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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1998
Commission File No. 0-18200
ARMANINO FOODS OF DISTINCTION, INC.
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(Exact name of registrant as specified in its charter)
COLORADO 84-1041418
- --------------------------------- --------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
30588 San Antonio Street, Hayward, CA 94544
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (510) 441-9300
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 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 -----
There were 10,127,369 shares of the Registrant's Common Stock outstanding as
of October 12, 1998.
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PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
ASSETS
September 30, December 31,
1998 1997
------------- ------------
Current Assets:
Cash and cash equivalents $ 424,146 $ 181,013
Treasury bills, held to maturity 3,242,036 2,975,403
Accounts receivable 870,304 1,720,683
Inventory 1,253,700 1,574,858
Prepaid expenses 305,053 237,673
Current deferred tax asset 542,673 619,000
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Total Current Assets 6,637,912 7,308,630
Property and Equipment, Net 4,795,059 5,070,557
Other Assets:
Deposits 13,000 13,000
Goodwill, net 511,938 543,438
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Total Other Assets 524,938 556,438
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Total Assets $11,957,909 $12,935,625
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 689,706 $ 1,228,607
Current portion of long-term debt 67,391 67,797
Line of credit payable - 287,439
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Total Current Liabilities 757,097 1,583,843
Deferred tax liability 203,000 203,000
Long-term debt 153,528 203,384
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Total Liabilities 1,113,625 1,990,227
Contingent Liabilities 155,000 -
Stockholders' Equity:
Common stock 10,765,438 11,136,042
Additional paid in capital 22,311 22,311
Accumulated deficit (98,465) (212,955)
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Total Stockholders' Equity 10,689,284 10,945,398
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Total Liabilities and Stockholders'
Equity $11,957,909 $12,935,625
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements. The balances for December 31, 1997 were taken from the audited
financial statements at that date and condensed.
2
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ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Statements of Operations
For the Quarter Ended September 30, 1998 and 1997
(Unaudited)
September 30, September 30,
1998 1997
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Net Sales $ 2,836,209 $ 3,807,454
Cost of Goods Sold 1,809,996 2,626,888
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Gross Profit 1,026,213 1,180,566
Operating Expenses:
General and administrative 298,273 417,428
Salaries and wages 192,213 196,372
Commissions 91,523 67,451
Advertising, demonstrations, promotions,
and slotting allowances 184,157 239,297
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Total Operating Expenses 766,166 920,548
Income From Operations 260,047 260,018
Other Income 42,447 43,564
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Income From Continuing Operations Before
Income Taxes 302,494 303,582
Current Tax Expense 25,950 81,967
Deferred Tax Expense 95,048 39,466
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Income from Continuing Operations
Before Extraordinary Loss $ 181,496 $ 182,149
Extraordinary (Loss) (net of income
Taxes of $72,400) (108,600) -
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Net Income $ 72,896 $ 182,149
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Basic Earnings Per Share:
Income from Continuing Operations $ .02 $ .02
Loss from an Extraordinary Item (.01) .00
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Basic Earnings Per share $ .01 $ .02
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Weighted Average Common Shares
Outstanding 11,109,103 11,244,769
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Diluted Earnings Per Share:
Income from Continuing Operations $ .02 $ .02
Loss from an Extraordinary Item (.01) .00
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Diluted Earnings Per Share $ .01 $ .02
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Weighted Average Common Shares
Outstanding Assuming Dilution 11,109,103 11,483,365
========== ==========
The accompanying notes are an integral part of these condensed financial
statements.
3
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ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Statements of Operations
For the Nine Months Ended September 30, 1998 and 1997
(Unaudited)
September 30, September 30,
1998 1997
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Net Sales $10,325,714 $10,894,179
Cost of Goods Sold 7,317,436 7,503,863
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Gross Profit 3,008,278 3,390,316
Operating Expenses:
General and administrative 1,118,568 1,163,070
Salaries and wages 751,476 843,056
Commissions 292,821 246,923
Advertising, demonstrations, promotions,
and slotting allowances 594,735 629,497
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Total Operating Expenses 2,757,600 2,882,546
Income From Operations 250,678 507,770
Other Income 121,139 153,431
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Income From Continuing Operations Before
Income Taxes 371,817 661,201
Current Tax Expense 29,250 178,967
Deferred Tax Expense 119,477 85,517
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Income from Continuing Operations
Before Extraordinary Loss $ 223,090 $ 396,717
Extraordinary (Loss) (net of income
Taxes of $72,400) (108,600) -
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Net Income $ 114,490 $ 396,717
Basic Earnings Per Share:
Income from Continuing Operations $ .02 $ .03
Loss from an extraordinary item (.01) .00
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Basic Earnings Per share $ .01 $ .03
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Weighted Average Common Shares Outstanding 11,194,716 11,444,730
========== ==========
Diluted Earnings Per Share:
Income from Continuing Operations $ .02 $ .03
Loss from an extraordinary item (.01) .00
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Diluted earnings per share $ .01 $ .03
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Weighted Average Common Shares Outstanding
Assuming Dilution 11,272,785 11,662,520
========== ==========
The accompanying notes are an integral part of these condensed financial
statements.
4
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ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997
(Unaudited)
September 30, September 30,
1998 1997
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Cash Flows From Operating Activities:
Net income $ 114,490 $ 396,717
Adjustment to reconcile net income to
net cash provided by operations:
Depreciation and amortization 504,447 319,427
Changes in assets and liabilities:
Decrease in accounts receivable 850,379 652,014
(Increase) Decrease in inventories 321,158 (308,285)
Increase in prepaid expenses (67,380) (148,281)
Decrease in deferred tax assets 76,327 85,517
Increase (Decrease)in accounts payable
and accrued expenses (538,901) 61,454
Increase in income taxes payable - 178,967
(Decrease) in net liabilities
of discontinued operations - (75,145)
Increase in contingent liabilities-
extraordinary item 155,000 -
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Total Adjustments 1,301,030 765,668
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Net Cash Provided By
Operating Activities 1,415,520 1,162,385
Cash Flows To Investing Activities:
Decrease in deposits on future equipment
purchases - 464,610
Capital expenditures (197,449) (2,492,405)
Purchase/Reduction of U.S. Treasury
Bills, net (266,633) 2,528,449
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Net Cash Provided By (Used For)
Investing Activities (464,082) 500,654
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Cash Flows From Financing Activities:
Issuance of common stock - 13,356
Purchase of Treasury stock (370,604) (407,053)
Payments on capital lease obligations (50,262) (18,381)
Proceeds/(Payment) on short term borrowings (287,439) -
Payments on note payable - (32,073)
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Net Cash (Used For) Financing Activities: (708,305) (444,151)
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Net Increase In Cash and Cash Equivalents 243,133 1,218,888
Cash and Cash Equivalents Beginning of Period 181,013 742,856
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Cash and Cash Equivalents End of Period $ 424,146 $ 1,961,744
=========== ===========
The accompanying notes are an integral part of these condensed financial
statement.
5
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ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring accruals, considered necessary
for a fair presentation have been included. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
December 31, 1997 audited financial statements and notes thereto for Armanino
Foods of Distinction, Inc. The results of operations for the periods ended
September 30, 1998 and 1997 are not necessarily indicative of the operating
results for the full year.
The condensed consolidated financial statements include the accounts of
Armanino Foods of Distinction, Inc. ("Parent") and it's wholly-owned dormant
subsidiary AFDI, Inc.
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments (Treasury Bills) purchased with a maturity of
three months or less to be cash equivalents.
The Company acquired a subsidiary (Alborough, Inc.) during May, 1996.
The Company recorded goodwill in the amount of $609,938 as part of the
purchase. The Company is amortizing the goodwill over 15 years, on a straight
line basis.
Earnings Per Share - The Company calculates earnings per share in
accordance with Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings Per Share," which requires the Company to present basic and diluted
earnings per share. The computation of basic earnings per share is based on
the weighted average number of shares outstanding during the periods
presented. The computation of diluted earnings per shares is based on the
weighted average number of outstanding common shares during the year plus,
when their effect is dilutive, additional shares assuming the exercise of
certain vested and non-vested stock options and warrants, reduced by the
number of shares which could be purchased from the proceeds.
The weighted average common shares and common equivalent shares
outstanding for purposes of calculating earnings (loss) per share was as
follows:
September 30, September 30,
1998 1997
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Weighted average common shares outstanding
used in basic earnings per share for the nine
months ending 11,194,716 11,444,730
Effect of dilutive stock options 78,069 217,790
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Weighted average common shares and potential
dilutive common equivalent shares outstanding
used in dilutive earning per share 11,272,785 11,662,520
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6
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ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(Unaudited)
NOTE 1 - CONTINUED
For the nine months ended September 30, 1998 the Company had 1,862,350
stock options that could potentially dilute earnings per share in the future
that were not included in the diluted computation because to do so would have
been antidilutive for the periods presented.
The September 30, 1998 financial statements reflect that the shareholders
approved a 1 for 300 reverse stock split and a 300 for 1 forward stock split,
wherein in lieu of issuing the fractional share that resulted from the reverse
split to the shareholders of record of less than 300 shares, immediately prior
to the reverse split, the Company made a cash payment of $.95 per share, the
average daily closing price for the ten days prior to the June 16, 1998
effective date. (See Note 8)
NOTE 2 - INVENTORY
Inventory is carried at the lower of cost or market with cost being
determined on the first-in, first-out method and consisted of the following at
September 30, 1998 and December 31, 1997:
September 30, December 31,
1998 1997
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Raw materials & supplies $ 459,816 $ 666,007
Finished goods 793,884 908,851
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$1,253,700 $1,574,858
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NOTE 3 - RELATED PARTY TRANSACTIONS
The Company incurred $20,130 and $23,788 respectively, for the nine
months ended September 30, 1998 and 1997, in accounting and consulting fees to
Polly, Scatena, Gekakis & Co., an accounting firm, the managing partner of
which is also a stockholder and director of the Company. Services provided by
the accounting firm are an extension of the internal accounting functions of
the Company, as well as management, business and systems consulting.
NOTE 4 - INCENTIVE COMPENSATION
The Company has accrued $0 and $50,000 for the nine months ended
September 30, 1998 and September 30, 1997 respectively, for its management and
employee incentive compensation plans. These amounts are based on achieving a
predetermined level of sales, net income and personal goals and objectives.
Accrued amounts are eligible for distribution only when the (1) predetermined
level of sales and net income and (2) personal goals and objectives are
achieved.
7
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ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(Unaudited)
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
September 30, December 31,
1998 1997
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Furniture & Office Equipment $ 296,673 $ 263,913
Plant Machinery & Equipment 4,608,948 4,469,322
Leasehold Improvements 1,891,986 1,873,381
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6,797,607 6,606,616
Accumulated Depreciation 2,002,548 1,536,059
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$4,795,059 $5,070,557
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The Company's property, plant and equipment is pledged as collateral on
a business line of credit.
NOTE 6 - LINE OF CREDIT
As of September 30, 1998 and December 31, 1997, the Company had $0 and
$287,439 respectively outstanding on a $500,000 business line of credit. The
line of credit accrues interest at prime plus .75%. The line of credit
matures in September 1999, and is secured by the Company's accounts
receivable, inventory and equipment.
NOTE 7 - INCOME TAXES
The Company accounts for income taxes in accordance with FASB Statement
109, "Accounting for Income Taxes."
As of September 30, 1998 and December 31, 1997 the net deferred tax
assets and liabilities consisted of the following:
September 30, December 31,
1998 1997
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Current deferred tax asset $ 542,673 $ 619,000
Deferred Tax Liability (203,000) (203,000)
Management estimates that the Company will generate adequate net profits
to offset net operating loss carryforwards prior to the expiration of the net
operating loss carryforwards. Consequently, a deferred tax asset valuation
allowance has not been accrued.
NOTE 8 - STOCKHOLDERS' EQUITY
As of September 30, 1998, the Company had 1,862,350 outstanding stock
options to purchase the Company's stock at prices ranging from $.925 to $1.14
per share to employees, directors and a consultant, expiring on January 28,
2000 through March 25, 2008. During the nine months ended September 30, 1998,
the Company canceled 919,996 previously issued stock options, held by
employees, directors and a consultant and granted 1,447,350 stock options to
8
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ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(Unaudited)
NOTE 8 - CONTINUED
purchase common shares at $1.015 to $1.14 per share expiring on January 28,
2000 though March 25, 2008. Also during the nine months ended September 30,
1998, 496,499 previously issued stock options were forfeited or expired.
During the six months ended June 30, 1997, the Company received $9,250,
from issuance of 10,000 shares at $.925 in connection with options exercised,
under the 1993 Stock Option Plan.
In July 1998, the Company paid $127,669 to the holders of 134,388 shares
of the Company's common stock which were cancelled in conjunction with the 1
for 300 reverse and 300 for 1 forward stock splits, which were approved at the
May 1998 shareholder meeting. The purpose of the stock splits was to reduce
cost of administering shareholder accounts and decreasing the amount of time
spent by the Company's management responding to shareholder requests. The
stock splits decrease the cost by eliminating shareholders of record with less
than 300 shares, who accounted for less than 1% of the outstanding stock, but
accounted for approximately 85% of the total number of shareholders prior to
the reverse and forward stock splits.
On September 4, 1998 the Company's board of directors approved a stock
buy-back plan to purchase $1,000,000 of the Company's stock on the open
market. As of September 30, 1998, the Company purchased 622,500 shares on the
open market for $624,691.
NOTE 9 - ACQUISITION OF SUBSIDIARY
On May 20, 1996, the Company acquired all of the outstanding common stock
of Alborough, Inc., (dba Emilia Romagna), in a business combination accounted
for as a purchase. Alborough, Inc. was primarily engaged in the manufacturing
of gourmet Italian foods. The results of operations of Alborough, Inc. is
included in the accompanying financial statements since the date of
acquisition. The total cost of the acquisition was $738,779, which exceeded
the fair market value of the net assets of Alborough, Inc. by $609,938. The
excess is recorded as goodwill and is being amortized over 15 years. The
purchase price could increase significantly depending upon the gross margin
attributable to sales made to certain specified customers over the 3-year
period subsequent to the consummation of the purchase agreement. The
agreement between the parties provides that additional payments may be earned
by Alborough, Inc.'s former 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. As of September 30, 1998, no additional payments have been
made to Alborough Inc.'s former shareholders as minimum sales to the specified
customers had not been achieved. The Company does not anticipate that any
additional payments will need to be made.
9
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ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(Unaudited)
NOTE 10 - EXTRAORDINARY ITEM
The Company entered into a sales representative agreement with Mass
Marketing Services in February 1994 under which Mass Marketing assisted
Armanino Foods in selling its product to "club stores" including Price Club
and Costco. In January 1997 the Company, based on its view that Mass
Marketing had breached the Agreement which had contributed to the Company
losing its club store business, terminated the Agreement and paid Mass
Marketing approximately $23,380, estimated to be the equivalent of two months'
commissions.
In 1997, Mass Marketing initiated a lawsuit in San Diego, California,
claiming that it had not breached the Agreement and demanding additional
termination payments as called for by the Agreement in the event of a
termination without cause. The issue was submitted to arbitration in July
1998, and in September the arbitrator awarded Mass Marketing damages in the
total amount of $167,342. Pending the Company's action to overturn the award,
which it considered erroneous, the parties settled the claim for $145,000.
The Company has accrued $155,000 for the award including legal fees to be
incurred. The total amount of $181,000, including legal fees incurred to
date, is classified as an extraordinary item for the quarter and nine months
ended September 30, 1998.
10
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ITEM II: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 V. QUARTER AND NINE MONTHS
ENDED SEPTEMBER 30, 1997
Net sales for the quarter ended September 30, 1998 were $2,836,209, as
compared to $3,807,454 for the quarter ended September 30, 1997. For the nine
months ended September 30, 1998, net sales were $10,325,714 as compared to
$10,894,179 for the nine months ended September 30, 1997. The decrease in
sales for the quarter and nine months is primarily attributable to lower sales
of the Company's meatball product line to a club-store customer. The lower
sales of meatballs for the nine months were partially offset by five months of
sales of entree products to a co-pack customer. Additionally increases in
sales of the pesto product line helped offset some of the meatball sales
decreases. The increases in sales of the pesto product were the result of the
Company's focus on expansion of the customer base for this product line. The
Company is presently developing entree products to support the sales effort in
this area. As of September 30, 1998, the Company has not obtained significant
sales of the entree products, other than to its co-pack customer during the
five months ended May 31, 1998.
Cost of goods sold as a percentage of net sales decreased from 69% for
the quarter ended September 30, 1997 to 63.8% for the quarter ended September
30, 1998. Cost of goods sold as a percentage of net sales increased from 68.9%
for the nine months ended September 30, 1997 to 70.9% for the nine months
ended September 30, 1998. The decrease in this percentage for the current
quarter is due to the shift in the product mix due to lower meatball product
line sales which carried lower margins than both the pesto and the pasta
product lines. For the nine months, cost of goods sold as a percentage of
sales increased primarily due to the costs associated with the entree product
line. Although showing continuing improvement, the Company experienced higher
than expected costs in the production of these products for a co-pack
customer. The combination of higher production costs and lower than expected
sales of the entree products, other than the co-pack customer, contributed to
the higher cost of goods sold percentage for the nine months ended September
30, 1998.
Operating expenses as a percentage of net sales were approximately 27%
for the quarter ended September 30, 1998 as compared to 24.2% for the quarter
ended September 30, 1997. Operating expenses for the first nine months of
1998 were 26.7% as compared to 26.5% for the first nine months of 1997. The
increase in this percentage for the quarter and the nine months is primarily
due to lower sales experienced for these periods. In absolute dollars,
general and administrative expenses decreased for the third quarter and nine
months of 1998 vs. 1997 primarily due to a decrease in consulting fees. The
lower salaries expense was due to two positions being vacant during the third
quarter of 1998. The increase in the dollar amount of commissions was
primarily due to assigning in-house accounts to a broker at the end of 1997.
Net income from continuing operations was $181,496 for the quarter ended
September 30, 1998 compared to $182,149 for the quarter ended September 30,
1997. Net income from continuing operations was $223,090 for the nine months
ended September 30, 1998 compared to $396,717 for the nine months ended
September 30, 1997. The decrease in net income from continuing operations for
the quarter and nine months was due to higher costs involved with the entree
product line. This had the biggest impact during the first and second
quarters of 1998.
11
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Net income was $72,896 for the quarter ended September 30, 1998 compared
to $182,149 for the quarter ended September 30, 1997. Net income was $114,490
for the nine months ended September 30, 1998 compared to $396,717 for the nine
months ended September 30, 1997. The decrease in the third quarter and nine
months was primarily due to an extraordinary charge of $108,600 net of income
tax effect, as a result of a settlement of a lawsuit involving the termination
of a sales representation contract with the Company's former club store
broker. Additionally, the net income for the nine months was lower due to
costs involved in manufacturing entree products for a co-pack customer.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had working capital of $5,880,815, an
increase of $156,028 from December 31, 1997. Current assets included
$4,536,486 in cash and cash equivalents, 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 nine months ended September 30, 1998, cash provided by
operating activities of the Company amounted to $1,415,521.
On September 8, 1998, the Company renewed its $500,000 business loan line
of credit with Wells Fargo Bank, in San Francisco, California. This loan
provides for interest at prime plus .75% with a maturity date of September 10,
1999. At September 30, 1998 the Company had $0 outstanding under this line.
The purpose of obtaining this line of credit is to afford the Company greater
cash liquidity and management of its cash investments.
The Company had made deposits on manufacturing equipment and leasehold
improvements in the amount of $1,600,000 as of June 30, 1997. The equipment
and leasehold improvements were placed in service during the third quarter of
1997 at the Hayward, California facility.
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 3-year period subsequent to the consummation of
the purchase agreement. 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. As of September 30, 1998, the
Company has not incurred any additional cost due to this provision.
On September 4, 1998 the Company's board of directors approved a stock
buy-back plan to purchase Company stock up to $1,000,000. As of September 30,
1998, the Company paid approximately $243,000 for common stock purchased on
the open market. The Company paid an additional $757,000 subsequent to
September 30, 1998, for the remaining stock purchases.
The Company presently has no material commitments for capital
expenditures.
12
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YEAR 2000 COMPLIANCE
In 1998, the Company began assessing the various issues relating to the
year 2000. During 1998 the Company has upgraded its accounting application
software which has been certified by the manufacturer to be year 2000
compliant. The accounting software includes sales order, inventory, accounts
receivable, accounts payable, general ledger as well as other modules.
The Company is in the process of evaluating the information technology
systems. An outside firm will be used for the initial evaluation and testing
of the Company's internal network of LAN's, the payroll processing system and
production related processing equipment.
The Company has incurred approximately $2,000 on upgrading software. It
is estimated that approximately $10,000 will be spent on evaluating and
testing current systems during the fourth quarter of 1998 and first quarter of
1999. Additional costs would involve purchasing new computer equipment or
converting parts in processing equipment. The Company will have estimates for
these additional costs by December 31, 1998.
The Company is planning to review its external relationships in order to
determine the impact which may arise from its dealings with customers,
suppliers and service providers.
The Company sells to approximately 250 customers. One customer accounts
for approximately 22% of total sales. The Company is in the process of
analyzing systems in order to implement Electronic Data Interchange. At the
present time this customer would be the only trading partner with E.D.I.
transactions. Contact is ongoing with this customer in order to insure that
they will be year 2000 compliant. Surveys will be sent to the remaining
customers by March 31, 1999 to attempt to determine the extent of their
compliance with the year 2000 issues. The Company does not expect a material
adverse affect from any single customer in this group. However, if a large
number of customers in this group ceased operations, the Company would be
negatively impacted. Management is unable to quantify this risk at this time.
The Company has not yet initiated formal contingency planning processes
to mitigate the risk to the Company if any vendors or customers are not
prepared for the year 2000. The Company intends to complete this process by
June 30, 1999.
The Company anticipates completion of the year 2000 project by the end of
the second quarter of 1999. There is considerable work remaining and
unforeseen difficulties may adversely affect the Company's ability to complete
its systems modifications correctly, completely, on time or within its cost
estimates. Additionally, there can be no assurance that third parties that
the Company deals with will resolve their year 2000 issues completely and
timely. Failure to complete the year 2000 project on time could have a
material adverse affect on future operating results and financial condition.
13
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PART II -OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 11, 1997, Mass Marketing Services filed a lawsuit in Superior
Court of San Diego County, California against the Company seeking damages for
breach of contract, open book account and reasonable value of services
rendered. The lawsuit arose after the Company terminated its sales
representation agreement with Mass Marketing. Mass Marketing asserted that it
was entitled to an additional ten months of commissions payment under a non
solicitation provision and attorneys fees under the agreement. The parties
agreed to arbitrate the dispute and the case was submitted to arbitration in
July 1998. The arbitrator awarded Mass Marketing damages in the total amount
of $167,342. Pending the Company's action to overturn the award, which it
considered erroneous, the parties settled the claim for $145,000.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBIT
27 - Financial Data Schedule Filed herewith
electronically
B. REPORTS ON FORM 8-K - None
14
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the
undersigned thereunto duly authorized.
ARMANINO FOODS OF DISTINCTION, INC.
By: /s/ William J. Armanino Dated: November 5, 1998
William J. Armanino
President
Chief Executive Officer
Chief Financial Officer
Treasurer
<PAGE>
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
27. Financial Data Schedule Filed herewith electronically
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheets and statements of operations found on page 2 and 4 of the
Company's Form 10-Q for the year to date, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 424,146
<SECURITIES> 3,242,036
<RECEIVABLES> 870,304
<ALLOWANCES> 0
<INVENTORY> 1,253,700
<CURRENT-ASSETS> 6,637,912
<PP&E> 4,795,059
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,957,909
<CURRENT-LIABILITIES> 757,097
<BONDS> 0
<COMMON> 10,765,438
0
0
<OTHER-SE> (76,154)
<TOTAL-LIABILITY-AND-EQUITY> 11,957,909
<SALES> 10,325,714
<TOTAL-REVENUES> 10,325,714
<CGS> 7,317,436
<TOTAL-COSTS> 7,317,436
<OTHER-EXPENSES> 2,757,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 371,817
<INCOME-TAX> 148,727
<INCOME-CONTINUING> 223,090
<DISCONTINUED> 0
<EXTRAORDINARY> (108,600)
<CHANGES> 0
<NET-INCOME> 114,490
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
