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 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; in April 1991, the Company effected a one for fifteen reverse split of the shares of the Company's Common Stock outstanding; in June 1998, the Company effected a one for 300 reverse split immediately followed by a 300 for one forward split of the shares of the Company's Common Stock outstanding; and in January 1999, the Company effected a one for five reverse split of the shares of the Company's Common Stock outstanding. All financial and share data in this Report 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 pastas and pasta sheets as well as value-added specialty Italian pastas, focaccia, meatballs and 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 a separate label, namely the Italian Holiday label, which services government type institutional 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 five varieties, Basil, Cilantro, Dried Tomato-Garlic, Roasted Red Bell Pepper and Dried Tomato Feta based sauces under the Armanino label. Basil, Dried Tomato Garlic and Roasted Red Bell Pepper pesto sauces are available to the Company's retail, foodservice and industrial customers, and the Cilantro and Dried Tomato Feta pesto is available to foodservice customers only.
The Company markets several lines of frozen pastas, namely stuffed pastas and pasta sheets, cooked and uncooked.
The Company's line of frozen stuffed pastas, both cooked and uncooked, includes meat, chicken and cheese ravioli; cheese raviolini; meat and cheese tortellini and tri-color tortellini/capelleti style, manicotti and stuffed shells. The meat, chicken 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 -- Potato;
(c) pasta sheets (used for lasagna).
(d) lasagna with meat sauce and vegetable lasagna.
All of these products are sold under the Armanino brand label. Additionally, the Company developed a value added formulated version of its meat and cheese ravioli and lasagna entree products. These value-added products are sold to government type institutional customers only under the Italian Holiday label.
Previously, the Company marketed 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 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 frozen meatballs presently include two varieties -- beef meatballs and turkey, beef, pesto meatballs. These products are available to its retail and foodservice customers under the Armanino label.
The Company presently markets plain and olive frozen foccacia. 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.
NEW PRODUCTS
During the first quarter of 2000, the Company introduced a Dried Tomato, Feta pesto sauce which is available to its foodservice customers only. Additionally, the Company plans to introduce a Southwestern Chipolte sauce during the second quarter of 2000.
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 2000. With respect to the Company's foodservice line, the Company is currently researching the addition of new sauces, stuffed pastas and entree products to its line during 2000.
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. Several 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 lasagna, 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.
In 1999, the Company purchased a new oil storage tank and packaging equipment to compliment the pesto production operation, thereby increasing production efficiencies and improving manufacturing costs. The Company also purchased a second tortellini machine and additional ravioli dies in order to meet customer demands. The oil storage tank was placed into service during the first quarter of 2000, and the new pasta equipment items will be placed into service during the second quarter of 2000.
In the first quarter of 2000, the Company determined that it would be more feasible to discontinue the in-house production of the specialty type pasta line of products and concentrate its efforts on the manufacture of its ravioli and tortellini line of products due to the increased demands for these products by its customers. The Company will continue to market the specialty pasta products, however, they will be manufactured for the Company by an outside source under a co-pack arrangement.
In 1998, the Company streamlined the pasta special product line (such as tortellini and raviolini) by moving the production of these products from the entree line to the ravioli line. The move increased manufacturing capacity and efficiency of both lines.
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 stuffed pasta 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 set price. S.F. Pasta 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.
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 Modesto, California laboratory firm to assist in this testing. The Company completed its Hazard Analysis and Critical Control Points program, required by USDA regulations. The Company implemented this program subsequent to receiving approval of the program by the U.S.D.A. in January 1999.
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 through a network of food brokers and sold to retail, foodservice, club-type stores, and industrial accounts. During the third quarter of 1998, the Company appointed DOT Foods to distribute the Company's line of products to new and existing customers on a non-exclusive national basis. DOT Foods is a master distributor servicing both regional and national distributors. Approximately 30% of the Company's sales are currently handled by DOT Foods.
For the year ended December 31, 1999, three independent brokers, namely, Herspring, Acosta (formerly Kelley-Clarke) and Progresive Marketing accounted for approximately 18%, 15% and 13%, respectively, of the sales of the Company.
For the year ended December 31, 1998, three independent brokers, Progressive Marketing, Herspring and Kelley-Clarke, Inc. accounted for approximately 18%, 16% and 14%, respectively, of the sales of the Company.
For the year ended December 31, 1997, one independent broker, Kelley- Clarke, Inc., accounted for approximately 13% of the sales of the Company.
The loss of brokers or distributors 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 or distributors have established accounts with customers such as supermarket chains, the termination of a broker or distributor will not generally affect sales to such customers when another broker or distributor 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
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 included an "earn-out" formula which provided 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, this criteria was not met and the Company is not obligated to make any additional purchase price payments.
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, vegetable oil, eggs, dairy products, cooked meat, bread crumbs, flour, garlic, 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, they 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 10, 2000, the Company employed 38 persons on a full-time basis and two on a part-time basis. The Company also presently uses two to four persons on a full-time basis, as needed, from a temporary employment service.
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 a trademark registration for the mark Italian Holiday from the U.S. Patent and Trademark office. This trademark was used by the Company on certain of its frozen stuffed pasta products and meatball products, and currently uses this trademark on its value-added line of products only.
In August 1998, the Company received a trademark registration for the mark Pasta Regina from the U.S. Patent & Trademark Office. The Company previously used this mark on certain of its flat and filled pastas, including ravioli and tortellini sold to foodservice, industrial and retail accounts, and will be retained for future use.
As a result of its acquisition of Emilia Romagna, the Company held the "Emilia Romagna" trademark registered with the State of California. This trademark was used by the Company on certain frozen pasta and pasta products.
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.
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 $7,720 per month through July 31, 2000. The monthly rental will increase effective on 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 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.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceeding.
ITEM 4.
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, 1999.
PART II
ITEM 5.
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. The prices shown give retroactive effect to a 1 for 5 reverse stock split which became effective at the close of business on January 29, 1999.
QUARTER ENDED HIGH LOW ------------------ ------- -------
March 31, 1998 $6.09 $4.69 June 30, 1998 $6.09 $3.75 September 30, 1998 $5.00 $2.34 December 31, 1998 $5.00 $2.50
March 31, 1999 $3.25 $2.44 June 30, 1999 $3.03 $2.31 September 30, 1999 $5.31 $2.59 December 31, 1999 $4.62 $3.50
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of holders of record of the Company's no par value common stock at March 10, 2000, was 441.
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. During the quarter ended December 31, 1999, the Company did not sell any securities which were not registered under the Securities Act of 1933, as amended.
ITEM 6.
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, 1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ---------- Total Assets $11,292,908 $11,042,613 $12,935,625 $11,926,101 $9,054,289 Long-Term Debt 94,668 142,291 203,384 45,850 71,599 Cash Dividends Per Share -0- -0- -0- -0- -0-
STATEMENT OF OPERATIONS DATA:
For the Years Ended December 31, 1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- Net Sales $12,155,719 $13,512,172 $15,347,165 $15,305,029 $13,504,429 Net Income From Con- tinuing Operations 509,872 337,921 717,287 1,055,122 1,092,740 Net Income From Con- tinuing Operations Per Common Share $.26 $.15 $.31 $.43 $.50
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 VS. YEAR ENDED DECEMBER 31, 1998
Net sales for the year ended December 31, 1999 were $12,155,719 compared to $13,512,172 for the year ended December 31, 1998. The decrease in sales for the year ended December 31, 1999 is attributed to lower sales of the Company's meatball product line to the club store customer and high co-pack sales of entree products to a co-pack customer in 1998. Increased sales of the pesto product line offset some of the decreases in the other product lines. The increases in pesto sales were the results of the Company's continuing focus on expansion of the customer base for this product line. The Company utilized various promotional programs to accomplish some of the sales increases.
Cost of goods sold as a percentage of net sales decreased from 70.2% for the year ended December 31, 1998 to 62.1% for the year ended December 31, 1999. The decrease in this percentage is due to the shift in the product mix favoring the higher margin pesto product line.
Operating expenses as a percentage of net sales increased to 31.6% for the year ended December 31, 1999, compared to 26.8% for the year ended December 31, 1998. The increase in the percentage is partially due to the decrease in net sales. Additionally, the increase in the percentage and the dollar amount of these expenses for 1999 was due to increases in salary and promotional expenses. The increase in salary expense was due to filling vacant positions and employee bonuses paid in 1999. The increase in promotions expense was due to the Company implementing various programs during the year to drive some of the sales increases.
Interest and other income decreased for the year ended December 31, 1999, compared to year ended December 31, 1998. This decrease was due to lower cash reserves due to the repurchase of Company stock at the end of 1998.
Income from continuing operations was $509,872 for the year ended December 31, 1999, compared to $337,921 for the year ended December 31, 1998. The increase in net income is primarily attributed to higher pesto sales contributing a more favorable margin.
Net income was $509,872 for the year ended December 31, 1999 compared to $218,461 for the year ended December 31, 1998. The net income in 1998 was impacted by higher manufacturing costs due to a co-pack arrangement and an extraordinary charge of $119,460 net of tax effect, as a result of a settlement of a lawsuit involving the termination of a sales representation contract with the Company's former club store broker.
YEAR ENDED DECEMBER 31, 1998 VS. YEAR ENDED DECEMBER 31, 1997
Net sales for the year ended December 31, 1998 were $13,512,172 compared to $15,347,165 for the year ended December 31, 1997. The decrease in sales for the year ended December 31, 1998 is attributable to lower sales of the Company's meatball product line to a club-store customer. The lower meatball sales were partially offset by five months of entree product sales to a co- pack customer. Additionally, the pesto product line experienced increased sales during the year and helped offset some of the meatball sales decreases. The increases in pesto sales were the result of the Company's continuing focus on expansion of the customer base for this product line. During the year ended December 31, 1998, the Company had not obtained significant sales of the entree product that were anticipated, other than to its co-pack customer during the five months ended May 31, 1998.
Cost of goods sold as a percentage of net sales decreased from 70.7% for the year ended December 31, 1997 to 70.2% for the year ended December 31, 1998. The decrease in this percentage is due to the shift in the product mix due to the lower meatball product line sales, which carried lower margins than both the pesto and pasta product lines. The decrease in this percentage due to the product mix was partially offset by higher entree production costs for a co-pack customer.
Operating expenses as a percentage of net sales increased to 26.8% for the year ended December 31, 1998 compared to 24.8% for the year ended December 31, 1997. The increase in the percentage is due to the decrease in net sales. Total dollar amount of these expenses decreased by approximately $195,000 for the year ended December 31, 1998, as compared to the year ended December 31, 1997. The decreases were primarily in salary expense due to vacancies in some management positions for a portion of the year. Additionally, advertising, demonstrations and promotions showed a decrease for the year, primarily due to lower demonstrations at club-stores due to lower club-store meatball sales.
Interest and other income decreased for the year ended December 31, 1998 compared to year ended December 31, 1997. This decrease was due to the combination of lower cash reserves and lower interest rates on Treasury Bills during 1998 as compared to 1997.
Income from continuing operations was $337,921 for the year ended December 31, 1998 compared to $717,287 for the year ended December 31, 1997. The decrease in net income is primarily attributed to lower sales and higher costs attributable to the manufacture of the entree products for a co-pack customer. Tax expense in 1997 was lower compared to 1998 due to manufacturing credits gained on machinery purchases which were taken in 1997.
Net income was $218,461 for the year ended December 31, 1998, compared to $717,287 for the year ended December 31, 1997. The net income in 1998 was impacted by lower sales, higher manufacturing costs and a return to normal tax levels. Additionally, 1998 net income was impacted by an extraordinary charge of $119,460 net of tax effect, as a result of a settlement of a lawsuit involving the termination of a sales representation contract with the Company's former club-store broker.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had working capital of $5,545,057 an increase of $562,395 from December 31, 1998. The increase is primarily attributable to the net income for the year ended December 31, 1999. Current assets included $4,797,358 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, 1999, cash provided by operating activities of the Company amounted to $1,459,263. This was primarily a result of the net income from operations, non-cash depreciation and amortization expense and decrease in inventory. For the year ended December 31, 1998, cash provided by operating activities of the Company amounted to $1,287,557. This was primarily a result of non-cash depreciation and amortization expense, decrease in accounts receivable and decrease in inventory. For the year ended December 31, 1997, the Company's operating activities generated $855,635. This was primarily a result of net income from continuing operations experienced during the year. 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, 1999, the Company has invested $3,094,060 in U.S. treasury bills which are included as cash equivalents.
As of September 10, 1999, the Company decided not to renew its business loan line of credit due to adequate cash reserves. The Company had renewed its $500,000 business loan line of credit with Wells Fargo Bank in San Francisco, California in September 1998. This loan provided for interest at prime plus .75% with a maturity date of September 10, 1999. At December 31, 1998, the Company had $0 outstanding under this line.
During 1999, the Company's board of directors approved a buy-back plan to purchase Company stock totaling $500,000. Subsequent to year-end the board increased this amount to a total of $800,000. During 1998, the Company's board of directors approved two stock buy-back plans to purchase Company stock totaling $1,250,000. As of December 31, 1999, the Company purchased stock amounting to $299,205 for the 1999 stock buy-back plan and $1,250,000 for the 1998 stock buy-back plan. The Company paid an additional $374,359 subsequent to December 31, 1999, to purchase common stock 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 has 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 provided a written report indicating that the Company's systems were year 2000 compliant.
The Company incurred approximately $2,000 on upgrading software. Approximately $4,000 was spent on evaluating and testing current systems during the fourth quarter of 1998. During 1999, the Company incurred approximately $8,000 to upgrade its hardware systems.
The Company reviewed 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 30% of total sales. At the present time this customer is the only trading partner with E.D.I. transactions. Contact is ongoing with this customer to ensure that they are year 2000 compliant. Surveys were 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.
At the present time, the Company has not experienced any year 2000 related issues. However, there can be no assurance that third parties the Company deals with have resolved 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 of the Company.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS.
The financial statements and financial statement schedules are set forth on pages through hereto.
ITEM 9.
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 18, 2000.
PART IV
ITEM 14.
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 ..................................
Consolidated Balance Sheets, December 31, 1999 and 1998 .......
Consolidated Statements of Operations, for the years ended December 31, 1999, 1998 and 1997 ..............................
Consolidated Statement of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 ..................
Consolidated Statements of Cash Flows, for the years ended December 31, 1999, 1998 and 1997 ..............................
Notes to Consolidated Financial Statements ....................
(b) 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.
(c) 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)
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 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)
10.5 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
10.6 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
10.7 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
10.8 Employment Agreement with Incorporated by reference to Robert P. Kraemer Exhibit 10.12 to the Registrant's Form 10-K for the year ended December 31, 1997
10.9 Consulting Agreement with Incorporated by reference to Robert H. Anderson Exhibit 10.13 to the Registrant's Form 10-K for the year ended December 31, 1997
10.10 Consulting Agreement with Incorporated by reference to Robert P. Kraemer Exhibit 10.13 to the Registrant's Form 10-K for the year ended December 31, 1998
21 Subsidiaries of the Incorporated by reference to Registrant Exhibit 21 to the Registrant's Form 10-K for the year ended December 31, 1998
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.
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 as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1999, 1998 and 1997. 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, 1999 and 1998 and the results of their operations and their cash flows for the years ended December 31, 1999, 1998 and 1997, in conformity with generally accepted accounting principles.
/s/ PRITCHETT, SILER & HARDY, P.C.
January 25, 2000, except for Note 13 as to which the date is March 13, 2000 Salt Lake City, Utah
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, --------------------------- 1999 1998 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 3,142,068 $ 633,580 Treasury bills, held to maturity - 1,768,283 Accounts receivable, net 1,655,290 1,271,740 Inventory 900,956 1,183,370 Prepaid expenses 223,285 197,523 Current deferred tax asset 425,000 606,000 ----------- ----------- Total Current Assets 6,346,599 5,660,496 ----------- -----------
PROPERTY AND EQUIPMENT, net 4,473,871 4,867,679 ----------- -----------
OTHER ASSETS: Deposits 13,000 13,000 Goodwill, net 459,438 501,438 ----------- ----------- Total Other Assets 472,438 514,438 ----------- ----------- $11,292,908 $11,042,613 =========== ===========
The accompanying notes are an integral part of these financial statements.
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, --------------------------- 1999 1998 ----------- ----------- CURRENT LIABILITIES: Accounts payable $ 490,458 $ 539,905 Accrued expenses 263,461 76,837 Current portion capital lease obligation 47,623 61,092 ----------- ----------- Total Current Liabilities 801,542 677,834
DEFERRED TAX LIABILITY 398,000 321,000
CAPITAL LEASE OBLIGATION, less current portion 94,668 142,291 ----------- ----------- Total Liabilities 1,294,210 1,141,125 ----------- -----------
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, 1,873,581 and 1,982,381 shares issued and outstanding at December 31,1999 and 1998, respectively 9,461,009 9,873,671 Additional paid-in-capital 22,311 22,311 Retained earnings 515,378 5,506 ----------- ----------- Total Stockholders' Equity 9,998,698 9,901,488 ----------- ----------- $11,292,908 $11,042,613 =========== ===========
The accompanying notes are an integral part of these financial statements.
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, --------------------------------------- 1999 1998 1997 ----------- ----------- -----------
SALES, net of returns and discounts $12,155,719 $13,512,172 $15,347,165
COST OF GOODS SOLD 7,552,869 9,485,636 10,855,162 ----------- ----------- ----------- GROSS PROFIT 4,602,850 4,026,536 4,492,003 ----------- ----------- -----------
OPERATING EXPENSES: General and administrative 1,322,945 1,417,252 1,425,013 Salaries, wages and related payroll taxes 1,230,939 1,059,305 1,197,928 Commissions 315,496 384,613 333,516 Advertising, demonstrations, promotions and trade allowances 977,879 755,521 854,908 ----------- ----------- ----------- Total Operating Expenses 3,847,259 3,616,691 3,811,365 ----------- ----------- ----------- INCOME FROM OPERATIONS 755,591 409,845 680,638 ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest expense (2,296) (11,630) (23,834) Interest and other income 142,177 158,596 200,933 Loss on sale of fixed assets (5,064) (542) (15,634) ----------- ----------- ----------- Total Other Income 134,817 146,424 161,465 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 890,408 556,269 842,103
CURRENT TAX EXPENSE 122,536 25,808 10,816
DEFERRED TAX EXPENSE 258,000 192,540 114,000 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEMS AND DISCONTINUED OPERATIONS 509,872 337,921 717,287
EXTRAORDINARY ITEM: Loss on settlement of lawsuit (net of income taxes of $61,540 at December 31, 1998) - (119,460) - ----------- ----------- ----------- NET INCOME $ 509,872 $ 218,461 $ 717,287 ----------- ----------- -----------
[Continued]
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
[Continued]
For the Years Ended December 31, --------------------------------------- 1999 1998 1997 ----------- ----------- -----------
EARNINGS PER COMMON AND EQUIVALENT SHARES:
BASIC EARNINGS PER SHARE: Income from continuing operations $ .26 $ .15 $ .32 Extraordinary Item - (.05) - ----------- ----------- ----------- BASIC EARNINGS PER SHARE $ .26 $ .10 $ .32 ----------- ----------- ----------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,942,676 2,185,423 2,248,375 ----------- ----------- -----------
DILUTED EARNINGS PER SHARE: Income from continuing operations $ .26 $ .15 $ .31 Extraordinary Item - (.05) - ----------- ----------- ----------- DILUTED EARNINGS PER SHARE $ .26 $ .10 $ .31 ----------- ----------- ----------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - ASSUMING DILUTION 1,950,834 2,191,883 2,299,242 ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
The accompanying notes are an integral part of this financial statement.
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, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Cash Flows from Operating Activities: Net income $ 509,872 $ 218,461 $ 717,287 ----------- ----------- ----------- Adjustments to reconcile net income to net cash used by operations: Depreciation and amortization 676,048 666,260 489,688 Non-cash expenses 5,064 3,120 40,539 Change in deferred tax asset / liability 258,000 131,000 114,000 Changes in assets and liabilities: (Increase) decrease in accounts receivable (383,550) 448,943 (22,344) (Increase) decrease in inventory 282,414 391,488 (507,954) (Increase) decrease in prepaid expenses (17,762) 40,150 (129,567) Increase (decrease) in accounts payable and accrued expenses 129,177 (611,865) 229,131 Increase (decrease) in net liabilities of discontinued operations - - (75,145) ----------- ----------- ----------- Total Adjustments 949,391 1,069,096 138,348 ----------- ----------- ----------- Net Cash Provided by Operating Activities 1,459,263 1,287,557 855,635 ----------- ----------- ----------- Cash Flows from Investing Activities: Purchases of property and equipment (246,804) (421,924) (2,281,583) Proceeds from sale of property and equipment 1,500 - 17,104 (Increase) decrease in deposits - - 4,916 (Purchase) redemption of US treasury bills, net 1,768,716 1,206,687 1,015,509 ----------- ----------- ----------- Net Cash Provided (Used) by Investing Activities 1,523,412 784,763 (1,244,054) ----------- ----------- ----------- Cash Flows from Financing Activities: Proceeds from borrowing on line of credit - - 287,439 Payments on line of credit - (287,439) - Payments on note payable - - (32,073) Payments on capital lease obligations (61,092) (67,798) (35,093) Proceeds from common stock Issuances - - 13,356 Purchase of treasury stock (412,662) (1,264,949) (407,053) ----------- ----------- ----------- Net Cash Provided (Used) by Financing Activities (473,754) (1,620,186) (173,424) ----------- ----------- ----------- [Continued]
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
[Continued]
For the Years Ended December 31, --------------------------------------- 1999 1998 1997 ----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 2,508,921 452,134 (561,843)
Cash and Cash Equivalents at Beginning of Period 633,147 181,013 742,856 ----------- ----------- -----------
Cash and Cash Equivalents at End of Period $ 3,142,068 $ 633,147 $ 181,013 ----------- ----------- -----------
Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ 2,296 $ 11,630 $ 23,834 Income taxes $ 18,000 $ - $ 105,859
Supplemental Disclosures of Non-Cash Investing and Financing Activities: For the year ended December 31, 1999: None
For the year ended December 31, 1998: The Company issued a total of 600 shares of stock in exchange for services rendered valued at $2,578.
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 1,000 shares of restricted common stock in exchange for services rendered of $4,106. The Company applied deposits of $459,694 against equipment purchases.
The accompanying notes are an integral part of these financial statements.
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 [See Note 2]. The Company had $0 and $167,554 in excess of federally insured amounts in its bank accounts at December 31, 1999 and 1998, 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. At December 31, 1999 and 1998 the Company has established an allowance for doubtful accounts of $5,000 and $10,000, respectively. 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.
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued]
EARNINGS PER SHARE - The Company calculates earnings per share in accordance with the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 "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.
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 1999 and 1998 was $42,000 and $42,000.
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, 1999, 1998 and 1997 are $48,815, $70,734 and $45,363, respectively, of research and development costs associated with the development of new products.
RECENTLY ENACTED ACCOUNTING STANDARDS - Statement of Financial Accounting Standards (SFAS) No. 132, "Employer's Disclosure about Pensions and Other Postretirement Benefits", SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", SFAS No. 134, "Accounting for Mortgage-Backed Securities " and SFAS No. 135, "Rescission of FASB Statement No. 75 and Technical Corrections" were recently issued. SFAS No. 132, 133, 134 and 135 have no current applicability to the Company or their effect on the financial statements would not have been significant.
NOTE 2 - RELATED PARTY TRANSACTIONS
Fees paid to related parties - Amounts paid to related parties are as follows:
For the Years Ended December 31, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Accounting fees paid to a company controlled by a shareholder and a director $ 17,342 $ 32,495 $ 26,450
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - CASH EQUIVALENTS
At December 31, 1999, cash equivalents consisted of US treasury bills, which are carried at their amortized costs, as follows and presented as cash equivalents in the accompanying financial statements:
Amortized Market Maturity Date Acquired Maturity Date Cost Value Value - ------------- ------------- ---------- ---------- ----------
10/21/99 1/20/00 $ 598,394 $ 597,750 $ 600,000 12/2/99 1/13/00 2,495,666 2,493,750 2,500,000 ---------- ---------- ---------- 3,094,060 3,091,500 3,100,000 Cash 48,008 48,008 48,008 ---------- ---------- ---------- $3,142,068 $3,139,508 $3,148,008 ---------- ---------- ---------- NOTE 4 - INVENTORY
Inventory consists of the following at December 31, 1999 and 1998:
1999 1998 ----------- -----------
Raw materials and supplies $ 419,909 $ 481,226 Finished goods 481,047 702,144 ----------- ----------- $ 900,956 $ 1,183,370 ----------- -----------
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment (including capitalized leases) consists of the following at December 31, 1999 and 1998:
1999 1998 ----------- -----------
Office equipment $ 310,025 $ 299,822 Machinery and equipment 4,886,780 4,814,842 Leasehold improvements 1,890,087 1,906,876 ----------- ----------- 7,086,892 7,021,540 Less: Accumulated depreciation and amortization (2,613,021) (2,153,861) ----------- ----------- $ 4,473,871 $ 4,867,679 ----------- -----------
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PROPERTY AND EQUIPMENT [Continued]
Depreciation expense amounted to $634,048, $624,260 and $447,688 for the years ended December 31, 1999, 1998 and 1997, respectively.
NOTE 6 - LEASES
CAPITAL LEASES - The Company is the lessee of equipment under a capital lease expiring in 2002. The assets and liabilities under the capital lease 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 over its related lease term. Amortization expense of $50,000 and $75,000 for the assets under the capital lease and have been included in depreciation expense for 1999 and 1998.
Equipment at December 31, 1999 and 1998 under capital lease obligations is as follows:
1999 1998 ----------- -----------
Equipment $ 234,675 $ 375,000 Less: Accumulated amortization (111,734) (170,067) ----------- ----------- $ 122,941 $ 204,933 ----------- -----------
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 ------------------------ --------------
2000 $ 58,800 2001 58,800 2002 44,100 -------- Total future minimum lease payments $161,700 Less: amounts representing interest and executory costs (19,409) -------- Present value of the future minimum lease payments 142,291 Less: Lease current portion (47,623) -------- Capital lease obligations - long term $ 94,668 --------
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LEASES [Continued]
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 Company also leases equipment under an operating lease expiring upon 90 days written notice.
The future minimum lease payments for non-cancelable operating leases having remaining terms in excess of one year as of December 31, 1998 are as follows:
Year ending December 31, Lease Payments ------------------------ --------------
2000 99,329 2001 95,882 2002 97,280 2003 57,888 Thereafter - -------- Total Minimum Lease Payments $350,379 --------
Lease expense charged to operations was $97,977, $89,046 and $128,865 for the years ended December 31, 1999, 1998 and 1997.
NOTE 7 - 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 generally allow for either party to give a two months cancellation notice.
401(K) PROFIT SHARING PLAN - The Company has a 401(K) profit sharing plan and trust that covers all employees. Any 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 1999, 1998 and 1997 contributions to the plan charged to operations were $7,380, $10,678, and $8,515, respectively.
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - AGREEMENTS AND COMMITMENTS [Continued]
INCENTIVE COMPENSATION PLANS - For 1998 and 1997, the Board of Directors established a combined incentive compensation plan for management and employees, funded based on the individual achieving specific personal objectives and upon the Company meeting predetermined sales revenues and pretax income from operations. For 1998 and 1997 the plan was not funded as the individual's objectives and predetermined sales and earnings levels were not achieved.
NOTE 8 - INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 Accounting for Income Taxes [SFAS No. 109]. SFAS No. 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, 1999 and 1998, the total of all deferred tax assets was $425,000 and $606,000 and the total of the deferred tax liabilities was $398,000 and $321,000. 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, 1999, 1998 and 1997 consist of the following:
1999 1998 1997 ----------- ----------- ----------- Current income tax expense: Federal $ 122,536 $ 4,561 $ - State - 21,247 10,816 ----------- ----------- ----------- Current tax expense 122,536 25,808 10,816 ----------- ----------- ----------- Deferred tax expense (benefit) arising from: Excess of tax over financial accounting depreciation $ 77,000 $ 118,000 $ 77,000 Carryforward of excess contributions (21,266) - - Use of federal NOL carry- forwards 236,691 103,679 203,799 Use of state NOL carryforwards - 1,941 (1,941) Federal alternative minimum tax credit (89,918) (4,561) - State alternative minimum tax credit - (21,247) (10,816) Inventory 263A adjustment 2,946 2,297 (8,112) State investment tax credits 52,547 (7,569) (145,930) ----------- ----------- ----------- Net deferred tax expense $ 258,000 $ 192,540 $ 114,000 ----------- ----------- -----------
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES [Continued]
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:
1999 1998 1997 ----------- ----------- ----------- Computed tax at the expected statutory rate $ 302,739 $ 189,607 $ 286,315 ----------- ----------- ----------- State and local income taxes, net of federal benefit 54,752 34,230 51,688 Non-deductible expenses 10,098 12,509 18,923 Goodwill amortization 16,855 16,855 16,855 State tax credits 10,337 (7,569) (145,930) Effect of alternative minimum taxes - - 7,139 Other Items (14,245) (27,284) (110,174) ----------- ----------- ----------- Income tax expense $ 380,536 $ 218,348 $ 124,816 ----------- ----------- -----------
As of December 31, 1999 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 $696,000 that expire in 2006 and 2012.
The temporary differences and carryforwards gave rise to the following deferred tax asset (liability) at December 31, 1999 and 1998:
1999 1998 ----------- ----------- Excess of tax over book accounting depreciation $ (398,000) $ (321,000) Inventory 263A adjustment 10,367 13,313 State alternative minimum tax credits 103,584 103,584 Federal alternative minimum tax credits 188,381 98,464 State Investment Tax Credits 100,952 153,499 Federal NOL carryforwards - 237,140 Federal contribution carryforwards 21,716 -
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.
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES [Continued]
As of December 31, 1999 and 1998 the deferred tax asset (liability) consisted of the following:
1999 1998 ----------- ----------- Current deferred tax assets $ 425,000 $ 606,000 Deferred tax assets (liabilities) (398,000) (321,000) ----------- ----------- $ 27,000 $ 285,000 ----------- -----------
Management estimates that the Company will generate adequate net profits to use alternative minimum tax carryforwards and state investment tax credits, consequently, a deferred tax asset valuation allowance has not been accrued.
NOTE 9 - 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, 1999, 1998 and 1997:
For the years ended December 31, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Income from continuing operations available to common stockholders $ 509,872 $ 337,921 $ 717,287 ----------- ----------- -----------
Weighted average number of common shares outstanding used in basic earnings per share 1,942,676 2,185,423 2,248,375
Effect of dilutive securities: Stock options 8,158 6,460 50,867 Stock warrants - - - Weighted number of common shares and potential dilutive common shares outstanding used in dilutive earnings per share 1,950,834 2,191,883 2,299,242 ----------- ----------- -----------
The Company had at December 31, 1999, 1998 and 1997 options to purchase 352,740, 357,190 and 203,999 shares of common stock , respectively, at prices ranging from $4.29 to $5.70 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).
Subsequent to the year ending December 31, 1999, the Company repurchased shares of the Company's common stock [See Note 13].
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY
COMMON STOCK - During 1999 and 1998 the Company purchased 108,800 and 267,706 shares of common stock for $ 412,663 and $1,264,949, respectively, on the open market. Subsequent to the year ending December 31, 1999, the Company repurchased shares of the Company's common stock [See Note 13].
STOCK SPLITS - During May 1998, the Company's shareholders approved a 1 for 300 reverse stock split followed by the 300 for 1 forward stock split of all its previously issued outstanding common shares with 26,851 shares being repurchased for approximately $127,669. During January 1999, the Company approved a 1 for 5 reverse stock split of all its previously issued outstanding common stock. The split was effective January 29, 1999, with 208 fractional shares being issued. The effect of these common stock splits have been reflected in these financials statements.
COMMON STOCK ISSUANCES - During 1998 and 1997, the company issued 600 and 1,000 shares of restricted common stock valued at $2,578 and $4,106, respectively, in exchange for services rendered. The Company issued during 1997, 2,000 shares of stock in connection with options exercised, under the 1993 stock option plan.
The restricted stock issued during the years ended December 31, 1998 and 1997 for non-cash consideration were valued at the mean between the closing bid less 25%-35% attributable to the transferability restrictions of the stock.
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, 1999, 1998 and 1997.
STOCK WARRANTS - During July 1999, the Company issued a warrant in connection with a manufacturing arrangement. The warrant issued entitles the holder to purchase up to 100,000 shares of the Company's common stock at $3.00 for a period of one year expiring July 6, 2000. As of December 31, 1999 no shares have been issued.
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY [Continued]
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 1999, 1998 and 1997 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:
1999 1998 1997 ----------- ----------- -----------
Net Income As reported $ 509,872 $ 218,461 $ 717,287 Proforma $ 509,229 $ 196,126 $ 714,407
Basic earnings per As reported $ .26 $ .10 $ .32 share Proforma $ .26 $ .09 $ .32
Diluted earnings As reported $ .26 $ .10 $ .31 per share Proforma $ .26 $ .09 $ .31
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, 1999, 1998 and 1997 risk-free interest rates of 4.9%, 5.5% and 6.3% expected dividend yields of zero, expected life of 10, 7.5 and 5.6 years, and expected volatility 56%, 46% and 45%.
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 650,000. At December 31, 1999 and 1998, total options available to be granted under the Plan amounted to 255,760 and 269,510, respectively.
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY [Continued]
A summary of the status of the options granted under the Company's stock option plan and other agreements at December 31, 1999, 1998 and 1997, and changes during the years then ended is presented below:
A summary of the status of the options outstanding under the Company's stock option plans and employment agreements at December 31, 1999 is presented below:
ARMANINO FOODS OF DISTINCTION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - 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, ------------------------------------ 1999 1998 1997 ---------- ---------- ----------
Broker A $1,904,384 $1,940,339 $1,940,461 Broker B 1,710,345 2,424,687 - Broker C 2,199,994 2,169,182 -
NOTE 12 - EXTRAORDINARY LOSS FROM 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 was entitled to, an additional ten months of commissions (approximately $100,000) and attorneys fees under the agreement. The parties agreed to arbitrate the dispute and the case was submitted to arbitration in July 1998. The arbitrator awarded Mass Marketing damages in the total amount of $167,342. Pending the Company's action to overturn the award, which it considered erroneous. The parties settled the claim for $145,000. The Company expended approximately $36,000 defending their position.
NOTE 13 - SUBSEQUENT EVENTS
Subsequent to the year ending December 31, 1999, the Company repurchased 79,500 shares of the Company's common stock for approximately $374,359.
During January 2000, the Company issued to members of the Board of Directors a total of 60,000 options to purchase common stock at $5.08 per share, expiring in April 2005.
During March 2000, the Company issued 3,000 shares of restricted stock valued at $12,585 for consulting services rendered. The stock was valued at the mean between the closing bid and asked prices for the Company's stock less 25% attributable to the transferability restrictions on the stock.
During March 2000, the Company issued stock options to purchase 10,000 shares of common stock to a consultant. The shares are exercisable at $5.72 per share and expire in February 2010.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Ex change 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 28, 2000 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, Chief Executive March 28, 2000 William J. Armanino Officer and Chairman of the Board
/s/ Edmond J. Pera Treasurer, Chief Financial March 28, 2000 Edmond J. Pera Officer and Secretary
/s/ John J. Micek, III Director March 28, 2000 John J. Micek, III
/s/ David Scatena Director March 28, 2000 David Scatena
/s/ Tino Barzie Director March 28, 2000 Tino Barzie
____________________________ Director J. Bryan King
/s/ Joseph F. Barletta Director March 28, 2000 Joseph F. Barletta
EXHIBIT INDEX EXHIBIT METHOD OF FILING - ------- -----------------------------
23. CONSENT OF INDEPENDENT PUBLIC Filed herewith electronically ACCOUNTANTS
27. FINANCIAL DATA SCHEDULE Filed herewith electronically