U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] Quarterly Report under Section 13 or 15 (d) of the Securities Exchange
Act of 1934.
For the quarterly period ended June 30, 1996.
[ ] Transition Report under Section 13 or 15 (d) of the Exchange Act.
For the transition period from to
Commission File Number 000-19318
SPARTA FOODS, INC.
(exact name of small business issuer as specified in its charter)
Minnesota 41-1618240
(state or other jurisdiction of (IRS Employer Identification No,)
incorporation or organization)
2570 Kasota Avenue, St. Paul, MN 55108
(Address of principal executive offices)
(612) 646-1888
(Issuer's telephone number)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practicable date:
6,674,049 shares of Common Stock at August 2, 1996
Transitional Small Business Disclosure Format: Yes No X
<PAGE>
SPARTA FOODS, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 1996
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets at
June 30, 1996 and September 30, 1995 3
Condensed Consolidated Statements of Operations for the
three-month periods and the nine-month periods ended
June 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the
nine-month periods ended June 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements -
June 30, 1996 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBIT INDEX 14
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPARTA FOODS, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1996 September 30,
(unaudited) 1995
------------- -------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 600 $ 863
Accounts receivable, less allowance
of $39,544 (1996) and $75,000 (1995) 762,629 678,458
Inventories
Finished goods 269,455 320,303
Raw materials and packaging 545,529 609,766
Prepaid expenses 55,370 37,495
----------- -----------
Total current assets 1,633,583 1,646,885
----------- -----------
Property and Equipment 5,886,544 5,832,508
Less accumulated depreciation 2,039,258 1,733,420
----------- -----------
3,847,286 4,099,088
----------- -----------
Other Assets
Goodwill, less accumulated amortization
of $96,822 (1996) and $80,148 (1995) 463,069 479,673
Covenants not-to-compete, less accumulated
amortization of $223,333 (1996) and
$186,733 (1995) 110,167 146,767
Property held for resale, less accumulated
depreciation of $9,990 (1996) 930,010 940,000
Other 223,491 242,105
----------- -----------
1,726,737 1,808,545
----------- -----------
$ 7,207,606 $ 7,554,518
=========== ===========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Note payable, bank $ 416,448 $ 997,721
Current maturities of long-term debt 598,479 594,803
Accounts payable 648,970 1,218,455
Accrued expenses 409,372 361,814
----------- -----------
Total current liabilities 2,073,269 3,172,793
----------- -----------
Long-term Debt, less current maturities 2,189,055 2,636,913
----------- -----------
Stockholders Equity
Preferred Stock, authorized 1,000,000 shares,
no designated par value, none issued -- --
Common Stock, authorized 15,000,000 shares,
$.01 par value; issued and outstanding
6,672,799 (1996) and 4,062,799 (1995) 66,728 40,627
Additional paid-in capital 4,920,504 3,777,317
Accumulated deficit (2,041,950) (2,073,132)
----------- -----------
2,945,282 1,744,812
----------- -----------
$ 7,207,606 $ 7,554,518
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
SPARTA FOODS, INC.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
For the three For the nine
months ended Months ended
June 30 June 30
------- -------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 3,346,613 $ 3,167,468 $ 9,262,690 $ 8,803,723
Cost of sales 2,430,227 2,224,996 6,762,206 6,455,859
---------- ---------- ---------- ----------
Gross profit 916,386 942,472 2,500,484 2,347,864
Selling, general and administrative
expenses 735,602 830,145 2,194,622 2,556,595
---------- ---------- ---------- ----------
Operating income (loss) 180,784 112,327 305,862 (208,731)
Other income (expense), net 35,826 (1,992) 70,213 36,244
Interest expense (93,710) (143,306) (344,893) (372,863)
---------- ---------- ---------- ----------
Income (loss) before income taxes 122,900 (32,971) 31,182 (545,350)
Provision for income tax -- -- -- --
---------- ---------- ---------- ----------
Net income (loss) $ 122,900 $ (32,971) $ 31,182 $ (545,350)
========== ========== ========== ==========
Net income (loss) per common and common
equivalent share:
Primary earnings (loss) per share $ .01 $ (.01) $ .01 $ (.14)
=========== =========== =========== ===========
Weighted average number of
common and common equivalent
shares outstanding 9,162,490 4,062,799 6,505,866 3,829,028
=========== =========== =========== ===========
Full diluted earnings (loss) per share $ .01 $ (.01) -- $ (.14)
=========== =========== =========== ===========
Weighted average number of
common and common equivalent
shares outstanding 9,292,110 4,062,799 7,118,036 3,829,028
=========== =========== =========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
SPARTA FOODS, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
For the nine
months ended
June 30
-------
1996 1995
---- ----
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 31,182 $ (545,350)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 401,043 382,079
Changes in assets and liabilities:
Accounts receivable (84,171) 46,586
Inventories 115,085 19,408
Prepaid expenses (18,614) (44,104)
Other assets 5,041 (82,990)
Accounts payable and accrued expenses (501,927) (12,704)
----------- -----------
Net cash used in operating activities (52,361) (237,075)
----------- -----------
Cash Flows from Investing Activities
Purchases of property and equipment (71,734) (365,622)
----------- ----------
Net cash used in investing activities (71,734) (365,622)
----------- ----------
Cash Flows From Financing Activities
Net borrowings (payments) on line of
credit (581,274) 491,454
Long-term borrowings (repayments), net (444,182) 196,897
Issuance of Common Stock
(excluding stock issued for conversion of
debt), net of cost 1,149,288 (38,498)
----------- ----------
Net cash provided by financing activities 123,832 649,853
----------- ----------
Net increase (decrease) in cash (263) 47,156
Cash Balance
Beginning of period 863 4,348
----------- ----------
End of period $ 600 $ 51,504
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 356,149 $ 491,453
=========== ===========
Supplemental Schedule of Noncash Financing
Activities
Conversion to Common Stock:
of trade account payable $ 20,000 $ --
of long-term debt and trade accounts payable -- 1,137,790
Conversion to long-term debt of trade
accounts payable -- 217,000
Debt forgiven on leased asset -- 12,861
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
Notes to Condensed Consolidated Financial Statements
June 30, 1996
(unaudited)
NOTE 1. GENERAL
The unaudited condensed consolidated balance sheet at June 30, 1996, the
condensed consolidated statements of operations for the three-month periods and
the nine-month periods ended June 30, 1996 and 1995, and the condensed
consolidated statements of cash flows for the nine-month periods ended June 30,
1996 and 1995, include all adjustments which in the opinion of management are
necessary in order to make the financial statements not misleading and are not
necessarily indicative of results of operations to be expected for the entire
fiscal year ending September 30, 1996.
The unaudited financial statements should be read in conjunction with the
audited financial statements for the years ended September 30, 1995 and 1994,
contained in Form 10-KSB and Form 10-KSB/A(No.1), and Management's Discussion
and Analysis of Financial Condition and Results of Operations contained herein.
NOTE 2. FINANCING AGREEMENT
The Company has a financing agreement with a bank which involves a line of
credit, term note and capital equipment note. At June 30, 1996, advances under
this agreement are secured by the Company's accounts receivable, inventories and
equipment. Maximum borrowings under the line of credit are determined by an
accounts receivable and inventory borrowing base calculation or $1,200,000,
whichever is less; such borrowings bear interest at prime plus 2 percent (10.25
percent at June 30, 1996). At June 30, 1996, $416,448 was outstanding on the
line of credit. The Company is required to maintain certain minimum net income
and net worth levels. In addition, a maximum debt to net worth ratio is
specified, dividends and capital expenditures are restricted, and compensation
and new options / warrants are also limited. Previously, the Company was in
violation of certain financial covenants of the financing agreement and obtained
a waiver of the covenant violations from the bank. The bank and the Company have
negotiated new covenants based on fiscal 1996 financial projections.
NOTE 3. SALE OF COMMON STOCK
On February 2, 1996 the Company raised $1,280,000 pursuant to a private offering
of 2,560,000 units, each unit consisting of one share of Common Stock and a
Warrant to purchase one share of Common Stock at $0.75 per share. The Warrants
are exercisable for a three-year period. The Company has filed a Form S-3
Registration Statement which has been declared effective by the Securities and
Exchange Commission, to register the possible resale by certain shareholders of
the shares issued and warrant shares that may be issued upon exercise of
warrants received in the offering.
NOTE 4. INCOME TAX
The provision for income tax is stated at zero because the statutory tax is
offset by the availability of tax benefits from prior years.
<PAGE>
NOTE 5. NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
For the three-month and nine-month periods ended June 30, 1996, primary earnings
per common and common equivalent share is calculated based on the net income for
the period and the weighted average number of common shares outstanding during
the period assuming the issuance of shares for the exercise of all stock options
and warrants having exercise prices which are less than the average market price
of Common Stock using the treasury stock method. Under that method, the assumed
proceeds from the exercises are used to repurchase shares to the extent possible
and then apply the balance of the funds to reduce debt, thereby decreasing
interest expense; accordingly, 1996 net income has been increased for the
computation of primary earnings by $12,534 (three-month period) and $15,415
(nine-month period). The computation of fully diluted earnings per share employs
the treasury stock method but uses the market price at the close of the period
rather than the average prices during the periods.
Common Stock equivalents (options and warrants) were anti-dilutive for the
three-month and the nine-month periods ended June 30, 1995.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
La Canasta of Minnesota, Inc. ("La Canasta"), the Company's predecessor,
and now a wholly-owned subsidiary of the Company, began producing limited
volumes of hand stretched tortillas, corn tortillas and corn tortilla chips
shortly following its organization in 1981, primarily for sale to
restaurants. The Company was organized under the laws of the State of
Minnesota in 1988, originally under the name of "Sparta Corp." for the
purposes of raising capital for the acquisition of, or investment in, a
business. In January 1991, the Company acquired all of the outstanding
capital stock of La Canasta. The shareholders of La Canasta entered into
this transaction to obtain capital for La Canasta and to facilitate La
Canasta's plans to expand its product lines, markets and production
capabilities. La Canasta began expanding its product mix in 1990 when it
acquired food processing equipment from SuperValu, Inc. in Hopkins,
Minnesota, and started producing Ken Davis barbecue sauces. This enabled La
Canasta to expand into other tomato-based products, such as Mexican salsas
and picante sauces. In January 1992, the Company continued with this
expansion by acquiring the business of Cruz Distributing, Inc., a
distributor of Cruz brand press flour tortillas to retail establishments
and McDonald's restaurants. In November 1992, the Company acquired from
Chapala International, Inc. the Chapala registered trademarks and trade
names, and certain other assets related to the sale and distribution of
Mexican-style foods to wholesalers and others for retail sale, including
product formulas for salsas and customer lists.
In October 1993, the Company acquired substantially all of the assets of
International Food Products, Inc. ("IFP") of Lakeville, Minnesota, which
was engaged in the manufacture and sale of tortillas and tortilla chips.
This acquisition provided the Company with additional manufacturing
capabilities, the established La Campana Paradiso and Mexitos brand names,
and the retail and food service distribution services of Bradley
Distributing, Inc. and Sysco Corporation, respectively.
The foregoing acquisitions were effected to improve the Company's capacity
to efficiently manufacture a broad line of Mexican-style food products and
to increase sales and market share by developing a broad-based responsive
and capable distribution network. While these acquisitions increased sales,
the Company incurred significant legal, accounting and debt-related
expenses to complete the transactions. As a result, the Company incurred a
substantial loss in fiscal year 1994 and anticipated additional losses in
fiscal year 1995.
<PAGE>
The Board of Directors adopted a restructuring plan in October 1994 in
response to the Company's loss and anticipated losses and to correct the
ongoing problems of integrating the Company's acquisitions and other
corporate problems. In the first quarter of fiscal 1995, the Board of
Directors hired Joel Bachul and Merrill Ayers as its new CEO and CFO,
respectively, and they were given the primary responsibility of managing
the restructuring process. The focus of management's efforts to date has
been to complete a comprehensive financial restructuring and effectuate
changes in connection with its products and its production and distribution
systems necessary to attain profitability. Management believes it has
substantially completed its restructuring process. Its business plan to
achieve a turnaround to profitability has been met by improving profit
margins, reducing operating expenses and placing the Company on the
threshold for long-term growth. The Company plans to increase sales by
focusing on new markets and brand positioning and continue its program of
controlling costs.
Results of Operations
The Company's net sales increased $458,967 (5.2%) for the nine months ended
June 30, 1996, as compared to the nine months ended June 30, 1995. Net
sales increased $179,145 (5.7%) for the three months ended June 30, 1996,
as compared to the three months ended June 30, 1995. The increases
primarily resulted from expansion of the Company's existing customer base
in the retail and food service industries as well as expansion into new
territories.
The Company has historically had higher sales in its third and fourth
fiscal quarters which end June 30 and September 30, respectively, than in
its first and second quarters. Management believes that this is a result of
seasonal consumption patterns with respect to the Company's food products,
such as consumption of higher volumes of tortilla chips, salsas, and
barbecue sauces, during the summer months. This seasonality may cause
quarterly results of operations to fluctuate.
Gross profit, as a percentage of net sales, for the nine months ended June
30, 1996 was 27.0% compared to 26.7 % for the same period in 1995. Gross
profit, as a percentage of net sales, for the three months ended June 30,
1996, was 27.4 % compared to 29.8 % for the three months ended June 30,
1995. The higher percentage for the nine-month period reflects increased
efficiency and cost savings achieved in the consolidation of the Company's
Lakeville production facility with its St. Paul production facility which
was completed during the fourth quarter of fiscal 1995. The lower
percentage for the three month period reflects the increased cost of
certain ingredients, primarily wheat and corn, as compared to the year
earlier period.
Selling, general and administrative expenses decreased $361,973 or 14% in
the nine months ended June 30, 1996, as compared to the same period in
1995. These expenses decreased $94,543 or 11% in the three months ended
June 30, 1996, as compared to the same period in 1995. Selling, general and
administrative expenses, as a percentage of net sales, decreased 5% to 24 %
for the nine months ended June 30, 1996, as compared to the same period in
1995 and decreased 4% to 22% for the three months ended June 30, 1996 as
compared to the same period in 1995. These decreases are due primarily to
the absence of expenses associated with the Company's comprehensive
financial restructuring that occurred in the first three quarters of fiscal
1995.
Interest expense decreased $27,970 for the nine-month period ended June 30,
1996 compared to the same period ended June 30, 1995. Interest expense
decreased $49,596 for the three-month period ended June 30, 1996 compared
to the three months ended June 30, 1995. Both decreases reflect the effect
of interest rate and debt reductions that occurred for a portion of the
period following the completion of the Company's private placement of Units
on February 2, 1996.
<PAGE>
Liquidity and Capital Resources
The Company has financed its activities to date primarily through debt,
cash generated from its operations and the issuance of securities. Selling
shareholders have no obligation to exercise their warrants; however, in the
event such warrants are exercised, the Company will receive approximately
$2,124,450 in net proceeds which it will use to repay existing debt and for
general working capital purposes.
Cash used in operating activities during the nine months ended June 30,
1996, was $52,361 consisting principally of the decrease of accounts
payable and accrued expenses of $501,927, offset by a positive operating
cash flow of $432,225 (net income of $31,182 adjusted for non-cash
depreciation and amortization expenses of $401,043). Cash used in investing
activities was $71,734, primarily the result of capitalized costs
associated with a new press tortilla line in fiscal 1995 and the
refurbishing of other production equipment. Cash provided by financing
activities was $123,832 due mainly to the issuance of additional Common
Stock for $1,149,288 offset by reductions in bank borrowings of $1,025,456.
The Company estimates that as of June 30, 1996, there is an additional
$370,000 which could be drawn under its bank Line of Credit. The amount
available under this Line of Credit fluctuates daily based upon the
Company's eligible accounts receivable and inventory. The Line of Credit,
Bank Term Note and Bank Capital Note are subject to various financial
covenants, the violation of which could result in termination of the loan
agreements which would require the Company to repay the loans in full. The
Company had been in default of the financial covenants in the past, and the
bank had waived such defaults. It is management's opinion that the Company
will be able to meet the requirements of these covenants in the future,
however, there is no assurance that the Company will not violate the
financial covenants in the future or that the bank would waive any
violations.
At June 30, 1996, the Company had cash of $600 and a negative working
capital of $439,686. As of August 9, 1996, none of the Company's creditors
have threatened or instituted formal legal proceedings against the Company.
On February 2, 1996, the Company raised $1,280,000 pursuant to a private
offering of 2,560,000 units, each unit consisting of one share of Common
Stock and a Warrant, exercisable for three years, to purchase one share of
Common Stock at $0.75 per share. The Company filed a Registration Statement
on Form S-3, which has been declared effective by the Securities and
Exchange Commission, to register the possible resale by certain
shareholders, including shareholders who participated in the Company's
December 1994 restructuring and February 2, 1996 private placement, of an
aggregate of 6,185,400 shares of Common Stock including up to 2,978,900
shares that shareholders may acquire upon exercise of outstanding warrants.
The Company believes that the additional capital raised, its bank credit
facilities and cash flow from operations will be sufficient to meet its
operating requirements through fiscal 1996, assuming the following: (i) the
Company's fiscal 1996 sales equal or exceed fiscal 1995 sales; (ii) there
are no significant increases in expenses in fiscal 1996; and (iii) the
Company is able to keep its bank credit facilities operative. With the
Company's retail brands dominant position in the local retail market and
the strong growth in the foodservice sector, management believes that
fiscal 1996 sales will exceed 1995 sales. It also believes that the Company
will continue to significantly reduce its expenses in fiscal 1996 with the
consolidation and lease of the Lakeville facility. While the Company
believes these assumptions are reasonable, there is no assurance that the
Company will not require additional working capital to be able to maintain
its operations.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Earnings per Common Share.
27 Financial Data Schedule (filed only in electronic format).
(b) Reports on Form 8-K
A report on Form 8-K was not filed during the quarter ended June 30, 1996.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SPARTA FOODS, INC.
(Registrant)
Dated: August 13, 1996 By:/s/ Joel P. Bachul
Joel P. Bachul,
President and Chief Executive Officer
Dated: August 13, 1996 By: /s/ A. Merrill Ayers
A. Merrill Ayers
Treasurer, Secretary and Chief
Financial Officer
<PAGE>
Sparta Foods, Inc.
Exhibits Index
Exhibit Description
Number
11 Computation of Earnings per Common Share
27 Financial Data Schedule (filed only in electronic format)
COMPUTATION OF EARNINGS PER COMMON SHARE Exhibit 11
(unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
June 30 June 30
------- -------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 122,900 $ (32,971) $ 31,182 $ (545,350)
Primary earnings per share:
Adjusted net income under treasury stock method
(reduced interest expense) $ 135,434 -- $ 46,597 --
=========== =========== =========== ===========
Shares:
Weighted average number of
common shares outstanding 6,667,304 $ 4,062,799 $ 5,477,580 $ 3,829,028
Excess of shares issuable for the assumed
exercise of options and warrants over the number of
shares proceeds from the exercise of such options
and warrants, using the average market price (treasury
stock market) 2,495,186 -- 1,028,286 --
----------- ----------- ----------- -----------
Weighted average number of common and
common equivalent shares outstanding 9,162,490 4,062,799 6,505,866 3,829,028
=========== =========== =========== ===========
Primary earnings per share (loss) $ .01 $ (.01) $ .01 $ (.14)
=========== =========== =========== ===========
Fully diluted earnings per share
Shares:
Weighted average number of common shares
outstanding 6,667,304 4,062,799 5,477,580 3,829,028
Excess of shares issuable for the assumed
exercise of options and warrants over the
number of shares proceeds from the
exercise of such options and warrants,
using the closing market price (treasury
stock market) 2,624,806 -- 1,640,456 --
Weighted average number of common and
common equivalent shares outstanding 9,292,110 4,062,799 7,118,036 3,829,028
=========== =========== =========== ===========
Fully diluted earnings (loss) per share $ .01 $ (.01) $ -- $ (.14)
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 600
<SECURITIES> 0
<RECEIVABLES> 802,173
<ALLOWANCES> 39,544
<INVENTORY> 814,984
<CURRENT-ASSETS> 1,633,583
<PP&E> 5,886,544
<DEPRECIATION> 2,039,258
<TOTAL-ASSETS> 7,207,606
<CURRENT-LIABILITIES> 2,073,269
<BONDS> 0
0
0
<COMMON> 66,728
<OTHER-SE> 2,878,554
<TOTAL-LIABILITY-AND-EQUITY> 7,207,606
<SALES> 9,262,690
<TOTAL-REVENUES> 9,262,690
<CGS> 6,762,206
<TOTAL-COSTS> 6,762,206
<OTHER-EXPENSES> 2,194,622
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 344,893
<INCOME-PRETAX> 31,182
<INCOME-TAX> 0
<INCOME-CONTINUING> 31,182
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,182
<EPS-PRIMARY> .01
<EPS-DILUTED> 0
</TABLE>
