<PAGE>
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 March 31, 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 11,246,399 shares of the Registrant's Common Stock outstanding as
of March 31, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
ASSETS
March 31, December 31,
1998 1997
Current Assets:
Cash and cash equivalents $ 312,308 $ 181,013
Treasury bills, held to maturity 2,482,030 2,975,403
Accounts receivable 1,275,815 1,720,683
Inventory 1,620,727 1,574,858
Prepaid expenses 233,195 237,673
Current deferred tax asset 666,928 619,000
Total Current Assets 6,591,003 7,308,630
Property and Equipment, Net 4,982,889 5,070,557
Other Assets:
Deposits 13,000 13,000
Goodwill, net 532,938 543,438
Total Other Assets 545,938 556,438
Total Assets $12,119,830 $12,935,625
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 788,517 $ 1,228,607
Notes payable - -
Current portion of long-term debt 69,365 67,797
Line of credit payable - 287,439
Total Current Liabilities 857,882 1,583,843
Deferred tax liability 203,000 203,000
Long-term debt 185,443 203,384
Total Liabilities 1,246,325 1,990,227
Stockholders' Equity:
Common stock 11,136,042 11,136,042
Additional paid in capital 22,311 22,311
Accumulated deficit (284,848) (212,955)
Total Stockholders' Equity 10,873,505 10,945,398
Total Liabilities and Stockholders' Equity $12,119,830 $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.
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PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Statements of Operations
For the Quarter Ended March 31, 1998 and 1997
(Unaudited)
March 31, March 31,
1998 1997
Net Sales $3,723,423 $3,339,613
Cost of Goods Sold 2,877,922 2,349,861
Gross Profit 845,501 989,752
Operating Expenses:
General and administrative 407,944 362,741
Salaries and wages 268,629 335,511
Commissions 105,488 109,344
Advertising, demonstrations, promotions,
and slotting allowances 218,102 188,248
Total Operating Expenses 1,000,163 995,844
Income (Loss) From Operations (154,662) (6,092)
Other Income 34,841 55,193
Income From Continuing Operations Before
Income Taxes (119,821) 49,101
Current Tax Expense - 13,000
Deferred Tax Expense/(Benefit) (47,928) 7,623
Net Income/ (Loss) $ (71,893) $ 28,478
Basic Earnings/(Loss) Per Common Share $ (.01) $ .00
Weighted Average Common Shares Outstanding 11,246,399 11,585,877
Diluted Earnings/(Loss) Per Common Share $ (.01) $ .00
Weighted Average Common Shares Outstanding
Assuming Dilution 11,246,399 11,837,180
The accompanying notes are an integral part of these condensed financial
statements.
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PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Statements of Cash Flows
For the Quarter Ended March 31, 1998 and 1997
(Unaudited)
March 31, March 31,
1998 1997
Cash Flows From Operating Activities:
Net income/(loss) $ (71,893) $ 28,478
Adjustment to reconcile net income to net
cash (used for) provided by operations:
Depreciation and amortization 168,201 104,146
Changes in assets and liabilities:
Decrease in accounts receivable 444,868 861,624
(Increase)Decrease in inventories (45,869) 10,759
(Increase)Decrease in prepaid expenses 4,478 (34,758)
(Increase)Decrease in deferred tax assets (47,928) 7,623
(Decrease)in accounts payable and
accrued expenses (440,090) (310,938)
Increase (Decrease) in net liabilities
of discontinued operations - (75,145)
Total Adjustments 83,660 563,311
Net Cash Provided By
Operating Activities 11,767 591,789
Cash Flows To Investing Activities:
Increase in deposits on future equipment
Purchases - (1,137,910)
Capital expenditures (70,033) ( 8,803)
Reduction in U.S. treasury bills, net 493,373 50,911
Net Cash provided (Used For)
Investing Activities 423,340 (1,095,802)
Cash Flows From Financing Activities:
Issuance of common stock - 9,250
Payments on capital lease obligations (16,373) (6,127)
Increase(decrease) in borrowings (287,439) 300,000
Payments on notes payable - (15,837)
Net Cash Provided By (Used For) Financing
Activities: (303,812) 287,286
Net Increase (Decrease) In Cash and
Cash Equivalents 131,295 (216,727)
Cash and Cash Equivalents Beginning of Period 181,013 742,856
Cash and Cash Equivalents End of Period $ 312,308 $ 526,129
The accompanying notes are an integral part of these condensed financial
statement.
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PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 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
financial statements and notes thereto included in the December 31, 1997
audited financial statements for Armanino Foods of Distinction, Inc. The
results of operations for the periods ended March 31, 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 In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
128 "Earnings Per Share," which requires the Company to present basic and
diluted earnings per share, instead of the primary and fully diluted earning
per share. The computation of basic 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. Prior period earnings per share
and weighted average shares have been restated to reflect the adoption of SFAS
No. 128.
In calculating earnings (loss) per common and common equivalent share,
the net income was the same for the basic and diluted calculations.
Additionally, the weighted average common shares and common equivalent shares
outstanding for purposes of calculating earnings (loss) per share was as
follows:
March 31, March 31,
1998 1997
Weighted average common shares outstanding used in
basic earnings per share for the quarters ending 11,246,399 11,585,877
Effect of dilutive stock options - 251,263
Weighted average common shares and potential
dilutive common equivalent shares outstanding
used in dilutive earning per share 11,246,399 11,837,180
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PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1998
(Unaudited)
For the three months ended March 31, 1998 and 1997 the Company had
2,058,850 and 1,019,995 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.
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
March 31, 1998 and December 31, 1997:
March 31, December 31,
1998 1997
Raw materials & supplies $ 674,562 $ 666,007
Finished goods 946,165 908,851
$ 1,620,727 $ 1,574,858
Note 3 - Related Party Transactions
The Company incurred $5,340 and $10,256 respectively, for the three
months ended March 31, 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 $24,272 for the three months ended March
31, 1998 and March 31, 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.
Note 5 - Property and Equipment
Property and equipment consists of the following:
March 31, December 31,
1998 1997
Furniture & Office Equipment $ 277,667 $ 263,913
Plant Machinery & Equipment 4,525,601 4,469,322
Leasehold Improvements 1,873,381 1,873,381
6,676,649 6,606,616
Accumulated Depreciation 1,693,760 1,536,059
$4,982,889 $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 March 31, 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 1998, and is secured by the Company's accounts
receivable, inventory and equipment.
Note 7 Note Payable
At March 31, 1997, the Company's subsidiary (prior to the merging of
this subsidiary on December 31, 1997), Alborough, Inc. was obligated to pay a
note in the amount of $16,236. The note provided for monthly payments of
principal and interest at an annual rate of 10%. The final payment was made
in June of 1997.
Note 8 Income Taxes
Effective January 1, 1993 the Company adopted FASB Statement 109,
"Accounting for Income Taxes."
As of March 31, 1998 and December 31, 1997 the net deferred tax assets
and liabilities consisted of the following:
March 31, December 31,
1998 1997
Current deferred tax asset $ 666,928 $ 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 9 Stockholders' Equity
For the quarter ended March 31, 1998, the Company canceled 919,996
previously issued stock options, held by employees, directors and a
consultant, and granted to employees, directors and a consultant 1,447,350
stock options to purchase common shares at $1.015 to $1.14 per share expiring
on April 30, 2005 through March 25, 2008. Also during the quarter ended March
31, 1998, 299,999 previously issued stock options expired.
During the quarter ended March 31, 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.
Note 10 - 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
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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 March
31, 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.
Note 11 - Discontinued Operations
During the first quarter of 1997 the Company closed its quick service
Italian restaurant locations and discontinued the operations of AFDI, Inc.
The Company completed the disposition of the business during the second
quarter of 1997. AFDI, Inc. is reported as a discontinued operation for the
year ended December 31, 1996. During the three months March 31, 1997, the net
liability from discontinued operations had been reduced to $0.
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM II: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Quarter Ended March 31, 1998 v. Quarter Ended March 31, 1997
Net sales for the quarter ended March 31, 1998 were $3,723,423 as
compared to $3,339,613 for the quarter ended March 31, 1997 an increase of
11.5%. The increase in sales for the quarter is primarily attributable to a
new customer that the Company began co-packing for in September of 1997. The
Company's pesto product line also showed strong increases in the first
quarter. This was the result of the Company's continued focus on expanding
its customer base for this product line. These increases were partially
offset, however, by weaker meatball and pasta product line sales. In the
second quarter, the Company plans to introduce items from its entree line of
products to the retail and foodservice markets.
Cost of goods sold as a percentage of net sales increased from 70.4% for
the quarter ended March 31, 1997 to 77.3% for the quarter ended March 31,
1998. This increase was primarily due to the new entree products being sold to
a co-pack customer. Although showing continued improvement during the first
quarter, the entree line experienced costs in excess of the Company's
expectations.
Gross profit decreased to 22.7% for the quarter ended March 31, 1998
from 29.6% for the quarter ended March 31, 1997. This decrease was primarily
due to sales of the entree products.
Operating expenses as a percentage of net sales were approximately 26.9%
for the quarter ended March 31, 1998 as compared to 29.8% for the quarter
ended March 31, 1997. The decrease in this percentage for the quarter is
primarily due to the increase in sales. In absolute dollars general and
administrative expenses increased for the first quarter of 1998 vs. 1997
primarily due to an increase in consulting fees and art and label design
expense. The lower salaries expense was due to the allocation of some of the
previous general and administrative employees to the Company s plant
operations and therefore this expense is now included in cost of goods sold.
Additionally, the departure of an employee involved with the operations of
Alborough, Inc. (previously a wholly owned subsidiary) reduced this expense.
The net loss was $71,893 for the quarter ended March 31, 1998 compared
to net income of $28,478 for the quarter ended March 31, 1997. The decrease
in net income for the first quarter of 1998 compared to the first quarter of
1997 is primarily attributed to lower gross margins due to the change in the
product mix.
Quarter Ended March 31, 1998 v. Quarter Ended March 31, 1997
Liquidity and Capital Resources
At March 31, 1998, the Company had working capital of $5,733,121, an
increase of $8,334 from December 31, 1997. Current assets included $4,070,153
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 three months ended March 31, 1998, cash provided by operating
activities of the Company amounted to $11,767.
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On September 10, 1997, the Company renewed its $500,000 business loan
line of credit with Wells Fargo Bank, in San Francisco, California. This loan
provides for interest at prime plus .75% with a maturity date of September 10,
1998. At March 31, 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 March 31, 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 March 31, 1998, the
Company has not incurred any additional cost due to this provision.
The Company presently has no material commitments for capital
expenditures.
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PART II
OTHER INFORMATION
II. Other Information
Item 1. Legal Proceedings. None
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
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 May 8, 1998 William J. Armanino, President
Chief Executive Officer
Chief Financial Officer
Treasurer
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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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 312,308
<SECURITIES> 2,482,030
<RECEIVABLES> 1,275,815
<ALLOWANCES> 0
<INVENTORY> 1,620,727
<CURRENT-ASSETS> 6,591,003
<PP&E> 4,982,889
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,119,830
<CURRENT-LIABILITIES> 857,882
<BONDS> 0
<COMMON> 11,136,042
0
0
<OTHER-SE> (262,537)
<TOTAL-LIABILITY-AND-EQUITY> 12,119,830
<SALES> 3,723,423
<TOTAL-REVENUES> 3,723,423
<CGS> 2,877,922
<TOTAL-COSTS> 2,877,922
<OTHER-EXPENSES> 1,000,163
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (119,821)
<INCOME-TAX> (47,928)
<INCOME-CONTINUING> (71,893)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (71,893)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
