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, 1998.
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)
1565First Avenue NW, New Brighton, MN 55112
(Address of principal executive offices)
(651) 697-5500
(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:
7,851,416 of Common Stock at January 18, 1999.
Transitional Small Business Disclosure Format: Yes _____ No X
<PAGE>
SPARTA FOODS, INC.
FORM 10-QSB
QUARTER ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets at
December 31, 1998 and September 30, 1998 3
Condensed Consolidated Statements of Operations for
the three-month periods ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the
three-month periods ended December 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements
- December 31, 1998 6
Item 2. Management's Discussion and Analysis or Plan of Operation 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities 12
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>
December 31 September 30
1998 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 1,383,174 $ 1,131,255
Accounts receivable, less allowances of $30,000 868,004 877,752
Inventories:
Finished goods 504,303 436,784
Raw materials and packaging 423,645 396,396
Prepaid expenses 242,251 198,752
Income tax receivable 4,746 4,746
Deferred tax asset 43,000 43,000
------------ ------------
Total current assets 3,469,123 3,088,685
------------ ------------
Property and Equipment 9,208,646 9,045,342
Less accumulated depreciation 2,982,287 2,788,399
------------ ------------
6,226,359 6,256,943
------------ ------------
Other Assets
Restricted cash 201,613 242,059
Covenants not-to-compete, less accumulated amortization of
$ 41,089 and $39,424, respectively 58,911 60,576
Goodwill, less accumulated amortization of $88,613 and
$85,404, respectively
424,759 427,968
Deferred financing costs, less accumulated amortization of
$ 69,181 and $64,778, respectively 128,853 133,256
Deferred tax asset 219,100 227,000
Other 230,510 284,698
------------ ------------
1,263,746 1,375,557
------------ ------------
$ 10,959,228 $ 10,721,185
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Current maturities of long-term debt $ 374,447 $ 367,377
Accounts payable 548,104 506,874
Accrued expenses 344,144 469,448
------------ ------------
Total current liabilities 1,266,695 1,343,699
------------ ------------
Long-term Debt, less current maturities 2,570,765 2,667,623
------------ ------------
Stockholders Equity
Preferred Stock, authorized 1,000,000 shares, $1,000 par value;
issued and outstanding 2,500 shares 2,500,000 2,500,000
Common Stock, authorized 15,000,000 shares, $0.01 par value;
issued and outstanding 7,842,295 and 7,037,172 shares, respectively 78,423 70,371
Additional paid-in capital 5,369,141 4,977,092
Accumulated deficit (825,796) (837,600)
------------ ------------
7,121,768 6,709,863
------------ ------------
$ 10,959,228 $ 10,721,185
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
SPARTA FOODS, INC.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
For the three months
ended
December 31
1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 3,675,024 $ 3,812,157
Cost of sales 2,593,863 2,763,502
----------- -----------
Gross profit 1,081,161 1,048,655
Selling, general, and administrative expenses 1,043,111 1,004,075
----------- -----------
Operating income 38,050 44,580
Other income, net 32,252 38,232
Interest expense (50,598) (91,682)
----------- -----------
Income (Loss) before income tax 19,704 (8,870)
Provision for income tax 7,900 950
----------- -----------
Net income (loss) $ 11,804 $ (9,820)
=========== ===========
Basic and Diluted Earnings per share $ -- $ --
=========== ===========
Weighted average number of common shares outstanding
7,650,090 6,784,390
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
SPARTA FOODS, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
For the three months
ended December 31
1998 1997
Cash Flows from Operating Activities
<S> <C> <C>
Net income (loss) $ 11,804 $ (9,820)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and Amortization 203,165 160,273
Deferred taxes 7,900 --
Changes in assets and liabilities:
Accounts receivable 9,748 (67,700)
Inventories (94,768) 133,263
Prepaid expenses (43,499) 3,471
Accounts payable and accrued expenses (84,074) (341,294)
----------- -----------
Net cash provided by (used in) operating activities 10,276 (121,807)
----------- -----------
Cash Flows from Investing Activities
Decrease in restricted cash 40,446 1,456,755
Purchases of equipment (163,304) (1,660,560)
Change in deposits and other assets 54,188 (10,484)
----------- -----------
Net cash used in investing activities (68,670) (214,289)
----------- -----------
Cash Flows from Financing Activities
Net borrowings on line of credit -- 379,187
Repayment of Long-term Debt, net (89,788) (51,292)
Issuance of Common Stock, net of costs 400,101 13,013
Deferred financing costs -- (4,812)
----------- -----------
Net cash provided by financing activities 310,313 336,096
----------- -----------
Net increase in cash 251,919 --
Cash and cash equivalents
Beginning of period 1,131,255 600
----------- -----------
End of period $ 1,383,174 $ 600
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 50,095 $ 87,519
Income taxes -- 2,000
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
Sparta Foods, Inc.
Notes to Condensed Consolidated Financial Statements
December 31, 1998
(unaudited)
NOTE 1. GENERAL
The unaudited condensed consolidated balance sheet at December 31,
1998, the condensed consolidated statements of operations for the
three-month periods ended December 31, 1998 and 1997, and the condensed
consolidated statements of cash flows for the three-month periods ended
December 31, 1998 and 1997, 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, 1999.
The unaudited financial statements should be read in conjunction with
the audited financial statements for the years ended September 30, 1998
and 1997, contained in Form 10-KSB and Management's Discussion and
Analysis or Plan of Operation contained herein.
NOTE 2. FINANCING AGREEMENTS
The Company has a line of credit (the "Line of Credit") and term loan
(the "Term Loan") with a bank, secured by certain assets. Maximum
borrowings under the Line of Credit are determined by a borrowing base
calculation or $1,200,000, whichever is less. Borrowings bear interest
at prime (7.75 percent at December 31, 1998). The Company is to
maintain certain minimum net worth and debt service coverage levels.
The Company has a loan acquired through the State of Minnesota related
to a revenue bond issuance. The loan is due in monthly installments
that vary in accordance with the maturity dates of the related revenue
bonds, plus interest at rates varying from 4.5 to 6.0 percent. At
December 31, 1998, $1,756,667 is outstanding. The Company is to
maintain certain net worth and debt service coverage levels. In
addition certain dividend restrictions are stipulated and a debt
service reserve fund and a construction fund have been established. The
debt service reserve fund will remain until all loan obligations have
been satisfied. The construction fund represents undisbursed loan
proceeds that are available for approved equipment expenditures. These
fund amounts have been reflected on the consolidated balance sheet as
restricted cash.
NOTE 3. INCOME TAX
Deferred taxes are provided on an asset and liability method whereby
deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards, net of deferred tax
liabilities for temporary differences. For the three-month period ended
December 31, 1998, income taxes have been computed at the federal and
state statutory rates. For the three-month period ended December 31,
1997, income taxes are based upon a minimum state tax.
<PAGE>
NOTE 4. PREFERRED STOCK
On February 24, 1998, the Company issued 2,500 shares of Preferred
Stock, Series 1998. The shares are convertible at any time at the rate
of 606.06 shares of Common Stock for each share of Preferred Stock. The
holders of the preferred stock have the right to require the Company to
repurchase the stock in the event of a change in control authorized by
the Board of Directors or if the Company is in default with certain
covenants as defined in the agreement. The holders of the Preferred
Stock are entitled to receive, when, as and if declared by the
Company's Board of Directors, cash dividends at the rate of 5% annually
or, at the option of the Company, dividends of shares of additional
Preferred Stock at the rate of 7.5% annually. Dividends are fully
cumulative, accumulate without interest from the date the Preferred
Stock was originally issued, and, if declared by the Board of
Directors, are payable, semi-annually on January 1st and July 1st. At
December 31, 1998, cumulative and undeclared cash dividends totaled
$106,250 or $42.50 per share of preferred stock.
NOTE 5. NET INCOME PER COMMON SHARE
The Company is complying with "Statement of Financial Accounting
Standards No. 128, Earnings per Share" (FAS 128). FAS 128 requires the
presentation of basic earnings per share (EPS) and diluted earnings per
share amounts. Basic EPS is the net income related to the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects potential dilution assuming the issuance of common
stock for stock options and warrants exercisable under the treasury
stock method and also considers the potential conversion of convertible
preferred stock.
For the three-month periods ended December 31, 1998 and 1997, diluted
EPS does not include the assumed conversion of option, warrants and
preferred stock due to an antidilutive impact.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
Overview
La Canasta of Minnesota, Inc. ("La Canasta"), the predecessor of Sparta
Foods, Inc. (the "Company"), 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. Since 1991, the Company has completed acquisitions and
secured new broker and distributor relationships which has expanded its
trademark retail brands to include Cruz, Chapala, Mexitos and La
Campana Paradiso, its retail distribution network to include Crystal
Farms Refrigerated Distribution Company, Marigold Foods, Inc. and Royal
Foods, Inc. and its food service customers to include McDonald's,
Perkins, Friendly's and Carlos O'Kelly restaurants.
Results of Operations
The Company's net sales of $3,675,024 decreased $137,133 (3.6%) for the
three months ended December 31, 1998, as compared to the three months
ended December 31, 1997. This decrease primarily resulted from the
Company's loss of its largest private label barbecue sauce customer
during the second quarter of fiscal 1998. Sales to this customer
totaled approximately $243,000 (6.4%) for the three months ended
December 31, 1997.
Gross profit, as a percentage of net sales, for the three months ended
December 31, 1998, was 29.4% compared to 27.5% for the three months
ended December 31, 1997. This increase was primarily due to more
favorable operating efficiencies during the quarter associated with the
move to the new and improved manufacturing facility and utilization of
new equipment as compared to operating in two manufacturing locations
in the comparable quarter of the prior year.
Selling, general and administrative expenses of $1,043,111 increased
$39,036 or 3.9% in the three months ended December 31, 1998, as
compared to the three months ended December 31, 1997. This increase is
due mainly to the hiring of additional sales personnel to implement the
Company's long-term sales growth objectives.
Interest expense of $50,598 decreased $41,084 (44.8%) for the three
months ended December 31, 1998 compared to the three months ended
December 31, 1997. This decrease is due primarily to significant debt
reductions during the second and third quarters of fiscal 1998 related
to the use of proceeds from the issuance of preferred stock and the
sale of rental property. The Company recorded a current federal and
state income tax provision of $7,900 as compared to a minimum state tax
provision of $950 during the previous year's quarter.
<PAGE>
Liquidity and Capital Resources
The Company financed its current activities primarily through cash
generated from its operations and the issuance of common stock
resulting from the exercise of warrants.
Cash provided by operating activities during the three months ended
December 31, 1998 was $10,276 consisting principally of depreciation
and amortization of $203,165 and net income of $11,804 offset by a
decrease in accounts payable and accrued expenses of $84,074 and an
increase in inventories and prepaid expenses of $138,267. Cash used in
investing activities was $68,670 consisting principally of the purchase
of equipment of $163,304 offset by the utilization of restricted cash
of $40,446 and a decrease in deposits and other assets of $54,188. Cash
provided by financing activities was $310,313 consisting of $400,101 in
net proceeds from the issuance of common stock offset by a $89,788
reduction in long-term debt.
During October 1998, the Company received an aggregate of $401,937 and
issued an aggregate of 803,873 shares of common stock related to
warrants with expiration dates of October 20, 1998 and October 31,
1998.
At December 31, 1998, the Company had cash of $1,383,174 and working
capital of $2,202,428. The Company believes that its bank credit
facilities and cash flow from operations will be sufficient to meet its
operating requirements through fiscal 1999.
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
and salsa 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 placed
directly with the suppliers.
<PAGE>
Outlook
The Company's plan in fiscal 1999 is to continue to grow the business
by increasing sales and expanding its presence in new geographic
territories. The Company plans to grow the business internally as well
as through joint ventures and/or acquisitions and through the
development of new distribution relationships.
The Company relies on computer software and hardware systems to manage
its information and portions of its manufacturing. The Company is aware
of the computer software and hardware issues associated with the
programming code in existing computer software programs and
non-information technology such as micro-controllers found in computer
hardware. The issue is whether systems will properly recognize date
sensitive information. Much of the computer software and hardware in
use today are unable to recognize a year that begins with "20" instead
of "19." Many computers will be unable to recognize the Year 2000 and,
as a result, could generate erroneous data or cause a computer to fail.
Some computer systems may begin to operate improperly sooner for
failure to read other dates such as September 9, 1999.
The Company has completed an assessment of its exposure to the Year
2000 issue by evaluating its software and hardware systems. The
Company's assessment revealed that its exposure to the Year 2000 issue
is nominal, and it is currently upgrading its software and hardware
systems to make such systems Year 2000 compliant. The cost of such
upgrade is expected to be less than $10,000. In addition to evaluating
its own systems, the Company has inquired of its major customers and
suppliers as to their exposure to the Year 2000 issue to determine the
extent to which the Company is indirectly vulnerable to the Year 2000
issues from such customers and suppliers. Many of the Company's
customers and suppliers have responded that they believe they are or
will be Year 2000 compliant. The Company plans to continue to assess
its exposure to the Year 2000 issue and develop plans to address any
developments associated with the Year 2000 issue that could have an
adverse effect on the Company and its operations.
The foregoing statements contained in this Outlook section of
Management's Discussion and Analysis or Plan of Operation and those
relating to the Company's operating requirements through fiscal 1999
contained in Management's Discussion and Analysis or Plan of Operation
are forward looking statements that involve a number of risks and
uncertainties. Some additional 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. During 1998, sales to Crystal Farms
Refrigerated Distribution Company ("Crystal Farms") and Catalina
Specialty Foods, Inc. accounted for approximately 25% and 12%,
respectively, of the Company's sales, and management expects Crystal
Farms to account for a greater percentage of the Company's sales in the
future. Crystal Farms is the Company's largest single distributor of
its retail products and has a significant impact on the Company's
growth in the retail market. Although the Company and Crystal Farms
<PAGE>
operate under a distribution agreement, the loss of Crystal Farms as a
customer would have a material and adverse effect on the Company's
sales and profitability and future growth.
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 of 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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the quarter ended December 31, 1998, the Company sold shares of its
Common Stock without registration under the Securities Act of 1933, as follows:
<TABLE>
<CAPTION>
Aggregate
Number
of Shares of Total Exemption
Date Common Stock Purchaser Purchase Price Relied Upon
<S> <C> <C> <C> <C>
10/15/98 130,674 Issued to existing security holders $ 65,337 Section 4(2)
upon exercise of warrants
10/20/98 405,000 Issued to existing security holders $ 202,500 Section 4(2)
upon exercise of warrants
10/31/98 268,199 Issued to existing security holders $ 134,100 Section 4(2)
upon exercise of warrants
</TABLE>
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 December 31,
1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
SPARTA FOODS, INC.
(Registrant)
Dated: January 19, 1999 By: /s/ Joel P. Bachul
Joel P. Bachul,
President and Chief Executive Officer
Dated: January 19, 1999 By: /s/ A. Merrill Ayers
A. Merrill Ayers
Treasurer, Secretary and
Chief Financial Officer
Exhibit 11
COMPUTATION OF EARNING PER COMMON SHARE
(unaudited)
For the three months
ended
December 31
-------------------------------
1998 1997
----------- -----------
Basic Earnings per share:
Net income (loss) $ 11,804 $ (9,820)
Less Cumulative Preferred Stock
Dividends 31,250 --
----------- -----------
Income available to Common
Stockholders (19,446) (9,820)
----------- -----------
Weighted-average number of
common shares outstanding 7,650,090 6,784,390
----------- -----------
Basic Earnings per share $ -- $ --
----------- -----------
Diluted Earnings per share (Note) $ -- $ --
----------- -----------
Note
For the three-month periods ended December 31, 1998 and 1997, diluted
EPS does not include the assumed conversion of option, warrants and
preferred stock due to an antidilutive impact.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U. S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,383,174
<SECURITIES> 0
<RECEIVABLES> 898,004
<ALLOWANCES> 30,000
<INVENTORY> 927,948
<CURRENT-ASSETS> 3,469,123
<PP&E> 9,208,646
<DEPRECIATION> 2,982,287
<TOTAL-ASSETS> 10,959,228
<CURRENT-LIABILITIES> 1,266,695
<BONDS> 2,570,765
0
2,500,000
<COMMON> 78,423
<OTHER-SE> 4,543,345
<TOTAL-LIABILITY-AND-EQUITY> 10,959,228
<SALES> 3,675,024
<TOTAL-REVENUES> 32,252
<CGS> 2,593,863
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,043,111
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,598
<INCOME-PRETAX> 19,704
<INCOME-TAX> 7,900
<INCOME-CONTINUING> 11,804
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,804
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
