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 March 31, 2000.
___________ 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 May 9, 2000.
Transitional Small Business Disclosure Format: Yes _____ No X
<PAGE>
SPARTA FOODS, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets
at March 31, 2000 and September 30, 1999 3
Condensed Consolidated Statements of
Operations for the three-month and
six-month periods ended March 31, 2000
and 1999 4
Condensed Consolidated Statements of
Cash Flows for the six-month periods
ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial
Statements - March 31, 2000 7
Item 2. Management's Discussion and Analysis or 9
Plan of Operation
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPARTA FOODS, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31 September 30
2000 1999
-------------------------------------------
ASSETS (unaudited)
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 20,037 $ 2,701,596
Accounts receivable, less allowances of $35,000 and $30,000, respectively 2,190,240 1,235,531
Inventories:
Finished goods 703,420 461,105
Raw materials and packaging 823,318 1,005,016
Prepaid expenses and other assets 294,416 239,043
Deferred tax asset 38,000 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 4,069,431 5,722,291
- ------------------------------------------------------------------------------------------------------------------------------------
Property and Equipment 12,059,314 9,524,435
Less accumulated depreciation 3,869,508 3,593,581
- ------------------------------------------------------------------------------------------------------------------------------------
8,189,806 5,930,854
- ------------------------------------------------------------------------------------------------------------------------------------
Other Assets
Restricted cash 203,431 198,158
Litigation Claim Receivable 1,013,057 -
Covenants not-to-compete, less accumulated amortization of
$59,414 and $41,089, respectively 140,586 53,916
Goodwill, less accumulated amortization of $252,414 and $88,613, respectively
6,170,926 415,128
Deferred financing costs, less accumulated amortization of
$33,794 and $69,181, respectively 114,140 109,765
Deferred tax asset 115,000 190,000
Other 160,457 172,721
- ------------------------------------------------------------------------------------------------------------------------------------
7,917,597 1,139,688
- ------------------------------------------------------------------------------------------------------------------------------------
$ 20,176,834 $ 12,792,833
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Bank line of credit $ 1,495,000 $ -
Current maturities of long-term debt 1,331,841 1,190,241
Accounts payable 1,228,373 635,513
Accrued expenses 772,378 520,498
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,827,592 2,346,252
- ------------------------------------------------------------------------------------------------------------------------------------
Accrued Rent 119,679 96,515
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term Debt, less current maturities 6,090,18 1,475,760
- ------------------------------------------------------------------------------------------------------------------------------------
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
10,278,916 and 10,191,416 shares, respectively 102,789 101,914
Additional paid-in capital 7,164,118 7,100,150
Accumulated deficit (627,526) (827,758)
- ------------------------------------------------------------------------------------------------------------------------------------
9,139,381 8,874,306
- ------------------------------------------------------------------------------------------------------------------------------------
$ 20,176,834 $ 12,792,833
====================================================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
SPARTA FOODS, INC.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
For the three months For the six months
Ended Ended
March 31 March 31
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 7,019,585 $ 3,430,866 $ 13,565,321 $7,105,890
Cost of sales 4,547,100 2,545,010 8,832,938 5,138,873
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 2,472,485 885,856 4,732,383 1,967,017
Selling, general, and administrative expenses 2,052,085 1,095,849 3,948,293 2,138,960
Costs incurred related to a potential sale of the
Company 9,603 - 83,103 -
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 410,797 (209,993) 700,987 (171,943)
Other income (expense), net (26,806) 36,809 (1,031) 69,061
Interest expense (187,683) (48,443) (366,724) (99,041)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) before income tax 196,308 (221,627) 333,232 (201,923)
Provision for income tax 81,000 (4,900) 133,000 3,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 115,308 (216,727) 200,232 (204,923)
Preferred stock dividends (31,250) (31,250) (62,500) (62,500)
Net income (loss) available to common shareholders
$ 84,058 $ (247,977) $ 137,732 (267,423)
====================================================================================================================================
Earnings (Loss) per Share:
Basic $ 0.01 $ (0.03) $ 0.01 $ (0.03)
Diluted $ 0.01 $ (0.03) $ 0.01 $ (0.03)
====================================================================================================================================
Weighted average number of common shares outstanding:
Basic
Diluted 10,278,916 9,358,909 10,239,008 8,504,500
10,615,127 9,358,909 10,521,475 8,504,500
====================================================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
SPARTA FOODS, INC.
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(unaudited) For the six months
ended March 31
--------------
2000 1999
---- ----
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 200,232 $ (204,923)
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and Amortization 844,743 414,944
Loss on the sale of Equipment - 1,457
Deferred taxes 117,000 -
Changes in assets and liabilities, net of the effects from purchasing
Food Products Corporation and transfers to Litigation Claim
Receivable:
Accounts receivable (42,674) 114,782
Deposits receivable - (359,902)
Inventories (259,514) (370,775)
Prepaid expenses (55,373) (124,690)
Accounts payable and accrued expenses 427,219 115,031
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,231,633 (414,076)
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Acquisition of a tortilla manufacturer and distributor (6,000,000) -
Increase in Litigation Claim Receivable (222,521) -
(Increase) Decrease in restricted cash (5,273) 39,414
Purchases of equipment (195,571) (350,236)
Change in deposits and other assets 12,264 80,974
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (6,411,101) (229,848)
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net borrowings on bank line of credit 1,495,000 -
Increase (repayment) of Long-term Debt, net 953,066 (181,731)
Issuance of Common Stock, net of costs 64,843 2,154,601
Deferred financing costs (15,000) -
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,497,909 1,972,870
- ------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (2,681,559) 1,328,946
Cash and cash equivalents
Beginning of period 2,701,596 1,131,255
- ------------------------------------------------------------------------------------------------------------------------------
End of period $ 20,037 $ 2,460,201
==============================================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash payments for:
Interest $ 367,505 $ 100,503
Income taxes 12,500 -
Supplemental Schedule of Non Cash Investing and Financing Activities:
Transfers from Current Assets to Litigation Claim Receivable:
Accounts Receivable $ 135,751
Inventory 654,785
-------------------
Total 790,536
===================
</TABLE>
<PAGE>
Supplemental Schedule of Non Cash Investing and Financing Activities
(continued):
<TABLE>
<S> <C> <C>
Acquisition of Assets of Food Products Corporation:
Working Capital Acquired $ 4,163,674 -
Fair value of other assets acquired 6,009,967 -
Liabilities assumed (1,173,641) -
-------------------
Total 9,000,000 -
Less Seller Financed Note (3,000,000) -
===================
Cash Purchase Price (6,000,000) -
===================
=================================================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
Sparta Foods, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2000
(unaudited)
NOTE 1. GENERAL
The unaudited condensed consolidated balance sheet at March 31, 2000, the
condensed consolidated statements of operations for the three-month and
six-month periods ended March 31, 2000 and 1999, and the condensed
consolidated statements of cash flows for the six-month periods ended March
31, 2000 and 1999, include all adjustments which in our opinion 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, 2000.
The unaudited financial statements should be read in conjunction with the
audited financial statements for the years ended September 30, 1999 and
1998, contained in Form 10-KSB, as amended, for the year ended September
30, 1999 and Management's Discussion and Analysis or Plan of Operation
contained herein.
NOTE 2. ACQUISITION
On October 13, 1999, we acquired all assets and assumed certain liabilities
of Food Products Corporation, a tortilla manufacturer in Phoenix, Arizona,
for $9,000,000, plus assumed liabilities of $1,173,641. In connection with
the acquisition, we entered into a secured subordinated note with the
sellers. At March 31, 2000, $2,877,000 is outstanding on the seller note
and is payable in 20 quarterly installments of $183,470, including interest
at 8 percent. In addition, we entered into a new term loan and line of
credit with our bank, referred to below. The acquisition has been accounted
for as a purchase. The results of operations of Foods Products Corporation
are included in our financial statements since the date of acquisition.
Unaudited pro-forma results of operations for the three-month and six-month
periods ended March 31, 2000 and 1999 as though Food Products Corporation
had been acquired on October 1, 1998 follows:
three-months ended six-months ended
March 31, March 31,
2000 1999 2000 1999
- --------------------------------------------------------------------------------
Net Sales $7,019,585 $6,500,000 $13,915,000 13,200,000
Net Income (Loss) $115,308 ($95,000) $225,000 ($30,000)
Earnings (Loss) per share:
Basic $0.01 ($0.01) $0.01 $0.01)
Diluted $0.01 ($0.01) $0.01 ($0.01)
<PAGE>
NOTE 3. LITIGATION CLAIM RECEIVABLE
In January 1999, we entered into a five-year Supply Agreement with Rupari
Food Services, Inc. (a former customer) to supply private label food
products. The agreement details certain minimum order requirements and
payment terms, with which the customer is not in compliance. We notified
the customer of these events of default and after continued noncompliance
terminated the agreement. Upon termination, as detailed in the agreement,
the customer is required to pay for all remaining inventory and accounts
receivable, totaling approximately $790,000 as of March 31, 2000, and a
payment obligation totaling approximately $1,800,000 for not fulfilling
specific five-year minimum order requirements. The customer has denied
their responsibility, claiming we produced a sub-standard product. We have
filed legal action against the customer seeking all required payments
defined in the agreement plus any legal and other costs (totaling
approximately $223,000 as of March 31, 2000) incurred related to the
action. As of March 31, 2000, the inventory, accounts receivable, legal
fees incurred to date, and other costs incurred related to our legal action
have been combined and classified as "Litigation Claim Receivable" in the
Other Assets section of our balance sheet. Nothing has been recorded for
the five-year minimum order payment obligation to us by this customer. We
believe, the ultimate outcome of this matter will result, at a minimum, in
our recovery of our stated Litigation Claim Receivable.
NOTE 4. FINANCING AGREEMENTS
We have a line of credit and term loan with a bank, secured by certain
assets. Maximum borrowings under the line of credit are determined by a
borrowing base calculation or $3,000,000, whichever is less. At March 31,
2000, $1,495,000 is outstanding on the line of credit and our borrowing
base calculation totals approximately $2,350,000. The term loan has a
five-year term with monthly principal installments of $55,000. At March 31,
2000, $2,970,000 is outstanding on the term loan. Borrowings on the line of
credit bear interest at prime and on the term loan at prime plus 0.25
percent (prime was 9.0 percent at March 31, 2000). Interest payments are
due monthly. We are to maintain certain minimum net worth and debt service
coverage levels.
We have 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 March 31, 2000,
$1,575,000 is outstanding. We are to maintain certain net worth and debt
service coverage levels. In addition certain dividend restrictions are
stipulated and a debt service reserve fund has been established. The debt
service reserve fund will remain until all loan obligations have been
satisfied and is reflected on the consolidated balance sheet as restricted
cash.
NOTE 5. 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 and six-month
periods ended March 31, 2000 and 1999, income taxes have been computed at
the federal and state statutory rates.
<PAGE>
NOTE 6. PREFERRED STOCK
We have 2,500 shares of preferred stock outstanding which 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 us to repurchase the stock in the event of a change in control
authorized by the board of directors or if we are in default with certain
covenants defined in the agreement. The holders of the preferred stock are
entitled to receive, when and if declared by the board of directors, cash
dividends at the rate of 5% annually or, at our option, 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 semiannually on January 1st and July 1st. At March 31, 2000
cumulative and undeclared dividends total $262,500 or $105 per preferred
share.
On December 31, 1999, we entered into a merger agreement with Cenex Harvest
State Cooperatives subject to approval by our shareholders. If our
shareholders approve the merger, each share of our common stock will be
converted into $1.41 in cash and the features of the preferred stock will
change as the holder of the preferred shares (Harvest States Cooperatives)
then has the right to require us to repurchase the preferred stock. At that
time, the preferred stock will become redeemable preferred stock and will
be shown outside of equity on our balance sheet at its redemption value of
$1,000 per share plus unpaid dividends.
NOTE 7. SEGMENT AND PRODUCT LINE INFORMATION
We have two reportable segments: retail and food service. Our reportable
segments are strategic business units that offer principally the same
products but are distributed to different types of customers. They are
managed separately because each business requires different marketing
strategies. We evaluate performance based on sales and gross profit of the
respective segments and do not separately evaluate total assets, cash
flows, or other financial matters. Sales and gross profit by segment for
the three-month and six-month periods ended March 31, 2000 and 1999 are as
follows:
Retail Food Service Totals
- -------------------------------------------------------------------------------
For the three-months ended March 31,
Net Sales: 2000 $4,429,216 $2,590,369 $7,019,585
1999 $1,156,794 $2,274,072 $3,430,866
Gross Profit:2000 $1,628,101 $844,384 $2,472,485
1999 $372,000 $513,856 $885,856
For the six-months ended March 31,
Net Sales: 2000 $8,570,015 $4,995,306 $13,565,321
1999 $2,429,119 $4,676,771 $7,105,890
Gross Profit:2000 $3,085,195 $1,647,188 $4,732,383
1999 $825,750 $1,141,267 $1,967,017
<PAGE>
Our percentage of revenue by major product line for the three-month and
six-month periods ended March 31, 2000 and 1999 are as follows:
For the three-months ended For the six-months ended
March 31, March 31,
2000 1999 2000 1999
- --------------------------------------------------------------------------------
Tortillas 81% 80% 80% 80%
Corn tortilla chips 17% 16% 17% 16%
Salsa and all other products 2% 4% 3% 4%
NOTE 8. EARNINGS (LOSS) PER SHARE
We are complying with the "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. Diluted EPS for the
three-month and six-month periods ended March 31, 2000 and 1999 includes
336,211 and 282,467, respectively, weighted-average shares assumed issued
for options and warrants, and the conversion of preferred stock has not
been assumed due to an antidilutive impact. Diluted EPS for the three-month
and six-month periods ended March 31, 1999, does not include the assumed
conversion of option, warrants and preferred stock due to an antidilutive
impact.
NOTE 9. AGREEMENT WITH POTENTIAL ACQUIROR AND SPECIAL SHAREHOLDER MEETING
On December 31, 1999, we entered into an Agreement of Merger with Cenex
Harvest States Cooperatives (Cenex), who owns 92,500 shares of our common
stock and 2,500 shares of our preferred stock, convertible into 1,515,150
shares of common stock, and SF Acquisition Corp.(SF), a wholly-owned
subsidiary of Cenex. Completion of the merger is subject to shareholder
approval. Pursuant to the Agreement, SF will merge with Sparta, Sparta will
be the surviving company, and each issued and outstanding share of our
common stock will be converted into the right to receive $1.41 in cash,
without interest. A special shareholder meeting to consider and vote upon
the proposed merger with Cenex is scheduled for 9:30 a.m. on June 1,
2000 at the offices of Fredrikson & Byron, P.A.
<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., 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 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 $4,429,216 increased $3,272,422, 282.9%, our food
service net sales of $2,590,369 increased $316,297, 13.9%, and our overall
net sales of $7,019,585 increased $3,588,719, 104.6%, for the three months
ended March 31, 2000, as compared to the three months ended March 31, 1999.
Our retail net sales of $8,570,015 increased $6,140,896, 252.8%, our food
service net sales of $4,995,306 increased $318,535, 6.8%, and our overall
net sales of $13,565,321 increased $6,459,431, 90.9%, for the six months
ended March 31, 2000, as compared to the six months ended March 31, 1999.
Our increases in retail net sales and primarily in our overall net sales
are due to the acquisition, in October of 1999, of Food Products
Corporation. Retail net sales from our new facility in Arizona totaled
$2,867,375 or 79.9% of our overall increase in net sales for the three
months ended March 31, 2000 and $5,570,171 or 86.2% of our overall increase
in net sales for the six months ended March 31, 2000. Our increases in food
service net sales are caused primarily by a growth in sales to established
customers.
Gross profit, as a percentage of net sales, for the three months ended
March 31, 2000 compared to the three months ended March 31, 1999, was 36.8%
compared to 32.2% (increasing 4.6%) for retail sales, 32.6% compared to
22.6% (increasing 10.0%) for food service sales, and 35.2% compared to
25.8% (increasing 9.4%) for total sales. Gross profit, as a percentage of
net sales, for the six months ended March 31, 2000 compared to the six
months ended March 31, 1999, was 36.0% compared to 34.0% (increasing 2.0%)
for retail sales, 33.0% compared to 24.4% (increasing 8.6%) for food
service sales, and 34.9% compared to 27.7% (increasing 7.2%) for total
sales. These increases in gross margin percentage are 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. In addition, our gross margin
percentage on food service sales has increased due to more favorable
manufacturing efficiencies and raw material pricing.
<PAGE>
Selling, general and administrative expenses of 29.2% of net sales for the
three months ended March 31, 2000 decreased by 2.7% compared to 31.9% of
net sales for the three months ended March 31, 1999. Selling, general and
administrative expenses of 29.1% of net sales for the six months ended
March 31, 2000 decreased by 1.0% compared to 30.1% of net sales for the six
months ended March 31, 1999. These percentage decreases are caused
primarily by higher sales volume covering certain fixed administrative
costs. The costs incurred related to our potential merger with Cenex
Harvest States of $83,103 for the six months ended March 31, 2000 are
primarily legal and accounting fees.
Interest expense of $187,683 increased $139,240 for the three months ended
March 31, 2000 compared to the three months ended March 31, 1999. Interest
expense of $366,724 increased $267,683 for the six months ended March 31,
2000 compared to the six months ended March 31, 1999. These increases are
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
March 31, 2000 was $115,308 compared to a net loss of $216,727 for the same
period in 1999. The net income for the six months ended March 31, 2000 was
$200,232 compared to a net loss of $204,923 for the same period in 1999.
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 six months ended March 31,
2000 was $1,231,633 consisting of net income of $200,232, depreciation and
amortization of $844,743, deferred taxes of $117,000, and an increase in
accounts payable and accrued expenses of $427,219 offset by an increase in
current assets of $357,561. Cash used in investing activities was
$6,411,101 consisting principally of the acquisition of Food Products
Corporation for $6,000,000, an increase in litigation claim receivable of
$222,521, and the purchase of equipment for $195,571. Cash provided by
financing activities was $2,497,909 consisting principally of a net
increase in borrowings on the bank line of credit of $1,495,000, a net
increase in long-term borrowings of $953,066, and net proceeds from the
issuance of common stock of $64,843.
At March 31, 2000, we had cash and cash equivalents of $20,037, working
capital of $(758,161), and availability under our bank line of credit of
$855,000. 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 incurred
costs totaling $1,013,057 at March 31, 2000 (classified as Litigation Claim
Receivable on our balance sheet). We believe, the outcome of this legal
action will result in full payment for these costs. 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.
<PAGE>
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 or
our common stock will 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 100 %
interest in our net book value and earnings. Sparta will therefore become a
private company, and public trading of our common stock will cease. As a
result, our shares will no longer be traded on the Nasdaq Small Cap 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, business, 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
to retail and foodservice industries. We understand that Cenex plans to
grow the business internally and through acquisition.
<PAGE>
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
benefits discussed above. Any and all appreciation in value of Sparta will
accrue solely to the benefit of Cenex.
As mentioned in Note 3 and Management's Discussion and Analysis or Plan of
Operation, we believe the ultimate outcome of the legal action against
Rupari Food Service, Inc. will result, at a minimum, in our recovery of our
stated "Litigation Claim Receivable" (see the Consolidated Balance Sheet).
However, the outcome of this litigation is subject to numerous risks and
uncertainties which may result in an unfavorable outcome. The foregoing
statements contained in this Outlook section of Management's Discussion and
Analysis or Plan of Operation and those relating to our operating
requirements and the sufficiency of our cash flow from operations and our
bank line-of-credit to meet 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) the failure to complete the
proposed merger with Cenex due to not obtaining a majority vote of our
shareholders; (vii) an unfavorable outcome of the legal action against a
former major customer; 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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11 Computation of Earnings (Loss) 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 March 31, 2000.
<PAGE>
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: May 12, 2000 By: /s/ Joel P. Bachul
Joel P. Bachul,
President and Chief Executive Officer
Dated: May 12, 2000 By: /s/ A. Merrill Ayers
A. Merrill Ayers
Treasurer, Secretary and
Chief Financial Officer
Exhibit 11
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(unaudited)
<TABLE>
<CAPTION>
For the three months For the six months
Ended Ended
March 31 March 31
----------------------------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Basic Earnings (Loss) per share:
<S> <C> <C> <C> <C>
Net income (loss) $ 115,308 $ (216,727) $ 200,232 $ (204,923)
Less Preferred Stock Dividends 31,250 31,250 62,500 62,500
------ ------ ------ ------
Income (Loss) available to Common
Stockholders $84,058 (247,977) 137,732 (267,423)
------- --------- ------- ---------
Weighted-average number of Common shares
outstanding 10,278,916 9,358,909 10,239,008 8,504,500
---------- --------- ---------- ---------
Basic Earnings (Loss) per share $ 0.01 $ (0.03) $ 0.01 $ (0.03)
- ------------------------------- -
Diluted Earnings (Loss) per share:
Income (Loss) available to Common
Stockholders 84,058 (247,977) 137,732 (267,423)
Add back Preferred Stock Dividends Note Note Note Note
---- ----- ---- ----
Income (Loss) available to Common and
Common Equivalent Stockholders 84,058 (247,977) 137,732 (267,423)
------ --------- ------- ---------
Weighted-average number of Common shares
outstanding 10,278,916 9,358,909 10,239,008 8,504,500
Add excess of shares issuable for the assumed
exercise of options and warrants over the number
of shares possible of repurchase using the proceeds
from the exercise of such options and warrants at
the average market price (treasury stock method) 336,211 Note 282,467 Note
---- ----
Weighted-average number of common and
common equivalent shares outstanding
10,615,127 9,358,909 10,521,475 8,504,500
---------- --------- ---------- ---------
Diluted Earnings (Loss) per share $ 0.01 $ (0.03) $ 0.01 $ (0.03)
- ---------------------------------
</TABLE>
Note
For the three-month and six-month periods ended March 31, 2000 and 1999,
diluted EPS does not include the assumed conversion of preferred stock due
to an antidilutive impact. In addition, for the three-month and six-month
periods ended March 31, 1999 diluted EPS does not include the assumed
conversion of options and warrants due to an antidilutive impact
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 20,037
<SECURITIES> 0
<RECEIVABLES> 2,225,240
<ALLOWANCES> 35,000
<INVENTORY> 1,526,738
<CURRENT-ASSETS> 4,069,431
<PP&E> 12,059,314
<DEPRECIATION> 3,869,508
<TOTAL-ASSETS> 20,176,834
<CURRENT-LIABILITIES> 4,827,592
<BONDS> 6,090,182
0
2,500,000
<COMMON> 102,789
<OTHER-SE> 7,164,118
<TOTAL-LIABILITY-AND-EQUITY> 20,176,834
<SALES> 13,565,321
<TOTAL-REVENUES> 13,565,321
<CGS> 8,832,938
<TOTAL-COSTS> 8,832,938
<OTHER-EXPENSES> 4,031,396
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 366,724
<INCOME-PRETAX> 333,232
<INCOME-TAX> 133,000
<INCOME-CONTINUING> 200,232
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 200,232
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
