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