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 September 30, 2003
Commission File No. 0-18200
ARMANINO FOODS OF DISTINCTION, INC.
(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
(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 3,300,108 shares of the Issuer's Common Stock outstanding as of
September 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
September 30, 2003 December 31, 2002
------------------ -----------------
Current Assets:
Cash and cash equivalents $1,408,137 $1,094,002
Certificates of deposit 630,000 -
Accounts receivable, net 1,442,950 2,084,160
Inventory 1,438,440 1,888,085
Prepaid expenses 225,327 309,698
Current portion of direct financing lease receivable 55,531 91,533
Current deferred tax asset 90,912 116,412
---------- ----------
Total Current Assets 5,291,297 5,583,890
Property and Equipment, net 1,936,401 2,162,282
Direct financing lease receivable, net 469,911 475,008
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 $8,200,047 $8,723,618
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable & accrued payroll and related taxes $ 654,249 $ 930,266
Dividends payable 165,971 163,634
Income Taxes payable 29,573 -
---------- ----------
Total Current Liabilities 849,793 1,093,900
Deferred tax liability 7,663 33,163
deferred income on direct financing lease 58,429 63,157
---------- ----------
Total Liabilities 915,885 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, 3,300,108 shares issued and outstanding
at 9/30/03 and 3,250,108 at 12/31/02 8,114,397 7,987,522
Additional paid in capital 37,911 37,911
Retained earnings (859,479) (479,468)
---------- ----------
7,292,829 7,545,965
Less: Deferred compensation expense in
accordance with APB 25 (8,667) (12,567)
----------- ----------
Total Stockholders' Equity 7,284,162 7,533,398
----------- ----------
Total Liabilities & Stockholders' Equity $ 8,200,047 $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 September 30, 2003 and 2002
(Unaudited)
September 30, 2003 September 30, 2002
------------------ ------------------
Net Sales $3,317,230 $3,407,071
Cost of Goods Sold 2,233,182 2,456,254
---------- ----------
Gross Profit 1,084,048 950,817
Operating Expenses:
General, administrative and selling 303,387 367,813
Salaries and wages 374,474 432,754
Commissions 136,548 149,962
----------- ----------
Total Operating Expenses 814,409 950,529
Income From Operations 269,639 288
Other Income 11,445 12,365
Income From Continuing Operations Before
Income Taxes 281,084 12,653
Current Tax Expense 59,574 5,441
Deferred Tax Expense 37,400 -
----------- ----------
Income Before Discontinued Operations 184,110 7,212
Discontinued Operations:
Loss on Disposal of Discontinued
Entree Line - (1,336,506)
Tax Benefit - 467,777
----------- ----------
Net Loss on Discontinued Operations - (868,729)
Net Income/(Loss) $ 184,110 $ (861,517)
=========== ==========
Basic Income/(Loss) Per Common Share
Income from Continuing Operations .06 -
Loss from discontinued Operations - (0.27)
Net Income/(Loss) .06 (0.27)
Weighted Average Common Shares
Outstanding 3,275,108 3,250,108
=========== ==========
Diluted Income/(Loss) Per Common Share
Income from Continuing Operations .06 -
Loss from Discontinued Operations - (0.26)
Net Income/(Loss) .06 (0.26)
Weighted Average Common Shares
Outstanding 3,330,701 3,319,707
=========== ==========
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 Nine Months Ended September 30, 2003 and 2002
(Unaudited)
September 30, 2003 September 30, 2002
------------------ ------------------
Net Sales $9,882,356 $10,158,947
Cost of Goods Sold 7,067,934 7,132,391
---------- -----------
Gross Profit 2,814,422 3,026,556
Operating Expenses:
General, administrative and selling 1,071,731 1,069,273
Salaries and wages 1,179,600 1,273,340
Commissions 426,436 410,726
---------- -----------
Total Operating Expenses 2,677,767 2,753,339
Income From Operations 136,655 273,217
Other Income 36,022 38,551
---------- -----------
Income From Continuing Operations Before
Income Taxes 172,677 311,768
Current Tax Expense 59,574 103,941
Deferred Tax Expense - 18,119
---------- -----------
Income Before Discontinued Operations 113,103 189,708
========== ===========
Discontinued Operations:
Loss on Disposal of Discontinued Entre Line - (1,336,506)
Tax Benefit - 467,777
---------- -----------
Net Loss on Discontinued Operations - (868,729)
Net Income/(Loss) $ 113,103 $ (679,021)
========== ===========
Basic Income/(Loss) Per Common Share
Income from Continuing Operations .03 .06
Loss from Discontinued Operations - (.27)
Net Income/(Loss) .03 (.21)
Weighted Average Common Shares
Outstanding 3,258,533 3,228,168
========== ===========
Diluted Income/(Loss) Per Common Share
Net Income from Continuing Operations .03 .05
Loss from Discontinued Operations - (.25)
Net Income/(Loss) .03 (.20)
Weighted Average Common shares
Outstanding 3,289,089 3,474,719
========== ===========
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 Nine Months Ended September 30, 2003 and 2002
(Unaudited)
September 30, 2003 December 31, 2002
------------------ -----------------
Cash Flows From Operating Activities:
Net income/(loss) $ 113,103 $ (679,021)
Adjustment to reconcile net income to net cash
provided by operations:
Net loss on disposal of discontinued operations - 868,729
Depreciation and amortization 385,610 441,542
Loss on sale of equipment 5,362 -
Net change in deferred taxes - 18,119
Earned revenue from direct financing lease (4,728) (9,004)
Non-cash expense 3,900 6,000
Changes in assets and liabilities:
Decrease in accounts receivable 641,210 28,954
(Increase)/Decrease in inventories 449,645 (496,691)
(Increase)/Decrease in prepaid expenses 84,371 (140,934)
Decrease in accounts payable and accrued payroll
and related taxes (276,017) (302,215)
(Increase)/Decrease in income taxes payable 29,573 (82,506)
---------- ----------
Total Adjustments 1,318,926 331,994
---------- ----------
Net Cash Provided By/(Used) For Operating Activities 1,432,029 (347,027)
Cash Flows From Investing Activities:
Proceeds from sale of equipment 3,000 -
Capital expenditures (168,090) (289,871)
Proceeds received from direct financing lease 41,099 78,261
Purchase of certificates of deposit (630,000) -
---------- ----------
Net Cash Used For Investing Activities (753,991) (211,610)
Cash Flows From Financing Activities:
Dividends paid (490,778) (882,224)
Proceeds from exercise of stock options 126,875 205,137
Payments on capital lease obligations - (42,447)
---------- ----------
Net Cash Used For Financing Activities: (363,903) (719,534)
Net Increase/(Decrease) In Cash and Cash Equivalents 314,135 (1,278,171)
Cash and Cash Equivalents Beginning of Period 1,094,002 2,496,140
---------- ----------
Cash and Cash Equivalents End of Period $1,408,137 $1,217,969
========== ==========
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 Nine Months Ended September 30, 2003 and 2002
(Unaudited)
September 30, 2003 September 30, 2002
------------------ ------------------
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the period for
Interest $ - $ -
Income tax $ - $204,230
Supplemental Disclosures of Non-Cash Items:
For the nine months ended September 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 nine months ended
September 30, 2003 the Company recognized $3,900 as compensation
expense.
6
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
September 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 September
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 and Certificates of Deposit)
purchased with a maturity of three months or less to be cash equivalents. The
Company had $77,041 in excess of federally insured amounts in its bank
accounts at September 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 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 September 30, 2003, the Company
has established an allowance for doubtful accounts of $20,000 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.
7
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2003
(Unaudited)
Note 1 - Basis of Presentation (Continued)
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
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 when the 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
under "General, administrative and selling" category in the Operating Expenses
section of the Consolidated Statements of Operations.
Net sales comprised of the following for the quarter and nine months
ended September 30, 2003 and 2002:
For the Quarters For the Nine Months
Ended September 30, Ended September 30,
------------------------ --------------------------
2003 2002 2003 2002
---------- ---------- ----------- -----------
Gross Sales $3,755,532 $3,879,887 $11,292,201 $11,832,665
Less Discounts $ (58,123) $ (66,792) $ (183,015) $ (201,433)
Slotting $ (32,651) $ (67,965) $ (153,354) $ (181,889)
Promotional $ (347,528) $ (338,059) $(1,073,476) $(1,290,396)
---------- ---------- ----------- -----------
Net Sales $3,317,230 $3,407,071 $ 9,882,356 $10,158,947
---------- ---------- ----------- -----------
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.
8
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2003
(Unaudited)
Note 1 - Basis of Presentation (Continued)
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:
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- --------- --------- ---------
Weighted average common
shares outstanding used
in basic earnings (loss)
per share 3,275,108 3,250,108 3,258,533 3,228,168
Effect of dilutive stock
options 55,593 69,599 30,556 246,551
Weighted average common
shares and potential
dilutive common shares
outstanding used in
dilutive earnings
loss per share 3,330,701 3,319,707 3,289,089 3,474,719
For the nine months ended September 30, 2003 the Company had 22,000
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.
9
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2003
(Unaudited)
Note 1 - Basis of Presentation (Continued)
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 nine months ended September 30, 2003 the Company recognized
$3,900 as compensation expense.
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 2003 and
2002 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 For the Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- --------- --------- ---------
Net Income (Loss) As reported $ 184,110 $(861,517) $ 113,103 $(679,021)
Add: Stock-based employee compensation
expense included in reported net income 1,300 1,300 3,900 1,733
Deduct: Total stock-based employee
compensation expense determined under
fair value based method (13,112) (22,949) (39,337) (68,846)
Net Income (Loss) Proforma $ 172,298 $(883,166) $ 77,666 $(746,134)
Basic earnings (loss) As reported $ .06 $ (.27) $ .03 $ (.21)
per share Proforma $ .05 $ (.27) $ .02 $ (.23)
Diluted earnings(loss) As reported $ .06 $ (.26) $ .03 $ (.20)
per share Proforma $ .05 $ (.27) $ .02 $ (.22)
10
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2003
(Unaudited)
Note 1 - Basis of Presentation (Continued)
Reclassification - The financial statements for the quarter and nine
months ended September 30, 2002 have been reclassified to conform with the
classifications and headings used in the quarter and nine month ended
September 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
September 30, 2003 and December 31, 2002:
September 30, 2003 December 31, 2002
------------------ -----------------
Raw materials & supplies $ 453,818 $ 361,398
Finished goods 984,622 1,526,687
---------- ----------
$1,438,440 $1,888,085
========== ==========
Note 3 - Related Party Transactions
The Company incurred $12,145 and $10,263 respectively, for the nine
months ended September 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 $24,000 respectively, for the nine months
ended September 30, 2003 and September 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 $15,000 respectively, for the nine
months ended September 30, 2003 and 2002 in consulting fees to Tino Barzie, a
former director of the Company.
11
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2003
(Unaudited)
Note 4 - Property and Equipment
Property and equipment consists of the following:
Estimated Useful
Life in Years September 30, 2003 December 31, 2002
---------------- ------------------ -----------------
Office Equipment 3-10 $ 208,008 $ 205,619
Computer & Software 2-5 112,308 101,452
Plant Machinery &
Equipment 5-20 3,687,442 3,547,520
Vehicles 7 23,061 23,061
Leasehold Improvements 3-10 1,802,372 1,802,372
----------- -----------
5,833,191 5,680,024
Accumulated Depreciation (3,896,790) (3,517,742)
----------- -----------
$ 1,936,401 $ 2,162,282
=========== ===========
During the nine months ended September 30, 2003 and 2002, depreciation
expense amounted to $385,610 and $441,542, respectively.
Note 5 - Stockholders' Equity
Common Stock:
During the quarter ended September 30, 2003, the Company issued 50,000
shares of stock at $2.54 per share upon exercise of stock options by a former
employee, under the 1993 stock option plan.
Stock Options:
As of September 30, 2003, the Company had 817,900 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 December 2004 through August 2010.
Dividends:
On December 12, 2002, the Company declared a cash dividend of $.05 per
share payable to shareholders of record on December 26, 2002. 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.
12
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2003
(Unaudited)
Note 5 - Stockholders' Equity (Continued)
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.
On September 25, 2003, the Company declared a cash dividend of $.05 per
share payable to shareholders of record on October 7, 2003. The cash dividend
including fees, in the amount of $165,971 was paid on October 24, 2003.
Note 6 - Intangible Assets
As of September 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 label for $100,000. The purchase
price was allocated $94,000 for formulas, $1,000 for trademarks and $5,000 for
equipment. At September 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 September 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 September 25, 2003, the Company declared a cash dividend of $.05 per
share payable to shareholders of record on October 7, 2003. The cash
dividend, including fees, in the amount of $165,971 was paid on October 24,
2003.
In October of 2004, the Company issued 20,000 shares of stock at $2.54
per share upon exercise of stock options, by a former director, under the 1993
stock option plan.
13
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 September 30, 2003 were $3,317,230
compared to $3,407,071 for the quarter ended September 30, 2002. For the nine
months ended September 30, 2003 net sales were $9,882,356 compared to
$10,158,947. The decrease in sales for the quarter can be attributed to the
cancellation during the second quarter of 2003 of an in-store deli program by
a co-pack customer which had begun during the third quarter of 2002. This
program produced significant sales of the Company's meatballs in the second
half of 2002. The program was cancelled during the second quarter of 2003.
During the first six months of 2003, the Company had no significant sales of
product to this customer. The decrease in sales for the nine months can be
attributed to slight decreases in all of the Company's products. The overall
decrease included the impact of a one-time sale in the second quarter of 2002
and the discontinued meatball program as discussed above.
Although the Company continued to use promotional programs during the
nine months of 2003, as planned, the Company used fewer promotional programs
than in 2002. The reduction was primarily in the retail area of the Company's
business. The Company believes that the heavy retail promotional spending in
2002 has resulted in increases in net retail sales, after excluding the
discontinued meatball item discussed above, starting with the third quarter of
2003.
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. 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.
14
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 decreased from 72.1% for
the quarter ended September 30, 2002 to 67.3% for the quarter ended September
30, 2003. The decrease in this percentage was primarily due to a shift in the
product mix favoring higher margin items in the third quarter of 2003. The
mix was primarily impacted by the discontinuance of a meatball product by a
co-pack customer in 2003. Cost of goods sold as a percentage of net sales
increased from 70.2% for the nine months ended September 30, 2002 to 71.5% for
the nine months ended September 30, 2003. The increase in this percentage was
due to the write-off of old discontinued products and samples during the
second quarter of 2003.
Operating expenses as a percentage of net sales were 24.6% for the
quarter ended September 30, 2003 compared to 27.9% for the quarter ended
September 30, 2002. The decrease in this percentage is due to the cost
cutting measures the Company implemented at the end of the second quarter of
2003. The cost cutting included a reduction in personnel and a reduction of
various general, administrative and selling expenses. Operating expenses as a
percentage of net sales were unchanged at 27.1% for the nine months ended
September 30, 2003 and September 30, 2002. The overall dollar amount of
operating expenses for the nine months ended September 30, 2003 was lower due
to the cost reductions implemented during the second quarter of 2003.
Net income from continuing operations for the quarter ended September 30,
2003 was $184,110 compared to net income of $7,212 for the quarter ended
September 30, 2002. The increase in net income for the quarter was due to a
combination of higher gross margins experienced and the reduction in costs
implemented by the Company. Net income from continuing operations for the
nine months ended September 30, 2003 was $113,103 compared to $189,708 for the
nine months ended September 30, 2002. The decrease in net income from
continuing operations for the nine months was the result of net losses
sustained during the first six months of 2003.
Net income for the quarter ended September 30, 2003 was $184,110 compared
to a net loss of $861,517 for the quarter ended September 30, 2002. Net
income for the nine months ended September 30, 2003 was $113,103 compared to
net loss of $679,021 for the nine months ended September 30, 2002. The net
loss sustained in the quarter and nine months of 2002 was the result of the
Company's decision to write-off equipment associated with its discontinued
entree product line.
Liquidity And Capital Resources
At September 30, 2003, the Company had working capital of $4,441,504 a
decrease of $48,486 from December 31, 2002. The decrease in working capital
is primarily due to the cash dividends paid offset by net income for the nine
months. Current assets included $3,481,087 in cash, cash equivalents and
accounts receivable. Management believes that this level of working capital
is adequate to meet anticipated needs for liquidity.
15
PART I - FINANCIAL INFORMATION
ARMANINO FOODS OF DISTINCTION, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
(Continued)
During the nine months ended September 30, 2003, cash provided by
operating activities of the Company amounted to $1,432,029, primarily due to a
decrease in accounts receivable of $641,210 and inventories of $449,645. 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 nine months ended September 30, 2003, cash used for investing
activities of the Company amounted to $753,991. This was the result of
capital expenditures made and certificates of deposit purchased partially
offset by proceeds from the direct financing lease and proceeds from sale of
equipment.
During the nine months ended September 30, 2003, cash used by financing
activities of the Company amounted to $363,903. This was the result of
dividends declared in December of 2002, March 2003 and May 2003 and paid
during the nine months ended September 30, 2003 partially offset by proceeds
from exercise of stock options.
Subsequent to September 30, 2003, the Company paid a dividend aggregating
$165,971, including fees, that was declared in September of 2003.
Subsequent to September 30, 2003, the Company ordered new equipment which
will complement and improve existing production operations. The equipment is
expected to be operational in the beginning of 2004. An initial deposit of
$63,000 was made in October of 2003 with a balance of approximately $41,000
to be paid upon installation.
The Company presently has no other commitments for material capital
expenditures.
ITEM 3: CONTROLS AND PROCEDURES
As of September 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 September 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.
16
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.
None
Item 5. Other Information.
None
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 Chief Filed herewith electronically
Financial Officer
Pursuant to Section 302
of the Sarbanes-Oxley Act
of 2002
32.1 Certification of Chief Filed herewith electronically
Executive Officer Pursuant
to 18 U.S.C. Section 1350
32.2 Certification of Chief Filed herewith electronically
Financial Officer Pursuant
to 18 U.S.C. Section 1350
Reports on Form 8-K:
During the quarter ended September 30, 2003, the Company filed one
report on Form 8-K dated July 25, 2003, reporting information under Items 7
and 9 of that form concerning the Company's earnings release for the second
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: November 4, 2003 President
Chief Executive Officer
By:/s/ Edmond J. Pera
Edmond J. Pera
Secretary
Treasurer
Chief Operating Officer
18