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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 000-23033
Authentic Specialty Foods, Inc.
(Exact name of the Registrant as specified in its charter)
Texas 75-1782453
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1313 Avenue R
Grand Prairie, Texas 75050
(Address of principal executive offices)
972-933-4100
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for 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 No X
----- -----
Number of shares of Common Stock outstanding as of the latest
practicable date, November 14, 1997: 7,786,500.
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AUTHENTIC SPECIALTY FOODS, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet
at September 30, 1997 and December 31, 1996
Condensed Consolidated Statement of Operations
for the three and nine months ended September 30, 1997 and 1996
Condensed Consolidated Statement of Cash Flows
for the nine months ended September 30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements
Supplemental Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. Other Information
Item 6. Exhibits
Signatures
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
SEPTEMBER 30, December 31,
1997 1996
--------------------------------
ASSETS (unaudited)
Current Assets
Cash and cash equivalents $ 3,673,053 $ 200,479
Accounts receivable 3,703,959 1,474,753
Inventories (5) 14,270,065 780,222
Prepaid expenses 609,084 108,104
------------ ------------
TOTAL CURRENT ASSETS 22,256,161 2,563,558
------------ ------------
Property and Equipment, net of depreciation and amortization 12,050,029 2,822,537
Other Assets (principally goodwill and other intangibles) (3 and 4) 22,330,834 1,703,043
------------ ------------
TOTAL ASSETS $ 56,637,024 $ 7,089,138
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable to bank $ -- $ 1,319,442
Current portion of long-term debt 1,385,949 766,432
Accounts payable 2,913,025 1,723,999
Accrued expenses 2,718,679 310,244
------------ ------------
TOTAL CURRENT LIABILITIES 7,017,653 4,120,117
------------ ------------
Long-Term Debt Less Current Maturities 5,938,710 919,866
Deferred Income Taxes (3) 2,865,000 --
Commitments and Contingencies -- --
Stockholders' Equity (1)
Preferred stock, $.01 par value, authorized 5,000,000 shares,
no shares issued or outstanding -- --
Common stock, $1.00 par value, authorized 20,000,000 shares,
7,786,500 shares issued and outstanding 7,786,500 1,700,000
Additional paid-in capital 34,199,004 1,860,152
Accumulated deficit (1,169,843) (1,510,997)
------------ ------------
Total Stockholders' Equity 40,815,661 2,049,155
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 56,637,024 $ 7,089,138
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 4
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1997 1996 1997 1996
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net sales $ 8,381,324 $ 5,202,673 $ 19,342,931 $ 15,730,219
Cost of sales 5,032,444 3,468,669 12,222,907 10,395,358
--------- --------- ---------- ----------
GROSS PROFIT 3,348,880 1,734,004 7,120,024 5,334,861
Operating expenses 3,032,094 1,616,221 6,278,644 4,930,142
--------- --------- --------- ---------
INCOME FROM OPERATIONS 316,786 117,783 841,380 404,719
--------- --------- --------- ---------
Other income and expense:
Interest expense (135,727) (80,056) (301,339) (246,721)
Other income (expense) 26,479 235 27,490 (20,055)
-------- ------- -------- --------
(109,248) (79,821) (273,849) (266,776)
-------- ------- -------- --------
INCOME BEFORE INCOME TAXES 207,538 37,962 567,531 137,943
Income tax expense 103,889 12,907 226,377 46,901
------- ------ ------- ------
NET INCOME $ 103,649 $ 25,055 $ 341,154 $ 91,042
============ ============ ============ ============
Earnings per common share $ 0.03 $ 0.01 $ 0.17 $ 0.05
=========== ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding 3,619,870 1,700,000 2,041,504 1,700,000
============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 5
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (362,089) $ 422,404
Cash Flows From Investing Activities
Purchase of property and equipment (433,788) (480,801)
Proceeds on disposal of property and equipment 50,750 115,486
Purchase of La Victoria (12,000,000) --
Purchase of La Monita (2,753,018) --
------------ ---------
NET CASH USED IN INVESTING ACTIVITIES (15,136,056) (365,315)
------------ ---------
Cash Flows From Financing Activities
Increase (decrease) in line of credit (1,319,442) 298,421
Payments on long-term debt (6,413,500) (262,679)
Payments on note payable to officer -- (80,000)
Net proceeds upon issuance of stock 32,570,101 --
Redemption of common stock (5,866,440) --
------------ ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 18,970,719 (44,258)
------------ ---------
INCREASE IN CASH AND CASH EQUIVALENTS 3,472,574 12,831
Cash and Cash Equivalents
Beginning of period 200,479 9,027
------------ ---------
Ending of period $ 3,673,053 $ 21,858
============ =========
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 301,339 $ 203,745
============ =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 6
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included in this Quarterly
Report on Form 10-Q have been prepared by the Company, without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted, pursuant to such rules and regulations, although
management believes the disclosures are adequate to make the information
presented not misleading. These condensed consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Registration Statement on Form S-1, as amended
(Registration No. 333-29959), filed with the Securities and Exchange
Commission, which became effective August 27, 1997.
The financial statements presented herein as of September 30, 1997 and for the
three and nine months ended September 30, 1997 and 1996 reflect, in the opinion
of management, all material adjustments consisting only of normal recurring
adjustments necessary for a fair presentation of the financial position, results
of operations and cash flows for these interim periods.
2. INITIAL PUBLIC OFFERING
On September 2, 1997 the Company sold 4,000,000 shares of its common stock in
an initial public offering resulting in net proceeds to the Company of
approximately $28.1 million. On September 9, 1997, the Company sold an
additional 600,000 shares of common stock to the underwriters pursuant to the
exercise of the underwriters' over-allotment option. This resulted in
additional net proceeds to the Company of approximately $4.5 million.
3. ACQUISITION OF LA VICTORIA FOODS, INC.
On September 2, 1997, pursuant to a contribution and exchange agreement, the
Company acquired beneficial ownership of 100% of the capital stock of La
Victoria Foods, Inc. (La Victoria) for $12 million in cash, Company common
stock with a value of $10.8 million, the assumption of approximately $5 million
in liabilities, and direct acquisition costs of $0.5 million, for an aggregate
purchase price of $28.3 million. The Company used a portion of the proceeds
from the initial public offering to make the cash payment and to repay certain
assumed liabilities.
The acquisition has been accounted for as a purchase. Accordingly, the purchase
price is being allocated to assets and liabilities based on their estimated fair
values as of the date of the acquisition and is summarized as follows (in
millions):
<TABLE>
<C> <C>
Current assets $15.5
Property and equipment 7.8
Current liabilities (4.5)
Long-term debt (5.8)
-------
$13.0
=======
</TABLE>
The cost in excess of the net assets acquired of approximately $15.3 million has
been allocated to intangible assets of $19 million and deferred tax liabilities
of $3.7 million, $0.8 of which was recorded as a direct addition to additional
paid-in capital. The intangible assets consist primarily of La Victoria's
tradename and goodwill and are being amortized on a straight-line basis over
<PAGE> 7
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
their estimated useful lives of 40 years. The Company has not yet completed its
evaluation of the purchase price and accordingly, the preliminary purchase
price allocation could change as additional information becomes known. The
Company's condensed consolidated statements of operations for the three months
and nine months ended September 30, 1997 includes La Victoria's results of
operations since its acquisition on September 2, 1997. The following unaudited
pro forma summary represents the consolidated results of operations as if the
acquisition had occurred at the beginning of the periods presented and does not
purport to be indicative of what would have occurred had the acquisition been
made as of those dates or of results that may occur in the future. The
following pro forma summary does not include the results of operations for La
Monita (see Note 4), as they are not considered material (in thousands except
per share data).
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ------------------------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 15,652 $ 14,506 $ 45,591 $ 44,184
Cost of Sales 8,459 8,148 24,883 24,917
----------------------------------- ------------------------------------
Gross Profit 7,193 6,358 20,708 19,267
Operating Expenses 5,887 5,153 17,961 17,314
----------------------------------- ------------------------------------
Income from Operations 1,306 1,205 2,747 1,953
Other Expenses (net) 158 290 547 837
Income Tax Expense 518 434 1,013 517
----------------------------------- ------------------------------------
Net Income $ 630 $ 481 $ 1,187 $ 599
=================================== ====================================
Net Income per
Common Share $ 0.09 $ 0.07 $ 0.16 $ 0.08
=================================== ====================================
</TABLE>
4. ACQUISITION OF LA MONITA MEXICAN FOOD PRODUCTS, INC.
On September 30, 1997, the Company acquired the net assets of La Monita Mexican
Food Products, Inc. (La Monita) for approximately $2.8 million in cash, $850,000
of which was paid directly to the former owner, with the remainder used to
retire certain debt. The acquisition has been accounted for as purchase. The
purchase price has been allocated approximately as follows: fixed assets of $1.4
million, current assets of $0.4 million and current liabilities of $0.8 million.
The cost in excess of the net assets acquired of approximately $1.8 million has
been allocated to intangibles. The Company has not yet completed its evaluation
of the purchase price and accordingly, the preliminary purchase price allocation
could change as additional information becomes known. The Company's condensed
consolidated statements of operations for the quarter and nine months ended
September 30, 1997 do not include any results of La Monita's operations as the
acquisition was effective September 30, 1997.
<PAGE> 8
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in, first-out
(FIFO) basis, or market. Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
- ------------------------------------------------------
<S> <C> <C>
Raw materials $ 398,232 $ 83,265
Packaging materials 762,991 246,849
Finished goods 13,108,842 450,108
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$14,270,065 $780,222
=========== ========
</TABLE>
6. EARNINGS PER SHARE
Earnings per common share are determined by dividing the net income by the
weighted average number of shares of common stock outstanding including common
stock equivalents.
The FASB has issued Statement No. 128, Earnings Per Share, which supersedes APB
Opinion No. 15. Statement No. 128 requires the presentation of earnings per
share by all entities that have common stock or potential common stock, such as
options, warrants and convertible securities, outstanding that trade in a
public market. Those entities that have only common stock outstanding are
required to present basic earnings per share amounts. All other entities are
required to present basic and diluted per share amounts. Diluted per share
amounts assume the conversion, exercise or issuance of all potential common
stock instruments unless the effect is to reduce a loss or increase the income
per common share from continuing operations. All entities required to present
per share amounts must initially apply Statement No. 128 for annual and interim
periods ending after December 15, 1997. Earlier application is not permitted.
The adoption of Statement No. 128 would have had no material affect on reported
earnings per share.
7. SUBSEQUENT EVENTS
On October 30, 1997, the Company acquired all of the capital stock of Sauces
Unlimited, Inc., a manufacturer of picante and other sauces located in Texas.
The $2.9 million purchase price included a $2.4 million payment to two former
stockholders, $0.3 million to retire a term loan and revolving credit facility,
and the assumption of $0.2 million in long-term debt.
<PAGE> 9
ITEM 2. AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED)
The following discussion and analysis provides information that the Company's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the accompanying unaudited condensed consolidated
financial statements and the notes thereto and with the financial statements
and notes thereto included in the Company's Registration Statement on Form S-1,
as amended (Registration Number 333-29959), filed with the Securities and
Exchange Commission, which became effective August 27, 1997.
DISCUSSION OF HISTORICAL FINANCIAL STATEMENTS
Authentic Specialty Foods, Inc. acquired La Victoria Foods, Inc. (the "La
Victoria Acquisition") effective upon the closing of the initial public
offering on September 2, 1997. Accordingly, only one month of La Victoria's
operations are included in the Company's actual results for the three months
and nine months ended September 30, 1997. As a result of the acquisition, the
Company now has two operating divisions: La Victoria, which is primarily
responsible for salsas and Mexican sauces and Calidad Foods ("Calidad"),
which is primarily responsible for tortillas and tortilla chips.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30,1996 AND 1997
NET SALES. Net sales consists of gross sales less the amount of discounts,
returns and allowances. Net sales for the three months ended September 30, 1997
were $8,381,324 compared to $5,202,673 for the three months ended September 30,
1996, an increase of $3,178,651, or 61.1%. $2,965,000 of the net sales increase
was attributable to La Victoria sales subsequent to the La Victoria Acquisition
on September 2, 1997. The remainder of the increase in net sales resulted from
meat and cheese sales to two independent Dallas grocery chains served by
Calidad.
COST OF SALES AND GROSS MARGIN. Cost of sales consists primarily of labor, raw
materials and overhead used in the production of the products manufactured by
Calidad and La Victoria. Calidad also incurs costs to purchase various
products (such as meats, cheeses and shelf-stable products) that have been
manufactured by third parties for distribution through Calidad's direct store
delivery system. Gross margin for the three months ended September 30, 1997 was
$3,349,000 compared to $1,734,000 for the three months ended September 30, 1996,
an increase of $1,615,000, or 93.1%. As a percentage of net sales, gross margin
increased from 33.3% for the three months ended September 30, 1996 to 40.0% for
the three months ended September 30, 1997. The increase in gross margin was
attributable to increased sales levels at Calidad, as well as La Victoria gross
margin generated subsequent to the La Victoria Acquisition on September 2, 1997.
The increase in gross margin as a percentage of net sales was due to the higher
gross margin percentage experienced by La Victoria's salsa and Mexican sauce
operations, as compared to Calidad, which has high margin businesses like
tortillas and tortilla chips, as well as lower margin businesses like imported
meats and cheeses.
OPERATING EXPENSES. Operating expenses consist primarily of commissions,
promotional expenses and advertising, sales and administrative salaries, fleet
expenses and general overhead. Operating expenses for the three months ended
September 30, 1997 were $3,032,000 compared to $1,616,000 for the three months
ended September 30, 1996, an increase of $1,416,000, or 87.6%. As a percentage
of net sales, operating expenses increased from 31.1% for the three months
ended September 30, 1996 to 36.2% for the three months ended September 30, 1997.
The increase in operating expenses was primarily due to higher transportation
expenses to new markets (Arkansas and Louisiana)
<PAGE> 10
served by Calidad, the increased administrative costs involved in operating as
a public company and La Victoria operating expenses incurred subsequent to the
La Victoria Acquisition on September 2, 1997.
OTHER EXPENSES. Other expenses consist primarily of interest expense and gain
or loss on the disposal of property and equipment. Other expenses for the
three months ended September 30, 1997, were $109,000 compared to $80,000 for
the three months ended September 30, 1996, an increase of $29,000, or 36.3%.
As a percentage of net sales, other expenses decreased from 1.5% for the three
months ended September 30, 1996 to 1.3% for the three months ended September
30, 1997. The increase was attributable to interest expense associated with
capital leases at La Victoria, which was partially offset by lower interest
expense due to the repayment of Calidad debt with the initial public offering
proceeds and interest income generated by funds raised from the initial public
offering.
TAXES. The Company had income tax expense of $104,000 for the three months
ended September 30, 1997 compared to $13,000 for the three months ended
September 30, 1996. The increase was attributable to the increase in earnings
described above. In connection with the La Victoria Acquisition, the Company
recognized deferred tax liabilities of approximately $3.9 million, which were
provided on the amounts allocated to the identifiable assets. The net deferred
tax liabilities recorded have been reduced by approximately $1.1 million to $2.8
million because of the elimination of the valuation allowance on the Company's
deferred tax assets. The valuation allowance has been eliminated because, as a
result of the La Victoria Acquisition, the Company believes it is now more
likely than not that these assets will be realized. Of the total deferred tax
assets of $1.1 million, approximately $800,000 represents amounts generated
before the Company's December 31, 1993 quasi-reorganization and accordingly are
recorded as a direct addition to additional paid-in capital, with the balance as
an adjustment to intangibles.
NET INCOME. For the reasons described above, net income for the three months
ended September 30, 1997 was $104,000 compared to $25,000 for the three months
ended September 30, 1996, an improvement of $79,000 or 316.0%. As a percentage
of net sales, net income improved from 0.5% for the three months ended
September 30, 1996 to 1.2% for the three months ended September 30, 1997.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
NET SALES. Net sales for the first nine months of 1997 were $19,343,000
compared to $15,730,000 for the first nine months of 1996, an increase of
$3,613,000, or 23.0%. $2,965,000 of the net sales increase was attributable to
La Victoria net sales subsequent to the La Victoria Acquisition on September 2,
1997. The remainder of the increase was due to meat and cheese sales to two
independent Dallas grocery chains served by Calidad.
COST OF SALES AND GROSS MARGIN. Gross margin for the first nine months of 1997
was $7,120,000 compared to $5,335,000 for the first nine months of 1996, an
increase of $1,785,000, or 33.5%. As a percentage of net sales, gross margin
increased from 33.9%
<PAGE> 11
in the first nine months of 1996 to 36.8% in the first nine months of 1997. The
increase in gross margin was attributable to increased sales levels at Calidad,
as well as La Victoria gross margin generated subsequent to the La Victoria
Acquisition on September 2, 1997. The increase in gross margin as a percentage
of net sales was due to the higher gross margin percentage experienced by La
Victoria relative to Calidad, as described above.
OPERATING EXPENSES. Operating expenses for the nine months ended September 30,
1997 were $6,279,000 compared to $4,930,000 for the nine months ended September
30, 1996, an increase of $1,349,000, or 27.4%. As a percentage of net sales,
operating expenses increased from 31.3% for the first nine months of 1996 to
32.5% for the first nine months of 1997. The increase in operating expenses
was due to higher transportation expenses to new markets (Arkansas and
Louisiana) served by Calidad, the increased administrative costs involved in
operating as a public company and operating expenses incurred by La Victoria
subsequent to the La Victoria Acquisition on September 2, 1997, offset
partially by a $144,000 decrease in non-compete and consulting payments to two
former shareholders that were incurred in the first nine months of 1996 but not
in the first nine months of 1997.
OTHER EXPENSES. Other expenses for the first nine months of 1997 were $274,000
compared to $267,000 for the first nine months of 1996, an increase of $7,000,
or 2.6%. As a percentage of net sales, other expenses decreased from 1.7% for
the first nine months of 1996 to 1.4% for the first nine months of 1997. The
increase was due to interest expense associated with capital leases at La
Victoria, which was partially offset by lower interest expense due to the
repayment of Calidad debt with the initial public offering proceeds, interest
income generated by funds raised from the initial public offering and a $22,000
write-off of equipment that was incurred in 1996 but not in 1997.
TAXES. The Company had income tax expense of $226,000 for the nine months
ended September 30, 1997 compared to $47,000 for the nine months ended
September 30, 1996. The increase was attributable to the increase in earnings.
In connection with the La Victoria Acquisition, the Company recognized net
deferred tax liabilities of approximately $2.8 million, as described in the
discussion of the Company's historical financial statements above under the
section on taxes in the comparison of the three months ended September 30, 1996
and 1997.
NET INCOME. For the reasons described above, net income for the first nine
months of 1997 was $341,000 compared to $91,000 for the first nine months of
1996, an improvement of $250,000, or 274.7%. As a percentage of net sales, net
income improved from 0.6% for the first nine months of 1996 to 1.8% for the
first nine months of 1997.
<PAGE> 12
ITEM 2. AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED)
DISCUSSION OF PRO FORMA FINANCIAL STATEMENTS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
Authentic Specialty Foods, Inc. acquired La Victoria effective upon the closing
of the initial public offering on September 2, 1997. Accordingly, only one
month of La Victoria's operations are included in the Company's actual results
for the three months and nine months ended September 30, 1997. Because the
acquisition of La Victoria was presented as an integral part of the initial
public offering and due to the material level of La Victoria's annual sales
relative to that of the Company's, the Company believes that a discussion of
the Company's consolidated pro forma results would benefit the reader. This pro
forma discussion should be read in conjunction with Note 3 to the financial
statements included herein.
NET SALES. Net sales for the three months ended September 30, 1997
were $15,652,000 compared to $14,506,000 for the three months ended September
30, 1996, an increase of $1,146,000, or 7.9%. $933,000 of the net sales increase
occurred
<PAGE> 13
ITEM 2. AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED)
at La Victoria and was primarily due to increased sales volume. This additional
sales volume was largely attributable to more effective use of in-store
promotions and advertising expenditures. The remainder of the increase in net
sales resulted from meat and cheese sales to two independent Dallas grocery
chains served by Calidad.
COST OF SALES AND GROSS MARGIN. Gross margin for the three months ended
September 30, 1997 was $7,193,000 compared to $6,358,000, for the three months
ended September 30, 1996, an increase of $835,000, or 13.1%. As a percentage of
net sales, gross margin increased from 43.8% for the three months ended
September 30, 1996 to 46.0% for the three months ended September 30, 1997. The
increase in gross margin was attributable to increased sales levels and a
continued emphasis on cost controls and efficiencies at La Victoria.
OPERATING EXPENSES. Operating expenses for the three months ended September 30,
1997 were $5,887,000 compared to $5,153,000 for the three months ended
September 30, 1996, an increase of $734,000, or 14.2%. As a percentage of net
sales, operating expenses increased from 35.5% for the three months ended
September 30, 1996 to 37.6% for the three months ended September 30, 1997. The
increase in operating expenses was primarily due to increased advertising and
promotional expenses at La Victoria, higher transportation expenses to new
markets (Arkansas and Louisiana) served by Calidad and the increased
administrative costs involved in operating as a public company.
OTHER EXPENSES. Other expenses for the three months ended September 30, 1997,
were $158,000 compared to $290,000 for the three months ended September
30, 1996, a decrease of $132,000, or 45.5%. As a percentage of net sales, other
expenses decreased from 2.0% for the three months ended September 30, 1996 to
1.0% for the three months ended September 30, 1997. The decrease was due to
reduced working capital borrowings and a lower term debt balance at La
Victoria, interest income generated by funds raised from the initial public
offering and a $58,000 write-off of equipment that was incurred in 1996 but not
in 1997.
TAXES. The Company had income tax expense of $518,000 for the three months
ended September 30, 1997 compared to $434,000 for the three months ended
September 30, 1996. The increase was attributable to the increase in earnings.
In connection with the La Victoria Acquisition, the Company recognized net
deferred tax liabilities of approximately $2.8 million, as described in the
discussion of the Company's historical financial statements above under the
section on taxes in the comparison of the three months ended September 30, 1996
and 1997.
NET INCOME. For the reasons described above, pro forma net income for the three
months ended September 30, 1997 was $630,000 compared to $481,000 for the three
months ended September 30, 1996, an improvement of $149,000, or 31.0%. As a
percentage of net sales, net income improved from 3.3% for the three months
ended September 30, 1996 to 4.0% for the three months ended September 30, 1997.
<PAGE> 14
ITEM 2. AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED)
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
NET SALES. Net sales for the first nine months of 1997 were $45,591,000 compared
to $44,184,000 for the first nine months of 1996, an increase of $1,407,000, or
3.2%. Calidad experienced a net sales increase of $647,000 primarily due to meat
and cheese sales to two independent Dallas grocery chains. The remainder of the
sales increase occurred at La Victoria and was primarily due to increased third
quarter sales volume. This additional sales volume was largely attributable to
more effective use of in-store promotions and advertising expenditures.
Partially offsetting the third quarter sales increase at La Victoria was a
slight sales decrease for the first six months of 1997 that was due to the
withdrawal from certain less profitable markets in the eastern and central
United States.
COST OF SALES AND GROSS MARGIN. Gross margin for the first nine months of 1997
was $20,708,000 compared to $19,267,000 for the first nine months of 1996, an
increase of $1,441,000, or 7.5%. As a percentage of net sales, gross margin
increased from 43.6% in the first nine months of 1996 to 45.4% in the first
nine months of 1997. The increase in gross margin was attributable to increased
sales and improved manufacturing efficiencies due to cost controls at La
Victoria.
OPERATING EXPENSES. Operating expenses for the first nine months of 1997 were
$17,961,000 compared to $17,314,000 for the first nine months of 1996, an
increase of $647,000, or 3.9%. As a percentage of net sales, operating expenses
increased from 39.2% for the first nine months of 1996 to 39.4% for the first
nine months of 1997. The increase in operating expenses was due to increased
advertising and promotional expenses at La Victoria and higher transportation
expenses to new markets (Arkansas and Louisiana) served by Calidad, offset
partially by a $144,000 decrease in non-compete and consulting payments to two
former shareholders that were incurred in the first nine months of 1996 but not
in the first nine months of 1997.
OTHER EXPENSES. Other expenses for the first nine months of 1997 were $547,000
compared to $837,000 for the first nine months of 1996, a decrease of $290,000,
or 34.6%. As a percentage of net sales, other expenses decreased from 1.9% for
the first nine months of 1996 to 1.2% for the first nine months of 1997. The
decrease was due to reduced working capital borrowings at La Victoria, interest
income generated by funds raised from the public offering and a $70,000
write-off of equipment that was incurred in 1996 but not in 1997.
TAXES. The Company had income tax expense of $1,013,000 for the nine months
ended September 30, 1997 compared to $517,000 for the nine months ended
September 30, 1996. The increase was attributable to the increase in earnings.
In connection with the La Victoria Acquisition, the Company recognized net
deferred tax liabilities of approximately $2.8 million, as described in the
discussion of the Company's historical financial statements above under the
section on taxes in the comparison of the three months ended September 30, 1996
and 1997.
<PAGE> 15
ITEM 2. AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED)
NET INCOME. For the reasons described above, pro forma net income for the first
nine months of 1997 was $1,187,000 compared to $599,000 for the first nine
months of 1996, an improvement of $588,000, or 98.2%. As a percentage of net
sales, net income improved from 1.4% for the first nine months of 1996 to 2.6%
for the first nine months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The initial public offering was consummated on September 2, 1997 and raised
$28.1 million net of underwriting discounts and offering expenses. As was
contemplated in the prospectus for the initial public offering, $2.5 million
was utilized to retire the Company's revolving credit facility, term loan
facility and a note to a former shareholder, $12 million was paid to Robert
Tanklage pursuant to the La Victoria acquisition and $5.9 million was used to
repurchase 788,500 shares owned by The Shansby Group. On September 17, 1997,
the underwriters exercised their option to purchase 600,000 shares to cover
over-allotments. The sale of these shares raised an additional $4.5 million,
net of the underwriters' discount.
Included in the La Victoria purchase was the assumption of a $5 million note
payable to a former shareholder of that company. The offering prospectus
indicated an intent to refinance this note after the offering, and the note
was refinanced under the La Victoria credit facility described below. To
provide the Company with the ability and flexibility to pursue future
acquisitions, the Company executed a $10 million credit facility with Union
Bank of California on October 16, 1997. This facility accrues interest at the
lower of the bank's prime rate or LIBOR plus 150 basis points and requires the
bank's approval for any acquisition that requires access to more than $5
million of the facility. As of November 14, 1997, approximately $9.8 million
was available under this facility.
On September 30, 1997, the Company completed the transactions contemplated by an
Asset Purchase Agreement with Gilbert Moreno Enterprises, Inc. in which certain
assets of the company doing business as La Monita Mexican Food Products ("La
Monita") in Houston, Texas were purchased and selected liabilities were assumed.
The $2.8 million purchase price included an $850,000 payment to the former owner
of La Monita, with the remainder used to retire certain debt. The cash payments
were made with available cash reserves resulting from the offering.
On October 30, 1997 the Company completed the transactions contemplated by a
Stock Purchase Agreement with Sauces Unlimited, Inc., a manufacturer of picante
and other Mexican sauces located in Texas. The $2.9 million purchase price
included a $2.4 million payment to two former stockholders, $314,000 to retire a
term loan and revolving credit facility and the assumption of $207,000 in
long-term debt. The cash payments were made with available cash reserves.
As contemplated by the prospectus for the initial public offering, the Company
has used a large portion of the cash received in the offering to fund its
acquisition program. Accordingly, it is likely that the credit facility with
Union Bank of California will be accessed to fund any short-term working capital
needs or additional acquisitions. The Company believes that it has sufficient
availability under this facility for these purposes for the foreseeable
future.
FORWARD-LOOKING INFORMATION
Information included in this Quarterly Report on Form 10-Q, including
information incorporated by reference herein, contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
including projections, estimates and expectations. Those statements by their
nature are subject to certain risks, uncertainties and assumptions and will be
influenced by various factors. Should one or more of these statements or their
underlying assumptions prove to be incorrect, actual results could vary
materially. Although the Company believes that such projections, estimates and
expectations are based on reasonable assumptions, it can give no assurance that
such projections, estimates and expectations will be achieved. Important factors
that could cause actual results to differ materially from those in the
forward-looking statements herein include economic developments, federal and
state regulatory developments, conditions of the capital markets and equity
markets during the periods covered by the forward-looking statements and changes
in customer consumption trends, in the demographics of the Company's primary
markets and in the price of raw materials used in the Company's manufacturing of
products. In addition, certain of such projections and expectations are based on
historical results, which may not be indicative of future performance.
<PAGE> 16
PART II. OTHER INFORMATION
Item 6. Exhibits
1.1* Underwriting Agreement between the Company, Cruttenden Roth
Incorporated, Sutro & Co. Incorporated and Wedbush Morgan Securities
Inc., dated August 27, 1997.
2.1* Asset Purchase Agreement made and entered into as of September 23,
1997, by and among the Company, La Monita Mexican Food Products, Inc.,
Gilbert Moreno Enterprises, Inc. and Gilbert G. Moreno.
2.2* Stock Purchase Agreement made and entered into as of October 29, 1997,
by and among the Company, Sauces Unlimited, Inc., Lawrence L. Amstutz,
Ruth C. Amstutz and Barry L. Brock.
3.1* Bylaws of the Company, adopted June 19, 1997.
27.1 Restated Financial Data Schedule.
- ----------------
* Previously filed.
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
AUTHENTIC SPECIALTY FOODS, INC.
Date: November 21, 1997 /s/ Samuel E. Hillin, Jr.
------------------------------------------
Samuel E. Hillin, Jr.
Vice President and Chief Financial Officer
(Principal Financial Officer)
<PAGE> 18
INDEX TO EXHIBITS
Exhibit No. Description
---------- -----------
1.1* Underwriting Agreement between the Company, Cruttenden Roth
Incorporated, Sutro & Co. Incorporated and Wedbush Morgan
Securities Inc., dated August 27, 1997.
2.1* Asset Purchase Agreement made and entered into as of September 23,
1997, by and among the Company, La Monita Mexican Food Products,
Inc., Gilbert Moreno Enterprises, Inc. and Gilbert G. Moreno.
2.2* Stock Purchase Agreement made and entered into as of October 29,
1997, by and among the Company, Sauces Unlimited, Inc., Lawrence L.
Amstutz, Ruth C. Amstutz and Barry L. Brock.
3.1* Bylaws of the Company, adopted June 19, 1997.
27.1 Restated Financial Data Schedule.
- ----------------
* Previously filed.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONDENSED FINANCIAL STATEMENTS FOR THE 9-MONTH PERIOD ENDED SEPTEMBER 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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