U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2003
Commission File No. 0-18200
ARMANINO FOODS OF DISTINCTION, INC.
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(Exact name of small business issuer as specified in its charter)
COLORADO 84-1041418
- ------------------------------ -------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
incorporation or organization) Number)
30588 San Antonio St., Hayward, CA 94544
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(Address of principal executive office)(Zip Code)
Issuer's telephone number, including area code: (510) 441-9300
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
There were 3,250,108 shares of the Issuer's Common Stock outstanding as of
June 30, 2003.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
ASSETS
June 30, December 31,
2003 2002
---------- ------------
Current Assets:
Cash and cash equivalents $2,103,407 $1,094,002
Accounts receivable, net 1,459,740 2,084,160
Inventory 1,418,954 1,888,085
Prepaid expenses 127,952 309,698
Current portion of direct financing lease
receivable 51,298 91,533
Current deferred tax asset 136,812 116,412
---------- ----------
Total Current Assets 5,298,163 5,583,890
Property and Equipment, net 1,939,194 2,162,282
Direct financing lease receivable, net 488,026 475,008
Other Assets:
Deposits 32,000 32,000
Goodwill 375,438 375,438
Indefinite life - Intangible assets 95,000 95,000
---------- ----------
Total Other Assets 502,438 502,438
---------- ----------
Total Assets $8,227,821 $8,723,618
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued payroll and
related taxes $ 850,500 $ 930,266
Dividends payable 163,285 163,634
---------- ----------
Total Current Liabilities 1,013,785 1,093,900
Deferred tax liability 16,163 33,163
Deferred income on direct financing lease 60,025 63,157
---------- ----------
Total Liabilities 1,089,973 1,190,220
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, 3,250,108 shares
issued and outstanding at June 30, 2003
and December 31, 2002, respectively 7,987,522 7,987,522
Additional paid in capital 37,911 37,911
Retained earnings (877,618) (479,468)
---------- ----------
7,147,815 7,545,965
Less: Deferred compensation expense
in accordance with APB 25 (9,967) (12,567)
---------- ----------
Total Stockholders' Equity 7,137,848 7,533,398
---------- ----------
Total Liabilities & Stockholders' Equity $8,227,821 $8,723,618
========== ==========
The accompanying notes are an integral part of these condensed financial
statements. The balances for December 31, 2002 were taken from the audited
financial statements at that date and condensed.
2
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Statements of Operations
For the Quarter Ended June 30, 2003 and 2002
(Unaudited)
June 30, June 30,
2003 2002
---------- ----------
Net Sales $3,181,445 $3,456,798
Cost of Goods Sold 2,343,112 2,372,411
---------- ----------
Gross Profit 838,333 1,084,387
Operating Expenses:
General, administrative and selling 382,918 353,443
Salaries and wages 400,651 432,394
Commissions 150,581 127,373
---------- ----------
Total Operating Expenses 934,150 913,210
Income/(Loss) From Operations (95,817) 171,177
Other Income 10,948 9,873
---------- ----------
Income/(Loss) From Continuing Operations
Before Income Taxes (84,869) 181,050
Current Tax Expense - 54,900
Deferred Tax Expense/(Benefit) (29,279) 10,951
---------- ----------
Net Income/(Loss) $ (55,590) $ 115,199
========== ==========
Basic Income/(Loss) Per Common Share $ (.02) $ .04
========== ==========
Weighted Average Common Shares Outstanding 3,250,108 3,246,287
========== ==========
Diluted Income/(Loss) Per Common Share $ (.02) $ .03
========== ==========
Weighted Average Common Shares Outstanding
Assuming Dilution 3,272,470 3,476,145
========== ==========
The accompanying notes are an integral part of these condensed financial
statements.
3
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Statements of Operations
For the Six Months Ended June 30, 2003 and 2002
(Unaudited)
June 30, June 30,
2003 2002
---------- ----------
Net Sales $6,565,127 $6,751,876
Cost of Goods Sold 4,834,753 4,676,137
---------- ----------
Gross Profit 1,730,374 2,075,739
Operating Expenses:
General, administrative and selling 768,344 701,460
Salaries and wages 805,126 840,586
Commissions 289,888 260,764
---------- ----------
Total Operating Expenses 1,863,358 1,802,810
Income/(Loss) From Operations (132,984) 272,929
Other Income 24,577 26,186
---------- ----------
Income/(Loss) From Continuing Operations
Before Income Taxes (108,407) 299,115
Current Tax Expense - 98,500
Deferred Tax Expense/(Benefit) (37,400) 18,119
---------- ----------
Net Income/(Loss) $ (71,007) $ 182,496
========== ==========
Basic Income/(Loss) Per Common Share $ (.02) $ .06
========== ==========
Weighted Average Common Shares Outstanding 3,250,108 3,217,016
========== ==========
Diluted Income/(Loss) Per Common Share $ (.02) $ .05
========== ==========
Weighted Average Common shares Outstanding
Assuming Dilution 3,268,146 3,478,526
========== ==========
The accompanying notes are an integral part of these condensed financial
statements.
4
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2003 and 2002
(Unaudited)
June 30, June 30,
2003 2002
---------- ----------
Cash Flows From Operating Activities:
Net income/(loss) $ (71,007) $ 182,496
Adjustment to reconcile net income to net
cash provided by operations:
Depreciation and amortization 256,667 295,528
Loss on sale of equipment 5,362 -
Net change in deferred taxes (37,400) 18,119
Earned revenue from direct financing lease (3,131) (5,821)
Non-cash expense 2,600 6,000
Changes in assets and liabilities:
Decrease in accounts receivable 624,420 31,961
(Increase)/Decrease in inventories 469,131 (293,774)
(Increase)/Decrease in prepaid expenses 181,746 (132,890)
Decrease in accounts payable and accrued
payroll and related taxes (79,766) (307,937)
Decrease in income taxes payable - (82,506)
---------- ----------
Total Adjustments 1,419,629 (471,320)
---------- ----------
Net Cash Provided By/(Used) For Operating
Activities 1,348,622 (288,824)
Cash Flows From Investing Activities:
Proceeds from sale of equipment 3,000 -
Capital expenditures (41,941) (262,361)
Proceeds received from direct financing lease 27,217 50,600
---------- ----------
Net Cash Used For Investing Activities (11,724) (211,761)
Cash Flows From Financing Activities:
Dividends paid (327,493) (718,452)
Proceeds from exercise of stock options - 205,137
Payments on capital lease obligations - (27,973)
---------- ----------
Net Cash Used For Financing Activities: (327,493) (541,288)
Net Increase/(Decrease) In Cash and Cash
Equivalents 1,009,405 (1,041,873)
Cash and Cash Equivalents Beginning of Period 1,094,002 2,496,140
---------- ----------
Cash and Cash Equivalents End of Period $2,103,407 $1,454,267
========== ==========
The accompanying notes are an integral part of these condensed financial
statements.
5
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2003 and 2002
(Unaudited)
June 30, June 30,
2003 2002
---------- ----------
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period for
Interest $ - $ -
Income tax $ - $ 121,392
Supplemental Disclosures of Non-Cash Items:
For the six months ended June 30, 2003.
During 2002, the Company issued a total of 60,000 options to
a director to purchase common stock at $2.54 per share, which
was below the current market value of the Company common
stock of $2.80. The options vest equally over 36 months.
At December 31, 2002, in accordance with APB 25, the Company
recorded additional paid in capital of $15,600, compensation
expense of $3,033 and deferred compensation of $12,567 as a
reduction of stockholders equity. For the six months ended
June 30, 2003 the Company recognized $2,600 as compensation
expense.
6
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
of the United States of America for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles of the United States of America
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,
2002 audited financial statements and notes thereto for Armanino Foods of
Distinction, Inc. The results of operations for the periods ended June 30,
2003 and 2002 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 had $320,324 in
excess of federally insured amounts in its bank accounts at June 30, 2003.
Intangible Assets - The Company acquired a subsidiary (Alborough, Inc.)
during May 1996. The Company recorded goodwill in the amount of $609,938 as
part of the purchase. During October 2002, the Company purchased proprietary
formulations, trademarks and related equipment of a product line sold under
the Garlic Zing(R) label. In relation to this purchase the Company recorded
$95,000 for formulas and trademarks. In 2002, the Company adopted Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets". The Company has classified its intangible assets as indefinite-life
intangible assets and accordingly has stopped recording amortization. The
Company has no other indefinite-life or definite-life intangible assets. (See
Note 6)
Accounts Receivable - Accounts receivable consist of trade receivables
arising in the normal course of business. At June 30, 2003, the Company has
established an allowance for doubtful accounts of $13,714 which reflects the
Company's best estimate of probable losses inherent in the accounts receivable
balance. The Company determines the allowance based on known troubled
accounts, historical experience, and other currently available evidence.
Amounts written off for the years presented are insignificant for disclosure.
The Company accounts for revenue recognition in accordance with the
Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" (SAB 101), SFAS 48, "Revenue Recognition
When Right of Returns Exists" and EITF No. 00-14, 00-25, 01-09 "Accounting for
Consideration Given by a Vendor to a Customer". The Company recognizes
revenue when rights and risk of ownership have passed to the customer, when
there is persuasive evidence of an arrangement, product has been shipped or
delivered to the customer, the price and terms are finalized, and collection
of resulting receivable is reasonably assured. Products are primarily shipped
7
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(Unaudited)
FOB shipping point at which time title passes to the customer. In some
instances the Company uses common carriers for the delivery of products. In
these arrangements, sales are recognized upon delivery to the customer. The
Company's revenue arrangements with its customers often include early payment
discounts and such sales incentives as trade allowances, promotions and
co-operative advertising. These sales incentives are recorded at the later of
when revenue is recognized or over the period that the sales incentives are
offered. Sales incentives that do not provide an identifiable benefit or
provide a benefit where the Company could not have entered into an exchange
transaction with a party other than the customer are netted against revenues.
Incentives providing an identifiable benefit, where the Company could have
entered into the same transaction with a party other than the customer, are
classified as "General, administrative and selling" in the Operating Expenses
section of the Consolidated Statements of Operations.
Net sales comprised of the following for the quarter and six months ended June
30, 2003 and 2002:
For the Quarters For the Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Gross Sales $3,630,439 $4,150,330 $7,436,670 $7,952,778
Less Discounts $ (63,433) $ (64,906) $ (124,892) $ (134,641)
Slotting $ (60,887) $ (31,114) $ (120,703) $ (113,924)
Promotional $ (324,674) $ (597,512) $ (725,948) $ (952,337)
---------- ---------- ---------- ----------
Net Sales $3,181,445 $3,456,798 $6,565,127 $6,751,876
---------- ---------- ---------- ----------
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles in the United States
of America 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.
Earnings 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 period 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 per share was as follows:
8
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(Unaudited)
For the Quarters For the Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Weighted average common
shares outstanding used
in basic earnings (loss)
per share 3,250,108 3,246,287 3,250,108 3,217,016
Effect of dilutive stock
options 22,362 229,858 18,038 261,510
Weighted average common
shares and potential
dilutive common shares
outstanding used in
dilutive earnings loss
per share 3,272,470 3,476,145 3,268,146 3,478,526
For the six months ended June 30, 2003 the Company had 167,820 additional
stock options that could potentially dilute earnings per share in the future
that were not included in the diluted computation.
Stock Options - In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure, an
amendment of FASB Statement No. 123" ("SFAS 148"). This Statement amends SFAS
123 to provide alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements. Certain
of the disclosure modifications are required for fiscal years ending after
December 15, 2002 and are included in the notes to these consolidated
financial statements.
The Company has stock option plans that provide for stock-based employee
compensation, including the granting of stock options, to certain key
employees. The plans are more fully described in Note 12. The Company accounts
for the stock options plans in accordance with the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees",
and related interpretations. Under this method, compensation expense is
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price.
During 2002, the Company issued a total of 60,000 options to a director
to purchase common stock at $2.54 per share, which was below the current
market value of the Company common stock of $2.80. The options vest equally
over 36 months. At December 31, 2002, in accordance with APB 25, the Company
has recorded additional paid in capital of $15,600, compensation expense of
$3,033 and deferred compensation of $12,567 as a reduction of stockholders
equity. For the six months ended June 30, 2003 the Company recognized $2,600
as compensation expense.
9
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(Unaudited)
During the periods presented in the accompanying financial statements the
Company has granted options under the 1993 and 2002 Stock Options Plans and
executive and other employment agreements (SEE Note 12). 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 under SFAS No. 123 has been recognized for the stock option
plans or other agreements in the accompanying statement of operations. Had
compensation cost for the Company's stock option plans and agreements been
determined based on the fair value at the grant date for awards in 2002 and
2001 consistent with the provisions of SFAS No. 123, the Company's net
earnings net of taxes and earnings per share would have been reduced to the
pro forma amounts indicated below:
For the Quarter Months For the Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net Income As Reported $ (55,590) $ 115,199 $ (71,007) $ 182,496
(Loss) Proforma $ (75,609) $ 80,163 $ (111,043) $ 112,424
Basic earnings As reported $ (.02) $ .04 $ (.02) $ .06
(loss) per Proforma $ (.02) $ .04 $ (.02) $ .06
share
Diluted earn- As reported $ (.02) $ .02 $ (.02) $ .03
ings (loss) Proforma $ (.02) $ .02 $ (.02) $ .03
per share
Reclassification - The financial statements for the quarter and six
months ended June 30, 2002 have been reclassified to conform with the
classifications and headings used in the quarter and six month ended June 30,
2003.
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, 2003 and December 31, 2002:
June 30, 2003 December 31, 2002
------------- -----------------
Raw materials & supplies $ 336,247 $ 361,398
Finished goods 1,082,707 1,526,687
---------- ----------
$1,418,954 $1,888,085
========== ==========
10
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(Unaudited)
Note 3 - Related Party Transactions
The Company incurred $11,640 and $8,005 respectively, for the six months
ended June 30, 2003 and 2002, in accounting and consulting fees to Polly,
Scatena, Vasheresse & May, 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.
The Company incurred $0 and $12,000 respectively, for the six months
ended June 30, 2003 and June 30, 2002 in consulting fees to First London
Securities Corporation. A director of the company is a 48% shareholder of DGN
Securities which owns 100% of First London Securities Corporation.
The Company incurred $10,000 and $10,000 respectively, for the six months
ended June 30, 2003 and 2002 in consulting fees to Tino Barzie, a former
director of the Company.
Note 4 - Property and Equipment
Property and equipment consists of the following:
Estimated Useful June 30, December 31,
Life in Years 2003 2002
---------------- -------- ------------
Office Equipment 3-10 $ 208,008 $ 205,619
Computer Software 2-5 105,070 101,452
Plant Machinery & Equipment 5-20 3,567,473 3,547,520
Vehicles 7 23,061 23,061
Leasehold Improvements 3-10 1,802,372 1,802,372
----------- ----------
5,705,984 5,680,024
Accumulated Depreciation (3,766,790) (3,517,742)
----------- ----------
$ 1,939,194 $2,162,282
=========== ==========
During the six months ended June 30, 2003 and 2002, depreciation expense
amounted to $256,667 and $295,528, respectively.
Note 5 - Stockholders' Equity
Stock Options:
As of June 30, 2003, the Company had 867,900 outstanding stock options to
purchase the Company's stock at prices ranging from $2.31 to $2.86 per share
to current and former employees, directors and former consultants, expiring in
August 2003 through August 2010.
11
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(Unaudited)
Dividends:
On December 12, 2002, the Company declared a cash dividend of $.05 per
share payable to shareholders of record on December 26, 2003. The cash
dividend, including fees, in the amount of $163,634 was paid on January 21,
2003.
On March 14, 2003, the Company declared a cash dividend of $.05 per share
payable to shareholders of record on March 26, 2003. The cash dividend,
including fees, in the amount of $163,859 was paid on April 25, 2003.
On May 21, 2003, the Company declared a cash dividend of $.05 per share
payable to shareholders of record on June 27, 2003. The cash dividend,
including fees, in the amount of $163,285 was paid on July 25, 2003.
Note 6 - Intangible Assets
As of June 30, 2003 the Company's intangible assets consisted of the
following:
Goodwill $ 375,438
Formulas & Trademarks 95,000
On October 14, 2002 the Company purchased proprietary formulations,
trademarks and related equipment of a product line consisting of natural
"vegan" spreads sold under the Garlic Zing(R) label for $100,000. The purchase
price was allocated $94,000 for formulas, $1,000 for trademarks and $5,000 for
equipment. At June 30, 2003, the company has $95,000 in formulas and
trademarks classified as indefinite-life intangible assets.
Goodwill represents the excess of the cost of purchasing Alborough, Inc.
over the fair market value of the assets on May 20, 1996. At June 30, 2003,
the company has $375,438 in goodwill classified as an indefinite-life
intangible assets.
During the year ended December 31, 2002, the Company completed its
initial test of the Company's intangible assets for impairment in accordance
with SFAS No. 142. The Company used the quoted market price of it stock to
test its intangible assets for impairment and determined that the Company's
intangible assets were not impaired.
Prior to adopting SFAS No. 142 on January 1, 2002, the Company's goodwill
was being amortized on a straight-line basis over the estimated useful life of
fifteen years, in accordance with Accounting Principles Board Opinion No. 17,
"Intangible Assets".
Note 7 - Subsequent Event
On May 21, 2003, the Company declared a cash dividend of $.05 per share
payable to shareholders of record on June 27, 2003. The cash dividend,
including fees, in the amount of $163,285 was paid on July 25, 2003.
12
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This Quarterly Report on Form 10-QSB contains forward-looking statements
(as such term is defined in the Private Securities Litigation Reform Act of
1995), and information relating to the Company that is based on beliefs of
management of the Company, as well as assumptions made by and information
currently available to management of the Company. When used in this Report,
the words "estimate," "project," "believe," "anticipate," "intend," "expect,"
and similar expressions are intended to identify forward-looking statements.
Such statements reflect the current views of the Company with respect to
future events based on currently available information and are subject to
risks and uncertainties that could cause actual results to differ materially
from those contemplated in such forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company does not undertake any
obligation to release publicly any revisions to these forward looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
Net sales for the quarter ended June 30, 2003 were $3,181,445 compared to
$3,456,798 for the quarter ended June 30, 2002. For the six months ended June
30, 2003 net sales were $6,565,127 compared to $6,751,876 for the six months
ended June 30, 2002. The decrease in net sales for the quarter and six months
is primarily attributable to lower pesto sauce sales to foodservice customers
and overall lower retail sales.
The decrease in sales in the second quarter of 2003 was exacerbated by a
one time sale in the second quarter of 2002 to a customer that ran a limited
time offer program. Additionally, during the second quarter of 2003, another
customer decided to switch from the Company's frozen sauce to a shelf-stable
sauce. Accordingly, sales to this customer decreased during the second
quarter of 2003 and are expected to cease completely some time during the
third quarter of 2003. The Company believes that these lower sales will be
offset by sales to another customer who is expected to start purchasing one of
the Company's pesto products in the fourth quarter of 2003.
In the retail area, lower sales were experienced in all of the Company's
products. This was primarily due to higher purchases during promotional
periods in the first six months of 2002. Although the Company continued using
promotional programs during the second quarter of 2003, as planned, the
Company used fewer promotional programs than in the second quarter of 2002.
This decrease in promotional programs impacted sales in 2003 as compared to
prior year sales.
The Company continues to focus its efforts on increasing its customer
base through various sales programs and development of new products.
Promotional and marketing programs are used with various distributors and
retail outlets to support existing sales and develop recognition of the
Company's products. Sales samples are utilized to introduce potential
customers to the Company's line of products. The research and development
department assists the sales effort by developing new and innovative uses for
the Company's products as well as formulating products that meet specific
needs of customers.
13
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
[CONTINUED]
Cost of goods sold as a percentage of net sales increased from 68.6% for
the quarter ended June 30, 2002 to 73.6% for the quarter ended June 30, 2003.
Cost of goods sold as a percentage of net sales increased from 69.3% for the
six months ended June 30, 2002 to 73.6% for the six months ended June 30,
2003. The increase in cost of goods sold was due to a shift in the product
mix from pesto sales to lower margin products and the write-off of old,
discontinued products and samples.
Operating expenses as a percentage of net sales were 29.4% for the
quarter ended June 30, 2003 compared to 26.4% for the quarter ended June 30,
2002. Operating expenses as a percentage of net sales were 28.4% for the six
months ended June 30, 2003 compared to 26.7% for the six months ended June 30,
2002. The increase in the percentages for the quarter and six months, was
primarily the result of lower sales in 2003 used in the calculation.
Net loss from continuing operations for the quarter ended June 30, 2003
was $55,590 compared to net income of $115,199 for the quarter ended June 30,
2002. Net loss from continuing operations for the six months ended June 30,
2003 was $71,007 compared to net income of $182,496 for the six months ended
June 30, 2002. The net loss for the quarter and six months of 2002 was the
result of lower pesto sales and write-off of old and discontinued inventories.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, the Company had working capital of $4,284,378 a
decrease of $205,612 from December 31, 2002. The decrease in working capital
is primarily due to the net loss sustained and cash dividends paid. Current
assets included $3,563,147 in cash, cash equivalents and accounts receivable.
Management believes that this level of working capital is adequate to meet
anticipated needs for liquidity.
During the six months ended June 30, 2003, cash provided by operating
activities of the Company amounted to $1,348,622, primarily due to a decrease
in accounts receivable of $624,420 and inventories of $469,131. At December
31, 2002, accounts receivable reflected the higher sales experienced in
December as well as tax refunds. Inventories were higher at December 31,
2002, primarily due to an increased level of retail meat products on hand to
accommodate projected demand.
During the six months ended June 30, 2003, cash used by investing
activities of the Company amounted to $11,724. This was the result of capital
expenditures offset by proceeds from the direct financing lease and proceeds
from sale of equipment.
During the six months ended June 30, 2003, cash used by financing
activities of the Company amounted to $327,493. This was the result of
dividends declared in December of 2002 and March 2003 and paid during the
first six months of 2003.
Subsequent to June 30, 2003, the Company paid a dividend aggregating
$163,285, including fees, that was declared in May of 2003.
14
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
[CONTINUED]
In January 2003, the Company ordered new equipment which will complement
and improve existing production operations. An initial deposit of
approximately $24,000 was made with a balance of $104,000 expected to be paid
in the third quarter of 2003, upon successful installation of the equipment.
The Company presently has no other commitments for material capital
expenditures.
ITEM 3: CONTROLS AND PROCEDURES
As of June 30, 2003, under the supervision and with the participation of
the Company's Chief Executive Officer and the Principal Financial Officer,
management has evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Chief Executive Officer and Principal Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of June 30,
2003. There were no changes in internal control over financial reporting that
occurred during the fiscal quarter covered by this report that have materially
affected, or are reasonably likely to affect, the Company's internal control
over financial reporting.
15
PART II
OTHER INFORMATION
II. Other Information
Item 1. Legal proceedings
None
Item 2. Changes In Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission Of Matters To A Vote Of Security Holders
On May 22, 2003, the Company held an Annual Meeting of Shareholders at
which William J. Armanino, John J. Micek, III, Daivd Scatena, Joseph F.
Barletta, Edmond J. Pera and Douglas Nichols were each reelected to the Board
of Directors. In addition, the Company's 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 Withheld
-------- --- --------
William J. Armanino 2,427,124 75,744
John J. Micek, III 2,427,124 75,744
David Scatena 2,427,124 75,744
Joseph F. Barletta 2,426,990 75,878
Edmond J. Pera 2,426,990 75,878
Douglas Nichols 2,427,124 75,744
Appointment of Pritchett, Siler & Hardy, P.C.:
For Against Abstentions
--- ------- -----------
2,426,990 Shares 41,818 Shares 9,350 Shares
Item 5. Other Information
None
16
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
31.1 Certification of Chief Filed herewith electronically
Executive Officer
Pursuant to Section 302
of the Sarbanes-Oxley Act
of 2002
31.2 Certification of Principal Filed herewith electronically
Financial Officer
Pursuant to Section 302
of the Sarbanes-Oxley Act
of 2002
32.2 Certification of Chief Filed herewith electronically
Executive Officer Pursuant
to 18 U.S.C. Section 1350
32.3 Certification of Principal Filed herewith electronically
Financial Officer Pursuant
to 18 U.S.C. Section 1350
Reports on Form 8-K:
During the quarter ended June 30, 2003, the Company filed one report on
Form 8-K dated April 21, 2003, reporting information under Items 7 and 9 of
that form concerning the Company's earnings release for the first quarter.
17
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
William J. Armanino
Dated: August 14, 2003 President
Chief Executive Officer
By:/s/ Edmond J. Pera
Edmond J. Pera
Secretary
Treasurer
Chief Operating Officer
(Principal Financial Officer)
18