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 December 31, 1995.
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:
4,062,799 shares of Common Stock at January 17, 1996
Transitional Small Business Disclosure Format: Yes No X
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPARTA FOODS, INC.
Condensed Consolidated Balance Sheet
(unaudited)
<TABLE>
<CAPTION>
December 31, 1995
ASSETS
<S> <C>
Current Assets
Cash $ 550
Accounts receivable, less allowance of $74,848 780,248
Inventories:
Finished goods 320,682
Raw materials and packaging 581,290
Prepaid expenses 66,186
Total current assets 1,748,956
Property and Equipment 5,855,952
Less accumulated depreciation 1,840,052
-----------
4,015,900
Other Assets
Goodwill, less accumulated amortization of $85,752 474,138
Covenants not-to-compete, less accumulated
amortization of $199,267 134,233
Property held for resale 940,000
Other 252,862
-----------
1,801,233
7,566,089
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Note payable, bank 853,120
Note payable, individuals 400,000
Current maturities of long-term debt 600,603
Accounts payable 1,189,028
Accrued expenses 366,328
-----------
Total current liabilities 3,409,079
Long-term Debt, less current maturities 2,484,593
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 4,062,799 shares 40,627
Additional paid-in capital 3,777,317
Accumulated deficit (2,145,527)
-----------
1,672,417
$ 7,566,089
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
SPARTA FOODS, INC.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
For the three months ended
December 31
1995 1994
<S> <C> <C>
Net Sales $ 2,920,625 $ 2,792,940
Cost of sales 2,154,317 2,079,995
----------- -----------
Gross profit 766,308 712,945
Selling, general and administrative expenses 701,314 746,990
----------- -----------
Operating income (loss) 64,994 (34,045)
Other income (expense), net 4,112 (3,071)
Interest expense (141,501) (120,739)
----------- -----------
Loss before income taxes (72,395) (157,855)
Provision for income tax -- --
----------- -----------
Net loss $ (72,395) $ (157,855)
=========== ===========
Net loss per common share $ (.02) $ (.05)
=========== ===========
Weighted average number of common shares
outstanding 4,062,799 3,369,107
=========== ===========
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
SPARTA FOODS, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
For the three months
ended December 31
1995 1994
---------- ---------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (72,395) $ (157,855)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 129,471 130,563
Changes in assets and liabilities:
Accounts receivable (101,790) (81,568)
Inventories 28,097 24,426
Prepaid expenses (28,691) (6,437)
Other assets (15,527) (42,157)
Accounts payable and accrued expenses (24,913) (98,868)
----------- -----------
Net cash used in operating activities (85,748) (231,896)
----------- -----------
Cash Flows From Investing Activities
Purchases of property and equipment (23,444) (112,673)
----------- -----------
Net cash used in investing activities (23,444) (112,673)
----------- -----------
Cash Flows From Financing Activities
Net short-term borrowings 255,399 237,997
Long-term borrowings -- 80,000
Payments on long-term borrowings (146,520) (25,531)
Issuance of Common Stock, excluding stock issued for
conversion of debt, net of cost -- 71,529
----------- -----------
Net cash provided by financing activities 108,879 363,995
----------- -----------
Net cash increase/(decrease) (313) 19,426
Cash Balance
Beginning of period 863 4,348
----------- -----------
End of period $ 550 $ 23,774
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 135,884 $ 254,339
=========== ===========
Supplemental Schedule of Noncash Financing
Activities
Conversion of long-term debt and accounts payable to
Common Stock $ -- $ 1,137,800
Conversion of accounts payable to long-term debt -- 217,000
=========== ===========
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
Notes to Condensed Consolidated Financial Statements
December 31, 1995
(unaudited)
NOTE 1. GENERAL
The unaudited condensed consolidated balance sheet at December 31, 1995, the
condensed consolidated statements of operations for the three-month periods
ended December 31, 1995 and 1994, and the condensed consolidated statements of
cash flows for the three-month periods ended December 31, 1995 and 1994, 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), respectively, 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 December 31, 1995, 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 3
percent (11.5 percent at December 31, 1995). At December 31, 1995, $853,120 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 bank agreement and
obtained a waiver of the covenant violations from the bank through December 31,
1995. The bank and the Company are currently negotiating new covenants based on
fiscal 1996 financial projections.
NOTE 3. SUBSEQUENT EVENT
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
at $0.50 per share and a warrant, exercisable for three years, to purchase an
additional share of Common Stock at $0.75 per share. The Company granted to
investors in the offering one-time demand and piggy-back registration rights
which expire on February 1, 1998. As a result of the offering, the Company's
outstanding common shares have increased to 6,622,799 shares.
<PAGE>
NOTE 3. (continued)
The following Pro Forma Balance Sheet is based upon the actual balance sheet of
December 31, 1995 (unaudited) after giving effect to the sale on February 2,
1996 of 2,560,000 shares of Common Stock and the payment of certain debt. See
Note A.
<TABLE>
<CAPTION>
Pro Forma
Balance Sheet Pro Forma Adjustments Balance Sheet at
at Dec. 31, 1995 (Note A) Dec. 31, 1995
--------
(unaudited) (increase) (decrease) (unaudited)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash $ 550 $ 1,239,445 $ 700,000 $
411,507 128,488
Receivables 780,248 780,248
Inventories 901,972 901,972
Prepayments 66,186 66,196
----------- ----------- ----------- -----------
Current assets 1,748,956 1,239,445 1,111,507 1,876,894
Property and equipment, net 4,015,900 4,015,900
Other assets 1,801,233 40,000 1,761,233
----------- ----------- ----------- -----------
7,566,089 1,239,445 1,151,507 7,654,027
=========== =========== =========== ===========
Liabilities and
Stockholders Equity
Note payable, bank 853,120 700,000 153,120
Note payable, individuals 400,000 400,000 --
Long-term debt, current 600,603 600,603
Accounts payable and accrued
expenses 1,555,356 11,507 1,543,849
----------- ----------- -----------
Current Liabilities 3,409,079 1,111,507 2,297,572
----------- ----------- -----------
Long-term debt, net 2,484,593 2,484,593
----------- -----------
Stockholders equity:
Preferred Stock -- --
Common Stock - outstanding
shares 4,062,799 and 6,622,799 40,627 25,600 66,227
Additional paid-in capital 3,777,317 1,173,845 4,951,162
Accumulated deficit (2,145,527) (2,145,527)
----------- ----------- -----------
1,672,417 1,199,445 2,871,862
----------- ----------- ----------- -----------
$ 7,566,089 1,199,445 $ 1,111,507 $ 7,654,027
=========== =========== =========== ===========
</TABLE>
<PAGE>
NOTE 3. (continued)
Note A
On February 2, 1996, the Company received $1,239,445, net of broker's
commission and miscellaneous fees of $40,555, from the sale of 2,560,000 shares
of its Common Stock at $0.50 per share. The proceeds were used to reduce its
Line of Credit with a bank by $700,000 and to pay in full its notes payable to
individuals of $400,000 and accrued interest thereon. Financing cost of
approximately $40,000 is charged to Additional Paid-in Capital.
NOTE 4. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is calculated based on the net income (loss)
for the period and the weighted average number of common shares outstanding
during the period. Common Stock equivalents (options and warrants) are
anti-dilutive for both of the three-month periods ended December 31, 1995 and
1994.
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.
<PAGE>
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 1994.
In response to this loss, the ongoing problems integrating the Company's
acquisitions and other corporate problems, the Board of Directors adopted a
restructuring plan in October 1994. 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 future profitability. In August 1995, the company relocated
its Lakeville, Minnesota tortilla and tortilla chip production operations to its
St. Paul manufacturing facility. The 45,000 square-foot Lakeville facility
operated four production lines and employed 33 people. For the year ended
September 30, 1995, the Company recorded a $943,778 loss including a $302,612
write-down of the Lakeville facility to reflect the recorded value of this
property at the lower of cost or fair market value. On February 1, 1996, the
Company leased the Lakeville facility for a period of 10 years with a purchase
option.
Results of Operations
The Company's net sales increased $127,685 (4.6%) for the three months ended
December 31, 1995, as compared to the three months ended December 31, 1994. This
increase 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.
<PAGE>
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 three months ended December
31, 1995, was 26.2% compared to 25.5% for the three months ended December 31,
1994. The higher percentage reflects some of the cost savings achieved in the
initial stages of consolidation of the Company's two production facilities which
was completed during the fourth fiscal quarter of 1995.
Selling, general and administrative expenses decreased $45,676 or 6% in the
three months ended December 31, 1995, as compared to the same period in 1994.
Selling, general and administrative expenses, as a percentage of net sales,
decreased 3% to 24% for the three months ended December 31, 1995, as compared to
the same period in 1994. These decreases are due mainly to the return to more
normal expense levels following the costs associated with the IFP operating
activities, related integration costs of the acquisition and costs associated
with the comprehensive financial restructuring in December 1994.
Interest expense increased $20,762 for the three month period ended December 31,
1995 compared to the three months ended December 31, 1994. This reflects
primarily the effect of increased interest rates and fees from the Company's
bank debt. Expected interest expense rate reductions did not occur due to the
delay in raising additional capital until the second fiscal quarter of 1996.
Liquidity and Capital Resources
The Company has financed its activities to date primarily through debt, cash
generated from its operations and, to a lesser extent, through the issuance of
Common Stock.
Cash used in operating activities during the three months ended December
31, 1995, was $85,748 consisting primarily of the net loss of $72,395, a
decrease in accounts payable and accrued expenses of $24,913, an increase in
accounts receivable of $101,790 and an increase in prepaid expenses and other
assets of $44,218, offset by depreciation and amortization of $129,471 and a
decrease in inventories of $28,097. Cash used in investing activities was
$23,444, primarily the result of capitalized costs associated with a new press
tortilla line in fiscal 1995 and the installation of production equipment moved
from the IFP production facility. Cash provided by financing activities was
$108,879 due mainly to a net increase in short-term borrowings under the line of
credit and short-term Convertible Notes payable to individuals, as described
below.
On October 20, 1995 the Company raised $400,000 from the issuance of Convertible
Notes that carry an annual interest rate of 10%. As additional consideration to
the Noteholders, the Company issued Warrants to purchase an aggregate 400,000
shares of Common Stock, exercisable at $0.50 per share. The Warrants expire 36
months from the date the loans were made. The Noteholders converted the Notes
into Units sold by the Company as part of the private offering.
<PAGE>
As of December 31, 1995, the Company had fully drawn its availability under its
bank Line of Credit and had been granted an overadvance availability of up to
$100,000 through January 31, 1996. 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 was in default of the financial covenants as of
December 31, 1995, and the bank has waived such defaults through December 31,
1995. The Company and the bank are currently negotiating new covenants based on
fiscal 1996 financial projections. It is management's opinion that the Company
will be able to meet the requirements of these new 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 will waive any such violations.
At December 31, 1995, the Company had cash of $550 and a negative working
capital of $1,660,123. As of December 31, 1995, 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
at $0.50 per share and a warrant, exercisable for three years, to purchase an
additional share of Common Stock at $0.75 per share. The Company granted to
investors in the offering one-time demand and piggy-back registration rights,
which expire on February 1, 1998.
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 food
service sector, management believes that fiscal 1996 sales will exceed 1995
sales. It also believes that the Company will 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 5. OTHER INFORMATION
(a) Warrants of 582,246 were issued by the Company in its
Private Placement of December 9, 1994, and were repriced to $0.50 on
October 20, 1995 in conjunction with bridge financing obtained by the
Company, which financing included warrants at that price.
(b) Reference is invited to Form 8-K, which is dated February
2, 1996 and relates to the Private Placement of February 2, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
A report on Form 8-K was not filed during the quarter ended
December 31, 1995.
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: February 13, 1996 By: /s/ Joel P. Bachul
Joel P. Bachul,
President and Chief Executive Officer
Dated: February 13, 1996 By: /s/ A. Merrill Ayers
A. Merrill Ayers
Treasurer, Secretary and Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 550
<SECURITIES> 0
<RECEIVABLES> 855,096
<ALLOWANCES> 74,848
<INVENTORY> 901,972
<CURRENT-ASSETS> 1,748,956
<PP&E> 5,855,952
<DEPRECIATION> 1,840,052
<TOTAL-ASSETS> 7,566,089
<CURRENT-LIABILITIES> 3,409,079
<BONDS> 0
0
0
<COMMON> 40,627
<OTHER-SE> 1,631,790
<TOTAL-LIABILITY-AND-EQUITY> 7,566,089
<SALES> 2,920,625
<TOTAL-REVENUES> 0
<CGS> 2,154,317
<TOTAL-COSTS> 701,314
<OTHER-EXPENSES> (4,112)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141,501
<INCOME-PRETAX> (72,395)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (72,395)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> 0
</TABLE>
