U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A (No. 1)
X Quarterly Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 31, 1999.
______ 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)
1565 First 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:
10,278,916 of Common Stock at February 4, 2000.
Transitional Small Business Disclosure Format: Yes No X
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This Amendment No. 1 to the Company's Quarterly Report on Form 10-QSB
for the quarterly period ended December 31, 1999 is being submitted to include a
discussion of: (1) the impact of the increased amortization on the quarter's
operations; and (ii) the impact on future operations and strategies that the
planned merger with Cenex may have on the Company's future operations.
PART I. FINANCIAL INFORMATION
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., operates as our wholly-owned subsidiary. La Canasta 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. We were 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, we acquired all of the outstanding capital stock
of La Canasta. Since 1991, we have completed acquisitions and secured new
broker and distributor relationships which has expanded our trademark
retail brands to include Cruz, Chapala, Mexitos and La Campana Paradiso,
our retail distribution network to include Crystal Farms Refrigerated
Distribution Company and Marigold Foods, Inc. and our food service
customers to include McDonald's, Perkins, Friendly's and Carlos O'Kelly
restaurants. In October 1999, we acquired Food Products Corporation,
located in Phoenix Arizona, a manufacturer and distributor of tortillas and
tortilla chips in the southwestern United States. The acquisition expanded
our retail brands to include Arizona Brand, Spanish Bell and La La's.
Results of Operations
Our retail net sales of $4,140,799 increased $2,868,474 (225.5%), our food
service net sales of $2,404,937 increased $2,238 (0.1%), and our overall
net sales of $6,545,736 increased $2,870,712 (78.1%) for the three months
ended December 31, 1999, as compared to the three months ended December 31,
1998. Our increase in retail net sales and in our overall net sales is due
primarily to the acquisition, in October of 1999, of Food Products
Corporation. Retail net sales from our new facility in Arizona totaled
$2,702,796 or 94.2% of our overall increase in net sales for the three
months ended December 31, 1999.
Gross profit, as a percentage of net sales, for the three months ended
December 31, 1999 compared to the three months ended December 31, 1998, was
35.2% compared to 35.6% (decreasing 0.4%) for retail sales, 33.4% compared
to 26.1% (increasing 7.3%) for food service sales, and 34.5% compared to
29.4% (increasing 5.1%) for total sales. This overall increase in gross
margin percentage is primarily due to the significant increase in retail
sales as a percentage of total sales, because our retail sales gross margin
percentage is greater than our food service sales gross margin percentage.
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In addition, our gross margin percentage on food service sales has
increased due to more favorable manufacturing efficiencies and raw material
pricing.
Selling, general and administrative expenses of 29.0% of net sales for the
three months ended December 31, 1999 increased by 0.6% compared to 28.4% of
net sales for the three months ended December 31, 1998. This increase is
due to additional administrative costs associated with operating from
multiple locations and also includes $73,875 of amortization of goodwill
associated with the acquisition of Food Products Corporation. The costs
incurred related to our potential merger with Cenex Harvest States of
$73,500 for the three months ended December 31, 1999 are primarily legal
and accounting fees.
Interest expense of $179,041 increased $128,443 for the three months ended
December 31, 1999 compared to the three months ended December 31, 1998.
This increase is due to additional borrowings related to our acquisition of
Food Products Corporation in October 1999.
For the reasons discussed above, net income for the three months ended
December 31, 1999 was $84,924 compared to net income of $11,804 for the
same period in 1998.
Liquidity and Capital Resources
We financed our current activities primarily through cash generated from
operations and increased short-term and long-term borrowings.
Cash provided by operating activities during the three months ended
December 31, 1999 was $160,290 consisting of net income of $84,924,
depreciation and amortization of $357,705, of which $73,875 is amortization
of goodwill related to the acquisition of Food Products Corporation, and
deferred taxes of $42,000 offset by an increase in current assets of
$243,283 and a decrease in current liabilities of $81,056. Cash used in
investing activities was $6,109,356 consisting principally of the
acquisition of Food Products Corporation for $6,000,000 and the purchase of
equipment for $108,479. Cash provided by financing activities was
$3,263,386 consisting principally of a net increase in borrowings on the
bank line of credit of $1,935,000, a net increase in long-term borrowings
of $1,278,543, and net proceeds from the issuance of common stock of
$64,843.
At December 31, 1999, we had cash and cash equivalents of $15,916, working
capital of $(17,832), and availability under our bank line of credit of
$665,000. We believe that our cash flow from operations and bank credit
facilities will be sufficient to meet our operating requirements through
fiscal 2000.
In December 1999, we filed legal action against a customer, Rupari Food
Services, Inc., seeking damages which include payment for certain current
assets totaling $820,000 at December 31, 1999. In our opinion, the outcome
of this legal action will result in full payment for these assets. However,
if we are not successful, the result of this legal action would have a
material negative impact on our future results of operations and capital
resources.
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Seasonality
We have historically had higher sales in our third and fourth fiscal
quarters which end June 30, and September 30, respectively, than in our
first and second quarters. We believe that this is a result of seasonal
consumption patterns with respect to our 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
We do not enter into futures contracts as defined by SFAS 80. We do,
however, enter into purchase orders for delayed delivery of raw materials,
generally 30 days for raw materials other than flour and corn. We enter
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 our products. These purchase
orders are placed directly with the suppliers.
Outlook
Our plan in fiscal 2000 is to continue to grow the business by increasing
sales and expanding our presence in new geographic territories. We plan to
grow the business internally as well as through joint ventures and/or
continued acquisitions and through the development of new distribution
relationships.
On December 31, 1999, we entered into a merger agreement with Cenex Harvest
States. In connection with the merger, each issued and outstanding share of
our common stock with be converted into the right to receive a $1.41 in
cash. If the merger is completed, Cenex will own 100% of our outstanding
shares of common stock, and Cenex will merge Sparta with its wholly owned
subsidiary and we will be the surviving company. Upon completion of the
merger you will no longer be entitled to participate in the business of
Sparta as a shareholder or to vote on corporate matters of Sparta. All our
common and preferred stock will be owned by Cenex and it will have a 100%
interest in our net book value and earnings. Sparta will therefore become a
private company, and the public trading of our common stock will cease. As
a result, our shares will no longer be traded on the Nasdaq SmallCap Market
and we will cease filing periodic and annual reports under the Securities
Exchange Act of 1934. You will incur a taxable gain for federal income tax
purposes as a result of the receipt of cash in exchange for common stock if
the basis in the shares of common stock you own is less than $1.41.
After the merger, we anticipate that Cenex will continue its review of
Sparta and its assets, businesses, operations, properties, policies,
corporate structure and management and consider whether any changes would
be desirable in light of the circumstances then existing. Upon completion
of the merger, the directors of Cenex's wholly-owned subsidiary will be the
initial directors of Sparta and the officers of Sparta, with the exception
of Mr. Ayers, will remain Sparta's officers.
We anticipate that Cenex will continue to operate Sparta's business as a
manufacturer and distributor of tortillas and value-added tortilla products
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to the retail and foodservice industries. We understand that Cenex plans to
grow the business internally and through acquisition.
As owner of 100% of Sparta's common stock following the merger, Cenex will
be able to enjoy the benefits of Sparta's cash flow and earnings, if any,
and will be able to exercise full voting control over Sparta. Sparta's
current shareholders will no longer have the opportunity to continue their
interest in an ongoing company with potential for future growth or any of
the benefits discussed above. Any and all appreciation in the value of
Sparta will accrue solely to the benefit of Cenex.
The foregoing statements contained in this Outlook section of Management's
Discussion and Analysis or Plan of Operation, including statements relating
to the impact on our future operations and strategies that our planned
merger with Cenex may have on our future operations, and those relating to
our operating requirements through fiscal 2000 contained in the
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 (i) the seasonality of our sales and raw
materials cost fluctuations, which are discussed above; (ii) a decline in
the national sales growth of tortillas; (iii) a loss of any significant
customers and distributors; (iv) the failure of our sales force to achieve
its sales targets; (v) our inability to grow our tortilla business due to
competitive forces; (vi) our failure to complete our planned merger with
Cenex or any unanticipated change in how Cenex plans to operate Sparta
after the merger; (vii) an unfavorable outcome of the legal action against
Rupari Food Services, Inc.; and the following:
Reliance on Principal Customers. During fiscal 1999, sales to Crystal Farms
Refrigerated Distribution Company ("Crystal Farms") and Catalina Specialty
Foods, Inc. accounted for approximately 26% and 12%, respectively, of our
sales. Due to our acquisition Food Products Corporation in October 1999,
these percentages during fiscal 2000 have been significantly reduced.
However, Crystal Farms is still our largest single distributor of retail
products and has a significant impact on our growth in the retail market.
Although Crystal Farms operates under a distribution agreement, the loss of
Crystal Farms as a customer would have a material and adverse effect on our
sales, profitability, and future growth.
Competition. The Mexican-style food manufacturing and distribution industry
is highly competitive. We are 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
we are. We also are 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 our brand names. In addition,
competition for shelf space in retail grocery stores is intense. In the
food service market, we are competing with a number of regional and
national producers of Mexican-style food products. Many of these
competitors are better capitalized than we are and have established sales
organizations. No assurance can be given that we will be able to compete as
we expand our markets.
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SIGNATURE
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, thereunto duly authorized.
SPARTA FOODS, INC.
(Registrant)
By /s/ Joel P. Bachul
Joel P. Bachul
President and Chief Executive Officer
Date: April 25, 2000
