ----- ------- ----- Outstanding at end of Period 358,790 $4.94 366,299 $6.40 408,299 $6.75 -------- ----- ------- ----- ------- ----- Weighted average fair value of options granted during the year 291,070 $ .12 34,400 $.15 80,000 $ .25 -------- ----- ------- ----- ------- -----
A summary of the status of the options outstanding under the Company's stock option plans and employment agreements at December 31, 1998 is presented below:
Options Outstanding Options Exercisable ------------------------------------- ----------------------- Average Weighted- Weighted- Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price - ------------- ----------- ----------- --------- ----------- --------- $4.63 114,300 6.0 years $4.63 114,300 $4.63 $5.08 2,680 1.0 years $5.08 2,066 $5.08 $5.08 - $5.48 31,000 4.4 years $5.15 18,500 $5.20 $5.08 184,000 6.0 years $5.08 184,000 $5.08 $4.30 - $5.70 26,810 9.1 years $5.06 3,699 $5.08 - ------------- ------- --------- ----- ------- ----- 358,790 322,565
F-20 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 1998 1997 1996 ---------- ---------- ---------- Broker A $ - $ - $5,191,525 Broker B 1,940,339 1,940,461 1,851,824 Broker C 2,424,687 - - Broker D 2,169,182 - - 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. was 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 have increased significantly depending upon Alborough, Inc. meeting certain earnings performance criteria over the next 3 years. As of December 31, 1998, the purchase price had not increased as the earnings performance criteria had not been attained. The agreement between the parties provided 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 have been 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 sales to the specified customers had not been achieved during the year ended December 31, 1998. As of December 31, 1997, the operations of 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. Net sales related to AFDI, Inc. for 1996 were $125,429. This amount has been reclassified to estimated loss from operations of AFDI, Inc. in the accompanying statement of operations. At December 31, 1998 and 1997 AFDI, Inc is a dormant subsidiary of the Company. F-21 ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - DISCONTINUED OPERATIONS [Continued] The following is a condensed proforma statement of operations that reflects what the presentation would have been for the year ended December 31, 1996 without the reclassifications required by "discontinued operations" accounting principles: 1996 ------------ Net Sales $ 15,430,458 Cost of goods sold (10,691,428) Other operating expenses (3,623,401) Other income (expense) 251,967 Provision for taxes (575,817) ------------ Net income $ 791,779 ------------ Earnings per share $ .07 ------------ NOTE 15 - EXTRAORDINARY LOSS FROM 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 was entitled to, an additional ten months of commissions (approximately $100,000) and attorneys fees under the agreement. The parties agreed to arbitrate the dispute and the case was submitted to arbitration in July 1998. The arbitrator awarded Mass Marketing damages in the total amount of $167,342. Pending the Company's action to overturn the award, which it considered erroneous, the parties settled the claim for $145,000. The Company expended approximately $36,000 defending their position. NOTE 16 - SUBSEQUENT EVENTS During January 1999, the Company approved a 1 for 5 reverse stock split of all its previously issued outstanding common stock. The split became effective on January 29, 1999, with 208 fractional shares being issued. The effect of the common stock split has been reflected in these financial statements (See Note 1 and 10). Subsequent to the year ending December 31, 1998, the Company repurchased 37,300 shares of the Company's common stock for approximately $113,500. F-22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Ex change 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, 1999 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, Chief Executive March 30, 1999 William J. Armanino Officer, Chief Financial Officer, Chairman of the Board /s/ Deborah Armanino-LeBlanc Vice President, Secretary March 30, 1999 Deborah Armanino-LeBlanc and Director /s/ Alexandria Breitman Treasurer (Principal March 30, 1999 Alexandria Breitman Accounting Officer) and Controller /s/ John J. Micek, III Director March 30, 1999 John J. Micek, III /s/ David Scatena Director March 30, 1999 David Scatena ____________________________ Director Tino Barzie /s/ J. Bryan King Director March 30, 1999 J. Bryan King EX-10.5 2 WELLS FARGO BANK ****RENEWAL NOTICE**** September 08, 1998 ARMANINO FOODS OF DISTINCTION, INC. 30588 SAN ANTONIO STREET HAYWARD, CA 94544-7102 RE: Renewal of: $500,000.00 PrimeLine Application Number: 10794279 Customer Number: 033525763918 Dear Customer: WELLS FARGO BANK, N.A. is pleased to inform you that your Business PrimeLine, in the amount of $500,000.00, was renewed on September 08, 1998. The new maturity date is September 1, 1999. Your PrimeLine remains subject to all terms and conditions of existing loan documentation, 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 .750% over the Index. A non-refundable Renewal Fee of $1,500.00 will be charged to your account number 0904338027. If you have any questions please do not hesitate to call me at (800) 545-2844. We appreciate your business and look forward to continuing to serve as your business bank. Sincerely, WELLS FARGO BANK, N.A. By: Ruby J. Crisp Name: Ruby J. Crisp Title: Assistant Vice-President EX-10.13 3 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT ("Agreement") is made effective as of the 21st day of August 1998, by and between ROBERT P. KRAEMER ("Kraemer") and ARMANINO FOODS OF DISTINCTION, INC., a Colorado corporation ("the Company"), under the following circumstances: A. Kraemer is the former Chief Operating Officer of the Company having resigned his positions with the Company, effective August 20, 1998. B. Because of Kraemer's knowledge of the Company's business, the Company desires to retain Kraemer as a consultant to the Company during the next twelve (12) month period. C. Kraemer is willing to render to the Company consulting services in connection with its business upon the terms and conditions hereinafter set forth. NOW, THEREFORE, the parties hereto agree as follows: 1. Consulting. The Company hereby retains Kraemer to perform independent consulting services for a period commencing as of August 21, 1998, the date hereof, and terminating on August 20, 1999. Kraemer hereby accepts the Company's retainer as independent consultant. 2. Consulting Services. When requested by the Company, Kraemer shall provide the Company with advice and counsel regarding the Company's business matters. Kraemer shall provide such services at such time (up to ten (10) hours 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 Kraemer to any new employer, any consulting assignment or self-employment duties. Additional time requested of Kraemer by the Company shall be compensated at a mutually agreeable rate. The Company and Kraemer agree that in the event Kraemer 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 but not forfeited until Kraemer complies with the Company's request. Kraemer shall exercise good faith and best efforts in providing such consulting services to the Company. All of Kraemer's services performed hereunder shall be for the exclusive benefit of the Company. Kraemer 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 monthly consulting fee (the "Consulting Fee") to Kraemer of Five Thousand Eight Hundred dollars ($5,800) payable the 21st day of each month during the term hereof commencing September 21, 1998. 4. Relationship of the Parties. The relationship of Kraemer to the Company shall be that of an independent contractor. Kraemer shall not be deemed to be employee or an agent of the Company for any purpose. Kraemer 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. Kraemer 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. Kraemer 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 Kraemer during the term of this Agreement, the unpaid portion of the Consulting Fee shall be paid to Kraemer'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 P. Kraemer ROBERT P. KRAEMER ARMANINO FOODS OF DISTINCTION, INC. By: /s/ William J. Armanino William J. Armanino Chairman, President and CEO EX-21 4 SUBSIDIARIES OF THE REGISTRANT Name State of Incorporation Other Names Used in Business - --------------- ---------------------- ---------------------------- AFDI, Inc. California None EX-23 5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We hereby consent to the incorporation of our report dated January 19, 1999, except for Notes 10, 11 and 16 as to which the date is February 11, 1999, appearing in the Annual Report on Form 10-K of Armanino Foods of Distinction, Inc. for the year ended December 31, 1998, 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 25, 1999 EX-27 6
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, 1998, and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1998 DEC-31-1998 633,580 1,768,283 1,271,740 0 1,183,370 5,660,496 4,867,679 0 11,042,613 677,834 0 0 0 9,873,671 27,817 11,042,613 13,512,172 13,512,172 9,485,636 9,485,636 3,616,691 0 11,630 556,269 218,348 337,921 0 (119,640) 0 218,461 .10 .10
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