<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1999
Commission File No. 0-18200
ARMANINO FOODS OF DISTINCTION, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1041418
- --------------------------------- --------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
30588 San Antonio Street, Hayward, CA 94544
-------------------------------------------------
(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 September 30, 1999.
<PAGE>
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
ASSETS
September 30, December 31,
1999 1998
------------- ------------
Current Assets:
Cash and cash equivalents $ 3,267,496 $ 633,580
Treasury bills, held to maturity - 1,768,283
Accounts receivable 1,256,939 1,271,740
Inventory 1,009,719 1,183,370
Prepaid expenses 238,080 197,523
Current deferred tax asset 377,908 606,000
----------- -----------
Total Current Assets 6,150,142 5,660,496
Property and Equipment, Net 4,495,971 4,867,679
Other Assets:
Deposits 13,000 13,000
Goodwill, net 469,938 501,438
----------- -----------
Total Other Assets 482,938 514,438
----------- -----------
Total Assets $11,129,051 $11,042,613
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable & accrued expenses $ 524,354 $ 616,742
Current portion of capital leases 46,539 61,092
----------- -----------
Total Current Liabilities 570,893 677,834
Deferred tax liability 321,000 321,000
Capital lease obligations 106,988 142,291
----------- -----------
Total Liabilities 998,881 1,141,125
Stockholders' Equity:
Common stock 9,760,214 9,873,671
Additional paid in capital 22,311 22,311
Retained earnings 347,645 5,506
----------- -----------
Total Stockholders' Equity 10,130,170 9,901,488
----------- -----------
Total Liabilities & Stockholders' Equity $11,129,051 $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.
2
<PAGE>
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Statements of Operations
For the Quarter Ended September 30, 1999 and 1998
(Unaudited)
September 30, September 30,
1999 1998
------------- -------------
Net Sales $ 3,163,441 $ 2,836,209
Cost of Goods Sold 1,892,579 1,809,996
----------- -----------
Gross Profit 1,270,862 1,026,213
Operating Expenses:
General and administrative 333,169 298,273
Salaries and wages 300,551 192,213
Commissions 69,936 91,523
Advertising, demonstrations, promotions,
and slotting allowances 278,449 184,157
----------- -----------
Total Operating Expenses 982,105 766,166
----------- -----------
Income From Operations 288,757 260,047
Other Income 27,923 42,447
----------- -----------
Income From Continuing Operations Before
Income Taxes 316,680 302,494
Current Tax Expense - 25,950
Deferred Tax Expense/(Benefit) 126,672 95,048
----------- -----------
Income from continuing operations
before Extraordinary Loss $ 190,008 $ 181,496
=========== ===========
Extraordinary (Loss) (net of income
taxes of $72,400) - (108,600)
----------- -----------
Net Income $ 190,008 $ 72,896
=========== ===========
Basic Earnings Per Common Share:
Income from Continuing Operations $ .10 $ .08
Loss from an Extraordinary Item - (.05)
----------- -----------
Basic Earnings Per Share $ .10 $ .03
=========== ===========
Weighted Average Common Shares
Outstanding 1,945,081 2,221,821
=========== ===========
Diluted Earnings Per Share:
Income from Continuing Operations $ .10 $ .08
Loss from an Extraordinary Item - (.05)
----------- -----------
Diluted Earnings Per Share $ .10 $ .03
=========== ===========
Weighted Average Common Shares Outstanding
Assuming Dilution 1,947,110 2,221,821
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
3
<PAGE>
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Statements of Operations
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
September 30, September 30,
1999 1998
------------- -------------
Net Sales $ 8,666,770 $10,325,714
Cost of Goods Sold 5,339,683 7,317,436
----------- -----------
Gross Profit 3,327,087 3,008,278
Operating Expenses:
General and administrative 1,059,652 1,118,568
Salaries and wages 813,731 751,476
Commissions 242,395 292,821
Advertising, demonstrations, promotions,
and slotting allowances 738,139 594,735
----------- -----------
Total Operating Expenses 2,853,917 2,757,600
----------- -----------
Income From Operations 473,170 250,678
Other Income 97,061 121,139
----------- -----------
Income From Continuing Operations Before
Income Taxes 570,231 371,817
Current Tax Expense - 29,250
Deferred Tax Expense/(Benefit) 228,092 119,477
----------- -----------
Income from Continuing Operations
Before Extraordinary Loss $ 342,139 $ 223,090
=========== ===========
Extraordinary (Loss) (net of income
taxes of $72,400) - (108,600)
----------- -----------
Net Income $ 342,139 $ 114,490
=========== ===========
Basic Earnings Per Common Share:
Income from Continuing Operations $ .18 $ .10
Loss from an Extraordinary Item - (.05)
----------- -----------
Basic Earnings Per Share $ .18 $ .05
=========== ===========
Weighted Average Common Shares Outstanding 1,949,428 2,238,943
=========== ===========
Diluted Earnings Per Share:
Income from Continuing Operations $ .18 $ .10
Loss from an Extraordinary Item - (.05)
----------- -----------
Diluted Earnings Per Share $ .18 $ .05
=========== ===========
Weighted Average Common Shares Outstanding
Assuming Dilution 1,950,001 2,254,557
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
September 30, September 30,
1999 1998
------------- -------------
Cash Flows From Operating Activities:
Net income/(loss) $ 342,139 $ 114,490
Adjustment to reconcile net income to net
cash provided by operations:
Depreciation and amortization 544,341 504,447
Changes in assets and liabilities:
Decrease in accounts receivable 14,801 850,379
Decrease in inventories 173,651 321,158
(Increase) in prepaid expenses (40,557) (67,380)
Decrease in deferred tax assets 228,092 76,327
(Decrease)in accounts payable and
accrued expenses (92,388) (538,901)
Increase in contingent liabilities--
extraordinary item - 155,000
----------- -----------
Total Adjustments 827,940 1,301,030
----------- -----------
Net Cash Provided By Operating Activities 1,170,079 1,415,520
Cash Flows From Investing Activities:
Capital expenditures (141,133) (197,449)
Purchase/Reduction of U.S. Treasury Bills,
net 1,768,283 (266,633)
----------- -----------
Net Cash Provided By (Used For) Investing
Activities 1,627,150 (464,082)
----------- -----------
Cash Flows From Financing Activities:
Purchase of Treasury stock (113,457) (370,604)
Payments on capital lease obligations (49,856) (50,262)
Proceeds/(Payment) on short term borrowings - (287,439)
----------- -----------
Net Cash (Used For) Financing Activities: (163,313) (708,305)
Net Increase In Cash and Cash Equivalents 2,633,916 243,133
Cash and Cash Equivalents Beginning of Period 633,580 181,013
----------- -----------
Cash and Cash Equivalents End of Period $ 3,267,496 $ 424,146
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
5
<PAGE>
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 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
September 30, 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:
September 30, September 30,
1999 1998
------------- -------------
Weighted average common shares
outstanding used in basic earnings
per share for the nine months ending 1,949,428 2,238,943
Effect of dilutive stock options 573 15,614
--------- ---------
Weighted average common shares and
potential dilutive common equivalent
shares outstanding used in dilutive
earning per share 1,950,001 2,254,557
========= =========
6
<PAGE>
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
NOTE 1 - CONTINUED
For the nine months ended September 30, 1999 the Company had 352,740
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
September 30, 1999 and December 31, 1998:
September 30, December 31,
1999 1998
------------- ------------
Raw materials & supplies $ 358,039 $ 481,226
Finished goods 651,680 702,144
---------- ----------
$1,009,719 $1,183,370
NOTE 3 - RELATED PARTY TRANSACTIONS
The Company incurred $22,342 and $20,130 respectively, for the nine
months ended September 30, 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:
September 30, December 31,
1999 1998
------------- ------------
Furniture & Office Equipment $ 303,018 $ 299,822
Plant Machinery & Equipment 4,888,177 4,814,842
Leasehold Improvements 1,937,884 1,906,876
----------- ----------
7,129,079 7,021,540
Accumulated Depreciation (2,633,108) 2,153,861
----------- ----------
$ 4,495,971 $4,867,679
=========== ==========
The Company's property, plant and equipment is pledged as collateral on a
business line of credit.
7
<PAGE>
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
NOTE 5 - INCOME TAXES
The Company accounts for income taxes in accordance with FASB Statement
109, "Accounting for Income Taxes."
As of September 30, 1999 and December 31, 1998 the net deferred tax
assets and liabilities consisted of the following:
September 30, December 31,
1999 1998
------------- ------------
Current deferred tax asset $ 377,908 $ 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 6 - STOCKHOLDERS' EQUITY
As of September 30, 1999, the Company had 372,740 outstanding stock
options to purchase the Company's stock at prices ranging from $3.09 to $10.50
per share to employees, directors and a consultant, expiring on January 28,
2000 through August 3, 2009.
During the nine months ended September 30,1999 the Company purchased
37,300 shares of its common stock on the open market for $113,458.
8
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM II: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999 V. QUARTER AND NINE MONTHS
ENDED SEPTEMBER 30, 1998
Net sales for the quarter ended September 30, 1999 were $3,163,441, as
compared to $2,836,209 for the quarter ended September 30, 1998. For the nine
months ended September 30, 1999, net sales were $8,666,770 as compared to
$10,325,714 for the nine months ended September 30, 1998. The increase in
sales for the quarter is primarily attributed to an increase in the pesto
product line sales. The decrease in sales for nine months 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 63.8% for
the quarter ended September 30, 1998 to 59.8% for the quarter ended September
30, 1999. Cost of goods sold as a percentage of net sales decreased from
70.8% for the nine months ended September 30, 1998 to 61.6% for the nine
months ended September 30, 1999. The decrease in this percentage for the
current quarter and nine months is due to the shift in the Company's overall
product mix. The mix shifted 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 31%
for the quarter ended September 30, 1999 as compared to 27% for the quarter
ended September 30, 1998. Operating expenses for the first nine months of
1999 were 33% as compared to 26.7% for the first nine months of 1998. The
increase in this percentage both for the quarter and nine months is primarily
due to an increase in salaries and advertising/promotional expenses. Salaries
increased due to a couple of vacant positions being filled. Additionally the
Company accrued a portion of the estimated bonus for 1999 compared to no bonus
being accrued in 1998. Advertising and promotional dollars spent both for the
quarter and the nine months increased due to various distributor and retail
programs being utilized by the sales department.
Net income from continuing operations for the quarter ended September 30,
1999 was $190,008 compared to $181,496 for the quarter ended September 30,
1998. Net income for the nine months ended September 30, 1999 was $342,139
compared to $223,090 for the nine months ended September 30, 1998. The
increase in net income was primarily due to lower costs due to ceasing
production of entree products for a co-pack customer.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had working capital of $5,579,249, an
increase of $596,587 from December 31, 1998. Current assets included
$4,524,435 in cash and cash equivalents, U.S. treasury bills, and accounts
receivable. Management believes that this level of working capital is
adequate to meet anticipated needs for liquidity.
During the nine months ended September 30, 1999, cash provided by
operating activities of the Company amounted to $1,170,079.
9
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM II: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 February 11, 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. This firm has provided a
written report indicating that the Company's systems are compliant with the
year 2000.
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. The Company anticipates that there will
not be additional costs associated with any internal system modifications,
other than routine system upgrades.
The Company is reviewing 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. 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 have been sent to the remaining customers 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
before December 31, 1999.
The Company anticipates completion of the year 2000 project by the end of
the fourth quarter of 1999. However, there can be no assurance that third
parties 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.
10
<PAGE>
PART II
OTHER INFORMATION
II. Other Information
Item 1. Legal proceedings.
None
Item 2. Changes In Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission Of Matters To A Vote Of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits And Reports On Form 8-K.
A. Exhibit
27 - Financial Data Schedule Filed herewith
electronically
B. Reports on Form 8-K - None.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the
undersigned thereunto duly authorized.
ARMANINO FOODS OF DISTINCTION, INC.
By: /s/ William J. Armanino
Dated: November 5, 1999 William J. Armanino
President
Chief Executive Officer
Chief Financial Officer
12
<PAGE>
<PAGE>
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
27. Financial Data Schedule Filed herewith electronically
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheets and statements of operations found on page 2 and 4 of the
Company's Form 10-Q for the year to date, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 3,267,496
<SECURITIES> 0
<RECEIVABLES> 1,256,939
<ALLOWANCES> 0
<INVENTORY> 1,009,719
<CURRENT-ASSETS> 6,150,142
<PP&E> 4,495,971
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,129,051
<CURRENT-LIABILITIES> 570,893
<BONDS> 0
<COMMON> 9,760,214
0
0
<OTHER-SE> 369,956
<TOTAL-LIABILITY-AND-EQUITY> 11,129,051
<SALES> 8,666,770
<TOTAL-REVENUES> 8,666,770
<CGS> 5,339,683
<TOTAL-COSTS> 5,339,683
<OTHER-EXPENSES> 2,853,917
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 570,231
<INCOME-TAX> 228,092
<INCOME-CONTINUING> 342,139
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 342,139
<EPS-BASIC> .18
<EPS-DILUTED> .18
</TABLE>
