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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] 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
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AUTHENTIC SPECIALTY FOODS, INC.
(Exact name of 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) (Zip code)
Registrant's telephone number, including area code: (972) 933-4100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class to on which each class
be so registered is to be so registered
<TABLE>
<S> <C>
NONE NOT APPLICABLE
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the last reported sale price of
the registrant's Common Stock on March 27, 1998 was $18,167,558.
As of March 27, 1998, there were outstanding 8,027,126 shares of
Common Stock, par value $1.00 per share, of the registrant.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this
report:
Definitive Proxy Statement (the "Proxy Statement") to be filed in
connection with the registrant's Annual Meeting of Shareholders currently
scheduled to be held on June 9, 1998 (Part III of this Report). The Proxy
Statement will be filed on or before April 30, 1998.
Such Proxy Statement shall be deemed to have been "filed" only to the
extent portions thereof are expressly incorporated by reference.
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This Annual Report on Form 10-K ("Annual Report")contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Actual
results could differ materially from those indicated by such forward-looking
statements as a result of numerous important factors, certain of which are
described herein. Readers should pay particular attention to the factors,
including economic developments and changes in consumer consumption trends, in
the demographics of the Company's primary markets, 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, described in the section of this Annual Report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Forward-Looking Information." Readers should also carefully
review the cautionary statements described in the other documents the Company
files from time to time with the Securities and Exchange Commission (the
"SEC"), specifically all Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K.
PART I
ITEM 1. BUSINESS.
INTRODUCTION
Authentic Specialty Foods, Inc. (the "Company" or "Authentic Specialty
Foods") is a leading provider of an extensive line of Mexican food products to
Mexican-American consumers, as well as non-Hispanic consumers who enjoy
authentic Mexican food. The Company believes that it is the largest
publicly-owned company engaged solely in the manufacture and distribution of
Mexican food products targeting primarily the Mexican-American consumer. The
Company has five separate brands -- Calidad(TM), La Victoria(TM), La
Monita(TM), The Tortilla King(TM) and Alamo Street(TM)(a brand of Sauces
Unlimited, Inc.) -- all of which are recognized for high quality products and
well-accepted by the Company's target consumers. These brands have strong
market positions in the southwestern and western regions of the United States,
particularly in Texas (Calidad, La Monita, The Tortilla King and Alamo Street)
and California (La Victoria). Since the completion of its initial public
offering on September 2, 1997 (the "Initial Public Offering"), the Company has
taken advantage of, and plans to continue to take advantage of, acquisition
opportunities in the highly fragmented Mexican food industry. Immediately
following the consummation of the Initial Public Offering, the Company acquired
La Victoria Foods, Inc. ("La Victoria"). Since the acquisition of La Victoria,
the Company has acquired three additional companies in the Mexican food
industry: La Monita Mexican Food Products, Inc. ("La Monita"), Sauces
Unlimited, Inc. ("Sauces Unlimited") and The Tortilla King, Inc. ("Tortilla
King").
The Company has only one business segment -- the manufacture and sale
of Mexican food products. The Company has formed two operating divisions -- DSD
Operations and Direct Warehouse Operations -- because of the similarities
within these divisions in the manner that the Company's products are
distributed. DSD Operations includes Calidad, La Monita and Tortilla King.
DSD Operations sells branded and private label tortillas and tortilla chips, as
well as both branded and non-branded cheeses, meats and shelf-stable products
(including spices, salsas and peppers) primarily to grocery stores in Texas and
certain adjacent states. Each company in the DSD Operations division uses
direct store delivery ("DSD") salespersons to deliver the Company's products to
retailers. In addition, Calidad provides its customers with a comprehensive
service program through which its DSD salespersons can manage substantially all
of a customer's Mexican food category. The Company intends to implement the
full-service category management program developed by Calidad at La Monita and
Tortilla King in 1998.
The Company's Direct Warehouse Operations division includes La
Victoria and Sauces Unlimited. Direct Warehouse Operations manufactures salsas
and other Mexican sauces. Generally, Direct Warehouse Operations' products are
delivered to a retail customer's warehouse or distribution facility rather than
directly to a customer's retail outlets. While La Victoria primarily sells its
products to grocery stores in California and certain other western states, it
also sells its products in the food service market on a branded and private
label basis and to warehouse clubs on a branded basis. Food service sales
consist primarily of sales to restaurants and wholesale restaurant suppliers.
Sauces Unlimited's primary customer base is the food service industry.
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RECENT ACQUISITIONS
The Company has made three significant acquisitions since the
completion of the Initial Public Offering and the consummation of the
acquisition of La Victoria. On September 30, 1997, the Company acquired La
Monita, a manufacturer of tortillas located in Houston, Texas. On October 31,
1997, the Company acquired Sauces Unlimited, a manufacturer of Mexican sauces
and salsas located in San Antonio, Texas. On January 9, 1998, the Company
acquired Tortilla King, a manufacturer of tortillas based in Victoria, Texas.
La Monita and Tortilla King have been combined with Calidad to create
the DSD Operations division. La Monita and Tortilla King primarily sell
branded and private label tortillas and tortilla chips in the Houston, San
Antonio and South Texas markets. La Monita manufactures corn tortillas in a
62,000 square foot facility located in Houston, Texas. Tortilla King
manufactures corn and flour tortillas in a 20,000 square foot facility in
Victoria, Texas. Victoria is located approximately 120 miles southwest of
Houston and 120 miles southeast of San Antonio. Tortilla chips sold by La
Monita and Tortilla King are manufactured at Calidad's Grand Prairie facility.
La Monita and Tortilla King both utilize DSD systems similar to Calidad's in
order to provide frequent service to their predominantly retail customer base.
Although La Monita and Tortilla King have historically not sold products other
than tortillas and tortilla chips, the Company intends to begin distributing
spices, meats, cheeses and certain shelf-stable products through their DSD
systems.
Sauces Unlimited has been combined with La Victoria to form the Direct
Warehouse Operations division. Sauces Unlimited manufactures Mexican sauces
and salsas and is located in San Antonio, Texas. Although it does manufacture
certain products for distribution through retail grocer channels, Sauces
Unlimited's primary customer base is the food service industry, to which it
provides larger sizes, including gallon and half-gallon containers, as well as
portion control and other size products. Included among the customers of
Sauces Unlimited are Sysco Corporation, Alliance Foodservice, Inc., U.S.
Foodservice, Inc. and McDonald's Corp. The Company intends to transfer most of
the volume currently produced by Sauces Unlimited to La Victoria's facility in
Rosemead, California in order to gain the efficiencies provided by La
Victoria's surplus capacity. Sauces Unlimited's facility will remain open as a
specialty facility engaged in the manufacture of portion control and other
smaller sizes.
PRODUCTS AND BRANDS
Through the acquisition of La Victoria, La Monita, Sauces Unlimited
and Tortilla King, the Company has expanded its already extensive line of
Mexican food products. The Company now has five separate brands --
Calidad(TM), La Victoria(TM), La Monita(TM), The Tortilla King(TM) and Alamo
Street(TM)(a brand of Sauces Unlimited) -- all of which are recognized for high
quality products and well-accepted by Mexican-American consumers. Under the
Calidad brand, the Company sells branded and private label tortillas and
tortilla chips, as well as both branded and non-branded cheeses, meats and
shelf-stable products (including spices, salsas and peppers). Under the La
Monita and Tortilla King brands, the Company sells branded and private label
tortillas and tortilla chips. Under the La Victoria and Alamo Street brands,
the Company sells a wide variety of branded salsas, taco sauces and other
Mexican sauces and specialty items (such as jalapenos, tomatillos, cheese sauce
and refried beans). The Company offers a variety of products to capitalize on
consumers' preferences for different types of Mexican food products. The
Company believes that the Calidad, La Victoria, La Monita and Tortilla King
products have gained wide acceptance in the Mexican-American population in
their respective geographic markets.
DSD Operations. The two primary products of DSD Operations are
tortillas and tortilla chips. Tortillas are traditional Mexican flat bread
made from wheat flour or corn flour (known as "masa"). They are used in all
aspects of Mexican cuisine, are served like bread and are cooked with many
Mexican dishes. Tortilla chips are also made from masa and are often served
with soups and salsas and eaten as a snack. In addition to distributing these
products under the Calidad, La Monita and Tortilla King brands, DSD Operations
also manufactures and distributes these products on a private label basis for
larger grocery store chains. The Company believes that offering certain of its
products on a private label basis expands the market for Mexican food products
generally and gives the Company a competitive advantage for shelf space over
other suppliers of Mexican food products.
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The Company sells a variety of cheese and meat products under the
Calidad brand and other brand names. Calidad's cheese products include a
variety of ethnic cheeses, and the meat products include chorizo (a
Mexican-style sausage) and tamales (corn meal stuffed with beef, pork or
chicken). These products are manufactured by third parties and distributed by
Calidad. Approximately 40% of these products are distributed under the Calidad
brand name, and the remainder are distributed under the original manufacturer's
brand name. Calidad distributes certain of these products under the
manufacturer's brand name because of their significant recognition within the
Mexican-American community.
Calidad also packages and sells a wide variety of spices that are used
in Mexican cuisine, including cayenne pepper, chili powder, chili peppers and
cinnamon. Calidad's spices are packaged in small packets that the Company
believes appeal to the Mexican-American consumer. Calidad distributes these
products primarily under the Calidad brand and also on a private label basis.
Shelf-stable products, such as salsas, peppers, fruit drinks and
cheese sauces are obtained from Mexican, national or regional producers and
distributed by Calidad. Approximately half of these shelf-stable products are
distributed under the Calidad brand, and the remainder are distributed under
the manufacturer's brand name. Certain products in this group carry the lowest
gross margins of Calidad's product line, but are essential to the Company's
strategy of providing an extensive line of Mexican food products.
Although La Monita and Tortilla King have historically not sold
products other than tortillas and tortilla chips, the Company intends to begin
distributing spices, meats, cheeses and certain shelf-stable products through
their DSD systems in 1998.
Direct Warehouse Operations. La Victoria markets salsas with a wide
variety of tastes, heat levels and container sizes. Salsas are used for
dipping with chips, as a condiment or as an ingredient in cooking a number of
Mexican food dishes. La Victoria sells its salsas under a variety of
descriptive names in order to emphasize the distinctive character of their
ingredients. Examples of these varieties are Salsa Suprema, Thick 'N Chunky
Salsa, Salsa Brava, Green Chili Salsa and Salsa Victoria. Each of the La
Victoria brand salsas contain different combinations of vegetables (chili
peppers, diced onions, jalapenos and garlic) in a green or red tomato-based
sauce.
One of La Victoria's more established products is taco sauce. La
Victoria has manufactured and marketed at least one variety of taco sauce for
almost 50 years and continues to be a market leader in this category in the
western United States. La Victoria also markets enchilada sauce, a mild sauce
made from fresh and dehydrated California and Pasilla chili pods. Beyond use
with enchiladas, it is marketed as a condiment for chili, soup and tamales.
La Victoria also sells a variety of specialty items under the La
Victoria brand, such as whole and nacho-sliced jalapenos, crushed tomatillos,
refried beans, cheddar cheese sauce and nacho cheese sauce (which is spiced
with jalapenos). Some of La Victoria's specialty items are produced under
separate one-year agreements with third party manufacturers. These agreements,
also known as co-packing arrangements, are renewable at the Company's option.
SALES AND MARKETING
The Company's combined market area encompasses the southwest and
western regions of the United States, particularly Texas and California. The
Company intends to explore the expansion of its marketing area to other
geographic areas with existing and new customers, additional distributor
relationships and through acquisitions.
DSD Operations. The marketing area for DSD Operations currently
encompasses various markets within Texas, Arkansas, Louisiana and Oklahoma.
Because the Company had limited financial resources prior to the Initial Public
Offering, management focused primarily on distribution within North Texas,
including the Dallas/Ft. Worth metroplex. Since the Initial Public Offering,
the Company's market presence in other areas of Texas has increased through the
acquisitions of La Monita and Tortilla King. These acquisitions have given the
Company a more established position in southcentral and southeastern Texas.
San Antonio, where Sauces Unlimited is located and Tortilla King distributes,
and Houston, where La Monita is located and Tortilla King distributes, have
large Mexican-American populations that are growing at rapid rates.
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Calidad has targeted major grocery store chains, independent grocery
chains and individual retailers that wish to appeal to the growing
Mexican-American community. Calidad is able to approach retail customers with a
comprehensive full-service program for managing substantially all of a store's
Mexican food category. Under its category management program, Calidad provides
an extensive line of quality Mexican food products, and utilizing its DSD
system, delivers these products to the store and stocks the store's shelves.
Generally, Calidad attempts to gain shelf space for all of its products in each
of its customer's stores. In those circumstances when this is not possible,
Calidad often utilizes one product in order to gain access to shelf space and,
through its commitment to service and quality, continues to add other products
from its product line. Calidad believes that its category management
capabilities enable Calidad to enter new markets where retailers are seeking
strategies to target the Mexican-American consumer. The Company intends to
implement its full-service category management program at La Monita and Tortilla
King in 1998.
DSD Operations spends the majority of its marketing funds reinforcing
the image of its brands as Mexican food brands that appeal primarily to
Mexican-Americans. This is done primarily through performance-based
promotional plans. These performance plans typically require the retailer to
provide equal or partial participation in costs associated with displays,
temporary price reductions and advertising. For example, the Company's
customers will often run photographs of the Company's products in their weekly,
biweekly and monthly circulars. The Company also runs promotions in
conjunction with Mexican-American holidays, such as Cinco de Mayo.
Direct Warehouse Operations. La Victoria's market is focused
primarily in California and adjacent western states with limited distribution
in the central United States. In recent years, La Victoria's management has
concentrated on its existing markets and discontinued sales in regions that
have traditionally been less profitable.
La Victoria targets primarily grocery store chains, independent retail
food outlets and individual retailers. In addition, La Victoria sells its
products in the food service market on a branded and private label basis and to
warehouse clubs on a branded basis. In general, La Victoria's approach to
retailers has differed from Calidad's in that La Victoria offers a more focused
product line, concentrated on Mexican sauces and salsas.
La Victoria employs a variety of marketing methods to support sales,
including advertising, coupons and in-store promotions and displays.
Historically, La Victoria's strategy has been to market broadly the La Victoria
brand rather than to focus on a specific product. However, in 1993 and 1994,
La Victoria focused its marketing efforts and expenditures on the introduction
of its line of Thick 'N Chunky Salsa. Management believes its efforts in
introducing this line of salsa created valuable exposure for the La Victoria
brand. La Victoria focuses its marketing efforts around several key events,
including the Super Bowl and Mexican-American holidays. The Company has
increased La Victoria's use of in-store marketing since its acquisition of La
Victoria.
DISTRIBUTION
DSD Operations. The products of Calidad and La Monita are distributed
through integrated, computerized DSD systems. Tortilla King also utilizes a
DSD system, but it will not be fully computerized until mid-1998. The DSD
systems utilize the Company's employees in the Dallas/Ft. Worth, Houston and
San Antonio market areas and independent distributors outside of these markets.
Through its DSD systems, the Company has established rapport with its customers
and built strong relationships at the retail level. In addition, the Company's
frequent visits to customers served by its DSD systems provide valuable
information with respect to its products, competition, consumers' shopping
habits, product positioning, marketing effectiveness, pricing and relative
shelf space.
Calidad provides its grocery store customers a comprehensive
full-service category management program. Under this program, Calidad manages
substantially all of a grocery store's Mexican food category by providing an
extensive line of quality Mexican food products, delivering these products to
the store, stocking the store's shelves and removing out-of-date or spoiled
products. DSD salespersons are generally scheduled to visit their customers
from two to seven times per week. DSD salespersons leave Calidad's facility
early each morning on predetermined routes, equipped with hand-held computers,
portable printers and a broad selection of Calidad's products. Nightly, when
salespersons return to Calidad's main distribution facility, all deliveries and
orders are downloaded into Calidad's main computer system. This information is
electronically disseminated to the proper department for invoicing, collection
and
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production scheduling. La Monita's DSD salespersons are also equipped with
hand-held computers, while Tortilla King has not yet implemented the hand-held
system. Neither La Monita nor Tortilla King have fully implemented the
full-service category management program developed by Calidad.
Calidad, La Monita and Tortilla King own or lease 94 DSD vehicles and
manage their DSD systems from their manufacturing and distribution facilities.
Although the DSD systems are generally administered in the same manner
regardless of whether the salesperson is a Company employee or an independent
distributor, there are certain differences between the two groups. Independent
distributors are utilized by the Company to target more distant and less
concentrated markets. These distributors are effective in introducing the
Company's products on either a branded or private label basis and are required
to provide services that are similar to those provided by the Company's DSD
employees in their market areas. In contrast to the Company's employees,
independent distributors own or lease their own vehicles. These distributors
are also responsible for any returns of the Company's products. Distributors
are compensated on a commission basis that equates to a higher percentage of
gross sales than that earned by the Company's employees. Almost all of
Calidad's distributors are linked by modem to the Company's computer system,
and the distributors of La Monita and Tortilla King will be similarly linked in
the future. The Company believes that its computer-enhanced distribution
system distinguishes it from many of the other participants in the Mexican food
industry.
Direct Warehouse Operations. Generally, in California and the western
United States, La Victoria's products are distributed directly to retailers'
warehouses and through wholesalers for distribution to independent grocery
stores. Unlike Calidad, La Monita and Tortilla King, La Victoria does not
utilize a DSD system. The majority of La Victoria's distribution outside of
California is serviced by public warehouses located in customers' markets which
are regularly supplied with La Victoria's products based on orders. La
Victoria owns or leases three vehicles and delivers its products to its
California distributors' and customers' warehouses from its distribution
facilities. Products sold to customers outside of California are delivered via
common carriers. Certain customers located in close proximity to La Victoria's
facilities frequently obtain products directly from La Victoria's main
distribution facility, utilizing their own vehicles.
Finished products are stored temporarily at the production facility
before being delivered directly to customers or transferred to the 170,000
square foot distribution center in City of Industry, California. The products
are stored in the main distribution center until they are delivered to a
customer or trucked by common carrier to La Victoria's ten regional
distribution centers. Co-packed shipments are trucked from the co-packer's
plant to La Victoria's City of Industry distribution center or one of the
regional distribution centers, in Clackamas, Oregon (near Portland); Salt Lake
City, Utah; Billings, Montana; Aurora, Colorado (near Denver); El Paso, Texas;
Itasca, Illinois (near Chicago); Tampa, Florida; Phoenix, Arizona;
Independence, Missouri; and Fond du Lac, Wisconsin.
CUSTOMERS
DSD Operations. The customer base of DSD Operations includes major
grocery stores, independent grocery chains and individual retailers. In the
past, this base has been quite stable, with little turnover. Although it is
difficult for many food companies to obtain shelf space in retail outlets, DSD
Operations currently sells to over 300 grocery retailers, distributors and food
service customers, and its products are on the shelves in an estimated 2,000
stores throughout its marketing areas. Among DSD Operations' customers are
Minyard Food Stores ("Minyard Foods"), Sack 'n Save, Carnival, Brookshire
Grocery Co., Wal-Mart Stores, Inc., Winn-Dixie Texas, Inc., The Kroger Co.,
Albertson's, Inc., H.E. Butt Grocery Company, Fiesta Mart, Inc. and Tom Thumb
Food Markets, Inc. Within the food industry and, in particular, within the
grocery store distribution channel of the food industry, it is common practice
for retailers to charge food producers fees ("slotting fees") for new product
placement. Slotting fees are charged to offset the retailers' startup costs
associated with the new item, including the costs of setting up scan codes,
printing shelf tags and resetting shelves. In general, DSD Operations does not
pay its customers slotting fees to sell its products. DSD Operations paid less
than $35,000 in slotting fees in 1997.
Sales to Calidad's top ten customers were $15.0 million in 1997, or
64.4% of net sales, compared to $14.5 million in 1996, or 68.6% of net sales.
Only Minyard Foods accounted for more than 10% of Calidad's net sales during
these periods. Most of Calidad's principal customer relationships have been
cultivated over a period of many years.
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In many cases, Calidad's relationships were established when retailers became
aware of the importance of Mexican-American consumers within their markets and
began to contemplate an appropriate service strategy.
Minyard Foods accounted for 16.4% of the Company's net sales during
1997. However, Minyard Foods actually consists of three separate operating
divisions: Minyard Food Stores, Sack 'n Save and Carnival. During 1997, Minyard
Food Stores accounted for $1.2 million of the Company's net sales (3.2%), Sack
'n Save accounted for $2.6 million (7.0%) and Carnival accounted for $2.3
million (6.2%). Calidad has a separate relationship with each of these three
divisions, which are operated somewhat autonomously and have different target
consumers.
Direct Warehouse Operations. La Victoria sells its products primarily
to major grocery stores, independent retail food outlets, individual retailers
and wholesalers. La Victoria currently has over 800 retail accounts and 200
food service accounts, and La Victoria's products are sold by an estimated
7,500 stores and distributors throughout its marketing area. Among La
Victoria's customers are Safeway, Inc., Lucky, Albertson's, Inc., Vons Grocery
Company and Ralph's Grocery. La Victoria paid approximately $137,000 for new
distribution and slotting fees in the fiscal year ended December 31, 1997.
La Victoria also sells its products to food service customers, such as
Sysco Corp. and Denny's, Inc. Relationships with other types of customers,
primarily warehouse clubs and private label programs, are currently managed
internally by La Victoria's regional sales managers. While these customers
have traditionally represented a relatively small amount of La Victoria's total
sales, La Victoria's management believes that the expansion of these categories
could provide an area of future growth for La Victoria.
TRADEMARKS
The Company believes that its Calidad logo, which features two
traditional Mexican dancers, is an important part of its efforts to appeal to
the Mexican-American consumer. Substantially all of Calidad's products bear a
green, yellow and red Calidad logo, but a few items have a blue, red and white
Calidad logo to differentiate the product type. The logo on all of Calidad's
products features the types of bright colors to which the Mexican-American
consumer is accustomed, and the picture of the dancers is reminiscent of images
from Mexico. The word "Calidad" means "Quality" in Spanish, and Calidad has
incorporated the phrase "Our Name Means Quality" into its logo. In order to
reinforce brand identity and underscore Calidad's ability to provide an
extensive line of Mexican food products, the Company's products can be found
throughout a store in a variety of food categories and are easily identified by
the Calidad logo that is incorporated across all product line packaging. The
Company has obtained federal registration for the trademarks contained in the
logo. The Company has successfully defended its trademark in the past against
one food company that had attempted to use it and plans to continue to defend
its trademark in the future.
When the Company acquired La Monita and Tortilla King, it also acquired
the La Monita and Tortilla King trademarks. "La Monita" means "the Little Doll"
in Spanish, has been used since 1961 and is well-recognized in the Houston
market, primarily for corn tortillas. The Tortilla King brand was trademarked
in 1987 and is well-recognized in the Houston and San Antonio markets, primarily
for tortillas.
La Victoria has a number of important trademarks and copyrights,
including La Victoria, Salsa Brava(TM), Salsa Suprema(TM), Suprema(TM),
Victoria(TM), Mexican Kitchen(TM) and a thermometer, which clearly indicates to
the consumer the heat level of each product (mild, medium, hot or extra hot). La
Victoria uses the slogans "When you're ready for real salsa" and "Food secrets
of Mexico" on many of its labels and in its advertisements. La Victoria has
successfully defended its trademark in the past and plans to continue to defend
its trademark in the future.
When the Company acquired Sauces Unlimited, it also acquired the Alamo
Street trademark. This brand has been used since 1992 for Mexican sauces and
salsas.
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MANUFACTURING
Calidad manufactures tortillas and tortilla chips at its facility in
Grand Prairie, Texas. At the facility, Calidad also repackages bulk spices
into smaller packaging that is designed to appeal to Mexican-American
consumers.
La Monita manufactures corn tortillas at its facility in Houston,
Texas. Tortilla chips sold by La Monita are manufactured by Calidad's plant in
Grand Prairie, Texas. Flour tortillas sold by La Monita are manufactured at
the Tortilla King plant in Victoria, Texas.
Tortilla King manufacturers corn and flour tortillas at its facility
in Victoria, Texas. Tortilla chips sold by Tortilla King are manufactured at
Calidad's plant in Grand Prairie, Texas.
Direct Warehouse Operations manufactures Mexican sauces and salsas at
its production facilities in Rosemead, California, a suburb of Los Angeles, and
in San Antonio, Texas. The products manufactured at the San Antonio facility
are made with processed tomatoes and vegetables purchased from outside sources.
Historically, the majority of La Victoria's products were manufactured with
fresh vegetables during the four to six month tomato harvest in California, and
La Victoria operated at or near capacity to fresh pack the vast majority of its
tomato-based products during the harvest season. The Company plans to shift La
Victoria to year-round production using processed tomatoes in June 1998. The
Company is in the process of transferring most of the volume currently
manufactured at the San Antonio facility to the facility in Rosemead,
California in order to increase inventory turnover and gain the efficiencies
provided by its available capacity. The San Antonio facility will remain open
as a specialty facility engaged in the manufacture of portion control (i.e.,
1/2 oz.) and other smaller sizes (i.e., 3 1/2 oz.).
The Company does not manufacture all of its branded products; some are
manufactured by third parties under co-packing arrangements. Products offered
by the Company but produced under co-packing arrangements include: nacho cheese
sauce, sweet breads, pork skins, chorizo, cheese, dried beans, taco shells,
tostada shells, ice pops, tamales, gelatin and chili con queso.
COMPETITION
Although the Company believes that its ability to supply an extensive
product line and its category management skills are unique in the Mexican food
industry, the Company faces significant competition in each of the components
of its product line. Many of these competitors are larger, more established
and better capitalized than the Company.
DSD Operations competes against national and local companies in the
manufacture and distribution of tortillas and tortilla chips. The two most
significant competitors are Mission Foods Corporation, a subsidiary of Gruma
S.A. de C.V. ("Mission"), and Bimar Foods Corporation, a subsidiary of Grupo
Industrial Bimbo, S.A. de C.V. ("Bimbo"). Both Mission and Bimbo are
significant participants in the southwestern region of the United States and are
larger and better capitalized than the Company. Mission produces primarily
tortillas and tortilla chips and is the most visible competitor in the Company's
markets. Bimbo entered the Texas market in 1995 with its acquisition of C&C
Bakery, and announced in March 1998 that it has agreed to buy the tortilla
operations of Mrs. Baird's Bakeries, Inc. ("Mrs. Baird's"). Mrs. Baird's
introduced its tortillas to the North Texas market in July 1995. Mrs. Baird's
has a full line of flour and corn tortillas marketed under the Mrs. Baird's
Texas Tortilla and Tia Rosa brand names.
In addition to direct competition from manufacturers of Mexican food
products, certain snack food companies, such as Frito-Lay Inc., manufacture and
distribute tortilla chips and corn chips. Frito-Lay Inc., a national company
headquartered in Dallas, markets its products under several brands, including
Doritos(TM) and Tostitos(TM), among others. However, management does not
believe that snack food companies compete directly with the Company because
their products are positioned as snack foods and are marketed primarily to
non-Hispanic consumers.
- 9 -
<PAGE> 10
With regard to Calidad's refrigerated product category (i.e., meats
and cheeses), there is only one principal DSD distributor, Cyclone Enterprises,
Inc., in the Company's major markets that competes in this product category.
In addition, several of the large grocery distributors such as Grocers Supply,
Fleming Companies, Inc. and Gourmet Award Foods also compete with Calidad in
the meat and cheese categories. Because of its DSD service levels, Calidad has
succeeded in gaining the ethnic meat and cheese business in all major
Dallas/Ft. Worth grocery chains catering to the Mexican-American consumer.
With respect to the spices that Calidad repackages and sells, Calidad
competes with Mojave Spice Co., Inc., DeLuna Spice Company and Fiesta Bolner
Spice Company.
With respect to Mexican food products that are distributed by Calidad
under other brands (such as salsas, peppers and other shelf-stable products),
this category is broad, with an array of products that are all produced by
other suppliers, and it generates less profitability than other categories.
Competing companies such as Fleming Companies, Inc., Gourmet Award Foods,
Grocers Supply and Cyclone Enterprises, Inc. carry similar products.
The Mexican sauce industry is highly competitive. In the western
United States, Direct Warehouse Operations primarily competes with Pace,
Tostitos and Old El Paso, and to a lesser extent, Ortega. These competitors are
divisions of the following major food companies: Campbell Soup Company,
Frito-Lay Inc., The Pillsbury Company and Nestle USA, Inc., respectively.
Additionally, Direct Warehouse Operations competes against smaller providers of
Mexican sauces and against providers of condiments in general.
GOVERNMENT REGULATION
Public Health. As a manufacturer and distributor of food products,
the Company is subject to the Federal Food, Drug and Cosmetic Act and
regulations promulgated thereunder by the Food and Drug Administration ("FDA").
This comprehensive regulatory scheme governs the manufacture (including
composition and ingredients), labeling, packaging and safety of food. The FDA
regulates manufacturing practices for foods through its current good
manufacturing practices regulations, specifies the standards of identity for
certain foods, including many of the products sold by the Company, and
prescribes the format and content of certain information required to appear on
food products labels.
In addition, the FDA enforces the Public Health Service Act and
regulations issued thereunder, which authorize regulatory activity necessary to
prevent the introduction, transmission or spread of communicable diseases. The
Company and its products are also subject to state and local regulation through
such measures as the licensing of manufacturing facilities, enforcement by
state and local health agencies of state standards for the Company's products,
inspection of the Company's facilities and regulation of the Company's trade
practices in connection with the sale of its products.
To monitor product quality, the Company maintains quality control
programs to test products during various processing stages. Management
believes that the Company's production and storage facilities and manufacturing
practices comply with applicable government regulations.
Employee Safety Regulations. The Company is subject to certain health
and safety regulations issued pursuant to the Occupational Safety and Health
Act. These regulations require the Company to comply with certain
manufacturing, health and safety standards to protect its employees from
accidents.
Environmental Regulations. The Company is subject to certain federal,
state and local environmental regulations regarding the discharge of wastewater
and other environmental matters. Management does not expect environmental
compliance to have a material impact on the Company's capital expenditures,
earnings or competitive position in the foreseeable future. See Item 3. Legal
Proceedings.
- 10 -
<PAGE> 11
EMPLOYEES
As of December 31, 1997, the Company had approximately 582 employees.
Of this total, 378 were hourly, 116 were salaried and 88 were compensated on a
commission basis. The Company's management considers its relationship with its
employees to be good.
Historically, La Victoria supplemented its workforce with hourly
workers on a seasonal basis. La Victoria's peak demand for seasonal employees
occurred from June to November, when fresh tomatoes are harvested in California
and La Victoria packed the majority of its product. During the four to six
month packing season, La Victoria employed an average of an additional 80 to 90
hourly employees. When the Company shifts La Victoria to year-round production
using processed tomatoes in June 1998, there will no longer be a need for
seasonal employees.
Except for La Victoria, none of the Company's employees are subject to
any collective bargaining agreements. La Victoria's hourly employees are subject
to a collective bargaining agreement with the United Industrial Workers,
Service, Transportation, Professional and Government of North America, SIUNA,
AFL-CIO. La Victoria has had a collective bargaining agreement with this union
since 1969. The current agreement went into effect on March 1, 1997 and expires
on February 29, 2000. La Victoria has never experienced a strike or any other
type of work stoppage.
ITEM 2. PROPERTIES.
Calidad manufactures tortillas and tortilla chips at its modern
facility in Grand Prairie, Texas, which is located in the Dallas/Ft. Worth
metroplex. Calidad spent an aggregate of $3.1 million in 1995 and 1996 to move
to the facility and to expand its production and distribution capabilities. The
70,000 square foot facility has six tortilla production lines and two tortilla
chip lines. Calidad employees approximately 100 production personnel at the
facility and currently operates on a two-shift basis, five days per week.
Calidad leases its Grand Prairie facility under a three-year sublease
that is scheduled to expire in August 1999, with an annual rental rate of
approximately $175,000. The sublease may be renewed at the option of the
Company for an additional six-year term at the fair market value on the date of
renewal.
La Monita manufactures corn tortillas at its facility in Houston,
Texas. The 62,000 square foot facility has five corn tortillas lines. La Monita
employs approximately 45 production personnel at the facility and currently
operates on a two-shift basis, five days per week. Flour tortillas sold by La
Monita are manufactured at the Tortilla King facility in Victoria, Texas, while
tortilla chips sold by La Monita are manufactured at the Calidad facility in
Grand Prairie, Texas.
La Monita leases its Houston facility under a two-year lease that
expires on September 30, 1999, with an annual rental rate of $114,000. Based
on the potential investment described above, the Company is currently
negotiating an extension of the lease with the property owner.
Tortilla King manufactures corn and flour tortillas at its facility in
Victoria, Texas. Victoria is located approximately 120 miles southwest of
Houston and 120 miles southeast of San Antonio. The 20,000
- 11 -
<PAGE> 12
square foot facility has four flour tortilla lines and five corn tortilla lines.
Tortilla King leases its Victoria facility under a seven-year lease that expires
on January 8, 2005, with annual rental payments of $66,000.
Sauces Unlimited manufactures Mexican sauces and salsas at its 30,000
square foot facility in San Antonio, Texas. The facility has the capability of
manufacturing products in a variety of sizes and container types. Sauces
Unlimited leases its facility under a ten-year lease that expires on October 31,
2007, with an annual rental rate of $115,200.
With the exception of co-packed products, all of La Victoria's
production is conducted at its production and warehouse facility in Rosemead,
California, a suburb of Los Angeles. The Rosemead facility consists of a total
of approximately 112,000 square feet, including approximately 61,000 square feet
of production space and approximately 51,000 square feet of warehouse space. La
Victoria leases its Rosemead production and warehouse facility under two
separate leases with affiliates of La Victoria. The 61,000 square feet
production facility is leased through July 2010 at lease rates that escalate
based upon changes in the Consumer Price Index (the "CPI") every five years.
The annual lease payment is approximately $214,000, and the next CPI escalation
will occur in August 2000. The 51,000 square foot warehouse facility is leased
through July 2010 at lease rates that escalate in accordance with the CPI every
five years. The annual lease payment is approximately $262,000, and the next
CPI escalation will occur in August 2000. During 1993 and 1994, La Victoria
completed a capital improvement program at the Rosemead facility, investing in
excess of $4 million over two years.
Finished products are stored temporarily at the Rosemead facility
before being transferred to La Victoria's approximately 170,000 square foot
warehouse and distribution center in City of Industry, California. The City of
Industry facility is leased through July 2010 at lease rates that escalate
according to the CPI every five years. The annual lease payment is
approximately $860,000, and the next CPI escalation will occur in August 2000.
ITEM 3. LEGAL PROCEEDINGS.
By letter dated April 13, 1995, the U.S. Environmental Protection
Agency (the "EPA") identified La Victoria as a potentially responsible party
("PRP") under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended ("CERCLA"), for the cleanup of contamination
from hazardous substances at the South El Monte Operable Unit of the San
Gabriel Valley Superfund Site. Under CERCLA, persons may be subject to joint
and several liability for cleanup costs.
La Victoria has completed a subsurface soil remediation of solvents at
its Rosemead facility, which is located within the San Gabriel Valley. The EPA
has identified approximately fifty PRPs at the site. The EPA has requested
that La Victoria participate in the groundwater sampling program for a remedial
investigation and feasibility study. Based on the limited impact to
groundwater that appears to be related to La Victoria's Rosemead facility, La
Victoria
- 12 -
<PAGE> 13
declined to participate in the groundwater monitoring. Since the EPA request,
La Victoria has received no further correspondence from the EPA. La Victoria
does not believe that its ultimate liabilities in relation to the site will have
a material effect on its financial position; however, it is not possible to
determine the ultimate environmental liabilities, if any, that may arise from
this matter.
The Company is party to litigation relating to property damage and
liability claims as well as certain employment - related matters arising in the
ordinary course of business, Management does not believe that the outcome of
the matters will have a material adverse effect on the financial position of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market for Registrant's Common Equity. Since September 2, 1997, the
Company's Common Stock has been traded on the Nasdaq National Market under the
symbol "ASFD." At March 27, 1998, the Company had 49 holders of record of
Common Stock.
The following table sets forth the high and low bid quotations per
share of Common Stock for the periods indicated.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
---------------------
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1997
Third Quarter (from September 2, 1997) . . . $ 12 3/8 $ 9
Fourth Quarter . . . . . . . . . . . . . . . 13 5/8 9
</TABLE>
Dividend Policy. The Company has never paid cash dividends on its
Common Stock and does not intend to pay cash dividends on the Common Stock in
the foreseeable future. The Company currently intends to retain its cash for
the continued development of its business. Payment of future dividends, if
any, will be at the discretion of the Board of Directors after taking into
account various factors, including the Company's financial condition, operating
results, current and anticipated cash needs and plans for expansion.
The Company's long-term debt agreements contain covenants, including
minimum tangible net worth and maximum debt-to-equity covenants, that have the
effect of restricting the amount of dividends paid on capital stock. Under the
most restrictive of these covenants, as of December 31, 1997, the Company would
have been permitted to pay dividends of up to $377,644 in the aggregate. See
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
Recent Sales of Unregistered Securities. In 1994, Herman L.
Graffunder and Samuel E. Hillin, Jr. received grants of 85,000 and 51,000
shares of Common Stock, respectively. These grants were made in connection
with the commencement of employment with the Company by Mr. Graffunder and Mr.
Hillin and were subject to forfeiture restrictions lapsing over a four-year
period. The forfeiture restrictions expired upon the consummation of the
Initial Public Offering on September 2, 1997. No cash consideration was
received by the Company in connection with these grants, which were exempt from
registration under the Securities Act because no sale of securities was
involved within the meaning of the Securities Act.
In connection with the Company's acquisition of Sauces Unlimited on
October 29, 1997, Lawrence L. Amstutz was issued warrants to purchase 39,216
shares of Common Stock at the purchase price of $11.125 per share, subject
- 13 -
<PAGE> 14
to customary adjustments, at any time prior to October 30, 2001. Also in
connection with the Company's acquisition of Sauces Unlimited, Barry L. Brock
was issued warrants to purchase 784 shares of Common Stock at the purchase price
of $11.125 per share, subject to customary adjustments, at any time prior to
October 30, 2001. These warrants were issued by the Company as part of the
purchase price for Sauces Unlimited. Because the warrants were issued in a
transaction not involving a public offering, they were exempt from registration
under the Securities Act pursuant to Section 4(2) of the Securities Act.
In connection with the Company's acquisition of Tortilla King on
January 9, 1998, 120,313 shares of Common Stock were issued to Saragosa Bazan,
Jr. and 120,313 shares of Common Stock were issued to Lydia E. Bazan. These
shares of Common Stock were issued by the Company as part of the purchase price
for Tortilla King, and the Company received no cash consideration in connection
with their issuance. Because these shares of Common Stock were issued in a
transaction not involving a public offering, they were exempt from registration
under the Securities Act pursuant to Section 4(2) of the Securities Act.
Upon consummation of the Initial Public Offering, Shansby Partners,
L.L.C., an affiliate of The Shansby Group ("Shansby Partners"), received a
five-year warrant to acquire 350,000 shares of Common Stock at an exercise price
of $8.00 per share, subject to customary adjustments (the "IPO Warrant"). The
IPO Warrant may not be exercised until September 3, 1998 and expires on
September 3, 2002. In connection with the Company's acquisition of La Monita on
September 30, 1997, Shansby Partners received a five-year warrant to acquire
30,000 shares of Common Stock at an exercise price of $10.5875 per share,
subject to customary adjustments (the "La Monita Warrant"). The La Monita
Warrant is exercisable at any time on or prior to September 30, 2002. In
connection with the Company's acquisition of Sauces Unlimited on October 29,
1997, Shansby Partners received a five-year warrant to acquire 30,000 shares of
Common Stock at an exercise price of $10.45 per share, subject to customary
adjustments (the "Sauces Unlimited Warrant"). The Sauces Unlimited Warrant is
exercisable at any time on or prior to October 29, 2002. In connection with the
Company's acquisition of Tortilla King on January 9, 1998, Shansby Partners
received a five-year warrant to acquire 30,000 shares of Common Stock at an
exercise price of $12.5125 per share, subject to customary adjustments (the
"Tortilla King Warrant"). The Tortilla King Warrant is exercisable at any time
on or prior to January 9, 2003. The Company received no cash consideration from
Shansby Partners for any of the foregoing Warrants, which were issued to Shansby
Partners in connection with financial advisory services it provided to the
Company. Because each of the Warrants was issued in a transaction not involving
a public offering, they were exempt from registration under the Securities Act
pursuant to Section 4(2) of the Securities Act.
For a discussion of the use of proceeds from the Initial Public
Offering, see Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
- 14 -
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain financial data for the Company
as of the dates and for the periods indicated. The financial data of the
Company as of and for the years ended December 31, 1994 and 1995 set forth
below have been derived from financial statements audited by Rylander, Clay &
Opitz, L.L.P., independent auditors. The financial data of the Company as of
and for the years ended December 31, 1996 and 1997 set forth below have been
derived from financial statements audited by McGladrey & Pullen, LLP,
independent auditors. The selected financial data of the Company as of and for
the periods ended July 31, 1993 and December 31, 1993 are unaudited. However,
in the opinion of the Company, all adjustments, consisting of normal recurring
accruals necessary for a fair presentation, have been made. The selected
financial data should be read in conjunction with Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the Company's Financial Statements and the Notes related thereto included
elsewhere in this Annual Report.
<TABLE>
<CAPTION>
FIVE
MONTHS
YEAR ENDED ENDED YEARS ENDED DECEMBER 31,
JULY 31, DECEMBER 31, -----------------------------------------------
1993 1993(1) 1994 1995 1996 1997
------- ------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . $20,328 $8,113 $19,637 $21,028 $21,198 $37,203
Cost of sales . . . . . . . . . . 14,974 5,466 13,213 14,266 14,081 22,328
------- ------ ------- ------- ------- -------
Gross profit . . . . . . . . . . 5,354 2,647 6,424 6,762 7,117 14,875
Operating expenses . . . . . . . . 8,511 3,304 7,210 6,940 6,768 15,260
------- ------ ------- ------- ------- -------
Income (loss) from
operations . . . . . . . . . . . (3,157) (657) (786) (178) 349 (385)
------- ------ ------- ------- ------- -------
Other income (expense)
Interest expense . . . . . . . . . (218) (98) (161) (219) (328) (507)
Interest income . . . . . . . . . . -- -- -- 62 2 --
Gain (loss) on disposal of
property and equipment . . . . . (514) -- (38) (192) (22) --
Other, net . . . . . . . . . . . . -- -- -- -- -- 27
------- ------ ------- ------- ------- -------
(732) (98) (199) (349) (348) (480)
------- ------ ------- ------- ------- -------
Income (loss) before income
taxes . . . . . . . . . . . . . (3,889) (755) (985) (527) 1 (865)
Income tax expense (benefit) . . . (520) -- -- -- -- (302)
------- ------ ------- ------- ------- -------
Net income (loss) . . . . . . . . $(3,369) $(755) $(985) $(527) $1 $(563)
======= ====== ======= ======= ======= =======
Basic and diluted earnings (loss)
per share . . . . . . . . . . . . $(2.15) $(0.48) $(0.59) $(0.31) $0.00 $(0.15)
Weighted average number of
common shares outstanding . . . . 1,564 1,564 1,680 1,700 1,700 3,693
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
AS OF JULY 31, --------------------------------------------------------
1993 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents . . . . $-- $238 $237 $9 $200 $363
Working capital (deficit) . . . . (2,289) (139) (44) (1,499) (1,557) 11,949
Total assets . . . . . . . . . . 6,630 7,436 5,946 7,132 7,089 58,780
Notes payable to bank . . . . . . 1,551 1,418 639 751 1,319 1,706
Long-term debt 1,528 1,513 949 1,249 920 7,420
Shareholders' equity . . . . . . 260 1,859 2,175 2,048 2,049 40,450
</TABLE>
- ---------------
(1) Represents a five month period. At December 31, 1993, the Company
changed its fiscal year end from July 31 to December 31.
(2) The Company adopted FASB Statement No. 128 for the year ended December
31, 1997, and as required restated all per share information for the
prior years to conform to the Statement. Because the Company incurred
a loss in 1997 and there were no common stock equivalents outstanding
in any year other than 1997, basic and diluted loss per share amounts
are the same in each period presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
- 15 -
<PAGE> 16
HISTORICAL INFORMATION
AUTHENTIC SPECIALTY FOODS, INC.
OVERVIEW
Following the Company's acquisition in early 1992 by The Shansby Group,
a buyout firm based in San Francisco that specializes in acquiring and improving
branded consumer product companies, Calidad executed a number of initiatives to
improve its operations and infrastructure. As a result of these initiatives and
the Initial Public Offering in September 1997, the Company has grown internally
and has taken advantage of acquisition opportunities in the highly fragmented
Mexican food industry. Immediately following the Initial Public Offering, the
Company acquired La Victoria. Since the consummation of the Initial Public
Offering and the acquisition of La Victoria, the Company has made three other
significant acquisitions: La Monita, Sauces Unlimited and Tortilla King.
When The Shansby Group acquired the Company in 1992, Calidad had two
facilities, a manufacturing facility in Ft. Worth and a distribution facility
in Rendon, Texas. In December 1992, Calidad relocated its distribution
facility, vehicle fleet and warehouse hub from the small, inefficient Rendon
facility to a 50,000 square foot facility in Grand Prairie, Texas. However,
because of capital constraints, Calidad was unable to relocate its
manufacturing facility at that time. The increased warehouse space and
centralized distribution capabilities enabled Calidad to increase its line of
Mexican food products and inventory and to expand its customer base within the
Dallas/Ft. Worth area. In order to manage its growing DSD sales route system
more efficiently, Calidad computerized its invoicing process by installing a
system utilizing hand-held computers on substantially all of its DSD routes.
As a result of Calidad's implementation of this system, as well as increases in
management staffing and benefit levels, increases in facility expenses from the
new distribution facility and the addition of a new fleet of vehicles, Calidad
experienced an overall increase in distribution and operating expenses.
As Calidad continued its growth, it became apparent in 1994 that its
20,000 square foot manufacturing facility in Ft. Worth was constraining
Calidad's ability to expand production. In August 1995, Calidad began to
consolidate its manufacturing, warehouse and office space into a modern 70,000
square foot location in Grand Prairie, Texas. This consolidation was completed
in January 1996. In November 1995, in conjunction with Calidad's relocation to
the new facility, Calidad acquired the tortilla and tortilla chip business of El
Paco Foods, Inc., a Dallas/Ft. Worth area tortilla and tortilla chip producer
("El Paco"). The primary purpose of the El Paco acquisition was to acquire
additional tortilla chip and flour tortilla manufacturing equipment, which
enabled Calidad to expand its manufacturing capacity. Calidad moved El Paco's
production and processing equipment to Calidad's Grand Prairie facility and
began servicing El Paco's customer base of small distributors and food service
outlets.
In June 1997, the Company changed its name from "Calidad Foods, Inc."
to "Authentic Speciality Foods, Inc." The Company acquired La Victoria on
September 2, 1997 immediately following the consummation of the Initial Public
Offering. On September 30, 1997, the Company acquired La Monita, a
manufacturer of tortillas located in Houston, Texas. On October 30, 1997, the
Company acquired Sauces Unlimited, a manufacturer of Mexican sauces and salsas
located in San Antonio, Texas. On January 9, 1998, the Company acquired
Tortilla King, a manufacturer of tortillas based in Victoria, Texas.
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements, the Selected Financial Data, and
the historical financial statements of the Company and the Notes related
thereto, which appear elsewhere in this Annual Report on Form 10-K.
- 16 -
<PAGE> 17
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
Years Ended December 31, December 31,
----------------------------------------- ----------------------
1995 1996 1997 1996 1997
---------- -------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold . . . . . . . . . 67.8 66.4 60.0 67.4 56.6
---------- -------- ---------- -------- -------
Gross margin . . . . . . . . 32.2 33.6 40.0 32.6 43.4
Operating expenses . . . . . . . . . 33.0 31.9 41.0 33.6 50.3
---------- -------- ---------- --------- -----
Income from operations . . . (0.8) 1.7 (1.0) (1.0) (6.9)
Other expenses, net . . . . . . . . . 1.7 1.6 1.3 1.5 1.1
---------- -------- ---------- -------- -------
Income (loss) before taxes . (2.5) 0.1 (2.3) (2.5) (8.0)
Provision (benefit) for income taxes 0.0 0.0 (0.8) (0.9) (2.9)
--------- -------- ---------- --------- --------
Net income (loss) . . . . . (2.5) % 0.1 % (1.5) % (1.6) % (5.1) %
========== ======== =========== ========= ========
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997
Authentic Speciality Foods acquired La Victoria effective upon the
closing of the Initial Public Offering on September 2, 1997, and acquired the
assets of La Monita on September 30, 1997. Accordingly, three months of
operations for La Victoria and La Monita are included in the Company's actual
results for the three months ended December 31, 1997. Sauces Unlimited was
acquired on October 30, 1997. Two months of its operations are therefore
included in the Company's actual results for the three months ended December
31, 1997.
Net Sales. Net sales consist of gross sales less the amount of
discounts, returns and allowances. Net sales for the three months ended
December 31, 1997 were $17,860,000 compared to $5,468,000 for the three months
ended December 31, 1996, an increase of $12,392,000, or 226.6%. Of this
improvement, $12,324,000 was attributable to sales for La Victoria, La Monita
and Sauces Unlimited. These companies were all acquired in 1997 and therefore
were not included in 1996 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
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 December 31, 1997 was $7,755,000 compared to $1,782,000 for
the three months ended December 31, 1996, an increase of $5,973,000, or 335.2%.
As a percentage of net sales, gross margin increased from 32.6% for the three
months ended December 31, 1996 to 43.4% for the three months ended December 31,
1997. The increase in gross margin was attributable to increased sales levels
at Calidad, as well as sales at La Victoria, La Monita and Sauces Unlimited
that were realized in 1997 but not included in 1996 results. The increase in
gross margin as a percentage of net sales was due to the higher gross margin
percentage experienced by La Victoria's operations relative to the margin
historically experienced by Calidad. Calidad's sales mix includes high margin
categories such as tortillas and tortilla chips, as well as lower margin items
including meats, cheeses and shelf-stable products.
- 17 -
<PAGE> 18
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 December 31, 1997 were $8,981,000 compared to $1,837,000 for the
three months ended December 31, 1996, an increase of $7,144,000, or 388.9%. As a
percentage of net sales, operating expenses increased from 33.6% for the three
months ended December 31, 1996 to 50.3% for the three months ended December 31,
1997. 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, operating expenses incurred by La Victoria, La Monita and Sauces
Unlimited subsequent to their acquisitions and a $2,915,000 payment to Robert
Tanklage, the former Chief Executive Officer of La Victoria in connection with
the termination of his employment agreement. Excluding the payment to Mr.
Tanklage, operating expenses for the three months ended December 31, 1997 were
$6,066,000, or 34.0% of net sales, which would have represented only a slight
increase over the prior year's fourth quarter.
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 December 31, 1997 were $207,000
compared to $81,000 for the three months ended December 31, 1996, an increase
of $126,000, or 155.6%. As a percentage of net sales, other expenses decreased
from 1.5% for the three months ended December 31, 1996 to 1.1% for the three
months ended December 31, 1997. The increase was attributable to interest
expense associated with capital leases at La Victoria, partially offset by
lower interest expense due to the repayment of Calidad debt with the proceeds
from the Initial Public Offering.
Taxes. The tax benefit for the three months ended December 31, 1997
was $529,000 compared to a tax benefit of $46,000 for the three months ended
December 31, 1996, an increase of $483,000. This increase in the benefit was
primarily attributable to the increase in the loss for the three months ended
December 31, 1997 compared to the three months ended December 31, 1996.
Net Income. For the reasons described above, the net loss for the
three months ended December 31, 1997 was $904,000 compared to a net loss of
$90,000 for the three months ended December 31, 1996. This resulted in an
increased net loss of $814,000, or 904.4%, compared to 1996. As a percentage of
net sales, the net loss increased from 1.6% for the three months ended December
31, 1996 to 5.1% for the three months ended December 31, 1997. Excluding the
$1,771,000 after-tax effect of the termination payment to Mr. Tanklage discussed
under "Operating Expenses" above, the Company recorded a net income of $867,000,
or 4.9%, as a percentage of net sales for the three months ended December 31,
1997.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1997
The Company acquired La Victoria effective upon the closing of the
Initial Public Offering on September 2, 1997. Certain assets of La Monita were
purchased on September 30, 1997. Sauces Unlimited was acquired on October 30,
1997. Four months of La Victoria's operations, three months of La Monita's
operations and two months of Sauces Unlimited's operations are therefore
included in the Company's actual results for the year ended December 31, 1997.
Net Sales. Net sales for the year ended December 31, 1997 were
$37,203,000 compared to $21,198,000 for the year ended December 31, 1996, an
increase of $16,005,000, or 75.5%. Of this improvement, $15,289,000 was
attributable to sales at La Victoria, La Monita and Sauces Unlimited subsequent
to their acquisitions. Each of these companies were acquired in 1997 and
therefore were not included in 1996 results. The remainder of the sales
increase 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. Gross margin for the year ended
December 31, 1997 was $14,875,000 compared to $7,117,000 for the year ended
December 31, 1996, an increase of $7,758,000, or 109.0%. As a percentage of
net sales, gross margin increased from 33.6% for the year ended December 31,
1996 to 40.0% for the year ended
- 18 -
<PAGE> 19
December 31, 1997. The increase in gross margin was attributable to increased
sales levels at Calidad as well as to sales at La Victoria, La Monita and
Sauces Unlimited subsequent to their acquisition dates. The increase in gross
margin as a percentage of net sales was due to the higher gross margin
percentage experienced by La Victoria's operations relative to the margin
historically experienced by Calidad. Calidad's sales mix includes higher margin
categories such as tortillas and tortilla chips, as well as lower margin items
including meats, cheeses and shelf-stable products.
Operating Expenses. Operating expenses for the year ended December 31,
1997 were $15,260,000 compared to $6,768,000 for the year ended December 31,
1996, an increase of $8,492,000, or 125.5%. As a percentage of net sales,
operating expenses increased from 31.9% for the year ended December 31, 1996 to
41.0% for the year ended December 31, 1997. The increase in operating expenses
was primarily due to higher transportation costs to new markets (Arkansas and
Louisiana) served by Calidad, the increased administrative costs involved in
operating as a public company, operating expenses incurred by La Victoria, La
Monita and Sauces Unlimited subsequent to their acquisitions and a $2,915,000
payment to Robert Tanklage, the former Chief Executive Officer of La Victoria in
connection with the termination of his employment agreement. These increases in
operating expenses were partially offset by a $242,000 decrease in non-compete
and consulting payments to two former shareholders that were incurred in 1996
but not in 1997. Excluding the payment to Mr. Tanklage, operating expenses for
the year ended December 31, 1997 were $12,345,000, or 33.2% as a percentage of
net sales.
Other Expenses. Other expenses for the year ended December 31, 1997
were $480,000 as compared to $348,000 for the year ended December 31, 1996, an
increase of $132,000, or 37.9%. As a percentage of net sales, other expenses
decreased from 1.6% for the year ended December 31, 1996 to 1.3% for the year
ended December 31, 1997. The increase in other expenses was attributable to
interest expense associated with capital leases at La Victoria, partially
offset by lower interest expense due to the repayment of Calidad debt with the
proceeds of the Initial Public Offering. Additionally, the Company realized a
gain of $27,000 from the sale of equipment in 1997 compared to a loss of
$22,000 that was incurred in 1996.
Taxes. The Company had an income tax benefit of $302,000 for the year
ended December 31, 1997 compared to no income tax benefit or expense for the
year ended December 31, 1996. The tax benefit for the year ended December 31,
1997 was the result, in part, of the loss generated in 1997. Additionally, for
the year ended December 31, 1997, as a result of the acquisitions, the Company
now believes that it is more likely than not the Company will have sufficient
taxable income in the future to fully realize the net deferred taxes that had
previously been fully reserved. Accordingly, the Company eliminated the
valuation allowance recorded on these net deferred assets. A portion of those
deferred taxes had been generated before the Company's quasi-reorganization and
pursuant to Staff Accounting Bulletin 86, were recorded as a direct addition to
additional paid-in capital.
Net Income. For the reasons described above, the net loss for the year
ended December 31, 1997 was $563,000 compared to a net income of $1,000 for the
year ended December 31, 1996, a decrease of $564,000. The net loss for the year
ended December 31, 1997 was 1.5% as a percentage of net sales. Excluding the
$1,771,000 after-tax effect of the termination payment to Mr. Tanklage
discussed under "Operating Expenses" above, the Company realized a net income of
$1,208,000, or 3.2% as a percentage of net sales for the year ended December 31,
1997.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1996
Calidad's sales growth was historically limited by its production
capacity. Since the relocation of Calidad's manufacturing facility in January
1996, significant new grocery store accounts were added to the customer base,
including Save-A-Lot, Western Family Foods and Brookshire Brothers. Calidad
has experienced steady growth in net sales, driven by extended route coverage
in North Texas (including the Dallas/Ft. Worth metroplex), as well as expanded
distribution into San Antonio, Texas and into Oklahoma, Louisiana and Arkansas.
Net Sales. Net sales for 1996 were $21,198,000 compared to
$21,028,000 for 1995, an increase of $170,000, or 0.8%. Net sales were flat
because net sales for 1995 included a substantial amount of sales of
shelf-stable products to Minyard Foods, which were discontinued in 1996.
Accordingly, these low margin sales of shelf-stable products to Minyard Foods
accounted for approximately $86,000 of Calidad's net sales in 1996, compared to
$2,864,000 in 1995.
- 19 -
<PAGE> 20
However, the discontinuation of these sales did not adversely affect Calidad's
relationship with Minyard Foods. In fact, net sales to Minyard Foods in 1996,
exclusive of shelf-stable products, increased by $777,000, or 15.6%, over 1995
net sales.
If sales of shelf-stable products to Minyard Foods are disregarded,
Calidad's net sales increased by $2,948,000, or 16.2%, from $18,164,000 in 1995
to $21,112,000 in 1996. Of this improvement, $2,018,000, or 68.5%, was
attributable to sales of manufactured products (e.g., tortillas, tortilla chips
and spices), of which approximately $741,000 resulted from the El Paco
acquisition. Approximately $761,000, or 25.8%, of the increase in net sales
was generated from increased sales of products manufactured by third parties
(e.g., meats and cheeses).
Costs of Sales and Gross Margin. The gross margins on products
manufactured by Calidad, such as tortillas and tortilla chips, have improved on
a year-to-year basis because of increased efficiencies from the new
manufacturing facility, as well as Calidad's emphasis on sales of manufactured
products in 1996. Most increases in raw material costs have traditionally been
recovered through price increases to Calidad's customers.
Gross margin for 1996 was $7,117,000 compared to $6,762,000 for 1995,
an increase of $355,000, or 5.2%. As a percentage of net sales, gross margin
increased from 32.2% in 1995 to 33.6% in 1996. The improvement in gross margin
was primarily attributable to the increase in sales of higher margin
manufactured products, combined with the discontinuation of low margin sales of
shelf-stable products to Minyard Foods, as described above. Gross margin
achieved on sales of products manufactured by Calidad has historically been
greater than the gross margin achieved on sales of products manufactured by
third parties. Accordingly, increased sales of manufactured products have a
greater impact on the overall gross margin of Calidad. Gross margin for 1996
also benefitted from improved manufacturing efficiencies that resulted from the
plant relocation and modernization.
Operating Expenses. Operating expenses for 1996 were $6,768,000
compared to $6,940,000 in 1995, a decrease of $172,000, or 2.5%. As a
percentage of net sales, operating expenses declined from 33.0% in 1995 to
31.9% in 1996. The decrease in operating costs was primarily attributable to
relocation expenses incurred in 1995 of approximately $337,000 and $58,000 of
long-haul transportation savings realized in 1996. These expense reductions
were partially offset by nonrecurring 1996 consulting and non-compete payments
to former shareholders and professional fees totaling $113,000 and an increase
of $101,000 in distributor commissions attributable to higher sales of
manufactured products.
Calidad expects that operating expenses will increase in absolute
amounts due, in part, to periodic reporting and compliance requirements
associated with being a public company, although such expenses vary as a
percentage of net sales. Additionally, Calidad expects that operating expenses
will increase in absolute amounts as a result of the implementation of its
acquisition strategy.
Other Expenses. Other expenses for 1996 were $348,000 compared to
$349,000 for 1995, a decrease of $1,000, or 0.3%. As a percentage of net
sales, other expenses decreased from 1.7% in 1995 to 1.6% in 1996. Interest
expense for 1996 was $328,000 compared to $219,000 for 1995, an increase of
$109,000, or 49.8%. The increase in interest expense was due to interest on
the Term Loan and debt incurred with the El Paco acquisition, which were used
to partially finance Calidad's plant relocation and modernization. See
"--Liquidity and Capital Resources." Other expenses also included a loss on
the disposal of property and equipment of $22,000 in 1996 compared to a loss of
$192,000 in 1995. Both of these losses resulted from the plant relocation and
modification. In addition, in 1995, interest income consisted primarily of
$51,000 of interest income received on a federal tax refund.
Taxes. Because the Company's deferred tax assets were fully reserved
by a valuation allowance, no provision for income taxes was recorded in 1995 or
1996. In addition, no taxable income was generated in 1996 that would require
an adjustment to additional paid-in capital pursuant to Staff Accounting
Bulletin No. 86.
Net Income. For the reasons described above, net income for 1996 was
$1,000 compared to a net loss of $527,000 for 1995, an improvement of $528,000.
As a percentage of net sales, net income improved from a loss of 2.5% in 1995
to a profit of 0.1% in 1996.
- 20 -
<PAGE> 21
DISCUSSION OF PRO FORMA FINANCIAL STATEMENTS
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997
The Company acquired La Victoria effective immediately following the
closing of the Initial Public Offering on September 2, 1997. Accordingly, only
four months of La Victoria's operations are included in the Company's actual
results for the year ended December 31, 1997, and no La Victoria operations are
included in the actual results for the year ended December 31, 1996. 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 it would be
beneficial to include a discussion of the Company's consolidated pro forma
results. This pro forma discussion should be read in conjunction with the
supplementary table presented below. Because of their relative immateriality
during 1997 to the overall Company in terms of net sales and net income for
1997, La Monita and Sauces Unlimited are not presented on a pro forma basis
for 1996 or 1997.
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
-------------------- ---------------------
1997 1996 1997 1996
------- ------ ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Net Sales $17,860 $15,163 $63,451 $59,347
Cost Of Sales 10,105 8,563 34,988 33,480
------- ------- ------- -------
Gross Margin 7,755 6,600 28,463 25,867
Selling, General & Administrative 6,066 5,737 24,027 23,051
One-Time La Victoria Charge 2,915 0 2,915 0
------- ------ ------- -------
Income from Operations (1,226) 863 1,521 2,816
Interest, net 206 235 754 1,002
(Gain) Loss on Disposal Of
Property and Equipment 1 0 0 70
------- ------ ------- -------
Income Before Income Taxes (1,433) 628 767 1,744
Income Tax Expense (Benefit) (529) 354 484 871
------- ------ ------- -------
Net Income (Loss) $ (904) $ 274 $ 283 $ 873
======= ====== ======= =======
</TABLE>
Net Sales. Net sales for the three months ended December 31, 1997 were
$17,860,000 compared to $15,163,000 for the three months ended December 31,
1996, an increase of $2,697,000, or 17.8%. This increase was attributable to
$2,067,000 in net sales at La Monita and Sauces Unlimited, offset by a $370,000
decrease in net sales at La Victoria and Calidad. Most of this decrease was due
to the elimination of non-accretive promotional activity at La Victoria.
Cost of Sales and Gross Margin. Gross margin for the three months
ended December 31, 1997 was $7,755,000 compared to $6,600,000 for the three
months ended December 31, 1996, an increase of $1,155,000, or 17.5%. As a
percentage of net sales, gross margin decreased from 43.5% for the three months
ended December 31, 1996 to 43.4% for the three months ended December 31, 1997.
The increased gross margin was attributable to sales at La Monita and Sauces
Unlimited subsequent to their acquisitions and an increase in Calidad net
sales. Despite lower sales, La Victoria experienced an increase in gross
margin due to a continued emphasis on cost controls and efficiencies.
Operating Expenses. Operating expenses for the three months ended
December 31, 1997 were $8,981,000 compared to $5,737,000 for the three months
ended December 31, 1996, an increase of $3,244,000, or 56.5%. As a percentage
of net sales, operating expenses increased from 37.8% for the three months ended
December 31, 1996 to 50.3% for the three months ended December 31, 1997. This
increase was primarily due to operating expenses incurred by La Monita and
Sauces Unlimited subsequent to their acquisitions, the $2,915,000 contract
termination payment to Robert Tanklage, La Victoria's former Chief Executive
Officer, higher transportation expenses to new markets (Arkansas and Louisiana)
served by Calidad and the increased administrative costs of operating as a
public company. These expense increases were partially offset by lower
advertising and promotional expenses at La Victoria and a $98,000 decrease in
non-compete and consulting payments to two former shareholders of El Paso that
was incurred in 1996 but not in 1997. Excluding the payment to Mr. Tanklage,
pro forma operating expenses for the three months ended December 31, 1997 were
$6,066,000, or 34.0% as a percentage of net sales.
Other Expenses. Other expenses for the three months ended December
31, 1997 were $207,000 compared to $235,000 for the three months ended December
31, 1996, a decrease of $28,000, or 11.9%. As a percentage of net sales, other
expenses decreased from 1.5% for the three months ended December 31, 1996 to
1.2% for the three months ended December 31, 1997. The decrease was due to
reduced working capital borrowings and a lower term debt balance at La
Victoria.
Taxes. The tax benefit for the three months ended December 31, 1997
was $529,000 compared to tax expense of $354,000 for the three months ended
December 31, 1996, a change of $883,000. This increase in the benefit was
primarily attributable to the loss for the three months ended December 31, 1997
whereas for the three months ended December 31, 1996 the Company had income
before income taxes of $628,000.
Net Income. For the reasons described above, the Company incurred a
net loss of $904,000 for the three months ended December 31, 1997 compared to a
net income of $274,000 for the three months ended December 31, 1996, a decrease
of $1,178,000, or 429.9%. The net loss for the three months ended December 31,
1997 was 5.1% as a percentage of net sales compared to a net income of 1.8% for
the three months ended December 31, 1996. Excluding
- 22 -
<PAGE> 22
the $1,771,000 after-tax effect of the termination payment to Mr. Tanklage
discussed under "Operating Expenses" above, the Company realized a net income
of $867,000, or 4.9% of net sales for the three months ended December 31, 1997.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1997
Net sales. Net sales for the year ended December 31, 1997 were
$63,451,000 compared to $59,347,000 for the year ended December 31, 1996, an
increase of $4,104,000, or 6.9%. Of this increase, $3,067,000 was attributable
to sales at La Monita and Sauces Unlimited subsequent to their acquisitions,
while Calidad experienced a $716,000 sales increase due to additional meat and
cheese distribution in the Dallas/Ft. Worth market and increased sales in the
outlying markets of Arkansas and Louisiana, offset by the loss of the Hudson
Foods and Pepperidge Farms dock business. The remainder of the net sales
increase occurred in the third quarter at La Victoria and was largely
attributable to more effective use of in-store promotions and advertising
expenditures. The third quarter increase was partially offset by lower sales
levels in the first six and last three months of 1997 at La Victoria. The
lower sales for the first six months of 1997 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 year ended
December 31, 1997 was $28,463,000 compared to $25,867,000 for the year ended
December 31, 1996, an increase of $2,596,000, or 10.0%. As a percentage of net
sales, gross margin increased from 43.6% for the year ended December 31, 1996
to 44.9% for the year ended December 31, 1997. The increase in gross margin
was attributable to the increased sales as compared to 1996 and improved
manufacturing efficiencies due to cost controls at La Victoria.
Operating Expenses. Operating expenses for the year ended December 31,
1997 were $26,942,000 compared to $23,051,000 for the year ended December 31,
1996, an increase of $3,891,000, or 16.9%. As a percentage of net sales,
operating expenses increased from 38.8% for the year ended December 31, 1996 to
42.5% for the year ended December 31, 1997. The increase in operating expenses
was due to higher transportation costs to new markets (Arkansas and Louisiana)
served by Calidad, the increased administrative costs of operating as a public
company, a $2,915,000 contract termination payment to Mr. Tanklage and operating
expenses incurred by La Monita and Sauces Unlimited subsequent to their
acquisitions. The expense increases were offset by a $242,000 decrease in
non-compete and consulting payments to two former shareholders that were
incurred in 1996 but not in 1997. Excluding the payment to Mr. Tanklage,
operating expenses for the year ended December 31, 1997 were $24,027,000, or
37.9% as a percentage of net sales.
Other Expenses. Other expenses for the year ended December 31, 1997
were $754,000 compared to $1,072,000 for the year ended December 31, 1996, a
decrease of $318,000, or 29.7%. As a percentage of net sales, other expenses
decreased from 1.8% for the year ended December 31, 1996 to 1.2% for the year
ended December 31, 1997. The decrease was due to reduced working capital
borrowings and lower term debt balance at La Victoria, interest income
generated by funds raised from the Initial 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 $484,000 for the year
ended December 31, 1997 compared to income tax expense of $871,000 for the
year ended December 31, 1996, a decrease of $387,000. The decrease in tax
expense was primarily the result of lower taxable income for the year ended
December 31, 1997 compared to the year ended December 31, 1996.
Net Income. For the reasons described above, pro forma net income for
the year ended December 31, 1997 was $283,000 compared to $873,000 for the year
ended December 31, 1996, a decrease of $590,000, or 67.6%. As a percentage of
net sales, net income decreased from 1.5% for the year ended December 31, 1996
to 0.4% for the year ended December 31, 1997. Excluding the $1,771,000
after-tax effect of the termination payment to Mr. Tanklage discussed under
"Operating Expenses" above, the Company realized a net income of $2,054,000, or
3.2% as a percentage of net sales for the year ended December 31, 1997.
- 23 -
<PAGE> 23
VARIABILITY IN QUARTERLY OPERATING RESULTS; SEASONALITY
The Company has experienced a minimal degree of seasonality over the
three previous years. Minor increases in tortilla, spice, meat and cheese sales
normally occur during the winter months. A similar sales increase for tortilla
chips and Mexican salsas and sauces is experienced during the summer months.
The Company believes that the relative inelasticity of demand for grocery
products is an insulating factor again material fluctuations in the Company's
sales levels. Anticipated sales gains due to product acceptance and favorable
market demographics should also serve as a seasonality buffer.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's losses and restricted access to capital
adversely affected the Company's ability to pursue acquisition and growth
opportunities. As the net sales of the Company have grown, the Company
experienced increased working capital requirements. These working capital
requirements were funded largely by borrowings under asset-based working
capital facilities. An initial $2,000,000 facility was funded in May 1993, with
effective interest rates ranging from prime rate plus 0.75% per annum to prime
rate plus 5.0% per annum as of the termination date. This facility was
replaced in April 1995 by the $2,000,000 Revolving Facility with a different
lender. The Revolving Facility accrued interest at prime rate plus 1.75%.
Although The Shansby Group has provided certain funding since
acquiring the Company in 1992, The Shansby Group was limited in the amount of
funding it was able to provide because of constraints imposed by its investment
objectives. Nevertheless, because of the Company's net losses incurred in 1994
and the decrease in the Company's available working capital facility in effect
during that year, The Shansby Group made several capital infusions that totaled
$1,085,000 in 1994. Furthermore, in order to fund capital expenditures,
including the El Paco acquisition, that were required to relocate and modernize
Calidad's plant in late 1995, The Shansby Group funded $400,000 of the
$2,529,000 of these capital and other expenditures. The remaining $2,129,000
was funded with (i) $600,000 under the Term Loan, (ii) a consulting and
non-compete agreement with the shareholders of El Paco under which the Company
was obligated to pay $549,000 and which was treated as indebtedness for
financial accounting purposes (the "El Paco Non-Compete"), (iii) a federal
income tax refund of $539,000, (iv) $162,000 from the sale of surplus
manufacturing equipment and (v) past due accounts receivable collections made
in late 1994. The Term Loan was initially funded in November 1995, accrued
interest at prime rate plus 2.0% per annum and was payable in 48 monthly
principal installments of $12,500 plus interest. The Term Loan and the
Revolving Facility were secured by a first lien on Calidad's equipment,
inventory, accounts receivable and general intangibles. The Company used the
net proceeds from the Initial Public Offering to repay all amounts outstanding
under, and to terminate, the Revolving Facility and the Term Loan. In
connection with the termination of the Revolving Facility, the Company paid a
$20,000 termination fee and expensed deferred financing costs of $29,000. The
El Paco Non-Compete is due in monthly installments of $11,667, with interest
imputed at 10.0%, through November 2000.
In connection with the acquisition of the Company by The Shansby Group
in 1992, a $1 million subordinated note was issued to the former shareholder of
the Company (the "Calidad Shareholder Note"). The Calidad Shareholder Note was
originally scheduled to mature on March 26, 1997. Because of funding
constraints on the Company, the former shareholder agreed to extend the note
for an additional two years to March 26, 1999. Interest on this note was
increased from 8.0% per annum to 10.5% per annum. The Company used a portion
of the net proceeds from the Initial Public Offering to repay the Calidad
Shareholder Note.
Working capital at December 31, 1997 increased by approximately
$13,502,000 to $11.9 million from a deficit of $1.6 million at December 31,
1996. The primary reason for the increase was the working capital acquired in
connection with the Initial Public Offering and the acquisitions.
During 1997, the Company's operating activities used cash of $1,182,000.
The cash used in operations was the result of the net loss of $563,000 offset by
noncash items, including depreciation, amortization, and deferred taxes, which
totaled $897,000, and the net increase in working capital components of
$1,516,000. The increase in working capital components was net of the effects
of the acquisitions, which provided working capital of approximately
$11,986,000.
During 1997, the Company used net cash in investing activities of
approximately $24,160,000 primarily as a result of the acquisitions of La
Victoria, La Monita and Sauces Unlimited which, in the aggregate, used cash of
approximately $23,591,000. Furthermore, approximately $11,160,000 of additional
purchase price for the acquisitions was noncash. The acquisitions also had the
noncash effect on investing activities by increasing property and equipment by
$11,356,000, and goodwill, tradenames and trademarks by $22,407,000.
The Company's financing activities during 1997 provided net cash of
approximately $25,505,000. The company's Initial Public Offering provided net
proceeds of $32,725,000 of which $5,866,000 was simultaneously used to redeem
788,500 shares of Common Stock. During 1997, the Company's line of credit
increased by $387,000 and long-term debt payments totaled $1,741,000. Noncash
financing activities included the long-term debt and capital lease obligations
assumed in connection with the acquisitions of $7,002,000, as well as a capital
lease transaction for approximately $490,000.
- 24 -
<PAGE> 24
The Company estimates that normal capital expenditures for the
foreseeable future will range from $500,000 to $750,000 per year.
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 Mr.
Tanklage pursuant to the La Victoria acquisition and $5.9 million was used to
repurchase 788,500 shares owned by The Shansby Group and TSG International. 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 Initial Public
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 1.50 points and
requires the bank's approval for any acquisition that requires access to more
than $5 million of the facility. As of December 31, 1997, approximately $8.3
million was available under this facility.
On September 30, 1997, the Company acquired certain assets of the
company doing business as La Monita Mexican Food Products, Inc. ("La Monita") in
Houston, Texas and related liabilities were assumed. The $2.9 million purchase
price included a $950,000 payment to the former owner of La Monita, with the
remainder used to retire certain debt and fund transaction expenses. The cash
payments were made with available cash reserves resulting from the Initial
Public Offering.
On October 30, 1997, the Company acquired Sauces Unlimited. The $3.0
million purchase price included a $2.4 million payment to two former
shareholders, $314,000 to retire a term loan and revolving credit facility, the
assumption of $207,000 in long-term debt and the issuance of warrants to
purchase 40,000 shares of Common Stock. The cash payments were made with
available cash reserves resulting from the Initial Public Offering.
In December 1997, Mr. Robert C. Tanklage received a payment of
$2,915,000 from the Company as a severance payment in accordance with the
provisions of his employment agreement with La Victoria. This payment was
funded with available cash reserves resulting from the Initial Public Offering.
Prior to December 31, 1997, $3.6 million of the $5 million advance from
Union Bank, used to pay a note to a former shareholder of La Victoria as
discussed above, was liquidated using available cash reserves. After this loan
payment was made, the Company had $8.3 in availability under the $10 million
credit facility with Union Bank of California.
- 25 -
<PAGE> 25
On January 9, 1998, the Company acquired Tortilla King. The $8.3
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 $467,000 in
transaction expenses. The cash outlay of $5.8 million was funded under the
Company's credit facility with Union Bank of California.
After the acquisitions referred to above, the Company had minimal cash
reserves but $3.3 million of availability under its credit facility with Union
Bank of California as of January 31, 1998. The Company believes that the funds
available to it from internally generated funds and under its existing credit
facility are sufficient to conduct its operations. However, in order to pursue
its acquisition program, the Company anticipates that it will obtain an
acquisition facility from one or more lending institutions. The Company has not
yet obtained any commitments for such facility.
INFLATION AND CHANGES IN PRICES
The cost of ingredients (e.g., corn flour and wheat flour) for
products that Calidad manufactures rise and fall in line with their value in
the commodity markets. The Company endeavors to insulate itself from wide
variations in prices by entering into supply contracts on a 90- to 360-day
basis. Generally, increases in raw material costs are recovered with periodic
product price increases. Product pricing for products manufactured by third
parties are negotiated. When price increases occur, the Company passes these
increases on to the retailer.
FORWARD-LOOKING INFORMATION
Information included in this Annual Report, including information
incorporated by reference herein, contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act, 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.
YEAR 2000
Historically, most computer systems (including microprocessors
embedded into plant equipment and other machinery) utilized software that
processed transactions using two digits to represent the year of the
transaction (i.e., 98 represents the year 1998). This software (including
software built into embedded microprocessors) requires modification to properly
process dates beyond December 31, 1999 (the "Year 2000 Issue"). The Company
presently believes that the Year 2000 Issue will not have a material adverse
effect on the Company's operations.
The Company intends to initiate formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company is vulnerable to those third parties' potential failure to remediate
their own Year 2000 Issue. However, there can be no guarantee that the systems
of other companies, on which the Company's systems rely, will be timely
converted, or that a failure to convert by another company, or a conversion
that is incompatible with the Company's systems, would not have a material
adverse effect on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Based on the Company's market capitalization, the quantitative and
qualitative disclosures required by Rule 305 of the Exchange Act are required
for the Company's Annual Report on Form 10-K for the year ended December 31,
1998 and, if material, will be so included.
- 26 -
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Reports F-2
Financial Statements
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE> 27
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Authentic Specialty Foods, Inc.
Grand Prairie, Texas
We have audited the accompanying consolidated balance sheets of Authentic
Specialty Foods, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Authentic Specialty
Foods, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
March 17, 1998
F-2
<PAGE> 28
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Authentic Specialty Foods, Inc.
(f/k/a Calidad Foods, Inc.)
Grand Prairie, Texas
We have audited the accompanying statements of operations, shareholders' equity,
and cash flows of Authentic Specialty Foods, Inc. (f/k/a Calidad Foods, Inc.)
for the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Authentic
Specialty Foods, Inc. (f/k/a Calidad Foods, Inc.) for the year ended December
31, 1995, in conformity with generally accepted accounting principles.
RYLANDER, CLAY & OPITZ, L.L.P.
Fort Worth, Texas
March 15, 1996
F-3
<PAGE> 29
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS (NOTE 4) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 363,371 $ 200,479
Accounts receivable, net of allowances for doubtful accounts
and market development fund of $292,000 in 1997 and
$75,000 in 1996 (Note 8) 4,859,352 1,474,753
Inventories (Note 3) 13,321,475 780,222
Prepaid expenses 425,241 108,104
Prepaid income taxes 358,274 --
Deferred income taxes (Note 6) 725,000 --
-------------------------------------
TOTAL CURRENT ASSETS 20,052,713 2,563,558
-------------------------------------
Property and Equipment, at cost (Note 5)
Buildings under capital lease 6,025,000 --
Equipment 8,975,349 2,722,438
Leasehold improvements 855,311 730,975
Fixtures 448,033 568,249
-------------------------------------
16,303,693 4,021,662
Less accumulated depreciation and amortization 1,724,450 1,199,125
-------------------------------------
14,579,243 2,822,537
-------------------------------------
Other Assets (Note 2)
Trademarks and tradenames, net of accumulated amortization of
$69,167 and $-0-, respectively 8,230,833 --
Goodwill, net of accumulated amortization of $595,267 in
1997 and $386,379 in 1996 15,813,456 1,646,667
Other 103,810 56,376
-------------------------------------
24,148,099 1,703,043
-------------------------------------
$ 58,780,055 $ 7,089,138
=====================================
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Line of credit (Note 4) $ 1,706,452 $ 1,319,442
Current portion of long-term debt 1,512,000 766,432
Accounts payable 2,778,293 1,723,999
Accrued compensation 614,696 --
Other accrued expenses 1,491,787 217,505
Income taxes payable -- 92,739
-------------------------------------
TOTAL CURRENT LIABILITIES 8,103,228 4,120,117
-------------------------------------
Long-Term Debt, less current portion (Notes 4 and 5) 7,419,894 919,866
-------------------------------------
Deferred Income Taxes (Note 6) 2,807,000 --
-------------------------------------
Commitments and Contingencies (Notes 5 and 10)
Shareholders' Equity (Notes 7 and 9)
Preferred stock, $0.01 par value; 5,000,000 shares authorized -- --
Common stock, $1.00 par value; 20,000,000 shares authorized 7,786,500 1,700,000
Additional paid-in capital 34,737,430 1,860,152
Accumulated deficit, since January 1, 1994 (2,073,997) (1,510,997)
-------------------------------------
40,449,933 2,049,155
-------------------------------------
$ 58,780,055 $ 7,089,138
=====================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 30
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales (Note 8) $ 37,203,363 $ 21,198,408 $ 21,028,390
Cost of sales 22,328,287 14,081,436 14,266,056
---------------------------------------------------------
GROSS MARGIN 14,875,076 7,116,972 6,762,334
Operating expenses:
Selling, general, and administrative 12,344,763 6,767,617 6,940,177
Employment contract termination (Note 2) 2,915,521 - -
---------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (385,208) 349,355 (177,843)
---------------------------------------------------------
Other income (expense):
Interest expense (507,211) (327,994) (219,142)
Other, net 27,419 (19,994) (130,356)
---------------------------------------------------------
(479,792) (347,988) (349,498)
---------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (865,000) 1,367 (527,341)
Income tax benefit (Note 6) 302,000 - -
---------------------------------------------------------
NET INCOME (LOSS) $ (563,000) $ 1,367 $ (527,341)
=========================================================
Basic and diluted earnings (loss) per common share $ (0.15) $ - $ (0.31)
=========================================================
Weighted-average number of common shares
outstanding 3,693,058 1,700,000 1,700,000
=========================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 31
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------------- ------------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 35,814 $ 358 1,700,000 $ 1,700,000
Cancellation of preferred stock (35,814) (358) -- --
Contribution of capital -- -- -- --
Net loss -- -- -- --
---------------------------------------------------------------
Balance, December 31, 1995 -- -- 1,700,000 1,700,000
Net income -- -- -- --
---------------------------------------------------------------
Balance, December 31, 1996 -- -- 1,700,000 1,700,000
Sale of common stock in initial public offering,
net of issuance costs of $1,499,473 -- -- 4,600,000 4,600,000
Redemption of common stock (Note 2) -- -- (788,500) (788,500)
Common stock issued in connection with acquisition
of La Victoria Foods, Inc. (Note 2) -- -- 2,275,000 2,275,000
Warrants for common stock issued in connection
with acquisitions of La Monita Mexican Food
Products and Sauces Unlimited, Inc.
(Notes 2 and 9) -- -- -- --
Tax benefit of net operating loss utilized (Note 7) -- -- -- --
Net loss -- -- -- --
---------------------------------------------------------------
Balance, December 31, 1997 -- $ -- 7,786,500 $ 7,786,500
===============================================================
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-In Accumulated
Capital Deficit Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1994 $ 1,459,794 $ (985,023) $ 2,175,129
Cancellation of preferred stock 358 -- --
Contribution of capital 400,000 -- 400,000
Net loss -- (527,341) (527,341)
-------------------------------------------------
Balance, December 31, 1995 1,860,152 (1,512,364) 2,047,788
Net income -- 1,367 1,367
-------------------------------------------------
Balance, December 31, 1996 1,860,152 (1,510,997) 2,049,155
Sale of common stock in initial public offering,
net of issuance costs of $1,499,473 28,124,527 -- 32,724,527
Redemption of common stock (Note 2) (5,077,940) -- (5,866,440)
Common stock issued in connection with acquisition
of La Victoria Foods, Inc. (Note 2) 8,693,000 -- 10,968,000
Warrants for common stock issued in connection
with acquisitions of La Monita Mexican Food
Products and Sauces Unlimited, Inc.
(Notes 2 and 9) 192,000 -- 192,000
Tax benefit of net operating loss utilized (Note 7) 945,691 -- 945,691
Net loss -- (563,000) (563,000)
-------------------------------------------------
Balance, December 31, 1997 $ 34,737,430 $ (2,073,997) $ 40,449,933
=================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 32
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ (563,000) $ 1,367 $ (527,341)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Deferred income taxes (302,000) -- --
Depreciation 916,470 515,117 354,716
Amortization 278,055 242,081 197,187
Loss (gain) on disposal of property and
equipment 4,487 22,240 191,574
Changes in assets and liabilities, net of effects
of acquisitions:
Receivables (192,510) (151,527) 430,565
Inventory 700,441 88,516 (157,477)
Prepaid expenses 126,291 26,973 (59,726)
Accounts payable (1,302,321) (232,199) 244,740
Accrued expenses (847,883) 52,231 16,352
-----------------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (1,181,970) 564,799 690,590
-----------------------------------------------------
Cash Flows From Investing Activities
Purchase of property and equipment (620,743) (320,988) (1,256,552)
Acquisition of La Victoria Foods, Inc. (17,529,362) -- --
Acquisition of other businesses (6,061,305) (159,921) (516,453)
Change in other assets 51,697 (28,540) (48,466)
-----------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (24,159,713) (509,449) (1,821,471)
-----------------------------------------------------
</TABLE>
(Continued)
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities
Increase (decrease) in line of credit 387,010 568,509 111,664
Borrowing (repayment) on note payable to
officer -- (80,000) 80,000
Proceeds of long-term debt -- -- 600,000
Payments made on long-term debt (1,740,522) (352,407) (288,641)
Net proceeds from common stock issued 32,724,527 -- --
Redemption of common stock (5,866,440) -- --
Capital contributions -- -- 400,000
------------------------------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 25,504,575 136,102 903,023
------------------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 162,892 191,452 (227,858)
Cash and Cash Equivalents
Beginning 200,479 9,027 236,885
------------------------------------------------
Ending $ 363,371 $ 200,479 $ 9,027
================================================
Supplemental Disclosures of Cash Flow Information
Cash paid for interest $ 524,930 $ 327,994 $ 219,142
Cash paid for income taxes 330,085 -- --
================================================
Supplemental Schedule of Noncash Investing and
Financing Activities (Note 2)
Equipment acquired under capital lease $ 490,000 $ -- $ --
================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 33
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Authentic Specialty Foods, Inc. and Subsidiaries (the
"Company") is engaged in the manufacture, distribution, and sale of a wide
variety of Mexican food products primarily to grocery stores, independent retail
and wholesale food outlets, and individual retailers located primarily in the
western United States and Texas.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, LV Foods, L.L.C., La
Victoria Foods, Inc., La Monita Mexican Food Products, Inc. and Sauces
Unlimited, Inc. All material intercompany accounts and transactions have been
eliminated in consolidation.
USE OF ESTIMATES: The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and their reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION: The Company recognizes revenue upon delivery of the product
to customers or distributors.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with original maturities
of three months or less to be cash equivalents.
The Company maintains its cash in bank deposit accounts which, at times, exceed
federally insured limits. The Company has not experienced any losses in such
accounts.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of cash and cash
equivalents, accounts receivable, and accounts payable approximates the carrying
amount because of the short maturity of those investments. The fair value of the
short- and long-term debt is estimated based on interest rates for the same or
similar debt offered to the Company having the same or similar remaining
maturities and collateral requirements and approximates the fair value.
INVENTORIES: Inventories are valued at the lower of cost or market. Cost is
determined on the first-in, first-out ("FIFO") method.
F-8
<PAGE> 34
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Depreciation and amortization: Depreciation and amortization are provided using
the straight-line method based on the estimated useful lives of individual
assets over the following periods:
<TABLE>
<CAPTION>
YEARS
-----------------------------------------------------
<S> <C>
Fixtures and equipment 3-10
Buildings under capital lease 13
Leasehold improvements Lesser of the term of lease or estimated useful lives
Goodwill 25-40
Trademarks and tradenames 40
</TABLE>
The Company reviews its long-lived assets, trademarks, and goodwill related to
those assets periodically to determine potential impairment by comparing the
carrying value of the long-lived assets, trademarks, and identified goodwill
with the estimated future net undiscounted cash flows expected to result from
the use of the assets, including cash flows from disposition. Should the sum of
the expected future net cash flows be less than the carrying value, the Company
would recognize an impairment loss at that date. An impairment loss would be
measured by comparing the amount by which the carrying value exceeds the fair
value (estimated discounted future cash flows) of the long-lived assets and
identified goodwill.
Goodwill not identified with impaired assets will continue to be evaluated to
determine whether events or circumstances warrant a write-down or revised
estimates of useful lives. The Company will determine a potential impairment by
comparing the carrying value of goodwill with the estimated future net
undiscounted cash flows expected to result from the use of the assets, including
cash flows from disposition. Should the sum of the expected future net cash
flows be less than the carrying value, the Company would recognize an impairment
loss at that date. An impairment loss would be measured by comparing the amount
by which the carrying value exceeds the fair value (estimated discounted future
cash flows) of the goodwill.
To date, management has determined that no impairment of long-lived assets and
goodwill exists.
F-9
<PAGE> 35
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax basis. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
MARKET DEVELOPMENT FUND ALLOWANCE: The Company provides credits to certain
customers related to specific marketing programs upon proof of the participation
by the customer. All credits offered to customers are recorded at the time of
performance as a credit against amounts due from the customers.
EARNINGS (LOSS) PER SHARE: 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. Basic per share amounts are computed,
generally, by dividing net income or loss by the weighted-average number of
common shares outstanding. Diluted per share amounts assume the conversion,
exercise, or issuance of all potential common stock instruments, unless the
effect is antidilutive, thereby reducing the loss or increasing the income per
common share.
The Company initially applied Statement No. 128 for the year ended December 31,
1997 and, as required by the statement, has restated all per share information
for the prior years to conform to the statement.
During 1997, the Company granted options and warrants to employees and
consultants to purchase a total of 450,000 shares of common stock at a
weighted-average exercise price of $8.64. Those options and warrants were not
included in the computation of diluted earnings per share because the Company
incurred a loss in 1997 and their inclusion in the calculation of diluted loss
per share would have an antidilutive effect. There were no common stock
equivalents outstanding during the years ended December 31, 1996 and 1995.
Therefore, basic and diluted earnings (loss) per share amounts are the same in
each period presented.
F-10
<PAGE> 36
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. ACQUISITIONS
LA VICTORIA FOODS, INC. ACQUISITION: On September 2, 1997, pursuant to a
contribution and exchange agreement, the Company completed the acquisition of
the beneficial ownership of 100 percent of the capital stock of La Victoria
Foods, Inc. ("La Victoria"). La Victoria is engaged in the manufacture,
distribution, and sale of a variety of salsas and other Mexican sauces. La
Victoria had been owned by the Tanklage family since 1947.
In April 1997, LV Foods, L.L.C. ("LV Foods") acquired a 50 percent interest in
the outstanding shares of La Victoria in exchange for $5 million in cash and a
$7 million note payable to the seller of the shares. LV Foods was owned 99
percent by TSG2 L.P. and TSG2 Management, L.L.C. and 1 percent by the former
chairman of the Company. TSG2 L.P. and TSG2 Management, L.L.C. are affiliates of
The Shansby Group ("Shansby"). Shansby, which is a related party, owned
substantially all of the Company prior to September 1997 (see Note 9).
On September 2, 1997, the Company acquired the 50 percent beneficial interest in
La Victoria held by Mr. Robert C. Tanklage. Mr. Tanklage received a total of
$17,600,000 for his 50 percent interest comprised of $12,000,000 in cash and
875,000 shares of common stock with a fair value of $5,600,000. The Company
employed Mr. Tanklage as president of La Victoria and assumed the obligation
under a five-year employment contract between Mr. Tanklage and La Victoria dated
May 31, 1997. On December 17, 1997, the Company terminated the employment
contract of Mr. Tanklage as part of a succession plan for La Victoria. Pursuant
to the terms of the contract, the Company paid Mr. Tanklage approximately
$2,915,000.
Concurrent with the acquisition of Mr. Tanklage's shares, 100 percent of the
ownership of LV Foods was transferred to the Company and LV Foods became a
wholly-owned subsidiary of the Company.
Because the Company and LV Foods were both controlled by Shansby, the
acquisition of LV Foods by the Company is a transaction between entities under
common control, and accordingly, the net assets and liabilities transferred in
the transaction were accounted for at historical cost in a manner similar to
that in pooling of interests accounting. Accordingly, the purchase price of LV
Foods is based on LV Foods' historical cost investment in La Victoria, its only
asset. This amount is based on LV Foods' original investment in La Victoria of
$12 million in April 1997, adjusted for net equity method adjustments.
F-11
<PAGE> 37
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. ACQUISITIONS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
Purchase price components (in thousands):
Common stock issued to Mr. Tanklage $ 5,600
Cash payments to Mr. Tanklage 12,000
Common stock issued to Shansby and former chairman for LV Foods 5,368
Retirement of note payable assumed 5,061
Transaction expenses 468
--------
Total purchase price $ 28,497
========
Fair value of net assets acquired 13,398
--------
Excess of purchase price over book value of net assets acquired $ 15,099
========
The excess purchase price has been allocated as follows (in thousands):
Trademarks and tradenames $ 8,300
Goodwill 10,277
Deferred taxes on amounts allocated to identified net assets other than goodwill (3,478)
--------
$ 15,099
========
</TABLE>
The present value of the payments required under the capital leases with the
Tanklage estate exceeded the fair value of the related real estate. Accordingly,
the excess of the payments over the fair value of the real estate represents
additional purchase price and has been recorded as a deferred purchase price
liability (see Note 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"), a manufacturer and distributor of Mexican food products located in
Victoria, Texas, for approximately $2.9 million in cash, $950,000 of which was
paid directly to the former owner with the remainder used to retire certain
debt, plus transaction expenses of approximately $292,000. The acquisition has
been accounted for as a purchase. The purchase price has been allocated
approximately as follows:
F-12
<PAGE> 38
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. ACQUISITIONS (CONTINUED)
property and equipment of $1.2 million, current assets of $416,000, current
liabilities of $800,000, and long-term debt of $60,000. The cost in excess of
the fair value of the net assets acquired of approximately $2.4 million has been
allocated to goodwill and is being amortized over an estimated life of 25 years.
ACQUISITION OF SAUCES UNLIMITED, INC.: On October 30, 1997, the Company executed
a stock purchase agreement with Sauces Unlimited, Inc., a manufacturer of salsas
and other Mexican food sauces located in San Antonio, Texas. The $3.0 million
purchase price included a $2.4 million payment to two former stockholders,
$300,000 to retire a term loan and revolving credit facility, and transaction
expenses of approximately $286,000. In addition, the former owners received
warrants to acquire a total of 40,000 shares of the Company's common stock at an
exercise price of $11.125 per share. The five-year warrant is exercisable
immediately. The estimated fair value of these warrants of approximately $79,000
was included as a transaction cost.
The acquisition has been accounted for as a purchase. The purchase price has
been allocated approximately as follows: property and equipment of $770,000,
current assets of $1,570,000, other assets of $100,000, current liabilities of
$847,000, and long-term debt of $200,000. The cost in excess of the fair value
of the net assets acquired of approximately $1,673,000 has been allocated to
goodwill and is being amortized over an estimated life of 25 years.
The above acquisitions, in aggregate, had the following noncash effect on the
accompanying statement of cash flows for the year ended December 31, 1997 (in
thousands):
<TABLE>
<S> <C>
Common stock and warrants for common stock
issued in connection with the acquisitions $11,160
=======
Working capital acquired:
Current assets:
Accounts receivable $ 3,192
Inventory 13,241
Other current assets 444
-------
Total current assets 16,877
=======
</TABLE>
F-13
<PAGE> 39
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Current liabilities:
Current portion of long-term debt 1,493
Accounts payable and other current liabilities 4,937
-------
Total current liabilities 6,430
-------
Net working capital $10,447
=======
Property and equipment $11,536
=======
Goodwill, trademarks, and tradenames $22,407
=======
Deferred taxes, net $ 2,002
=======
Long-term debt and capital lease obligations assumed $ 7,002
=======
</TABLE>
The results of operations of each of the above acquired companies since their
respective dates of acquisition have been included in the accompanying
consolidated statement of operations for the year ended December 31, 1997. The
following unaudited pro forma summary represents the consolidated results of
operations as if the acquisitions had occurred at the beginning of the periods
presented after giving effect to certain adjustments, primarily the amortization
of intangibles, and do not purport to be indicative of what would have occurred
had the acquisitions been made as of those dates or of results which may occur
in the future (in thousands, except per share data).
<TABLE>
<CAPTION>
PRO FORMA (UNAUDITED)
----------------------
1997 1996
-------- --------
<S> <C> <C>
Net sales $ 76,945 $ 76,769
Net income (loss) (85) 712
Basic and diluted income (loss) per common share (0.01) 0.09
</TABLE>
F-14
<PAGE> 40
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Raw materials $ 1,185,478 $ 83,265
Supplies 354,767 246,849
Finished goods 11,781,230 450,108
----------- -----------
$13,321,475 $ 780,222
=========== ===========
</TABLE>
NOTE 4. NOTES PAYABLE
Line of credit: The Company has a $10,000,000 revolving line-of-credit agreement
with a bank, expiring September 30, 1998. Advances under the agreement are
subject to borrowing base requirements and bear interest at the lower of the
bank's reference rate or LIBOR plus 1.5 percent. The interest rate was 8.5
percent at December 31, 1997. Borrowings under the agreement are secured by
substantially all assets of the Company. The agreement also contains certain
financial covenants, including maintaining minimum tangible net worth and debt
to tangible net worth ratios as well as not incurring a net loss before taxes in
any fiscal quarter. The Company has received the bank's consent to certain
departures from certain of these covenants.
Long-term debt: Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- --------
<S> <C> <C>
Noncompete and consulting agreement with El Paco Foods, Inc.'s selling
shareholders, discounted at 10%, due in monthly
installments of $11,667, through November 2000 $ 352,990 $452,262
</TABLE>
F-15
<PAGE> 41
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Notes payable to finance company, bearing interest at
approximately 9%, due in monthly installments of $8,299,
including interest, through January 2000 180,456
Note payable to bank, bearing interest at 6.48%,
due in monthly installments of
$91,667, plus interest, through October
1998 916,667
Deferred purchase price for La Victoria acquisition
resulting from fair value adjustment to capital
leases with former owner of La Victoria (Note 2).
Interest imputed at 9.75%, due in monthly installments
of $10,576, including interest, through
July 2010 925,000
Other notes payable retired in 1997 1,234,036
Capital lease obligations (Note 5) 6,556,781
----------- ----------
8,931,894 1,686,298
Less current maturities 1,512,000 766,432
----------- ----------
$ 7,419,894 $ 919,866
=========== ==========
</TABLE>
At December 31, 1997, approximate maturities of long-term debt, including
capital lease obligations, are as follows:
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1998 $1,512,000
1999 645,000
2000 602,000
2001 494,000
2002 538,000
Thereafter 5,141,000
----------
$8,932,000
==========
</TABLE>
F-16
<PAGE> 42
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LEASE COMMITMENTS
The Company leases its facilities and certain equipment under both capital and
operating leases. Certain equipment and office space is leased month to month.
Certain of the lease agreements can be adjusted periodically, based on changes
in the Consumer Price Index. Increases in rent payments as a result of these
changes are expensed as incurred.
The total minimum lease commitment under terms of operating and capital lease
agreements at December 31, 1997, is as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
----------- -----------
<S> <C> <C>
Year ending December 31:
1998 $ 897,000 $ 952,000
1999 651,000 952,000
2000 528,000 952,000
2001 448,000 934,000
2002 448,000 934,000
Thereafter 1,051,000 6,456,000
----------- -----------
$ 4,023,000 11,180,000
===========
Less amount representing interest (8% to 9.75%) 4,623,219
-----------
$ 6,556,781
===========
</TABLE>
The total rental expense relating to facilities and equipment included in the
statements of operations for the years ended December 31, 1997, 1996, and 1995
was $580,000, $475,000, and $581,000, respectively.
F-17
<PAGE> 43
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
--------- ---- ----
<S> <C> <C> <C>
Current $ -- $ -- $ --
Deferred $(302,000) -- --
--------- ---- ----
$(302,000) $ -- $--
========= ==== ====
</TABLE>
The Company's income tax expense (benefit) differed from the statutory federal
rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
----------- ----------------- -----------
<S> <C> <C>
Statutory rate applied to income (loss)
before tax $ (303,000) $ $ (185,000)
State income taxes (52,000)
Change in valuation allowance (1,269,000)
Tax benefit of net operating less utilized
(pre-quasi-reorganization) 945,691
Nondeductible expenses 390,309 28,000 28,000
Tax benefit not utilized (utilized) (14,000) (28,000) 157,000
----------- ----------------- -----------
$ (302,000) $ -- $ --
=========== ================= ===========
</TABLE>
F-18
<PAGE> 44
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES (CONTINUED)
The components of deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax liabilities:
Intangibles $(3,846,000) $ $
Buildings under capital lease (2,588,000)
Property and equipment (267,000)
Other (20,000) (43,000)
----------- -----------
(6,721,000) (43,000)
----------- -----------
Deferred tax assets:
Net operating loss carryforward 1,503,000 1,238,000 1,197,000
Accrued expenses 322,000 48,000 47,000
Allowances 137,000 26,000 20,000
Other assets 110,000
Capital lease obligations 2,415,000
Depreciation and amortization 152,000 33,000
----------- -----------
4,639,000 1,312,000 1297,000
Less valuation allowance (1,269,000) (1,297,000)
----------- -----------
4,639,000 43,000
----------- -----------
$(2,082,000) $ -- $ --
=========== =========== ===========
</TABLE>
F-19
<PAGE> 45
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES (CONTINUED)
The components giving rise to the net deferred tax liabilities described above
have been included in the accompanying balance sheets as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1997 1996 1995
---------------- ------------- -------------
<S> <C> <C> <C>
Current assets $ 725,000 $ -- $ --
Noncurrent (liabilities) (2,807,000) $ -- $ --
---------------- ------------- -------------
$ (2,082,000) $ -- $ --
================ ============= =============
</TABLE>
During 1997, the valuation allowance was eliminated because, as a result of the
acquisitions, the Company believes it is now more likely than not that those
assets will be realized. A portion of the deferred tax assets previously
reserved for, principally net operating losses, were generated before the
Company's quasi-reorganization and have been recorded as a direct addition to
additional paid-in capital (see Note 7).
At December 31, 1997, the Company had net operating losses of approximately
$4,303,000 expiring as follows:
<TABLE>
<CAPTION>
Expiration date:
<S> <C>
2008 $ 3,059,000
2009 415,000
2010 47,000
2011 119,000
2012 663,000
</TABLE>
These net operating losses are subject to certain annual limitations resulting
primarily from the initial public offering. Currently the annual limitation is
approximately $760,000.
F-20
<PAGE> 46
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. SHAREHOLDERS' EQUITY
Preferred stock: Under the Company's Restated Articles of Incorporation, the
Board of Directors of the Company is authorized to issue, from time to time,
without any action on the part of the Company's shareholders, up to 5,000,000
shares of preferred stock in one or more series, with such relative rights,
powers, preferences, limitations, and restrictions as are determined by the
Board of Directors at the time of issuance. Accordingly, the Board of Directors
is empowered to issue preferred stock with dividend, liquidation, conversion,
voting, or other rights which could adversely affect the voting power or other
rights of the holders of common stock. In the event of such issuance, the
preferred stock could be utilized, under either circumstance, as a method of
discouraging, delaying, or preventing a change in control of the Company.
QUASI-REORGANIZATION: The Board of Directors approved a corporate readjustment
of the accounts as of December 31, 1993, effected in accordance with accounting
principles applicable to quasi-reorganizations. At December 31, 1993, the
Company's assets and liabilities approximated fair value, and accordingly, there
was no write-down of the assets and liabilities of the Company in conjunction
with the quasi-reorganization. The quasi-reorganization was accomplished by
offsetting the accumulated deficit in retained earnings of $4,125,298 against
additional paid-in capital.
RECAPITALIZATION: In June 1997, the Company affected a 1,700-to-1 common stock
split and increased its authorized shares of common stock to 20,000,000. The
effect of this common stock split has been retroactively reflected in these
financial statements and notes for all periods presented.
INITIAL PUBLIC OFFERING: In September 1997, the Company completed a public
offering of shares of its common stock. The offering generated total net
proceeds of $34,224,000, less direct offering costs of approximately $1,500,000.
In connection with the offering, the Company repurchased 788,500 shares of
common stock owned by Shansby and TSG International for approximately $5.9
million. The price for this repurchase was based upon the net offering price
(after underwriters' discounts and commissions) in the public offering.
Stock options and warrants: In June 1997, the Board of Directors and the
shareholders of the Company approved its 1997 Stock Plan (the "Stock Plan"). The
purpose of the 1997 Stock Plan is to provide directors, employees, and
consultants of the Company and its subsidiaries additional incentive and reward
opportunities designed to enhance the profitable growth of the Company. The
Stock Plan provides for the granting of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended. The
Stock Plan also provides for the issuance of options that do not constitute
incentive stock options, as well as restricted stock awards. The options may be
granted at an exercise price of not less than the fair market value of common
stock at the date of grant (110 percent for more than 10 percent shareholders).
F-21
<PAGE> 47
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. SHAREHOLDERS' EQUITY (CONTINUED)
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized for the stock option plan.
Had compensation cost for the Company's stock option plan been determined based
on the fair value at the grant date for awards in 1997 consistent with the
provisions of SFAS No. 123, the Company's net loss and net loss per share would
have been increased to the pro forma amounts indicated below:
<TABLE>
<S> <C>
Net loss, as reported $ (563,000)
Net loss, pro forma (653,000)
Basic and diluted net loss per share, as reported (0.15)
Basic and diluted net loss per share, pro forma (0.18)
</TABLE>
The above pro forma effects on net loss and net loss per share are not likely to
be representative of the effects on reported net income (loss) for future years
because options vest over several years and additional awards generally are made
each year.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997:
<TABLE>
<S> <C>
Expected dividend yield --
Expected stock price volatility 15%
Risk-free interest rate 6.30%
Expected life of options (years) 3
</TABLE>
The weighted-average fair value, as determined using the Black-Scholes option
pricing model, of options and warrants granted during 1997 was $1.78.
F-22
<PAGE> 48
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. SHAREHOLDERS' EQUITY (CONTINUED)
Transactions involving stock options and warrants during the three years ended
December 31, 1997, are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
STOCK PRICE
WARRANTS OPTIONS PER SHARE
------- ------- --------
<S> <C> <C> <C>
Balance, December 31, 1996
Granted 450,000 198,000 $ 8.64
------- ------- ------
Balance, December 31, 1997 450,000 198,000 $ 8.64
======= ======= ======
Currently exercisable 100,000 $10.76
Not currently exercisable 350,000 198,000 $ 8.26
------- ------- ------
450,000 198,000 $ 8.64
======= ======= ======
</TABLE>
The following tables summarize information about stock options and warrants
outstanding as of December 31, 1997:
OPTIONS AND WARRANTS OUTSTANDING
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
REMAINING WEIGHTED-
NUMBER CONTRACTUAL AVERAGE
OF UNITS LIFE EXERCISE
Range of Exercise Price OUTSTANDING (IN YEARS) PRICE
--------- -------- ---------
<S> <C> <C> <C>
$8.00 483,000 6.4 $ 8.00
$9.88 to $11.13 165,000 7.0 10.53
--------- ---------
648,000 $ 8.64
========= =========
</TABLE>
F-23
<PAGE> 49
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. SHAREHOLDERS' EQUITY (CONTINUED)
As of March 5, 1998, an additional 70,000 options with an exercise price of
$12.19 per share were granted. Also, 175,000 options at an average exercise
price of approximately $10.21 per share which were outstanding at December 31,
1997, were canceled in connection with the resignations of the Company's
president and CEO/Chairman of the Board.
NOTE 8. MAJOR CUSTOMER
Sales to one major customer accounted for approximately 16, 28, and 37 percent
of net sales for the years ended December 31, 1997, 1996, and 1995,
respectively. The major customer accounted for approximately 5 percent of the
Company's accounts receivable balance at December 31, 1997.
NOTE 9. RELATED PARTY TRANSACTIONS
TSG2 L.P. owns approximately 18 percent of the Company's common stock
outstanding at December 31, 1997. TSG2 L.P. is an affiliate of Shansby, a
related party of the Company. In addition, two of the Company's directors are
principals of Shansby. The Company had the following transactions with Shansby
or its affiliates:
SHANSBY PARTIAL REDEMPTION: Simultaneously with the Company's initial public
offering, the Company redeemed 788,500 shares of common stock owned by Shansby
and TSG International for $5,866,440.
SHANSBY IPO WARRANT: Upon consummation of the initial public offering, Shansby
Partners, L.L.C. ("Shansby Partners") received a five-year warrant to acquire
350,000 shares of common stock at an exercise price of $8.00 per share. The
warrant expires on September 3, 2002, and is exercisable after September 3,
1998.
OTHER SHANSBY WARRANTS: In connection with the acquisitions of La Monita, Sauces
Unlimited, and Tortilla King (see Note 11), Shansby Partners received warrants
to acquire a total of 90,000 shares of common stock at exercise prices ranging
from $10.45 to $12.51 per share. The warrants are exercisable any time prior to
their expiration, which occurs five years after issuance. The estimated fair
value of warrants issued in connection with the La Monita, Sauces Unlimited and
Tortilla King acquisitions of approximately $170,000 has been included in the
transaction costs associated with these acquisitions (see Notes 2 and 11).
F-24
<PAGE> 50
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. RELATED PARTY TRANSACTIONS (CONTINUED)
SHANSBY ADVISORY AGREEMENT: In August 1997, the Company entered into a
three-year advisory agreement with Shansby Partners. The agreement required an
initial payment of $125,000 for advisory service over the term of the agreement.
Services rendered by Shansby Partners in connection with acquisitions or stock
offerings are billed separately. Accordingly, the Company paid Shansby Partners
$175,000 for services in connection with the initial public offering and a total
of $430,000 for the acquisitions of La Monita, Sauces Unlimited and Tortilla
King (see Notes 2 and 11).
NOTE 10. COMMITMENTS AND CONTINGENCIES
LITIGATION: The Company is party to litigation relating to property damage and
liability claims as well as certain employment-related matters arising in the
ordinary course of business. Management does not believe that the outcome of the
matters will have a material adverse effect on the financial position of the
Company.
EPA MATTERS: By letter dated April 13, 1995, the U.S. Environmental Protection
Agency ("EPA") has identified one of the Company's subsidiaries, La Victoria, as
a potentially responsible party ("PRP") under the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended ("CERCLA"), for
the cleanup of contamination from hazardous substances at the South El Monte
Operable Unit of the San Gabriel Valley Superfund Site. Under CERCLA, persons
may be subject to joint and several liability for cleanup costs.
The Company has completed a subsurface soil remediation of solvents at its
Rosemead facility, which is located within the San Gabriel Valley. The EPA has
identified approximately 50 PRPs at the site. The EPA has requested that La
Victoria participate in the groundwater sampling program for a remedial
investigation and feasibility study. Based on the limited impact to groundwater
that appears to be related to La Victoria's Rosemead facility, La Victoria
declined to participate in the groundwater monitoring. Since that time, La
Victoria has received no further correspondence from the EPA. The Company does
not believe that its ultimate liabilities in relation to the site will have a
material effect on its financial position; however, it is not possible to
determine the ultimate environmental liabilities, if any, that may arise from
this matter.
F-25
<PAGE> 51
AUTHENTIC SPECIALTY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. SUBSEQUENT EVENT
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 $8.3 million
purchase price included a $5.4 million payment to the former stockholder and
$2.5 million in the Company's common stock (240,626 shares) and $467,000 in
transaction costs. The acquisition will be 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.
F-26
<PAGE> 52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Rylander, Clay & Opitz, L.L.P. were dismissed by the Company as the
Company's auditors on April 18, 1997. The report of Rylander, Clay & Opitz,
L.L.P. on the financial statements for each of the two years in the period
ended December 31, 1995 did not contain any adverse opinion or disclaimer of
opinion, nor was it qualified or modified as to uncertainty, audit scope, or
accounting principles. The Company's decision to change auditors was approved
by the Company's Board of Directors. In connection with its audits, Rylander,
Clay & Opitz, L.L.P. did not identify any reportable conditions. During the
two years in the period ended December 31, 1996 and through the three-month
period ended March 31, 1997, there were no disagreements between the Company
and Rylander, Clay & Opitz, L.L.P. on any
- 27 -
<PAGE> 53
matter of accounting principles or practices, financial statement disclosure or
auditing scope and procedure, which, if not resolved to the satisfaction of
Rylander, Clay & Opitz, L.L.P. would have caused it to make a reference to the
subject matter of the disagreement in connection with its reports.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to the Company's directors and executive officers
is included in the Company's definitive Proxy Statement in connection with its
1998 Annual Meeting of Shareholders (the "1998 Proxy Statement"), which will be
filed with the SEC within 120 days after the end of the fiscal year ended
December 31, 1997, under the captions "ELECTION OF DIRECTORS -- Directors and
Nominees" and "INFORMATION ABOUT EXECUTIVE OFFICERS -- Executive Officers" and
is incorporated herein by reference in response to this Item 10. Notwithstanding
any provision in this Annual Report on Form 10-K to the contrary, under no
circumstances are the "Compensation Committee Report" or the information under
the heading "Shareholder Return Performance Presentation" incorporated herein
for any purpose.
ITEM 11. EXECUTIVE COMPENSATION.
Information relating to executive compensation is set forth in the
1998 Proxy Statement under the captions "ELECTION OF DIRECTORS -- Compensation
of Directors" and "INFORMATION ABOUT EXECUTIVE OFFICERS -- Compensation of
Executive Officers" and is incorporated herein by reference in response to this
Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to ownership of the Company's Common Stock by
management and certain other beneficial owners is set forth in the 1998 Proxy
Statement under the captions "ELECTION OF DIRECTORS -- Security Ownership of
Directors and Management" and "PRINCIPAL SHAREHOLDERS" and is incorporated
herein by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information relating to certain relationships and related transactions
is set forth in the 1998 Proxy Statement under the caption "ELECTION OF
DIRECTORS -- Certain Transactions" and is incorporated herein by reference in
response to this Item 13.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of this Report.
1. The following financial statements of the Company and the
related reports of independent auditors are included in Item 8. "Financial
Statements and Supplementary Data":
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . F-2
Financial Statements:
Consolidated Balance Sheets . . . . . . . . . . . . . . . F-4
Consolidated Statements of Operations . . . . . . . . . . F-5
Consolidated Statements of Shareholders' Equity . . . . . F-6
Consolidated Statements of Cash Flows . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . F-8
</TABLE>
- 28 -
<PAGE> 54
2. All financial schedules are omitted because (i) such schedules
are not required or (ii) the information required has been presented in the
aforementioned financial statements.
3. The following Exhibits are filed with this Report or
incorporated by reference as set forth below:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- --------- -----------------------------------------------------------------
<S> <C>
2.1 -- Contribution and Exchange Agreement between the Company, Robert C.
Tanklage, TSG2 L.P., TSG2 Management, L.L.C. and Keith R. Lively,
dated June 20, 1997 (incorporated by reference to Exhibit 2.1 to
the Company's Registration Statement on Form S-1 (Registration No.
333-29959) (the "S-1 Registration Statement"))
*2.2 -- First Amendment to Contribution and Exchange Agreement, dated July
30, 1997
*2.3 -- Second Amendment to Contribution and Exchange Agreement, dated
August 27, 1997
3.1 -- Restated Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the S-1 Registration Statement)
3.2 -- Bylaws of the Company (incorporated by reference to Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1997 ("September 30, 1997 10-Q"))
4.1 -- Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the S-1 Registration Statement)
4.2 -- Consulting Agreement between Calidad Foods, Inc. and Joseph
Patoskie, dated November 22, 1995 (incorporated by reference to
Exhibit 4.2 to the S-1 Registration Statement)
4.3 -- Consulting Agreement between Calidad Foods, Inc. and Richard
Patoskie, dated November 22, 1995 (incorporated by reference to
Exhibit 4.3 to the S-1 Registration Statement)
4.4 -- Secured Promissory Note, dated April 10, 1997, in favor of Carolyn
M. Johnson, Trustee (incorporated by reference to Exhibit 4.4 to
the S-1 Registration Statement)
4.5 -- Term Loan Agreement between Union Bank of California, N.A. and La
Victoria Foods, Inc., dated November 3, 1993, including Fourth
Amendment thereto, dated June 20, 1997 (incorporated by reference
to Exhibit 4.5 to the S-1 Registration Statement)
4.6 -- Business Loan Agreement between Union Bank of California, N.A. and
La Victoria Foods, Inc., dated October 24, 1995, including First
Amendment thereto, dated May 22, 1997, and Second Amendment
thereto, dated June 20, 1997 (incorporated by reference to Exhibit
4.6 to the S-1 Registration Statement)
10.1 -- Employment Agreement between Herman L. Graffunder and Calidad
Foods, Inc., dated June 23, 1997 (incorporated by reference to
Exhibit 10.1 to the S-1 Registration Statement)
10.2 -- Employment Agreement between Samuel E. Hillin, Jr. and Calidad
Foods, Inc., dated June 23, 1997 (incorporated by reference to
Exhibit 10.2 to the S-1 Registration Statement)
10.3 -- Authentic Specialty Foods, Inc. 1997 Stock Plan (incorporated by
reference to Exhibit 10.3 to the S-1 Registration Statement)
</TABLE>
- 29 -
<PAGE> 55
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- --------- ------------------------------------------------------------------
<S> <C>
10.4 -- Sublease Agreement between A-1 Freeman Relocation System, Inc. and
Calidad Foods, Inc., dated August 1, 1995 (incorporated by
reference to Exhibit 10.4 to the S-1 Registration Statement)
10.5 -- Lease and Agreement between Tanklage Investments Ltd. and La
Victoria Foods, Inc., dated February 1, 1993 (incorporated by
reference to Exhibit 10.5 to the S-1 Registration Statement)
10.6 Lease and Agreement between Robert C. Tanklage, Carolyn M. Johnson
and Frank Barclay, Trustees, and La Victoria Foods, Inc., dated
August 1, 1985 (incorporated by reference to Exhibit 10.6 to the
S-1 Registration Statement)
10.7 -- Lease and Agreement between Henry C. Tanklage, Erika A. Tanklage
and Louis N. Mantalica, Trustees, and La Victoria Foods, Inc.,
dated November 28, 1974 (incorporated by reference to Exhibit 10.7
to the S-1 Registration Statement)
10.8 -- Warrant Agreement between the Company and Shansby Partners,
L.L.C., dated September 2, 1997 (incorporated by reference to
Exhibit 5 to Amendment No. 2 to Schedule 13D filed by TSG2 L.P. on
February 5, 1998)
*10.9 -- Registration Rights Agreement between the Company and Robert C.
Tanklage, dated September 2, 1997
*10.10 -- Advisory Agreement between the Company and Shansby Partners,
L.L.C. dated August 15, 1997
10.11 -- Employment Agreement between Robert C. Tanklage and La Victoria
Foods, Inc., dated May 31, 1997 (incorporated by reference to
Exhibit 10.11 to the S-1 Registration Statement)
*10.12 -- Registration Rights Agreement between the Company, TSG2 L.P.,
Shansby Partners, L.L.C. and Keith R. Lively, dated September 2,
1997
10.13 -- Warrant Agreement between the Company and Shansby Partners,
L.L.C., dated September 30, 1997
10.14 -- Warrant Agreement between the Company and Shansby Partners,
L.L.C., dated October 29, 1997
10.15 -- Warrant Agreement between the Company and Shansby Partners,
L.L.C., dated January 9, 1997
*10.16 -- Termination Agreement between La Victoria Foods, Inc. and Robert
C. Tanklage, dated December 17, 1997
10.17 -- Asset Purchase Agreement by and among the Company, La Monita
Mexican Food Products, Inc., Gilbert Moreno Enterprises, Inc. and
Gilbert Moreno dated September 23 (incorporated by reference to
Exhibit 2.1 to the September 30, 1997 10-Q)
10.18 -- Stock Purchase Agreement by and among the Company, Sauces
Unlimited, Inc., Lawrence L. Amstutz, Ruth C. Amstutz and Barry L.
Brock dated October 29, 1997 (incorporated by reference to
Exhibit 2.2 to the September 30, 1997 10-Q)
*10.19 -- Stock Purchase Agreement by and among the Company, The Tortilla
King, Inc., Saragosa Bazan, Jr., Lydia E. Bazan and SBJ Trust,
dated January 9, 1998
16.1 -- Letter from Rylander, Clay & Opitz, L.L.P., dated August 6, 1997,
regarding change in certifying accountant (incorporated by
reference to Exhibit 16.1 to the S-1 Registration Statement)
*21.1 -- Subsidiaries of the Company
*27.1 -- Financial Data Schedule
</TABLE>
- -------------
* Filed herewith.
(b) Reports on Form 8-K.
None.
- 30 -
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 31,
1998.
AUTHENTIC SPECIALTY FOODS, INC.
By: /s/ SAMUEL E. HILLIN, JR.
----------------------------------------------
Samuel E. Hillin, Jr.
Chief Financial Officer and Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ROBERT K. SWANSON
--------------------------- Chief Executive Officer, Chairman of the Board March 31, 1998
Robert K. Swanson and Director (Principal Executive Officer)
/s/ MICHAEL T. WESTHUSING
---------------------------
Michael T. Westhusing President and Chief Operating Officer March 31, 1998
/s/ SAMUEL E. HILLIN, JR.
--------------------------- Chief Financial Officer and Vice President March 31, 1998
Samuel E. Hillin, Jr. (Principal Financial and Accounting Officer)
/s/ J. GARY SHANSBY
--------------------------- Director March 31, 1998
J. Gary Shansby
/s/ CHARLES H. ESSERMAN
--------------------------- Director March 31, 1998
Charles H. Esserman
/s/ TIM G. BRUER
--------------------------- Director March 31, 1998
Tim G. Bruer
/s/ CHARLES A. LYNCH
--------------------------- Director March 31, 1998
Charles A. Lynch
</TABLE>
- 31 -
<PAGE> 57
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- --------- -----------------------------------------------------------------
<S> <C>
2.1 -- Contribution and Exchange Agreement between the Company, Robert C.
Tanklage, TSG2 L.P., TSG2 Management, L.L.C. and Keith R. Lively,
dated June 20, 1997 (incorporated by reference to Exhibit 2.1 to
the Company's Registration Statement on Form S-1 (Registration No.
333-29959) (the "S-1 Registration Statement"))
*2.2 -- First Amendment to Contribution and Exchange Agreement, dated July
30, 1997
*2.3 -- Second Amendment to Contribution and Exchange Agreement, dated
August 27, 1997
3.1 -- Restated Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the S-1 Registration Statement)
3.2 -- Bylaws of the Company (incorporated by reference to Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1997 ("September 30, 1997 10-Q"))
4.1 -- Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the S-1 Registration Statement)
4.2 -- Consulting Agreement between Calidad Foods, Inc. and Joseph
Patoskie, dated November 22, 1995 (incorporated by reference to
Exhibit 4.2 to the S-1 Registration Statement)
4.3 -- Consulting Agreement between Calidad Foods, Inc. and Richard
Patoskie, dated November 22, 1995 (incorporated by reference to
Exhibit 4.3 to the S-1 Registration Statement)
4.4 -- Secured Promissory Note, dated April 10, 1997, in favor of Carolyn
M. Johnson, Trustee (incorporated by reference to Exhibit 4.4 to
the S-1 Registration Statement)
4.5 -- Term Loan Agreement between Union Bank of California, N.A. and La
Victoria Foods, Inc., dated November 3, 1993, including Fourth
Amendment thereto, dated June 20, 1997 (incorporated by reference
to Exhibit 4.5 to the S-1 Registration Statement)
4.6 -- Business Loan Agreement between Union Bank of California, N.A. and
La Victoria Foods, Inc., dated October 24, 1995, including First
Amendment thereto, dated May 22, 1997, and Second Amendment
thereto, dated June 20, 1997 (incorporated by reference to Exhibit
4.6 to the S-1 Registration Statement)
10.1 -- Employment Agreement between Herman L. Graffunder and Calidad
Foods, Inc., dated June 23, 1997 (incorporated by reference to
Exhibit 10.1 to the S-1 Registration Statement)
10.2 -- Employment Agreement between Samuel E. Hillin, Jr. and Calidad
Foods, Inc., dated June 23, 1997 (incorporated by reference to
Exhibit 10.2 to the S-1 Registration Statement)
10.3 -- Authentic Specialty Foods, Inc. 1997 Stock Plan (incorporated by
reference to Exhibit 10.3 to the S-1 Registration Statement)
</TABLE>
<PAGE> 58
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- --------- ------------------------------------------------------------------
<S> <C>
10.4 -- Sublease Agreement between A-1 Freeman Relocation System, Inc. and
Calidad Foods, Inc., dated August 1, 1995 (incorporated by
reference to Exhibit 10.4 to the S-1 Registration Statement)
10.5 -- Lease and Agreement between Tanklage Investments Ltd. and La
Victoria Foods, Inc., dated February 1, 1993 (incorporated by
reference to Exhibit 10.5 to the S-1 Registration Statement)
10.6 Lease and Agreement between Robert C. Tanklage, Carolyn M. Johnson
and Frank Barclay, Trustees, and La Victoria Foods, Inc., dated
August 1, 1985 (incorporated by reference to Exhibit 10.6 to the
S-1 Registration Statement)
10.7 -- Lease and Agreement between Henry C. Tanklage, Erika A. Tanklage
and Louis N. Mantalica, Trustees, and La Victoria Foods, Inc.,
dated November 28, 1974 (incorporated by reference to Exhibit 10.7
to the S-1 Registration Statement)
10.8 -- Warrant Agreement between the Company and Shansby Partners,
L.L.C., dated September 2, 1997 (incorporated by reference to
Exhibit 5 to Amendment No. 2 to Schedule 13D filed by TSG2 L.P. on
February 5, 1998)
*10.9 -- Registration Rights Agreement between the Company and Robert C.
Tanklage, dated September 2, 1997
*10.10 -- Advisory Agreement between the Company and Shansby Partners,
L.L.C. dated August 15, 1997
10.11 -- Employment Agreement between Robert C. Tanklage and La Victoria
Foods, Inc., dated May 31, 1997 (incorporated by reference to
Exhibit 10.11 to the S-1 Registration Statement)
*10.12 -- Registration Rights Agreement between the Company, TSG2 L.P.,
Shansby Partners, L.L.C. and Keith R. Lively, dated September 2,
1997
10.13 -- Warrant Agreement between the Company and Shansby Partners,
L.L.C., dated September 30, 1997
10.14 -- Warrant Agreement between the Company and Shansby Partners,
L.L.C., dated October 29, 1997
10.15 -- Warrant Agreement between the Company and Shansby Partners,
L.L.C., dated January 9, 1997
*10.16 -- Termination Agreement between La Victoria Foods, Inc. and Robert
C. Tanklage, dated December 17, 1997
10.17 -- Asset Purchase Agreement by and among the Company, La Monita
Mexican Food Products, Inc., Gilbert Moreno Enterprises, Inc. and
Gilbert Moreno dated September 23 (incorporated by reference to
Exhibit 2.1 to the September 30, 1997 10-Q)
10.18 -- Stock Purchase Agreement by and among the Company, Sauces
Unlimited, Inc., Lawrence L. Amstutz, Ruth C. Amstutz and Barry L.
Brock dated October 29, 1997 (incorporated by reference to
Exhibit 2.2 to the September 30, 1997 10-Q)
*10.19 -- Stock Purchase Agreement by and among the Company, The Tortilla
King, Inc., Saragosa Bazan, Jr., Lydia E. Bazan and SBJ Trust,
dated January 9, 1998
16.1 -- Letter from Rylander, Clay & Opitz, L.L.P., dated August 6, 1997,
regarding change in certifying accountant (incorporated by
reference to Exhibit 16.1 to the S-1 Registration Statement)
*21.1 -- Subsidiaries of the Company
*27.1 -- Financial Data Schedule
</TABLE>
- -------------
* Filed herewith.
<PAGE> 1
EXHIBIT 2.2
FIRST AMENDMENT TO CONTRIBUTION
AND EXCHANGE AGREEMENT
THIS FIRST AMENDMENT TO CONTRIBUTION AND EXCHANGE AGREEMENT,
dated as of July 30, 1997 (this "Amendment"), is by and among Robert C.
Tanklage ("Tanklage"), TSG2 L.P., a Delaware limited partnership ("TSG2"), TSG2
Management, L.L.C., a Delaware limited liability company ("TSG2 Management"),
Keith Lively ("Lively"; and together with TSG2 and TSG2 Management, the "LV
Foods Owners") and Authentic Specialty Foods, Inc., a Texas corporation
("ASF").
WHEREAS, the parties hereto have entered into that certain
Contribution and Exchange Agreement, dated as of June 20, 1997 (as amended
hereby, the "Agreement") (capitalized terms used but not defined herein shall
have the respective meanings ascribed to such terms in the Agreement); and
WHEREAS, the parties desire to amend certain provisions of the
Agreement;
NOW THEREFORE, for and in consideration of the mutual benefits
derived and to be derived from the Agreement and this Amendment by each party
hereto, as well as other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
as follows:
1. Section 1.3 of the Agreement is hereby amended to read in its
entirety as follows:
At the Closing, the LV Foods Owners will transfer, convey and
deliver to ASF 100% of the equity interest in LV Foods as
evidenced by the delivery of, if applicable, a certificate or
certificates evidencing such equity interest in good form and
duly endorsed for transfer or accompanied by duly executed
assignment in form reasonably acceptable to ASF in exchange
for one or more certificates registered in the name of the LV
Foods Owners (in proportion to their ownership of LV Foods)
for 1,400,000 shares of ASF Common Stock; provided, however,
if the Initial Public Offering Price is greater than $10 per
share, the aggregate number of shares of ASF Common Stock
issued to the LV Food Owners will be equal to the result of
(A) $14 million divided by (B) the Public Offering Price.
2. Except as expressly set forth herein, the terms and provisions
of the Agreement are hereby ratified and confirmed.
3. This Amendment may be executed in one or more counterparts,
each of which shall be deemed to be an original, but all of which shall
constitute one and the same agreement.
<PAGE> 2
IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement on the date first written above.
/s/ ROBERT C. TANKLAGE
---------------------------------------------
ROBERT C. TANKLAGE
TSG2 L.P.
By: TSG2 Management, L.L.C., its general partner
By: /s/ CHARLES H. ESSERMAN
------------------------------------------
Charles H. Esserman
Managing Member
TSG2 MANAGEMENT, L.L.C.
By: /s/ CHARLES H. ESSERMAN
------------------------------------------
Charles H. Esserman
Managing Member
/s/ KEITH LIVELY
---------------------------------------------
KEITH LIVELY
AUTHENTIC SPECIALTY FOODS, INC.
By: /s/ KEITH LIVELY
------------------------------------------
Name: Keith Lively
-------------------------------------
Title: Chief Executive Officer
------------------------------------
2
<PAGE> 1
EXHIBIT 2.3
SECOND AMENDMENT TO CONTRIBUTION
AND EXCHANGE AGREEMENT
THIS SECOND AMENDMENT TO CONTRIBUTION AND EXCHANGE AGREEMENT, dated as of
August 27, 1997 (this "Amendment"), is by and among Robert C. Tanklage
("Tanklage"), TSG2 L.P., a Delaware limited partnership ("TSG2"), TSG2
Management, L.L.C., a Delaware limited liability company ("TSG2 Management"),
Keith Lively ("Lively"; and together with TSG2 and TSG2 Management, the "LV
Foods Owners") and Authentic Specialty Foods, Inc., a Texas corporation ("ASF").
WHEREAS, the parties hereto have entered into that certain Contribution and
Exchange Agreement, dated as of June 20, 1997 and as amended by that certain
First Amendment to Contribution and Exchange Agreement dated as of July 30, 1997
(as previously amended and as amended hereby, the "Agreement") (capitalized
terms used but not defined herein shall have the respective meanings ascribed to
such terms in the Agreement); and
WHEREAS, the parties desire to amend certain provisions of the Agreement;
NOW THEREFORE, for and in consideration of the mutual benefits derived and
to be derived from the Agreement and this Amendment by each party hereto, as
well as other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. The fourth "WHEREAS" clause of the Agreement is hereby amended to read
in its entirety as follows:
WHEREAS, ASF is currently contemplating an initial public offer and
sale of 4,000,000 shares of its common stock, par value $1.00 per share
(the "ASF Common Stock") pursuant to a firm commitment underwriting, which
offer and sale of shares (the "Initial Public Offering") will be registered
pursuant to a registration statement on Form S-1 (the "Registration
Statement") to be filed with the Securities and Exchange Commission (the
"SEC");
2. The fifth "WHEREAS" clause of the Agreement is hereby amended to read in
its entirety as follows:
WHEREAS, ASF intends to use a portion of the proceeds from the Initial
Public Offering to redeem 788,500 shares of ASF Common Stock owned by The
Shansby Group and TSG International (the "Shansby Redemption") for a per
share purchase price equal to the price to public in the Initial Public
Offering less the underwriters' discounts and commissions (the "Net
Offering Price");
3. Except as expressly set forth herein, the terms and provisions of the
Agreement are hereby ratified and confirmed.
<PAGE> 2
4. This Amendment may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which shall constitute one
and the same agreement.
IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement on the date first written above.
/s/ ROBERT C. TANKLAGE
--------------------------------------
ROBERT C. TANKLAGE
TSG2 L.P.
By: TSG2 Management, L.L.C., its general partner
By: /s/ CHARLES H. ESSERMAN
-----------------------------------
Charles H. Esserman
Managing Member
TSG2 MANAGEMENT, L.L.C.
By: /s/ CHARLES H. ESSERMAN
-----------------------------------
Charles H. Esserman
Managing Member
/s/ KEITH LIVELY
--------------------------------------
KEITH LIVELY
AUTHENTIC SPECIALTY FOODS, INC.
By: /s/ KEITH LIVELY
-----------------------------------
Keith Lively
Chief Executive Officer
2
<PAGE> 1
EXHIBIT 10.9
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of September
2, 1997, is between AUTHENTIC SPECIALTY FOODS, INC., a Texas corporation (the
"Company"), and ROBERT C. TANKLAGE ("Holder").
W I T N E S S E T H:
WHEREAS, the Company, Holder, TSG2 L.P., TSG2 Management, L.L.C. and Keith
R. Lively have entered into a Contribution and Exchange Agreement dated June 20,
1997 (the "Contribution and Exchange Agreement"), pursuant to which, among other
things, the Company has agreed to issue a number of shares of its Common Stock,
par value $1.00 per share ("Common Stock"), determined in the manner set forth
in the Contribution and Exchange Agreement and subject to the terms and
conditions set forth therein; and
WHEREAS, the parties have agreed to enter into this Agreement in order to
satisfy one of the conditions to obligations of the parties to consummate the
transactions contemplated by the Contribution and Exchange Agreement; and
WHEREAS, the Company is prepared to consummate its initial public offering
(the "Initial Public Offering") of shares of Common Stock; and
WHEREAS, the consummation of the Initial Public Offering is a condition to
the obligations of the parties to consummate the transactions contemplated by
the Contribution and Exchange Agreement; and
WHEREAS, after the Initial Public Offering, each Holder will own a
substantial number of shares of Common Stock; and
WHEREAS, the Common Stock will be registered under Section 12 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); and
WHEREAS, under the provisions of the Securities Act of 1933, as amended
(the "Securities Act") and the General Rules and Regulations promulgated by the
Securities and Exchange Commission (the "SEC") thereunder, Holder is or may be
limited in the manner of selling the shares of Common Stock owned by Holder,
absent registration under the Securities Act of the sale of such shares or the
availability of another exemption from the registration requirements of the
Securities Act.
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, the parties hereto hereby agree as follows:
1. Demand Registration.
(A) Request for Registration. Holder agrees to execute on an expedited
basis any lockup agreements reasonably requested by the managing
underwriter for the Initial Public Offering; provided, however, that the
lockup period shall not exceed 180 days after the consummation of the
Initial Public Offering. Without limiting the generality of the foregoing,
Holder agrees, for the benefit of the Company and the underwriters for the
Initial Public Offering, that no Holder or any affiliate or family member
thereof will directly or indirectly sell, transfer or otherwise dispose of
any shares of Restricted Stock (as defined below) prior to the expiration
of 180 days after the consummation of the Initial Public Offering (such
expiration date shall be referred to herein as the "Lockup Expiration
Date"). As used in this Agreement, "Restricted Stock" shall mean all shares
of Common Stock issued to Holder pursuant to the Contribution and Exchange
Agreement and owned by any Holder after the Initial Public Offering,
together with any securities issued or issuable with respect to any such
Common Stock by way of stock dividend or stock split or in connection with
a combination of shares, recapitalization, merger, consolidation or other
reorganization, or otherwise. As to any particular shares of Restricted
Stock, such securities shall cease to be Restricted Stock when (a) a
registration statement with respect to the sale of such securities shall
have become effective under the Securities Act and such securities shall
have been disposed of in accordance with such registration statement, (b)
such securities may be distributed to the public pursuant to Rule 144 (or
any successor provision) under the Securities Act (even though not actually
sold pursuant thereto), (c) such securities shall have been otherwise
transferred, new certificates representing such securities not bearing a
legend restricting transfer shall have been delivered by the Company and
subsequent disposition of such securities (without any volume limitations)
shall not require registration or qualification of such securities under
the Securities Act or any similar state law then in force, (d) such
securities shall have ceased to be outstanding, or (e) the Holder or
Holders thereof shall agree in writing to terminate this Agreement (each
Holder and any permitted assignee of such Holder's rights and duties
hereunder are referred to herein as the "Holders" or individually as a
"Holder"). Subject to the conditions and limitations set forth in Section 4
of this Agreement, at any time after the Lockup Expiration Date, one or
more Holders may make a written request for registration under the
Securities Act of all or part of its or their Restricted Stock pursuant to
this Section 1 (a "Demand Registration"), provided that the Minimum Number
(as hereinafter defined) of shares of Restricted Stock shall be registered
in such offering. The term "Minimum Number" shall mean the lesser of (i)
50% of the initial number of shares of Restricted Stock issued pursuant to
the Contribution and Exchange Agreement (as adjusted for any stock splits,
stock combinations, stock dividends or recapitalizations that are effected
after the Initial Public Offering) or (ii) 100% of the number of shares of
Restricted Stock then beneficially owned by all of the Holders in the
aggregate. The Holder making such a request for a Demand Registration is
sometimes herein referred to as the "Designating Holder." Such request will
specify the aggregate number of shares of Restricted Stock proposed to be
sold and will also specify the intended method of
2
<PAGE> 3
disposition thereof. The Holders shall have the right to two Demand
Registrations in the aggregate; provided, however, that the Holders may not
elect more than one Demand Registration in any 18 month period. Within ten
days after receipt of such request, the Company will give written notice of
such registration request to all other Holders of Restricted Stock and
include, subject to the provisions of Section 1(B) hereof, in such
registration all Restricted Stock with regard to which the Company has
received written requests for inclusion therein within 15 business days
after the receipt by the applicable Holders of the Company's notice. Each
such request will also specify the aggregate number of shares of Restricted
Stock to be registered and the intended method of disposition thereof. The
Company may delay for a maximum of 90 days the filing of a registration
statement upon request from a Holder pursuant to this Section 1 when, it
its good faith judgment the Company reasonably believes that the filing
thereof at the time requested, or the offering of securities pursuant
thereto, would materially and adversely affect a pending or proposed public
offering of securities of the Company, an acquisition, merger,
recapitalization, consolidation, reorganization or similar transaction
relating to the Company or negotiations, discussions or pending proposals
with respect thereto or require premature disclosure of information not
otherwise required to be disclosed to the potential detriment of the
Company.
(B) Priority on Demand Registrations. If a registration pursuant to
this Section 1 involves an underwritten offering and the managing
underwriter shall advise the Company that, in its judgment, the number of
shares proposed to be included in such offering should be limited due to
market conditions, then the Company will promptly so advise each Holder of
Restricted Stock that has requested registration, and the shares of the
Company to be included in the offering, if any, shall first be excluded
from such offering to the extent necessary to meet such limitation; and if
further exclusions are necessary to meet such limitation, the securities
shall be excluded pro rata, based on the respective numbers of shares of
Common Stock and/or Warrants as to which registration shall have been
requested by such Holders and any "Holder," (as defined in the Registration
Rights Agreement of even date herewith by and among the Company and Shansby
Partners, L.L.C., TSG2 L.P. and Keith R. Lively (the "Shansby Registration
Rights Agreement") and referred to herein as a "Shansby Holder") that have
elected to participate in such registration. The term "Warrant" and
"Warrant Shares" shall have the respective meanings ascribed to such terms
in the Shansby Registration Rights Agreement. For purposes of this
paragraph, each Warrant shall be treated treated as representing the number
of Warrant Shares for which such Warrant is then exercisable.
(C) Selection of Underwriters and Counsel. The Board of Directors of
the Company will select and obtain the services of the investment banker or
investment bankers and manager or managers that will administer the
offering and the counsel to such investment bankers and managers; provided
that such investment bankers, managers and counsel must be approved by the
Holders of a majority in number of the shares of Restricted Stock to be
registered, which approval shall not be unreasonably withheld. Moreover, if
the registration of which the Company gives notice does involve an
underwriting, the right of each Holder to registration pursuant to this
Section 1 shall, unless the Company otherwise agrees, be conditioned upon
such Holder's participation as a seller in such underwriting and
3
<PAGE> 4
its execution of an underwriting agreement with the managing underwriter or
underwriters selected by the Company.
2. Piggyback Registration. If the Company proposes to file a registration
statement under the Securities Act with respect to an offering (other than the
Initial Public Offering) for the Company's own account of any class of its
equity securities (other than a registration statement on Form S-8 (or any
successor form) or any other registration statement relating solely to director
and/or employee benefit plans or filed in connection with an exchange offer, a
transaction to which Rule 145 (or any successor rule) under the Securities Act
applies, a transaction relating solely to an exchange offering, a transaction
relating solely to an acquisition of assets or property for securities or an
offering of securities solely to the Company's existing stockholders), then the
Company shall in each case give written notice of such proposed filing to the
Holders of Restricted Stock as soon as practicable (but no later than 15
business days) before the anticipated filing date, and such notice shall offer
such Holders the opportunity to register such number of shares of Restricted
Stock as each such Holder may request. Each Holder of Restricted Stock desiring
to have such Holder's Restricted Stock included in such registration statement
shall so advise the Company in writing within ten business days after the date
of the Company's notice, setting forth the amount of such Holder's Restricted
Stock for which registration is requested. If the Company's offering is to be an
underwritten offering, the Company shall, subject to the further provisions of
this Agreement, use its reasonable best efforts to cause the managing
underwriter or underwriters of a proposed underwritten offering to permit the
Holders of the Restricted Stock requested to be included in the registration for
such offering to include such securities in such offering on the same terms and
conditions as any similar securities of the Company included therein. Moreover,
if the registration of which the Company gives notice does involve an
underwriting, the right of each Holder to registration pursuant to this Section
1 shall, unless the Company otherwise agrees, be conditioned upon such Holder's
participation as a seller in such underwriting and its execution of an
underwriting agreement with the managing underwriter or underwriters selected by
the Company. Notwithstanding the foregoing, if the managing underwriter of such
offering advises the Company that the total number of securities that the
Holders and the Shansby Holders, other than the Company, intend to include in
such offering will in the good faith opinion of such managing underwriter
adversely affect the terms or pricing of such offering, then the number of
securities to be offered for the account of the Holders and the Shansby Holders
shall be reduced on a pro rata basis based on the number of shares of Common
Stock and/or Warrants proposed to be sold by the Holders and the Shansby Holders
to the extent necessary to reduce the total number of shares of Common Stock
and/or Warrants to be included in such offering for the Holders and the Shansby
Holders other than the Company to the number of shares of Common Stock and/or
Warrants recommended by such managing underwriter (with each Warrant being
treated for such purposes as representing the number of Warrant Shares for which
such Warrant is then exercisable). Any Restricted Stock excluded from an
underwriting shall be withdrawn from registration and shall not, without the
consent of the Company and the manager of the underwriting, be transferred in a
public distribution prior to the expiration of 180 days (or such other shorter
period of time as the manager of the underwriting may require) after the
effective date of the registration statement.
3. Registration Procedures. Whenever, pursuant to Section 1 or 2, any of
the Holders of Restricted Stock has requested that any Restricted Stock be
registered, the Company will, subject
4
<PAGE> 5
to the provisions of Section 4, use all reasonable best efforts to effect the
registration and the sale of such Restricted Stock in accordance with the
intended method of disposition thereof as promptly as practicable, and in
connection with any such request, the Company will:
(A) in connection with a request pursuant to Section 1, prepare and
file with the SEC, not later than 60 days after receipt of a request to
file a registration statement with respect to Restricted Stock, a
registration statement on any form for which the Company then qualifies and
which counsel for the Company shall deem appropriate and which form shall
be available for the sale of such Restricted Stock in accordance with the
intended method of distribution thereof, and use its reasonable best
efforts to cause such registration statement to become effective; provided
(i) that, before filing a registration statement or prospectus or any
amendments or supplements thereto, the Company will furnish to one counsel
selected by the Holders of a majority in number of shares of the Restricted
Stock covered by such registration statement copies of all such documents
proposed to be filed, which documents will be subject to the review of such
counsel, and (ii) that after the filing of the registration statement, the
Company will promptly notify each of the selling Holders of Restricted
Stock of any stop order issued or, to the knowledge of the Company,
threatened by the SEC and take all reasonable actions to prevent the entry
of such stop order or to remove it if entered;
(B) in connection with a registration pursuant to Section 1, prepare
and file with the SEC such amendments and supplements to such registration
statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective for a period of not
less than 180 days or such shorter period as shall terminate when all
shares of Restricted Stock covered by such registration statement have been
sold, and comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such registration statement
during such period in accordance with the intended methods of disposition
by the selling Holders thereof set forth in such registration statement;
(C) as soon as reasonably practicable, furnish to each of the selling
Holders, prior to filing a registration statement, copies of such
registration statement as proposed to be filed, and thereafter furnish to
such selling Holders such number of copies of such registration statement,
each amendment and supplement thereto (in each case, if specified by such
Holder, including all exhibits thereto), the prospectus included in such
registration statement (including each preliminary prospectus) and such
other documents as a selling Holder may reasonably request in order to
facilitate the disposition of the Restricted Stock owned by such selling
Holder;
(D) with reasonable promptness, use its reasonable best efforts to
register or qualify (or cause to be registered or qualified) such
Restricted Stock under such other securities or blue sky laws of such
jurisdictions within the United States as any selling Holder (or managing
underwriter in the case of an underwritten offering) reasonably (in light
of such selling Holder's or managing underwriter's intended plan of
distribution) requests and do any and all other acts and things that may be
reasonably necessary or advisable to enable such selling Holder to
consummate the disposition in such jurisdictions of the
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<PAGE> 6
Restricted Stock owned by such selling Holder; provided that the Company
will not be required to (i) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for
this subsection (D), (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process in any such
jurisdiction;
(E) with reasonable promptness, use reasonable best efforts to cause
the Restricted Stock covered by such registration statement to be
registered with or approved by such other governmental agencies or
authorities as may be necessary by virtue of the business and operations of
the Company to enable the selling Holder or Holders thereof to consummate
the disposition of such Restricted Stock;
(F) promptly notify each selling Holder of such Restricted Stock, at
any time when a prospectus relating thereto is required to be delivered
under the Securities Act, of the occurrence of any event known to the
Company requiring the preparation of a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such
Restricted Stock, such prospectus will not contain an untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading and
promptly make available to each selling Holder any such supplement or
amendment;
(G) in connection with a request pursuant to Section 1, enter into an
underwriting agreement in customary form, the form and substance of such
underwriting agreement being subject to the reasonable satisfaction of the
Company; provided, however, that the Holders will not be required to make
any representation or warranty with respect to the Company in connection
with or as a part of such underwriting agreement;
(H) in the event such sale is pursuant to an underwritten offering,
use its reasonable efforts to obtain a comfort letter or letters from the
Company's independent public accountants in customary form and covering
such matters of the type customarily covered by comfort letters as the
managing underwriter reasonably requests;
(I) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the SEC, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering a period of twelve months, beginning within three months after the
effective date of the registration statement, which earnings statement
shall satisfy the provisions of Section 11(a) of the Securities Act; and
(J) with reasonable promptness, use its reasonable efforts to cause
all such Restricted Stock to be qualified for trading on the NASDAQ
National Market and/or listed on each securities exchange on which the
Common Stock of the Company is then listed, provided that the applicable
qualification or listing requirements are satisfied.
Each selling Holder of Restricted Stock agrees that, upon receipt of any
notice from the Company of the happening of any event of the kind described in
subsection (F) hereof, such selling Holder will forthwith discontinue
disposition of Restricted Stock pursuant to the registration
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<PAGE> 7
statement covering such Restricted Stock until such selling Holder's receipt of
the copies of the supplemented or amended prospectus contemplated by subsection
(F) hereof, and, if so directed by the Company, such selling Holder will deliver
to the Company (at the Company's expense) all copies, other than permanent file
copies then in such selling Holder's possession, of the prospectus covering such
Restricted Stock current at the time of receipt of such notice. In the event the
Company shall give any such notice, the Company shall extend the period during
which such registration statement shall be maintained effective pursuant to this
Agreement (including the period referred to in subsection (B)) by the number of
days during the period from and including the date of the giving of such notice
pursuant to subsection (F) hereof to and including the date when each selling
Holder of Restricted Stock covered by such registration statement shall have
received the copies of the supplemented or amended prospectus contemplated by
subsection (F) hereof. Each selling Holder also agrees to notify the Company if
any event relating to such selling Holder occurs that would require the
preparation of a supplement or amendment to the prospectus so that such
prospectus will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading.
4. Conditions and Limitations.
(A) The Company's obligations under Section 1 shall be subject to the
following limitations:
(i) the Company shall not be required to furnish any audited
financial statements other than those audited statements customarily
prepared at the end of its fiscal year, or to furnish any unaudited
financial information with respect to any period other than its
regularly reported interim quarterly periods unless in the absence of
such other unaudited financial information the registration statement
would contain an untrue statement of material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading;
(ii) A registration statement will not count as a Demand
Registration until it has become effective and remains continuously
effective for the lesser of (i) the period during which all Restricted
Stock registered in the Demand Registration is sold and (ii) 180 days;
provided, however, that a registration shall not constitute a Demand
Registration if (x) after such Demand Registration has become
effective, such registration or the related offer, sale or
distribution of Restricted Stock thereunder is interfered with by any
stop order, injunction or other order or requirement of the SEC or
other governmental agency or court for any reason not attributable to
the Holders and such interference is not thereafter eliminated and (y)
the conditions to closing specified in the underwriting agreement, if
any, entered into in connection with such Demand Registration are not
satisfied or waived, other than by reason of a failure by the Holders;
and
(iii) the Company shall have received the information and
documents specified in Section 5 and each selling Holder shall have
observed or performed its other covenants and conditions contained in
such section.
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<PAGE> 8
(B) The Company's obligation under Section 2 shall be subject to the
limitations and conditions specified in such section and in clauses (i),
(ii) and (iii) of subsection (A) of this Section 4, and to the condition
that the Company may at any time terminate its proposal to register its
shares and discontinue its efforts to cause a registration statement to
become or remain effective.
5. Information from and Certain Covenants of Holders of Restricted Stock.
The Holders for whom Restricted Stock is to be registered pursuant to this
Agreement shall provide to the Company such information regarding the Restricted
Stock to be so registered, the Holder and the intended method of disposition of
such Restricted Stock as shall reasonably be required in connection with the
action to be taken. Any Holder whose Restricted Stock is included in a
registration statement pursuant to this Agreement shall execute all consents,
powers of attorney, registration statements and other documents reasonably
required to be signed by it in order to cause such registration statement to
become effective. Each selling Holder covenants that, in disposing of such
Holder's shares, such Holder will comply with Regulation M of the SEC adopted
pursuant to the Exchange Act.
6. Registration Expenses. All Registration Expenses (as defined herein)
will be borne by the Company. Underwriting discounts and commissions applicable
to the sale of Restricted Stock shall be borne by each selling Holder of the
Restricted Stock to which such discount or commission relates, and each selling
Holder shall be responsible for the fees and expenses of any counsel,
accountants or other agents retained by such selling Holder and all other
out-of-pocket expenses incurred by such selling Holder in connection with any
registration under this Agreement other than fees and expenses of counsel for
the Holders which are treated as Registration Expenses as set forth below.
As used herein, the term "Registration Expenses" means all expenses
incident to the Company's performance of or compliance with this Agreement
(whether or not the registration in connection with which such expenses are
incurred ultimately becomes effective), including without limitation all
registration and filing fees, fees and expenses of compliance with securities or
blue sky laws (including reasonable fees and disbursements of counsel in
connection with blue sky qualifications of the Restricted Stock), rating agency
fees, printing expenses, messenger and delivery expenses incurred by the
Company, internal expenses incurred by the Company (including, without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties), the fees and expenses incurred in connection with
the listing of the securities to be registered on each securities exchange on
which similar securities issued by the Company are then listed, and fees and
disbursements of counsel for the Company (but shall not include the fees or
disbursements of counsel for the Holders) and the Company's independent
certified public accountants (including the expenses of any special audit or
comfort letters required by or incident to such performance), securities acts
liability insurance (if the Company elects to obtain such insurance), the
reasonable fees and expenses of any special experts retained by the Company and
the fees and expenses of other persons retained by the Company in connection
with such registration.
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<PAGE> 9
7. Indemnification; Contribution.
(A) Indemnification by the Company. The Company agrees to indemnify
and hold harmless each selling Holder of Restricted Stock, its officers,
directors and agents and each person, if any, who controls such selling
Holder within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, from and against any and all losses,
claims, damages, liabilities and expenses (including reasonable attorneys'
fees and costs of investigation) arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement or prospectus relating to the Restricted Stock or in
any amendment or supplement thereto or in any preliminary prospectus
relating to the Restricted Stock, or arising out of or based upon any
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages, liabilities or
expenses arise out of, or are based upon, any such untrue statement or
omission or allegation thereof based upon information furnished in writing
to the Company by such selling Holder or on such selling Holder's behalf
expressly for use therein and provided further, that with respect to any
untrue statement or omission or alleged untrue statement or omission made
in any preliminary prospectus, the indemnity agreement contained in this
subsection shall not apply to the extent that any such loss, claim, damage,
liability or expense results from the fact that a copy of the final
prospectus was not sent or given to the person asserting any such losses,
claims, damages, liabilities or expenses at or prior to the written
confirmation of the sale of the Restricted Stock concerned to such person
if a final prospectus is made available by the Company on a timely basis.
The Company also agrees to include in any underwriting agreement with any
underwriters of the Restricted Stock provisions indemnifying and providing
for contribution to such underwriters, their officers and directors and
each person who controls such underwriters on substantially the same basis
as the provisions of this Section 8 indemnifying and providing for
contribution to the selling Holders.
(B) Indemnification by Holders of Restricted Stock. Each selling
Holder agrees to indemnify and hold harmless the Company, its officers,
directors and agents and each person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section 20
of the Exchange Act, from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable attorneys' fees and costs of
investigation) arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in any registration statement
or prospectus relating to the Restricted Stock or in any amendment or
supplement thereto or in any preliminary prospectus relating to the
Restricted Stock, or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided (i) that
such losses, claims, damages, liabilities or expenses arise out of, or are
based upon, any such untrue statement or omission or allegation thereof
based upon information furnished in writing to the Company by such selling
Holder or on such selling Holder's behalf expressly for use therein, (ii)
that with respect to any untrue statement or omission or alleged untrue
statement or omission made in any preliminary prospectus, the indemnity
agreement contained in this subsection shall not
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<PAGE> 10
apply to the extent that any such loss, claim, damage, liability or expense
results from the fact that a copy of the final prospectus was not sent or
given to the person asserting any such losses, claims, damages, liabilities
or expenses at or prior to the written confirmation of the sale of the
Restricted Stock concerned to such person, and (iii) that no selling Holder
shall be liable for any indemnification under this Section 8 in an
aggregate amount that exceeds the total net proceeds (before deducting
expenses) received by such selling Holder from the offering. Each selling
Holder also agrees to include in any underwriting agreement with
underwriters of the Restricted Stock provisions indemnifying and providing
for contribution to such underwriters, their officers and directors, and
each person who controls such underwriters, on substantially the same basis
as the provisions of this Section 7 indemnifying and providing for
contribution to the Company.
(C) Conduct of Indemnification Proceedings. If any action or
proceeding (including any governmental investigation) shall be brought or
asserted against any indemnified party hereunder in respect of which
indemnity may be sought from an indemnifying party, the indemnifying party
shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to such indemnified party, and shall assume the
payment of all expenses. Such indemnified party shall have the right to
employ separate counsel in any such action and to participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the indemnifying party has
agreed to pay such fees and expenses or (ii) the use of counsel chosen by
the indemnifying party to represent the indemnified party would, in the
opinion of counsel representing both parties, present such counsel with a
conflict of interest (in which case the indemnifying party shall not have
the right to direct the defense of such action on behalf of the indemnified
party or parties), in any of which events such fees and expenses shall be
borne by the indemnifying party and paid as incurred, upon presentation of
reasonable evidence of same; provided that the indemnifying party shall
only be responsible for the fees and expenses of one counsel for the
indemnified party or parties hereunder. The indemnifying party shall not be
liable for any settlement of any such action or proceeding effected without
its written consent, but if settled with its written consent, or if there
is a final judgment for the plaintiff in any such action or proceeding, the
indemnifying party agrees to indemnify and hold harmless such indemnified
party from and against any loss or liability (to the extent stated above)
by reason of such settlement or judgment.
(D) Contribution. If the indemnification provided for in this Section
7 is unavailable to the Company or the selling Holders in respect of any
losses, claims, damages, liabilities or judgments referred to therein, then
each such indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages, liabilities and
judgments, in such proportion as is appropriate to reflect the relative
fault of each such party in connection with such statements or omissions,
as well as any other relevant equitable considerations. The relative fault
of each such party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by such party, and the parties'
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<PAGE> 11
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the Holders agree that it would not be just and
equitable if contribution pursuant to this Section 7(D) were determined by
pro rata allocation or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as
a result of the losses, claims, damages, liabilities or judgments referred
to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigation or defending any such action or claim. Notwithstanding the
provisions of this Section 7(D), no selling Holder shall be required to
contribute any amount in excess of the amount by which the total price at
which the Restricted Stock of such selling Holder were offered to the
public exceeds the amount of any damages which such selling Holder has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation.
8. Amendments. This Agreement may be amended or modified upon the written
consent thereto of the Company and the Holders of not less than 66-2/3% of the
Restricted Stock.
9. Assignments. This Agreement shall be binding on and inure to the benefit
of the respective successors and assigns of the parties hereto and shall be
expressly assignable by the Holders with respect to their respective rights
created under this Agreement, provided a Holder may only assign the rights
created under this Agreement in conjunction with the transfer of a majority of
such Holder's Restricted Stock and the rights of the transferor under this
Agreement shall terminate upon such assignment.
10. Entire Agreement; Governing Law. This Agreement constitutes the entire
agreement of the parties relating to the subject matter hereof and all prior or
contemporaneous written or oral agreements are merged herein. This Agreement
shall be governed by and construed in accordance with the domestic laws of the
State of Texas without giving effect to any choice or conflict of law provision
or rule (whether of the State of Texas or any other jurisdiction) that would
cause the application of the laws of any jurisdiction other than the State of
Texas.
11. Notices. Any and all notices or other communications required or
permitted under this Agreement shall be given in writing and delivered in person
or sent by United States certified or registered mail, postage prepaid, return
receipt requested, or by overnight express mail, or by telex, facsimile or
telecopy to the address of such party set forth in the Contribution and Exchange
Agreement. Any such notice shall be effective upon receipt or three days after
placed in the mail, whichever is earlier. Any party may, by notice so delivered,
change its address for notice purposes hereunder.
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12. Severability. If any provision of this Agreement is invalid, illegal or
unenforceable, the balance of this Agreement shall remain in full force and
effect and this Agreement shall be construed in all respects as if such invalid,
illegal or unenforceable provision were omitted. If any provision is
inapplicable to any person or circumstance, it shall, nevertheless, remain
applicable to all other persons and circumstances.
13. Construction; Counterparts. Any section headings in this Agreement are
for convenience of reference only, and shall be given no effect in the
construction or interpretation of this Agreement or any provisions thereof. No
provision of this Agreement will be interpreted in favor of, or against, any
party by reason of the extent to which any such party or its counsel
participated in the drafting thereof or by reason of the extent to which any
such provision is inconsistent with any prior draft hereof or thereof. This
Agreement shall be deemed the mutual form of the parties hereto. This Agreement
may be executed in two or more counterparts, each of which shall be deemed an
original, and which together shall constitute but one and the same instrument.
14. Termination. This Agreement shall be terminate and be of no further
force or effect if the Contribution and Exchange Agreement is terminated in
accordance with its terms without the consummation of the transactions
contemplated thereby.
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IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement on the date first written above.
/s/ Robert C. Tanklage
---------------------------------
ROBERT C. TANKLAGE
AUTHENTIC SPECIALTY FOODS, INC.
By: /s/ Samuel E. Hillin, Jr.
------------------------------
Name: SAMUEL E. HILLIN, JR.
--------------------------
Title: Chief Financial Officer
and Vice President
-------------------------
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EXHIBIT 10.10
ADVISORY AGREEMENT
THIS ADVISORY AGREEMENT (the "Agreement") is made and entered into
effective as of August 15, 1997, among Authentic Specialty Foods, Inc., a Texas
corporation (the "Company"), and Shansby Partners, L.L.C., a Delaware limited
liability company (together with its successors, "Shansby Partners").
1. Retention. The Company hereby acknowledges that it has
retained Shansby Partners, and Shansby Partners acknowledges that, subject to
reasonable advance notice in order to accommodate scheduling, Shansby Partners
will provide the Company with financial advisory services, including assistance
with respect to identification of potential acquisition candidates and
assistance in the negotiation, implementation and financing of these
acquisitions, during the term of this Agreement. Notwithstanding the
foregoing, neither Shansby Partners nor any of its affiliates will be required
to use their funds to provide any financing (in connection with an acquisition
or otherwise) on behalf of the Company.
2. Term. The term of this Agreement shall expire on the third
anniversary of the consummation of the Company's initial public offering of
shares of its common stock pursuant to the Registration Statement on Form S-1
(Registration Number 333-29959) filed with the Securities and Exchange
Commission on June 25, 1997 under the Securities Act of 1933, as amended (the
"Initial Public Offering"), and the Agreement may be terminated by either party
for a material breach of the Agreement by the other party if the breach has not
been remedied within 60 days after notice of the breach is received by the
non-breaching party.
3. Compensation. The Company shall pay Shansby Partners an
initial $250,000 retainer for the services to be rendered in the future during
the term of this Agreement, which retainer shall be payable upon the
consummation of the Initial Public Offering. In addition, the Company shall
pay Shansby Partners financial advisory fees in connection with acquisitions
identified by the Company during the term of this Agreement. The amount of
such financial advisory fees shall be comparable to those customary for
investment banking firms rendering financial advisory services in connection
with acquisition transactions to the acquisition in question.
4. Reimbursement of Expenses. The Company agrees to pay or
reimburse Shansby Partners for all "Reimbursable Expenses," which shall consist
of all reasonable out-of-pocket expenses and disbursements (including without
limitation, costs of travel, postage, deliveries, communications, etc.)
incurred by Shansby Partners or its affiliates for the account of the Company
or in connection with the performance by Shansby Partners of the services
contemplated by Section 1 hereof, in each case upon presentation of evidence of
same. Promptly (but not more than 10 days) after request by or notice from
Shansby Partners, the Company shall pay Shansby Partners, by wire transfer of
immediately available funds to such account as Shansby Partners shall designate
in writing, the Reimbursable Expenses for which Shansby Partners has provided
the Company invoices or reasonably detailed descriptions. All past due
payments in respect of the Reimbursable Expenses
<PAGE> 2
shall bear interest at the lesser of the highest rate of interest which may be
charged under applicable law or the Prime Rate plus 5% from the Payment Date to
and including the date on which such Reimbursable Expenses plus accrued
interest thereon are fully paid to Shansby Partners.
5. Acquisition Opportunities. During the term of this Agreement,
Shansby Partners shall offer to the Company for its consideration any
acquisition opportunities for Mexican food companies that primarily produce
tortillas, tortilla chips, salsas or Mexican sauces and that are identified by
Shansby Partners or any affiliate thereof after the consummation of the Initial
Public Offering (each, an "Acquisition Opportunity").
If the Company declines to pursue any such Acquisition Opportunity,
then Shansby Partners or its affiliates can pursue such Acquisition Opportunity
without the involvement of the Company. Neither Shansby Partners nor any of
its affiliates will be required to use their funds to provide any financing (in
connection with an acquisition or otherwise) on behalf of the Company. If the
Company fails to notify Shansby Partners that the Company desires to pursue,
and has the financial capability to pursue, an Acquisition Opportunity within
30 days after Shansby Partners advises the Company of such Acquisition
Opportunity, then the Company shall be deemed to have declined such Acquisition
Opportunity. For purposes of this Agreement, the Company's "financial
capability" with respect to an Acquisition Opportunity shall mean the sum of,
without duplication: (i) the Company's cash on hand, (ii) the Company's
unutilized borrowing capacity under any existing revolving credit facility and
(iii) the amount that the Company could reasonably expect to borrow from third
parties in connection with the Acquisition Opportunity (including, without
limitation, through seller financing).
The Company shall use its reasonable best efforts to evaluate and
pursue in an expeditious manner any Acquisition Opportunities that it elects to
pursue, and if the Company determines that it does not wish to continue to
pursue such Acquisition Opportunity (or that it does not have the financial
capability to continue to pursue such Acquisition Opportunity), then the
Company will promptly notify Shansby Partners. Upon such notification, then
Shansby Partners or its affiliates can pursue such Acquisition Opportunity
without the involvement of the Company.
6. Indemnification. The Company jointly and severally shall
indemnify and hold harmless each of Shansby Partners, its affiliates, and their
respective directors, officers, controlling persons (within the meaning of
Section 15 of the Securities Act of 1933 or Section 20(a) of the Securities
Exchange Act of 1934, as amended), if any, agents and employees (Shansby
Partners, its affiliates, and such other specified persons being collectively
referred to as "Indemnified Persons," and individually as an "Indemnified
Person") from and against any and all claims, liabilities, losses, damages,
costs and expenses incurred by any Indemnified Person (including those arising
out of an Indemnified Person's negligence and reasonable fees and disbursements
of the respective Indemnified Person's counsel) which (i) are related to or
arise out of actions taken or omitted to be taken (including any untrue
statements made or any statements omitted to be made) by the Company or (ii)
are related to or arise out of actions taken or omitted to be taken by an
Indemnified Person with the Company's consent or in conformity with the
Company's instructions or the Company's actions or omissions or (iii) are
otherwise related to or arise out of Shansby Partners' engagement, as they are
incurred, upon presentation of evidence of same, in connection with
investigating, preparing for, defending, or appealing any action, formal or
informal claim, investigation, inquiry
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<PAGE> 3
or other proceeding, whether or not in connection with pending or threatened
litigation, caused by or arising out of or in connection with Shansby Partners
acting pursuant to Shansby Partners' engagement, whether or not any Indemnified
Person is named as a party thereto and whether or not any liability results
therefrom. The Company will, however, not be responsible for any claims,
liabilities, losses, damages or expenses that have resulted primarily from
Shansby Partners' bad faith, gross negligence or willful misconduct. The
Company also agrees that neither Shansby Partners nor any other Indemnified
Person shall have any liability to the Company for or in connection with such
engagement except for any such liability for claims, liabilities, losses,
damages or expenses incurred by the Company that have resulted primarily from
Shansby Partners' bad faith, gross negligence or willful misconduct. The
Company further agrees that it will not, without the prior written consent of
Shansby Partners, which consent shall not be unreasonably withheld, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding in respect of which indemnification may be
sought hereunder (where an Indemnified Person is a party to such claim, action,
suit or proceeding, or could reasonably be expected to potentially be such a
party) unless such settlement, compromise or consent includes an unconditional
release of Shansby Partners and each such Indemnified Person from all liability
arising out of such claim, action, suit or proceeding. THE COMPANY HEREBY
ACKNOWLEDGES THAT THE FOREGOING INDEMNITY SHALL BE APPLICABLE TO ANY CLAIMS,
LIABILITIES, LOSSES, DAMAGES OR EXPENSES THAT HAVE RESULTED FROM OR ARE ALLEGED
TO HAVE RESULTED FROM THE ACTIVE OR PASSIVE OR THE SOLE, JOINT OR CONCURRENT
ORDINARY NEGLIGENCE OF SHANSBY PARTNERS OR ANY OTHER INDEMNIFIED PERSON.
The foregoing right to indemnity shall be in addition to any rights
that Shansby Partners and/or any other Indemnified Person may have at common
law or otherwise and shall remain in full force and effect following the
completion or any termination of the engagement. The Company hereby consents
to personal jurisdiction and to service and venue in any court in which any
claim which is subject to this Agreement is brought against Shansby Partners or
any other Indemnified Person.
7. Investments in and Advice to Other Companies. The Company
acknowledges that Shansby Partners and its affiliates render advice to, own and
invest in a broad range of businesses and projects, including businesses and
projects that may be similar to, or competitive with, the Company, and, subject
to the provisions of Section 5, nothing in this Agreement shall prohibit
Shansby Partners or its affiliates from engaging in any such activities.
8. Governing Law. This Agreement shall be construed, interpreted
and enforced in accordance with the laws of the State of Texas, without giving
effect to any conflicts-of-law provisions thereof.
9. Notices. Any and all notices or other communications required
or permitted under this Agreement shall be given in writing and delivered in
person or sent by United States certified or registered mail, postage prepaid,
return receipt requested, or by overnight express mail, or by telex, facsimile
or telecopy to the address of such party set forth below. Any such notice
shall be effective upon receipt or three days after placed in the mail,
whichever is earlier.
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<PAGE> 4
If to Shansby Partners:
c/o The Shansby Group
250 Montgomery Street, Suite 1100
San Francisco, California 94104
Attention: Charles H. Esserman
Telecopy Number: (415) 421-5120
If to the Company:
1313 Avenue R
Grand Prairie, Texas 75050
Attention: President
Telecopy Number: (972) 933-4120
Any party may, by notice so delivered, change its address for notice purposes
hereunder.
10. Assignment. This Agreement and all provisions contained
herein shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns; provided, however, neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned (other than with respect to the rights and obligations of Shansby
Partners, which may be assigned to any one or more of its principals or
affiliates) by any of the parties without the prior written consent of the
other parties.
11. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument, and the signature of any
party to any counterpart shall be deemed a signature to, and may be appended
to, any other counterpart.
12. Other Understandings. All discussions, understandings and
agreements heretofore made between any of the parties hereto with respect to
the subject matter hereof are merged in this Agreement, which alone fully and
completely expresses the Agreement of the parties hereto. All calculations of
financial advisory fees and Reimbursable Expenses shall be made by Shansby
Partners and, in the absence of mathematical error, shall be final and
conclusive.
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<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date and year first above written.
SHANSBY PARTNERS, L.L.C.
By: /s/ CHARLES H. ESSERMAN
-----------------------------------------
Charles H. Esserman
Member
AUTHENTIC SPECIALTY FOODS, INC.
By: /s/ SAMUEL E. HILLIN, JR.
-----------------------------------------
Samuel E. Hillin, Jr.
Chief Financial Officer and Vice President
<PAGE> 1
EXHIBIT 10.12
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of
September 2, 1997, is by and among AUTHENTIC SPECIALTY FOODS, INC., a Texas
corporation (the "Company"), TSG2 L.P., a Delaware limited partnership
("TSG2"), Shansby Partners, L.L.C., a Delaware limited liability company
("Shansby Partners"), and Keith R. Lively ("Lively"). TSG2, Shansby Partners
and Lively and permitted assignees of their rights and duties hereunder are
each referred to herein as a "Holder" and are collectively referred to herein
as the "Holders."
W I T N E S S E T H:
WHEREAS, the Company, TSG2, Lively, Robert C. Tanklage and TSG2
Management, L.L.C. have entered into a Contribution and Exchange Agreement
dated June 20, 1997 (as amended, the "Contribution and Exchange Agreement"),
pursuant to which, among other things, the Company has agreed to issue a number
of shares of its Common Stock, par value $1.00 per share ("Common Stock"),
determined in the manner set forth in the Contribution and Exchange Agreement
and subject to the terms and conditions set forth therein; and
WHEREAS, the Company, TSG2 and Lively have agreed to enter into this
Agreement in order to satisfy one of the conditions to obligations of the
parties to consummate the transactions contemplated by the Contribution and
Exchange Agreement; and
WHEREAS, the Company is prepared to consummate its initial public
offering (the "Initial Public Offering") of shares of Common Stock; and
WHEREAS, the consummation of the Initial Public Offering is a
condition to the obligations of the Company, TSG2 and Lively to consummate the
transactions contemplated by the Contribution and Exchange Agreement; and
WHEREAS, in connection with the Initial Public Offering, the Company
and Shansby Partners have entered into a Warrant Agreement dated September 2,
1997, pursuant to which the Company has agreed to issue to Shansby Partners a
number of common stock purchase warrants (the "Warrants") to purchase shares
(the "Warrant Shares") of Common Stock, determined in the manner set forth in
the Warrant Agreement and subject to the terms and conditions set forth
therein; and
WHEREAS, after the Initial Public Offering, each Holder will own a
substantial number of shares of Common Stock; and
WHEREAS, the Common Stock will be registered under Section 12 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); and
<PAGE> 2
WHEREAS, under the provisions of the Securities Act of 1933, as
amended (the "Securities Act") and the General Rules and Regulations
promulgated by the Securities and Exchange Commission (the "SEC") thereunder,
Holder is or may be limited in the manner of selling the shares of Common Stock
owned by Holder, absent registration under the Securities Act of the sale of
such shares or the availability of another exemption from the registration
requirements of the Securities Act.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, the parties hereto hereby agree as
follows:
1. Demand Registration.
(A) Request for Registration. Holders agree to execute
on an expedited basis any lockup agreements reasonably requested by
the managing underwriter for the Initial Public Offering; provided,
however, that the lockup period shall not exceed 180 days after the
consummation of the Initial Public Offering. Without limiting the
generality of the foregoing, the Holders agree, for the benefit of the
Company and the underwriters for the Initial Public Offering, that no
Holder or any affiliate or family member thereof will directly or
indirectly sell, transfer or otherwise dispose of any Restricted
Securities (as defined below) prior to the expiration of 180 days
after the consummation of the Initial Public Offering (such expiration
date shall be referred to herein as the "Lockup Expiration Date"). As
used in this Agreement, "Restricted Securities" shall mean (i) all
shares of Common Stock issued to TSG2 and Lively pursuant to the
Contribution and Exchange Agreement and owned by TSG2 and Lively after
the Initial Public Offering, together with any securities issued or
issuable with respect to any such Common Stock by way of stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization, or
otherwise and (ii) the Warrants and the Warrant Shares (including any
securities received by Shansby Partners or its successors pursuant to
Section 12 of the Warrant Agreement). As to any particular Restricted
Securities, such securities shall cease to be Restricted Securities
when (a) a registration statement with respect to the sale of such
securities shall have become effective under the Securities Act and
such securities shall have been disposed of in accordance with such
registration statement, (b) such securities may be distributed to the
public pursuant to Rule 144 (or any successor provision) under the
Securities Act (even though not actually sold pursuant thereto), (c)
such securities shall have been otherwise transferred, new
certificates representing such securities not bearing a legend
restricting transfer shall have been delivered by the Company and
subsequent disposition of such securities (without any volume
limitations) shall not require registration or qualification of such
securities under the Securities Act or any similar state law then in
force, (d) such securities shall have ceased to be outstanding, or (e)
the Holder or Holders thereof shall agree in writing to terminate this
Agreement. Subject to the conditions and limitations set forth in
Section 4 of this Agreement, at any time after the Lockup Expiration
Date, one or more Holders may make a written request for registration
under the Securities Act of all or part of its or their Restricted
Securities pursuant to this Section 1 (a "Demand Registration"),
provided that the Minimum Number (as hereinafter defined) of
Restricted Securities shall be registered in such offering. The term
"Minimum Number" shall mean the lesser of (i)
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<PAGE> 3
50% of the initial number of Restricted Securities or (ii) 100% of the
number of Restricted Securities then beneficially owned by all of the
Holders in the aggregate. The Holder making such a request for a
Demand Registration is sometimes herein referred to as the
"Designating Holder." Such request will specify the aggregate number
of Restricted Securities proposed to be sold and will also specify the
intended method of disposition thereof. The Holders shall have the
right to two Demand Registrations in the aggregate; provided, however,
that the Holders may not elect more than one Demand Registration in
any 18 month period. Within ten days after receipt of such request,
the Company will give written notice of such registration request to
all other Holders of Restricted Securities and include, subject to the
provisions of Section 1(B) hereof, in such registration all Restricted
Securities with regard to which the Company has received written
requests for inclusion therein within 15 business days after the
receipt by the applicable Holders of the Company's notice. Each such
request will also specify the aggregate number of Restricted
Securities to be registered and the intended method of disposition
thereof. The Company may delay for a maximum of 90 days the filing of
a registration statement upon request from a Holder pursuant to this
Section 1 when, it its good faith judgment the Company reasonably
believes that the filing thereof at the time requested, or the
offering of securities pursuant thereto, would materially and
adversely affect a pending or proposed public offering of securities
of the Company, an acquisition, merger, recapitalization,
consolidation, reorganization or similar transaction relating to the
Company or negotiations, discussions or pending proposals with respect
thereto or require premature disclosure of information not otherwise
required to be disclosed to the potential detriment of the Company.
(B) Priority on Demand Registrations. If a registration
pursuant to this Section 1 involves an underwritten offering and the
managing underwriter shall advise the Company that, in its judgment,
the number of Restricted Securities proposed to be included in such
offering should be limited due to market conditions, then the Company
will promptly so advise each Holder of Restricted Securities that has
requested registration, and the securities of the Company to be
included in the offering, if any, shall first be excluded from such
offering to the extent necessary to meet such limitation; and if
further exclusions are necessary to meet such limitation, the
securities shall be excluded pro rata, based on the respective numbers
of shares of Common Stock and/or Warrants as to which registration
shall have been requested by such Holders (with each Warrant being
treated for such purposes as representing the number of Warrant Shares
for which such Warrant is then exercisable) and any "Holder," (as
defined in the Registration Rights Agreement of even date herewith
between the Company and Robert C. Tanklage (the "Tanklage Registration
Rights Agreement") and referred to herein as a "Tanklage Holder") that
have elected to participate in such registration.
(C) Selection of Underwriters and Counsel. The Board of
Directors of the Company will select and obtain the services of the
investment banker or investment bankers and manager or managers that
will administer the offering and the counsel to such investment
bankers and managers; provided that such investment bankers, managers
and counsel must be approved by the Holders of a majority in number of
the Restricted Securities to be registered, which approval shall not
be unreasonably withheld. Moreover, if the
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<PAGE> 4
registration of which the Company gives notice does involve an
underwriting, the right of each Holder to registration pursuant to
this Section 1 shall, unless the Company otherwise agrees, be
conditioned upon such Holder's participation as a seller in such
underwriting and its execution of an underwriting agreement with the
managing underwriter or underwriters selected by the Company.
2. Piggyback Registration. If the Company proposes to file a
registration statement under the Securities Act with respect to an offering
(other than the Initial Public Offering) for the Company's own account of any
class of its equity securities (other than a registration statement on Form S-8
(or any successor form) or any other registration statement relating solely to
director and/or employee benefit plans or filed in connection with an exchange
offer, a transaction to which Rule 145 (or any successor rule) under the
Securities Act applies, a transaction relating solely to an exchange offering,
a transaction relating solely to an acquisition of assets or property for
securities or an offering of securities solely to the Company's existing
stockholders), then the Company shall in each case give written notice of such
proposed filing to the Holders of Restricted Securities as soon as practicable
(but no later than 15 business days) before the anticipated filing date, and
such notice shall offer such Holders the opportunity to register such number of
Restricted Securities as each such Holder may request. Each Holder of
Restricted Securities desiring to have such Holder's Restricted Securities
included in such registration statement shall so advise the Company in writing
within ten business days after the date of the Company's notice, setting forth
the amount of such Holder's Restricted Securities for which registration is
requested. If the Company's offering is to be an underwritten offering, the
Company shall, subject to the further provisions of this Agreement, use its
reasonable best efforts to cause the managing underwriter or underwriters of a
proposed underwritten offering to permit the Holders of the Restricted
Securities requested to be included in the registration for such offering to
include such securities in such offering on the same terms and conditions as
any similar securities of the Company included therein. Moreover, if the
registration of which the Company gives notice does involve an underwriting,
the right of each Holder to registration pursuant to this Section 2 shall,
unless the Company otherwise agrees, be conditioned upon such Holder's
participation as a seller in such underwriting and its execution of an
underwriting agreement with the managing underwriter or underwriters selected
by the Company. Notwithstanding the foregoing, if the managing underwriter of
such offering advises the Company that the total number of Restricted
Securities that the Holders and the Tanklage Holders, other than the Company,
intend to include in such offering will in the good faith opinion of such
managing underwriter adversely affect the terms or pricing of such offering,
then the number of Securities to be offered for the account of the Holders and
the Tanklage Holders shall be reduced on a pro rata basis based on the number
of shares of Common Stock and/or Warrants proposed to be sold by the Holders
and the Tanklage Holders to the extent necessary to reduce the total number of
shares of Common Stock and/or Warrants to be included in such offering for the
Holders and the Tanklage Holders other than the Company to the number of shares
of Common Stock and/or Warrants recommended by such managing underwriter (with
each Warrant being treated for such purposes as representing the number of
Warrant Shares for which such Warrant is then exercisable). Any Restricted
Securities excluded from an underwriting shall be withdrawn from registration
and shall not, without the consent of the Company and the manager of the
underwriting, be transferred in a public distribution prior to the expiration
of 180 days (or such other shorter period of time as the manager of the
underwriting may require) after the effective date of the registration
statement.
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<PAGE> 5
3. Registration Procedures. Whenever, pursuant to Section 1 or
2, any of the Holders of Restricted Securities has requested that any
Restricted Securities be registered, the Company will, subject to the
provisions of Section 4, use all reasonable best efforts to effect the
registration and the sale of such Restricted Securities in accordance with the
intended method of disposition thereof as promptly as practicable, and in
connection with any such request, the Company will:
(A) in connection with a request pursuant to Section 1,
prepare and file with the SEC, not later than 60 days after receipt of
a request to file a registration statement with respect to Restricted
Securities, a registration statement on any form for which the Company
then qualifies and which counsel for the Company shall deem
appropriate and which form shall be available for the sale of such
Restricted Securities in accordance with the intended method of
distribution thereof, and use its reasonable best efforts to cause
such registration statement to become effective; provided (i) that,
before filing a registration statement or prospectus or any amendments
or supplements thereto, the Company will furnish to one counsel
selected by the Holders of a majority in number of the Restricted
Securities covered by such registration statement copies of all such
documents proposed to be filed, which documents will be subject to the
review of such counsel, and (ii) that after the filing of the
registration statement, the Company will promptly notify each of the
selling Holders of Restricted Securities of any stop order issued or,
to the knowledge of the Company, threatened by the SEC and take all
reasonable actions to prevent the entry of such stop order or to
remove it if entered;
(B) in connection with a registration pursuant to Section
1, prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement
effective for a period of not less than 180 days or such shorter
period as shall terminate when all Restricted Securities covered by
such registration statement have been sold, and comply with the
provisions of the Securities Act with respect to the disposition of
all securities covered by such registration statement during such
period in accordance with the intended methods of disposition by the
selling Holders thereof set forth in such registration statement;
(C) as soon as reasonably practicable, furnish to each of
the selling Holders, prior to filing a registration statement, copies
of such registration statement as proposed to be filed, and thereafter
furnish to such selling Holders such number of copies of such
registration statement, each amendment and supplement thereto (in each
case, if specified by such Holder, including all exhibits thereto),
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as a selling Holder
may reasonably request in order to facilitate the disposition of the
Restricted Securities owned by such selling Holder;
(D) with reasonable promptness, use its reasonable best
efforts to register or qualify (or cause to be registered or
qualified) such Restricted Securities under such other securities or
blue sky laws of such jurisdictions within the United States as any
selling Holder (or managing underwriter in the case of an underwritten
offering) reasonably (in light of such selling Holder's or managing
underwriter's intended plan of distribution) requests
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<PAGE> 6
and do any and all other acts and things that may be reasonably
necessary or advisable to enable such selling Holder to consummate the
disposition in such jurisdictions of the Restricted Securities owned
by such selling Holder; provided that the Company will not be required
to (i) qualify generally to do business in any jurisdiction where it
would not otherwise be required to qualify but for this subsection
(D), (ii) subject itself to taxation in any such jurisdiction or (iii)
consent to general service of process in any such jurisdiction;
(E) with reasonable promptness, use reasonable best
efforts to cause the Restricted Securities covered by such
registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of
the business and operations of the Company to enable the selling
Holder or Holders thereof to consummate the disposition of such
Restricted Securities;
(F) promptly notify each selling Holder of such
Restricted Securities, at any time when a prospectus relating thereto
is required to be delivered under the Securities Act, of the
occurrence of any event known to the Company requiring the preparation
of a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Restricted Securities, such
prospectus will not contain an untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading and promptly
make available to each selling Holder any such supplement or
amendment;
(G) in connection with a request pursuant to Section 1,
enter into an underwriting agreement in customary form, the form and
substance of such underwriting agreement being subject to the
reasonable satisfaction of the Company;
(H) in the event such sale is pursuant to an underwritten
offering, use its reasonable efforts to obtain a comfort letter or
letters from the Company's independent public accountants in customary
form and covering such matters of the type customarily covered by
comfort letters as the managing underwriter reasonably requests;
(I) otherwise use its reasonable best efforts to comply
with all applicable rules and regulations of the SEC, and make
available to its security holders, as soon as reasonably practicable,
an earnings statement covering a period of twelve months, beginning
within three months after the effective date of the registration
statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act; and
(J) with reasonable promptness, use its reasonable
efforts to cause all such Restricted Securities to be qualified for
trading on the NASDAQ National Market and/or listed on each securities
exchange on which the Common Stock of the Company is then listed,
provided that the applicable qualification or listing requirements are
satisfied.
Each selling Holder of Restricted Securities agrees that, upon receipt
of any notice from the Company of the happening of any event of the kind
described in subsection (F) hereof, such selling Holder will forthwith
discontinue disposition of Restricted Securities pursuant to the registration
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<PAGE> 7
statement covering such Restricted Securities until such selling Holder's
receipt of the copies of the supplemented or amended prospectus contemplated by
subsection (F) hereof, and, if so directed by the Company, such selling Holder
will deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such selling Holder's possession, of the
prospectus covering such Restricted Securities current at the time of receipt
of such notice. In the event the Company shall give any such notice, the
Company shall extend the period during which such registration statement shall
be maintained effective pursuant to this Agreement (including the period
referred to in subsection (B)) by the number of days during the period from and
including the date of the giving of such notice pursuant to subsection (F)
hereof to and including the date when each selling Holder of Restricted
Securities covered by such registration statement shall have received the
copies of the supplemented or amended prospectus contemplated by subsection (F)
hereof. Each selling Holder also agrees to notify the Company if any event
relating to such selling Holder occurs that would require the preparation of a
supplement or amendment to the prospectus so that such prospectus will not
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading.
4. Conditions and Limitations.
(A) The Company's obligations under Section 1 shall be
subject to the following limitations:
(i) the Company shall not be required to furnish
any audited financial statements other than those audited
statements customarily prepared at the end of its fiscal year,
or to furnish any unaudited financial information with respect
to any period other than its regularly reported interim
quarterly periods unless in the absence of such other
unaudited financial information the registration statement
would contain an untrue statement of material fact or omit to
state a material fact required to be stated therein or
necessary to make the statements therein not misleading;
(ii) A registration statement will not count as a
Demand Registration until it has become effective and remains
continuously effective for the lesser of (i) the period during
which all Restricted Securities registered in the Demand
Registration is sold and (ii) 180 days; provided, however,
that a registration shall not constitute a Demand Registration
if (x) after such Demand Registration has become effective,
such registration or the related offer, sale or distribution
of Restricted Securities thereunder is interfered with by any
stop order, injunction or other order or requirement of the
SEC or other governmental agency or court for any reason not
attributable to the Holders and such interference is not
thereafter eliminated and (y) the conditions to closing
specified in the underwriting agreement, if any, entered into
in connection with such Demand Registration are not satisfied
or waived, other than by reason of a failure by the Holders;
and
(iii) the Company shall have received the
information and documents specified in Section 5 and each
selling Holder shall have observed or performed its other
covenants and conditions contained in such section.
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(B) The Company's obligation under Section 2 shall be
subject to the limitations and conditions specified in such section
and in clauses (i), (ii) and (iv) of subsection (A) of this Section 4,
and to the condition that the Company may at any time terminate its
proposal to register its shares and discontinue its efforts to cause a
registration statement to become or remain effective.
5. Information from and Certain Covenants of Holders of
Restricted Securities. The Holders for whom Restricted Securities are to be
registered pursuant to this Agreement shall provide to the Company such
information regarding the Restricted Securities to be so registered, the Holder
and the intended method of disposition of such Restricted Securities as shall
reasonably be required in connection with the action to be taken. Any Holder
whose Restricted Securities are included in a registration statement pursuant
to this Agreement shall execute all consents, powers of attorney, registration
statements and other documents reasonably required to be signed by it in order
to cause such registration statement to become effective. Each selling Holder
covenants that, in disposing of such Holder's Restricted Securities, such
Holder will comply with Regulation M of the SEC adopted pursuant to the
Exchange Act.
6. Registration Expenses. All Registration Expenses (as defined
herein) will be borne by the Company. Underwriting discounts and commissions
applicable to the sale of Restricted Securities shall be borne by each selling
Holder of the Restricted Securities to which such discount or commission
relates, and each selling Holder shall be responsible for the fees and expenses
of any counsel, accountants or other agents retained by such selling Holder and
all other out-of-pocket expenses incurred by such selling Holder in connection
with any registration under this Agreement other than fees and expenses of
counsel for the Holders which are treated as Registration Expenses as set forth
below.
As used herein, the term "Registration Expenses" means all expenses
incident to the Company's performance of or compliance with this Agreement
(whether or not the registration in connection with which such expenses are
incurred ultimately becomes effective), including without limitation all
registration and filing fees, fees and expenses of compliance with securities
or blue sky laws (including reasonable fees and disbursements of counsel in
connection with blue sky qualifications of the Restricted Securities), rating
agency fees, printing expenses, messenger and delivery expenses incurred by the
Company, internal expenses incurred by the Company (including, without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties), the fees and expenses incurred in connection with
the listing of the securities to be registered on each securities exchange on
which similar securities issued by the Company are then listed, and fees and
disbursements of counsel for the Company (but shall not include the fees or
disbursements of counsel for the Holders) and the Company's independent
certified public accountants (including the expenses of any special audit or
comfort letters required by or incident to such performance), securities acts
liability insurance (if the Company elects to obtain such insurance), the
reasonable fees and expenses of any special experts retained by the Company and
the fees and expenses of other persons retained by the Company in connection
with such registration.
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7. Indemnification; Contribution.
(A) Indemnification by the Company. The Company agrees
to indemnify and hold harmless each selling Holder of Restricted
Securities, its officers, directors and agents and each person, if
any, who controls such selling Holder within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act,
from and against any and all losses, claims, damages, liabilities and
expenses (including reasonable attorneys' fees and costs of
investigation) arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any
registration statement or prospectus relating to the Restricted
Securities or in any amendment or supplement thereto or in any
preliminary prospectus relating to the Restricted Securities, or
arising out of or based upon any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, except insofar as such
losses, claims, damages, liabilities or expenses arise out of, or are
based upon, any such untrue statement or omission or allegation
thereof based upon information furnished in writing to the Company by
such selling Holder or on such selling Holder's behalf expressly for
use therein and provided further, that with respect to any untrue
statement or omission or alleged untrue statement or omission made in
any preliminary prospectus, the indemnity agreement contained in this
subsection shall not apply to the extent that any such loss, claim,
damage, liability or expense results from the fact that a copy of the
final prospectus was not sent or given to the person asserting any
such losses, claims, damages, liabilities or expenses at or prior to
the written confirmation of the sale of the Restricted Securities
concerned to such person if a final prospectus is made available by
the Company on a timely basis. The Company also agrees to include in
any underwriting agreement with any underwriters of the Restricted
Securities provisions indemnifying and providing for contribution to
such underwriters, their officers and directors and each person who
controls such underwriters on substantially the same basis as the
provisions of this Section 8 indemnifying and providing for
contribution to the selling Holders.
(B) Indemnification by Holders of Restricted Securities.
Each selling Holder agrees to indemnify and hold harmless the Company,
its officers, directors and agents and each person, if any, who
controls the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against any
and all losses, claims, damages, liabilities and expenses (including
reasonable attorneys' fees and costs of investigation) arising out of
or based upon any untrue statement or alleged untrue statement of a
material fact contained in any registration statement or prospectus
relating to the Restricted Securities or in any amendment or
supplement thereto or in any preliminary prospectus relating to the
Restricted Securities, or arising out of or based upon any omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided (i) that such losses, claims, damages,
liabilities or expenses arise out of, or are based upon, any such
untrue statement or omission or allegation thereof based upon
information furnished in writing to the Company by such selling Holder
or on such selling Holder's behalf expressly for use therein, (ii)
that with respect to any untrue statement or omission or alleged
untrue statement or omission made in any preliminary prospectus, the
indemnity agreement contained in this subsection shall not
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<PAGE> 10
apply to the extent that any such loss, claim, damage, liability or
expense results from the fact that a copy of the final prospectus was
not sent or given to the person asserting any such losses, claims,
damages, liabilities or expenses at or prior to the written
confirmation of the sale of the Restricted Securities concerned to
such person, and (iii) that no selling Holder shall be liable for any
indemnification under this Section 8 in an aggregate amount that
exceeds the total net proceeds (before deducting expenses) received by
such selling Holder from the offering. Each selling Holder also
agrees to include in any underwriting agreement with underwriters of
the Restricted Securities provisions indemnifying and providing for
contribution to such underwriters, their officers and directors, and
each person who controls such underwriters, on substantially the same
basis as the provisions of this Section 7 indemnifying and providing
for contribution to the Company.
(C) Conduct of Indemnification Proceedings. If any
action or proceeding (including any governmental investigation) shall
be brought or asserted against any indemnified party hereunder in
respect of which indemnity may be sought from an indemnifying party,
the indemnifying party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to such indemnified
party, and shall assume the payment of all expenses. Such indemnified
party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such indemnified
party unless (i) the indemnifying party has agreed to pay such fees
and expenses or (ii) the use of counsel chosen by the indemnifying
party to represent the indemnified party would, in the opinion of
counsel representing both parties, present such counsel with a
conflict of interest (in which case the indemnifying party shall not
have the right to direct the defense of such action on behalf of the
indemnified party or parties), in any of which events such fees and
expenses shall be borne by the indemnifying party and paid as
incurred, upon presentation of reasonable evidence of same; provided
that the indemnifying party shall only be responsible for the fees and
expenses of one counsel for the indemnified party or parties
hereunder. The indemnifying party shall not be liable for any
settlement of any such action or proceeding effected without its
written consent, but if settled with its written consent, or if there
is a final judgment for the plaintiff in any such action or
proceeding, the indemnifying party agrees to indemnify and hold
harmless such indemnified party from and against any loss or liability
(to the extent stated above) by reason of such settlement or judgment.
(D) Contribution. If the indemnification provided for in
this Section 7 is unavailable to the Company or the selling Holders in
respect of any losses, claims, damages, liabilities or judgments
referred to therein, then each such indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities and judgments, in such proportion as is
appropriate to reflect the relative fault of each such party in
connection with such statements or omissions, as well as any other
relevant equitable considerations. The relative fault of each such
party shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by such party, and the parties'
10
<PAGE> 11
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the Holders agree that it would not be just
and equitable if contribution pursuant to this Section 7(D) were
determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred
to in the immediately preceding paragraph. The amount paid or payable
by an indemnified party as a result of the losses, claims, damages,
liabilities or judgments referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigation or defending any
such action or claim. Notwithstanding the provisions of this Section
7(D), no selling Holder shall be required to contribute any amount in
excess of the amount by which the total price at which the Restricted
Securities of such selling Holder were offered to the public exceeds
the amount of any damages which such selling Holder has otherwise been
required to pay by reason of such untrue or alleged untrue statement
or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation.
8. Amendments. This Agreement may be amended or modified upon
the written consent thereto of the Company and the Holders of not less than
66-2/3% of the Restricted Securities.
9. Assignments. This Agreement shall be binding on and inure to
the benefit of the respective successors and assigns of the parties hereto and
shall be expressly assignable by the Holders with respect to their respective
rights created under this Agreement, provided a Holder may only assign the
rights created under this Agreement in conjunction with the transfer of a
majority of such Holder's Restricted Securities and the rights of the
transferor under this Agreement shall terminate upon such assignment.
10. Entire Agreement; Governing Law. This Agreement constitutes
the entire agreement of the parties relating to the subject matter hereof and
all prior or contemporaneous written or oral agreements are merged herein.
This Agreement shall be governed by and construed in accordance with the
domestic laws of the State of Texas without giving effect to any choice or
conflict of law provision or rule (whether of the State of Texas or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of Texas.
11. Notices. Any and all notices or other communications required
or permitted under this Agreement shall be given in writing and delivered in
person or sent by United States certified or registered mail, postage prepaid,
return receipt requested, or by overnight express mail, or by telex, facsimile
or telecopy to the address of such party set forth in the Contribution and
Exchange Agreement or the Warrant Agreement. Any such notice shall be
effective upon receipt or three days after placed in the mail, whichever is
earlier. Any party may, by notice so delivered, change its address for notice
purposes hereunder.
11
<PAGE> 12
12. Severability. If any provision of this Agreement is invalid,
illegal or unenforceable, the balance of this Agreement shall remain in full
force and effect and this Agreement shall be construed in all respects as if
such invalid, illegal or unenforceable provision were omitted. If any
provision is inapplicable to any person or circumstance, it shall,
nevertheless, remain applicable to all other persons and circumstances.
13. Construction; Counterparts. Any section headings in this
Agreement are for convenience of reference only, and shall be given no effect
in the construction or interpretation of this Agreement or any provisions
thereof. No provision of this Agreement will be interpreted in favor of, or
against, any party by reason of the extent to which any such party or its
counsel participated in the drafting thereof or by reason of the extent to
which any such provision is inconsistent with any prior draft hereof or
thereof. This Agreement shall be deemed the mutual form of the parties hereto.
This Agreement may be executed in two or more counterparts, each of which shall
be deemed an original, and which together shall constitute but one and the same
instrument.
14. Termination. This Agreement shall terminate and be of no
further force or effect if the Initial Public Offering is not consummated.
12
<PAGE> 13
IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement on the date first written above.
AUTHENTIC SPECIALTY FOODS, INC.
By: /s/ SAMUEL E. HILLIN, JR.
--------------------------------------
Name: Samuel E. Hillin, Jr.
-----------------------------------
Title: Chief Financial Officer and
Vice President
----------------------------------
TSG2 L.P.
By: /s/ CHARLES H. ESSERMAN
--------------------------------------
Name: Charles H. Esserman
------------------------------------
Title: Managing Member of its general partner,
TSG2 Management, L.L.C.
-----------------------------------
SHANSBY PARTNERS, L.L.C.
By: /s/ CHARLES H. ESSERMAN
--------------------------------------
Name: Charles H. Esserman
---------------------------------
Title: Member
--------------------------------
/s/ KEITH R. LIVELY
-----------------------------------------
Keith R. Lively
13
<PAGE> 1
EXHIBIT 10.16
TERMINATION AGREEMENT
THIS TERMINATION AGREEMENT ("Termination Agreement") is made and
entered into between LA VICTORIA FOODS, INC. ("La Victoria"), and ROBERT C.
TANKLAGE ("Tanklage").
WHEREAS, Tanklage is an employee of La Victoria; and
WHEREAS, Tanklage's employment with La Victoria is being terminated on
the terms and conditions set forth below pursuant to Section 7.04 of Tanklage's
Employment Agreement with La Victoria dated as of May 31, 1997 (the "Employment
Agreement"); and
WHEREAS, Tanklage's last day of employment with La Victoria shall be
December 31, 1997 (the "Termination Date"); and
WHEREAS, Tanklage and La Victoria desire to establish their respective
rights and obligations for the future;
NOW, THEREFORE, for and in consideration of the mutual promises and
covenants herein set forth, La Victoria and Tanklage agree as follows:
1. Termination of Employment and Other Responsibilities. Tanklage
acknowledges his termination as an employee of La Victoria and hereby resigns
from all offices, directorships, trusteeships, committee memberships and other
positions that Tanklage holds with La Victoria or any of its subsidiaries,
trusts or employee benefit plan. La Victoria and Tanklage agree that the
termination of each such office, directorship, committee membership or
employment shall be effective as of the Termination Date. Notwithstanding the
foregoing, the parties acknowledge that Tanklage will serve as a director and
Chairman of the Board of La Victoria until, in each case, he resigns or is
removed by a vote of a majority of a quorum of the Board of Directors from such
positions. During such time as Tanklage serves as Chairman of the Board of La
Victoria, he shall be entitled to an annual retainer of $10,000, payable in
equal monthly installments. In his capacity as Chairman of the Board, Tanklage
shall have such authority as is specified in the Bylaws of the Company from
time to time. Without limiting the generality of the foregoing, Tanklage
acknowledges that the President of La Victoria shall not report to the Chairman
of the Board, but instead shall report to the Chief Executive Officer of
Authentic Specialty Foods, Inc. Contemporaneously with the execution hereof,
Tanklage has executed a unanimous consent of directors of La Victoria (i)
electing Michael Westhusing as President and Chief Executive Officer of La
Victoria and (ii) electing Tanklage as Chairman of the Board of La Victoria.
2. Termination of Salary and Benefits. In accordance with Section 7.04
of the Employment Agreement, Tanklage shall receive on the Termination Date a
severance payment of $2,915,000. Except for such payment and the annual
retainer described in paragraph 1, Tanklage shall not be entitled to any
additional payments or benefits (including salary, compensation, benefits,
severance or termination payments, securities, property or other benefits) in
connection with his employment or the termination of his employment.
Notwithstanding the foregoing, the parties acknowledge that
<PAGE> 2
Tanklage shall be entitled (i) at his sole expense, to continuation coverage
for health benefits for himself and/or his dependents in accordance with the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and (ii) to
his post- employment benefits, if any, under La Victoria's profit sharing plan,
which benefits shall be paid in accordance with the terms of such profit
sharing plan.
3. Continuing Obligations. After the Termination Date, Tanklage agrees
to cooperate fully with respect to any reasonable request of La Victoria, its
attorneys or other representatives, for information or assistance related to
activities of Tanklage or matters of which he had knowledge during the period
of his employment by La Victoria.
4. Release and Waiver of All Claims
(a) Except for La Victoria's specific obligations to Tanklage
under this Termination Agreement, by execution of this Termination
Agreement, Tanklage, for himself, his legal representatives, heirs and
beneficiaries, forever releases La Victoria, its predecessors,
successors, parent companies, subsidiaries and affiliates, and their
respective officers, directors, employees, owners, shareholders,
agents and successors, from liability for any and all claims,
injuries, economic losses, damages, and causes of action of any kind,
both past and present, known or unknown, related to his employment by
La Victoria and/or the termination of his employment, and forever
waives any and all rights he may have in connection with such matters.
Tanklage understands and agrees that this Release and Waiver of All
Claims includes, but is not limited to, claims or causes of action
arising under the Employee Retirement Income Security Act of 1974, and
any other state or federal statute regulation or the common law
(contract, tort or other), relating in any way to his employment
and/or the termination of his employment with La Victoria. Tanklage
understands and specifically agrees that this Termination Agreement
and the consideration Tanklage will receive hereunder constitute a
complete settlement, compromise and release with respect to such
matters and an absolute bar to any and all claims Tanklage has or may
have with respect to such matters against La Victoria or the other
entities or persons identified herein, whether or not the same be
presently known or suspected. Notwithstanding any provision in this
paragraph 4 to the contrary, nothing in this paragraph 4 shall in any
way limit Tanklage's right to indemnification as an officer or
director of La Victoria in accordance with La Victoria's bylaws,
articles of incorporation or applicable law.
(b) Tanklage covenants and agrees not to bring or join any lawsuit
or file a charge or claim against La Victoria (including its
predecessors, successors, parent companies, subsidiaries and
affiliates, and their respective officers, directors, employees,
owners, shareholders, agents and successors) in any court or before
any government agency relating to his employment and/or the
termination of his employment. Moreover, Tanklage shall defend,
indemnify and hold harmless La Victoria, including its predecessors,
successors, parent companies, subsidiaries and affiliates, and their
respective officers, directors, employees, owners, shareholders,
agents and successors from any claim, demand, or cause of action
brought by any heir, administrator, executor, representative, agent or
other entity
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<PAGE> 3
acting by, through or on behalf of Tanklage relating to, based upon,
or arising out of the subject matters of this waiver and release of
all claims.
5. Miscellaneous
(c) This Termination Agreement shall be interpreted and construed
in accordance with and shall be governed by the laws of the State of
California, except to the extent federal law may apply. This contract
shall be construed and interpreted as the mutual form of La Victoria
and Tanklage.
(d) No failure by either party hereto at any time to give notice
of any breach by the other party of, or to require compliance with,
any condition or provision of this Termination Agreement shall be
deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
(e) The parties agree that in the event there is any breach or
asserted breach of the terms, covenants or conditions of this
Termination Agreement, the remedy of the parties hereto shall be in
both law and in equity, including injunctive relief for the
enforcement of or relief from any provisions of this Termination
Agreement.
(f) It is the desire and intent of the parties that the terms,
provisions, covenants and remedies contained in this Termination
Agreement shall be enforceable to the fullest extent permitted by law.
If any such term, provision, covenant or remedy of this Termination
Agreement or the application thereof to any person or circumstances
shall, to any extent, be construed to be invalid or unenforceable in
whole or in part, then such term, provision, covenant or remedy shall
be construed in a manner so as to permit its enforceability under the
applicable law to the fullest extent permitted by law. In any case,
the remaining provisions of this Termination Agreement or the
application thereof to any person or circumstances, other than those
to which they have been held invalid or unenforceable, shall remain in
full force and effect. It is further the desire and intent of the
parties that in the event of any breach of any portion of this
Termination Agreement, the remainder of this Termination Agreement
shall remain in effect as written and enforceable to the fullest
extent permitted by law.
(g) This Termination Agreement shall inure to the benefit of and
be binding upon the successors, assigns and representatives of La
Victoria and the heirs, administrators, executors and representatives
of Tanklage; provided, however, the obligations of Tanklage owed to La
Victoria under this Termination Agreement are personal to Tanklage and
may not be assigned or transferred by Tanklage to another; provided
further that the provisions of paragraph 4 shall inure to the benefit
of the persons described therein.
(h) This Termination Agreement constitutes the entire agreement of
the parties with regard to the termination of Tanklage's employment
with La Victoria, and supersedes any
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<PAGE> 4
and all prior written agreements between the parties, as well as
between Tanklage and any affiliate of La Victoria. Each party to this
Termination Agreement acknowledges that no representation, inducement,
promise or agreement, oral or written, has been made by either party,
which is not embodied herein, or referred to hereby and that no
agreement, statement or promise relating to the employment or
termination of employment of Tanklage with La Victoria, which is not
contained or provided for, identified or referred to in this
Termination Agreement, shall be valid or binding. Any modification of
this Termination Agreement shall be effective only if it is in writing
and signed by both parties. This paragraph is not intended to
foreclose the right of the parties to enter into any contemporaneous
or future agreement for consulting or other services; however, any
such agreement shall be independent of this Termination Agreement and
shall have no effect whatsoever on the provisions in the parties'
respective obligations and entitlements under this Termination
Agreement unless clearly and expressly stated therein.
Tanklage acknowledges that he has carefully read this Termination
Agreement, including but not limited to the Release and Waiver of All Claims
provisions; that he has had the opportunity to review it with his attorney;
that he fully understands its final and binding effect; that the only promises
made to him to sign this Termination Agreement are those stated above; that
this is the only agreement of its kind arising out of his employment
relationship with La Victoria, its parent, subsidiaries or other affiliates;
and that he is signing this Termination Agreement knowingly and voluntarily.
SIGNED AND ACCEPTED this 17th day of December, 1997.
/s/ Robert C. Tanklage
---------------------------------
ROBERT C. TANKLAGE
ACCEPTED AND AGREED TO this 17th day of December, 1997.
LA VICTORIA FOODS, INC.
By: /s/ Keith R. Lively
-----------------------------
-4-
<PAGE> 1
EXHIBIT 10.19
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") made and entered into
as of January 9, 1998 by and among AUTHENTIC SPECIALTY FOODS, INC., a Texas
corporation (the "Purchaser"), THE TORTILLA KING, INC., a Texas corporation
(the "Company"), SARAGOSA BAZAN, JR. and LYDIA E. BAZAN (collectively, the
"Stock Sellers"), and the SBJ TRUST dated April 27, 1993 between Saragosa
Bazan, Jr. and Lydia E. Bazan, as Grantors and Trustees (the "SBJ Trust," and
together with the Stock Sellers, the "Sellers").
W I T N E S S E T H:
WHEREAS, all of the outstanding shares of common stock, no par value
(the "Common Stock"), of the Company are owned of record and beneficially by
the Stock Sellers in the respective amounts set forth on Appendix I attached
hereto;
WHEREAS, the real property and improvements described on Appendix II
(the "Related Assets") are currently owned by SBJ Trust;
WHEREAS, the Stock Sellers desire to sell, and the Purchaser desires
to purchase, all of the outstanding Common Stock, and SBJ Trust desires to
transfer to sell to the Company all of the Related Assets, in each case on the
terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of and subject to the mutual
agreements, terms and conditions herein contained, the parties hereto agree as
follows:
ARTICLE I
SALE OF SHARES AND TRANSFER OF RELATED ASSETS
1.1 Purchase Price. At the Closing (as defined below), the Stock
Sellers will sell, transfer, convey and deliver to the Purchaser all of the
outstanding shares of Common Stock (the "Shares"), as evidenced by the delivery
of a certificate or certificates evidencing the Shares, accompanied by duly
executed stock powers, and the SBJ Trust will sell, transfer, convey and
deliver to the Company the Related Assets in accordance with the provisions of
Section 4.9, in exchange for the following aggregate consideration: (a)
$5,000,000, payable at the Closing by wire transfer or other delivery of
immediately available funds, in the respective amounts set forth on Appendix I,
and (b) 240,626 shares in the aggregate of common stock, par value $1.00 per
share (the "Purchaser Common Stock") registered in the names of the Sellers in
the respective percentages set forth on Appendix I.
1.2 Section 338(h)(10) Elections. The Sellers agree that, if
requested by the Purchaser within the time period prescribed by law for the
filing thereof, the Stock Sellers, in their capacity as all of the shareholders
of the Company immediately before the Closing, shall join the Purchaser in
making a timely, irrevocable and effective election under section 338(h)(10) of
the Code (and Treasury Regulation section 1.338(h)(10)-1) and a similar
election under any applicable state income tax law (collectively, the "Section
338(h)(10) Elections") with respect to the Purchaser's purchase of the Shares.
To facilitate such election, at the Closing the Stock Sellers shall deliver to
the Purchaser an Internal Revenue Service Form 8023 and any similar forms under
applicable state
<PAGE> 2
income tax law (the "Forms") with respect to the Purchaser's purchase of the
Shares, which Forms shall have been duly executed by each of the Stock Sellers.
If the Purchaser determines to make the Section 338(h)(10) Elections with
respect to its purchase of the Shares, the Purchaser shall cause the Forms to
be duly executed by an authorized person for the Purchaser, shall complete the
schedules required to be attached thereto, shall provide a copy of the executed
Forms and schedules to the Seller Representative, and shall duly and timely
file the Forms as prescribed by Treasury Regulation section 1.338(h)(10)-1 or
the corresponding provisions of applicable state income tax law.
1.3 No Assumption of Liabilities in connection with Related
Assets. Neither the Company nor the Purchaser shall assume or otherwise be
liable for, and shall be indemnified with respect to in accordance with the
provisions of Section 7.2 hereof, all other liabilities and obligations in
connection with the Related Assets.
1.4 Closing. The closing ("Closing") of the sale and purchase of
the Shares and the Related Assets shall take place at the offices of Cullen,
Carsner, Seerden & Cullen, L.L.P., 119 South Main Street, Victoria, Texas, at
10:00 a.m. on January 9, 1998, or at such other place, time and date upon which
the parties hereto may agree (the "Closing Date").
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF THE SELLERS AND THE COMPANY
The Sellers and the Company jointly and severally warrant and
represent to the Purchaser as follows:
2.1 Organization, Qualification and Capacity. The Company (i) is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Texas with corporate power and authority to own, operate
and lease its properties and to carry on its business as now conducted and as
contemplated to be conducted, and (ii) except as otherwise set forth on
Schedule 2.1, is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction where the character of its properties
or the nature of its business makes such qualification necessary, which
jurisdictions are listed on Schedule 2.1. Each Seller has full power and
authority to enter into this Agreement and the capacity and authority to make
the representations, warranties, covenants and agreements herein.
2.2 Capital Stock. The authorized capital stock of the Company
consists solely of 1,000,000 shares of Common Stock, 1,000 of which shares are
validly issued and outstanding, fully paid and nonassessable and the remainder
of which are unissued. All of the issued and outstanding capital stock of the
Company is owned beneficially and of record by the Stock Sellers, free and
clear of any pledge, lien, charge, encumbrance or other adverse claim. There
are no outstanding or authorized subscriptions, options, warrants, rights,
conversion rights, preemptive rights, rights of first refusal or other
agreements or commitments obligating the Company to issue or purchase shares of
its capital stock or any security convertible into capital stock or obligating
any Seller or the Company to purchase, sell or transfer any capital stock of
the Company. There are no voting trusts, proxies, or other agreements or
understandings with respect to the voting of the Common Stock. Set forth on
Schedule 2.2 is a true, complete and correct copy of the Company's stock
ledger, which fully and
2
<PAGE> 3
fairly describes all transactions involving any shares of capital stock of the
Company, including without limitation issuances, repurchases and transfers of
capital stock.
2.3 Subsidiaries. The Company has no subsidiaries (as hereinafter
defined).
2.4 Governmental Authorizations. The Company holds, and after the
consummation of the transactions contemplated hereby will hold, such licenses,
permits, consents, authorizations and orders of such Governmental Authorities
(as hereinafter defined) as are necessary to carry on its business as presently
being conducted, and such licenses, permits, consents, authorizations and
orders are in full force and effect and have been and are being fully complied
with by the Company. Schedule 2.4 lists and briefly describes all such
licenses, permits, consents, authorizations, and orders.
2.5 Financial Statements.
(a) Attached as Schedule 2.5 are copies of the balance
sheet of the Company as of December 31, 1997 (such date being referred
to herein as the "Statement Date") and the related statements of
income and statements of cash flows of the Company for each of the
months in the one year then ended (the "Financial Statements"). The
Financial Statements (including the notes thereto) have been prepared
in accordance with generally accepted accounting principles
consistently applied, present fairly the financial condition of the
Company as of the Statement Date, are correct and complete, and are
consistent with the books and records of the Company (which books and
records are correct and complete).
(b) Except for pending litigation fully described in
Schedule 2.8, there are no debts, liabilities or other obligations of
any nature, whether accrued, absolute, contingent or otherwise, of the
Company as of the Statement Date that are not reflected in the
Financial Statements.
2.6 No Adverse Changes. Except as disclosed in Schedule 2.6,
since the Statement Date, there have been no (a) material adverse changes
(whether or not within the control of the Company or the Sellers) in the
results of operations, business, prospects or financial condition of the
Company from that set forth in the Financial Statements, (b) events or
conditions (whether or not within the control of the Company or the Sellers)
affecting the assets, properties, contracts with suppliers or customers,
business, prospects or operations of the Company from that in effect on the
Statement Date or (c) material adverse changes (whether or not within the
control of the Sellers) to, or relating to, the Related Assets.
2.7 Properties.
(a) Schedule 2.7(a) Part I set forth a brief description
of (i) all real property (other than leaseholds) reflected in the
Financial Statements purported to be owned by the Company on the
Statement Date or real property (other than leaseholds) in which the
Company purports to have an interest on such date including real
property (other than leaseholds) sold after such date, which property,
however, shall be designated as sold, (ii) all real property (other
than leaseholds) acquired by the Company after the Statement Date, and
(iii) all real property (other than leaseholds) charged off any of the
financial records of the Company but
3
<PAGE> 4
still owned by the Company (collectively, the "Fee Property"). Except
as set forth on Schedule 2.7(a) Part I, the Company has good and
indefeasible title to the Fee Property, free of any mortgage, pledge,
lien, charge, encumbrance or other adverse claim and there are no
outstanding opinions or rights of first refusal to purchase any of the
Company's real properties or any portion thereof. The Company has
good title to all other properties and assets reflected in the
Financial Statements as of the Statement Date, or purported to have
been acquired by the Company after such date or used in connection
with the business of the Company (excepting, however, property and
other assets sold or otherwise disposed of in the ordinary course of
business subsequent to such date), and, except as set forth on
Schedule 2.7(a) Part I, are free of any mortgage, pledge, lien,
charge, encumbrance or other adverse claim. Schedule 2.7(a) Part II
sets forth a brief description (including without limitation the total
amount of rent and other payments actually payable with respect
thereto) of all real property, building and facilities leased by the
Company (collectively, the "Leases"). Except as fully described on
Schedule 2.7(a) Part II, the Company enjoys peaceful and undisturbed
possession under all Leases. Except as set forth on Schedule 2.7(a)
Part II, any of property subject to any Lease that is owned by any
Seller (or any affiliate thereof) is free of any mortgage, pledge,
lien, charge, encumbrance or other adverse claim. Except as set forth
in Schedule 2.7(a), there is no other real property, buildings or
facilities owned, used or occupied by Company.
(b) All of the Related Assets (and the current owner
thereof) are listed and described separately on Appendix II attached
hereto. SBJ Trust has good and indefeasible title to all real
property, and good title to all other property, included in the
Related Assets. The Related Assets are used for purposes relating to
operation of the business of the Company and for no other purpose.
Except for the Related Assets described on Appendix II and leased
facilities, as described on Schedule 2.7(a), there are no other assets
or rights (contractual or otherwise) relating to the business, assets,
prospects or operations of the Company in which any Seller, SBJ Trust
or any affiliate of Seller or SBJ Trust has any rights whatsoever.
Except for the provisions of Sections 2.7(b) and 4.9 and any other
provision referring to such section or compliance therewith, for the
purposes of this Agreement, all of the representations, warranties and
covenants made by Sellers or Company with respect to the Company's
assets or business shall also be made to the Related Assets as if they
had been owned by the Company since the earliest time that they were
owned by any Seller or any affiliate thereof.
(c) There are no parties in possession of any portion of
any real property purported to be owned or leased by the Company or
included in the Related Assets (each a "Real Property") as lessees,
licensees, tenants at sufferance, trespassers or otherwise, other than
the Company.
(c) There is no pending or, to the best of Sellers'
knowledge, threatened condemnation or similar proceeding or special
assessment affecting any Real Property, or any part thereof, nor has
any Seller or the Company received notification that any such
proceeding or assessment is contemplated by any Governmental
Authority. Neither (i) the location, occupancy, operation or use of
any Real Property (including the buildings, improvements, fixtures and
equipment forming a part thereof) nor (ii) the construction of any
Real Property violates any applicable law, statute, ordinance, rule,
regulation, order or
4
<PAGE> 5
determination of any Governmental Authority or any board of fire
underwriters (or other body exercising similar functions), or any
restrictive covenant or deed restriction (recorded or otherwise)
affecting any of the Real Property, including, without limitation, all
applicable zoning ordinances and building codes, flood disaster laws
and health laws and regulations (hereinafter sometimes collectively
called "Applicable Laws").
(e) No Real Property is within any area determined by the
Department of Housing and Urban Development to be flood prone under
the Federal Flood Disaster Protection Act of 1973.
(f) (i) There are no unpaid and presently due charges,
debts, liabilities, claims or obligations arising from the
construction, occupancy, ownership, use or operation of any Real
Property, or the business operated thereon, that could give rise to
any mechanic's or materialmen's or other statutory lien (A) against
such Real Property or any part thereof (including any Real Property
estate therein), or (B) for which the Company will be responsible, and
(ii) the Company has not entered into any agreement the performance of
which could give rise to a lien or other encumbrance against the Real
Property.
(g) There exists no action or proceeding to modify or
terminate the present zoning, if any, of any Real Property.
(h) There exists no judicial, quasi-judicial,
administrative or other proceeding or court order, building code
provision, deed restriction or restrictive covenant (recorded or
otherwise) or other private or public limitation that to the best of
Sellers' knowledge could in any way impede or adversely affect the use
of such Real Property by the Company as currently used.
(i) Each Real Property is connected to and serviced by
water, septic tank or sewage disposal (as applicable), gas, telephone
and electric facilities that are adequate for current use of such Real
Property and is in compliance with all Applicable Laws. All public
utilities required for the operation of such Real Property enter such
Real Property through adjoining public streets or, if they pass
through adjoining private land, do so in accordance with valid public
easements. Each Real Property abuts on and has direct vehicular
access to a public road, or has access to a public road via a
permanent, irrevocable appurtenant easement.
(j) To the best of Sellers' knowledge there is not any
(A) change contemplated in any Applicable Laws, (B) judicial or
administrative action, (C) action by adjacent landowners, (D)
administrative action, (E) natural or artificial conditions upon such
Real Property, or (F) significant adverse fact or condition relating
to such Real Property or its current use by the Company, that would
prevent, limit, impede or render more costly the Company's use of such
Real Property.
(k) Permanent certificates of occupancy, all licenses,
permits, authorizations and approvals required by all governmental
authorities having jurisdiction, and the requisite certificates of the
local board of fire underwriters (or other body exercising similar
functions)
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have been issued for such buildings and improvements constituting a
part of each Real Property and have been paid for and all of the
foregoing are in full force and effect.
(l) Each Real Property, including building and
improvements, is in good condition and repair. The equipment and
other personal property used in connection with the Company's business
and operations (i) is in good condition and repair, subject only to
normal wear and tear, (ii) is free of any patent structural defects or
(to the best of Seller's knowledge) latent structural defects, (iii)
is suitable for the purpose for which it is presently used, and (iv)
has been maintained in accordance with industry practice and
manufacturer's recommended guidelines.
(m) No commitments have been made by the Company, any
Seller or other person to any Governmental Authority, utility company,
school board, church or other religious body, or any homeowners or
homeowners' association, or any other organization, group or
individual, relating to any Real Property that would impose an
obligation upon the Purchaser or its successors or assigns to make any
contribution or dedication of money or land or to construct, install
or maintain any improvements of a public or private nature on or off
such Real Property. Each Real Property's compliance with all
Applicable Laws does not depend on, and no zoning, subdivision or
other governmental approval for such Real Property depends on, any
Real Property, or rights appurtenant thereto, other than such Real
Property. No Governmental Authority has imposed any requirement that
any developer of any Real Property pay directly or indirectly any
special fees or contributions or incur any expenses or obligations in
connection with any development of such Real Property or any part
thereof. The provisions of this subparagraph shall not apply to any
regular or nondiscriminatory local real estate or school taxes
assessed against any such Real Property.
(n) Each of the Leases is valid and subsisting and in
full force and effect in accordance with its terms, provisions and
conditions and constitutes the legal, valid, binding and enforceable
obligation of the Company and the landlord thereunder; no party
thereto is in default thereunder and no event has occurred that, with
notice or lapse of time or both, would constitute a default; all
initial installation work, if any, has been fully performed, paid for
and accepted. No landlord has given any notice to the Company or
Sellers of intention of instituting litigation with respect to any
Lease. True, complete and correct copies of each of the Leases as
currently in effect have been delivered to the Purchaser, and the
Company is not subject to any obligation to or for the benefit of the
landlord with respect any of the related Real Property except as fully
set forth in such Leases.
2.8 Litigation, Judgments, Etc. Except as fully described in
Schedule 2.8, there are no actions, suits, proceedings or investigations
pending or, to the best of Sellers' knowledge, threatened against or affecting
the Company or its assets in any court or before or by any federal, state or
other Governmental Authority, or before any arbitrator, and the Sellers have no
reason to believe that any such action, suit, proceeding or investigation will
be brought or threatened against the Company or its assets. Each of the
incidents giving rise to the matters listed on Schedule 2.8 is fully covered by
insurance (subject only to the applicable deductibles described on Schedule
2.22), is being defended by the applicable insurance carrier and its counsel,
and no such insurance carrier has given the Company notice of any reservation
of rights with respect to any of the foregoing. The Company is not in default
with respect to any judgment, order, writ, injunction, decree or award
applicable to it
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of any court or other Governmental Authority or arbitrator having jurisdiction
over it and all such judgments, orders, writs, injunctions, decrees and awards
are described in Schedule 2.8. Except as fully described in Section 2.10,
Section 2.12, Section 2.13 or in any disclosure schedule related thereto, the
Company is not in default with respect to any rule or regulation applicable to
it of any Governmental Authority having jurisdiction over it, or in violation
of any law or statute.
2.9 Intellectual Property.
(a) Marks. Schedule 2.9(a) lists all foreign and
domestic trademarks, service marks, trade dress, and trade names
(collectively, the "Marks"), and registrations therefor, used by
Company in connection with the conduct of business now being
conducted. Except as disclosed in Schedule 2.9(a) Company is the sole
owner of all right, title and interest in the Marks and, to the best
of Sellers' knowledge, there exist no facts that would invalidate the
Marks in the areas in which business is presently being conducted.
Except as disclosed on Schedule 2.9(a), to the best of Sellers'
knowledge, the Marks, as currently being used, do not infringe upon
any rights of a third party. Neither the Company nor any Seller has
received notice from a third party asserting that one or more of the
Marks are infringing, or would infringe if used in a geographic area
outside the area in which the Company's business is presently
conducted. Except as disclosed on Schedule 2.9(a), to the best of
Sellers' knowledge, there are no third party uses of the Marks or
colorable imitations thereof. Neither the Company, any Seller or any
of their affiliates, nor, to the best of Sellers' knowledge, any other
person has granted any rights or license whatsoever with respect to
the use of the Marks "Tortilla King" or "El Rey" or any derivation
thereof, or any other. Except as set forth on Schedule 2.9(a),
neither any Seller nor any affiliate of the Company has any rights or
license with respect to any of the Marks. Any rights or licenses that
any Seller or any affiliate of the Company has will be transferred to
the Company at or prior to the Closing for no additional
consideration. No rights in any of the Marks listed in Schedule
2.9(a) will be affected in any way by virtue of the execution of this
Agreement or the consummation of the transactions contemplated hereby.
No Mark is the subject of any pending, or to the best of Sellers'
knowledge, threatened, litigation, arbitration, interference or
protest proceeding.
(b) Patents. There are no foreign or domestic patents or
applications therefor used in the conduct of the business as now
conducted or in which the Company has rights (collectively, the
"Patents"). No patent rights other than those granted to the Company
by its purchase of equipment are necessary to conduct the business of
the Company as now conducted.
(c) Copyrights. There are no foreign or domestic
copyright registrations or applications for registration thereof used
in the conduct of the business of the Company as now conducted or in
which the Company has rights. All copyrights used in the conduct of
the business as now conducted, including all copyrights with respect
to advertising, software and photographs (collectively, the
"Copyrights"), are solely owned by the Company. Neither Company nor
any Seller has received any notice from a third party asserting any
allegations of infringement of any Copyrights. Neither the Company
nor any Seller has sold, licenced or transferred to any Seller,
employee or other person or entity any rights to any of the
Copyrights.
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(d) Trade Secrets. All trade secrets confidential
information and know-how used in the conduct of the business as now
conducted, including but not limited to customer information and
supplier information, are owned by the Company and can be used or sold
by the Company without infringing trade secret or other rights of
others. Schedule 2.9(d) contains a list of all current employees who
have (or could reasonably be expected to have) knowledge of the trade
secrets, confidential information and know-how. Each such employee
has executed agreements for maintaining the confidentiality of the
trade secrets, confidential information and know-how, which are in
full force and effect. Neither the Company nor any Sellers have sold,
licensed or otherwise transferred to any Seller, employee or any other
person any right to use or disclose any trade secret confidential
information and know-how. All such trade secrets, confidential
information and know-how are presently valid and protectable and none
of the trade secrets, confidential information and know-how are a part
of the public domain.
(e) All working requirements and all fees, annuities and
other payments that are due on or before the Closing for any foreign
or domestic Marks, Patents, and Copyright and all application and/or
registrations therefore have been met or paid.
(f) The Company has the right to use, free and clear of
the rightful claims by others all foreign and domestic Marks, Patents
and Copyrights and all applications and/or registrations therefore, as
well as all trade secrets confidential information and know-how used
or having been used in the conduct of the business of the Company as
now conducted.
2.10 Environmental and Health Laws.
(a) The Company is not in violation of any Environmental
Laws (as hereinafter defined) or any order or requirement of any court
or Governmental Authority to the extent pertaining to health or the
environment, nor are the operations or assets of the Company subject
to any remedial obligations (except for customary closure obligations)
under any Environmental Law;
(b) Without limitation of clause (a) above, the Company
is not subject to any existing, pending or, to the best of Sellers'
knowledge, threatened action, suit, investigation, inquiry or
proceeding by or before any court or Governmental Authority under any
Environmental Law and neither the Company nor the Sellers have reason
to believe that any such action, suit, investigation, inquiry or
proceeding will be brought against the Company;
(c) All notices, permits, licenses or similar
authorizations, if any, required to be obtained or filed by the
Company under any Environmental Law, including without limitation
those relating to the treatment, storage, disposal or release of a
hazardous substance or solid waste into the environment, have been
duly obtained or filed, and the Company is in compliance with the
terms and conditions of all such notices, permits, licenses and
similar authorizations;
(d) Since the effective date of the relevant requirements
of RCRA (as hereinafter defined) all hazardous substances or solid
wastes generated by the Company or at any property currently or
heretofore owned or leased by the Company, including, but not limited
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to, the Real Property and requiring disposal have been, to the extent
required by any Environmental Law, transported only by carriers
maintaining valid authorizations under RCRA and any other
Environmental Laws and treated and disposed of only at treatment,
storage and disposal facilities maintaining valid authorizations under
RCRA and any other Environmental Law, and, to the best of Sellers'
knowledge, such carriers and facilities have been and are operating in
compliance with such authorizations and to the best of Sellers'
knowledge are not the subject of any existing, pending or threatened
action, investigation or inquiry by any Governmental Authority in
connection with any Environmental Laws;
(e) There are no underground storage tanks or other
underground containers on or under any of the Company's assets or
operations;
(f) Without limiting the foregoing, there is no liability
to any third party in connection with any release or threatened
release of any hazardous substances, solid wastes, petroleum and
petroleum products into the environment as a result of or with respect
to the Company's assets or operations; and
(g) Copies of all environmental reports and records
possessed by Sellers or the Company that address the environmental
condition of any property currently or heretofore owned or leased by
the Company (including, but not limited to, the Real Property) or
other assets of the Company or environmental compliance or liability
concerns affecting the business of the Company are attached hereto as
Schedule 2.10(g).
For purposes of this Agreement, the term "Environmental Laws" shall
mean any and all laws, statutes, ordinances, rules, regulations, orders or
determinations of any Governmental Authority pertaining to health or the
environment currently or hereafter in effect in any and all jurisdictions in
which the Company's assets are located or in which its operations are
conducted, including without limitation, the Clean Air Act, as amended, the
Comprehensive Environmental, Response, Compensation, and Liability Act of 1980
("CERCLA"), as amended, the Federal Water Pollution Control Act, as amended,
the Occupational Safety and Health Act of 1970, as amended, the Resource
Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking
Water Act, as amended, the Toxic Substances Control Act, as amended, the
Hazardous & Solid Waste Amendments Act of 1984, as amended, the Superfund
Amendments and Reauthorization Act of 1986, as amended, the Hazardous Materials
Transportation Act, as amended, any state laws pertaining to the handling of
wastes or the use, maintenance, and closure of pits and impoundments, and other
environmental conservation or protection laws. For purposes of this Agreement,
the terms "hazardous substance" and "release" (or "threatened release") have
the meanings specified in CERCLA, and the terms "solid waste" and "disposal"
(or "disposed") have the meanings specified in RCRA; provided, however, that to
the extent the laws of the state in which the property is located or the
operations are conducted establish a meaning for "hazardous substance,"
"release," "solid waste" or "disposal" that is broader than that specified in
either CERCLA or RCRA, such broader meaning shall apply. For purposes of this
Agreement, the term "Governmental Authority" includes the United States, the
state, county, city and political subdivisions in which the Company's
operations or assets are located or which exercises jurisdiction over any of
the Company or its operations or assets, and any agency, department,
commission, board, bureau or instrumentality or any of them that exercises
jurisdiction over the Company or its operations or assets.
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2.11 Additional Schedules. Schedule 2.11 contains the following
separate schedules and has attached the following documents:
(a) Copies of all currently effective contracts or
options relating to the acquisition by the Company of any operating
business.
(b) Copies of all currently effective contracts for the
performance of services involving aggregate annual receipts or
payments by the Company in excess of $10,000.
(c) Copies of all currently effective contracts for the
purchase, sale, lease or exchange of real or personal property
involving aggregate receipts or payments by the Company in excess of
$10,000.
(d) Copies of all currently effective contracts for
construction on or improvement of any Real Property (and all
documentation relating thereto) involving aggregate receipts or
payments by the Company in excess of $10,000.
(e) A schedule, as of the Statement Date, of the trade
and accounts receivable of the Company in excess of $10,000 showing
separately for each such receivable its age denominated by an
appropriate classification.
(f) Except as otherwise delivered pursuant to clause (g)
or (j), copies of all currently effective agreements or arrangements
with regard to the payment of compensation (including without
limitation bonuses), profit-sharing, pension, vacation, retirement or
other compensation benefits to, or providing for the indemnification
of, current or former directors, officers or employees of the Company
whose compensation exceeds $40,000 per year, regardless of whether
said agreements or arrangements are legally binding (a schedule
setting forth the name or identification of each current or former
director, officer or employee of the Company who is currently being
paid or who is entitled to compensation (other than at hourly rates)
benefits that in the aggregate exceed $10,000 per year and the rate or
amounts thereof is set forth in Schedule 2.18); and all currently
effective written contracts or commitments with unions or other groups
or otherwise with respect to wages, working conditions, work rules or
employee benefits.
(g) A summary of all material statements of practice
followed by the Company with regard to the payment of compensation
(including without limitation bonuses), profit-sharing, pension,
vacation, retirement or other compensation benefits to current or
former directors, officers or employees of the Company whose
compensation exceeds $40,000 per year, whether or not said practices
are legally binding; and all currently effective material contracts or
commitments with unions or other groups or otherwise with respect to
wages, bonuses, working conditions, work rules or employee benefits
that were not required to be delivered pursuant to subparagraph (f) or
(j).
(h) Copies of all complaints and other pleadings (and
settlement documents and releases) relating to threatened, pending or
settled litigation or governmental proceedings or claims set forth on
Schedule 2.8.
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(i) A schedule listing and itemizing all current and
forecasted depreciation expenses of the Company or assets owned on the
Statement Date or acquired by the Company since such date.
(j) Copies of all pension, profit sharing, retirement,
bonus or stock option or stock purchase plans or hospitalization,
sickness and accident or other fringe benefit plans or programs of the
Company currently in effect with respect to employees or others.
(k) Copies of all currently effective contracts, notes,
financing statements, mortgages, deeds of trust and other instruments
relating to the borrowing of money or the guaranty of any obligation
for the borrowing of money and of all currently effective letters of
credit to which the Company is a party or otherwise liable or that
relate to the Company or its assets (whether contingently or
absolutely).
(l) Copies of all other currently effective contracts
material to the business and operations of the Company, regardless of
whether made in the ordinary course of business.
(m) Copies of all currently effective contracts
containing covenants limiting the freedom of the Company to compete in
any line of business or with any person in any geographical area.
(n) Copies of all currently effective contracts requiring
the payment to any person of any royalty or similar commission or fee
in excess of $10,000 per annum, of the Company not delivered pursuant
to subparagraph (g) above.
(o) Copies of all currently effective contracts to which
both (X) the Company, on one hand, and (Y) any Seller or any of its
officers, directors, partners or affiliates other than the Company, on
the other hand, are parties not otherwise delivered pursuant to this
Section 2.11.
The Company is not, and but for a requirement that notice be given or that a
period of time elapse or both would not be, in default under any contract,
agreement, lease or other instrument to which it is a party or by which it or
its properties is bound. All of the purportedly currently effective contracts,
agreements, understandings, licenses, franchises, permissions and commitments,
whether or not attached to a schedule to this Agreement, of the Company are in
good standing, valid and effective and the Company has, in the ordinary course
of business, paid all amounts due thereunder and has satisfied in full all the
liabilities and obligations with respect thereto and, no party other than the
Company is in default under any such contract, agreement, understanding,
franchise, permission or commitment.
2.12 Taxes.
(a) (i) All returns and reports ("Tax Returns") of or
with respect to any Tax (as hereinafter defined) that are required to
be filed on or before the Closing Date by or with respect to the
Company or the assets or business of the Company have been or will be
duly and timely filed (except as set forth on Schedule 2.12), (ii) all
items of income, gain, loss, deduction and credit or other items
required to be included in each such Tax Return have
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been or will be so included and all information provided in each such
Tax Return is true, correct and complete, (iii) all Taxes that have
become or will become due with respect to the period covered by each
such Tax Return (whether or not shown on such Tax Return) have been or
will be timely paid in full, (iv) all withholding Tax requirements
imposed on or with respect to the Company or its business have been or
will be satisfied in full in all respects, and (v) no penalty,
interest or other charge is or will become due with respect to the
late filing of any such Tax Return or late payment of any such Tax.
For purposes of this Agreement, "Taxes" shall mean any federal, state,
local, foreign and other taxes, assessments, fees and other
governmental charges, including without limitation income, gross
receipts, net proceeds, alternative or add-on minimum, ad valorem,
value added, turnover, sales, use, property (tangible and intangible),
stamp, lease, user, excise, duty, franchise, transfer, license,
withholding, payroll, employment, fuel, excess profits, occupational,
interest equalization, windfall profit, severance, and other similar
governmental charges (including interest and penalties).
(b) No Tax Returns of or with respect to the Company or
its business have been audited by the applicable Governmental
Authority.
(c) There is no claim against the Company or its assets
or business for any Taxes, and no assessment, deficiency or adjustment
has been asserted or proposed with respect to any Tax Return of or
with respect to the Company or its business.
(d) There is not in force any extension of time with
respect to the due date for the filing of any Tax Return of or with
respect to the Company or its assets or business or any waiver or
agreement for any extension of time for the assessment or payment of
any Tax of or with respect to the Company or its assets or business.
(e) The total amounts set up as liabilities for current
and deferred Taxes in the Financial Statements are sufficient to cover
the payment of all Taxes, whether or not assessed or disputed, which
are, or are hereafter found to be, or to have been, due by or with
respect to the Company and its assets or business up to and through
the periods covered thereby.
(f) Neither the execution or deliver of this Agreement,
nor the performance by any party of its obligations hereunder has
resulted or will result in the imposition of any Tax (or the
requirement to file any Tax Return) on the Company or any shareholder
of the Company (other than the Sellers).
2.13 Employee Benefit Plans. Schedules 2.11(f), Schedule 2.11(g)
or Schedule 2.11(j) set forth all employee benefit plans within the meaning of
section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") sponsored, maintained or contributed to by the Company for the
benefit of the employees of the Company ("Plans"), or has been so sponsored,
maintained or contributed to within six years prior to the Closing Date.
Except as otherwise set forth Schedule 2.11(f), Schedule 2.11(g) or Schedule
2.11(j), (a) all reports and disclosures relating to the Plans required to be
filed with or furnished to governmental agencies, Plan participants or Plan
beneficiaries have been filed or furnished in accordance with applicable law in
a timely manner, and each Plan has been administered in substantial compliance
with its governing documents and applicable law, (b) each of the Plans intended
to be qualified under Section 401 of the Code, satisfies
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the requirements of such Section and has received a favorable determination
letter from the Internal Revenue Service regarding such qualified status and
has not, since receipt of the most recent favorable determination letter, been
amended or operated in a way that would adversely affect such qualified status,
and (c) no act, omission or transaction has occurred which would result in
imposition on the Company of (i) breach of fiduciary duty liability damages
under Section 409 of ERISA, (ii) a civil penalty assessed pursuant to
subsections (c), (i) or (l) of Section 502 of ERISA or (iii) a tax imposed
pursuant to Chapter 43 of Subtitle D of the Code. Further, there is no Plan
sponsored, maintained or contributed to by the Company, or that has been
sponsored, maintained or contributed to by the Company that is subject to Title
IV of ERISA, and there is no employee benefit plan, within the meaning of
Section 3(3) of ERISA, which is not listed in Schedule 2.11(f), Schedule
2.11(g) or Schedule 2.11(j), and which is sponsored, maintained or contributed
to, or has been sponsored, maintained or contributed to by any corporation,
trade, business or entity under common control with the Company, within the
meaning of Section 414(b), (c) or (m) of the Code or Section 4001 of ERISA.
The termination of any Plans will not violate any law, rule or regulation and
will not result in (and has not resulted in) any liability to the Company
(other than resulting solely from reasonable expenses incurred to terminate any
such plan). Schedule 2.13 sets forth by number and employment classification
the approximate numbers of employees employed by the Company as of the date of
this Agreement, and none of said employees are subject to union or collective
bargaining agreements with the Company. The Company has not at any time on or
after January 1, 1997 had or, to the knowledge of Sellers, been threatened with
any work stoppages or other labor disputes or controversies with respect to its
employees which had a material adverse effect on the Company.
2.14 Authorization of Agreement - No Violation - No Consents.
Each of the Sellers and the Company has full power and authority to enter into
this Agreement and the other documents delivered pursuant to this Agreement
(collectively, the "Documents") to the extent each is a party thereto and the
capacity and authority to make the representations, warranties, covenants and
agreements herein or therein. Except as set forth on Schedule 2.14, neither
the execution or delivery of the Documents nor the consummation of the
transactions contemplated herein or therein (a) will conflict with or result in
a breach, default or violation of (i) any of the terms, provisions or
conditions of the Articles of Incorporation or Bylaws of the Company (copies of
all of which organization documents are attached as Schedule 2.14) or (ii) any
agreement, document, instrument, judgment, decree, order, governmental permit,
certificate, license, law, statute, rule or regulation to which any Seller or
the Company is a party or to which it is subject (including without limitation
the trust agreement and/or declaration of trust forming SBJ Trust), (b) will
result in the creation of any lien, charge or other encumbrance on any property
or assets of the Company, or (c) will require any Seller or the Company to
obtain the consent of any private nongovernmental third party not already
obtained. Except as expressly contemplated by the Documents, no consent,
action, approval or authorization of, or registration, declaration or filing
with, any governmental department, commission, agency or other instrumentality
or any other person or entity is required to authorize, or is otherwise
required in connection with, the execution and delivery of the Documents by any
Seller or the Company or their performance of the terms of the Documents or the
validity or enforceability of the Documents. This Agreement and each Document
delivered pursuant hereto constitutes the legal, valid and binding obligation
of the Company and each Seller (to the extent a party thereto) enforceable
against each such person in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws
affecting creditors' rights generally and to the principles of equity (whether
enforcement is sought in a proceeding in equity or at law).
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2.15 Brokerage Agreements. None of any Seller or the Company has
entered (directly or indirectly) into any agreement, with any person, firm or
corporation for the payment of any commission, brokerage or "finder's fee" in
connection with the transactions contemplated herein.
2.16 Accounts Receivable. All accounts and notes receivable of
the Company in excess of $10,000 arose in the ordinary and usual course of
business, represent valid obligations subject to no set-offs or counterclaims,
and either have been collected or are collectible (subject only to bankruptcy
stays sought by account debtors) in the ordinary and usual course of business
in the aggregate recorded amounts as reflected in the books of account of the
Company in accordance with their terms.
2.17 Banks. Schedule 2.17 sets forth (a) the name of each bank,
trust company, stock and other broker with which the Company has an account,
credit line, or safe deposit box or vault or maintains any relations, (b) the
names of all persons authorized to draw thereon or to have access to any safe
deposit box or vault, (c) the purpose of each such account, safe deposit box or
vault, and (d) the names of all persons authorized by proxies, powers of
attorney or like instruments, to act on behalf of the Company in matters
concerning any of its business or affairs.
2.18 Directors, Officers and Key Employees. Schedule 2.18
contains a true and complete list of the name, address and salary, as well as
the title or functional position, of each current director and officer of the
Company, and each other current employee, consultant, representative, salesman
or agent employed or under contract with the Company who received or accrued or
on an annualized basis would have received or accrued aggregate direct cash
remuneration as reflected on such person's Form W-2 at the rate of $40,000 or
more per annum from the Company in respect of the 24 months ended on the
Statement Date. Except as set forth on Schedule 2.18, none of the persons
listed on Schedule 2.18 has received any wage or salary increase or bonus since
the Statement Date, nor have any such increases or bonuses been adopted since
the Statement Date. Neither any Seller, the Company nor, to the best of
Sellers' knowledge, any of the officers or directors of the Company has ever
been convicted of a felony. None of any Seller or any of the persons set forth
on Schedule 2.18, and no relative or affiliate known to any Seller or the
Company of any such person has had in the last five years any transaction with
the Company involving the receipt by or payment by the Company of more than
$10,000 in cash, property or services or the increase in the debt or other
liabilities of the Company, except in the ordinary course of their employment
as set forth in Schedule 2.18 or as otherwise set forth on Schedule 2.18.
2.19 Suppliers and Customers. Schedule 2.19 sets forth the 20
most significant third party suppliers and the 20 most significant third party
customers of the Company (in terms of payments to or by such persons) during
the twelve-month period ended the Statement Date. The relationships of the
Company with its suppliers and customers are satisfactory, and no Seller is
aware of any intention by any such customer or supplier to terminate its
relationship with the Company or to reduce the amount of business conducted
with the Company.
2.20 No Material Omissions. Neither this Agreement nor any of the
documents delivered in connection therewith contains any untrue statement of a
material fact, nor does this Agreement or any such document omit to state any
fact necessary to make the statements contained therein not misleading in light
of the circumstances under which they were made. There is no fact that would
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materially adversely affect the operations, business, assets or prospects of
the Company that has not been disclosed in this Agreement or any Schedule
hereto.
2.21 Outstanding Debt. Except as disclosed on Schedule 2.21 or the
Financial Statements or incurred in the ordinary course of business since the
Statement Date, the Company has no outstanding debt, payables, liabilities or
liens of any kind, whether fixed, contingent, matured or unmatured. All such
debt, payables, liabilities or liens incurred as described above in the
ordinary course of business and existing on December 31, 1997 are listed on
Schedule 2.21.
2.22 Insurance. Schedule 2.22 Part I sets forth the following
information with respect to each insurance policy (including policies providing
property, casualty, liability, and workers' compensation and bond and surety
arrangements) related to the Company or its assets:
(a) the name, address, and telephone number of the agent,
(b) the name of the insurer, the name of the
policyholder, and the name of each covered insured;
(c) the policy number and period of coverage;
(d) the scope (including an indication of whether the
coverage was on a claims made, occurrence, or other basis) and amount
(including a description of how deductibles and ceilings are
calculated and operate) of coverage; and
(e) a description of any retrospective premium
adjustments or other loss-sharing arrangements.
True and complete copies of each such insurance policy are attached as
Schedule 2.22 Part II.
2.24 Inventory. The Company's inventory (including raw materials
and work-in-progress): (i) were acquired in the ordinary course of business
consistent with past practice; (ii) are of a quality, quantity, and condition
useable or saleable in the ordinary course of business within the Company's
normal inventory turnover experience; and (iii) are valued in accordance with
generally accepted accounting principles. The Company does not have any
liability with respect to the return or repurchase of any goods in the
possession of any customer outside the ordinary course of business.
2.25 Compliance with Laws. (a) The Company is in compliance with
all laws, regulations and orders applicable to it, its respective business and
operations (as conducted by it now and in the past), and its properties and
assets (in each case owned or used by it now or in the past). The Company has
not been cited, fined or otherwise notified of any asserted past or current
material failure to comply with any laws, regulations or orders and no
proceeding with respect to any such material violation is pending or, to the
Sellers' knowledge, threatened. The Company has not made any payment of funds
in connection with its business that is prohibited by law, and no funds have
been set aside to be used in connection with its business for any payment
prohibited by law.
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(b) The Company has complied with the terms and provisions of the
Immigration Reform and Control Act of 1986, as amended (the "Immigration Act").
With respect to each Employee (as defined in 8 C.F.R. 274a.1(f)) of the Company
for whom compliance with the Immigration Act as employer is required, the
Company has on file a true, accurate and complete copy of (i) each Employee's
Form I-9 (Employment Eligibility Verification Form) and (ii) all other records,
documents or other papers prepared, procured and/or retained by the Company
pursuant to the Immigration Act. The Company has not been cited, fined, served
with a Notice of Intent to Fine or with a Cease and Desist Order, nor has any
action or administrative proceeding been initiated or, to the knowledge of the
Sellers, threatened against the Company, by the Immigration and Naturalization
Service by reason of any actual or alleged failure to comply with the
Immigration Act.
(c) The Company is not subject to any contract, decree or
injunction that restricts the continued operation of any business or the
expansion thereof to other geographical areas, customers and suppliers or lines
of business.
2.26 Status of Securities. Each Stock Seller represents and
warrants that they have received a copy of the Purchaser's Prospectus dated
August 27, 1997 of the Purchaser (the "Prospectus") and Quarterly Report on
Form 10-Q/A filed with the Securities and Exchange Commission on November 21,
1997, and have reviewed such documents carefully. Each Stock Seller further
represents and acknowledges that the issuance to such person of shares of
Purchaser Common Stock pursuant to the terms of this Agreement has not been
registered or qualified under the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities or "blue sky" laws. Each Stock
Seller further represents and acknowledges that such securities may not be
sold, transferred or otherwise disposed of without an effective registration
statement under the Securities Act and compliance with applicable state
securities and "blue sky" laws, or an applicable exemption therefrom, and that
the certificates for such shares shall bear a restrictive legend to such
effect. Each Stock Seller represents to the Company that such person is taking
such shares for investment and not with a view to distribution, within the
meaning of the Securities Act. Without limiting the generality of the
foregoing, each Stock Seller agrees that it will not offer, issue, sell,
transfer, grant options to purchase or otherwise dispose of, for value or
otherwise, directly or indirectly, any shares of Purchaser Common Stock or
other equity securities of the Purchaser prior to February 23, 1998.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Sellers as follows:
3.1 Organization and Qualification. The Purchaser is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Texas, with corporate power and authority to own, operate
and lease its properties and to carry on its business as now conducted and as
contemplated to be conducted, and is not required to qualify to do business as
a foreign corporation in any jurisdiction.
3.2 Authorization of Agreement - No Violation - No Consents. The
Purchaser has full power and authority to enter into the Documents (to the
extent a party thereto) and to make the representations, warranties, covenants
and agreements made herein and therein. Except as expressly
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provided in this Agreement, neither the execution or delivery of the Documents
by the Purchaser nor the consummation of the transactions contemplated herein
by the Purchaser (a) will conflict with or result in a breach, default or
violation of (i) any of the terms, provisions or conditions of the articles of
incorporation or bylaws of the Purchaser or (ii) any agreement, document,
instrument, judgment, decree, order, governmental permit, certificate, license,
law, statute, rule or regulation to which the Purchaser is a party or to which
it is subject, (b) will result in the creation of any lien, charge or other
encumbrance on any property or assets of the Purchaser or (c) will require the
Purchaser to obtain the consent of any private nongovernmental third party. No
consent, action, approval or authorization of, or registration, declaration or
filing with, any governmental department, commission, agency or other
instrumentality or any other person or entity is required to authorize, or is
otherwise required in connection with, the execution and delivery of the
Documents by the Purchaser or its performance of the terms hereof by the
Purchaser or the validity or enforceability hereof or thereof against the
Purchaser. This Agreement and the Documents delivered by the Purchaser
pursuant hereto constitute the legal, valid and binding obligations of the
Purchaser enforceable against the Purchaser in accordance with their respective
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and other similar laws affecting creditors' rights generally and to the
principles of equity (whether enforcement is sought in a proceeding in equity
or at law).
3.3 Brokerage Agreements. The Purchaser has not entered
(directly or indirectly) into any agreement under which Seller or any affiliate
of Seller could be liable with any person, firm or corporation providing for
the payment of any commission, brokerage or "finder's fee" in connection with
the transactions contemplated herein.
ARTICLE IV
COVENANTS OF THE COMPANY AND THE SELLERS
Each of the Company and the Sellers further agrees, jointly and
severally, except as set forth in or contemplated by this Agreement or as
otherwise approved by the Purchaser in writing, that from the date hereof
through the Closing Date:
4.1 Conduct of Business of the Company Prior to the Closing Date.
(a) The business of the Company shall be operated only in
the ordinary course of business and consistent with past practice, and
consistent with such operation, the Company and the Sellers will use
all reasonable efforts to preserve intact the present organization of
the Company and the relationships of the Company with persons having
relationships with them;
(b) No change shall be made in the Articles of
Incorporation or Bylaws of the Company;
(c) No change shall be made in the number of shares of
authorized or issued capital stock of the Company; nor shall any
option, warrant, call, right, commitment, conversion right, right of
first refusal, or agreement of any character be granted or made by the
Company relating to the authorized or issued capital stock thereof;
nor shall the Company issue, grant or sell any securities or
obligations convertible into shares of the capital stock
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<PAGE> 18
of the Company; nor shall the Company make any declaration, setting
aside or payment of any dividend or distribution of assets of any kind
in respect of its capital stock, nor repurchase or agree to repurchase
any share of such capital stock;
(d) The Company shall not settle any tax claims
(including interest and penalties);
(e) The Company shall duly comply with all laws
applicable to the Company and all laws applicable to the transactions
contemplated by this Agreement;
(f) Except as fully reflected in the Financial Statements
and except in the ordinary course of business, the Company shall not
(i) incur any indebtedness in addition to any indebtedness outstanding
on the date hereof or renew or extend any indebtedness outstanding on
the date hereof; (ii) enter into any agreement requiring the
maintenance of a specified net worth; (iii) assume, guarantee, endorse
or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other
individual, firm or corporation, except for the endorsement of checks
for collection in the ordinary course of business; or (iv) make any
loans, advances or capital contributions to, or investments in, any
other individual, firm or corporation, except in connection with
normal relocations, travel advances or other advances which in the
aggregate are not in excess of $10,000;
(g) The Company shall not (i) increase the compensation
payable or to become payable by the Company to any officer, employee,
or director thereof, or increase any bonus, insurance, pension or
other employee benefit plan, or increase any payment plan, payment or
arrangement made to, for or with any officer, employee, or director
(other than a bonus of up to $25,000 for 1997 for Ray Bazan) or (ii)
commit itself (A) to any additional pension, profit-sharing, bonus,
incentive, deferred compensation, stock purchase, stock option, stock
appreciation right, group insurance, severance pay, retirement or
other employee benefit plan, agreement or arrangement, or to any
employment or material consulting agreement with or for the benefit of
any person or (B) to amend any of such plans or any of such agreements
in existence on the date hereof (other than amendments required by law
to preserve the qualified status of a Plan), (iii) engage in any
transaction (either acting alone or in conjunction with Sellers, any
Plan or trust created thereunder) in connection with which the Company
could be subjected (directly or indirectly) to either a civil penalty
assessed pursuant to subsections (c), (i) or (1) of Section 502 of
ERISA or a tax imposed pursuant to Chapter 43 of Subtitle D of the
Code, (iv) terminate any Plan in a manner, or take any other action
with respect to any Plan, that could result in the liability of the
Company to any person, (v) take any action that could adversely affect
the qualification of any Plan or its compliance with the applicable
requirements of ERISA, (vi) fail to make full payment when due of all
amounts that, under the provisions of any Plan, any agreement relating
thereto or applicable law, the Company is required to pay as
contributions thereto or (vii) fail to file, on a timely basis, all
reports and forms required by federal regulations with respect to any
Plan;
(h) The Company shall not, except in the ordinary course
of business, sell, transfer, mortgage, or otherwise dispose of, or
encumber, or agree to sell, transfer, mortgage or otherwise dispose of
or encumber, any properties, real, personal or mixed, tangible or
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intangible, which have a value on the books of the Company, either
individually or in the aggregate, in excess of $10,000;
(i) The Company shall not enter into any other agreement,
commitment or contract, except agreements, commitments or contracts
for the purchase, sale or lease of products or services in the
ordinary course of business, consistent with past practice and not in
excess of current requirements;
(j) Except as fully reflected in the Financial Statements
or on Schedule 4.1(j), the Company shall not make any single capital
expenditure, capital addition or capital improvement in an amount
exceeding $10,000 for any single facility;
(k) Without limiting the provisions of Section 4.5
hereof, none of the Company, the Sellers or the officers or directors
of the Company may approve, recommend or undertake, with the Company
as the surviving, disappearing or acquiring corporation, any merger,
consolidation, share exchange, acquisition of all or substantially all
of the assets, tender offer or other takeover transaction or enter
into any negotiations with, or furnish or cause to be furnished, any
information concerning its business, properties or assets to, any
person (other than the Purchaser) that the Company or any of such
officers or directors knows to be interested in any such transaction;
(l) The Company shall not take, or permit to be taken,
any action or do, or permit to be done, anything in the conduct of the
business of the Company that would be contrary to or in breach of any
of the terms or provisions of this Agreement or that would cause any
of the representations contained herein to be or to become untrue;
(m) The Company shall not settle any claim, action or
proceeding existing on or commenced after the date hereof or waive any
right against a third party;
(n) The Company shall not make any loan or advance to any
officer, director, employee, consultant, representative, salesman or
agent of the Company involving more than $10,000 in the aggregate or
make any other loan or advance;
(o) The Company shall not pay or commit to pay any
commission or other amount to any director or officer of the Company
or any employee, consultant, representative, salesman or agent of the
Company or any relative or affiliate of any of them except in
accordance with employment contracts or arrangements entered into in
the ordinary or usual course of business;
(p) The Company shall not make any unlawful payment to
governmental or quasi-governmental officials or, except as fully
described on Schedule 2.11(m), payments to customers or suppliers for
the sharing of fees or rebating of charges or reciprocal practices;
(q) Except as provided in Section 6.1(h), none of any
Seller or any of the persons set forth on Schedule 2.18, and no
relative or affiliate known to any Seller or the Company of any such
person shall enter into any transaction with the Company involving the
receipt by or payment by the Company of more than $10,000 in cash,
property or services or the
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increase in the debt or other liabilities of the Company, except in
the ordinary course of their employment or as set forth on Schedule
2.18; and
(r) Except as fully described on Schedule 4.1(r) or as
provided in Section 6.1(h), the Company or the Sellers shall not amend
any Lease or any instrument affecting the Real Property.
4.2 Obtaining Consents. The Sellers and the Company will use all
reasonable efforts to obtain, and to assist the Purchaser in obtaining, all
consents, resignations, authorizations and approvals and making all filings
necessary for the consummation of the transactions contemplated by this
Agreement.
4.3 Access by the Purchaser to the Company. During the period
from the date of this Agreement to the Closing Date or the prior termination of
this Agreement pursuant to Section 6.3, the Purchaser and its employees,
representatives and agents shall be given access to the facilities, properties,
personnel, books and records of the Company for the purpose of conducting an
investigation of its financial condition, corporate status, business,
properties and assets; provided, however, that such investigation shall be
conducted in a manner that does not interfere with normal operations of the
Company. The Company will cause the employees, counsel, accountants and other
representatives of the Company to be available to the Purchaser and its
employees and agents at all reasonable times for such purposes.
4.4 Confidentiality. None of the Company, any Seller or any
employee or other representative or agent of the Company or any Seller will
disclose or use any information obtained in the course of the negotiation of
this Agreement or otherwise or set forth in any schedule hereto, except (a) in
connection with the consummation hereof, (b) as required by law, (c) as may be
necessary to the prosecution or defense of any claim or suit brought to enforce
rights under this Agreement, or (d) to the extent that the same may become
public other than through the action of the Company or any Seller or the
representatives, agents or employees of the Company or any Seller. If the
transactions contemplated hereby are not consummated and this Agreement
terminates, the Company, any Seller, their employees and other representatives
and agents promptly will return all copies of documents, contracts or records
and other properties furnished by the Purchaser or its affiliates pursuant to
this Agreement.
4.5 Exclusive Agreement. Except to the extent otherwise expressly
contemplated by this Agreement, unless this Agreement is terminated prior to
Closing, none of Sellers, the Company nor any affiliate thereof will directly
or indirectly (a) encourage, solicit or engage in discussions or any
negotiations with, or provide any information to, any person or entity (other
than the Purchaser or affiliates of the Purchaser) concerning any possible
disposition of any of the Company or any asset thereof or of any Related Asset
(unless and to the extent that such property or asset would be expressly
permitted by this Agreement to be disposed of), or (b) do anything or enter
into any agreement or take any action that by its terms or effect could
reasonably be expected to adversely affect the ability of the parties to
consummate the transactions contemplated by this Agreement on the terms and
conditions set forth herein or that would be contrary to or breach any of the
terms or provisions of this Agreement or that would cause any of the
representations or warranties contained herein to be or become untrue in any
material respect.
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4.6 Satisfaction of Closing Conditions. The Company and Sellers
shall use all reasonable efforts to satisfy the conditions to Closing set forth
in Article VI relating to any Seller or the Company in an expeditious manner.
4.7 Delivery of Documents at Closing. At the Closing, subject to
satisfaction of the conditions set forth in Article VI, Sellers and the Company
shall execute and deliver to the Purchaser all documents required to be
delivered pursuant to Section 6.1.
4.8 Real Property Matters. Within seven days after the date of
this Agreement, Sellers shall deliver or cause to be delivered to the Purchaser
the following:
(a) Owner policies of title insurance covering all Real
Property owned by the Company or SBJ Trust, if a Related Asset,
including, without limitation, the property at 302 Profit Drive,
Victoria, Texas (the "Facility"), insuring the Company or SBJ Trust,
if a Related Asset has fee simple title thereto, up to the fair market
value thereof, subject only to the encumbrances set forth in Schedule
2.7(a) (the "Existing Title Policies"), together with legible copies
of all documents listed in such title policies as exceptions to title.
If an Existing Title Policy has not been issued for any tract
constituting a part of a Related Asset, then the Sellers shall
deliver, at Sellers' sole cost and expense, to the Purchaser a
commitment from an underwriter reasonably acceptable to the Purchaser
to issue a Texas-form owner policy of title insurance in respect of
each such Real Property, insuring the Company owns the Real Property
in question free of all claims (other than those set forth on Schedule
2.7(a)) up to the fair market value thereof (each, a "Title
Commitment"), together with legible copies of all documents listed in
such Title Commitment as exceptions to title.
(b) Surveys of each tract of Real Property (the
"Surveys") consisting of a plat and field notes prepared by a licensed
surveyor reasonably acceptable to the Purchaser, each of which shall
(i) reflect the actual dimensions of, and area within, the Real
Property in question, the locations of all easements, setback lines,
encroachments or overlaps thereon or thereover, (ii) identify by
recording reference all easements, setback lines, and other matters
referred to in the Existing Title Policy or Title Commitment (as
applicable) therefor, (iii) be certified to the Company; (iv) reflect
any area within the Real Property that has been designated by the
Federal Insurance Administration, the Army Corps of Engineers, or any
other Governmental Authority as being subject to special or increased
flood hazards, and (v) in general, comply with the requirements of the
Texas Surveyor's Association for Category 1A Condition II surveys.
All encroachments or other survey defects shall be cured or insured
prior to Closing.
4.9 Sale of Related Assets. At or prior to the Closing, SBJ Trust
will sell, transfer, convey and deliver, all of their rights, ownership and
interest in all of the Related Assets to the Purchaser, free and clear of any
mortgage, pledge, lien, charge, encumbrance or other adverse claim. Such
transfer shall be effected pursuant to conveyance documents, with a general
warranty of title, in form and substance satisfactory to the Purchaser in its
reasonable judgment. Contemporaneously with the foregoing transfer of any
Related Asset, any leases, licenses, notes or other obligations between the
Company and any Seller not provided for in this Agreement or fully disclosed on
any Schedule to this Agreement shall be terminated as of such date, for no
additional consideration, and with no remaining obligations or liabilities for
the Company after such date.
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4.10 Transfer of Marks. At or prior to the Closing, any rights or
licenses that any Seller or any affiliate of the Company has will be
transferred to the Company for no additional consideration, and any such Seller
or affiliate will execute and deliver to the Company such instruments of
transfer as shall be requested by the Purchaser, in each case in form and
substance satisfactory to the Purchaser in its reasonable judgment (the "Marks
Conveyance Instruments").
ARTICLE V
COVENANTS OF THE PURCHASER
The Purchaser further agrees, except as set forth in or contemplated
by this Agreement or as otherwise approved by the Sellers in writing, as
follows:
5.1 Obtaining Consents. The Purchaser will use all reasonable
efforts to obtain all consents, authorizations and approvals and making all
filings necessary for the consummation of the transactions contemplated by this
Agreement.
5.2 Confidentiality. Until the transactions contemplated hereby
have been consummated (and if for any reason such transactions are not
consummated for a period of one year after the effective date hereof), neither
the Purchaser nor any employee or other representative or agent of the
Purchaser will disclose or use any information obtained in the course of its
investigation under Section 4.3, the negotiation of this Agreement or otherwise
or set forth in any schedule hereto, except (a) in connection with the
consummation hereof, (b) as required by law, (c) as may be necessary to the
prosecution or defense of any claim or suit brought to enforce rights under
this Agreement, (d) to the extent that the same may become public other than
through the action of the Purchaser, or the representatives, agents or
employees of the Purchaser or (e) in connection with the negotiation and
consummation of the sale of securities of the Purchaser or any of its
affiliates to investors, provided that such investors agree to keep such
information confidential on the terms set forth herein. If the transactions
contemplated hereby are not consummated and this Agreement terminates, the
Purchaser, its employees and other representatives and agents promptly will
return all copies of documents, contracts or records and other properties
furnished by Sellers or Company pursuant to this Agreement.
5.3 Satisfaction of Closing Conditions. The Purchaser shall use
all reasonable efforts to satisfy the conditions to Closing set forth in
Article VI relating to the Purchaser in an expeditious manner.
5.4 Delivery of Documents at Closing. At the Closing, subject to
satisfaction of the conditions set forth in Article VI, the Purchaser shall
execute and deliver to the Sellers the documents contemplated to be delivered
pursuant to Section 6.2.
5.5 Distribution of Amounts to Pay Taxes. The Purchaser
acknowledges that, the Company is an S Corporation (within the meaning of the
Code) and that the Sellers will have taxable income based upon their respective
share of the income of the Company for 1997 ("S Corporation Income"). The
Purchaser further acknowledges that effective as of the Closing Date, the Board
of Directors of the Company has declared a dividend to the Sellers equal to (a)
the amount of federal income taxes payable by the Sellers to the extent
directly related to the S Corporation Income for
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1997 (which for purposes of clarity does not include any income or gain
resulting from the transactions contemplated by this Agreement) less (b) any
amounts distributed by the Company to either or both of the Sellers subsequent
to January 1, 1997 (including without limitation the distribution of $52,500
made to Saragosa Bazan, Jr. in October 1997); provided, however, that the
amount set forth in clause (a) shall in no event be greater than $250,000.
Such dividend will be payable by the Company within ten business days following
the determination by the Company and/or its auditors of the amount set forth in
clause (a).
ARTICLE VI
CONDITIONS TO THE CLOSING; TERMINATION
6.1 Conditions to Obligation of the Purchaser. The obligation of
the Purchaser to effect the transactions contemplated by this Agreement is
subject to the satisfaction (or waiver in writing by the Purchaser) of each of
the following conditions:
(a) Representations and Warranties of the Company and the
Sellers to be True. (i) The representations and warranties of the
Company and the Sellers hereunder shall be made again at the Closing
and shall be true and correct as of the Closing, except to the extent
expressly contemplated by this Agreement, (ii) the Company and the
Sellers shall have performed all covenants required of them by this
Agreement as of the Closing and (iii) the Company and the Sellers
shall have furnished the Purchaser at the Closing with a certificate
of the Sellers and the President of the Company to such effect, as
well as to the effect that all of the conditions contemplated by this
Section 6.1 have been satisfied as of the Closing Date.
(b) Third Party Consents. The Company and the Sellers
shall have obtained all required consents to the transactions
contemplated by this Agreement from the parties to material contracts,
agreements, understandings, franchises, permissions and commitments of
the Company and the Sellers.
(c) Statutory Requirements; Litigation. All statutory
requirements for the valid consummation of the transactions
contemplated herein shall have been fulfilled and all necessary
governmental consents, approvals or authorizations shall have been
obtained, and there shall not be any actual or threatened litigation
(including any investigation by any Governmental Authority) to
restrain or invalidate the transactions contemplated herein, the
defense of which would, in the judgment of the Purchaser, made in good
faith and based upon the advice of counsel, involve expense or lapse
of time that would be materially adverse to the interests of the
Purchaser.
(d) Stock Certificates. The Stock Sellers shall have
delivered to the Purchaser at the Closing one or more stock
certificates representing the Shares in good delivery form and
accompanied by duly executed stock powers evidencing all of the Common
Stock.
(e) Lease Agreement. The Company and SBJ Trust shall
have executed and delivered to each other a Lease Agreement in the
form of Exhibit A attached hereto (the "Lease Agreement").
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(f) Officers and Directors. The Company and the Sellers
shall have delivered to the Purchaser resignations for each director
and officer of the Company (other than Saragosa Bazan, Jr.), which
resignations shall be effective contemporaneously with the closing of
the purchase by the Purchaser of the Common Stock.
(g) Real Property. The Sellers shall have delivered to
the Purchaser the following documents:
(i) General Warranty Deed. A general warranty
deed from SBJ Trust to the Company with respect to the Related
Assets, as contemplated by Section 4.9, together with such
other instruments of transfer as shall be reasonably requested
by the Purchaser in connection with the transfer of the
Related Assets.
(ii) Removal of Existing Tenants. Evidence
satisfactory to the Purchaser in its reasonable judgment that,
no person other than the Company occupies any portion of any
of the Leaseholds or has any rights to occupy any portion of
any of the Leaseholds.
(iii) Owner Policy of Title Insurance. A
Texas-form owner policy of title insurance for the Related
Assets for which a Title Commitment was delivered to the
Purchaser pursuant to Section 4.8 hereof, in an amount equal
to the fair market value of such Real Property insuring the
Company owns the Real Property in question or leasehold estate
therein (as applicable) subject only to the exceptions to
title set forth in the applicable Title Commitment that are
acceptable to the Purchaser in its reasonable judgment.
(h) Repayment of Amounts Owed to the Company by the
Sellers. Any amounts owed by any Seller (or any affiliate or family
member thereof) to the Company shall be repaid in full at or prior to
the Closing.
(i) Employment Agreements. The Company and each of
Saragosa Bazan, Jr., Lydia Bazan and Ray Bazan shall have entered into
employment agreements in the form attached hereto as Exhibit B
(collectively, the "Employment Agreements"), and Mark Bazan shall have
entered into an advisory agreement with the Company in a form that is
substantially similar to the Employment Agreements.
(j) Marks Conveyance Instruments. At or prior to the
Closing, the Sellers and any affiliates of the Company shall have
delivered to the Company any Marks Conveyance Instruments required to
be delivered pursuant to Section 4.10 hereof.
6.2 Conditions to Obligations of the Sellers and the Company. In
addition to the satisfaction of the conditions referred to in subparagraph (b)
of Section 6.1 hereof, the obligations of the Company and the Sellers to effect
the transactions contemplated by this Agreement shall be subject to the
satisfaction (or waiver in writing by the Sellers) of each of the following
conditions
(a) Representations and Warranties of the Purchaser to Be
True. (i) The representations and warranties of the Purchaser
hereunder shall be made again at the Closing
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and shall be true and correct as of the Closing, except to the extent
expressly contemplated by this Agreement, (ii) the Purchaser shall
have performed all covenants required of it by this Agreement as of
the Closing and (iii) the Purchaser shall have furnished the Company
and the Sellers at the Closing with a certificate of an executive
officer of the Purchaser to such effect, as well as to the effect that
all of the conditions contemplated by this Section 6.2 have been
satisfied as of the Closing Date.
(b) Statutory Requirements; Litigation. All statutory
requirements for the valid consummation of the transactions
contemplated herein shall have been fulfilled and all necessary
governmental consents, approvals or authorizations shall have been
obtained and there shall not be any actual or threatened litigation
(including any investigation by any Governmental Authority) to
restrain or invalidate the transactions contemplated herein, the
defense of which would, in the judgment of the Sellers, made in good
faith and based upon the advice of counsel, involve expense or lapse
of time that would be materially adverse to the interests of the
Sellers.
(c) Payment of Purchase Price. The Purchaser shall have
paid the cash purchase price for the shares of Common Stock to be paid
at the Closing as specified in Section 1.1 hereof and shall have
delivered certificates for shares of Purchaser Common Stock registered
in the names of the Sellers, in each case in the respective amounts
set forth on Appendix I.
(d) Lease Agreement. The Company and SBJ Trust shall
have executed and delivered to each other the Lease Agreement.
(e) Employment Agreements. The Company and each of
Saragosa Bazan, Jr., Lydia Bazan and Ray Bazan shall have entered into
the Employment Agreements, and the Company shall have entered into an
advisory agreement with Mark Bazan in a form that is substantially
similar to the Employment Agreements.
(f) Repayment of Certain Indebtedness. The Company
and/or the Purchaser shall have arranged for the repayment of all
amounts outstanding under the promissory notes that are described on
Schedule 2.11(k), but only to the extent described thereon.
6.3 Termination of Agreement. Anything herein to the contrary
notwithstanding, this Agreement and the transactions contemplated herein may be
terminated at any time before the Closing as follows:
(a) Mutual Consent. By the mutual consent of the Sellers
and the Purchaser.
(b) Expiration Date. By any of the Sellers or the
Purchaser if the Closing shall not have occurred on or before January
31, 1997; provided, however, that no party hereto can terminate this
Agreement pursuant to this clause 6.3(b) if at such time such party is
in breach of any provision of this Agreement.
6.4 Effect of Termination and Failure of Conditions. In the event
of termination of this Agreement as provided in Section 6.3, or of the failure
of a condition resulting in the Purchaser, the Company or the Sellers not
performing its or their obligations hereunder pursuant to the terms of
25
<PAGE> 26
Section 6.1 or 6.2, as the case may be, this Agreement shall forthwith become
void and there shall be no liability on the part of any party hereto with
respect thereto except (i) the provisions of Sections 4.4 and 5.2 shall survive
any such termination and (ii) nothing herein shall relieve any party from
liability for any breach hereof.
ARTICLE VII
ADDITIONAL AGREEMENTS OF THE PARTIES
7.1 Survival of Representations and Warranties.
(a) All statements contained in any certificate,
schedule, exhibit, financial statement or other document or instrument
delivered by or on behalf of any party hereto pursuant to or in
connection with this Agreement for the purposes of this Agreement
shall be deemed to be representations and warranties hereunder.
Except to the extent otherwise provided in paragraph (b) below, the
representations, warranties and covenants hereunder shall survive the
Closing and any investigation of any of the parties with respect
thereto indefinitely.
(b) The representations hereunder shall survive the
Closing for the following periods after the Closing Date:
(i) The representations and warranties set forth
in Sections 2.2 and 2.10, and all of the covenants set forth
in this Agreement, shall survive without limitation as to
time.
(ii) The representations and warranties set forth
in Sections 2.12 and 2.13 shall survive until one day after
the expiration of the applicable statute of limitations
(including all extensions).
(iii) All other representations shall survive for
two years and one day.
The date of expiration of any representation or warranty shall
be referred to herein as the "Termination Date". Representations and
warranties under this Agreement shall be of no further force or effect
after the applicable Termination Date; provided, however, that there
shall be no such termination of any representation or warranty with
respect to a bona fide claim asserted with respect thereto prior to
such date in accordance with the terms of Section 7.2.
7.2 Indemnification.
(a) Indemnification by Sellers for Claims Relating to
Occurrences or Conditions Prior to Closing. Sellers jointly and
severally agree to defend, indemnify, protect, save and hold harmless
the Purchaser, the Company, and their affiliates, successors, assigns,
officers, directors and controlling persons (collectively, the
"Purchaser Indemnitees") from and against any and all demands, claims,
actions, causes of action, assessments, losses, damages, liabilities,
costs and expenses, including, without limitation, litigation costs
and all attorneys'
26
<PAGE> 27
and experts' fees and expenses (collectively, the "Losses") relating
to (i) the ownership, condition, operation or conduct of the business
of the Company and its operations and business and (ii) the Related
Assets and arising or accruing on or prior to the Closing Date.
(b) Breaches of Representations, Warranties, Covenants or
Agreements. Sellers jointly and severally agree to defend, indemnify
and hold harmless the Purchaser Indemnitees from and against any and
all Losses asserted against, resulting from, imposed upon or incurred
by any of the Purchaser Indemnitees by, or arising out of, or as a
result of, any of the representations, warranties, covenants or
agreements of Sellers or the Company contained in this Agreement or
any certificate or instrument delivered by any Seller or the Company
pursuant to the terms hereof being incorrect, untrue or breached.
Subject to the foregoing, the Purchaser Indemnitees shall have the
right to indemnification under this Section 7.2(b) in accordance with
its terms, regardless of whether any of them could alternatively
receive indemnification with respect thereto under Section 7.2(a)(i).
The Purchaser agrees to defend, indemnify and hold harmless the Seller
Indemnitees from and against any and all Losses asserted against,
resulting from, imposed upon or incurred by any of the Seller
Indemnitees by, or arising out of, or as a result of, any of the
representations, warranties, covenants or agreements of the Purchaser
contained in this Agreement or any certificate or instrument delivered
by the Purchaser pursuant to the terms hereof being incorrect, untrue
or breached. Subject to the foregoing, the Seller Indemnitees shall
have the right to indemnification under this Section 7.2(b) in
accordance with its terms, regardless of whether any of them could
alternatively receive indemnification with respect thereto under
Section 7.2(a)(ii). Notwithstanding the foregoing provisions of this
clause (b), Sellers and/or the Purchaser shall have liability pursuant
to this Section 7.2(b) arising out of representations and warranties
being incorrect or untrue or covenants or agreements breached only
with respect to Losses arising out of or as a result of a breach or
untruth described in a Claim Notice given to Sellers or the Purchaser,
respectively, in accordance with the provisions hereof on or prior to
the applicable Termination Date, if any.
(c) Express Negligence Acknowledgment. Without limiting
or enlarging the scope of the indemnification obligations set forth in
this Agreement, AN INDEMNIFIED PARTY WILL BE ENTITLED TO
INDEMNIFICATION IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT
REGARDLESS OF WHETHER THE LOSS GIVING RISE TO SUCH INDEMNIFICATION
OBLIGATION IS THE RESULT OF THE SOLE, CONCURRENT, OR COMPARATIVE
NEGLIGENCE, FAULT, OR STRICT LIABILITY OF SUCH INDEMNIFIED PARTY.
(d) Assertion of Claims. All claims for indemnification
by any of the Seller Indemnitees or any of the Purchaser Indemnitees
under Section 7.2(a) or any other provision of this Agreement or any
Document shall be asserted and resolved as follows:
(i) Any person claiming indemnification hereunder
is hereinafter referred to as the "Indemnified Party" and any
person against whom such claims are asserted hereunder is
hereinafter referred to as the "Indemnifying Party." In the
event that any Losses are asserted against or sought to be
collected from an Indemnified Party by a third party, said
Indemnified Party shall with reasonable promptness and in
writing notify the Indemnifying Party of the Losses,
specifying the nature of and specific
27
<PAGE> 28
basis for such Losses and the indemnity claim and the amount
or the estimated amount thereof to the extent then feasible
and enclosing a copy of all papers (if any) served with
respect to the claim (the "Claim Notice"). The Indemnifying
Party shall not be obligated to indemnify the Indemnified
Party with respect to any such Losses if the Indemnified Party
fails to notify the Indemnifying Party thereof in accordance
with the provisions of this Agreement in reasonably sufficient
time so that the Indemnifying Party's ability to defend
against the Losses is not prejudiced, but only to the extent
such notification within such time period is practicable. The
Indemnifying Party shall have 30 days from the date the Claim
Notice is given in accordance with the notice provisions
hereof (the "Notice Period") to notify the Indemnified Party
(x) whether it disputes the liability of the Indemnifying
Party to the Indemnified Party hereunder with respect to such
Losses and (y) whether it desires, at the sole cost and
expense of the Indemnifying Party, to defend the Indemnified
Party against such Losses; which election to defend may be
made without prejudicing the Indemnifying Party as to its
liability hereunder, other than with respect to the costs of
defense. Notwithstanding the foregoing, any Indemnified Party
is hereby authorized prior to and during the Notice Period to
file any motion, answer or other pleading that it shall deem
necessary or appropriate to protect its interests or those of
the Indemnifying Party (and of which it shall have given
notice and opportunity to comment to the Indemnifying Party)
and that is not prejudicial to the Indemnifying Party. (A) In
the event that the Indemnifying Party notifies the Indemnified
Party within the Notice Period that it desires to defend the
Indemnified Party against such Losses and except as
hereinafter provided, the Indemnifying Party shall have the
right to defend by all appropriate proceedings, and with
counsel of its own choosing, which proceedings shall be
promptly settled or prosecuted by them to a final conclusion.
If the Indemnified Party desires to participate in, but not
control, any such defense or settlement it may do so at its
sole cost and expense. If requested by the Indemnifying
Party, the Indemnified Party agrees to cooperate with the
Indemnifying Party and its counsel in contesting any Losses
that the Indemnifying Party elects to contest, or, if
appropriate and related to the claim in question, in making
any counterclaim against the person asserting the third party
Losses, or any cross-complaint against any person. No claim
with respect to which the Indemnifying Party has admitted its
liability may be settled or otherwise compromised without the
prior written consent of the Indemnifying Party. Any party
settling or compromising a claim in violation of the preceding
sentence shall be solely liable for the amount of the
settlement or compromise. (B) If the Indemnifying Party does
not notify the Indemnified Party within 30 days after the
receipt of a Claim Notice that it elects to undertake the
defense thereof, the Indemnified Party shall have the right to
defend at the expense of the Indemnifying Party the claim with
counsel of its choosing reasonably satisfactory to the
Indemnifying Party, subject to the right of the Indemnifying
Party to assume the defense of any claim at any time prior to
settlement or final determination thereof. Any such defense
shall be prosecuted promptly and vigorously by the Indemnified
Party. In the case of either (A) or (B), if the Indemnifying
Party has not yet admitted its liability for a claim, the
Indemnified Party shall send a written notice to the
Indemnifying Party of any proposed settlement of any claim
received by the Indemnified Party. The Indemnifying Party
shall have an option for 30 days
28
<PAGE> 29
following receipt of such notice to (i) admit liability for
the claim if it has not already done so and (ii) if liability
has been admitted, reject, in its reasonable judgment, the
proposed settlement. Failure to reject such settlement within
such 30-day period shall be deemed an acceptance of such
settlement. If the Indemnified Party settles any such claim
over the objection of the Indemnifying Party, the Indemnified
Party shall thereby waive any right to indemnity therefor,
unless the Indemnifying Party has not prior to the time of
settlement admitted liability for such claim.
(ii) In the event any Indemnified Party should
have a claim for Losses against any Indemnifying Party
hereunder that does not involve a Loss being asserted against
or sought to be collected from it by a third party (for
example, but without limitation, a Loss resulting from a
breach of a representation, warranty or covenant), the
Indemnified Party shall send a Claim Notice with respect to
such claim to the Indemnifying Party. If the Indemnifying
Party does not notify the Indemnified Party within 30 days
from the date the claim notice is given that it disputes such
claim for Losses, the amount of such Losses shall be
conclusively deemed a liability of the Indemnifying Party
hereunder.
7.3 Sellers' Access to the Company. If the Closing occurs, then,
following such Closing and upon at least 48 hours' prior written notice, the
Sellers and their employees, representatives and agents shall be given access
during reasonable business hours to the facilities, properties, personnel,
books and non-privileged records of the Company for the purpose of satisfying
any obligations imposed upon the Sellers pursuant to this Agreement, including
without limitation the indemnification obligations imposed pursuant to Section
7.2; provided, however, that such investigation shall be conducted in a manner
that does not interfere with normal operations of the Company. The Company
will cause the employees, counsel, accountants and other representatives of the
Company to be available to the Sellers and their agents at all reasonable times
during business hours for such purposes.
7.4 Agreement Not to Compete.
(a) As a further inducement to the Purchaser to enter
into this Agreement, each Seller agrees that during the period from
the Closing Date until the fifth anniversary after the latest date
that any Seller ceases to be an employee of the Purchaser or any of
its subsidiaries:
(i) No Seller shall, directly or indirectly, for
their own account or for the account of others, as an officer,
director, passive stockholder, owner, partner, member,
promoter, consultant, advisor, employee, manager or otherwise,
participate in the promotion, financing, ownership, operation
or management of, or assist in, furnish advice with respect
to, or carry on through a proprietorship, partnership, joint
venture, limited liability company, corporation, other form of
business entity or otherwise, any business activity in a
geographic market within the State of Texas or any other state
where the Company is doing such business or has plans to do
such business, involving or relating to the business of
distributing, packaging, and processing tortillas, tortilla
chips and related products; provided, however, that nothing in
this clause (i) shall prohibit any Seller's aggregate
beneficial ownership
29
<PAGE> 30
of not in excess of 1% of any class of common stock that is
listed for trading on a national securities exchange; and
(ii) No Seller shall furnish advice to, solicit,
or do business with any customer (or any previous customer
within the last year) of the Company or any of its
subsidiaries relating to the business of the Company in any
geographic market within the State of Texas or any other state
where such customer is doing business with the Company or any
of its subsidiaries.
(iii) No Seller shall encourage or induce any
current or former employee of the Company or any of its
subsidiaries or affiliates to leave the employment of the
Company or any of its subsidiaries or affiliates, offer
employment, retain, hire or assist in the hiring of any such
employee by any person, association, or entity not affiliated
with the Company or any of its subsidiaries or affiliates.
(b) Although the parties to this Agreement have, in good
faith, used all reasonable efforts to make this covenant reasonable in
both geographic area and in duration, and it is not anticipated, nor
is it intended, by either of the parties to this Agreement that any
court of competent jurisdiction would find it necessary to reform this
covenant not to compete to make it reasonable in both geographic area
and in duration, or otherwise, the parties to this Agreement agree
that any court of competent jurisdiction making a determination that
it is necessary to reform this covenant not to compete to make it
reasonable in either geographic area or duration, or otherwise, shall
be, and hereby is, empowered and directed to reform this Agreement to
a reasonable restriction rather than invalidating this covenant or
otherwise rendering it unenforceable.
(c) In the event of breach by any Seller of this covenant
not to compete, it is understood and agreed (i) that the Purchaser or
the Company shall be entitled to injunctive relief as well as any and
all other applicable remedies at law and in equity; and (ii) that
damages, if any, for the breach of this covenant not to compete will
accrue and be recoverable by the Purchaser or any subsidiary as of and
from the date of the breach insofar as the damages for such breach
relate to an action that occurred within the scope of the geographic
area and duration of the covenant not to compete determined to be
reasonable (whether or not the covenant is reformed in connection with
such determination).
ARTICLE VIII
MISCELLANEOUS
8.1 Certain Definitions. The following terms as used in this
Agreement shall have the following meanings:
(a) The term "subsidiary" shall mean with respect to a
specified entity (i) in the case of a corporation, 40% or more of the
capital stock, the holders of which are regularly entitled to vote for
the election of directors, is owned directly or indirectly by such
entity, (ii) in the case of a trust, partnership or other entity, a
trust, partnership or entity of which such
30
<PAGE> 31
specified entity owns directly or indirectly 40% or more of the
beneficial interest or equity; and
(b) The term "affiliate" shall mean with respect to a
specified entity, an entity that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under
common control with the entity specified.
8.2 Expenses. Each party hereto shall bear its own legal,
accounting and other costs and expenses incident to the negotiation of this
Agreement and the performance of the transactions contemplated herein. All
expenses of the Company with respect to the transactions contemplated herein
shall be solely for the account of Sellers.
8.3 Notices. Any notice, communication, request, instruction or
other document required or permitted hereunder or under any document delivered
pursuant hereto shall be given in writing and delivered in person or sent by
U.S. Mail postage prepaid, return receipt requested, or by telex, facsimile or
telecopy to the addresses or facsimile numbers, as appropriate, as set forth
below.
If to the Sellers, and, prior to the Closing, the Company, to:
c/o Mr. Saragosa Bazan, Jr.
and Ms. Lydia E. Bazan
216 Fenway
Victoria, Texas 77904
Telecopy: (512) 573-3367
with a copy to:
Ms. Jean S. Cullen
Cullen, Carsner, Seerden & Cullen, L.L.P.
119 South Main Street
Victoria, Texas 77902
Telecopy: (512) 573-2603
and in the case of the Purchaser, and after the Closing, the Company, to:
Authentic Specialty Foods, Inc.
c/o The Shansby Group
250 Montgomery Street
Suite 1100
San Francisco, California 94194
Attention: Keith R. Lively
Telecopy: (415) 421-5120
31
<PAGE> 32
with a copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin
Houston, Texas 77002-6760
Attention: J. Mark Metts, Esq.
Telecopy: (713) 758-2346
or at such other address or facsimile number as may have been specified by like
notice.
8.4 Headings. The descriptive headings of the several Articles
and Sections of this Agreement are inserted for convenience only and do not
constitute a part of the Agreement.
8.5 Entire Agreement. This Agreement, the documents to be
executed hereunder, and the exhibits attached hereto constitute the entire,
completely integrated agreement between the parties hereto pertaining to the
subject matter hereof and supersede all prior agreements, understandings,
negotiations and discussions, whether oral or written, of the parties
pertaining to the subject matter hereof, including without limitation that
certain letter of intent dated October 8, 1997 by and among the Purchaser, the
Company and Saragosa Bazan, Jr., as extended and amended by that certain letter
agreement dated December 15, 1997.
8.6 Waiver. At any time prior to the Closing, any party hereto
may (a) extend the time for the performance of any of the obligations or other
acts of any other party hereto or (b) waive compliance with any of the
agreements of any other party or with any conditions to its own obligations.
Any agreement on the part of a party hereto to any such extension or waiver
shall be valid if set forth in an instrument in writing signed on behalf of
such party. The consummation of the transactions contemplated hereby shall not
be deemed a waiver of the right any party may have hereunder with respect to
any other party's representations, warranties, covenants or agreements
contained in or related to this Agreement being incorrect, untrue or breached.
8.7 Amendment. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto. No supplement,
alteration or modification of this Agreement shall be binding unless executed
in writing by the parties hereto.
8.8 Public Statements. After the date here of and prior to the
Closing Date, Sellers, the Company and the Purchaser shall consult with each
other with regard to all publicity, general employee announcements and public
announcements concerning this Agreement and the transactions contemplated
hereby and, except as required by applicable law or the applicable rules or
regulations of any governmental body or stock exchange (including, without
limitation, the Nasdaq Stock Market), no party shall issue a press release or
announcement concerning this Agreement and the transactions contemplated hereby
without the prior written consent of the other parties hereto, which shall not
be unreasonably withheld. On or after the Closing Date, Sellers shall not
issue a press release or announcement concerning this Agreement and the
transactions contemplated hereby without the prior written consent of the
Purchaser.
32
<PAGE> 33
8.9 Further Actions. Each party shall execute and deliver such
other certificates, agreements and other documents and take such other actions
as may reasonably be requested by the other parties in order to consummate or
implement the transactions contemplated by this Agreement. Without limiting
the foregoing, Sellers agree to perform any reasonable acts necessary to obtain
state, federal or foreign registration of any Mark currently used in the
Company's business as now conducted. Without limiting the foregoing, if, at
any time or from time to time after the Closing, the Purchaser, the Company or
any Seller shall identify any Related Asset that was not transferred to the
Company as required by Section 4.9, then the Sellers shall immediately
transfer, without additional consideration, all of their rights, ownership and
interest in any such Related Asset to the Company, free and clear of any
mortgage, pledge, lien, charge, encumbrance or other adverse claim. Such
transfer shall be effected pursuant to conveyance documents in form and
substance satisfactory to the Purchaser in its reasonable judgment.
8.10 Assignment. No Seller may assign or delegate any of its
rights or duties hereunder, without the prior written consent of the Purchaser.
Any assignment or delegation made without such consent shall be void. Except
as otherwise provided herein, this Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective permitted successors,
assigns and legal representatives.
8.11 Independent Covenants. The covenants contained herein are
independent and separate, and in the event that any provision contained herein
is declared invalid or illegal, the other provisions hereof shall not be
affected or impaired thereby and shall remain valid and enforceable.
8.12 Specific Performance. In the event of a breach or threatened
breach by any party hereto of the provisions of this Agreement, any other party
hereto shall be entitled to specific performance. Nothing herein shall be
construed as prohibiting any party hereto from pursuing any other remedies
available for such breach or threatened breach, including the recovery of
damages.
8.13 Governing Law. This Agreement and the other documents
delivered pursuant hereto and the legal relations between the parties shall be
governed and construed in accordance with the laws of the State of Texas,
without giving effect to principles of conflict of laws.
8.14 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed an original but
all of which together shall constitute one and the same instrument.
8.15 Withholding or Granting of Consent. Except as otherwise
provided in this Agreement, each party hereto may, with respect to any consent
or approval that it is entitled to grant pursuant to this Agreement or any
other document or instrument or agreement delivered or entered into pursuant
hereto, grant or withhold such consent or approval in its sole and uncontrolled
discretion, with or without cause, and subject to such conditions as it shall
deem appropriate.
8.16 No Third Party Beneficiaries. Nothing in this Agreement shall
provide any benefit to any third party or entitle any third party to any claim,
cause of action, remedy or right of any kind, it being the intent of the
parties that this Agreement shall not be construed as a third party beneficiary
contract; provided, however, that the indemnification provisions in Sections
7.2 shall inure to the benefit of the Purchaser Indemnitees and the Seller
Indemnitees as provided therein.
33
<PAGE> 34
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the date first above written.
AUTHENTIC SPECIALTY FOODS, INC.
By: /s/ SAMUEL E. HILLIN, JR.
------------------------------
Samuel E. Hillin, Jr.
Vice President
THE TORTILLA KING, INC.
By: /s/ SARAGOSA BAZAN, JR.
------------------------------
Saragosa Bazan, Jr.
President
/s/ SARAGOSA BAZAN, JR.
---------------------------------
SARAGOSA BAZAN, JR.
/s/ LYDIA E. BAZAN
---------------------------------
LYDIA E. BAZAN
SBJ TRUST
By /s/ SARAGOSA BAZAN, JR.
-------------------------------
Saragosa Bazan, Jr.
Trustee
By /s/ LYDIA E. BAZAN
-------------------------------
Lydia E. Bazan
Trustee
34
<PAGE> 35
APPENDICES, EXHIBITS AND SCHEDULES
Appendix I Ownership of Common Stock
Appendix II Related Assets
Exhibit A Form of Lease Agreement
Exhibit B Form of Employment Agreement
Schedule 2.1 Foreign Jurisdictions
Schedule 2.2 Stock Ledger
Schedule 2.4 Governmental Authorizations
Schedule 2.5 Financial Statements
Schedule 2.6 Adverse Changes
Schedule 2.7(a) Leases
Schedule 2.8 Litigation
Schedule 2.9(a) Marks
Schedule 2.9(d) Certain Employees
Schedule 2.10(g) Environmental Reports and Records
Schedule 2.11(a) Options
Schedule 2.11(b) Service Agreements
Schedule 2.11(c) Agreements Relating to Real Property
Schedule 2.11(d) Construction Contracts
Schedule 2.11(e) Accounts Receivable
Schedule 2.11(f) Compensation
Schedule 2.11(g) Compensation Policies
Schedule 2.11(h) Pleadings and Complaints
Schedule 2.11(i) Depreciation Schedules
Schedule 2.11(j) Employee Benefits
Schedule 2.11(k) Credit Documents
Schedule 2.11(l) Material Contracts
Schedule 2.11(m) Agreements Not to Compete
Schedule 2.11(n) Royalty Agreements
Schedule 2.11(o) Contracts with Interested Parties
Schedule 2.12 Taxes
Schedule 2.13 Employee Benefit Plan, Employee Classification
Schedule 2.14 Conflicts
Schedule 2.17 Banks
Schedule 2.18 Officers and Directors
Schedule 2.19 Suppliers and Customers
Schedule 2.21 Outstanding Indebtedness
Schedule 2.22 Part I Insurance Information
Schedule 2.22 Part II Insurance Policies
Schedule 4.1(j) Capital Expenditures, Additions, and Improvements
Schedule 4.1(r) Certain Amendments
<PAGE> 36
APPENDIX I
OWNERSHIP OF COMMON STOCK
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NUMBER OF PORTION OF PURCHASER
SHARES OF CASH PURCHASE COMMON STOCK
COMMON STOCK PRICE TO TO BE
SELLER OWNED BE RECEIVED RECEIVED
- ------------------- ------------ ------------- ------------
<S> <C> <C> <C>
Saragosa Bazan, Jr. 500 $2,375,000 120,313
Lydia E. Bazan 500 2,375,000 120,313
SBJ Trust 0 250,000 0
----- ---------- -------
Total 1,000 $5,000,000 240,626
===== ========== =======
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
La Victoria Foods, Inc.
La Monita Mexican Food Products, Inc.
Sauces Unlimited, Inc.
The Tortilla King, Inc.
LV Foods, L.L.C.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 363
<SECURITIES> 0
<RECEIVABLES> 4,859
<ALLOWANCES> 0
<INVENTORY> 13,321
<CURRENT-ASSETS> 20,053
<PP&E> 16,304
<DEPRECIATION> 1,724
<TOTAL-ASSETS> 58,780
<CURRENT-LIABILITIES> 8,103
<BONDS> 0
0
0
<COMMON> 7,787
<OTHER-SE> 32,663
<TOTAL-LIABILITY-AND-EQUITY> 58,780
<SALES> 37,203
<TOTAL-REVENUES> 37,203
<CGS> 22,328
<TOTAL-COSTS> 22,328
<OTHER-EXPENSES> 15,260
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 507
<INCOME-PRETAX> (865)
<INCOME-TAX> (302)
<INCOME-CONTINUING> (563)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (563)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
