SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB/A (No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
Commission File Number 000-19318
SPARTA FOODS, INC.
(Exact name of Small Business Issuer as specified in its Charter)
Minnesota 41-1618240
(State of incorporation (I.R.S. Employer
or organization) Identification Number)
2570 Kasota Avenue
St. Paul, Minnesota 55108
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (612) 646-1888
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: Common
Stock, par value $.01 per share.
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or 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
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ ]
Registrant's revenues for its most recent fiscal year: $12,662,819
The aggregate market value of the voting stock held by non-affiliates was
approximately $6,078,085 based upon the average high and low bid prices of the
Registrant's Common Stock as of January 29, 1997.
There were 6,685,049 shares of Common Stock, $.01 par value, outstanding as
of January 29, 1997.
Transitional Small Business Disclosure Format (check one):
Yes No X
<PAGE>
The Registrant is providing this Amendment No. 1 to Form 10-KSB to amend
Part I, Item 1 and Part II, Item 6.
Part I.
ITEM 1. DESCRIPTION OF BUSINESS
General
Sparta Foods, Inc. ("Sparta" or the "Company") manufactures a broad line of
Mexican food products which include corn and flour tortillas, stone ground and
corn flour tortilla chips, picante and other salsas and sauces. These products
are distributed under the Company's own brand names and under private labels.
The Company's products include La Canasta, La Campana Paradiso and Mexitos
tortilla chips, Cruz, La Canasta and La Campana Paradiso tortillas, La Canasta,
La Campana Paradiso and Chapala salsas and picante sauces. The Company also
manufactures barbecue sauces and salsas for others under private label.
The Company's branded retail products are sold in supermarkets located
primarily in the midwestern United States, with selected products sold in
western Canada. The Company also produces its Mexican-style products for other
food distributors under private labels, including Crystados for Crystal Farms
Refrigerated Distribution Company which distributes its products to retail
stores in 23 states. Other private label products include Ken Davis and
Rudolph's barbecue sauces utilizing the customer's proprietary recipes. In
addition, the Company supplies over six thousand restaurants and other food
service establishments through distributors that include Alliant Food Service,
Inc., Sysco Corporation and J.P. Food Service, Inc. The Company places
significant emphasis on the development of the food service market and is
currently an approved supplier to such restaurants as McDonalds, Chilis, Carlos
O'Kellys and Perkins Restaurants.
The Company is capitalizing on the significant growth in the sale of
Mexican food products which has occurred in the United States over the past
decade. Over the fifteen-year period ended in 1995, sales of soft tortillas in
the United States grew from approximately $300 million to approximately $2.5
billion. Management believes that this growth is partially a result of Mexican
food products becoming less ethnic due to strong consumer acceptance. This is
evidenced by the large number of non-Mexican restaurants currently offering such
Mexican items as nachos, chips and salsa, fajitas, quesadillas, burritos and
taco salads.
Prior to 1994, the Company spent significant time and resources through
acquisition and internal product development to expand its production
capabilities and its line of authentic Mexican food products and to establish a
strong distribution network. Although these activities increased sales, they
negatively impacted the Company's net income. In fiscal 1994 and 1995 the
Company incurred net losses. The Company is now focusing its efforts on a return
to profitability by attempting to expand its existing business and enter
carefully selected new geographic areas in the branded retail, private label and
food service markets. The Company recorded net income of $105,307 for the year
ended September 30, 1996.
Business Strategy
The Company's principal business objective is to improve profitability by
increasing sales and reducing costs. The Company plans to increase sales by
expanding its product marketing and sales activity and broadening its
distribution patterns and by placing greater emphasis on the production of
tortillas. The Company plans to direct greater marketing and sales resources to
increase brand awareness of its products, including tortilla chips, in each
product's respective target market. In addition, the Company plans to
concentrate its manufacturing resources on high volume branded retail products
that it believes will generate the highest gross profit margins. The Company is
also seeking to improve profitability by reducing and controlling excess
operating costs.
Industry and Market
Sales of Mexican-style food products such as corn and flour tortillas, corn
chips and salsas have increased substantially over the past decade in the United
States, through both restaurants and retail stores. Tortillas are becoming
increasingly popular as evidenced by their use in restaurant foods such as
fajitas, burritos, enchiladas, quesadillas, taco salads, and, most recently,
"wraps". According to a Tortilla Industry Association study, over the
fifteen-year period ended in 1995, sales for soft tortillas in the United States
grew from $300 million to approximately $2.5 billion.
<PAGE>
The increase in past sales may be partially attributable to the growth in
the United States Hispanic population, and a continued increase in the sale of
Mexican-style food products is not assured. However, the Company's management
believes that Mexican-style food products have become less "ethnic" and now
enjoy a greater consumer acceptance, as illustrated by the fact that non-Mexican
restaurants, such as McDonalds, feature Mexican-style foods on their menus.
Products and Marketing
General. The Mexican-style food products manufactured and marketed by the
Company include whole and pre-cut corn and flour tortillas (including die-cut,
hand stretched and press flour tortillas), stone ground corn and corn flour
tortilla chips and salsas (picante and thick and chunky) for distribution to
retail food stores, food service establishments and other manufacturers of
Mexican-style food products. The Company also manufactures products for other
food distributors to be sold under their own private labels using the customers
or the company's proprietary recipes. During the fiscal years ended September
30, 1996, 1995 and 1994, the percentage of sales of tortillas, tortilla chips,
barbecue sauces, salsas and all other products as compared to all sales of the
Company were as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
<S> <C> <C> <C>
1996 1995 1994
Products
Tortillas 70% 63% 55%
Corn tortilla chips 17% 20% 25%
Barbecue sauces, salsas and all other products 13% 17% 20%
</TABLE>
The Company continually seeks to expand its product lines through the
development of new products for retail sale under the Company's own branded
labels and value-added products for the food service market. In November 1996,
the Company began manufacturing and distributing seven new retail tortilla chips
under the La Canasta brand and flavored flour tortilla wraps to food service
establishments.
<PAGE>
The Company distributes its products through distribution centers in 21
states and into Western Canada. During the fiscal years ended September 30,
1996, 1995 and 1994, the Company's percentage of sales for distribution to food
service establishments, to retail stores under its own brand names, and under
private label or as ingredients for other food manufacturers, compared to total
Company sales, were as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
<S> <C> <C> <C>
1996 1995 1994
Market Segment
Food service
establishments 54% 51% 44%
Branded retail 29% 31% 33%
Private label and
ingredients 17% 18% 23%
</TABLE>
Food Service. The Company's products are currently served in an estimated
six thousand restaurants and other food service establishments under La Canasta,
Mexitos, and Cruz labels, and are approved for use in the food service
operations of such restaurants as McDonald's, Chili's, Carlos O'Kelly's and
Perkins Restaurants. The establishment of food service accounts with restaurant
chains, schools, in-plant feeders or other food service establishments is
initiated primarily through direct contact by the Company's sales personnel or
brokers. The Company pays food brokers a commission based upon the percentage of
the net sales of products sold. The Company is obligated to pay such commission
for as long as the broker continues to achieve specified minimum sales. Sales to
food service establishments are effected through distributors who carry product
inventory at their distribution centers located in nine midwestern states,
Florida and Canada. These distributors include Alliant Food Service, Inc., J. P.
Food Services, Inc. and Sysco Corporation, who on a combined basis accounted for
over 30% of the Company's food service sales in its fiscal year ended September
30, 1996. The Company's distributors provide continued sales and service to the
food service customer, while the Company's direct sales personnel and brokers
continue to solicit new restaurant customers and act as coordinators between the
Company and the distributors.
Branded Retail. The Company's branded retail products are sold to retail
grocery chains and independent stores through distributors, such as Crystal
Farms Refrigerated Distribution Company which distributes refrigerated goods to
retail stores in 23 states and Bradley Distributing, Inc. which distributes
products to approximately 160 retail stores in the 13 county Minneapolis/St.
Paul metropolitan area. The Company's products appear in such grocery chains as
Cub Foods and Rainbow Foods and in independent stores such as Byerly's and
Lunds. Through its retail store distributors, the Company often establishes
incentives, such as volume sales discounts, which are offered to encourage
retail stores to prominently display the Company's products. The Company also
utilizes in-store demonstrations to promote its retail products. The Company's
distributors deal directly with the retail stores in soliciting orders to be
filled from local warehouses and assist in arranging shelf space and
implementing in-store promotions.
Private Label and Ingredients. The Company manufactures products for other
food distributors to be sold under their own private labels, using the Company's
recipes or recipes provided by such distributors. Since 1991, the Company has
been the sole manufacturer of Ken Davis brand barbecue sauces for Ken Davis
Products, Inc., and in December 1993 began production of barbecue sauces for
Rudolph's Licensing, Inc., under the Rudolph's brand name. The Company also
manufactures and sells tortillas to other manufacturers to be used as
ingredients for the production of Mexican food products. Two such manufacturers
are Arden International Kitchens and Schwan's Sales Enterprises, Inc. Arden uses
the Company's tortillas to manufacture its "Charritos" brand Mexican food items,
and Schwan uses the Company's tortillas in its frozen burritos which are sold
door to door by delivery truck in 48 states.
<PAGE>
The Company believes that there are two principal factors which tend to
promote the Company's growing sales of private label products. First is its
manufacturing expertise, and second is its experience in both the food service
and retail markets. Sales to private label customers are initiated and
maintained directly by Company sales personnel.
Principal Customers
The Company's sales to significant customers during fiscal years 1996, 1995
and 1994 were as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
(In thousands)
<S> <C> <C> <C>
1996 1995 1994
Customer
Crystal Farms Refrigerated Distribution Company $2,557 $1,879 $1,780
Catalina Specialty Foods, Inc. $1,962 $1,617 $1,005
Bradley Distributing, Inc. $1,011 $1,162 $1,020
Ken Davis Products, Inc. $978 $1,112 $1,068
</TABLE>
The Company has agreements with Crystal Farms Refrigerated Distribution
Company, Ken Davis Products, Inc. and Catalina Specialty Foods, Inc. a
distributor to McDonalds Corporation. The loss of any of these customers named
above would have an adverse effect on the Company's sales and operating results.
As part of its marketing plan, the Company is attempting to establish a strong
brand recognition in key markets in order to minimize the likelihood of any such
loss.
Manufacturing and Supplies
The Company manufactures its products at its principal place of business
located at 2570 Kasota Avenue, St. Paul, Minnesota. The Company manufactures its
products on 12 production lines. These include: (i) a hand stretched flour
tortilla line; (ii) a die-cut flour tortilla line; (iii) three press flour
tortilla lines; (iv) two lines for the production of corn tortillas; (v) two
stone ground corn tortilla chip lines; and (vi) three lines for the production
of picante salsas, barbecue sauces and other tomato-based sauces.
<PAGE>
The principal ingredients for the Company's manufactured products are corn,
wheat flour, corn flour, corn and soybean oils and tomato-based products. These
ingredients may be purchased by the Company from a number of sources and are
generally readily available under normal conditions. Samples of incoming
ingredients are tested to ensure that they meet the quality specifications
dictated by the Company. The Company has made contract purchases through the
first half of 1997 of corn, flour and oils to secure consistency in price and
quality and reasonable assurance of a supply of product ingredients. Although
the Company believes that such contracts help reduce the risk of unexpected and
unfavorable increases in raw material prices, the Company may be required to
purchase its raw material at a higher than current market price if current
market prices fall below the Company's contract price. The Company believes that
termination of one or more of its raw material contracts will not adversely
affect its ability to control its raw material costs as such contracts can be
replaced. The Company regularly maintains stores of corn, flour and other
ingredients in sufficient quantities at its plant to permit the Company to
fulfill one to two weeks of normal production, and cooking oil and other
ingredients in sufficient quantities to fulfill three or more weeks of
production.
Competition
The tortilla, tortilla chip, salsa and picante sauce industry in the United
States is comprised of a large number of small regional producers, many of which
have a limited line of products, and several dominant producers with broad
product lines.
The retail market for fried corn tortilla chips is dominated by Frito
Lay, which the Company believes is a market leader in the 13 county Minneapolis/
St. Paul area market and the national market. The Company also competes with Old
Dutch and Barrel O Fun brands. The Company estimates that it has less than a one
percent share of the national corn tortilla chip market. While national
manufacturers of snack foods have established recognizable brands such as Frito
Lay, shipping costs for the light and bulky tortilla chips provide the Company
certain pricing advantages in the local market area. In marketing its salsas and
picante sauces for retail distribution, the Company competes with such brands as
Pace, Old El Paso, Frito Lay and Chi Chi's. The Company believes that it
currently has less than a one percent share of the national salsa market. The
Company estimates that its retail sales of tortillas give it greater than a 50%
share of the 13 county Minneapolis/St. Paul metropolitan market, and that its
principal competition comes from Resers Foods, Zapata and Azteca Foods, which
supply most of the remaining market.
Many of the makers and distributors of these competing products for retail
distribution are better capitalized that the Company and have the advantage of
intensive local and national advertising programs as well as greater brand name
recognition. In addition, competition for shelf space at retail food stores is
intense. While the Company's management believes that the quality of its
products is good and that the retail prices for its products are competitive,
the Company's ability to obtain retail shelf space is primarily dependent on its
distributors and brokers. Although sales of the Company's retail products
outside the Minneapolis/ St. Paul metropolitan area is increasing, particularly
with respect to the Cruz brand tortillas distributed by Crystal Farms, the
Company's market share of retail sales outside of that area is not currently
material.
In marketing its products to food service establishments, the Company is
competing with a number of regional and national producers of Mexican-style
products, including BecLin Foods, Inc., Lake Park, Minnesota; Mexican Originals
(Tyson Foods, Inc.), Fayetteville, Arkansas; and Mission Foods, Inc., Los
Angeles, California. Most of these competitors are better capitalized than the
Company and have well established sales organizations. While the Company is a
major suppler of Mexican-style tortillas and tortilla chips to restaurants,
corporate cafeterias and schools in the states of Iowa, Minnesota, North Dakota,
South Dakota, and Wisconsin, competition will continue to be strong. While
competition outside the Minneapolis/St. Paul area is expected to be more
intense, the Company's management believes it will be able to increase its
market share in other metropolitan area markets because of its ability to
fulfill a distributor's needs with a broad line of quality Mexican-style food
products and by having its products approved by selected restaurant chains.
Trademarks
The principal trade names that the Company currently utilizes are CRUZ, LA
CAMPANA PARADISO and LA CANASTA in the retail sale of tortillas; LA CAMPANA
PARADISO, LA CANASTA, CHAPALA, and MEXITOS in the retail sale of tortilla chips;
and LA CAMPANA PARADISO, LA CANASTA and CHAPALA in the retail sale of salsas.
The Company also uses the trade names LA CANASTA, CRUZ and MEXITOS in connection
with food service sales. Except as discussed below, all of these trade names or
their associated logos are believed to be owned by the company.
<PAGE>
The Company's CRUZ logo is the subject of a federal trademark registration
which expires January 2000. The mark CHAPALA used in connection with salsas is
the subject of a federal trademark registration which expires November 2004. The
Company owns a federal trademark registration for its MEXITOS logo which expires
May 2005. All of the Company's trademark registrations are subject to renewal
rights and may terminate prior to their respective expiration dates due to
cancellation, disclaimer or surrender.
The Company's trademarks provide an identity between the Company and its
products. In the absence of federal trademark registrations, prior use of a
trademark may establish an exclusive right to its use in connection with the
sale of products in a particular market area. In addition, the above federal
trademark registrations provide rights in their respective marks throughout the
United States and create some legal presumptions should the registered trademark
be infringed.
The mark LA CAMPANA PARADISO is licensed by the Company from an affiliate
of a former director of the Company. The license agreement expires December 31,
1999 and requires the payment of three percent (3%) of the gross sales of
products sold under the LA CAMPANA PARADISO mark.
Under concurrent use agreements, the Company may not use the LA CANASTA
mark or related logos in 14 western states and has assigned its rights to those
marks in those states to La Canasta Mexican Food Products, Inc. La Canasta
Mexican Food Products, Inc. is not affiliated with the Company but is an
affiliate of a principal shareholder and former director of the Company.
There is no assurance that any of the trade names or other trademarks used
by the Company, whether or not registered, will be free from future challenge by
others as to prior use or as otherwise being unprotectable.
Government Regulation
The Company is subject to licensing, regulation and periodic inspection by
various local, state and federal agencies, including those administering health,
sanitation, environmental, building, safety and fire laws and regulations. These
agencies include, but are not limited to the Minnesota Department of Health,
City of St. Paul, the U.S. Food and Drug Administration, the Minneapolis/St.
Paul, Minnesota Metropolitan Waste Control Commission. As a result of recent
U.S. Food and Drug Administration rule changes, some of the Company's products
required changes in labeling. Nutritional testing has been completed on all
applicable products, and the results of such testing have been incorporated in
new packaging as required by those rules. To managements knowledge, the Company
is in substantial compliance with all applicable rules and regulations of the
above-referenced agencies. The costs associated with the Company's compliance
with environmental laws are minimal.
Personnel
As of December 1, 1996 the Company employed a total of 123 persons. Of
these full-time employees, four serve in an executive capacity, 109 are engaged
in manufacturing, shipping, quality control and plant supervision, three are
engaged in sales and marketing, and seven are engaged in administrative tasks.
None of the Company's employees are covered by a collective bargaining
agreement. The Company provides its employees with a health, dental, disability
and life insurance program. The Company's management believes that its relations
with its employees are good.
<PAGE>
PART II
ITEM 6 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 flour 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 purpose 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. Under the umbrella of the Company, La
Canasta had begun to expand 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 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
also 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. 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 substantial losses
in fiscal years 1994 and 1995.
In response to these years of losses, the ongoing problems of 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
profitability.
Results of Operations
Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended
September 30, 1995.
<PAGE>
During fiscal 1996, the Company had net sales of $12,662,819, an increase
of $670,831, or 6%, compared to net sales of $11,991,988 in fiscal 1995. This
increase in net sales resulted primarily from additional marketing efforts
relating to expansion of its existing customer base as well as into new
territories. Four customers accounted for 51% of net sales in fiscal 1996 and
48% of net sales in fiscal 1995.
Gross profit as a percentage of net sales for fiscal 1996 was 27% compared
to 26% for fiscal 1995. This increase in fiscal 1996 was primarily due to more
favorable operating efficiencies and discontinued sales of unprofitable
products. Overhead costs were reduced in certain areas to maximize product
margins. Even though the Company faced increasing pricing pressures from raw
material suppliers, it was able to minimize these cost increases by implementing
selective price increases. At the end of fiscal 1995 the Company consolidated
its production operations from its Lakeville facility to its St. Paul plant
resulting in additional cost savings achieved in fiscal 1996.
Selling, general and administrative expenses were $2,968,569 for fiscal
1996, a decrease of $315,423 or 10%, as compared to $3,283,992 in fiscal 1995.
Selling, general and administrative expenses as a percentage of net sales for
fiscal 1996 were 23% compared to 27% for fiscal 1995. This decrease was
primarily attributable to the return to more normal expense levels which began
in fiscal 1995 following the costs associated with the IFP operating activities,
related integration costs of the acquisition and professional costs associated
with the withdrawn secondary public offering and bridge financing during fiscal
1994.
Interest expense was $431,741 for fiscal 1996, a decrease of $84,471
compared to $516,212 in 1995. This lower interest expense reflects primarily the
effect of interest rate and debt reductions associated with the completion of
the Company's private placement in February, 1996. See, "Liquidity and Capital
Resources."
The Company recorded other income of $86,018 during fiscal 1996 compared to
other expense of $279,450 in fiscal 1995. This income results primarily from the
rental of the Company's Lakeville property. Other expense in fiscal 1995 was
primarily the non-recurring charge of $302,612 reflecting management's estimate
of the excess of the property's net book value over current market value. Net
income for fiscal 1996 was $105,307 compared to a net loss in fiscal 1995 of
$943,778, for the reasons set forth above.
Fiscal Year Ended September 30, 1995 Compared to September 30, 1994
During fiscal 1995, the Company had net sales of $11,991,988, an increase
of $811,075, or 7% as compared to net sales of $11,180,913 in fiscal 1994. This
increase in net sales resulted primarily from additional marketing efforts
relating to expansion of its existing customer base as well as into new
territories. Four customers accounted for 48% of net sales in 1995 and 44% of
net sales in 1994. Fiscal 1994 sales included approximately $600,000 in products
with low volume and/or low margins as well as heavily discounted products. These
were not continued in fiscal 1995. Excluding these sales, sales on continuing
products increased approximately 13% in fiscal 1995. During fiscal 1995, the
Company expanded its food service business in Illinois, Indiana, Kansas,
Nebraska and Wisconsin and its retail business into Wisconsin, Illinois and
Iowa.
<PAGE>
Gross profits as a percentage of net sales for fiscal 1995 was 26% compared
to 24% for fiscal 1994. This increase in fiscal 1995 was primarily due to more
favorable operating efficiencies and discontinued sales of unprofitable
products. Overhead costs were reduced in certain areas to maximize product
margins. Even though the Company faced increasing pricing pressures from flour,
corrugated and plastic material suppliers, it was able to minimize these cost
increases by implementing selective price increases. During fiscal 1995 the
Company consolidated its production operations from its Lakeville facility to
its St. Paul plant. Currently, other than USDA-related meat products produced by
outside suppliers, all of the Company's products are produced in-house.
Selling, general and administrative expenses were $3,283,992 for fiscal
1995, a decrease of $56,975, or 2%, as compared to $3,340,967 in fiscal 1994.
Selling, general and administrative expenses as a percentage of net sales for
fiscal 1995 were 27%, compared to 30% for fiscal 1994. This decrease was
primarily attributable 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 withdrawn secondary public
offering and bridge financing during fiscal 1994.
Interest expense was $516,212 for fiscal 1995, a decrease of $155,683
compared to $671,895 in 1994. This reduced interest expense reflects primarily
the comprehensive financial restructuring in December 1994.
The Company incurred Other Expense of $279,450 during fiscal 1995 compared
to Other Income of $3,707 in fiscal 1994. This expense consists primarily of the
write-down as discussed above. Excluding this the net loss in fiscal 1995 would
have been $641,166 or an improvement of 46% over fiscal 1994's net loss of
$1,193,177.
Seasonality
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, salsa and barbecue sauces,
during the summer months. This seasonality may cause quarterly results of
operations to fluctuate.
Raw Material Cost Fluctuations
The Company does not enter into futures contracts as defined by SFAS 80. It
does, however, enter into purchase orders for delayed delivery of raw materials,
generally 30 days for raw materials other than flour and corn. The Company
enters into purchase orders for delayed delivery of flour and corn for a period
of 2-18 months, depending on current pricing, to ensure the availability of the
type of flour and corn best suited for the Company's products. These purchase
orders are place directly with the suppliers. At the end of each reporting
period, the Company evaluates the open purchase orders for corn to determine
whether a loss should be recognized.
<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.
During fiscal 1996 net cash provided by operating activities was $305,511,
consisting principally of net income of $105,307 adjusted for non-cash
depreciation and amortization expenses of $552,902 and a decrease in inventories
of $181,597, offset by a decrease of accounts payable and accrued expenses of
$489,620.
Net cash used in investing activities in fiscal 1996 was $161,286,
primarily the result of capitalized costs associated with the refurbishing of
production equipment and down payments on the construction of a freezer
expansion. During fiscal 1996 net cash used in financing activities was $144,488
due mainly to the issuance of additional Common Stock for $808,620 net of costs,
offset by net reductions in borrowings of $953,108.
The Company estimates that as of September 30, 1996, there is an additional
$470,000 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 has 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 September 30, 1996, the Company had cash of $600 and a negative working
capital of $480,444.
On February 2, 1996, the Company raised $1,280,000 pursuant to a private
offering of 2,560,000 equity 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 who
participated in the Company's December 1994 financial 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 1997, assuming (i) the Company's fiscal
1997 sales equal or exceed fiscal 1996 sales; (ii) there are no significant
increases in expenses in fiscal 1997; and (iii) the Company is able to keep its
bank credit facilities operative.
Accounting Standards Issued and Not Yet Adopted
The Financial Accounting Standards Board (FASB) has issued Statement No.
123 (SFAS 123), Accounting for Stock-Based Compensation. This statement is
effective for the Company's 1997 fiscal year. SFAS 123 establishes a fair
value-based method of accounting for stock-based compensation plans and
encourages, but does not require, entities to adopt that method for grants to
employees in place of APB Opinion No. 25, Accounting for Stock Issued to
Employees, which uses an intrinsic value-based accounting method. At this time,
the Company does not intend to adopt SFAS 123 in measuring expenses for grants
to employees. However, the Company must present pro forma net income (loss) and
related per share amounts as if SFAS 123 had been adopted, and such pro forma
amounts are expected to reflect higher amounts of expenses than amounts reported
in the financial statements.
<PAGE>
Outlook
Management believes the restructuring it began in October 1994 has
substantially been completed. Its plan in fiscal 1997 will be to increase
revenues and improve profitability by focusing on new markets and product brand
positioning of tortillas and tortilla chips in the retail and food service
markets to take advantage of strong industry growth patterns. See Item One -
"Description of Business - Business Strategy."
The foregoing statements contained in this Outlook section of Management's
Discussion and Analysis of Financial Condition and Results of Operations,
including those relating to the Company's operating requirements through fiscal
1997 contained in Management's Discussion and Analysis of Financial Condition
and Results of Operations, and other forward looking statements made in Item
One, "Description of Business - Business Strategy" of this Form 10-KSB/A (No. 1)
for the period ended September 30, 1996, involve a number of risks and
uncertainties. Some of the factors that could cause actual results to differ
materially include but are not limited to seasonality of its sales and raw
materials cost fluctuations, which are discussed above, and the following:
Reliance on Principal Customers. The Company has several customers who each
accounted for a significant percentage of the Company's sales in fiscal 1996.
During that period, sales to Crystal Farms Refrigerated Distribution Company,
Ken Davis Products, Inc., Catalina Specialty Foods, Inc. and Bradley
Distributing, Inc. accounted for approximately 20%, 8%, 15% and 8% of the
Company's sales, respectively. The loss of any of the foregoing customers could
have a material and adverse effect on the Company's sales and profitability.
Competition. The Mexican-style food manufacturing and distribution industry
is highly competitive. The Company is in competition with a number of
manufacturers and distributors of Mexican-style food products and, to a limited
extent, manufacturers of "snack foods," many of which are better capitalized
than the Company. The Company will also be subject to future competition from
other manufacturers, distributors and retailers who enter into the Mexican-style
food and distribution industry. In the retail market, many of these competitors
engage in extensive local and national advertising and marketing, and the brand
names for products distributed by those competitors are significantly more
recognizable to the consumer than the Company's brand names. In addition,
competition for shelf space in retail grocery stores is intense. In the food
service market, the Company is competing with a number of regional and national
producers or Mexican-style food products. Many of these competitors are better
capitalized than the Company and have established sales organizations. No
assurance can be given that the Company will be able to compete as it expands
its markets.
Product Liability. The Company may be subject to significant liability
should the consumption of any of its products cause injury, illness or death.
Although the Company carries product liability insurance in the aggregate amount
of $2,000,000, with limits per occurrence of $1,000,000, there can be no
assurance that this insurance will be adequate to protect the Company against
product liability claims, or that such insurance will continue to be available
to the Company on reasonable terms.
Government Regulation. The Company's business is subject to various
federal, state and local environmental and health regulations. If the Company
were found not to be in compliance with such regulations, sanctions and
penalties could be imposed which could materially and adversely affect the
Company's business.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SPARTA FOODS, INC.
Dated: January 30, 1997 By: /s/ A. Merrill Ayers
---------------------
A. Merrill Ayers, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act 1934, this
Report has been signed by the following persons on behalf of the Company, in the
capacities, and on the dates, indicated.
Signature and Title
/s/ Michael J. Kozlak )
Michael J. Kozlak, Director )
)
)
/s/ Larry Arnold )
Larry Arnold, Director )
) By: /s/ A. Merrill Ayers
) A. Merrill Ayers as Attorney-in-
/s/ Joel P. Bachul ) Fact pursuant to Power of Attorney
Joel P. Bachul, Director ) previously filed.
)
)
- -------------------------- ) Date: January 30, 1997
Edward Jorgensen, Director )
)
)
/s/ Richard H. Leepart )
Richard H. Leepart, Director )
)
)
/s/ R. Dean Nelson )
R. Dean Nelson, Director )
