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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1999
Commission File No. 0-18200
ARMANINO FOODS OF DISTINCTION, INC.
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(Exact name of registrant as specified in its charter)
COLORADO 84-1041418
- --------------------------------- --------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
30588 San Antonio Street, Hayward, CA 94544
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (510) 441-9300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes -X- No -----
There were 1,945,081 shares of the Registrant's Common Stock outstanding as
of March 31, 1999.
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PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
ASSETS
March 31, December 31,
1999 1998
----------- ------------
Current Assets:
Cash and cash equivalents $ 1,628,804 $ 633,580
Treasury bills, held to maturity 951,878 1,768,283
Accounts receivable 1,040,290 1,271,740
Inventory 1,004,248 1,183,370
Prepaid expenses 185,748 197,523
Current deferred tax asset 622,474 606,000
----------- -----------
Total Current Assets 5,433,442 5,660,496
Property and Equipment, Net 4,722,947 4,867,679
Other Assets:
Deposits 13,000 13,000
Goodwill, net 490,938 501,438
----------- -----------
Total Other Assets 503,938 514,438
----------- -----------
Total Assets $10,660,327 $11,042,613
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable & accrued expenses 390,564 616,742
Current portion of long-term debt 53,649 61,092
Line of credit payable - -
---------- -----------
Total Current Liabilities 444,213 677,834
Deferred tax liability 321,000 321,000
Long-term debt 131,794 142,291
---------- -----------
Total Liabilities 897,007 1,141,125
Stockholders' Equity:
Common stock 9,760,214 9,873,671
Additional paid in capital 22,311 22,311
Accumulated deficit (19,205) 5,506
----------- -----------
Total Stockholders' Equity 9,763,320 9,901,488
----------- -----------
Total Liabilities & Stockholders' Equity $10,660,327 $11,042,613
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements. The balances for December 31, 1998 were taken from the audited
financial statements at that date and condensed.
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ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Statements of Operations
For the Quarter Ended March 31, 1999 and 1998
(Unaudited)
March 31, March 31,
1999 1998
---------- ----------
Net Sales $2,540,873 $3,723,423
Cost of Goods Sold 1,685,363 2,877,922
---------- ---------
Gross Profit 855,510 845,501
Operating Expenses:
General and administrative 335,822 407,944
Salaries and wages 244,861 268,629
Commissions 89,362 105,488
Advertising, demonstrations, promotions,
and slotting allowances 255,384 218,102
---------- ----------
Total Operating Expenses 925,429 1,000,163
---------- ----------
(Loss) From Operations (69,919) (154,662)
Other Income 28,734 34,841
---------- ----------
(Loss) From Continuing Operations Before
Income Taxes (41,185) (119,821)
Current Tax Expense - -
Deferred Tax Expense/(Benefit) (16,474) (47,928)
========== ==========
Net Loss $ (24,711) $ (71,893)
Basic Earnings/(Loss) Per Common Share $ (.01) $ (.03)
---------- ----------
Weighted Average Common Shares Outstanding 1,958,266 2,249,280
========== ==========
Diluted Earnings/(Loss) Per Share $ (.01) $ (.03)
---------- ----------
Weighted Average Common Shares Outstanding
Assuming Dilution 1,958,266 2,249,280
========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
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ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 1998
(Unaudited)
March 31, March 31,
1999 1998
--------- ---------
Cash Flows From Operating Activities:
Net income/(loss) $ (24,711) $ (71,893)
Adjustment to reconcile net income to net
cash provided by operations:
Depreciation and amortization 170,241 168,201
Changes in assets and liabilities:
Decrease in accounts receivable 231,450 444,868
(Increase) Decrease in inventories 179,122 (45,869)
Decrease in prepaid expenses 11,775 4,478
(Increase) in deferred tax assets (16,474) (47,928)
(Decrease)in accounts payable and
accrued expenses (226,178) (440,090)
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Total Adjustments 349,936 83,660
---------- ---------
Net Cash Provided By Operating Activities 325,225 11,767
Cash Flows From Investing Activities:
Capital expenditures (15,009) (70,033)
(Purchase)/Reduction of U.S. Treasury Bills, net 816,405 493,373
---------- ---------
Net Cash Provided By Investing Activities 801,396 423,340
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Cash Flows From Financing Activities:
Purchase of Treasury stock (113,457) -
Payments on capital lease obligations (17,940) (16,373)
Proceeds/(Payment) on short term borrowings - (287,439)
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Net Cash (Used For) Financing Activities: (131,397) (303,812)
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Net Increase In Cash and Cash Equivalents 995,224 131,295
Cash and Cash Equivalents Beginning of Period 633,580 181,013
---------- ---------
Cash and Cash Equivalents End of Period $1,628,804 $ 312,308
The accompanying notes are an integral part of these condensed financial
statements.
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ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered necessary for a
fair presentation have been included. It is suggested that these condensed
consolidated financial statements be read in conjunction with the December 31,
1998 audited financial statements and notes thereto for Armanino Foods of
Distinction, Inc. The results of operations for the periods ended March 31,
1999 and 1998 are not necessarily indicative of the operating results for the
full year.
The condensed consolidated financial statements include the accounts of
Armanino Foods of Distinction, Inc. ("Parent") and it's wholly-owned dormant
subsidiary AFDI, Inc.
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments (Treasury Bills) purchased with a maturity of
three months or less to be cash equivalents.
The Company acquired a subsidiary (Alborough, Inc.) during May, 1996. The
Company recorded goodwill in the amount of $609,938 as part of the purchase.
The Company is amortizing the goodwill over 15 years, on a straight line basis.
Earnings/(Loss) Per Share - The Company calculates earnings per share in
accordance with Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings Per Share," which requires the Company to present basic and diluted
earnings per share. The computation of basic earnings per share is based on the
weighted average number of shares outstanding during the periods presented. The
computation of diluted earnings per share is based on the weighted average
number of outstanding common shares during the year plus, when their effect is
dilutive, additional shares assuming the exercise of certain vested and non-
vested stock options and warrants, reduced by the number of shares which could
be purchased from the proceeds.
The weighted average common shares and common equivalent shares outstanding
for purposes of calculating earnings (loss) per share was as follows:
March 31, March 31,
1999 1998
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Weighted average common shares outstanding used in
basic earnings per share for the nine months ending 1,958,266 2,249,280
Effect of dilutive stock options - -
--------- ----------
Weighted average common shares and potential
dilutive common equivalent shares outstanding
used in dilutive earning per share 1,958,266 2,249,280
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ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
(Unaudited)
NOTE 1 - CONTINUED
For the three months ended March 31, 1999 the Company had 374,490 stock
options that could potentially dilute earnings per share in the future that were
not included in the diluted computation because to do so would have been
antidilutive for the periods presented.
NOTE 2 - INVENTORY
Inventory is carried at the lower of cost or market with cost being
determined on the first-in, first-out method and consisted of the following at
March, 1999 and December 31, 1998:
March 31, December 31,
1999 1998
---------- -----------
Raw materials & supplies 472,459 481,226
Finished goods 531,789 702,144
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$1,004,248 $1,183,370
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NOTE 3 - RELATED PARTY TRANSACTIONS
The Company incurred $9,465 and $5,340 respectively, for the three months
ended March 31, 1999 and 1998, in accounting and consulting fees to Polly,
Scatena, Gekakis & Co., an accounting firm, the managing partner of which is
also a stockholder and director of the Company. Services provided by the
accounting firm are an extension of the internal accounting functions of the
Company, as well as management, business and systems consulting.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
March 31, December 31,
1999 1998
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Furniture & Office Equipment $ 303,019 $ 299,822
Plant Machinery & Equipment 4,806,914 4,814,842
Leasehold Improvements 1,924,524 1,906,876
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7,034,457 7,021,540
Accumulated Depreciation 2,311,510 2,153,861
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$4,722,947 $4,867,679
========== ==========
The Company's property, plant and equipment is pledged as collateral on a
business line of credit.
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ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
(Unaudited)
NOTE 5 - LINE OF CREDIT
As of March 31, 1999 and December 31, 1998, the Company had $0 outstanding
on a $500,000 business line of credit. The line of credit accrues interest at
prime plus .75%. The line of credit matures in September 1999, and is secured
by the Company's accounts receivable, inventory and equipment.
NOTE 6 - INCOME TAXES
The Company accounts for income taxes in accordance with FASB Statement
109, "Accounting for Income Taxes."
As of March 31, 1999 and December 31, 1998 the net deferred tax assets and
liabilities consisted of the following:
March 31, December 31,
1999 1998
--------- -----------
Current deferred tax asset $ 622,474 $ 606,000
Deferred Tax Liability (321,000) (321,000)
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 7 - STOCKHOLDERS' EQUITY
As of March 31, 1999, the Company had 374,490 outstanding stock options to
purchase the Company's stock at prices ranging from $4.63 to $10.50 per share to
employees, directors and a consultant, expiring on January 28, 2000 through
March 25, 2008.
During the quarter ended March 31,1999 the Company purchased 37,300 shares
of its common stock on the open market for $113,458.
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ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
(Unaudited)
NOTE 8 - ACQUISITION OF SUBSIDIARY
On May 20, 1996, the Company acquired all of the outstanding common stock
of Alborough, Inc., (dba Emilia Romagna), in a business combination accounted
for as a purchase. Alborough, Inc. was primarily engaged in the manufacturing
of gourmet Italian foods. The results of operations of Alborough, Inc. is
included in the accompanying financial statements since the date of acquisition.
The total cost of the acquisition was $738,779, which exceeded the fair market
value of the net assets of Alborough, Inc. by $609,938. The excess is recorded
as goodwill and is being amortized over 15 years. The purchase price could
increase significantly depending upon the gross margin attributable to sales
made to certain specified customers over the 3-year period subsequent to the
consummation of the purchase agreement. The agreement between the parties
provides that additional payments may be earned by Alborough, Inc.'s former
shareholders based on a percentage of gross margin attributable to sales made to
specified customers. The sales must be made during a specified period of time
and subject
to certain minimum sales levels being achieved. As of March 31, 1999, no
additional payments have been made to Alborough Inc.'s former shareholders as
minimum sales to the specified customers had not been achieved. The Company
does not anticipate that any additional payments will need to be made.
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ITEM II: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1999 V. QUARTER ENDED MARCH 31, 1998
Net sales for the quarter ended March 31, 1999 were $2,540,873, as compared
to $3,723,423 for the quarter ended March 31, 1998. The decrease in sales is
primarily attributable to lower sales of the Company's meatball and entree
product lines. The decline in the meatball product line sales was due to loss
of sales to a club-store customer. The entree product line sales decrease was
due to the Company ceasing production for a co-pack customer. The Company
continues to focus its efforts on expanding its customer base for all of its
products through promotional programs and an expanded sale force.
Cost of goods sold as a percentage of net sales decreased from 77% for the
quarter ended March 31, 1998 to 66% for the quarter ended March 31, 1999. The
decrease in this percentage for the current quarter is due to the shift in the
product mix due to lower meatball and entree product line sales which carried
lower margins than both the pesto and the pasta product lines.
Operating expenses as a percentage of net sales were approximately 36% for
the quarter ended March 31, 1999 as compared to 27% for the quarter ended March
31, 1998. The increase in this percentage for the quarter is primarily due to
lower sales for the quarter ended March 31,1999. In absolute dollars, general
and administrative expenses decreased for the first quarter. This decrease can
be attributed to various expenses in the category. Some of the larger decreases
in this category included outside temporary services and art and label design
expense. Salaries decreased due to a management position being eliminated.
Commissions decreased due to the decrease in meatball sales.
Net loss was $(24,711) for the quarter ended March 31, 1999 compared to
$(71,893) for the quarter ended March 31, 1998. The decrease in net loss for
the quarter was due to ceasing production of entree products for a co-pack
customer.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had working capital of $4,989,229, an
increase of $6,567 from December 31, 1998. Current assets included $3,620,972
in cash and cash equivalents, U.S. treasury bills, and accounts receivable.
Management believes that this level of working capital is adequate to meet
anticipated needs for liquidity.
During the three months ended March 31, 1999, cash provided by operating
activities of the Company amounted to $325,225.
On September 8, 1998, the Company renewed its $500,000 business loan line
of credit with Wells Fargo Bank, in San Francisco, California. This loan
provides for interest at prime plus .75% with a maturity date of September 10,
1999. At March 31, 1999, the Company had $0 outstanding under this line. The
purpose of obtaining this line of credit is to afford the Company greater cash
liquidity and management of its cash investments.
On May 20, 1996, the Company purchased all of the outstanding stock of
Alborough, Inc. (dba Emilia Romagna). The total cost of the acquisition was
$738,779 including professional fees paid in relation to the acquisition.
Additionally, the terms of the agreement include an "earn-out" formula which
provides for payments to Alborough shareholders over a three-year period based
on certain performance criteria established. The purchase price could increase
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significantly depending upon Alborough, Inc. meeting certain earnings
performance criteria over the 3-year period subsequent to the consummation of
the purchase agreement. The agreement between the parties provides that
additional payments may be earned by Alborough, Inc. shareholders based on a
percentage of gross margin attributable to sales made to specified customers.
The sales must be made during a specified period of time and subject to certain
minimum sales levels being achieved. As of March 31, 1999, the Company has not
incurred any additional cost due to this provision.
During the third and fourth quarters of 1998 the Company's board of
directors approved two stock buy-back plans to purchase a total of $1,250,000 of
the Company's Common Stock. As of March 31, 1999, the Company had completed the
buy-back and paid approximately $1,250,000 for Common Stock purchased on the
open market.
The Company presently has no material commitments for capital expenditures.
YEAR 2000 COMPLIANCE
In 1998, the Company began assessing the various issues relating to the
year 2000. During 1998 the Company upgraded its accounting application software
which has been certified by the manufacturer to be year 2000 compliant. The
accounting software includes sales order, inventory, accounts receivable,
accounts payable, general ledger as well as other modules.
The Company utilized an outside firm to evaluate its information technology
systems. This outside firm performed the initial evaluation and testing of the
Company's internal network of LAN's, the payroll processing system and
production related processing equipment. The outside firm is in the process of
compiling a report on these systems. The report will contain recommendations on
any modifications the Company will need to make in order to be year 2000
compliant.
The Company has incurred approximately $2,000 on upgrading software.
Approximately $4,000 had been spent on evaluating and testing current systems
during the fourth quarter of 1998. Additional costs would involve purchasing
new computer equipment or converting parts in processing equipment. The Company
will have estimates for these additional costs by May 31, 1999.
The Company is planning to review its external relationships in order to
determine the impact which may arise from its dealings with customers, suppliers
and service providers.
The Company sells to approximately 250 customers. One customer accounts
for approximately 22% of total sales. The Company is in the process of
analyzing systems in order to implement Electronic Data Interchange. At the
present time this customer would be the only trading partner with E.D.I.
transactions. Contact is ongoing with this customer in order to insure that
they will be year 2000 compliant. Surveys will be sent to the remaining
customers by May 31, 1999 to attempt to determine the extent of their compliance
with the year 2000 issues. The Company does not expect a material adverse
affect from any single customer in this group. However, if a large number of
customers in this group ceased operations, the Company would be negatively
impacted. Management is unable to quantify this risk at this time.
The Company has not yet initiated formal contingency planning processes to
mitigate the risk to the Company if any vendors or customers are not prepared
for the year 2000. The Company intends to complete this process by June 30,
1999.
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The Company anticipates completion of the year 2000 project by the end of
the second quarter of 1999. There is considerable work remaining and unforeseen
difficulties may adversely affect the Company's ability to complete its systems
modifications correctly, completely, on time or within its cost estimates.
Additionally, there can be no assurance that third parties that the Company
deals with will resolve their year 2000 issues completely and timely. Failure
to complete the year 2000 project on time could have a material adverse affect
on future operating results and financial condition.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
27 - Financial Data Schedule Filed herewith electronically
B. REPORTS ON FORM 8-K - None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the undersigned
thereunto duly authorized.
ARMANINO FOODS OF DISTINCTION, INC.
By: /s/ William J. Armanino Dated: April 29, 1999
William J. Armanino
President
Chief Executive Officer
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT METHOD OF FILING
27. Financial Data Schedule Filed herewith electronically
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheets and statements of operations found on page 2 and 4 of the Company's Form
10-Q for the year to date, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,628,804
<SECURITIES> 951,878
<RECEIVABLES> 1,040,290
<ALLOWANCES> 0
<INVENTORY> 1,004,248
<CURRENT-ASSETS> 5,433,442
<PP&E> 4,722,947
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,660,327
<CURRENT-LIABILITIES> 444,213
<BONDS> 0
<COMMON> 9,760,214
0
0
<OTHER-SE> 3,106
<TOTAL-LIABILITY-AND-EQUITY> 10,660,327
<SALES> 2,540,873
<TOTAL-REVENUES> 2,540,873
<CGS> 1,685,363
<TOTAL-COSTS> 1,685,363
<OTHER-EXPENSES> 925,429
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (41,185)
<INCOME-TAX> (16,474)
<INCOME-CONTINUING> (24,711)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,711)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
