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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ________
Commission File No. 0-18200
ARMANINO FOODS OF DISTINCTION, INC.
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(Exact Name of Registrant as Specified in its Charter)
Colorado 84-1041418
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(State or Other Jurisdiction of (I.R.S. Employer Identi-
Incorporation or Organization) fication Number)
30588 San Antonio Street, Hayward, California 94544
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(Address of Principal Executive Offices, Including Zip Code)
Registrant's telephone number, including area code: (510) 441-9300
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: No Par Value
Common Stock
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
As of March 24, 1998, 11,246,399 Shares of the Registrant's Common Stock were
outstanding. The aggregate market value of voting stock of the Registrant
held by non-affiliates was approximately $9,333,000.
Documents incorporated by reference: Part III is incorporated by reference to
the Registrant's Proxy Statement relating to the Annual Meeting of
Shareholders to be held May 21, 1998.
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 228,495 of this chapter) is not contained in this
and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
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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 frozen food products,
including primarily pesto and other Italian-style sauces, stuffed and flat
pasta products, focaccia, meatballs and an Italian line of entree products.
The Company's business began in 1978 as Armanino Frozen Foods, a
division of Armanino Marketing Corp., which started producing frozen pesto
sauce and eventually developed most of the Company s present line of products.
In January 1987, substantially all of the business conducted by Armanino
Frozen Foods division was transferred to Armanino Foods of Distinction, Inc.,
a Delaware corporation ("Armanino-Delaware"). In February 1988, Armanino-
Delaware was acquired by the Company in a stock exchange transaction in which
Armanino-Delaware became a wholly-owned subsidiary of the Company. In
December 1990, Armanino-Delaware was merged into the Company.
In May 1995, the Company formed AFDI, Inc., a California corporation, as
a wholly-owned subsidiary for the purpose of operating the Company's new
Italian quick service restaurants. In February 1997, the Company determined
that this concept was not meeting the Company's performance criteria and that
it would be more beneficial to concentrate management's time and effort to the
Company's ongoing business. The Company determined to discontinue operations
of Focaccia Di Genova on February 17, 1997. As a result, AFDI, Inc. has
become a dormant subsidiary of the Company.
In May 1996, the Company acquired all of the issued and outstanding
shares of Alborough, Inc., dba Emilia Romagna, for the purpose of expanding
its product line to include highly specialized upscale frozen pasta products
for the foodservice and industrial markets. As of December 31, 1997,
Alborough, Inc. was merged into the Company.
The Company is a Colorado corporation incorporated in October 1986,
under the name "Falcon Fund, Inc." for the purpose of creating a corporate
vehicle to seek and acquire a business opportunity. Following the acquisition
of its present business, the Company changed its name to "Armanino Foods of
Distinction, Inc." in November 1988.
In April 1990, the Company effected a one for six reverse split of the
shares of the Company's Common Stock outstanding and in April 1991, the
Company effected a one for fifteen reverse split of the shares of the
Company's Common Stock outstanding. All financial and share data in this
Prospectus gives retroactive effect to the reverse splits.
The Company's offices are presently located at 30588 San Antonio Street,
Hayward, California 94544, and its telephone number is (510)441-9300.
PRODUCTS
The Company's line of frozen products presently includes pesto sauces,
stuffed and flat pastas to include value-added specialty Italian pastas,
focaccia, meatballs and an Italian line of entree products. These products
are marketed through a network of food brokers and sold to retail and
foodservice distributors, club type stores and industrial accounts. Several
of these products are sold under separate labels, including the Armanino
label, and the 2
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Italian Holiday and Pasta Regina labels which services the mass type feeding
demands of certain foodservice customers. The products and the labels they
bear are identified as such in each product's category described below.
The Company presently markets a line of pesto sauces which are available
in four varieties, Basil, Cilantro, Dried Tomato-Garlic and Roasted Red Bell
Pepper based sauces under the Armanino label. The Basil and Dried Tomato
Garlic pesto sauces are available to the Company's retail, foodservice and
industrial customers; the Red Bell Pepper pesto is available to its
foodservice and industrial customers and Cilantro pesto to foodservice
customers only.
The Company also markets one other frozen sauce. This is a Pepperonata
sauce, which is available to its foodservice customers.
The Company markets several lines of frozen pastas, namely stuffed and
flat pastas and pasta sheets, cooked and uncooked.
The Company's line of frozen stuffed pastas, both cooked and uncooked,
includes meat, cheese, vegetable, spicy turkey, seafood and mushroom ravioli;
tri-color raviolini; meat and cheese tortellini and tri-color
tortellini/capelleti style, meat and cheese tortelloni, manicotti and stuffed
shells. The meat and cheese ravioli and meat and cheese tortellini are
available to the Company's retail and foodservice customers. The remaining
pastas sold by the Company are available to its foodservice customers only, as
follows:
(a) all other stuffed pastas named above;
(b) gnocchi in two varieties -- Potato and Red Bell Pepper;
(c) flat pasta (strands) consisting of fettucini in four flavors (Red
Bell Pepper, Black Pepper, Spinach and Plain), Angel Hair, Linguini in three
flavors (Plain, Tri-Color and Squid Ink); and
(d) pasta sheets (used for lasagna).
The Company also markets six of its existing 10 pound frozen stuffed
pasta products (meat and cheese ravioli, meat and cheese tortellini, manicotti
and stuffed shells) under the Italian Holiday Brand label in order to satisfy
a specific sector of the Company's foodservice customers. The Company
additionally has marketed four of its existing 10 pound frozen stuffed pastas,
namely raviolis and tortellini (meat and cheese varieties of each) under the
Pasta Regina Brand label in order to satisfy certain customer needs.
The Company's line of frozen meatballs presently includes beef meatballs
and turkey, beef, pesto meatballs. The beef meatball line is available to its
retail and clubstore customers under the Armanino label; and the Turkey, Beef,
Pesto meatball line is available to its retail and foodservice (general)
customers under the Armanino label as well as to foodservice (specific)
customers under the Italian Holiday label.
The Company's line of frozen foccacia presently includes two varieties,
plain and plain topped with green and black olives. The focaccia is available
in 1/4 sheets (1/4 sheet is approximately eight inches by twelve inches),
precooked frozen and sold to foodservice customers.
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NEW PRODUCTS
The Company continues to research potential Italian entree line
opportunities. The Company plans to introduce a number of new Italian entree
products to its foodservice and in-store deli customers during 1998.
The Company is also continuing to research and develop additional frozen
sauces for the foodservice and retail market. During the first quarter of
1998, the Company re-introduced its Dried Tomato Garlic Pesto sauce to its
retail customers emphasizing a new packaging design. Additionally, the
Company plans to introduce the Roasted Red Bell Pepper sauce to its retail
customers during the second quarter of 1998. With respect to the Company's
foodservice line, the Company is currently researching the addition of new
sauces to its line during 1998.
MANUFACTURING OPERATIONS
Beginning in January, 1991, the Company manufactured frozen pesto sauce
at its facilities in South San Francisco, California. In August 1994, the
operation was transferred to the Company's new facilities in Hayward,
California. Prior to 1991, an independent company manufactured and packaged
this product for the Company. The Company made the decision to begin its own
manufacturing operations based on its need to gain control of its production
costs, production quality and its production schedule in order to better meet
the needs of its customers.
Shortly following completion of its move to the Hayward location, the
Company began in-house production of its ravioli line of products. In Fall of
1997, the Company moved its then subsidiary's (Emilia Romagna) operations to
the Company's facilities consolidating its manufacturing operations under one
roof. Most of the products, including certain tortellini products, that were
previously manufactured by Emilia Romagna will continue to be manufactured by
the Company.
Also during the third quarter of 1997, the Company completed expansion
of its manufacturing operations to include multi-purpose manufacturing and
assembly equipment for entree line items including lasagne, cannelloni,
manicotti; pasta sheets and specialty pastas such as tortellini and
tortelloni, as well as other entree line items. To complement this line
further, kettles were also purchased to manufacture sauces for this line as
well as a refrigeration system for quick cooling of product and new packaging
equipment.
The annual production rate of products varies as does the capacity of
the equipment, depending on the type of product being produced. The Company
believes that its equipment has sufficient capacity to meet its production
needs for at least the next twelve months.
The Company's line of frozen meatballs is manufactured by Pan Ready
(formerly Spun Steak) of South San Francisco, California. The Company has an
agreement with Pan Ready pursuant to which that company manufactures these
products based on the Company's proprietary formulas at a set price, as well
as Pan Ready's products on a "private label" basis at a set price. Pan Ready
has agreed to keep the Company's proprietary recipes confidential.
Certain tortellini products are manufactured for the Company by the San
Francisco Pasta Company ("S.F. Pasta") of Hayward, California. The Company
has an agreement with S.F. Pasta pursuant to which that company manufactures
and packages these products based on the Company's proprietary formulas at a
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set price. At present, the Company purchases this product based on S.F.
Pasta's proprietary formulas, on a private label basis at a set price. S.F.
Pasta has agreed to keep the Company's recipes confidential. The Company
intends to manufacture and package these products in-house beginning in the
third quarter of 1998.
The Company's cooked sauce, namely Pepperonata, is being manufactured
and packaged by Home Maid Ravioli Company ("Home Maid") of San Mateo,
California. The Company intended to bring the manufacturing of this item in-
house during 1997. However, until the Company is able to determine the
feasibility and potential sales of this sauce, the Company will continue to
utilize Home Maid for the manufacture of this sauce. The Company has entered
into an agreement with Home Maid pursuant to which Home Maid has agreed to
manufacture and package this sauce item based upon the Company's proprietary
formulas at a set price. Home Maid has agreed to keep the Company's recipes
confidential.
Certain frozen stuffed pasta items are manufactured for the Company by
Flagship Foods of San Jose, California. The Company has an agreement with
Flagship Foods pursuant to which that company will manufacture and package
these products based on the Company's proprietary formulas at a set price.
Flagship Foods has agreed to keep the Company's recipes confidential.
The Company's focaccia products are manufactured for the Company by
Maggiora Bakery ("Maggiora") in Richmond, California. The Company entered
into an agreement with Maggiora pursuant to which that Company will
manufacture and package these products based on the Company's proprietary
formulas at a set price. Maggiora has agreed to keep the Company's recipes
confidential.
In September 1997, the Company entered into a manufacturing and
packaging agreement with Wolfgang Puck Foods Company (WPFCO) pursuant to which
the Company has agreed to manufacture and package certain proprietary products
of WPFCO under their label to their retail customers. The Company has agreed
to keep WPFCO's recipes confidential.
All products manufactured by outside sources are produced on a "co-pack"
or "completed-cost" basis, except for the cost of branded packaging and
labeling which are borne by the Company. The manufacturer makes all
arrangements to purchase and inspect raw materials, schedule actual
production, and initiate movement of all finished goods to a warehouse
designated by the Company.
Quality assurance is monitored continually by the manufacturer during
processing for temperature, color, flavor, consistency, net weight and
integrity of packaging. Periodic inspections are made by the Company in
processing and sanitation compliance.
With regard to the production of frozen pesto sauces, pasta and Italian
line of entree products at the Company's own facilities, the Company is
responsible for the supervision of the above-mentioned quality assurance
measures and has employed its own in-house quality control personnel to assure
that the Company's processing and sanitation compliances are met. The Company
also performs process analysis as well as microbiological and nutritional
analysis of all its in-house production, and uses a Hayward, California
laboratory firm to assist in this testing. The Company is in the process of
developing its Hazard Analysis and Critical Control Points program, required
by USDA regulations, which will be implemented in 1999.
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All raw materials are purchased from approved suppliers by manufacturers
on contract where specific requirements on quality, size, and packing medium
must be met, or on a spot market basis where prior specifications have been
met or qualified by testing.
DISTRIBUTION AND MARKETING
The Company's products are marketed primarily through a network of food
brokers and sold to retail, foodservice, club-type stores, and industrial
accounts.
For the year ended December 31, 1997, one independent broker, Kelley-
Clarke, Inc., accounted for approximately 13% of the sales of the Company.
For the year ended December 31, 1996, two independent brokers, Mass
Marketing Services, Inc. and Kelley-Clarke, Inc. (previously Ibbotson, Berri
and DeNola), accounted for approximately 34% and 12%, respectively, of the
sales of the Company.
For the year ended December 31, 1995, two independent brokers, Mass
Marketing Services, Inc. and Ibbotson, Berri and DeNola, accounted for
approximately 42% and 14%, respectively, of the sales of the Company.
The loss of brokers who represent a significant amount of sales could
have a materially adverse effect on the business of the Company. However, the
Company believes that once brokers have established accounts with customers
such as supermarket chains, the termination of a broker will not generally
affect sales to such customers when another broker serving the area is
available, or the Company is able to take over marketing responsibilities.
QUICK SERVICE RESTAURANTS
In 1995, the Company developed a concept for quick service Italian
restaurants. In June 1996, the Company opened its first restaurant in
Burlingame, California under the name Focaccia di Genova which specialized in
manufacturing and selling focaccia bread as a specialty item. The restaurant
also served Italian style salads, sandwiches and soups. In addition, LaVazza
brand coffee and coffee-related items were merchandised pursuant to a
strategic alliance with Lavazza Premium Coffees Corporation, an international
coffee company. It was the Company's original intention to open restaurants
both in Burlingame, California and Mountain View, California on a test basis.
After operating the Burlingame restaurant for several months, and analyzing
the investment required to open an additional restaurant and fund its ongoing
operations, the Company decided to abandon the Mountain View location and
focus on determining whether the Burlingame location would meet the Company's
performance criteria.
In February 1997, after analyzing the restaurant's performance, and the
allocation of management's time and efforts into other areas of the Company's
business which management determined to be more beneficial for the Company,
the Company decided to abandon the restaurant concept. As a result, AFDI,
Inc. is a dormant subsidiary of the Company.
ACQUISITION OF EMILIA ROMAGNA FOODS
In May 1996, the Company acquired all of the issued and outstanding
shares of Alborough, Inc. which conducted business under the trade name
"Emilia Romagna Foods". Emilia Romagna Foods manufactured highly specialized
upscale pasta products for the industrial and foodservice markets which
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utilizes state-of-the-art manufacturing equipment and techniques. The total
cost of the acquisition was $738,779 including professional fees paid in
relation to the acquisition. Additionally, the terms of the agreement include
an "earn-out" formula which provides for payments to the former Alborough
shareholders over a three year period based on certain performance criteria
established. The purchase price could have increased significantly depending
upon the attainment of earnings performance criteria over the three year
period, however, at the present time, it does not appear that the Company will
be obligated to make any additional purchase price payments. The earning
performance criteria are based on a percentage of gross margin attributable to
sales made of specific products to specified customers. The sales must be
made during a specified period of time and subject to certain minimum sales
levels being achieved.
Emilia Romagna's product line consisted of the three categories, they
being frozen filled pastas (e.g. seafood ravioli, lobster ravioli, tri-color
cappelletti, smoked chicken ravioli) frozen flat pastas and gnocchi.
Approximately 300 different products had been produced over the years at
Emilia Romagna. Capacities of the equipment varied depending on the items
produced (per orders) on a given day.
RAW MATERIALS
The Company primarily uses basil, vegetables, olive oil, canola oil,
eggs, dairy products, cheeses, cooked meat, spinach, bread crumbs, flour,
cilantro, dried tomatoes, garlic, red and green bell peppers, tomato puree and
sauce (concentrated), herbs and spices in packaging its products. There are
ample supplies of these raw materials and the Company anticipates no raw
material supply shortages in the foreseeable future.
COMPETITION
The Company faces substantial competition in its business. Because many
of the Company's products are sold frozen and have a relatively shorter shelf
life and are more expensive than many competing dried products, and products
packed in cans or jars. Although these types of competing products are
marketed by some companies which have significantly greater financial and
other resources than those of the Company, including advertising budgets, the
Company markets its products on the basis of quality and natural ingredients
rather than price.
With respect to other frozen food manufacturers, the Company believes
that its products are highly competitive with other frozen products in pricing
and quality. However, the Company faces stiff competition in the area of on-
going promotional support, and the Company has found it difficult to convince
new accounts to change their established suppliers. The Company may also face
competition from future entrants into the industry.
There is no assurance that the Company's products will meet with public
acceptance in new markets. The Company believes that the Company has achieved
name recognition nationally with emphasis in the West Coast Region.
EMPLOYEES
As of March 18, 1998, the Company employed 61 persons on a full-time
basis and two on a part-time basis. The Company also presently uses two to
three persons on a full-time basis, as needed, from a temporary employment
service.
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PATENTS AND TRADEMARKS
Although the Company's formulas and recipes are not subject to patent
protection, the Company treats these as proprietary and uses confidentiality
agreements as appropriate in an attempt to protect such formulas and recipes.
To date, the Company has not encountered any difficulties in keeping its
formulas and recipes confidential, and has not been required to enforce its
confidentiality agreements.
The Company uses the name "Armanino" as trademark for its products.
However, no trademark application has been filed for Armanino. In November
1995, the Company received trademark protection for the mark Italian Holiday
from the U.S. Patent and Trademark office. This trademark is used by the
Company on certain of its frozen stuffed pasta products and meatball products.
In December 1996, the Company filed a trademark application with the
U.S. Patent & Trademark Office to register the name Pasta Regina as a
trademark. The Company intends to use this mark on certain of its flat and
filled pastas, including ravioli and tortellini sold to foodservice industrial
and retail accounts. This application is pending.
As a result of its acquisition of Emilia Romagna, the Company has the
"Emilia Romagna" trademark registered with the State of California. This
trademark was used by the Company on certain of its frozen pasta and pasta
products and will be retained for future use.
GOVERNMENT REGULATION
The Company's current manufacturing operations are regulated by the
United States Department of Agriculture ("USDA") as well as state and local
authorities. The Company is subject to various regulations with respect to
cleanliness, maintenance of food production equipment, food handling and
storage, and is subject to on-site inspections. The Company, as a distributor
of food items, is also subject to regulation by government agencies,
including, specifically, the USDA. Under various statues and regulations, the
regulatory agencies prescribe requirements and establish standards for
quality, purity and labeling. The finding of a failure to comply with one or
more regulatory requirements can result in a variety of sanctions, including
stopping production, monetary fines and/or the compulsory withdrawal of
products from the supermarket shelves. However, the Company believes that in
the event any such violations were found to exist, the Company could seek
compensation from the manufacturer of the cited product on products not
manufactured by the Company since the manufacturer is responsible for
processing, manufacturing, packaging and labeling such products. Neverthe-
less, there can be no assurance that the Company would be successful in
recovering such compensation.
ITEM 2. PROPERTIES.
The Company leases approximately 24,375 square feet of office,
production and warehouse space located at 30588 San Antonio Street, Hayward,
California, 94544. The base rent is $7,207 per month through July 31, 1998.
The monthly rental will increase effective on August 1, 1998, August 1, 2000
and August 1, 2002 based upon the increase in the Consumer Price Index on
those dates with a minimum of 3.5% cumulative annual increase and a maximum of
a 7% cumulative annual increase. The lease expires on August 9, 2003 with an
option to extend the term for two periods of five years each. In addition to
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the base rent the Company is required to pay all utilities, expenses, maintain
insurance on the property and pay any increases in real estate taxes on the
property.
In 1995, the Company entered into a lease of approximately 2,000 square
feet of retail space located at 1420 Burlingame Avenue in Burlingame,
California, as the location for its first quick service restaurant. The base
rent under the lease was $5,000 per month through October 31, 1996. In March
1997, a Lease Termination Agreement was entered into relieving the Company of
all of the obligations under this lease.
In 1996, the Company entered into a lease for a second restaurant
location which consists of approximately 2200 square feet located in the San
Antonio Shopping Center, 2550 West El Camino Real, Mountain View, California.
The base rent was $4,260 per month through October 31, 1996. In March 1997, a
Lease Termination Agreement was entered into which relieved the Company of all
of its obligations under this lease.
As a result of the acquisition of Alborough, Inc., dba Emilia Romagna,
the Company assumed all lease obligations on a manufacturing facility which
consisted of approximately 7,320 square feet located at 20275 Mack Road in
Hayward, California. The base rent was $3,899 per month. In July 1997, a
Lease Termination Agreement was entered into relieving the Company of all its
obligations under this lease.
ITEM 3. LEGAL PROCEEDINGS.
On June 11, 1997, Mass Marketing Services filed a lawsuit in Superior
Court of San Diego County, California against the Company seeking damages for
breach of contract, open book account and reasonable value of services
rendered. The lawsuit arose after the Company terminated it sales
representation agreement with Mass Marketing. Mass Marketing asserted that it
is entitled to an additional ten months of commissions (approximately
$100,000) and attorneys fees under the agreement. The parties agreed to
arbitrate the dispute in San Mateo County, California. No date has been set
for the arbitration. Management cannot reasonably predict the ultimate
outcome, but believes that it will not have a material effect on the Company's
financial position. The Company intends to vigorously defend their position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRINCIPAL MARKET OR MARKETS. The Company's Common Stock is traded in
the over-the-counter market and, since April 27, 1990, has been traded on the
Nasdaq Small-Cap Market under the symbol "ARMF".
The following table sets forth the closing high and low trading prices
of the Common Stock for the periods indicated, as reported by The Nasdaq Stock
Market.
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QUARTER ENDED HIGH LOW
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March 31, 1996 $2.6875 $1.625
June 30, 1996 $2.3125 $1.50
September 30, 1996 $1.875 $1.375
December 31, 1996 $1.875 $1.15625
March 31, 1997 $1.46875 $1.0625
June 30, 1997 $1.3125 $0.9375
September 30, 1997 $1.4375 $1.0625
December 31, 1997 $1.75 $0.84375
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of holders of
record of the Company's no par value common stock at March 18, 1998, was
3,341.
DIVIDENDS. Holders of common stock are entitled to receive such
dividends as may be declared by the Company's Board of Directors. No
dividends have been paid with respect to the Company's common stock and no
dividends are anticipated to be paid in the foreseeable future.
PRIVATE SALES OF SECURITIES. The Company did not sell any securities
which were not registered under the Securities Act of 1933, as amended, during
the quarter ended December 31, 1997.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain selected financial data with
respect to the Company, and is qualified in its entirety by reference to the
financial statements and notes thereto filed herewith:
BALANCE SHEET DATA:
At December 31,
1997 1996 1995 1994 1993
----------- ----------- ---------- ---------- ----------
Total Assets $12,935,625 $11,926,101 $9,054,289 $8,047,228 $7,129,575
Long-Term Debt 203,384 45,850 71,599 95,120 -0-
Cash Dividends
Per Share -0- -0- -0- -0- -0-
STATEMENT OF OPERATIONS DATA:
For the Years Ended December 31,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------
Net Sales $15,347,165 $15,305,029 $13,504,429 $10,451,956 $8,719,939
Net Income
From Con-
tinuing
Operations $ 717,287 $ 1,055,122 $ 1,092,740 $ 470,252 $ 343,997
Net Income
From Con-
tinuing
Operations
Per Common
Share $.06 $.09 $.10 $.05 $.03
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996
Net sales for the year ended December 31, 1997, were $15,347,165
compared to $15,305,029 for the year ended December 31, 1996. Although sales
were flat overall, specific product lines and divisions experienced increases
and offsetting decreases. Pesto product line sales increased by 8%. Most of
this increase was driven by the foodservice area. The pasta product line,
excluding club store sales, showed a strong increase of 26%, primarily in the
foodservice area and a co-pack contract. Due to the loss of club store
business for the Company's pasta products in 1996, the overall pasta business
experienced a net decrease in sales of 9%. Meatballs experienced good
increases in both the foodservice and retail area. These increases were
offset by the loss of meatball sales to a club store customer. The increased
sales in some of the areas mentioned were the result of the Company's focus on
the expansion of the foodservice market giving the Company a more diversified
customer base. The Company continues to support its sales through promotional
programs, advertising and demonstrations.
Cost of goods sold as a percentage of net sales increased to 70.7% for
the year ended December 31, 1997, compared to 69.2% for the year ended
December 31, 1996. The increase in the cost of goods sold percentage was
impacted by several factors. Lower pasta sales to a club store impacted the
percentage of pasta fixed manufacturing costs related to total pasta sales.
Increase in sales from a co-pack situation changed the product mix to include
higher manufacturing cost/lower margin products associated with a co-pack
situation. Additionally, the start-up of the Company's new state-of-the-art
entree line and the inefficiencies associated with a start-up impacted the
cost of goods sold percentage.
Operating expenses as a percentage of net sales increased to 24.8% for
the year ended December 31, 1997 compared to 20.61% for the year ended
December 31, 1996. The increase in operating expenses was the result of
adding personnel to assist in the management of the Company's expanded
manufacturing capacity and new product lines. Expenses associated with
additional personnel increased as well. Furthermore, the Company incurred
higher expenses to outside consultants, a full year of public relations
expense and more participation in conventions and shows by the sales personnel
to introduce the Company's products.
Interest and other income decreased from $264,835 for the year ended
December 31, 1996 to $200,933 for the year ended December 31, 1997. The
decrease resulted from lower cash reserves earning interest due to the use of
cash for the purchase of the new entree line. Additionally, lower operating
income and cash flows, impacted the cash reserves for 1997 as compared to
1996.
Net income from continuing operations before income taxes was $842,103
for the year ended December 31, 1997, compared to $1,807,437 for the year
ended December 31, 1996. The decrease was due to the combination of factors
described above. Loss of club store business, the costs and expenses
associated with the start-up of the entree processing line and increases in
operating expenses associated with the expansion of the Company's operations,
all impacted the net income from operations.
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During the first quarter of 1997, the Company adopted a plan to
discontinue the quick service Italian restaurant locations and operations of
its AFDI, Inc. subsidiary. The Company disposed of the business during the
second quarter of 1997. The operations of AFDI, Inc. are reported as
discontinued operations for the year ended December 31, 1996. Net sales
related to AFDI, Inc. for 1997 and 1996 were $20,975 and $125,429,
respectively. These amounts have been reclassified to an estimated loss from
operations of AFDI, Inc. in the statement of operations. As a result of these
discontinued operations, the Company had net income of $717,287 for the year
ended December 31, 1997, as compared to net income of $446,967 in the prior
year.
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
Total net sales for the year ended December 31, 1996, were $15,305,029
as compared to $13,504,429 for the year ended December 31, 1995. The 13%
increase included strong increases leading to record sales in both the pesto
and meatball product lines. Additionally, sales of new specialty pastas being
manufactured by Alborough, Inc. (subsidiary acquired during year) contributed
to this increase. The pesto product line showed the strongest gains in the
foodservice area. Continuing expansion of the customer base in the East Coast
market and a new distributor in the Pacific Rim market facilitated this
growth. The meatball product line had strong increases in sales in both the
retail and club store area. The Company continued to support these sales
through its promotional programs.
Cost of goods sold as a percentage of sales increased from 65.6% for the
year ended December 31, 1995, to 69.2% for the year ended December 31, 1996.
This increase is primarily due to the change in the Company's overall product
mix. The change in the product mix was partially due to the acquisition of a
new subsidiary (Alborough, Inc.) and the shift in the mix of the Company's
original products. The pasta products of this subsidiary currently have lower
margins than that of the pasta products the Company was previously
manufacturing. Additionally, higher meatball sales and lower pasta sales from
the Company's original product line shifted the product mix toward the lower
margin products.
Operating expenses as a percentage of net sales were 20.6% for the year
ended December 31, 1996, compared to 22.5% for the year ended December 31,
1995. The decrease in this percentage is primarily attributable to higher
sales. The dollar amount of operating expenses increased to $3,155,091 for
1996 compared to $3,043,082 for 1995. The increase in the dollar amount of
operating expenses was primarily due to increases in commissions and
advertising, demonstrations, promotions and trade allowances, which management
believes led to increased sales. These expenses were partially offset by
lower salary expense due to the fact that no incentive bonuses were
distributed to Officers of the Company for 1996.
Interest and other income increased from $134,147 for the year ended
December 31, 1995, to $264,835 for the year ended December 31, 1996. This was
primarily the result of the receipt of funds in the first quarter of 1996 from
warrant exercises, which enabled the Company to earn interest on these
additional cash reserves.
Net income from continuing operations was $1,055,112 for the year ended
December 31, 1996, compared to $1,092,740 for the year ended December 31,
1995. The decrease in net income from continuing operations was a result of
losses incurred from the operations of the Alborough, Inc. subsidiary
12
<PAGE>
purchased during 1996. The losses incurred by this subsidiary and included in
the consolidated net income from continuing operations amounted to
approximately $200,000.
During the first quarter of 1997, the Company adopted a plan to
discontinue the quick service Italian restaurant locations and operations of
its AFDI, Inc. subsidiary. The Company disposed of the business during the
second quarter of 1997. The operations of AFDI, Inc. are reported as
discontinued operations for the year ended December 31, 1996. Net sales
related to AFDI, Inc. for 1996 and 1995 were $125,429 and $0, respectively.
These amounts have been reclassified to an estimated loss from operations of
AFDI, Inc. in the statement of operations. As a result of these discontinued
operations, the Company had net income of $446,967 for the year ended December
31, 1996, as compared to net income of $1,092,740 in the prior year.
YEAR ENDED DECEMBER 31, 1995 VS. YEAR ENDED DECEMBER 31, 1994
Total net sales for the year ended December 31,1995, were $13,504,429 as
compared to $10,451,956 for the year ended December 31, 1994. The 29%
increase in overall sales included strong increases in all three of the
Company's main product lines. Pesto sales increased mainly in the foodservice
area. Expansion of the customer base to the East Coast market and continuing
strength in the West Coast sales facilitated this growth. Strong pasta line
sales were evident in retail, club store and foodservice areas. The increases
were the result of an improved product being sold for the full year and from
increased support through demonstration and promotional programs for the club
stores. Meatball sales increased due to a full year of new club store sales
and increased support through demonstration programs. The Company is
continuing to focus on the introduction of new products to the retail and
foodservice markets, and the expansion of its customer base for its current
products.
Cost of goods sold as a percentage of net sales decreased from 70% for
the year ended December 31, 1994, to 66% for the year ended December 31, 1995.
This is primarily due to three factors. Sales increased which in turn
improved gross margins as production overhead costs were absorbed by more
output. The product mix during 1995 shifted slightly to more profitable
items. Additionally, the efficiencies and control available through in-house
production, for the entire year, contributed to the decline in the cost of
goods sold as a percentage of net sales.
Operating expenses as a percentage of sales for the year ended December
31, 1995, were 22.5% as compared to 23% for the year ended December 31, 1994.
The increase in the dollar amount of operating expenses is primarily due to an
increase in the advertising, demonstrations, promotions and slotting
allowances expense. These programs were used to support sales by increasing
customer awareness for the Company's products and expanding the customer base.
General and administrative expenses increased primarily due to an increase in
research and development expenses. This included research and development of
new items for the Company and the development of the focaccia product for the
Company's quick service restaurants which are expected to open in 1996.
Additionally, general and administrative expenses increased due to an increase
in sales travel expenses as they related to developing new areas and expanding
the customer base.
Interest and other income increased from $82,542 for the year ended
December 31, 1994 to $134,147 for the year ended December 31, 1995. This
increase was primarily the result of the increase in the interest rates and
additional accumulated cash reserves from the net income experienced for the
year. 13
<PAGE>
Income from continuing operations was $1,092,740 for the year ended
December 31, 1995, as compared to $470,252 for the year ended December 31,
1994. The increase for the year is due to higher sales and production
improvements.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had working capital of $5,724,787, a
decrease of $1,405,887 from December 31, 1996. The decrease is primarily
attributable to the utilization of cash reserves for the purchase of the new
state-of-the-art sauced entree line. Current assets included $4,877,099 in
cash, U.S. treasury bills and accounts receivable. Management believes that
this level of working capital is adequate to meet anticipated needs for
liquidity.
During the year ended December 31, 1997, cash provided by operating
activities of the Company amounted to $855,635. This was primarily a result
of net income from continuing operations, the realization of deferred tax
assets, and non-cash depreciation and amortization expense. For the years
ended December 31, 1996 and 1995, the Company's operating activities generated
$896,171 and $1,911,187 in cash, respectively. This was primarily a result of
the net income from continuing operations experienced during these years.
During 1997 and 1996, the Company expended approximately $2,300,000 on
equipment and leasehold improvements for a new sauced entree line. The
Company placed this equipment and leasehold improvements in service in
September of 1997. All of the expenditures for this line were made from the
Company's cash reserves. As of December 31, 1997, the Company has invested
$2,975,403 in U.S. treasury bills.
On September 10, 1997, the Company renewed its $500,000 business loan
line of credit with Wells Fargo Bank in San Francisco, California. This loan
provides for interest at prime plus .75% with a maturity date of September 10,
1998. At December 31, 1997, the Company had $287,439 outstanding under this
line. The purpose of obtaining this line of credit is to afford the Company
greater cash liquidity and management of its cash investments.
On May 20, 1996, the Company purchased all of the outstanding stock of
Alborough, Inc. (d/b/a Emilia Romagna). The total cost of the acquisition was
$738,779 including professional fees paid in relation to the acquisition.
Additionally, the terms of the agreement include a "earn-out" formula which
provides for payments to Alborough shareholders over a three year period based
on certain performance criteria established. The purchase price could have
increased significantly depending upon the attainment of certain earning
performance criteria over the three year period, however, at the present time
it does not appear that the Company will be obligated to make any additional
purchase price payments. The earnings performance criteria are based on a
percentage of gross margin attributable to sales made of specific products to
specified customers. The sales must be made during a specified period of time
and subject to certain minimum sales levels being achieved. No additional
payments were made to Alborough, Inc.'s former shareholders as minimum sales
to the specified customers had not been achieved during the year ended
December 31, 1997.
The Company presently has no material commitments for capital
expenditures.
ITEM 8. FINANCIAL STATEMENTS.
The financial statements and financial statement schedules are set forth
on pages F-1 through F-21 hereto.
14
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE.
Not applicable.
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by these Items is incorporated herein by
reference to the Company's definitive Proxy Statement relating to the Annual
Meeting of Shareholders to be held May 21, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. The following financial statements are filed as part of this
Report:
PAGE
----
Independent Auditors' Report ................................. F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996.. F-2
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995 ....................... F-3
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995 ......... F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 ....................... F-7
Notes to Consolidated Financial Statements ................... F-9
(a) 2. All schedules have been omitted, as the required information
is inapplicable or the information is presented in the financial statements or
the notes thereto.
(a) 3. Exhibits.
Exhibit
Number Description Location
- ------- ------------------------- ------------------------------------
3 Articles of Incorporation Incorporated by reference to Exhibit
and Bylaws No. 3 to Registrant's Form S-18 Reg-
istration Statement (No. 33-14130-D)
3.1 Articles of Amendment Incorporated by reference to Exhibit
to the Articles of Incor- No. 3.1 to Registrant's Form S-18
poration Registration Statement
(No. 33-14130-D)
3.2 Articles of Amendment Incorporated by reference to
to the Articles of Incor- Exhibit No. 3.3 to Registrant's
poration filed on April Form S-1 Registration State-
16, 1991 ment (No. 33-40098)
15
<PAGE>
10.1 1993 Stock Option Plan Incorporated by reference to Exhibit
No. 1 to Registrant's Report on Form
10-K for the year ended December 31,
1992
10.2 Amended and Restated Incorporated by reference to
Lease for 30588 San Exhibit No. 10.5 to Registrant's
Antonio Street, Hayward Report on Form 10-K for the fiscal
California year ended December 31, 1993
10.3 Manufacturing and Pack- Incorporated by reference to
aging Agreement with San Exhibit 10.12 to the Registrant's
Francisco Pasta Company Report on Form 10-K for the fiscal
year ended December 31, 1994
10.4 Business Loan Agreement, Incorporated by reference to
Promissory Notes and Com- Exhibit 10.14 to the Registrant's
mercial Security Agreement Report on Form 10-K for the fiscal
with Wells Fargo Bank Year ended December 31, 1994
10.5 Renewal Notice from Wells Filed herewith electronically
Fargo, Inc.
10.6 Promissory Note dated Incorporated by reference to Exhibit
May 8, 1995, to Wells 10.16 to the Registrant's Form S-1
Fargo Bank Registration Statement
(File No. 33-40098)
10.7 Manufacturing and Pack- Incorporated by reference to
ing Agreement with Pan Exhibit 10.17 to the Registrant's
Ready Foods, Inc. Form S-1 Registration Statement
(File No. 33-40098)
10.8 Manufacturing and Packag- Incorporated by reference to
ing Agreement with San Exhibit 10.16 to the Registrant's
Francisco Pasta, Inc. Annual Report on Form 10-K for the
(Second Agreement) year ended December 1, 1995
10.9 Manufacturing and Packag- Incorporated by reference to
ing Agreement with Home Exhibit 10.17 to the Registrant's
Made Ravioli Company Annual Report on Form 10-K for the
year ended December 1, 1995
10.10 Employment Agreement dated Incorporated by reference to
January 1, 1996, with Exhibit 10.18 to the Registrant's
William J. Armanino Form 10-K for the year ended
December 31, 1995
10.11 Employment Agreement with Incorporated by reference to
Robert H. Anderson Exhibit 10.15 to the Registrant's
Form 10-K for the year ended
December 31, 1996
10.12 Employment Agreement with Filed herewith electronically
Robert P. Kraemer
10.13 Consulting Agreement with Filed herewith electronically
Robert H. Anderson
16
<PAGE>
21 Subsidiaries of the Filed herewith electronically
Registrant
23 Consent of Pritchett, Filed herewith electronically
Siler & Hardy, P.C.
27 Financial Data Schedule Filed herewith electronically
(b) The Company filed no Reports on Form 8-K during the last quarter
of the period covered by this Report.
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
Hayward, California
We have audited the accompanying consolidated balance sheets of Armanino Foods
of Distinction, Inc. and Subsidiary at December 31, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1997, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the financial position of Armanino Foods of
Distinction, Inc. and Subsidiary as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for the years ended December
31, 1997, 1996 and 1995, in conformity with generally accepted accounting
principles.
/s/ Pritchett, Siler & Hardy, P.C.
January 12, 1998, except for Note 11
as to which the Date is March 11, 1998
F-1
<PAGE>
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS DECEMBER 31,
1997 1996
CURRENT ASSETS: ---------- ----------
Cash and cash equivalents $ 181,013 $ 742,856
Treasury bills, held to maturity 2,975,403 3,990,912
Accounts receivable 1,720,683 1,698,339
Inventory 1,574,858 1,066,904
Prepaid expenses 237,673 108,106
Current deferred tax asset 619,000 656,000
----------- -----------
Total Current Assets 7,308,630 8,263,117
----------- -----------
PROPERTY AND EQUIPMENT, net 5,070,557 2,599,936
----------- -----------
OTHER ASSETS:
Deposits 13,000 477,610
Goodwill, net 543,438 585,438
----------- -----------
Total Other Assets 556,438 1,063,048
----------- -----------
$12,935,625 $11,926,101
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 287,439 $ -
Accounts payable 1,154,037 933,235
Accrued expenses 74,570 66,241
Note payable - 32,073
Current portion long-term debt 67,797 25,749
Net liabilities of discontinued operations - 75,145
----------- -----------
Total Current Liabilities 1,583,843 1,132,443
PREFERRED TAX LIABILITY 203,000 126,000
LONG-TERM DEBT, less current portion 203,384 45,850
----------- -----------
Total Liabilities 1,990,227 1,304,293
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock; no par value, 10,000,000 shares
authorized, no shares issued and outstanding - -
Common stock; no par value, 40,000,000 shares
authorized, 11,246,399 and 11,584,099 shares
issued and outstanding at December 31, 1997
and 1996 respectively 11,136,042 11,529,739
Additional paid-in-capital 22,311 22,311
Accumulated deficit (212,955) (930,242)
----------- -----------
Total Stockholders' Equity 10,945,398 10,621,808
----------- -----------
$12,935,625 $11,926,101
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
----------- ----------- -----------
SALES, net of returns and discounts $15,347,165 $15,305,029 $13,504,429
COST OF GOODS SOLD 10,855,162 10,594,464 8,866,667
----------- ----------- -----------
GROSS PROFIT 4,492,003 4,710,565 4,637,762
----------- ----------- -----------
OPERATING EXPENSES:
General and administrative 1,425,013 1,017,990 976,340
Salaries, wages and related payroll
taxes 1,197,928 923,739 993,085
Commissions 333,516 400,311 310,244
Advertising, demonstrations, promo
tions and trade allowances 854,908 813,051 763,413
----------- ----------- -----------
Total Operating Expenses 3,811,365 3,155,091 3,043,082
----------- ----------- -----------
INCOME FROM OPERATIONS 680,638 1,555,474 1,594,680
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (23,834) (7,791)
(8,579)
Interest and other income 200,933 264,835 134,147
Gain (loss) on sale of fixed assets (15,634) (5,081)
(5,924)
----------- ----------- -----------
Total Other Income 161,465 251,963 119,644
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 842,103 1,807,437 1,714,324
CURRENT TAX EXPENSE 10,816 126,911 106,584
DEFERRED TAX EXPENSE 114,000 625,414 515,000
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE DISCONTINUED OPERATIONS 717,287 1,055,112 1,092,740
DISCONTINUED OPERATIONS:
Estimated loss from operations of
AFDI, Inc. to be disposed of (net
of income taxes of $210,168 at
December 31, 1996) - (313,550) -
Estimated loss on disposal of AFDI,
Inc. (net of income taxes of
$197,464 at December 31, 1996) - (294,595) -
----------- ----------- -----------
LOSS FROM DISCONTINUED OPERATIONS - (608,145) -
NET INCOME $ 717,287 $ 446,967 $ 1,092,740
----------- ----------- -----------
(Continued)
F-3
<PAGE>
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
----------- ----------- -----------
EARNINGS PER COMMON AND EQUIVALENT SHARES:
BASIC EARNINGS PER SHARE:
Income from continuing operations $ .06 $ .09 $ .11
Loss from discontinued operations
of AFDI, Inc. - (.03) -
Loss on disposal of AFDI, Inc. - (.02) -
----------- ----------- -----------
BASIC EARNINGS PER SHARE $ .06 $ .04 $ .11
----------- ----------- -----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 11,241,892 11,168,231 10,089,090
----------- ----------- -----------
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ .06 $ .09 $ .10
Loss from discontinued operations
of AFDI, Inc. - (.03) -
Loss on disposal of AFDI, Inc. - (.02) -
----------- ----------- -----------
DILUTED EARNINGS PER SHARE $ .06 $ .04 $ .10
----------- ----------- -----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - ASSUMING DILUTION 11,496,208 12,158,539 10,532,307
----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
COMMON STOCK ADDITIONAL
----------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
---------- ----------- --------- -----------
BALANCE, December 31, 1994 10,083,538 $ 9,337,385 $22,311 $(2,469,949)
Shares of restricted common
stock issued for services
rendered at $.774 per
share, January, 1995 1,000 774 - -
Shares of common stock
issued for warrants exer-
cised at $1.50 per share,
net of deferred offering
cost of $8,031, November
- December, 1995 11,290 8,904 - -
Shares of common stock
issued for options exer-
cised at $.925 per share,
November - December, 1995 48,500 44,863 - -
Net income for the year
ended December 31, 1995 - - - 1,092,740
---------- ----------- ------- -----------
BALANCE, December 31, 1995 10,144,328 9,391,926 22,311 (1,377,209)
Shares of common stock
issued for warrants exer-
cised at $1.5 per share
net of deferred offering
costs of $1,702, January
- March, 1996 1,712,682 2,567,321 - -
Shares of common stock
issued for underwriter
units exercised at $1.89
per unit, February, 1996 43,124 81,504 - -
Shares of common stock
issued for options exer-
cised at prices ranging
from $.925 to $1.281,
April - June, 1996 50,000 46,250 - -
Shares of restricted stock
issued for services ren-
dered at $1.12 to $1.28
per share, June - Septem-
ber, 1996 30,000 36,790 - -
(Continued)
F-5
<PAGE>
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(Continued)
COMMON STOCK ADDITIONAL
----------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
---------- ----------- ---------- ----------
Shares of common stock
repurchased and canceled
at $1.50 per share,
December, 1996 (396,035) (594,052) - -
Net income for the year
ended December 31, 1996 - - - 446,967
---------- ----------- ------- -----------
BALANCE, December 31, 1996 11,584,099 11,529,739 22,311 (930,242)
Shares of restricted common
stock issued for services
rendered at $.821 per
share, January, 1997 5,000 4,106 - -
Shares of common stock
issued for options exer-
cised at $.925 per share,
February, 1997 10,000 9,250 - -
Shares of common stock
repurchased and canceled
at $1.09 - $1.16 per
share, May to August, 1997 (352,700) (407,053) - -
Net income for the year
ended December 31, 1997 - - - 717,287
---------- ----------- ------- -----------
BALANCE, December 31, 1997 11,246,399 $11,136,042 $22,311 $ (212,955)
The accompanying notes are an integral part of this financial statement.
F-6
<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,
1997 1996 1995
----------- ----------- -----------
Cash Flows from Operating Activities:
Net income $ 717,287 $ 446,967 $1,092,740
----------- ----------- -----------
Adjustments to reconcile net income
to net cash used by operations:
Depreciation and amortization 489,688 386,838 332,251
Non-cash expenses 40,539 5,081 5,924
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable (22,344) (443,470) 329,200
(Increase) decrease in inventory (507,954) (109,104) (22,652)
(Increase) decrease in prepaid
expenses (129,567) (39,289) 16,602
Change in deferred tax assets/
liability 114,000 217,000 515,000
Increase (decrease) in accounts
payable and accrued expenses 229,131 187,335 (228,734)
(Increase) decrease in net assets
from discontinued operations - 169,668 (129,144)
Increase (decrease) in net liabili-
ties of discontinued operations (75,145) 75,145 -
----------- ----------- -----------
Total Adjustments 138,348 449,204 818,447
----------- ----------- -----------
Net Cash Provided by Operating
Activities 855,635 896,171 1,911,187
----------- ----------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment (2,281,583) (429,158) (397,501)
Proceeds from sale of property and
equipment 17,104 2,800 1,600
(Increase) decrease in deposits 4,916 (464,610) 8,550
Purchase of US treasury bills, net 1,015,509 (1,532,759) (999,392)
Goodwill in purchase of subsidiary - (609,938) -
----------- ----------- -----------
Net Cash Used by Investing
Activities (1,244,054) (3,033,665) (1,386,743)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from borrowing on line of
credit 287,439 - 323,000
Payments on line of credit - - (323,000)
Proceeds from notes payable - 72,426 -
Payments on note payable (32,073) (40,353) -
Payments on capital lease obligations (35,093) (23,521) (21,486)
Proceeds from common stock Issuances 13,356 2,731,865 54,541
Purchase of treasury stock (407,053) (594,052) -
----------- ----------- -----------
Net Cash Provided (Used) by
Financing Activities (173,424) 2,146,365 33,055
----------- ----------- -----------
F-7
<PAGE>
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Continued)
Net Increase (Decrease) in Cash and
Cash Equivalents (561,843) 8,871 557,499
Cash and Cash Equivalents at
Beginning of Period 742,856 733,985 176,486
----------- ----------- ----------
Cash and Cash Equivalents at End
of Period $ 181,013 $ 742,856 $ 733,985
----------- ----------- ----------
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period for:
Interest $ 23,834 $ 7,791 $ 9,714
Income taxes $ 105,859 $ 201,864 $ 44,632
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
For the year ended December 31, 1997:
The Company entered into a capital lease for equipment valued at $234,675.
The Company issued a total of 5,000 shares of restricted common stock in
exchange for services rendered of $4,106.
The Company applied deposits of $459,694 to equipment purchases.
For the year ended December 31, 1996:
The Company issued a total of 30,000 shares of restricted common
stock in exchange for services rendered of $36,790.
For the year ended December 31, 1995:
The Company issued a total of 1,000 shares of stock in exchange for
services rendered valued at $774.
The accompanying notes are an integral part of this financial statement.
F-8
<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 other frozen Italian entrees, and it's wholly-owned
dormant subsidiary AFDI, Inc. [Subsidiary] incorporated in May 1995.
CONSOLIDATION - All significant intercompany transactions between Parent and
Subsidiary have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS - For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents. The Company had $59,159 and
$592,298 in excess of federally insured amounts in its bank accounts at
December 31, 1997 and 1996, respectively.
TREASURY BILLS - The Company accounts for investments in debt and equity
securities in accordance with Statement of Financial Accounting Standard
(SFAS) 115, "Accounting for Certain Investments in Debt and Equity
Securities,". Under SFAS 115 the Company's treasury bills (debt securities)
have been classified as held-to-maturity and are recorded at amortized cost.
Held-to-maturity securities represent those securities that the Company has
both the positive intent and ability to hold until maturity.
ACCOUNTS RECEIVABLE - Accounts receivable consist of trade receivables arising
in the normal course of business. Management believes all amounts are fully
collectible and thus no allowance for doubtful accounts has been established.
Amounts written off for the years presented are insignificant for disclosure.
INVENTORY - Inventory is carried at the lower of cost or market, as determined
on the first-in, first-out method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Expenditures for major renewals and betterments that extend the useful lives
of property and equipment are capitalized, upon being placed in service.
Expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation is computed for financial statement purposes on a straight-line
basis over the estimated useful lives of the assets which range from three to
twenty years. For federal income tax purposes, depreciation is computed under
the modified accelerated cost recovery system.
EARNINGS PER SHARE - In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings Per Share," which requires the Company to present basic and diluted
earnings per share, instead of the primary and fully diluted earning per
share. The computation of basic earning per share is based on the weighted
average number of shares outstanding during the periods presented. The
computation of diluted earnings per shares is based on the weighted average
number of outstanding common shares during the year plus, when their effect is
dilutive, additional shares assuming the exercise of certain vested and
non-vested stock options and warrants, reduced by the number of shares which
could be purchased from the proceeds. Prior period earnings per share and
weighted average shares have been restated to reflect the adoption of SFAS No.
128. F-9
<PAGE>
GOODWILL - Goodwill represents the excess of the cost of purchasing Alborough,
Inc. over the fair market value of the assets at the date of acquisition, and
is being amortized on the straight-line method over 15 years. Amortization
expense charged to operations for 1997 and 1996 was $42,000 and $24,500
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." This statement requires an asset and liability approach for
accounting for income taxes.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amount of revenues and expenses
during the reporting period. Actual results could differ from those
estimated.
RESEARCH AND DEVELOPMENT COST - The Company expenses the cost of developing
new products as incurred as research and product development costs. Included
in general and administrative expense at December 31, 1997 and 1996 are
$45,363 and $32,443 of research and development costs associated with the
development of new products.
RECLASSIFICATION - The financial statements presented for the year ended
December 31, 1995 have been reclassified to conform to the titles and headings
used in the presentation of the December 31, 1996 financial statements.
NOTE 2 - RELATED PARTY TRANSACTIONS
Fees paid to related parties - Amounts paid to related parties are as follows:
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
Accounting fees paid to a company ----------- ----------- -----------
controlled by a shareholder and
a director $ 26,450 $ 20,757 $ 29,399
Consulting and other fees paid or
accrued to individuals who are
directors, officers or shareholders
of the Company $ - $ 750 $ 29,100
AMOUNTS PAYABLE TO RELATED PARTIES - Included in the Company's accounts
payable at December 31, 1997 and 1996 are amounts owing to shareholders,
officers and directors in the amount of $4,234 and $3,500, respectively.
NOTE 3 - TREASURY BILLS
At December 31, 1997, US treasury bills consisted of the following investments
which are carried at their amortized cost:
AMORTIZED MARKET MATURITY
DATE ACQUIRED MATURITY DATE COST VALUE VALUE
- ------------- ------------- ----------- ----------- -----------
7/10/97 1/8/98 $ 1,498,548 $ 1,498,170 $ 1,500,000
10/23/97 4/23/98 1,476,855 1,475,655 1,500,000
----------- ----------- -----------
$ 2,975,403 $ 2,973,825 $ 3,000,000
----------- ----------- -----------
F-10
<PAGE>
NOTE 4 - INVENTORY
Inventory consists of the following at December 31, 1997 and 1996:
1997 1996
----------- -----------
Raw materials and supplies $ 666,007 $ 275,472
Finished goods 908,851 791,432
---------- ----------
$1,574,858 $1,066,904
---------- ----------
The Company's inventory is pledged as collateral on a business line of credit.
[See Note 6]
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment (including capitalized leases and the assets and
related accumulated depreciation acquired in the purchase of Alborough Inc.
[See Note 13]) consists of the following at December 31, 1997 and 1996:
1997 1996
----------- -----------
Office equipment $ 263,913 $ 224,968
Machinery and equipment 4,469,322 2,096,048
Leasehold improvements 1,873,381 1,389,223
----------- -----------
6,606,616 3,710,239
Less Accumulated depreciation
and amortization (1,536,059) (1,110,303)
----------- -----------
$ 5,070,557 $ 2,599,936
----------- -----------
Depreciation expense amounted to $447,688, $362,338 and $332,251 for the years
ended December 31, 1997, 1996 and 1995, respectively. The Company's property,
plant and equipment is pledged as collateral on a business line of credit.
[See Note 6]
NOTE 6 - LINE OF CREDIT / NOTE PAYABLE
As of December 31, 1997, the Company had $287,439 outstanding on a $500,000
business line of credit. The line of credit accrues interest at prime plus
.75%, which was 9.25% at December 31, 1997. The line of credit matures in
September 1998, and is secured by the Company's accounts receivables,
inventory and equipment.
At December 31, 1996, the Company's subsidiary Alborough, Inc. was obligated
to pay a note in the amount of $32,073. The note provides for monthly
payments of principal and interest at an annual rate of 10%. The note was
paid off during June 1997.
NOTE 7 - LEASES
CAPITAL LEASES - The Company is the lessee of equipment under two capital
leases expiring in 1999 and 2002. The assets and liabilities under the
capital leases were recorded at the lower of the present value of the minimum
lease payments or the fair value of the assets at the time of purchase. The
asset is amortized
F-11
<PAGE>
over its related lease term. Amortization expense of $36,734 and $25,000 for
the asset under capital leases and have been included in depreciation expense
for 1997 and 1996.
Equipment at December 31, 1997 and 1996 under capital lease obligations is as
follows:
1997 1996
----------- -----------
Equipment $ 375,000 $ 125,000
Less Accumulated amortization (95,067) (58,333)
----------- -----------
$ 279,933 $ 91,667
----------- -----------
Total future minimum lease payments, executory costs and current portion of
capital lease obligations are as follows:
Future minimum lease payments for the years ended December 31,
YEAR ENDING DECEMBER 31, LEASE PAYMENTS
------------------------ --------------
1998 90,000
1999 77,000
2000 58,800
2001 58,800
2002 44,100
--------
Total future minimum lease payments $328,700
Less amounts representing interest
and executory costs (57,519)
--------
Present value of the future minimum
lease payments 271,181
Lease current portion (67,797)
--------
Capital lease obligations - long term $203,384
--------
OPERATING LEASES - The Company leases its office and production facility under
an operating lease expiring in August 2003, with options to extend through
August 2013 at fair market rates.
The future minimum lease payments for non-cancelable operating leases having
remaining terms in excess of one year as of December 31, 1997 are as follows:
YEAR ENDING DECEMBER 31, LEASE PAYMENTS
------------------------ --------------
1998 87,256
1999 88,894
2000 90,112
2001 86,480
2002 87,741
Thereafter 52,212
--------
Total Minimum Lease Payments $492,695
--------
F-12
<PAGE>
Lease expense charged to operations was $128,865, $118,508 and $78,070 for the
years ended December 31, 1997, 1996 and 1995. The Company received $47,923 in
sublease rentals during the year ended December 31, 1995.
NOTE 8 - AGREEMENTS AND COMMITMENTS
MANUFACTURING - Certain of the Company's products are manufactured and
packaged on a "co-pack" or "toll-pack" basis by third parties at agreed upon
prices. The agreements with the co-packers have terms of one year and allow
for periodic price adjustments. These agreements allow for either party to
give a two months cancellation notice.
SALES - During the year ended December 31, 1994, the Company agreed to issue
30,000 shares of common stock to a distributor in the future provided that the
distributor's portion of the Company's annual net sales exceed various levels
ranging from $500,000 to $1,500,000. During the years ended December 31,
1997, 1996, and 1995 the distributor's portion of the Company's sales did not
exceed the predetermined levels, therefor no shares of common stock were
issued under the agreement.
401(K) PROFIT SHARING PLAN - The Company has a 401(K) profit sharing plan and
trust that covers all non-union employees. Any non-union employees who have
completed 1,000 hours of service within twelve consecutive months and have
reached age 21 are eligible to participate in the plan. The plan became
effective January 1, 1993 and has a plan year of January 1 through December
31. During 1997, 1996 and 1995 contributions to the plan charged to
operations were $8,515, $9,065 and $6,837, respectively.
EMPLOYMENT AGREEMENTS - The Company has entered into employment agreements,
with the president and a key employee of the Company. The agreements include a
base salary, plus stock options [See Note 11]. Additionally, other benefits
are provided including participation in the Company's incentive compensation
plans. The current agreements cover three year periods ending December 31,
1998 and September 14, 2000.
INCENTIVE COMPENSATION PLANS - For the years ending December 31, 1996 and
1995, the Company approved a management and an employee compensation plans to
compensate those individuals who contribute to the financial success of the
Company. The plans were funded based on predetermined levels of pretax income
from the Company's operations. For 1995, the management and employee plans
were funded as pretax earnings from operations, not including expenses
attributable to acquisition activities, exceeded the predetermined level of
$1,700,000 and $1,400,000, prior to the accrual of the incentive bonus
expenses, respectively. Management and employee incentive compensation of
$74,616 and $67,419, respectively was paid or accrued during 1995. For 1996
the plans were not funded as pretax earnings from operations did not exceed
the predetermined levels.
For 1997, the Board of Directors established a combined incentive compensation
plan for management and employees, which is funded based on the individual
achieving specific personal objectives and upon the Company meeting
predetermined sales revenues and pretax income from operations. For 1997 the
plan was not funded as the individual's objectives and predetermined sales and
earnings levels were not achieved.
F-13
<PAGE>
NOTE 9 - INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 Accounting for Income taxes [FASB 109].
FASB 109 requires the Company to provide a net deferred tax asset or liability
equal to the expected future tax benefit or expense of temporary reporting
differences between book and tax accounting and any available operating loss
or tax credit carryforwards. At December 31, 1997 and 1996, the total of all
deferred tax assets was $619,000 and $656,000 and the total of the deferred
tax liabilities was $203,000 and $126,000. The amount of and ultimate
realization of the benefits from the deferred tax assets for income tax
purposes is dependent, in part, upon the tax laws in effect, the Company's
future earnings, and other future events, the effects of which cannot be
determined.
The components of income tax expense from continuing operations for the years
ended December 31, 1997, 1996 and 1995 consist of the following:
1997 1996 1995
----------- ----------- ----------
Current income tax expense:
Federal $ - $ 25,479 $ 37,442
State 10,816 101,432 69,142
----------- ----------- ----------
Net tax expense 10,816 126,911 106,584
----------- ----------- ----------
Deferred tax expense (benefit)
arising from:
Excess of tax over financial
accounting depreciation $ 77,000 $ 16,169 $ 54,154
Carryforward of excess contributions - - 5,200
Use of federal NOL carryforwards 203,799 614,946 515,442
Use of state NOL carryforwards (1,941) - 67,897
Federal alternative minimum tax credit - (25,479) (37,442)
State alternative minimum tax credit (10,816) - (68,342)
Inventory 263A adjustment (8,112) (1,771) (360)
State investment tax credits (145,930) 21,549 (21,549)
----------- ----------- ----------
Net deferred tax expense $ 114,000 $ 625,414 $ 515,000
----------- ----------- ----------
Deferred income tax expense results primarily from the reversal of temporary
timing differences between tax and financial statement income.
A reconciliation of income tax expense at the federal statutory rate to income
tax expense at the company's effective rate is as follows:
1997 1996 1995
----------- ----------- ----------
Computed tax at the expected statutory
rate $ 286,315 $ 614,500 $ 582,900
----------- ----------- ----------
State and local income taxes, net of
federal benefit 51,688 110,940 105,226
Non-deductible expenses 18,923 11,792 9,734
Goodwill amortization 16,855 9,832 -
State tax credits (145,930) 7,237 -
F-14
<PAGE>
Effect of alternative minimum taxes 7,139 2,022 (22,708)
Other Items (110,174) (3,998) (53,568)
----------- ----------- ----------
Income tax expense $ 124,816 $ 752,325 $ 621,584
----------- ----------- ----------
As of December 31, 1997 the Company has net tax operating loss (NOL)
carryforwards available to offset its future income tax liability. The NOL
carryforwards have been used to offset deferred taxes for financial reporting
purposes. The Company has federal NOL carryforwards of $823,000 that expire
in 2006 and 2012.
The temporary differences and carryforwards gave rise to the following
deferred tax asset (liability) at December 31, 1997 and 1996:
1997 1996
----------- -----------
Excess of tax over book accounting
depreciation $ (203,000) $ (126,000)
Inventory 263A adjustment 15,610 7,498
State alternative minimum tax credits 82,338 71,522
Federal alternative minimum tax credits 93,903 93,903
State Investment Tax Credits 145,930 -
Benefit of future losses from discon-
tinued operations - 231,277
Federal NOL carryforwards 279,278 251,800
State NOL carry forwards 1,941 -
The alternative minimum tax credits have no date of expiration and are
available to offset the Company's future income tax liability. The state
investment tax credits are from the purchase of manufacturing equipment and
expire in March 2008.
As of December 31, 1997 and 1996 the deferred tax asset (liability) consisted
of the following:
1997 1996
----------- -----------
Current deferred tax assets $ 619,000 $ 656,000
Deferred tax assets (liabilities) (203,000) (126,000)
----------- -----------
$ 416,000 $ 530,000
----------- -----------
Management estimates that the Company will generate adequate net profits to
offset net operating loss carryforwards prior to the expiration of the net
operating loss carryforwards. Consequently, a deferred tax asset valuation
allowance has not been accrued.
NOTE 10 - EARNINGS PER SHARE
The following data shows the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of potential
dilutive common stock for the years ended December 31, 1997, 1996 and 1995:
F-15<PAGE>
<PAGE>
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
----------- ----------- -----------
Income from continuing operations avail-
able to common stockholders $ 717,287 $ 446,967 $ 1,092,740
----------- ----------- -----------
Weighted average number of common
shares outstanding used in basic
earnings per share for the years
ending 11,241,892 11,168,231 9,143,720
Effect of dilutive securities:
Stock options 254,316 650,906 443,217
Stock warrants - 339,402 -
Weighted number of common shares
and potential dilutive common shares
outstanding used in dilutive earning
per share 11,496,208 12,158,539 10,532,307
----------- ----------- -----------
The Company had at December 31, 1997, 1996 and 1995 options and warrants to
purchase 1,019,995, 360,000 and 3,013,705 shares of common stock ,
respectively, at prices ranging from $1.34 to $2.10 per share, that were not
included in the computation of diluted earnings per share because their effect
was anti-dilutive (the options exercise price was greater than the average
market price of the common shares).
The Company subsequent to the year ending December 31, 1997, issued options to
employees, directors and a consultant to purchase 1,177,350 common shares at
$1.015 to $1.14 per share, expiring on April 30, 2005 through March 25, 2008.
In connection with the subsequent grant of options, 649,996 options held by
directors either expired were canceled by the Company. The Company also
subsequently issued 3,000 shares of restricted common stock to a consultant
for services valued at $2,565.
NOTE 11 - STOCKHOLDERS' EQUITY
TREASURY STOCK - During 1997 and 1996 the Company purchased 352,700 and
396,035 shares of common stock for $407,053 and $594,053, respectively, on the
open market to be retired by the Company.
SECONDARY OFFERING OF THE COMPANY'S UNITS - In September 1991 the Company
completed a sale of 1,725,000 units. Each unit sold for $3.15 and consisted
of 2 shares of common stock and one common stock purchase warrant. Gross
proceeds from the sale of these units amounted to $5,433,750 and offering
costs incurred were $913,113 (including $34,878 paid to related parties) for
net proceeds of $4,520,637. Each warrant entitled the holder to purchase, at
a price of $3.15, subject to adjustment, one share of common stock until
September 18, 1993. In February 1993, the board approved lowering the exercise
price to $1.50 per warrant. On September 6, 1993, the exercise period of the
warrants was extended to September 18, 1995. The exercise period of the
warrants was extended to March 18, 1996. As of December 31, 1996 and 1995,
1,712,682 and 11,290 of the warrants had been exercised with the remaining
1,028 warrants expiring.
In connection with the offering, the Company issued to the underwriter and its
designees, for $100, an option to purchase from the Company up to 150,000
F-16
<PAGE>
units. Each unit consists of two shares of common stock and one warrant. The
option was exercisable during a four year period commencing September 18, 1992
at an exercise price of $3.78 per unit. The terms of the underwriter's common
stock purchase warrants are identical to the warrants described above. As of
December 31, 1996, 43,124 shares of common stock and 21,562 warrants had been
issued upon the exercise of the option. The remaining 128,438 units and the
21,562 warrants issued on the exercise of the option expired, during 1996
COMMON STOCK ISSUANCES - During 1997 and 1996, the Company issued 5,000 and
30,000 shares of restricted common stock valued at $4,106 and $36,790,
respectively, in exchange for services rendered. The Company issued during
1997 and 1996, 10,000 and 50,000 shares of stock, respectively, in connection
with options exercised, under the 1993 stock option plan. During 1996,
1,712,682 warrants and 21,562 underwriter option units were exercised and
1,755,806 shares of common stock were issued. The warrants and underwriters
options were issued in the Company's 1991 secondary offering.
During 1995, the Company issued 1,000 shares of restricted common stock valued
at $744, in exchange for services rendered. The Company issued 48,500 shares
of stock in connection with options exercised, under the 1993 stock option
plan. Also during 1995, 11,290 warrants were exercised and 11,290 shares of
common stock issued. The warrants were issued in the Company's 1991 secondary
offering.
The restricted stock issued during the years ended December 31, 1997, 1996 and
1995 for non-cash consideration were valued at the mean between the closing
bid as less 25%-35% attributable to the transferability restrictions of the
stock.
The Company, subsequent to the year ended December 31, 1997, issued 3,000
restricted shares of common stock to a consultant for services valued at
$2,565.
PREFERRED STOCK - The Company is authorized to issue 10,000,000 shares of no
par value preferred stock with such rights and preferences and in such series
as determined by the Board of Directors at the time of issuance. No shares
are issued or outstanding as of December 31, 1997 and 1996.
STOCK OPTIONS - During the periods presented in the accompanying financial
statements the Company has granted options under the 1993 Stock Options Plan
(the Plan) and executive and other employment agreements. The Corporation has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no
compensation cost has been recognized for the stock option plans or other
agreements. Had compensation cost for the Company's stock option plan and
agreements been determined based on the fair value at the grant date for
awards in 1997, 1996 and 1995 consistent with the provisions of SFAS No. 123,
the Company's net earnings and earnings per share would have been reduced to
the pro forma amounts indicated below:
1997 1996 1995
----------- ----------- -----------
Net Income As reported $ 717,287 $ 446,967 $ 1,092,740
Proforma $ 714,407 $ 443,278 $ 1,091,907
Basic earnings per share As reported $ .06 $ .04 $ .11
Proforma $ .06 $ .04 $ .11
Diluted earnings per As reported $ .06 $ .04 $ .10
share Proforma $ .06 $ .04 $ .10
F-17
<PAGE>
The fair value of each option granted is estimated on the date granted using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the period ended December 31, 1997, 1996
and 1995 risk-free interest rates of 6.3%, 6.3% and 6.2% expected dividend
yields of zero, expected life of 5.6, 8.1 and 8.3 years, and expected
volatility 45%, 48% and 50%.
1993 STOCK OPTION PLAN - During 1993 and later amended in 1995 and 1996, the
Board of Directors adopted a Stock Option Plan (the Plan). Under the terms and
conditions of the Plan, the board is empowered to grant stock options to
employees, officers, directors and consultants of the Company. Additionally,
the Board will determine at the time of granting the vesting provisions and
whether the options will qualify as Incentive Stock Options under Section 422
of the Internal Revenue Code (Section 422 provides certain tax advantages to
the employee recipients). The Plan was approved by the shareholders of the
Company at its 1993 annual shareholder meeting. The total number of shares of
common stock available under the Plan may not exceed 3,250,000. At December
31, 1997 and 1996, total options available to be granted under the Plan
amounted to 1,310,005 and 1,110,005.
A summary of the status of the options granted under the Company's stock
option plan and other agreements at December 31, 1997, 1996 and 1995, and
changes during the years then ended is presented below:
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- ---------- --------
Outstanding at
beginning of
period 2,041,495 $1.35 2,026,495 $1.22 1,479,995 $1.10
Granted 172,000 $1.24 400,000 $1.88 625,000 $1.50
Exercised (10,000) $ .93 (50,000) $ .93 (48,500) $ .93
Forfeited (302,000) $1.78 (315,000) $1.30 - -
Expired (70,000) $1.27 (20,000) $ .93 (30,000) $ .93
--------- -------- --------- -------- ---------- --------
Outstanding at
end of Period 1,831,495 $1.28 2,041,495 $1.35 2,026,495 $1.23
--------- -------- --------- -------- ---------- --------
Weighted average
fair value of
options granted
during the year 172,000 $.03 400,000 $.05 625,000 $.04
--------- -------- --------- -------- ---------- --------
A summary of the status of the options outstanding under the Company's stock
option plans and employment agreements at December 31, 1997 is presented
below:
F-18<PAGE>
<PAGE>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------- ----------- ----------- -------- ----------- --------
$0.75 (a) 200,000 2 months $ .75 200,000 $ .75
$0.93 (b) 581,500 7 years $ .93 570,388 $ .93
$1.50 (c) 499,995 2 months $ 1.50 499,995 $ 1.50
$1.50 (d) 200,000 3 years $ 1.50 133,332 $ 1.50
$2.00 (e) 50,000 8 years $ 2.00 40,278 $ 2.00
$1.87 (f) 70,000 3 years $ 1.87 30,000 $ 1.87
$1.34 (g) 100,000 6 years - - -
$2.03 (h) 100,000 8 years $ 2.03 40,000 $ 2.03
$1.10 (i) 30,000 4 years $ 1.10 30,000 $ 1.10
--------- ---------
1,831,495 1,543,993
(a) Non-qualified stock options granted to non-employee Directors of the
Company, which are exercisable at $.75 per share, have a vesting provision
which requires both the participation of the recipient directors and a certain
level of earnings. The options subsequently expired as of March 11, 1998.
(b) In December 1994, the Board of Directors granted stock options
exercisable at $.93 per share to management, employees and directors amounting
to 840,000 shares, consisting of 300,000 shares granted as non-statutory
options and 540,000 shares granted as incentive stock options. The options
contain vesting requirements relating to time and net profits.
(c) Non-qualified stock options granted to non-employee Directors of the
Company, which are exercisable at $1.50 per share and expire on March 11,
1998. As of January 29, 1998, 399,994 options were canceled with the remaining
99,999 options expiring on March 11, 1998.
(d) Non-qualified options granted in July 1995, to two directors of the
Company. Each director received options to purchase up to 100,000 shares of
Common Stock at $1.50 per share, which vest as to one-third of the total
number of shares at the end of each year following the date of grant and
expire on July 27, 2000. The options subsequently were canceled as of January
29, 1998.
(e) Non-qualified options granted in July 1995, to two directors of the
Company. Each director received options to purchase up to 25,000 shares at
$2.00 per share which vest as to 1/36th of the total number of shares each
month commencing August 1, 1995 and expire on July 27, 2005. The Options were
subsequently canceled as of January 29, 1998.
Incentive stock options granted in March 1996, to the president of the Company
in connection with an employment agreement, 30,000 of which vest upon
execution of the agreement and 40,000 which vest on each year ending December
31, 1996, 1997 and 1998 in the event the Company attains certain levels of
profitability for the respective years. These options expire March 14, 2001.
During 1997 and 1996, the predetermined levels of profitability were not
achieved and a total of 80,000 options were forfeited. The 70,000 remaining
options exercise price was subsequently changed to $1.015 per share on January
29, 1998. The vesting provisions for the 40,000 options vesting December 31,
1998 was also changed to exclude the Company attaining certain levels of
profitability.
F-19<PAGE>
<PAGE>
(g) Incentive stock options to purchase 100,000 shares of common stock at
$1.34 per share granted in September 1997, to the Chief Operating Officer.
The options vest as to 16,667 on March 15, 1998 and the remaining 1/36th of
the remaining 83,333 each month commencing April 15, 1998 through April 15,
2000, with all options expiring on September 14, 2003. The options exercise
price was subsequently changed to $1.015 per share on January 29, 1998.
(h) Incentive stock options to purchase 100,000 shares of common stock at
$2.03 per share granted in December 1995, to the Director of Sales and
Marketing for the Company in connection with an employment agreement. The
options vest as to one-fifth of the total number of shares as of each December
31, 1996 through 2000, and expire on December 8, 2005. The options exercise
price was subsequently changed to $1.015 per share on January 29, 1998.
(i) During May 1996, the Board on Directors granted incentive stock options
to a consultant to purchase 72,000 shares of the common stock at $1.095 per
share. The options vest as to 6,000 per month commencing March 22, 1997, with
all options expiring on May 20, 2002. On July 31, 1997 42,000 of the options
expired upon termination of the consultant's services.
The Company subsequent to the year ending December 31, 1997, issued options to
employees, directors and a consultant to purchase 1,177,350 common shares at
$1.015 to $1.14 per share, expiring on April 30, 2005 through March 25, 2008.
NOTE 12 - SIGNIFICANT CUSTOMERS
The Company sells its products through a network of independent food brokers
who are paid commissions ranging from 3% to 5% of sales depending on products
sold and selling price. A significant percentage of the Company's total sales
is sold through 2 or fewer brokers. The following table lists the total sales
from continuing operations through brokers that accounted for 10% or more of
total sales:
DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Broker A $ - $ 5,191,525 $ 5,731,106
Broker B 1,940,461 1,851,824 1,852,410
NOTE 13 - ACQUISITION OF SUBSIDIARY
On May 20, 1996, the Company acquired all of the outstanding common stock of
Alborough, Inc., (dba Emilia Romagna), in a business combination accounted for
as a purchase. Alborough, Inc. is primarily engaged in the manufacturing of
gourmet Italian foods. The results of operations of Alborough, Inc. is
included in the accompanying financial statements since the date of
acquisition. The total cost of the acquisition was $738,779, which exceeded
the fair market value of the net assets of Alborough, Inc. by $609,938. The
excess is recorded as goodwill and is being amortized over 15 years. The
purchase price could increase significantly depending upon Alborough, Inc.
meeting certain earnings performance criteria over the next 3 years. As of
December 31, 1997, the purchase price had not increased as the earnings
performance criteria had not been attained. The agreement between the parties
provides that additional payments may be earned by Alborough, Inc.'s previous
shareholders based on a percentage of gross margin attributable to sales made
to specified customers. The sales must be made during a specified period of
time and subject to certain minimum sales levels being achieved. No additional
payments were made to the former shareholders of Alborough, Inc. as minimum
F-20
<PAGE>
sales to the specified customers had not been achieved during the year ended
December 31, 1997. As of December 31,1997 Alborough, Inc. had been merged into
the Parent.
NOTE 14 - DISCONTINUED OPERATIONS
During the first quarter of 1997 the Company adopted a plan to discontinue the
quick service Italian restaurant locations and operations of AFDI, Inc. The
business was disposed of during the second quarter of 1997. AFDI, Inc. is
reported as a discontinued operation for the year ended December 31, 1996 and
1995. Net sales related to AFDI, Inc. for 1996 and 1995 were $125,429 and $0
respectively. These amounts have been reclassified to estimated loss from
operations of AFDI, Inc. in the accompanying statement of operations. At
December 31, 1997 AFDI, Inc is a dormant subsidiary of the Company.
The following is a condensed proforma statement of operations that reflects
what the presentation would have been for the years ended December 31, 1996
and 1995 without the reclassifications required by "discontinued operations"
accounting principles:
1996 1995
------------ ------------
Net Sales $ 15,430,458 $ 13,504,429
Cost of goods sold (10,691,428) (8,866,667)
Other operating expenses (3,623,401) (3,043,082)
Other income (expense) 251,967 119,644
Provision for taxes (575,817) (621,584)
------------ ------------
Net income $ 791,779 $ 1,092,740
------------ ------------
Earnings per share $ .07 $ .10
------------ ------------
Net Assets/(liabilities) of AFDI, Inc. consisted of the following and have
been reclassified in the accompanying financial statements at December 31:
1996 1995
------------ ------------
Cash $ 17,303 $ 12,265
Inventories 19,404 -
Property and equipment 431,469 6,071
Other assets 54,034 151,332
Current liabilities (21,418) -
Loss on disposal of discontinued segment (492,060) -
Loss from operations of discontinued
operations (83,877) -
------------ ------------
Net asset/(liability) of discontinued
operations $ (75,145) $ 169,668
------------ ------------
NOTE 15 - LITIGATION
On June 11, 1997, Mass Marketing Services filed a lawsuit in Superior Court of
San Diego County, California against the Company seeking damages for breach of
contract, open book account and reasonable value of services rendered. The
lawsuit arose after the Company terminated its sales representation agreement
with Mass Marketing. Mass Marketing asserted that it is entitled to an
additional ten months of commissions (approximately $100,000) and attorneys
fees under the agreement. The parties agreed to arbitrate the dispute in San
F-21
<PAGE>
Mateo County, California. No date has been set for the arbitration. Management
cannot reasonably predict the ultimate outcome, but believes that it will not
have a material effect on the Company's financial position. The Company
intends to vigorously defend their position.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARMANINO FOODS OF DISTINCTION, INC.
Dated: March 30, 1998 By/s/ William J. Armanino
William J. Armanino, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signature Capacity Date
/s/ William J. Armanino President, Treasurer, March 30, 1998
William J. Armanino Chief Executive Officer,
Chief Financial Officer,
Chairman of the Board
/s/ Deborah Armanino-LeBlanc Vice President, Secretary March 30, 1998
Deborah Armanino-LeBlanc and Director
/s/ John J. Micek, III Director March 30, 1998
John J. Micek, III
/s/ David Scatena Director March 30, 1998
David Scatena
/s/ Robert M. Geller Director March 30, 1998
Robert M. Geller
/s/ Tino Barzie Director March 30, 1998
Tino Barzie
/s/ Henry W. Poett, III Director March 30, 1998
Henry W. Poett, III
/s/ Soren Svenningsen Director March 30, 1998
Soren Svenningsen
WELLS FARGO
RENEWAL NOTICE
P.O. Box 1060
San Jose, CA 95108
September 8, 1997
Armanino Foods
of Distinction, Inc.
30588 San Antonio Street
Hayward, CA 94544-7102
RE: Renewal of Business PrimeLine
Application # 04285351
Customer # 0335257639
Dear Armanino Foods:
Wells Fargo Bank is pleased to inform you that your Business PrimeLine
#0335257639, in the amount of $500,000.00, was renewed on September 8, 1997.
The new maturity date is September 10, 1998.
Your PrimeLine remains subject to all terms and conditions of the Business
Loan Agreement, as modified by this Renewal Notice. The interest rate to be
applied to the unpaid principal balance of the Note will be at a rate of 0.75%
over the Index.
A non-refundable renewal fee of $1,500.00 will be charged to your account
#0295087449.
If you have any questions, please do not hesitate to call us at our toll free
number 1-800-372-8242 press 1, press 3. We appreciate your business and look
forward to continuing to serve as your business bank.
Sincerely,
/s/ Liela Alemania
Liela Alemania
Documentation Representative
EMPLOYMENT AGREEMENT
ROBERT F. KRAEMER
THIS EMPLOYMENT AGREEMENT is made and entered into as of September 15,
1997, by and between ARMANINO FOODS OF DISTINCTION, INC., a Colorado
corporation ("Corporation"), and ROBERT P. KRAEMER ("Employee") under the
following circumstances:
A. Corporation desires to employ Employee as its Chief Operating
Officer because of his knowledge, experience and expertise.
B. Employee desires to become employed by Corporation in such
capacity.
C. The parties hereto desire to set forth in writing the terms and
conditions of the employment relationship to be established.
NOW, THEREFORE, the parties hereto agree as follows:
1. Employment.
Corporation shall employ Employee as the Chief Operating Officer
of Corporation pursuant to the terms and conditions hereinafter set forth, and
Employee shall perform the duties of such position.
2. Terms of Employment.
Subject to the provisions of paragraph 7, the initial term of
employment shall be three (3) years, commencing as of September 15, 1997, and
terminating on September 14, 2000. If, upon expiration of the term of this
Agreement a new written agreement has not been negotiated and executed,
Employee shall continue to be employed by Corporation on at-will basis,
subject to his resigning or Corporation terminating his employment for any
reason or no reason at all, at anytime, with or without notice, in the
Corporation's sole discretion.
3. Duties and Responsibilities.
a. Subject to the directives of the President and Chief
Executive Officer, Employee shall be responsible for all day-to-day
operational activities of Corporation. All current employees, other than the
President and Chief Executive Officer, shall report to Employee. Such
reporting requirements may be changed by the President and Chief Executive
Officer from time to time in the exercise of his reasonable business judgment.
The guidelines for many of the specific duties and responsibilities of such
position are set forth on the position description attached hereto as Exhibit
A. It is anticipated that Employee's duties and responsibilities as manager of
all day-to-day operational activities of Corporation shall include immediate,
short-term, mid-term and long-term goals and objectives established by the
President and Chief Executive Officer in conjunction with members of the
Corporation's Board of Directors. Such goals may be modified from time to time
consistent with Employee's duties as the Chief Operating Officer of
Corporation. Employee agrees to perform his services conscientiously,
effectively and to the best of his ability.
4. Base Salary.
In consideration of Employee's services under this Agreement to
Corporation, Employee's base salary shall be fixed at an annual rate of One
Hundred Thirty Thousand Dollars ($130,000.00), from the effective date of this
Agreement payable in accordance with Corporation's normal payroll practices.
Such base salary shall be reviewed no later than March 15,1998 and at least
annually thereafter for increases by the Board of Directors at the same time
the officers of Corporation are reviewed.
5. Incentive Bonus Compensation.
As further consideration for Employee's services under this
Agreement, Corporation shall pay Employee such incentive bonus compensation to
which Employee may be entitled pursuant to Corporation's Employee Incentive
Compensation Plan as may be adopted by the Board of Directors of Corporation
for the years 1998, 1999 and 2000. Employee shall be entitled to a pro-rata
distribution, if any, of Corporation's Employee Incentive Compensation Plan as
in effect for the year 1997. Employee acknowledges that he has received a copy
of the Employee Incentive Compensation Plan as in effect for the year 1997.
6. Benefits.
In consideration for Employee's accepting the employment provided
for herein, Corporation agrees to provide the following benefits:
a. After ninety (90) days of employment, all the standard
benefits normally provided to the employees of Corporation and described in
Corporation's employee handbook, including, but not limited to, social
security benefits, workers' compensation, 401(k) plan participation, long-term
disability insurance, health insurance of various kinds and similar benefits.
Corporation's standard ninety (90) day eligibility period applicable to
vacation and sick leave accrual and holiday pay shall not apply to Employee.
Employee hereby waives coverage under Corporation's health and dental
insurance plan until March 15, 1998 without reimbursement from the
Corporation.
b. During 1997, Employee shall accrue vacation days on a
prorated basis at the annual rate of three (3) weeks per year. Employee shall
be entitled to three (3) weeks paid vacation days per calendar year thereafter
and in accordance with Corporation's standard policies.
c. Corporation shall reimburse Employee for reasonable and
necessary expenses incurred by him in the performance of his duties hereunder
upon presentation of vouchers in accordance with Corporation's policies.
d. Subject to board of director's approval, Employee shall be
granted 100,000 incentive stock options of Corporation, which shall vest in
accordance with the vesting schedule set forth in the Stock Option Agreement
attached hereto as Exhibit B. The exercise price shall be the mean between the
bid and asking price of Corporation's common stock on the date such options
are ratified by the Board of Directors. Such options shall be granted as
incentive stock options pursuant to the terms and conditions set forth in the
form of Stock Option Agreement attached hereto as Exhibit B and the 1993 Stock
Option Plan of Corporation, as amended.
e. Such other flexible executive perquisites that may be
approved by the Board of Directors of Corporation for the senior management
group of employees of Corporation.
f. Corporation shall reimburse Employee for automobile expenses
incurred by Employee in carrying out his duties hereunder in an amount up to
$600 per month. Such reimbursement shall include, but not be limited to,
seventy-five percent (75%) of gas, oil, maintenance, lease payments,
automobile loan or similar payments and insurance expenses; provided, however,
that if Employee owns
2
his own vehicle, and does not incur automobile lease or loan payments,
Employee shall be reimbursed for such automobile use at the applicable federal
income tax mileage reimbursement rate. Subject to the submission by Employee
of the documentary evidence as required below, Employee's business use an
automobile shall be assumed to be seventy-five percent (75%) of its total use.
Employee shall furnish to Corporation adequate records and other documentary
evidence required by federal and state statutes and regulations for the
s~stant-aticn of such payments as deductible business expenses of Corporation
and not as deductible compensation to Employee.
g. Corporation shall provide Employee with the use of, or
reimburse Employee for the cost of, an apartment, or other suitable housing,
within close proximity to Corporation's offices, to enable Employee to more
effectively fulfill his obligations under this Agreement. The parties agree
that the initial budgeted cost for such required local housing shall be one
thousand dollars ($1,000) per month. In the event Corporation is required to
commit to a lease term for such apartment, rather than a month to month
tenancy, and Employee terminates his employment hereunder pursuant to Section
7(b) hereof prior to the end of the term of such tenancy, Employee shall
indemnify Corporation for fifty percent (50%) of any costs, expenses or
damages incurred as a result of such early termination. In addition, in the
event Employee moves his permanent residence to a location which provides
Employee with more convenient access to Corporation's offices, Corporation
shall assist Employee in defraying the cost of such relocation in an amount
mutually agreeable to the parties.
7. Early Termination and Severance.
a. By Corporation. Corporation, acting through its President or
Board of Directors, may terminate this Agreement at any time for "just cause".
If such termination is for any reason other than "just cause", then all of the
rights, duties and obligations of the parties under this Agreement shall cease
upon the effective date of termination, except that Corporation shall pay to
Employee a sum equal to one month of base pay for each month subsequent to
September 15, 1997 in which the effective date of termination occurs, up to a
maximum of twelve (12) months' base pay. If such termination is for "just
cause," then all of the rights, duties and obligations of the parties under
this Agreement shall cease upon the effective date of termination. For
purposes of this Agreement, such termination shall be deemed for "just cause"
if: (I) it is by reason of Employee's commission of acts of neglect,
dishonesty, fraud or other acts involving moral turpitude as determined in the
good faith judgment of the Board of Directors of Corporation; (ii) failure to
follow lawful directives of Corporation's Board of Directors, (iii) material
breach of any of the provisions of this Agreement by Employee, (iv) the
habitual neglect by Employee of his duties hereunder, or (vi) continued
unsatisfactory performance of Employee's duties hereunder as determined in the
good faith judgment of the Board of Directors of Corporation.
b. By Employee. Employee may terminate this agreement in his
sole discretion for any reason upon thirty (30) days prior written notice to
the President of Corporation. Upon the effective date of such termination by
Employee, all of the rights, duties, and obligations of the parties under this
Agreement small cease, including Employee's right to his base salary and
incentive bonus compensation benefits.
c. Survival of Severance Rights. In the event Employee's
employment is terminated by Corporation after the expiration of the term of
this Agreement for any reason other than "just cause", including the failure
to renew or extend this Agreement or negotiate a new agreement with Employee,
then all of the rights, duties and obligations of the parties to each other
shall cease upon
3
the effective date of termination, except that Corporation shall pay to
Employee a sum equal to twelve (12) months' base pay.
8. Confidentiality and Non-Disclosure. Employee agrees to execute and
comply with the terms and conditions of Corporation's Employee Confidentiality
and Rights Agreement, a copy of which has been provided to Employee.
9. Arbitration: Any dispute arising out of the termination of
Employee's employment (including, but not limited to, purported violations of
statute, claims based on any alleged breach of duty arising out of contract or
tort) or any other alleged violation of a statutory, contractual or common law
right(s) (but excluding workers' compensation, unemployment insurance claims
and wage and hour matters within the jurisdiction of the State Labor
Commissioner) or any claim for discrimination or harassment arising out of
Employee's employment, which cannot be resolved through either discussion or
mediation, shall be submitted to final and binding arbitration before a
neutral arbitrator pursuant to the American Arbitration Association Employment
Dispute Resolution Rules, as may be amended from time to time. Statutes and
laws covered by this Agreement, include, but are not limited to, equal
employment opportunity laws (which include claims for age, race, color,
disability, medical condition, marital status, religion, ancestry, national
origin, sexual harassment and discrimination, and sexual orientation), the
Federal Civil Rights Acts of 1964 and 1991, as amended, the Age Discrimination
in Employment Act, the Americans with Disabilities Act, the California Falr
Employment and Housing Act and California wrongful discharge law. Employee may
be represented by counsel of his choice, at his own expense.
Arbitration will be the exclusive means of resolving any dispute
described above. No other action will be brought by the Employee in any court
or other forum except those claims specifically excluded in the arbitration
procedures, or as otherwise provided by law. If any dispute should arise,
Employee agrees to deliver a written Request for Arbitration to the President
of Corporation within one (1) year of the date the dispute occurred. The
request for arbitration shall describe the dispute in sufficient detail to
advise the Corporation of the nature of the dispute, the date when the dispute
first arose, and the remedies sought. Employee agrees to respond within ten
(10) calendar days to each communication regarding the selection of an
arbitrator and scheduling of the hearing. If Employee does not file a written
Request for Arbitration within one year of the date of said occurrence or does
not respond to any communication about the arbitration proceeding within ten
(10) calendar days, such claims will be untimely and therefore barred. The
limitations period set forth herein shall not be subject to tolling. Employee
shall not have the right to raise any claims, in any forum, arising out of any
controversy that is subject to arbitration.
10. Notices.
Notices required or permitted by this Agreement shall be effective
upon mailing, postage prepaid, or upon personal delivery, to the following
address:
To Corporation: Armanino Foods of Distinction, Inc
30588 San Antonio Street
Hayward, CA 94544
Attention: William J. Armanino
To Employee: Robert P. Kraemer
2568 Butch Drive
Gilroy, CA 95020
4
11. Miscellaneous Provisions.
a. The law of the State of California shall govern the
interpretation and enforcement of this Agreement.
b. If any provision of this Agreement is held by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions shall nevertheless continue in full force and effect without being
impaired or invalidated in any way.
c. This Agreement contains all of the covenants and agreements
between the parties on the matter stated herein. Each party to this Agreement
acknowledges that no representations, 1nducements, promises, or agreements,
orally or otherwise, have been made by any party, or anyone acting on behalf
of any party, which are not embodied herein, and that no other agreement,
statement, or promise on the subject matter stated herein not contained in
this Agreement shall be valid or binding.
d. Any modification of this Agreement shall be effective only
if it is in writing and executed by the party or parties to be charged.
e. This Agreement shall be binding upon and inure to the
benefit of the parties and their spouses, successors, assigns, personal
representatives, heirs and legal representatives.
f. Employee shall have the right to rescind this Agreement if
the board of directors of Corporation shall fail to approve or ratify the
Stock Option Agreement attached hereto as Exhibit B at its next regularly
scheduled board of directors meeting.
IN WITNESS WHEREOF, the parties hereto have entered into this
Agreement as of the date first hereinabove written.
ARMANINO FOODS OF DISTINCTION, INC.,
a Colorado corporation
By: /s/ William J. Armanino
WILLIAM J. ARMANINO
ITS: President
"Corporation"
/s/ Robert P. Kraemer
ROBERT P. KREAMER
"Employee"
5
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("Agreement") is made effective as of the 1st
day of June, 1997, by and between ROBERT H. ANDERSON ("Anderson") and ARMANINO
FOODS OF DISTINCTION, INC., a Colorado corporation (the "Company"), under the
following circumstances:
A. Anderson is the former Chief Operating Officer of the Company
having resigned his positions with the Company.
B. Because of the knowledge of the Company's business and customers
which Anderson has acquired over the past nine (9) months, the Company desires
to retain Anderson as a consultant to the Company during the next nine (9)
month period.
C. Anderson is willing to render to the Company consulting services
in connection with its business and customers upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, the parties hereto agree as follows:
1. Consulting. The Company hereby retains Anderson to perform
independent consulting services for a period commencing as of June 1, 1997 the
date hereof and terminating on February 28, 1998. Anderson hereby accepts the
Company's retainer as independent consultant.
2. Consulting Services. When requested by the Company, Anderson
shall provide the Company with advice and counsel regarding the Company's
business matters. Anderson shall provide such services at such times (up to
two days equivalent per month on a non-cumulative basis) and locations as are
reasonably requested by the Company, provided, however, that such services do
not conflict, with respect to either times or duties, with any employment
duties of Anderson to any new employer, any consulting assignment or self-
employment duties. Additional time requested of Anderson by the Company shall
be compensated at a mutually agreeable rate. The Company and Anderson agree
that in the event Anderson fails to provide such services to the Company when
requested and continues to do so for a period of thirty (30) days after
notified in writing by the Company of such failure, the consulting payment
required to be paid hereunder shall be suspended until Anderson complies with
the Company's request. Anderson shall exercise good faith and best efforts in
providing such consulting services to the Company. All of Anderson's services
performed hereunder shall be for the exclusive benefit of the Company.
Anderson shall be reimbursed for all reasonable business expenses incurred by
him in performance of any services hereunder, as approved in advance by the
Company.
3. Consulting Fee. The Company shall pay a quarterly consulting fee
(the "Consulting Fee") to Anderson of thirty-nine thousand dollars
($39,000.00) payable in three (3) installments of thirty-nine thousand dollars
each on July 1, 1997, October 1, 1997 and January 2, 1998.
4. Relationship of the Parties. The relationship of Anderson to the
Company shall be that of an independent contractor. Anderson shall not be
deemed to be employee or an agent of the Company for any purpose. Anderson
agrees not to represent or warrant to any other person that he has any
authority to bind or
commit the Company to any obligation.
5. Benefits. Anderson shall not have any claim under this Agreement
or otherwise against the Company for compensation other than as set forth in
paragraph 3 above.
6. Assignment and Acceleration. Anderson shall not assign, sell,
transfer or delegate any of his duties pursuant to this Agreement. In the
event a sale, merger or other change in control of the Company, any unpaid
portion of the Consulting Fee shall be paid immediately in advance.
7. Amendment. This Agreement may be modified or amended only by a
writing signed by both parties hereto.
8. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter of this
Agreement and any and all written or oral agreements heretofore existing
between the parties hereto are expressly canceled.
9. Inurement and Death Benefit. This Agreement shall inure to the
benefit of and be binding upon the parties, their heirs, legal
representatives, successors and assigns. In the event of the death of Anderson
during the term of this Agreement, the unpaid portion of the Consulting Fee
shall be paid to Anderson's heirs.
10. Governing Law. This Agreement shall be governed and interpreted by
the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto above have executed this
Agreement on the day and year first written above.
/s/ Robert H. Anderson
ROBERT H. ANDERSON
"Anderson"
ARMANINO FOODS OF DISTINCTION, INC.
By: /s/ William J. Armanino
William J. Armanino
Chairman, President and CEO
SUBSIDIARIES OF THE REGISTRANT
Name State of Incorporation Other Names Used in Business
- --------------- ---------------------- ----------------------------
AFDI, Inc. California None
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation of our report dated January 12, 1998,
except for Notes 10 and 11 as to which the date is March 11, 1998, appearing
in the Annual Report on form 10-K of Armanino Foods of Distinction, Inc. for
the year ended December 31, 1997, in the Company's Registration Statement on
Form S-8, SEC File No. 33-94196.
/s/ PRITCHETT, SILER & HARDY, P.C.
PRITCHETT, SILER & HARDY, P.C.
Salt Lake City, Utah
March 27, 1998
<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, 1997, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 181,013
<SECURITIES> 2,975,403
<RECEIVABLES> 1,720,683
<ALLOWANCES> 0
<INVENTORY> 1,574,858
<CURRENT-ASSETS> 7,308,630
<PP&E> 5,070,557
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,935,625
<CURRENT-LIABILITIES> 1,583,843
<BONDS> 0
0
0
<COMMON> 11,136,042
<OTHER-SE> (190,644)
<TOTAL-LIABILITY-AND-EQUITY> 12,935,625
<SALES> 15,347,165
<TOTAL-REVENUES> 15,347,165
<CGS> 10,855,162
<TOTAL-COSTS> 10,855,162
<OTHER-EXPENSES> 3,811,365
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,834
<INCOME-PRETAX> 842,103
<INCOME-TAX> 124,816
<INCOME-CONTINUING> 717,287
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 717,287
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
