<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] 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 X No
----- -----
Number of shares of Common Stock outstanding as of the latest
practicable date, May 6, 1998: 8,027,126.
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<PAGE> 2
AUTHENTIC SPECIALTY FOODS, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at March 31, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
- -----------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 912,192 $ 363,371
Accounts receivable 5,872,798 4,859,352
Inventories (3) 11,927,763 13,321,475
Prepaid expenses 635,242 783,515
Deferred income taxes 625,000 725,000
------------ ------------
TOTAL CURRENT ASSETS 19,972,995 20,052,713
------------ ------------
Property and Equipment, net of depreciation and amortization 15,554,984 14,579,243
Trademarks and tradenames, net of amortization 8,178,958 8,230,833
Other Assets (primarily goodwill, net of amortization) 22,475,375 15,917,266
------------ ------------
$ 66,182,312 $ 58,780,055
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Line of credit $ 6,346,179 $ 1,706,452
Current portion of long-term debt 1,248,720 1,512,000
Accounts payable 3,143,134 2,778,293
Accrued expenses 790,112 2,106,483
------------ ------------
TOTAL CURRENT LIABILITIES 11,528,145 8,103,228
------------ ------------
Long-term debt less current portion 7,283,234 7,419,894
Deferred income taxes 3,305,000 2,807,000
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $.01 par value, authorized 5,000,000 shares, -- --
Common stock, $1.00 par value, authorized 20,000,000 shares, 8,027,126 7,786,500
Additional paid-in capital 37,053,804 34,737,430
Accumulated deficit (1,014,997) (2,073,997)
------------ ------------
44,065,933 40,449,933
------------ ------------
$ 66,182,312 $ 58,780,055
============ ============
</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
MARCH 31, 1998 MARCH 31, 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 20,876,011 $ 5,438,146
Cost of sales 11,889,421 3,512,279
-------------- --------------
GROSS PROFIT 8,986,590 1,925,867
Operating expenses 6,888,234 1,658,954
-------------- --------------
INCOME FROM OPERATIONS 2,098,356 266,913
-------------- --------------
Other income (expense), net (340,356) (82,909)
-------------- --------------
INCOME BEFORE INCOME TAXES 1,758,000 184,004
Income tax expense 699,000 62,000
-------------- --------------
NET INCOME $ 1,059,000 $ 122,004
============== ==============
NET INCOME PER SHARE:
Basic $ 0.13 $ 0.07
Diluted $ 0.13 $ 0.07
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
Basic 8,003,063 1,700,000
Diluted 8,219,189 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>
THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,509,397 (40,850)
Cash Flows From Investing Activities
Purchase of property and equipment (334,109) (60,998)
Proceeds on disposal of property and equipment 4,000 30,479
Purchase of Tortilla King (5,870,254) --
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (6,200,363) (30,519)
-------------- --------------
Cash Flows From Financing Activities
Increase in line of credit 4,639,727 --
Payments on long-term debt (399,940) (91,201)
-------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,239,787 (91,201)
-------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 548,821 (162,570)
Cash and Cash Equivalents
Beginning 363,371 200,479
-------------- --------------
Ending $ 912,192 $ 37,909
============== ==============
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 347,000 $ 81,571
============== ==============
Supplemental Schedule of Noncash Investing and Financing Activities:
Common stock and warrants issued in connection
with The Tortilla King, Inc. acquisition $ 2,557,000 $ --
============== ==============
</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 Company's Annual Report on Form 10-K for
the year ended December 31, 1997, filed by the Company with the Securities and
Exchange Commission.
The financial statements presented herein as of March 31, 1998 and for the three
months ended March 31, 1998 and 1997 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.
The Company acquired La Victoria, La Monita, and Sauces Unlimited during the
last four months of 1997 and The Tortilla King in January 1998 (See Note 2), all
of which were accounted for as purchases. Accordingly, the results of
operations for the three months ended March 31, 1997 only include the results
of operations for Calidad Foods, the predecessor company to Authentic Specialty
Foods, Inc. Results of operations for the three months ended March 31, 1998
include all the entities owned by Authentic Specialty Foods, Inc. (See Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Quarterly Report on Form 10-Q).
2. ACQUISITION OF THE TORTILLA KING, INC.
On January 9, 1998, the Company acquired the stock of The Tortilla King, Inc., a
manufacturer and seller of tortilla chips in Victoria, Texas. The $8.4 million
purchase price included a $5.4 million payment to the former stockholder, $2.5
million in the Company's common stock (240,626 shares) and $557,000 in
transaction costs. The acquisition has been accounted for as a purchase. 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 available. The Company's condensed consolidated
statements of operations for the three months ended March 31, 1998 includes The
Tortilla King's results of operations since its acquisition on January 9, 1998.
<PAGE> 7
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. 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>
March 31, December 31,
1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 1,202,596 $ 1,185,478
Packaging materials 763,852 354,767
Finished goods 9,961,315 11,781,230
------------ ------------
$ 11,927,763 $ 13,321,475
============ ============
</TABLE>
4. SUBSEQUENT EVENTS
On May 7, 1998, Authentic Specialty Foods, Inc., a Texas corporation
(the "Company"), entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Agrobios, S.A. de C.V., a corporation organized under the laws
of the United Mexican States ("Agrobios") and a subsidiary of Desc, S.A. de
C.V., and Authentic Acquisition Corporation, a Texas corporation and
wholly-owned subsidiary of Agrobios ("MergerCo"). Under the terms of the
Merger Agreement, MergerCo will commence a cash tender offer (the "Tender
Offer") for all of the outstanding shares of common stock of the Company for
$17.00 per share in cash. As soon as practicable following the completion of
the Tender Offer, the parties to the Merger Agreement will consummate a
second-step merger in which MergerCo will be merged with and into the Company
and the remaining shareholders of the Company will also receive $17.00 per
share in cash. Consummation of the second-step merger requires the vote of
66 2/3% of the issued and outstanding shares of the Company's common stock for
the approval thereof, and the Tender Offer is conditioned upon, among other
things, the tender to MergerCo of at least 66 2/3% of the outstanding shares
of the Company's common stock on a fully-diluted basis.
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements of the Company and the notes related
thereto which appear elsewhere in this Quarterly Report on Form 10-Q and the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, filed
by the Company with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain historical
financial data for the Company as a percentage of net sales:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1998
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<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales .......................... 100.0 % 100.0 %
Cost of goods sold ................. 64.6 57.0
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Gross Margins ............. 35.4 43.0
Operating expenses ................. 30.5 33.0
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Income from Operations .... 4.9 10.0
Other expenses, net ................ 1.5 1.6
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Income (loss) before taxes 3.4 8.4
Provision (benefit) for income taxes 1.2 3.3
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Net income (loss) ......... 2.2 % 5.1 %
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Authentic Specialty Foods, Inc. acquired La Victoria, La Monita and
Sauces Unlimited during the last four months of 1997 and Tortilla King in
January 1998. Accordingly, results for the three months ended March 31, 1997
only include Calidad Foods, the predecessor company to Authentic Specialty
Foods, Inc. Results for the three months ended March 31, 1998 include all the
entities owned by Authentic Specialty Foods, Inc.
Net Sales. Net sales consist of gross sales less the amount of
discounts, returns and allowances. Net sales for the three months ended March
31, 1998 were $20,876,000 compared to $5,438,000 for the three months ended
March 31, 1997, an increase of $15,438,000, or 283.9%. Of this improvement,
$15,200,000 was attributable to sales for La Victoria, La Monita, Sauces
Unlimited and Tortilla King. These companies were all acquired subsequent to
March 31, 1997 and therefore were not included in 1997 results. The remainder of
the increase in net sales resulted from additional Calidad meat and cheese
distribution in the Dallas/Ft. Worth market and increased sales in the outlying
markets of Arkansas and Louisiana.
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 the Company. The Company also incurs costs to purchase various
products (such as meats, cheeses, sweetbread and shelf-stable products) that
have been manufactured by third parties for distribution through the Company's
Direct Store Delivery ("DSD") operations in Texas as well as selected
shelf-stable products distributed by La Victoria through its warehouse delivery
system. Gross margin for the three months ended March 31, 1998 was $8,987,000
compared to $1,926,000 for the three months ended March 31, 1997, an increase of
$7,061,000, or 366.6%. As a percentage of net sales, gross margin increased from
35.4% for the three months ended March 31, 1997 to 43.0% for the three months
ended March 31, 1998. The increase in gross margin was attributable to increased
sales levels at Calidad, as well as sales at La Victoria, La Monita, Sauces
Unlimited and Tortilla King that were realized in 1998 but not included in 1997
results. Additionally, $125,000 in reduced manufacturing overhead at
La Victoria was recognized as gross margin for the three months ended
March 31, 1998. This resulted from lower production costs and increased
production volumes. The increase in gross margin as a percentage of net sales
was primarily due to the higher gross margin percentage experienced by the
Direct Warehouse Operations (La Victoria and Sauces Unlimited) relative to the
margin historically experienced by Calidad and the other DSD companies.
Calidad's sales mix includes high margin categories such as tortillas and
tortillas chips, as well as lower margin items including meats, cheeses and
shelf-stable products.
<PAGE> 9
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 March 31, 1998 were $6,888,000 compared to $1,659,000 for the three
months ended March 31,1997, an increase of $5,229,000, or 315.2%. As a
percentage of net sales, operating expenses increased from 30.5% for the three
months ended March 31, 1997 to 33.0% for the three months ended March 31,1998.
The increase in operating expenses was primarily 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, La Monita, Sauces Unlimited and
Tortilla King. Partially offsetting these expense increases was a reduction
of $200,000 in marketing development and advertising accruals. It is
management's opinion that the remaining reserves are adequate to cover future
costs incurred under these programs.
Other expenses. Other expenses consist primarily of interest expense,
interest income and gain or loss on the disposal of property and equipment.
Other expenses for the three months ended March 31, 1998 were $341,000 compared
to $83,000 for the three months ended March 31, 1997, an increase of $258,000,
or 310.8%. As a percentage of net sales, other expenses increased from 1.5% for
the three months ended March 31, 1997 to 1.6% for the three months ended March
31, 1998. The increase was attributable to interest expense associated with
capital leases at La Victoria and the debt utilized to acquire Tortilla King,
partially offset by lower interest expense due to the repayment of Calidad debt
with the proceeds from the Company's initial public offering in September 1997
(the "Initial Public Offering").
Taxes. The tax expense for the three months ended March 31, 1998 was
$699,000 compared to a tax expense of $62,000 for the three months ended March
31, 1997, an increase of $637,000. This increase was primarily attributable to
the increase in net income for the three months ended March 31, 1998 compared to
the three months ended March 31, 1997.
Net Income. For the reasons described above, net income for the three
months ended March 31, 1998 was $1,059,000 compared to a net income of $122,000
for the three months ended March 31, 1997. This resulted in increased net income
of $937,000, or 768.0%, compared to 1997. As a percentage of net sales, net
income increased from 2.2% for the three months ended March 31, 1997 to 5.1% for
the three months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, the proceeds from the Initial Public Offering were utilized
in the last four months of 1997 (i) to acquire La Monita and Sauces Unlimited,
(ii) to fund the $2.9 million severance payment to Robert C. Tanklage in
accordance with the provisions of his employment agreement with La Victoria and
(iii) to repay an advance from Union Bank of California, N.A. ("Union Bank")
that was originally obtained to retire a $5 million note to a former
shareholder of La Victoria. After the events described above, the Company had
minimal cash balances and had accessed $1.7 million of its $10 million credit
facility with Union Bank as of December 31, 1997.
On January 9, 1998, the Company acquired The Tortilla King, Inc. ("Tortilla
King"). The $8.4 million purchase price included a $5 million payment to the
former shareholder, $2.5 million in Common Stock, $390,000 to retire term debt
and $557,000 in transaction expenses. The cash outlay of $5.9 million was
funded under the Company's credit facility with Union Bank. After the Tortilla
King acquisition and the results of operations for the three months ended March
31, 1998, the Company had minimal cash balances but still had $3.7 million of
availability under its credit facility with Union Bank.
The Company believes that the funds available to it from internally generated
funds and under its existing credit facility with Union Bank are sufficient to
conduct its operations. However, the Company anticipates that it would have to
obtain a larger credit facility in order to pursue additional acquisitions.
FORWARD-LOOKING INFORMATION
Information included in this Quarterly Report on Form 10-Q 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 consumer 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, the ability of the Company to
find appropriate acquisition candidates, the ability of the Company to
negotiate and consummate acquisitions on acceptable terms and the ability of
the Company to integrate the operations of acquired companies into existing
operations. In addition, certain of such projections and expectations are
based on historical results, which may not be indicative of future performance.
<PAGE> 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
Current Report on Form 8-K, dated May 7, 1998, reporting that the
Company entered into an Agreement and Plan of Merger with Agrobios,
S.A. de C.V. and Authentic Acquisition Corporation, dated as of
May 7, 1998.
<PAGE> 11
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: May 15, 1998 /s/ SAMUEL E. HILLIN, JR.
------------------------------------------
Samuel E. Hillin, Jr.
Vice President and Chief Financial Officer
(Principal Financial Officer)
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
---------- -----------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 912
<SECURITIES> 0
<RECEIVABLES> 5,873
<ALLOWANCES> 0
<INVENTORY> 11,928
<CURRENT-ASSETS> 19,973
<PP&E> 16,906
<DEPRECIATION> 2,327
<TOTAL-ASSETS> 66,182
<CURRENT-LIABILITIES> 11,528
<BONDS> 0
0
0
<COMMON> 8,027
<OTHER-SE> 36,039
<TOTAL-LIABILITY-AND-EQUITY> 66,182
<SALES> 20,876
<TOTAL-REVENUES> 20,876
<CGS> 11,889
<TOTAL-COSTS> 11,889
<OTHER-EXPENSES> 6,888
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 345
<INCOME-PRETAX> 1,758
<INCOME-TAX> 699
<INCOME-CONTINUING> 1,059
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,059
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
