<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 June 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 June 30, 1999.
<PAGE>
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
ASSETS
June 30, December 31,
1999 1998
----------- ------------
Current Assets:
Cash and cash equivalents $ 2,673,907 $ 633,580
Treasury bills, held to maturity 197,947 1,768,283
Accounts receivable 1,174,565 1,271,740
Inventory 1,109,764 1,183,370
Prepaid expenses 140,640 197,523
Current deferred tax asset 504,580 606,000
----------- -----------
Total Current Assets 5,801,403 5,660,496
Property and Equipment, Net 4,609,344 4,867,679
Other Assets:
Deposits 13,000 13,000
Goodwill, net 480,438 501,438
----------- -----------
Total Other Assets 493,438 514,438
----------- -----------
Total Assets $10,904,185 $11,042,613
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable & accrued expenses 475,909 616,742
Current portion of long-term debt 48,058 61,092
Line of credit payable - -
----------- -----------
Total Current Liabilities 523,967 677,834
Deferred tax liability 321,000 321,000
Long-term debt 119,056 142,291
----------- -----------
Total Liabilities 964,023 1,141,125
Stockholders' Equity:
Common stock 9,760,214 9,873,671
Additional paid in capital 22,311 22,311
Retained earnings 157,637 5,506
----------- -----------
Total Stockholders' Equity 9,940,162 9,901,488
----------- -----------
Total Liabilities & Stockholders'
Equity $10,904,185 $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 June 30, 1999 and 1998
(Unaudited)
June 30, June 30,
1999 1998
----------- -----------
Net Sales $ 2,962,456 $ 3,766,082
Cost of Goods Sold 1,761,741 2,629,518
----------- -----------
Gross Profit 1,200,715 1,136,564
Operating Expenses:
General and administrative 390,661 412,351
Salaries and wages 268,319 290,634
Commissions 83,097 95,810
Advertising, demonstrations, promotions,
and slotting allowances 204,306 192,476
----------- -----------
Total Operating Expenses 946,383 991,271
----------- -----------
Income From Operations 254,332 145,293
Other Income 40,404 43,851
----------- -----------
Income From Continuing Operations Before
Income Taxes 294,736 189,144
Current Tax Expense 30,000 3,300
Deferred Tax Expense 87,894 72,357
----------- -----------
Net Income $ 176,842 $ 113,487
=========== ===========
Basic Earnings Per Common Share $ .09 $ .05
----------- -----------
Weighted Average Common Shares Outstanding 1,945,081 2,246,031
=========== ===========
Diluted Earnings Per Share N/A $ .05
----------- -----------
Weighted Average Common Shares Outstanding
Assuming Dilution N/A 2,274,003
=========== ===========
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 Six Months Ended June 30, 1999 and 1998
(Unaudited)
June 30, June 30,
1999 1998
----------- -----------
Net Sales $ 5,503,329 $ 7,489,505
Cost of Goods Sold 3,447,104 5,507,440
----------- -----------
Gross Profit 2,056,225 1,982,065
Operating Expenses:
General and administrative 726,483 820,295
Salaries and wages 513,180 559,263
Commissions 172,459 201,298
Advertising, demonstrations, promotions,
and slotting allowances 459,690 410,578
----------- -----------
Total Operating Expenses 1,871,812 1,991,434
----------- -----------
Income From Operations 184,413 (9,369)
Other Income 69,138 78,692
----------- -----------
Income From Continuing Operations Before
Income Taxes 253,551 69,323
Current Tax Expense 32,000 3,300
Deferred Tax Expense 69,420 24,429
----------- -----------
Net Income $ 152,131 $ 41,594
=========== ===========
Basic Earnings Per Common Share $ .08 $ .02
----------- -----------
Weighted Average Common Shares Outstanding 1,951,638 2,256,646
=========== ===========
Diluted Earnings Per Share N/A $ .02
----------- -----------
Weighted Average Common Shares Outstanding
Assuming Dilution N/A 2,271,067
=========== ===========
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 Six Months Ended June 30, 1999 and 1998
(Unaudited)
June 30, June 30,
1999 1998
----------- -----------
Cash Flows From Operating Activities:
Net income $ 152,131 $ 41,594
Adjustment to reconcile net income to
net cash provided by operations:
Depreciation and amortization 339,448 336,324
Changes in assets and liabilities:
Decrease in accounts receivable 97,175 463,694
Decrease in inventories 73,606 23,602
Decrease in prepaid expenses 56,883 3,485
Decrease in deferred tax assets 101,420 24,429
(Decrease)in accounts payable and
accrued expenses (140,833) (640,880)
----------- -----------
Total Adjustments 527,699 210,654
----------- -----------
Net Cash Provided By Operating
Activities 679,830 252,248
Cash Flows From Investing Activities:
Capital expenditures (60,113) (164,688)
Reduction of U.S. Treasury Bills, net 1,570,336 499,886
----------- -----------
Net Cash Provided By Investing
Activities 1,510,223 335,198
----------- -----------
Cash Flows From Financing Activities:
Purchase of Treasury stock (113,457) (127,669)
Payments on capital lease obligations (36,269) (32,996)
Payment on short term borrowings - (287,439)
----------- -----------
Net Cash (Used For) Financing
Activities: (149,726) (448,104)
----------- -----------
Net Increase In Cash and Cash Equivalents 2,040,327 139,342
Cash and Cash Equivalents Beginning of Period 633,580 181,013
----------- -----------
Cash and Cash Equivalents End of Period $ 2,673,907 $ 320,355
=========== ===========
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
June 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
June 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 recorded goodwill in the amount of $609,938 as part of the
purchase of Alborough, Inc. during May, 1996. 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:
June 30, June 30,
1999 1998
----------- -----------
Weighted average common shares outstanding
used in basic earnings per share for the
six months ending $1,945,081 $2,256,646
Effect of dilutive stock options N/A 14,421
6
<PAGE>
Weighted average common shares and potential
dilutive common equivalent shares outstanding
used in dilutive earning per share N/A 2,271,067
=========== ===========
For the six months ended June 30, 1999 the company had 373,810 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
June 30, 1999 and December 31, 1998:
June 30, December 31,
1999 1998
----------- -----------
Raw materials & supplies $ 489,151 $ 481,226
Finished goods 620,613 702,144
----------- -----------
$ 1,109,764 $ 1,183,370
=========== ===========
Note 3 - Related Party Transactions
The Company incurred $15,229 and $9,135 respectively, for the six months
ended June 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:
June 30, December 31,
1999 1998
----------- -----------
Furniture & Office Equipment $ 303,018 $ 299,822
Plant Machinery & Equipment 4,843,836 4,814,842
Leasehold Improvements 1,934,799 1,906,876
----------- -----------
7,081,653 7,021,540
Accumulated Depreciation 2,472,309 2,153,861
----------- -----------
$ 4,609,344 $ 4,867,679
=========== ===========
The Company's property, plant and equipment is pledged as collateral on a
business line of credit.
7
<PAGE>
Note 5 - Line of Credit
As of June 30, 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 June 30, 1999 and December 31, 1998 the net deferred tax assets and
liabilities consisted of the following:
June 30, December 31,
1999 1998
----------- -----------
Current deferred tax asset $ 504,580 $ 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 June 30, 1999, the Company had 373,810 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 six months ended June 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 Six Months Ended June 30, 1999 v. Quarter and Six Months Ended
June 30, 1998
Net sales for the quarter ended June 30, 1999 were $2,962,456 as compared
to $3,766,082 for the quarter ended June 30, 1998. For the six months ended
June 30, 1999, net sales were $5,503,329 as compared to $7,489,505 for the six
months ended June 30, 1998. The decrease in sales for the quarter and six
months is primarily attributed to lower sales of the Company's meatball and
entree product line. 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 sales force.
Cost of goods sold as a percentage of net sales decreased from 70% for
the quarter ended June 30, 1998 to 59.5% for the quarter ended June 30, 1999.
Cost of goods sold as a percentage of net sales decreased from 73.5% for the
six months ended June 30, 1998 to 62.6% for the six months ended June 30,
1999. The decrease in this percentage for the current quarter and six 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 32%
for the quarter ended June 30, 1999 as compared to 26.3% for the quarter ended
June 30, 1998. Operating expenses for the first six months of 1999 were 34%
as compared to 26.6% for the first six months of 1998. The increase in this
percentage for the quarter and six months is due to lower sales for the
respective periods. In absolute dollars operating expenses were lower for
both the quarter and six month period ended June 30, 1999. Included in
operating expenses were lower general and administrative expenses which
decreased due to lower art and label design expense, office expenses and
shareholder and investor expense. Additionally salaries expense was lower due
to a management position being eliminated. Commissions decreased due to lower
meatball sales and the utilization of sales personnel instead of outside
brokers in certain areas of the country. Promotions increased due to various
distributor and retail programs being utilized by the sales department.
Net income for the quarter ended June 30, 1999 was $176,842 compared to
$113,487 for the quarter ended June 30, 1998. Net income for the six months
ended June 30, 1999 was $152,131 compared to $41,594 for the six months ended
June 30, 1998. The increase in net income was due to lower costs due to
ceasing production of entree products for a co-pack customer. Additionally,
lower operating expenses contributed to the increase in net income.
Liquidity and Capital Resources
At June 30, 1999, the Company had working capital of $5,277,436, an
increase of $294,774 from December 31, 1998. Current assets included
$4,046,419 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.
9
<PAGE>
During the six months ended June 30, 1999, cash provided by operating
activities of the Company amounted to $679,830.
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 June 30, 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.
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. 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. Based on
discussions with the outside consulting firm, the Company anticipates that
these additional costs will not be material.
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.
10
<PAGE>
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
September 30, 1999.
The Company anticipates completion of the year 2000 project by the end of
the third quarter of 1999. However, 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.
11
<PAGE>
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.
On May 20, 1999 the Company held an Annual Meeting of Shareholders at
which William J. Armanino, Deborah Armanino-LeBlanc, John J. Micek, III, David
Scatena and Tino Barzie were each reelected to the Board of Directors. In
addition, the Company' shareholders ratified the appointment of Pritchett,
Siler & Hardy, P.C. as the Company's auditors. The following sets forth the
votes cast for, against or withheld, as well as the number of abstentions and
broker non-votes, as to each of the matters presented at the meeting:
ELECTION OF DIRECTORS
Nominees For Witheld
William J. Armanino 1,610,077 Shares 8,238 Shares
Deborah Armanino-LeBlanc 1,610,911 Shares 7,404 Shares
John J. Micek, III 1,610,850 Shares 7,465 Shares
David Scatena 1,610,850 Shares 7,465 Shares
Tino Barzie 1,611,516 Shares 6,799 Shares
J. Bryan King 1,610,850 Shares 7,465 Shares
APPOINTMENT OF PRITCHETT, SILER & HARDY, P.C.
For Against Abstentions
1,612,431 Shares 5,383 Shares 501 Shares
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
12
<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: August 3, 1999 William J. Armanino
President
Chief Executive Officer
Chief Financial Officer
13
<PAGE>
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 2,673,907
<SECURITIES> 197,947
<RECEIVABLES> 1,174,565
<ALLOWANCES> 0
<INVENTORY> 1,109,764
<CURRENT-ASSETS> 5,801,403
<PP&E> 4,609,344
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,904,185
<CURRENT-LIABILITIES> 523,967
<BONDS> 0
<COMMON> 9,760,214
0
0
<OTHER-SE> 179,948
<TOTAL-LIABILITY-AND-EQUITY> 10,904,185
<SALES> 5,503,329
<TOTAL-REVENUES> 5,503,329
<CGS> 3,447,104
<TOTAL-COSTS> 3,447,104
<OTHER-EXPENSES> 1,871,812
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 253,551
<INCOME-TAX> 101,420
<INCOME-CONTINUING> 152,131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 152,131
<EPS-BASIC> .08
<EPS-DILUTED> .08
</TABLE>
