SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-13852
GRIST MILL CO.
(Exact name of registrant as specified in charter)
Delaware 41-0974681
(State of Incorporation) (IRS Employer Identification No.)
21340 HAYES AVENUE, LAKEVILLE, MINNESOTA 55044-0430
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 469-4981
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock par value $.10 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. __X__
As of July 31, 1997, 6,723,530 common shares were outstanding, and the aggregate
market value of the common shares (based upon the last price of such stock as
reported by the Nasdaq National Market) of Grist Mill Co. held by non-affiliates
was approximately $46,224,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended May 31, 1997 are incorporated by reference in Parts II and IV.
Portions of the Proxy Statement of Registrant for its 1997 Annual Meeting of
Shareholders are incorporated by reference in Part III of this report.
<PAGE>
PART I
ITEM I. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS.
Grist Mill Co. ("Grist Mill" or the "Company") manufactures and markets private
label, or store brand grocery products, as well as value priced branded food
grocery products. Most of the Company's products are targeted toward consumers
who demand "value pricing", the combination of high quality with low prices. In
the store brand market, the Company produces value-priced products for sales
under customers' store names. The Company's customers include virtually all of
the major U.S. grocery retailers and wholesalers.
The Company was incorporated in 1971 as a Delaware corporation at which time it
acquired two subsidiaries (i) Grist Mill, Inc., which had its origins as a sole
proprietorship formed around 1917 and was one of the oldest manufacturers of
natural food in the country; and (ii) Enright Natural Food Co., which had its
origins as a sole proprietorship in the specialty health food business.
Following incorporation, the Company's primary emphasis was as a manufacturer of
store branded granola cereals. The Company's product line broadened in the
1980's to include graham cracker pie crusts, granola bars, and fruit snacks. In
1994 the Company completed a manufacturing facility for the production of flaked
ready-to-eat cereals and has since broadened its ready-to-eat product line to
include a wide variety of ready-to-eat cereal products. In 1994 fruit-filled
cereal bars were added to the Company's product offerings. And in 1996 the
Company introduced fat free fruit-filled cereal bars and crisp rice marshmallow
bars. Additionally, the Company contract manufactures products for other branded
food companies.
In January 1990, the Company acquired Grist Mill Confections, a Danville,
Illinois-based supplier of the Company's fruit snacks.
The Company's executive offices are located at 21340 Hayes Avenue, P.O. Box 430,
Lakeville, Minnesota 55044-0430. The corporate office telephone number is (612)
469-4981.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates primarily in one business segment - the development,
production, and marketing of various food products. The same production and
distribution personnel and facilities, and the same support services are
employed in the production of all products.
<PAGE>
(c) NARRATIVE DESCRIPTION OF BUSINESS
Many consumers are cost-conscious in their grocery purchasing decisions, yet
still demand high quality in the food products they purchase. In response to
such demand, many food retailers choose to afford to their customers
value-priced products as alternatives to higher priced brand name products.
Value-priced food products offer considerable price savings to the consumer
while providing comparable taste, texture and quality of higher priced products,
which are generally sold under a manufacturer's brand name and are supported by
advertising media. Many retailers provide products under their store names as
the value-priced alternative. Retailers can purchase and sell store brand
products at lower prices because such products are not generally supported by
widespread media advertising, as are their branded counterparts. In calendar
year 1996, unit market share for store brands in U.S. grocery stores was 20.2%,
up from 19.4% in 1995.
The Company's primary strategy is to identify market opportunities where
high-visibility brand name products are being sold successfully and to develop
high quality products of comparable appearance, taste, and texture for sale at
lower prices. By developing these value-priced products for existing high volume
markets, the Company avoids many of the front-end risks of product development
and the expenses associated with advertising and introducing products with
unknown demand. The Company believes it has positioned itself to take advantage
of the opportunities that the market for value-priced food products presents.
For customers offering their own label, the Company makes its products available
on a store brand basis. To the extent that grocery retailers do not offer a
store brand, the Company has provided the Grist Mill brand to be sold as a
value-priced alternative.
The Company believes that its strengths consist of superior overall product
quality, close relationships with major grocery retailers, low manufacturing
overhead, a strong national broker network, and an ability to react quickly to
changing market conditions.
CUSTOMERS
The Company's customers include national and regional supermarket retailers and
wholesalers, such as:
Albertson's, Inc.
American Stores Company
Associated Wholesale
Grocers, Inc.
Bi-Lo, Inc.
Bruno's, Inc.
C&S Wholesaler Grocers,
Inc.
Dominick's Finer Foods, Inc.
Fleming Companies, Inc.
Fred Meyer, Inc.
Giant Eagle, Inc.
Giant Food, Inc.
Grand Union Company
Great Atlantic & Pacific Tea Co.
Hannaford Bros. Company
H.E. Butt Grocery Company
Kroger Co.
Marsh Supermarkets, Inc.
Nash Finch Company
Ralphs Grocery Company
Roundy's
Safeway, Inc.
Shaw's Supermarkets, Inc.
Spartan Stores, Inc.
Stater Bros. Markets
Stop & Shop Supermarket Co.
SUPERVALU
TOPCO Associates, Inc.
Vons Companies, Inc.
Wakefern Food Corporation
Wal-Mart Supercenters
Winn Dixie Stores, Inc.
<PAGE>
FRUIT SNACKS
The Company estimates that the national store brand fruit snack market is
approximately $325 million in annual retail revenues. Since 1985, the Company
has marketed fruit snacks, first on a store brand basis and subsequently under
the Grist Mill brand and other Company-owned brand names as value-priced
alternatives to brand name products. Today the Company markets fruit snacks in
several shapes including Dinosaurs, Sharks, Pocahontas, Aladdin, and Lion's
Kingdom.
READY-TO-EAT CEREALS
The Company markets a line of ready-to-eat cereals consisting of various flaked,
extruded, and granola cereals. The Company developed its business in the granola
cereal market over 20 years ago by manufacturing and marketing granola cereals.
In 1995, the Company added low fat granola varieties.
In 1994 the Company completed installation of a new cereal production system and
introduced a total of six new cereal items. The cereal business expanded further
in 1995 with the installation of extrusion cereal processes which extended the
Company's line of pre-sweetened cereal products. The Company introduced a
variety of new cereals in fiscal 1995, 1996 and 1997 as it became a full line
supplier of ready-to-eat cereals for its store brand customers.
Grist Mill's ready-to-eat cereal offerings now include 21 products which are
similar to major branded ready-to-eat cereal products. The Company also markets
a line of 5 unique premium cereals for sale to its store brand customers.
The overall U.S. ready-to-eat cereal category totals approximately $7.5 billion
in annual grocery retail sales. Store brands currently comprise approximately 7%
or $525 million of these sales. Grist Mill markets its cereal products primarily
under store brands.
WHOLESOME SNACK BARS AND PIE CRUSTS
The Company markets wholesome snack bars, including several varieties of granola
bars, low fat and non-fat fruit-filled cereal bars and crisp rice marshmallow
bars.
The Company markets regular and low fat chewy granola bars in a variety of
flavors, primarily under store brand names. The low fat bar line was introduced
in fiscal 1996. Grist Mill is currently the dominant private label supplier of
granola bars to the store brand market.
Late in 1994 the Company made its initial shipments of "Fruit & Grain" bars, a
line of fruit-filled cereal bars marketed exclusively under store brand names.
In 1996 a no-fat version of this bar was introduced. Also in fiscal 1996, the
Company introduced a crisp rice marshmallow bar product. Grist Mill is the
dominant private label supplier of these products to retailers.
Grist Mill entered the preformed graham cracker pie crust market as a store
brand supplier in
<PAGE>
1982 and is currently the store brand market leader for this product.
CONTRACT MANUFACTURING
The Company's reputation for being an efficient manufacturer of high quality
food products has led to opportunities for Grist Mill to contract manufacture
food products for other companies. During 1994, the Company established a
contract manufacturing relationship with a major branded packaged foods company.
Sales to this customer were 18% and 29% of consolidated sales for fiscal 1997
and 1996, respectively. During fiscal 1997, this customer experienced a decline
in consumer demand for its products. This resulted in a decline of contract
manufacturing of approximately 30% in 1997 compared to 1996. Management believes
that contract manufacturing sales will continue to decline in fiscal 1998.
NEW PRODUCT DEVELOPMENT
The Company's development efforts center on finding niche product opportunities
that have proven consumer market appeal and are price sensitive. The Company
also works with its store brand customers responding to their new product
development needs. As these opportunities have arisen, the Company has acted
quickly to develop a comparable product, which it then markets against the
higher priced competition. This strategy allows the Company to avoid many of the
front-end risks of research and development and the expenses associated with
advertising and introducing products with unknown demand.
SALES, MARKETING AND DISTRIBUTION
The Company markets its products to virtually all of the major U.S. grocery
retailers and wholesalers. The Company believes that its ability to sell
additional grocery products is enhanced by its reputation for quality,
value-priced products and its commitment to store brand and value-priced product
manufacturing and marketing.
The Company has developed for its customers more than 750 labels. Such labels
are trademarks of customers and have gained significant recognition among
consumers. The Company believes that its ability to develop unique and
recognizable packaging of its products is a valuable service to its store brand
customers.
The Company promotes its products primarily through in-store promotions with its
customers, rather than through national advertising, and assists its customers
in positioning the Company's store brand products to compete effectively with
brand name alternatives.
The Company sells its products through food brokers with which it has developed
strong relationships. The Company has a national sales force consisting of six
regional sales managers. This sales force handles the relationships with brokers
who sell the Company's products to retailers and wholesalers.
RAW MATERIALS
The Company purchases grains, fruit and fruit concentrates, sweeteners,
chocolate, nutmeats
<PAGE>
and packaging materials from a variety of sources. Typically, the Company enters
into three to twelve month fixed price contracts for these items. The Company's
profitability can be impacted by changes in market prices for ingredients and
packaging.
MANUFACTURING OPERATIONS AND FACILITIES
All Grist Mill products are manufactured in Company-owned and operated
facilities located in Lakeville, Minnesota and Danville, Illinois. A diverse
number of processing operations are conducted at the Lakeville facility,
including: a line for baking cereal and grain-based products; lines for the
cooking, flaking, extruding, and baking of ready-to-eat cereals; three lines for
the manufacturing of bar-type products including granola, fruit-filled and crisp
rice marshmallow bars (two of these lines have the capability of chocolate
enrobing, and one has caramel manufacturing capabilities); a line for producing
pie crusts; and a number of packaging machinery lines with the capability for
form, fill and seal operations, and cartoning and casing. In 1997, the Company
expanded its corporate office facilities in Lakeville and began expanding its
cereal manufacturing capacity. The Company owns twelve acres of land contiguous
to the Lakeville facility which could be used for further expansion.
The Company's acquisition of Grist Mill Confections, Inc. (formerly Tempo
Confections) in January 1990 enabled the Company to bring fruit snack
manufacturing in-house, increasing the flexibility of such manufacturing. Prior
to the acquisition, the Company's fruit snack products were being manufactured
by third party suppliers. The Danville facility produces product using a starch
molding process, and also has a production system for enrobing of confection
centers with sugar or other materials. The facility's packaging equipment
consists of machinery for form, fill and seal of its products in bulk.
COMPETITION
Producers of major brand name products (mostly companies much larger than Grist
Mill) compete for shelf space with producers of value-priced products
manufactured by the Company. The Company operates in a highly competitive and
rapidly changing environment within which there are many manufacturers of food,
snack, and confectionery products. General Mills, Inc., Farley Foods USA and
Ferrerra Pan Candy Company are the Company's primary competitors in the fruit
snack area. In the ready-to-eat cereal market, Kellogg Company and General
Mills, Inc. are the overall market share leaders and Ralcorp Holdings, Inc. and
Malt-O-Meal Company are the largest competitors in store brand ready-to-eat
cereal products. In the wholesome bar category, Kellogg's, General Mills,
Nabisco and Quaker Oats each have a significant market presence. The Company's
primary competitor in the pie crust market is Keebler Co. Other value-priced
producers competing in the Company's product lines include McKee Baking, Sovex
Natural Foods, Inc., Angela Marie's, Inc. and Brach & Brock Confections, Inc.
Contract manufacturing and grain-based ingredient sales are specialized services
which the Company provides on an order-by-order basis. The Company is aware of
other companies which have the production capabilities necessary to compete with
the Company in these areas.
<PAGE>
EMPLOYEES
As of May 31, 1997 the Company employed 652 permanent full-time employees, of
which 116 were management, sales and administration and 536 were production.
Depending on production needs, the Company also uses temporary employees. During
the year ended May 31, 1997, the number of temporaries fluctuated between 100
and 200. With the exception of its collective bargaining agreement covering
approximately 40 production employees through the Bakery Workers Union Local No.
455, Danville, Illinois, the Company does not have collective bargaining
agreements with its personnel. The Company believes that its employee relations
are good.
ITEM 2. PROPERTIES
The Company's headquarters, Lakeville production and warehousing facility, and
administrative offices are located in an industrial park 20 miles south of
Minneapolis in Lakeville, Minn. The production and distribution facility in
Lakeville is 221,000 square feet. The administrative offices occupy 22,000
square feet. The Company also utilizes four third party regional distribution
centers to store its inventory.
The Danville production facility and administrative offices are located in
Danville, Ill., which is 130 miles south of Chicago, Ill. The plant has 120,000
square feet of production and administrative office space.
The Company also owns approximately 18 acres and 12 acres of vacant land
contiguous to its Danville and Lakeville facilities, respectively. Additionally,
the Company owns 22.5 acres of vacant land in Christian County, KY.
See Note D to the financial statements regarding property pledged as collateral
against mortgages payable.
ITEM 3. LEGAL PROCEEDINGS
There were no claims or pending litigation that, in the opinion of management,
would have a significant effect on the Company's financial position, results of
operations, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended May 31, 1997.
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Principal Occupation and Business
Name Age Experience for Past Five Years
- ------------------- --- ------------------------------
Ronald K. Zuckerman 55 Chairman of the Board since 1975; Chief
Executive Officer from 1975 to 1993;
Chief Financial Officer 1975 to 1992.
Glen S. Bolander 51 President and Chief Executive Officer
since 1993; President and Chief
Operating Officer from 1988 to 1993;
President 1987 to 1988; Executive Vice
President 1985 to 1987.
Michael J. Cannon 40 Vice President-Sales since 1994; Vice
President-Core Products Group from 1993
to 1994; Vice President-Grocery 1988 to
1993.
Daniel J. Kinsella 39 Vice President, Chief Financial Officer
and Treasurer since 1992; Director of
Finance and Treasurer 1990 to 1992.
Michael A. Parent 40 Vice President Operations since 1996;
Director of Operations Services 1994 to
1996; Manufacturing Controller 1991 to
1994.
Thomas L. Traub 39 Vice President Human Resources since
1997; Human Resources Director 1996 to
1997; Human Resources Manager 1995 to
1996; Human Resources Manager, General
Mills Inc. 1990 to 1995.
All officers hold office for one year or until their successors are designated.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SECURITIES AND RELATED STOCKHOLDER MATTERS
The information required in Item 5 is contained on page 24 of the Company's
annual report to shareholders for the year ended May 31, 1997 and is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required in Item 6 is contained on page 12 of the Company's
annual report to shareholders for the year ended May 31, 1997 and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required in Item 7 is contained on pages 13 and 14 of the
Company's annual report to shareholders for the year ended May 31, 1997 and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required in Item 8 is contained on pages 15 through 24 of the
Company's annual report to shareholders for the year ended May 31, 1997 and is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in Item 10 is contained in the Company's definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after the
close of the fiscal year for which this report is filed and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required in Item 11 is contained in the Company's definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after the
close of the fiscal year for which this report is filed and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in Item 12 is contained in the Company's definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after the
close of the fiscal year for which this report is filed and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in Item 13 is contained in the Company's definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after the
close of the fiscal year for which this report is filed and is incorporated
herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
Page
1. Financial statements:
Reference is made to the table of contents to financial
statements and schedules hereinafter contained 15
2. Financial schedules:
Reference is made to the table of contents to financial
statements and schedules hereinafter contained for all
other financial statement schedules 15
<PAGE>
3. Exhibits:
<TABLE>
<CAPTION>
Item No. Item Method of Filing
- -------- ------------------------------------------- ---------------------------------------------
<S> <C> <C>
3(a) Certificates of Incorporation of Grist Mill Incorporated by reference to Exhibit
Co., as amended. 3(a) to Grist Mill Co.'s annual report
on Form 10-K for the year ended May 31, 1989.
3(b) Certificates of Incorporation of Grist Mill Incorporated by reference to Exhibit
Co., as amended October 4, 1996. 3 to Grist Mill Co.'s quarterly report
on Form 10-Q for the quarter ended
November 30, 1996.
3(c) By-laws of Grist Mill Co., as amended. Filed herewith.
4(a) $4,000,000 Revolving Credit Agreement Incorporated by reference to Exhibit
dated October 31, 1996. 4 to Grist Mill Co's. quarterly report
on Form 10-Q for the quarter ended
November 30, 1996.
4(b) Rights Agreement dated May 22, 1996 Incorporated by reference to Exhibit
between the Company and Norwest 4 to Grist Mill Co.'s report on Form
Bank Minnesota N.A. as Rights Agent 8-A dated June 6, 1996.
4(c) $5,900,000 Real Estate Mortgage and Filed herewith.
Promissory Note dated May 29, 1997.
10(a) Grist Mill Co. 1986 Non-Qualified Stock Incorporated by reference to
Option Plan as amended December 21, Exhibit 1-(b) to Grist Mill Co.'s
1988 to increase the number of options Form 10-K for the year ended
that may be granted under the plan to May 31, 1989.
800,000.
10(b) Amendment No. 4 to Grist Mill Co. 1986 Incorporated by reference to
Non-Qualified Stock Option Plan dated Grist Mill Co.'s Registration
August 26, 1991, to increase the number Statement on Form S-8 dated
of options which may be granted under August 29, 1996
the plan to 900,000
10(c) Amendment No. 5 to Grist Mill Co. 1986 Incorporated by reference to
Non-Qualified Stock Option Plan dated Grist Mill Co.'s Registration
October 12, 1993 to increase the number Statement on Form S-8 dated
of options that may be granted under August 29, 1996.
the plan to 1,700,000
<PAGE>
Item No. Item Method of Filing
- -------- ------------------------------------------- ---------------------------------------------
10(d) Amendment No. 6 to Grist Mill Co. 1986 Incorporated by reference to
Non-Qualified Stock Option Plan dated Grist Mill Co.'s Registration
September 26, 1995 to increase the Statement on Form S-8 dated
number of options that may be granted August 29, 1996.
under the plan to 2,500,000
10(e) Employment Agreement with Glen S. Incorporated by reference to
Bolander. Exhibit 10(d) to Grist Mill Co.'s annual report
on Form 10-K for the year ended May 31, 1994.
10(f) Amendment No. 1 to Employment Incorporated by reference to
Agreement with Glen S. Bolander. Exhibit 10(e) to Grist Mill Co.'s annual report on
Form 10-K for the year ended May 31, 1994.
10(g) Split Dollar Insurance Agreement: Incorporated by reference to
Glen S. Bolander Beneficiary. Exhibit 10(f) to Grist Mill Co.'s annual report
on Form 10-K for the year ended May 31, 1994.
10(h) Employment Agreement with Incorporated by reference to
Ronald K. Zuckerman. Exhibit 10(g) to Grist Mill Co.'s
annual report on Form 10-K for
the year ended May 31, 1994.
10(i) Amendment No. 1 to Employment Filed herewith.
Agreement with Ronald K. Zuckerman.
11 Computation of earnings per share. Filed herewith.
13 Annual Report to Shareholders. Those portions of Annual Report to Shareholders
expressly incorporated by reference herein,
which shall be deemed filed with the Commission.
21 Subsidiaries of the Registrant. Filed herewith.
23 Consent of Independent Auditors. Filed herewith.
27 Financial Data Schedule. Filed herewith.
</TABLE>
<PAGE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter ended May
31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: August 25, 1997 GRIST MILL CO.
/s/ GLEN S. BOLANDER
---------------------------------
Glen S. Bolander
President, Chief Executive
Officer and a Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Dated
- --------- ----- -----
<S> <C> <C>
/s/ Ronald K. Zuckerman Chairman of the Board August 25, 1997
- --------------------------- and a Director
Ronald K. Zuckerman
/s/ Glen S. Bolander President, Chief Executive August 25, 1997
- --------------------------- Officer and a Director (Principal
Glen S. Bolander Executive Officer)
/s/ Daniel J. Kinsella Vice President, Chief Financial August 25, 1997
- --------------------------- Officer, Secretary and Treasurer
Daniel J. Kinsella (Principal Financial and Accounting
Officer)
/s/ Charles H. Perlman Director August 25, 1997
- ---------------------------
Charles H. Perlman
/s/ Roger L. Weston Director August 25, 1997
- ---------------------------
Roger L. Weston
</TABLE>
<PAGE>
GRIST MILL CO.
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
YEARS ENDED MAY 31, 1997, 1996 AND 1995.
TABLE OF CONTENTS
Page
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . (A)
Consolidated Statements of Earnings . . . . . . . . . . . . . . . . . . . . (A)
Consolidated Statements of Financial Position . . . . . . . . . . . . . . . (A)
Consolidated Statements of Changes in Shareholders' Equity. . . . . . . . . (A)
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . (A)
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . (A)
Schedule II - Valuation and Qualifying Accounts and Reserves. . . . . . . . 16
Exhibit 11 - Computations of Earnings Per Share . . . . . . . . . . . . . . 17
Exhibit 21 - Grist Mill Co. List of Subsidiaries. . . . . . . . . . . . . . 18
(A) Item is contained in the Company's annual report to shareholders for
the year ended May 31, 1997 and is incorporated herein by reference.
Schedules not listed above have been omitted because they are either not
applicable or the required information has been provided in the consolidated
financial statements or notes thereto.
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
GRIST MILL CO.
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING CHARGED TO CHARGED TO BALANCE AT
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS END OF PERIOD
----------- --------- -------- ----- ---------- -------------
<S> <C> <C> <C> <C> <C>
Accumulated amortization of
deferred charges, principally
package design:
Year ended May 31, 1997 $1,479,000 $939,000 $(927,000) (1) $1,491,000
Year ended May 31, 1996 1,453,000 605,000 (579,000) (1) 1,479,000
Year ended May 31, 1995 988,000 479,000 ( 14,000) (2) 1,453,000
</TABLE>
(1) Write-off of fully amortized package design.
(2) Write-off of fully amortized trademark.
EXHIBIT 3(c)
BY-LAWS
OF
GRIST MILL CO,
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office shall be
established and maintained at the office of the United States Corporation
Company, in the City of Dover, in the County of Kent, in the State of Delaware,
and said corporation shall be the registered agent of this corporation in charge
thereof.
SECTION 2. OTHER OFFICES. The corporation may have other offices,
either within or without the State of Delaware, at such place or places as the
Board of Directors may from time to time appoint or the business of the
corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS. Annual meetings of stockholders for the
election of directors and for such other business as may be stated in the notice
of the meeting, shall be held at such place, either within or without the State
of Delaware, and at such time and date as the Board of Directors, by resolution,
shall determine and as set forth in the notice of the meeting. In the event the
Board of Directors fails to so determine the time, date and place of meeting the
annual meeting of the stockholders shall be held at the office of the
corporation in Chicago, Illinois on the third Thursday in August at 2:00 P.M.
If the date of the annual meeting shall fall upon a legal holiday, the
meeting shall be held on the next succeeding business day. At each annual
meeting the stockholders entitled to vote shall elect a Board of Directors and
they may transact such other corporate business as may be brought before the
meeting.
SECTION 2. OTHER MEETINGS. Meetings of stockholders for any purpose
other than the election of directors may be held at such time and place, within
or without the State of Delaware, as shall be stated in the notice of the
meeting.
SECTION 3. VOTING. Each stockholder entitled to vote in accordance with
the terms of the Certificate of Incorporation and in accordance with the
provisions of these By-Laws shall be entitled to one vote, in person or by
proxy, for each share of stock entitled to
<PAGE>
vote held by such stockholder, but no proxy shall be voted after three years
from its date unless such proxy provides for a longer period. Upon the demand of
any stockholder, the vote for directors and the vote upon any question before
the meeting, shall be by ballot. Directors shall be elected by a plurality of
the votes cast in respect of the shares present in person or represented by
proxy at the meeting and entitled to vote on the election of directors. For
example, if there are five directors to be elected, the directors who will be
declared elected will be those five nominees who receive the most votes
irrespective of whether such number of votes represents a majority of the shares
present. All other questions and matters to be voted on by stockholders shall,
except as otherwise required by law or the Certificate of Incorporation, be
decided by the affirmative vote of the majority of the votes cast.
A complete list of the stockholders entitled to vote at the ensuing
election, arranged in alphabetical order, with the address of each, and the
number of shares held by each, shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 4. QUORUM. Except as otherwise required by law, by the
Certificate of Incorporation or by these By-Laws, the presence, in person or by
proxy, of stockholders holding a majority of the stock of the corporation
entitled to vote shall constitute a quorum at all meetings of the stockholders.
In case a quorum shall not be present at any meeting, a majority in interest of
the stockholders entitled to vote thereat, present in person or by proxy, shall
have power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until the requisite amount of stock entitled to
vote shall be present. At any such adjourned meeting at which the requisite
amount of stock entitled to vote shall be represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed; but only those stockholders entitled to vote at the meeting as
originally noticed shall be entitled to vote at any adjournment or adjournments
thereof.
SECTION 5. SPECIAL MEETINGS. Special meetings of the stockholders for
any purpose or purposes may be called by the President or Secretary, and shall
be called by them upon a requisition in writing therefor, stating the purpose or
purposes thereof, delivered to the President or Secretary, signed by a majority
of the directors or by twenty-five percent, in interest of the stockholders
entitled to vote, or by resolution of the directors.
SECTION 6. NOTICE OF MEETINGS. Written notice, stating the place, date
and time of the meeting, and the general nature of the business to be
considered, shall be given to each stockholder entitled to vote thereat at
his/her address as it appears on the records of the corporation, not less than
ten nor more than fifty days before the date of the meeting.
SECTION 7. ACTION WITHOUT MEETING. Except as otherwise provided by the
Certificate of Incorporation, whenever the vote of stockholders at a meeting
thereof is required
<PAGE>
or permitted to be taken in connection with any corporate action by any
provisions of the statutes or of the Certificate of Incorporation or of these
By-Laws, the meeting and vote of stockholders may be dispensed with, if all the
stockholders who would have been entitled to vote upon the action if such
meeting were held, shall consent in writing to such corporate action being
taken.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND TERM. The number of directors shall be four (4).
The directors shall be elected at the annual meeting of the stockholders and
each director shall be elected to serve until his/her successor shall be elected
and shall qualify.
SECTION 2. RESIGNATION. Any director, member of a committee or other
officer may resign at any tune. Such resignation shall be made in writing, and
shall take effect at the time specified therein, and if no time be specified, at
the time of its receipt by the President or Secretary. The acceptance of a
resignation shall not be necessary to make it effective.
SECTION 3. VACANCIES. If the office of any director, member of a
committee or other officer becomes vacant, the remaining directors in office,
though less than quorum by an affirmative vote of a majority thereof, whether or
not constituting a quorum, may fill such vacancy for the unexpired term, or if
there are not remaining directors, by affirmative vote of a majority of the
stockholders. If at any time the number of directors shall be increased, the
additional directors to be elected may be elected by the directors then in
office by the affirmative vote of a majority thereof at a regular meeting or at
a special meeting called for that purpose to serve until the next election of
directors.
SECTION 4. ELECTION OF DIRECTORS. The Directors of the Corporation
shall be elected at the annual meeting of the stockholders or at any meeting of
the stockholders held in lieu of such annual meeting, which meeting, for the
purposes of these By-Laws, shall be deemed the annual meeting.
SECTION 5. REMOVAL OF DIRECTORS. Any Director may be removed from
office, with or without cause (1) at any annual or special meeting, whether or
not such meeting is called expressly for that purpose, by the affirmative vote
of the holders of a majority of the shares then entitled to vote at an election
of directors, or (2) at any time, without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by stockholders having not less than the minimum number of votes
that would be necessary to authorize such action at a meeting at which all
shares entitled to vote thereon were present and voted. Within ten (10) days
after obtaining such authorization, notice summarizing the material features of
the authorized action shall be given to those stockholders who have not
consented in writing.
<PAGE>
SECTION 6. NOTICE OF SPECIAL MEETINGS OF DIRECTORS. Notice of each
special meeting of the Board of Directors, stating the time, place and purpose
or purposes thereof, shall be given by the President, or by any two (2) members
of the Board to each member of the Board no less than five (5) days prior to
such special meeting. Attendance of a Director at a meeting shall constitute a
waiver of notice of such meeting except when a director states at the beginning
of the meeting an objection to the transaction of business because the meeting
is not lawfully called or convened.
SECTION 7. PARTICIPATION OF DIRECTORS BY MEANS OF COMMUNICATIONS
EQUIPMENT. Members of the Board of Directors, or of any committee thereof, shall
be deemed present at a meeting of such Board or committee if a conference
telephone or similar communications equipment, by means of which all persons
participating in the meeting can hear each other, is used.
SECTION 8. MEETINGS. Regular meetings of the directors may be held
without notice at such places and times as shall be determined from time to time
by resolution of the directors.
Special meetings of the Board may be called by the President or by the
Secretary on the written request of any two directors of at least two days'
notice to each director and shall be held at such place or places as may be
determined by the directors, or as shall be stated in the call of the meeting.
SECTION 9. QUORUM. A majority of the directors shall constitute a
quorum for the transaction of business. If at any meeting of the Board there
shall be less than a quorum present, a majority of those present may adjourn the
meeting from time to time until a quorum is obtained, and no further notice
thereof need be given other than by announcement at the meeting which shall be
so adjourned.
SECTION 10. COMPENSATION. Directors shall not receive any stated salary
for their services as directors or as members of committees, but by resolution
of the Board a fixed fee and expenses of attendance may be allowed for
attendance at each meeting. Nothing herein contained shall be construed to
preclude any director from serving the corporation in any other capacity as an
officer, agent or otherwise, and receiving compensation therefor.
SECTION 11. ACTION WITHOUT MEETING. Any action required or permitted to
be taken at any meeting of the Board of Directors, or of any committee thereof,
may be taken without a meeting, if a written consent thereto is signed by all
members of the Board, or of such committee, as the case may be, and such written
consent is filed with the minutes of proceedings of the Board or committee.
<PAGE>
ARTICLE IV
OFFICERS
SECTION 1. OFFICERS. The officers of the corporation shall be a
Chairman of the Board, a President, a Treasurer, and a Secretary, all of whom
shall be elected by the Board of Directors and who shall hold office until their
successors are elected and qualified. In addition, the Board of Directors may
elect one or more Vice Presidents and such Assistant Secretaries and Assistant
Treasurers as they may deem proper. None of the officers of the corporation need
be directors. The officers shall be elected at the first meeting of the Board of
Directors after each annual meeting. More than two offices may be held by the
same person.
SECTION 2. OTHER OFFICERS AND AGENTS. The Board of Directors may
appoint such other officers and agents as it may deem advisable, who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as shall be determined from time to time by the Board of Directors.
SECTION 3. CHAIRMAN. The Chairman of the Board of Directors shall
preside at all meetings of the Board of Directors and the stockholders. He/she
shall be the chief executive officer of the corporation and shall have the
general powers and duties of supervision and management usually vested in the
chief executive officer of a corporation. He/she shall have general supervision,
direction and control of the business of the corporation. Except as the Board of
Directors shall authorize the execution thereof in some other manner he/she
shall execute bonds, mortgages and other contracts on behalf of the corporation,
and shall cause the seal to be affixed to any instrument requiring it and when
so affixed the seal shall be attested by the signature of the Secretary or the
Treasurer or an Assistant Secretary or an Assistant Treasurer.
SECTION 4. PRESIDENT. The President shall have such powers and perform
duties as shall be assigned to him/her by the directors.
SECTION 5. VICE-PRESIDENT. Each Vice President shall have such powers
and shall perform such duties as shall be assigned to him/her by the directors.
SECTION 6. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate account of
receipts and disbursements in books belonging to the corporation. He/she shall
deposit all moneys and other valuables in the name and to the credit of the
corporation in such depositories as may be designated by the Board of Directors.
The Treasurer shall disburse the funds of the corporation as may be
ordered by the Board of Directors, or the President, taking proper vouchers for
such disbursements. He/she shall render to the Chairman of the Board and the
Board of Directors at the regular meetings of the Board of Directors, or
whenever they may request it, an account of all his/her transactions as
Treasurer and of the financial condition of the corporation. If required by the
Board of
<PAGE>
Directors, he/she shall give the corporation a bond for the faithful discharge
of his duties in such amount and with such surety as the Board shall prescribe.
SECTION 7. SECRETARY. The Secretary shall give, or cause to be given,
notice of all meetings of stockholders and directors, and all other notices
required by law or by these By-Laws, and in case of his/her absence or refusal
or neglect so to do, any such notice may be given by any person thereunto
directed by the Chairman of the Board, or by the directors, or stockholders,
upon whose requisition the meeting is called as provided in these By-Laws.
He/she shall record all the proceedings of the meetings of the corporation and
of the directors in a book to be kept for that purpose, and shall perform such
other duties as may be assigned to him/her by the directors or the Chairman of
the Board. He/she shall have the custody of the seal of the corporation and
shall affix the same to all instruments requiring it, when authorized by the
directors or the Chairman of the Board, and attest the same.
SECTION 8. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Assistant
Treasurers and Assistant Secretaries, if any, shall be elected and shall have
such powers and shall perform such duties as shall be assigned to them,
respectively, by the directors.
ARTICLE V
MISCELLANEOUS
SECTION 1. CERTIFICATES OF STOCK. Certificates of stock, signed by the
Chairman of the Board of Directors, President or Vice President, and the
Treasurer or an Assistant Treasurer, or Secretary or an Assistant Secretary,
shall be issued to each stockholder certifying the number of shares owned by
him/her in the corporation. When such certificates are countersigned (1) by a
transfer agent other than the corporation or its employee, or, (2) by a
registrar other than the corporation or its employee, the signatures of such
officers may be facsimiles.
SECTION 2. LOST CERTIFICATES. A new certificate of stock may be issued
in the place of any certificate theretofore issued by the corporation, alleged
to have been lost or destroyed, and the directors may, in their discretion,
require the owner of the lost or destroyed certificate, or his/her legal
representatives, to give the corporation a bond, in such sum as they may direct,
not exceeding double the value of the stock, to indemnify the corporation
against any claim that may be made against it on account of the alleged loss of
any such certificate, or the issuance of any such new certificate.
SECTION 3. TRANSFER OF SHARES. The shares of stock of the corporation
shall be transferable only upon its books by the holders thereof in person or by
their duly authorized attorneys or legal representatives, and upon such transfer
the old certificates shall be surrendered to the corporation by the delivery
thereof to the person in charge of the stock and transfer books and ledgers, or
to such other person as the directors may designate, by whom
<PAGE>
they shall be canceled, and new certificates shall thereupon be issued. A record
shall be made of each transfer and whenever a transfer shall be made for
collateral security, and not absolutely, it shall be so expressed in the entry
of the transfer.
SECTION 4. STOCKHOLDERS RECORD DATE. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock
for the purpose of any other lawful action, the Board of Directors may affix, in
advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
SECTION 5. DIVIDENDS. Subject to the provisions of the Certificate of
Incorporation, the Board of Directors may, out of funds legally available
therefor at any regular or special meeting, declare dividends upon the capital
Stock of the corporation as and when they deem expedient. Before declaring any
dividend there may be set apart out of any funds of the corporation available
for dividends, such sum or sums as the directors from tune to time in their
discretion deem proper for working capital or as a reserve fund to meet
contingencies or for equalizing dividends or for such other purposes as the
directors shall deem conducive to the interests of the corporation.
SECTION 6. SEAL. The corporate seal shall be circular in form and shall
contain the name of the corporation, the year of its creation and the words
"CORPORATE SEAL DELAWARE." Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
SECTION 7. FISCAL YEAR. The fiscal year of the corporation shall be
determined by resolution of the Board of Directors.
SECTION 8. CHECKS. All checks, drafts or other orders for the payment
of money, notes or other evidences of indebtedness issued in title name of the
corporation shall be signed by such officers, agent or agents of the corporation
and in such manner as shall be determined from time to time by resolution of the
Board of Directors.
SECTION 9. NOTICE AND WAIVER OF NOTICE. Whenever any notice is required
by these By-Laws to be given, personal notice is not meant unless expressly so
stated and any notice so required shall be deemed to be sufficient if given by
depositing the same in United States mail, postage prepaid, addressed to the
person entitled thereto at his/her address as it appears on the records of the
corporation, and such notice shall be deemed to have been given on the day of
such mailing. Stockholders not entitled to vote shall not be entitled to receive
notice of any meetings except as otherwise provided by statute.
<PAGE>
Whenever any notice whatever is required to be given under the
provisions of any law, or under the provisions of the Certificate of
Incorporation of the corporation or these By-Laws, a waiver thereof in writing,
signed by the person or persons entitled to said notice, whether before or after
the time stated therein, shall be deemed equivalent thereto.
SECTION 10. INDEMNIFICATION.
10.1. Right to indemnification. The corporation shall indemnify and
hold harmless and advance expenses to, to the fullest extent permitted by
applicable law as it presently exists or may hereafter be amended, any person
who was or is made or is threatened to be made a party or is otherwise involved
in any action, suit, or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding") by reason of the fact that he/she, or a person
for whom he/she is the legal representative, is or was a director, officer,
employee or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust, enterprise or non-profit entity,
including service with respect to employee benefit plans, against all expenses,
liability, and loss reasonably incurred or suffered by such person. The
corporation shall be required to indemnify and advance expenses to a person in
connection with a proceeding initiated by such person only if the proceeding was
authorized by the Board of Directors of the corporation.
10.2. Prepayment of Expenses. The corporation shall pay the expenses
incurred in defending any proceeding in advance of its final disposition,
provided, however, that the payment of expenses incurred by a director or
officer in his/her capacity as a director or officer (except with regard to
service to an employee benefit plan or nonprofit organization) in advance of the
final disposition of the proceeding shall be made only upon receipt of an
undertaking by the director or officer to repay all amounts advanced if it
should be determined that the director or officer is not entitled to be
indemnified under this Article or otherwise.
10.3. Claims. If a claim for indemnification or payment of expenses
under this Article is not paid in full within ninety days after a written claim
therefor has been received by the corporation, the claimant may file suit to
recover the unpaid amount of such claim and, if successful in whole or in part,
shall be entitled to be paid the expense of prosecuting such claim. In any such
action the corporation shall have the burden of proving that the claimant was
not entitled to the requested indemnification or payment of expenses under
applicable law.
10.4. Non-Exclusivity of Rights. The rights conferred on any person by
this Article shall not be exclusive of any other rights which such person may
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, these By-Laws, agreement, vote of stockholders or disinterested
directors or otherwise.
10.5. Amendment or Repeal. Any repeal or modification of the foregoing
provisions of this Article V, Section 10 shall not adversely affect any right or
protection of a director, officer or employee of the corporation existing at the
time of such repeal or modification.
<PAGE>
ARTICLE VI
AMENDMENTS
These By-Laws may be altered or repealed and By-Laws may be made at any
annual meeting of the stockholders or at any special meeting thereof if notice
of the proposed alteration or repeal or By-Law or By-Laws to be made be
contained in the notice of such special meeting, by the affirmative vote of a
majority of the stock issued and outstanding and entitled to vote thereat, or by
the affirmative vote of a majority of the Board of Directors, at any regular or
special meeting of the Board of Directors.
EXHIBIT 4(c)
PROMISSORY NOTE
$5,900,000.00 May 29, 1997
Due Date: May 31, 2006 Minneapolis, Minnesota
FOR VALUE RECEIVED, GRIST MILL CO., a Delaware corporation ("Maker")
promises to pay to the order of COMMERCE MORTGAGE COMPANY, A DIVISION OF
COMMERCE FINANCIAL GROUP, INC., a Minnesota corporation ("Payee") or its
assigns, at its office located at 8400 Normandale Lake Boulevard, Suite 980,
Bloomington, Minnesota 55437, or such other place as may be designated from time
to time by the holder hereof, in lawful money of the United States of America,
the principal sum of FIVE MILLION NINE HUNDRED THOUSAND AND NO/100 DOLLARS
($5,900,000.00), or the unpaid principal balance outstanding from all sums
advanced against this Note, whichever amount is less, together with interest
thereon as hereinafter provided.
1. Interest shall accrue on the principal balance hereof as
follows:
(a) Commencing on the date hereof to and including May 31,
2000, interest shall accrue on the outstanding principal balance hereof
at the rate of eight and six-hundred twenty-five thousandths percent
per annum (8.625%);
(b) Commencing on June 1, 2000, to and including May 31, 2003,
interest shall accrue on the principal balance hereof at a fixed rate
per annum, which rate shall be equal to (i) the then-Three Year
Treasury Base Rate (as hereinafter defined); plus (ii) two and ten one
hundredths percent (2.10%); and
(c) Commencing on June 1, 2003, to and including May 31, 2006,
interest shall accrue on the principal balance hereof at a fixed rate
per annum, which rate shall be equal to (i) the then-Three Year
Treasury Base Rate; plus (ii) two and ten one hundredths percent
(2.10%)
As used herein, the Three Year Treasury Base Rate shall mean the
average yield rounded up to the nearest one-eighth percent (.125%) of the yield
on U.S. Treasury Notes having a maturity (as of the date such yield is
calculated) closest to three years, as determined by Lender from the Federal
Reserve Board Release H.15 (519) (or from such other appropriate source
determined by Lender if such Release is no longer published) on the twenty
business days immediately preceding the day on which the interest rate is
scheduled to be adjusted hereunder.
2. Maker shall pay the principal of this Note and interest
thereon as follows:
(a) On the first day of June, 1997, there shall be due and
Maker shall pay interest accrued from the date hereof to and including
May 31, 1997;
(b) On the first day of each month, commencing on July 1,
1997, to and including June 1, 2000, there shall be due and Maker shall
pay monthly installments of principal and interest in the amount of
$58,972.00, which shall be the amount that would
<PAGE>
be required to amortize the principal balance of this Note over a term
ending May 31, 2012;
(c) On the first day of each month, commencing on July 1,
2000, to and including June 1, 2003, there shall be due and Maker shall
pay monthly installments of principal and interest, each of which shall
be in an amount equal to the amount that would be required to amortize
the then-remaining principal balance of this Note (taking into account
any permitted partial prepayment made pursuant to Paragraph 3 of this
Note) over a term beginning June 1, 2000, and ending May 31, 2012,
together with interest accruing thereon at the applicable rate as
provided above;
(d) On the first day of each month, commencing on July 1,
2003, to and including June l, 2006, there shall be due and Maker shall
pay monthly installments of principal and interest, each of which shall
be in an amount equal to the amount that would be required to amortize
the then-remaining principal balance of this Note over a term beginning
June 1, 2003, and ending May 31, 2012, together with interest accruing
thereon at the applicable rate as provided above.
On May 31, 2006, the Maturity Date, the entire remaining principal
balance of this Note, together with any accrued, unpaid interest, shall be due
and payable in full.
3. Maker may prepay this Note in full, but not in part, at any time by
giving Payee sixty (60) days prior written notice. At any time of prepayment,
and in consideration of Payee's willingness to accept such prepayment, Maker
shall pay, in addition to the then outstanding principal balance plus accrued
unpaid interest, a prepayment premium in an amount equal to:
(a) to and including May 31, 2000, an amount equal to two
percent (2%) of the then-outstanding principal balance of the Loan; and
(b) after May 31, 2000, to and including May 31, 2003, an
amount equal to one percent (1%) of the then-outstanding principal
balance of the Loan; and
(c) after May 31, 2003, this Note may be prepaid in full at
any time without payment of any prepayment premium.
Notwithstanding the foregoing, and provided Maker is not then in
default under this Note or under any other agreement evidencing or securing this
Note, Maker may prepay up to Three Million and no/100ths Dollars ($3,000,000.00)
of the loan evidenced by the Note without premium or other payment provided such
prepayment is made between April 1, 2000 and May 31, 2000. Any such partial
prepayment shall be applied to this Note in the inverse order of maturity.
<PAGE>
4. Interest charges will be calculated on amounts advanced hereunder on
the actual number of days said amounts are outstanding. Such interest shall be
computed on the basis of a year comprised of 360 days, but charged for the
actual number of days elapsed (including the first day but excluding the last
day) occurring in the period for which interest is payable. Payments under this
Note shall be applied initially against accrued interest and escrow charges, if
any, and thereafter in reduction of principal.
5. This Note is secured, inter alia, by that certain Mortgage,
Security Agreement and Fixture Financing Statement of even date herewith between
Maker as mortgagor and Payee as mortgagee, covering certain real property in the
County of Dakota, State of Minnesota, as described therein (the "Mortgage").
6. Maker acknowledges that if any payment required under this Note is
not paid within ten (10) days after the same becomes due and payable, Payee will
incur extra administrative expenses (i.e. in addition to expenses incident to
receipt of timely payment) in connection with the delinquency in payment.
Because, from the nature of the case, the actual damages suffered by Payee in
incurring such extra administrative expenses would be impracticable or extremely
difficult to ascertain, it is agreed that three percent (3%) of the amount of
the delinquency payment shall be the amount of damages to which the Payee is
entitled, upon such breach, in compensation for such extra administrative
expenses. Therefore, the Maker shall, in such event, without further notice, pay
to Payee liquidated damages in the amount of three percent (3%) of the amount of
such delinquent payments. The provisions of this paragraph are intended to
govern only the determination of the above-described damages in the event of a
breach in performance of the obligation of Maker to make timely payments
hereunder. Nothing in this Note shall be construed as an express or implied
agreement by Payee to forbear in the collection of any delinquent payment, or be
construed as in any way giving the undersigned the right, express or implied, to
fail to make timely payment hereunder, whether upon payment of such damages or
otherwise. The right of Payee to receive payment of such liquidated damages, and
receipt thereof, are without prejudice to the right of Payee to collect such
delinquent payments and any other amounts required to be paid hereunder or under
any security for this Note or to declare a default hereunder or under any
security for this Note.
7. Maker and any endorsers or guarantors hereof severally waive
presentment and demand for payment, notice of intent to accelerate maturity,
protest or notice of protest and non-payment, bringing of suit and diligence in
taking any action to collect any sums owing hereunder or in proceeding against
any of the rights and properties securing payment hereunder, and expressly agree
that this Note, or any payment hereunder, may be extended from time to time, and
consent to the acceptance of further security or the release of any security for
this Note, all without in any way affecting the liability of Maker and any
endorsers or guarantors hereof. No extension of time for the payment of this
Note, or any installment thereof, made by agreement by Payee with any person now
or hereafter liable for the payment of this Note, shall affect the original
liability under this Note of the undersigned, even if the undersigned is not a
party to such agreement.
<PAGE>
8. Any Event of Default under the Mortgage shall constitute an Event of
Default under this Note.
Upon the occurrence of an Event of Default, in addition to any other
rights or remedies Payee may have at law or in equity, Payee may, at its option,
without notice to Maker, declare immediately due and payable the entire unpaid
principal sum hereof, together with all accrued and unpaid interest thereon plus
any other sums owing at the time of such Event of Default pursuant to this Note,
the Mortgage or any other document evidencing and/or securing the loan evidenced
by this Note.
The failure to exercise the foregoing or any other options shall not
constitute a waiver of the right to exercise the same or any other option at any
subsequent time in respect of the same event or any other event. The acceptance
by the holder of any payment hereunder which is less than payment in full of all
amounts due and payable at the time of such payment shall not constitute a
waiver of the right to exercise any of the foregoing options at that time or at
any subsequent time.
9. Maker agrees to pay all expenses for the preparation of this Note,
including exhibits, and any amendments to this Note as may from time to time
hereafter be required, and the reasonable attorneys' fees and legal expenses of
counsel for Payee from time to time incurred in connection with the preparation
and execution of this Note and any document relevant to this Note, any
amendments hereto or thereto, and the consideration of legal questions prompted
by actions or inactions of Maker and relevant hereto and thereto. Maker agrees
to reimburse Payee upon demand for all reasonable out-of-pocket expenses
(including attorneys' fees and legal expenses) in connection with Payee's
enforcement of the obligations of the Maker hereunder or under the Mortgage or
any other document relevant hereto or thereto, whether or not suit is commenced
including, without limitation, attorneys' fees and legal expenses in connection
with any appeal of a lower court's order or judgment. The obligations of the
Maker under this paragraph shall survive for a period of six months after any
termination of this Note, the Mortgage, and any other document relevant hereto
or thereto.
10. This Note shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns, except that
Maker may not assign or transfer its rights hereunder without the prior written
consent of the Payee, except in connection with a bona fide corporate
reorganization to which the surviving corporation assumes all of Maker's
obligations under this Note and the Mortgage. In connection with the actual or
prospective sale by the Payee of any interest or participation in the loan
obligation evidenced by this Note, Maker hereby authorizes the Payee to furnish
any publicly available financial information concerning the Maker or any of its
affiliates, however acquired, to any person or entity.
11. This Note shall be governed by and construed according to the laws
of the State of Minnesota. Maker hereby irrevocably submits to the jurisdiction
of any Minnesota State court or Federal court over any action or proceeding
arising out of or relating to this Note, and Maker
<PAGE>
hereby irrevocably agrees that all claims in respect of such action or
proceeding may be heard and determined in such Minnesota State or Federal court.
Maker hereby irrevocably waives, to the fullest extent it may effectively do so,
the defense of an inconvenient forum to the maintenance of such action or
proceeding in such Minnesota State or Federal court.
12. The invalidity or unenforceability in particular circumstances of
any provision of this Note shall not extend beyond such provision or such
circumstances and no other provision of this instrument shall be affected
thereby.
13. Maker and Payee agree that no payment of interest or other
consideration made or agreed to be made by Maker to Payee pursuant to this Note
shall, at any time, be in excess of the maximum rate of interest permissible by
law. In the event such payments of interest or other consideration provided for
in this Note shall result in an effective rate of interest which, for any period
of time, is in excess of the limit of the usury or any other law applicable to
the loan evidenced hereby, all sums in excess of those lawfully collectible as
interest for the period in question shall, without further agreement or notice
between or by any party hereto, be applied to the unpaid principal balance and
not to the payment of interest; if a surplus remains after full payment of
principal and lawful interest, the surplus shall be remitted by Payee to Maker,
and Maker hereby agrees to accept such remittance. This provision shall control
every other obligation of the Maker and Payee relating to this Note.
GRIST MILL CO.
By: /s/ Daniel J. Kinsella
----------------------------------
Daniel J. Kinsella
Grist Mill Co.
Vice President
Chief Financial Officer
<PAGE>
MORTGAGE, SECURITY AGREEMENT AND
FIXTURE FINANCING STATEMENT
THIS MORTGAGE, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT (the
"Mortgage") dated as of the 29th day of May, 1997, by and between GRIST MILL
CO., a Delaware corporation, whose address is 21340 Hayes Avenue, Lakeville,
Minnesota, 55044 (the "Mortgagors"), and COMMERCE MORTGAGE COMPANY, A DIVISION
OF COMMERCE FINANCIAL GROUP, INC., whose address is 8400 Normandale Lake
Boulevard, Suite 980, Bloomington, Minnesota 55437 (the "Mortgagee");
WITNESSETH:
WHEREAS, Mortgagee is making a loan to Mortgagor in the amount of FIVE
MILLION NINE HUNDRED THOUSAND AND NO/100ths DOLLARS ($5,900,000.00) for the
financing of Mortgagor's manufacturing/warehouse/distribution facility, which is
located at 21340 Hayes Avenue in Lakeville, Minnesota; and
WHEREAS, the loan being made by Mortgagee is evidenced by that certain
promissory note of even date herewith between Mortgagor as Maker and Mortgagee
as Payee in the sum of Five Million Nine Hundred Thousand and no/100ths Dollars
($5,900,000.00) (the "Note") which Note shall mature on May 31, 2006, subject to
acceleration as provided in the Note, and the principal of which Note bears
interest as provided therein, which Note is fully incorporated herein by
reference; and
WHEREAS, Mortgagor has agreed to mortgage and grant a security interest
in the Mortgaged Property, as herein defined, to secure payment of the Note and
its obligations under this Mortgage;
NOW, THEREFORE, in consideration of One Dollar ($1.00) and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and to secure the due and punctual payment of the principal,
prepayment premium (if applicable) and interest on the Note and any and all
extensions, amendments, renewals and modifications at any time thereof and
substitutions at any time therefor, all other sums due and owing on the Note,
and the payment of all fees, sums, expenses and advances of Mortgagee made in
accordance with the terms of this Mortgage, with interest thereon at the rate
equal to that specified in the Note (collectively called the "Indebtedness"),
Mortgagor does hereby grant, bargain, sell, convey, release, mortgage, warrant,
grant a security interest in and pledge unto Mortgagee, its successors and
assigns, forever, the following:
A. LAND AND BUILDINGS
All of its right, title and interest in and to the tracts, parcels and
interests in land lying and being in the County of Dakota, State of Minnesota,
as legally described in Exhibit A hereto and made a part hereof (the "Land") and
the buildings, structures, fixtures constituting real property, annexations and
other improvements now standing or at any time hereafter constructed or placed
upon the Land (the "Buildings"), including all hereditaments, easements,
appurtenances, riparian rights, mineral rights, water rights, rights in and to
the lands lying in
<PAGE>
streets, alleys and roads adjoining the Land, estates, and other rights and
interests now or hereafter belonging to or in any way pertaining to the Land or
Buildings; and
B. REVENUES AND INCOME
All rents, issues, profits, leases, condemnation awards and insurance
proceeds now or hereafter arising from the ownership, occupancy or use of the
Land or Buildings or any part thereof, and all products and proceeds thereof
(the "Revenues and Income"); and
C. PLANS, LICENSES AND PERMITS
All assignable plans and specifications, engineering reports, tests and
studies, leases, licenses, permits and approvals, now or hereafter arising with
respect to the Land or Buildings or any part thereof, and all products and
proceeds thereof (the "Plans, Licenses and Permits").
TO HAVE AND TO HOLD the Land, Buildings, Revenues and Income and Plans,
Licenses and Permits (collectively called the "Mortgaged Property"), together
with all privileges, hereditaments and appurtenances thereunto now or hereafter
belonging, or in any wise appertaining, and the products and proceeds thereof,
unto Mortgagee, its successors and assigns, forever;
PROVIDED, NEVERTHELESS, that these presents are upon the express
condition that if Mortgagor shall pay or cause to be paid the Indebtedness, and
if Mortgagor shall duly and punctually perform and observe all of the terms,
covenants, agreements and conditions contained in this Mortgage and the Note,
then this Mortgage and the estate, right and interest of Mortgagee in and to the
Mortgaged Property shall cease and be and become void and of no force and
effect, and shall be satisfied and released of record at mortgagor's expense;
otherwise this Mortgage shall remain in full force and effect.
Mortgagor and Mortgagee further agree as follows:
ARTICLE I
GENERAL COVENANTS, AGREEMENTS AND WARRANTIES
Section 1.01 Warranty of Title: Permitted Encumbrances. Mortgagor
covenants, represents and warrants that (a) it is the lawful owner of and has
good right and lawful authority to grant, bargain, sell, convey, release,
mortgage, grant a security interest in, and pledge the Mortgaged Property as
provided herein, except for any plans and specifications title to which is
vested, by contract or applicable law, in the architect or other professional
that prepared the same (the "Plans and Specifications") (b) it is and will
continue to be well and truly seized of good and marketable title to the
Mortgaged Property, except for such Plans and Specifications, (c) the Mortgaged
Property except for such Plans and Specifications, is and will remain throughout
the term of this Mortgage free and clear of all mortgages, liens, pledges,
charges and encumbrances, excepting only the lien of this Mortgage and such
Permitted Encumbrances as are listed on Exhibit B attached hereto and made a
part hereof, and (d) Mortgagor warrants and
<PAGE>
will defend the title to the Mortgaged Property, except for such Plans and
Specifications, against all claims and demands whatsoever not specifically
excepted herein.
Section 1.02 Payment of Indebtedness; Observance of Terms and
Covenants. Mortgagor shall duly and punctually (a) pay each and every
installment of principal and interest on the Note and all other portions of the
Indebtedness before the termination of any grace period, and (b) perform and
observe before the termination of any grace period all of the terms, covenants,
agreements and conditions contained in this Mortgage and the Note and all other
documents and instruments given as security for the payment of the Note.
Section 1.03 Validity: Enforceable Obligations. Mortgagor covenants,
represents and warrants that (a) the Note, this Mortgage and all other documents
and instruments executed and delivered by it in connection with the execution
and delivery of the Note have been duly executed and delivered and are valid and
enforceable obligations of Mortgagor in accordance with the terms thereof and
hereof, and (b) this Mortgage does not, nor does the Note, nor does the
performance or observance by Mortgagor of any of the matters or things in this
Mortgage provided for, contravene any covenant in any indenture or agreement
affecting Mortgagor or any of its properties.
Section 1.04 Additional Assurances. Mortgagor shall (a) at Mortgagor's
written request, do, execute, acknowledge and deliver all and every further act,
deed, conveyance, transfer and assurance necessary or proper for the carrying
out more effectively of the purpose of this Mortgage and, without limiting the
foregoing, for conveying, mortgaging, assigning, and confirming unto Mortgagee
all of the Mortgaged Property or property intended so to be, whether now owned
or hereafter acquired, including without limitation the preparation, execution
and filing of any documents, such as financing statements and continuation
statements, deemed advisable by Mortgagee for maintaining its lien on any part
of the Mortgaged Property, and (b) pay any and all recording fees, filing fees,
mortgage registry tax, stamp taxes or other charges arising out of or incident
to the filing or recording of this Mortgage, such further assurances and
instruments and the issuance and delivery of the Note.
Section 1.05 Maintenance and Repairs. Subject to the provisions of
Article III, Mortgagor shall (a) cause the Mortgaged Property and every part
thereof to be maintained, preserved and kept in safe and good repair, working
order and condition, and will comply with all laws and regulations of any
governmental authority with reference to the Mortgaged Property and the manner
of using or operating the same, and with all restrictive covenants, if any,
affecting the title to the Mortgaged Property, or any part thereof, (b) from
time to time make all necessary and proper repairs, renewals, replacements,
additions and betterments to the Mortgaged Property and every part thereof so
that the value and efficient use thereof shall be fully preserved and maintained
And so that all laws and regulations as aforesaid shall be complied with, and
(c) promptly repair and restore the Mortgaged Property and every part thereof
which may become damaged or destroyed by fire, casualty or otherwise to their
condition prior to any such damage or destruction.
Section 1.06 Removal of Mortgaged Property. Subject to the provisions
of Section 1. 11 hereof, Mortgagor shall not without the prior written consent
of Mortgagee, which consent shall not be unreasonably withheld, (a) remove the
Buildings or any part thereof from the Land, (b)
<PAGE>
except for alterations which in any year do not exceed $100,000 per year in the
aggregate, demolish, alter or modify the Buildings or any part thereof nor
construct additional improvements on the Land, or (c) abandon or vacate the
Mortgaged Property or any part thereof.
Section 1.07 Payment of operating Costs, Prior Mortgages and Liens.
Mortgagor shall pay all operating costs and expenses of the Mortgaged Property
and, except for Permitted Encumbrances, keep the same free from mechanics',
materialmen's and other mortgages, liens, charges, levy, execution or
attachment. Upon request, Mortgagor shall exhibit to Mortgagee satisfactory
evidence of compliance with this Section as evidenced by an ownership and
encumbrances report, provided that such a report need not be provided more often
than once each year.
Section 1.08 Payment of Taxes. Mortgagor shall (a) pay when due and
before any penalty attaches thereto all taxes, assessments, water charges, sewer
charges, and other fees, taxes, charges and assessments of every kind and nature
whatsoever (other than charges in the nature of income taxes payable by
Mortgagee) assessed or charged against or constituting a lien on the Mortgaged
Property or any interest therein, upon or against the Note or the Indebtedness
or upon or against the interest of Mortgagee in the Mortgaged Property or in the
Note or Indebtedness (the "Taxes"), and (b) upon demand furnish to Mortgagee
proof of the payment of any such Taxes. In the event of a court decree or an
enactment after the date hereof by any legislative authority of any law imposing
upon a mortgagee the payment of the whole or any part of the Taxes herein
required to be paid by Mortgagor, or changing in any way the laws relating to
the taxation of mortgages or debts secured by mortgages or a mortgagee's
interest in mortgaged premises, so as to impose such Tax on Mortgagee or on the
interest of Mortgagee in the Mortgaged Property, then, in any such event,
Mortgagor agrees that it shall bear and pay the full amount of such Tax,
provided that if for any reason payment by Mortgagor of any such Tax would be
unlawful, or if the payment thereof would constitute usury or render the
Indebtedness wholly or partially usurious, Mortgagee, at its option, may, upon
120 days prior notice, declare the entire Indebtedness to be immediately due and
payable (but without any prepayment penalty), or pay that amount or portion of
such Tax as renders the Indebtedness unlawful or usurious, in which event
Mortgagor shall concurrently therewith pay the remaining lawful and nonusurious
portion or balance of said Tax.
Section 1.09 Contest of Taxes and Liens. Notwithstanding any other
provision of this Mortgage to the contrary, Mortgagor will not be required to
pay, discharge or remove any Tax, or any lien against the Mortgaged Property or
any part thereof, including a mechanic's lien (a "Lien") so long as Mortgagor
shall in good faith contest the same or the validity thereof by appropriate
legal proceedings which shall operate to prevent the collection of the Tax or
Lien so contested and the sale of the Mortgaged Property, or any part thereof,
to satisfy the same, provided that Mortgagor shall, prior to the date such Tax
or Lien is due and payable, have given to Mortgagee a title insurance indemnity
or cash or such other reasonable security as may be required by Mortgagee to
insure such payment and interest and penalties thereon and prevent any sale or
forfeiture of the Mortgaged Property by reason of such nonpayment. Any such
contest shall be prosecuted with due diligence and Mortgagor shall promptly
after final determination thereof pay the amount of any such Tax or Lien so
determined, together with all interest and penalties thereon, which may be
payable in connection therewith. Notwithstanding
<PAGE>
the provisions of this Section, Mortgagor shall (and if Mortgagor shall fail so
to do, Mortgagee may, but shall not be required to) pay any such Tax or Lien
notwithstanding such contest if, in the reasonable opinion of Mortgagee, the
Mortgaged Property, or any part thereof, shall be in jeopardy or in danger of
being forfeited or foreclosed prior to resolution of such contest.
Section 1.10 Protection of Security. Mortgagor shall promptly notify
Mortgagee of and appear in and defend any suit, action or proceeding that
affects the Mortgaged Property, the Indebtedness or the rights or interest of
Mortgagee hereunder. Mortgagee may elect to appear in or defend any such action
or proceeding and Mortgagor agrees to indemnify and reimburse Mortgagee from any
and all loss, damage, expense or cost arising out of or incurred in connection
with any such suit, action or proceeding, including without limitation, all
reasonable sums paid by Mortgagee to establish or defend the rights and lien of
this Mortgage or to protect the Mortgaged Property or any part thereof,
including costs of evidence of title and reasonable attorneys fees, which
amounts shall be paid by Mortgagor to Mortgagee upon demand together with
interest thereon from the date of payment by Mortgagee at the rate equal to that
specified in the Note.
Section 1.11 Prohibition of Sale, Lease and Mortgage. In the event:
(a) Mortgagor sells, leases, conveys, transfers, assigns,
further mortgages or encumbers or disposes of the Mortgaged Property or
any part thereof, or any interest therein, or agrees to do so, except
as otherwise provided in Section 1.06 hereof; or
(b) any stock of Mortgagor is sold, conveyed, pledged,
transferred or assigned through a merger or consolidation with another
corporation; or
whether occurring by voluntary or involuntary act or by operation of law or
otherwise, without the written consent of the Mortgagee being first obtained
(which consent may be granted or withheld in Mortgagee's sole and absolute
discretion), then at the sole option of the Mortgagee, Mortgagee may declare an
Event of Default to have occurred under this Mortgage, thereby entitling
Mortgagee to exercise any and all rights and remedies available to it as
provided in this Mortgage upon the occurrence of an Event of Default; provided,
however, that the Mortgagee shall grant its consent to (i) a merger or
consolidation by the Mortgagor with another corporation, or (ii) a merger or
consolidation of any Subsidiary (as hereinafter defined) of the Mortgagor with
the Mortgagor (if the Mortgagor is the surviving corporation) or with a
wholly-owned Subsidiary of the Mortgagor, provided that the following conditions
are met in their entirety:
(a) the surviving entity would be a solvent corporation
organized under the laws of any State of the United States of America;
(b) such surviving corporation expressly assumes in writing
the Mortgagor's duties, obligations and liabilities under this
Mortgage, the Note, and all other loan documents executed by Mortgagor
in connection with the loan evidenced by the Note,
<PAGE>
including all covenants herein and therein contained, and such
surviving entity shall succeed to and be substituted for the Mortgagor
in all said documents with the same effect as if it had been named
herein and therein as a party hereto and thereto; and
(c) immediately following the merger and after giving effect
thereto, (i) no event or condition would exist which, with or without
the lapse of time or the giving of notice, or both, would constitute an
Event of Default (as hereinafter defined), and (ii) the Consolidated
Tangible Net Worth (as hereinafter defined) (calculated as if the
"Mortgagor" meant the surviving entity) of the surviving entity and its
Subsidiaries would be no less than the Consolidated Tangible Net Worth
of the Mortgagor and its Subsidiaries immediately prior to the merger
or consolidation.
For the purposes of this Mortgage, the following terms shall have the
following meanings:
"Subsidiary" or "subsidiaries" shall mean any corporation or
corporations at least 80% of the outstanding capital stock of every class of
which is hereafter owned, directly or indirectly, by the Mortgagor.
"Consolidated Tangible Net Worth" shall mean the aggregate amount of
stockholders' equity of the Mortgagor and its Subsidiaries on a consolidated
basis determined in accordance with generally accepted accounting principles
consistent with those followed in preparation of the financial statements
furnished to Mortgagee in connection with the loan evidenced by the Note, less
the purchase price of acquired businesses in excess of the fair market value of
the tangible net assets, other items of goodwill, patents, trademarks, trade
names, copyrights, organization expense, treasury stock, unamortized debt
discount and expense, any write-up of the value of any assets, and other like
intangibles, all determined on a consolidated basis in accordance with generally
accepted accounting principles.
In the event Mortgagor shall request the consent of Mortgagee in
accordance with this Section 1.11, Mortgagor shall deliver a written request to
Mortgagee together with complete information regarding such a conveyance, lease
or encumbrance and shall allow Mortgagee 30 days from the date of receipt
thereof for evaluation of such request. Such approval may be subject to or
conditioned upon such other modifications of the loan terms as may be deemed
necessary or appropriate by Mortgagee in its sole and absolute discretion,
including without limitation conditioning such approval on Mortgagor's payment
to Mortgagee of a fee therefor in an amount equal to one-quarter of one percent
(1/4%) of the then outstanding principal balance of the Note or on Mortgagor's
agreement to an increase in the interest rate applicable to the loan evidenced
by the Note or otherwise, except that no such fee or increase in the interest
rate shall be required with regard to a merger or consolidation meeting the
requirements for Mortgagee's consent as set forth herein. Consent as to any one
transaction shall not be deemed to be a waiver of the right to require consent
to future or successive transactions.
Section 1.12 Business Loan Representation. Mortgagor represents and
warrants to Mortgagee that the loan evidenced by the Note is a business loan
transacted solely for the purpose of carrying on the business of Mortgagor and
that neither the Mortgaged Property nor any part thereof constitutes the
homestead of Mortgagor.
<PAGE>
Section 1.13 Further Representation. Mortgagor further represents and
warrants to Mortgagee except as may be disclosed in that certain Phase I
Environmental Site Assessment dated August 20, 1991, prepared by Twin City
Testing for Mortgagor (the "Report"), to the best of Mortgagor's knowledge there
have been no releases of hazardous substances, pollutants or contaminants into
or on the Land or emitted from the Land into the air or discharged into any
water, including ground waters above, below or on the Land by or on behalf of
Mortgagor. Mortgagor acknowledges and agrees that the Land includes real
property not covered by the Report and Mortgagor further acknowledges and agrees
that the representations and warranties contained in this Mortgage include all
of the Land, as defined in this Mortgage. Without limiting the generality of the
foregoing, Mortgagor further represents and warrants that to the best of its
knowledge (A) the Mortgaged Property complies with all applicable environmental
laws, and that no "hazardous substances or wastes" (as defined in any and all
applicable federal and state laws) have been generated, stored, buried or
disposed of upon, under, or on the Mortgaged Property by or on behalf of
Mortgagor or create any violation of or subject the Property to the provisions
of the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("Super Fund Statute" or "CERCLA"), except for substances or
wastes which are used in the ordinary course of Mortgagor's business, provided
such substances or wastes are disposed of in accordance with all applicable laws
and regulations, (B) no underground storage tanks were or are located on the
Mortgaged Property, and (C) no ground water contamination is present.
ARTICLE II
INSURANCE AND ESCROWS
Section 2.01 Insurance. Mortgagor shall procure and keep in full force
and effect during the term of this Mortgage, at its sole cost and expense, the
following:
(a) insurance written by a company having an A rating or
better, as reflected in the then current issue of "Best's Insurance
Guide", covering the Mortgaged Property against all risks of loss or
damage to the Mortgaged Property, including but not limited to loss or
damage caused by fire and extended coverage perils, including the cost
of debris removal, together with vandalism, malicious mischief,
sprinkler leakage, and agreed amount endorsements, and insuring the
builder's risk during construction with course of construction
endorsement, all in amounts of not less than the full replacement cost
of the Buildings;
(b) such other insurance covering the Mortgaged Property
against loss or damage by other casualties and contingencies (including
without limitation boiler explosion insurance) as Mortgagee may from
time to time reasonably require but only to the extent such insurance
is customary for similar businesses and properties of the type covered
hereby, all in such manner and for such amounts as may be satisfactory
to Mortgagee;
(c) flood insurance in the amount of the loan evidenced by the
Note, unless evidence is provided that the Mortgaged Property is not
within a 100-year flood plain as defined by the Federal Insurance
Administration; and
<PAGE>
(d) business interruption insurance covering risk of loss due
to the occurrence of any hazards described in the foregoing Subsections
in an amount and on terms satisfactory to Mortgagee.
The policy or policies of such insurance shall (i) be written on forms
and with insurance companies and contain terms reasonably satisfactory to
Mortgagee, (ii) contain deductible limits and co-insurance provisions (which
shall in no event be less than 90% of full replacement cost of the Buildings),
(iii) name as the insured parties Mortgagor and Mortgagee as their interests may
appear, (iv) be in amounts sufficient to prevent Mortgagor from becoming a
co-insurer of any loss thereunder, except as otherwise provided in subparagraph
(ii) above, and (v) bear a mortgagee clause in favor of Mortgagee in form
satisfactory to Mortgagee, all with loss proceeds under all such policies to be
made payable to Mortgagee to the extent required in section 3.01 herein. At
least annually, Mortgagor shall review all insurance coverage covering the
Mortgaged Property or otherwise required hereunder with its insurance
specialist, disclose to Mortgagee the results and substance of such review and
obtain any increase in the amount of such coverage as may be required by
Mortgagee to the extent reasonably necessary in light of any material increase
in any insurable risk factor, or of any new material insurable risk factor,
relating to Mortgagor's business or the Mortgaged Property.
Mortgagor shall also procure and keep in full force and effect during
the term of this mortgage, with insurance companies satisfactory to Mortgagee,
comprehensive general public liability insurance covering the liability of
Mortgagor for claims for bodily injury, death or property damage occurring on,
in or about the Mortgaged Property in such amounts not less than $3,000,000.00
per occurrence for bodily injury and $500,000.00 per occurrence for property
damage, the policies of which insurance shall name Mortgagee as an additional
insured.
All required policies of insurance or certificates thereof acceptable
to Mortgagee together with evidence of the payment of current premiums therefor
shall be delivered to Mortgagee, and Mortgagor shall be obligated to provide
evidence to Mortgagee of the payment of premiums as may be required from time to
time by Mortgagee. Mortgagor shall, within 30 days prior to the expiration of
any such policy, deliver either original policies or certificates of the insurer
evidencing the renewal of such insurance together with evidence of the payment
of current premiums therefor. All policies shall specifically provide that
Mortgagee shall receive 30 days prior written notice from the insurance carrier
before cancellation of any such policies. In the event of a foreclosure of this
Mortgage or any acquisition of the Mortgaged Property by Mortgagee all such
policies and any proceeds payable therefrom, whether payable before or after a
foreclosure sale, or during the period of redemption, if any, shall become the
absolute property of Mortgagee to be utilized at its discretion. In the event of
foreclosure or the failure to obtain and keep any insurance required herein,
Mortgagor empowers Mortgagee to effect insurance upon the Mortgaged Property at
Mortgagor's expense and for the benefit of Mortgagee in the amounts and types
aforesaid for a period of time extending through the time of redemption from
foreclosure sale, and if necessary therefore, to cancel any or all existing
insurance policies. Mortgagor agrees to furnish Mortgagee copies of all
inspection reports and insurance recommendations received by Mortgagor from any
insurer.
Section 2.02 Escrows. If requested by Mortgagee from and after the
occurrence of an Event of Default hereunder or under the Note not cured during
the applicable cure period,
<PAGE>
Mortgagor shall deposit with Mortgagee on the date of such request and on the
first day of each and every month thereafter, an amount equal to one-twelfth
(l/12th) of the annual taxes, assessments and insurance premiums (the "Charges")
due on or relating to the Mortgaged Property as reasonably estimated by
Mortgagee on the basis of the most recent ascertainable amount thereof, which
amounts shall be deposited in non interest-bearing accounts at or as designated
by the Mortgagee. So long as no Event of Default is continuing and acceleration
of the Indebtedness has not occurred, from time to time out of such deposits and
to the extent such deposits are sufficient Mortgagee will, upon presentation to
Mortgagee by Mortgagor of bills therefor, pay the Charges or will upon
presentation of receipted bills therefor, reimburse Mortgagor for such payments
made by Mortgagor; provided, however, that in the event (a) the deposits on hand
are not sufficient to pay all of the Charges when the same become due from time
to time, or (b) Mortgagee estimates that the current monthly deposits are less
than the estimated monthly amounts necessary to pay the Charges as they become
due from time to time, then Mortgagor shall pay to Mortgagee on demand the
amount necessary to make up the deficiency, with the excess of any such deposits
to be credited to subsequent payments to be made for such items. If an Event of
Default, as herein defined, shall occur and be continuing under the terms of
this Mortgage or the Note, Mortgagee may, at its option, without being required
to do so, apply any deposits on hand to the Indebtedness in such order and
manner as Mortgagee may elect. When the Indebtedness has been fully paid any
remaining deposits shall be returned to Mortgagor or other person entitled
thereto. All deposits are hereby pledged as additional security for the
Indebtedness and shall be held for the purposes for which made as herein
provided. Such deposits may be held by Mortgagee, or its agent, and may be
commingled with other funds of Mortgagee, or its agent, and shall be held
without any allowance of interest thereon and shall not be subject to the
decision or control of Mortgagor. The enforceability of the covenants relating
to taxes and assessments provided in Section 1.08 hereof and the payment of
premiums for insurance provided in Section 2.01 hereof shall not be affected
except insofar as those obligations have been met by compliance with this
Section. Mortgagee may from time to time, at its option, waive, and after such
waiver, reinstate any and all of the provisions contained in this Section. While
such waiver is in effect, Mortgagor shall pay taxes and assessments and premiums
for insurance as herein provided.
ARTICLE III
APPLICATION OF INSURANCE AND AWARDS
Section 3.01 Damage to or Destruction of the Mortgaged Property.
Mortgagor shall give Mortgagee prompt notice of any damage to or destruction of
the Mortgaged Property or any part thereof, and in case of loss covered by
policies of insurance, Mortgagee and Mortgagor jointly shall settle and adjust
any claim arising out of such policies and collect and receipt for the proceeds
payable therefrom, provided, that Mortgagor may itself adjust and collect for
any losses arising out of a single occurrence aggregating not in excess of
$100,000. Any expense incurred by Mortgagee in the adjustment and collection of
insurance proceeds (including without limitation the cost of any independent
appraisal of the loss or damage on behalf of Mortgagee) shall be reimbursed to
Mortgagee first out of any proceeds.
Section 3.02 Condemnation. Mortgagor shall give Mortgagee prompt notice
of any action, actual or threatened, in condemnation or eminent domain and
hereby assigns, transfers
<PAGE>
and sets over to Mortgagee the entire proceeds of any award or claim for damages
for all or any part of the Mortgaged Property taken or damaged under the power
of eminent domain or condemnation. Mortgagee is hereby authorized to intervene
in any such action in the name of Mortgagor, to compromise and settle any such
action or claim, and to collect and receive from the condemning authorities and
give proper receipts and acquittances for such proceeds, provided, that
Mortgagor may itself adjust and collect for any award or claim not in excess of
$100,000. Any expenses incurred by Mortgagee in intervening in such action or
compromising and settling such action or claim, or collecting such proceeds
shall be reimbursed to Mortgagee first out of the proceeds.
Section 3.03 Disbursement of Insurance and Condemnation Proceeds. If
(i) the proceeds from any insurance claim or condemnation award received
pursuant to Section 3.01 or 3.02 (after payment of expenses as contemplated by
such Sections), together with any monies deposited by Mortgagee in an interest
bearing account with Mortgagor for the purposes of restoration or repair as
hereinafter set forth are sufficient to repair and restore the Mortgaged
Property to substantially the same condition as existed immediately prior to
such damage, destruction or condemnation and (ii) there does not then exist
an Event of Default which has continued uncured for a period of time sufficient
to permit Mortgagee to declare all principal and interest due under the Note
immediately due and payable, and (iii) such repair or restoration (when paid
for) shall not result in the creation of any lien or encumbrance on the
Mortgaged Property, other than Permitted Encumbrances, and (iv) the insurance
proceeds, if more than One Hundred Thousand Dollars ($100,000.00), are paid to
the Mortgagee and disbursed in accordance with construction loan procedures
reasonably satisfactory to Mortgagee to assure lien-free completion of the work,
and (v) Mortgagor pays the Mortgagee's reasonable expenses in connection with
the foregoing, and (vi) the casualty occurs at least six calendar (6) months
prior to the expiration of the term of the loan evidenced by the Note, provided,
however, that in the event that the casualty occurs less than six (6) months
prior to the expiration of the Loan at a time when mortgagor has the right to
extend said term pursuant to the provisions set forth, the casualty shall be
deemed to have Occured at least six (6) months prior to the expiration of the
term of the Loan if Mortgagor notifies mortgagee in writing within thirty (30)
days after the occurrence of the casualty that Mortgagor elects to exercise its
rights to extend the Loan, then Mortgagor shall have the right to use such
proceeds to repair and restore the Mortgaged Property; provided, however, that
if such proceeds exceed one Hundred Thousand Dollars ($100,000.00), Mortgagee
shall have the right to approve (which approval shall not be unreasonably
withheld or delayed) the plans for such repair and restoration. If at such time
Mortgagor has defaulted under its obligations to Mortgagee, but such default has
not continued for a period of time sufficient to permit Mortgagee to declare all
principal and interest due under the Note immediately due and payable, then
Mortgagee shall not apply such casualty proceeds in repayment of the Loan until
such time as such default has continued for a period of time sufficient to
permit Mortgagee to declare all said principal and interest immediately due and
payable. In the event that any insurance or condemnation proceeds in excess of
one Hundred Thousand Dollars ($100,000.00) are so applied to the restoration or
repair of the Mortgaged Property, the restoration or repair shall be done under
the supervision of an architect reasonably acceptable to Mortgagee and pursuant
to plans and specifications reasonably approved by Mortgagee and subject to such
other terms, provisions, requirements and safeguards as Mortgagee may reasonably
require. In the case of any such restoration or repair where the cost thereof is
in excess of $100,000.00, the proceeds shall be held by Mortgagee for such
purposes
<PAGE>
and will from time to time be disbursed by Mortgagee to defray the costs of such
restoration or repair under such safeguards and controls as Mortgagee may
require to assure completion in accordance with the approved plans and
specifications and free of liens or claims. Any insurance or condemnation
proceeds which are not applied to repair or restoration of the Mortgaged
Property and any surplus which may remain after payment of all costs of
restoration or repair may at the option of Mortgagee be applied to reduction of
that portion of the Indebtedness (but without any prepayment penalty) then most
remotely to be paid, whether due or not, or returned to Mortgagor or other
person entitled thereto, the choice of application to be solely at the
discretion of Mortgagee.
In exercising its rights under this Article III, except where a
determination is specifically subject to Mortgagee's sole discretion, Mortgagee
agrees that its determinations shall be subject to a standard of reasonableness.
ARTICLE IV
LEASES AND RENTS
Section 4.01. Mortgagor to Comply with Leases. Mortgagor shall, at its
own cost and expense, (a) perform, comply with and discharge all of the
obligations of Mortgagor under any leases or agreements for the use of the
Mortgaged Property or any part thereof, (b) use its best efforts to enforce or
secure the performance of each obligation and understanding of the respective
tenants under any such leases, and (c) appear in and defend, any action or
proceeding arising out of or in any manner connected with Mortgagor's interest
in any leases of the Mortgaged Property or any part thereof. Mortgagor shall
permit no surrender nor assignment of any tenant's interest under said leases
unless the right to assign or surrender is expressly reserved under the lease.
Mortgagor shall not anticipate any installment of rent for more than one (1)
month in advance of its due date, nor execute any mortgage or create or permit a
lien which may be or become superior to any such leases, nor permit a
subordination of any lease to such mortgage or lien. Mortgagor shall not modify
or amend the terms of any such leases, nor borrow against or pledge the rentals
from such leases nor exercise or waive any default of the tenant thereunder
without the prior written consent of the Mortgagee.
Section 4.02. Mortgagee's Right to Perform Under Leases. In the event
Mortgagor fails to perform, comply with or discharge any obligations of
Mortgagor under any lease or should Mortgagee become aware of or be notified by
any tenant under any lease of a failure on the part of Mortgagor to so perform,
comply with or discharge its obligations under said lease, Mortgagee may, but
shall not be obligated to, and without demand upon Mortgagor, and without
waiving or releasing Mortgagor from any obligation contained in this Mortgage,
remedy such failure. Mortgagor shall pay to Mortgagee upon demand all sums
incurred by Mortgagee in remedying any such failure together with interest from
the date of advance by Mortgagee at the rate equal to that as specified in the
Note. No such advance shall be deemed to relieve Mortgagor from any default
hereunder.
Section 4.03. Assignment of Leases and Rents. As additional security
for the Payment of the Indebtedness, Mortgagor does hereby bargain, sell, assign
and transfer unto Mortgagee, its successors and assigns, all of the leases and
other agreements for use or occupancy
<PAGE>
whether written or verbal, which now or hereafter may affect the Mortgaged
Property, or any part thereof (each singly a "Lease" and collectively, the
"Leases"), during the term of this Mortgage and all of the rents, profits, and
other income of any kind now due and which may hereafter become due under or by
virtue of the Leases (the "Rents"), whether presently existing or entered into
at any time during the term of this Mortgage, whether before or after
foreclosure or during the period of redemption. It is the expressed intention of
Mortgagor and Mortgagee to establish an absolute transfer and assignment of all
such Leases and all of the Rents unto Mortgagee, its successors and assigns, and
Mortgagor does hereby appoint irrevocably Mortgagee its true and lawful attorney
in its name and stead, which appointment is coupled with an interest, to collect
all of said rents, profits and other income; provided that, unless and until an
Event of Default, as herein defined, occurs under this Mortgage, Mortgagor shall
have the right to collect and retain said Rents.
In the event that any Leases exist, Mortgagor agrees that upon or at
any time after (i) the occurrence of an Event of Default hereunder, under the
Note or under any separate Assignment of Leases and Rents ("Assignment")
securing the Note or under any other document evidencing and or securing the
Note (each such document, including the Note, this Mortgage and the Assignment
is singly a "Loan Document" and collectively, the "Loan Documents"), or (ii) the
first publication of notice of sale for the foreclosure of this Mortgage
pursuant to Minnesota Statutes, Chapter 580, or (iii) the commencement of an
action to foreclose this Mortgage pursuant to Minnesota Statutes, Chapter 581,
or (iv) the commencement of any period of redemption after foreclosure of this
Mortgage, Mortgagee shall, in any such event, and at any such time, upon
application to the District Court in the county where the Mortgaged Property or
any part thereof is located, by an action separate from the foreclosure under
Chapter 580, in the foreclosure action under Chapter 581 or by independent
action (it being understood and agreed that the existence of a foreclosure under
Chapter 580 or a foreclosure action under Chapter 581 is not a prerequisite to
any action for a receiver hereunder), be entitled to the appointment of a
receiver for the Rents, whether before or after foreclosure, or during the full
statutory period of redemption, if any, upon a showing that Mortgagor has
breached, beyond the expiration of any applicable cure period, any covenant
contained in this Mortgage, the Note, the Assignment or any other Loan Document,
including, without limitation, any covenant relating to any of the following:
(1) Repayment of Tenant security deposits, with interest
thereon, as required by Minnesota Statutes, Section 504.20, if
applicable;
(2) Payment when due of prior or current real estate taxes or
special assessments with respect to the Mortgaged Property, or the
periodic escrow for payment of the same;
(3) Payment when due of premiums for insurance of the types
required hereby, or the periodic escrow for payment of the same; or
(4) Keeping of the covenants required of a lessor or licensor
pursuant to Minnesota Statutes, Section 504.18, Subdivision 1, if
applicable.
<PAGE>
Mortgagee shall be entitled to the appointment of such a receiver without regard
to waste, adequacy of the security or solvency of Mortgagor. The court shall
determine the amount of the bond to be posted by the receiver. The receiver, who
shall be an experienced property manager, shall collect (until the Indebtedness
is paid in full and, in the case of a foreclosure sale, during the entire
redemption period, if any) the Rents, manage any portion of the Mortgaged
Property subject to any Lease so as to prevent waste, execute leases of such
portion within or beyond the period of the receivership, if approved by the
court, and apply all Rents, collected by him in the following order:
(a) to payment of all reasonable fees of the receiver, if any,
approved by the court;
(b) to the items listed in clauses (1) through (4) above (to
the extent applicable) in the priority as numbered;
(c) to expenses for normal maintenance, operation and
management of the portions of the Mortgaged Property subject to any
Lease, including but not limited to Mortgagee's out-of-pocket costs and
all other costs and expenses which Mortgagee is entitled to pay or
incur pursuant to the Assignment; and
(d) the balance to Mortgagee to be credited, prior to
commencement of foreclosure, against the Indebtedness, in such order as
Mortgagee may elect, or to be credited, after commencement of
foreclosure, to the amount required to be paid to effect a
reinstatement prior to foreclosure sale, or to be credited, after a
foreclosure sale, to any deficiency and then to the amount required to
be paid to effect a redemption, pursuant to Minnesota Statutes,
Sections 580.30, 580.23, 581.10, 582.032, 581.32, or their successors,
as the case may be, with any excess to be paid to Mortgagor, its
successors or assigns to the extent permitted by applicable law;
provided, however, that if this Mortgage is not reinstated nor the
Mortgaged Property redeemed, as and during the times provided by said
Sections 580.30, 580.23, 581.10, 582.032 or 582.32 or their successors,
the entire amount received pursuant hereto, after deducting therefrom
the amounts applied by Mortgagee to any deficiency, shall be the
property of the purchaser of the Mortgaged Property at the foreclosure
sale, together with all or any part of the Mortgaged Property acquired
through foreclosure. The receiver shall file periodic accountings as
the court determines are necessary and a final accounting at the time
of his discharge. Mortgagee shall have the right, at any time and
without limitation, as provided in Minnesota Statutes, Section 582.03,
to advance money to the receiver to pay any part or all of the expenses
which the receiver should otherwise pay, if cash were available from
the Mortgaged Property, and all sums so advanced, with interest at the
rate then payable under the Note, shall be a part of the sum required
to be paid to redeem from any foreclosure sale. Said sums shall be
proved by the affidavit of Mortgagee, its agent or attorney, describing
the expenses for which the same were advanced and describing the
Mortgaged Property, which must be filed for record in the office where
this Mortgage is recorded, and a copy thereof shall be furnished to the
sheriff and the receiver at least ten (10) days before the expiration
of any period of redemption.
<PAGE>
Upon the happening of any of the events set forth above, or during any
period of redemption after foreclosure sale, and prior to the appointment of a
receiver as hereinbefore provided, Mortgagee shall have the right to collect the
Rents and apply the same in the manner hereinbefore provided for the application
thereof by a receiver. The rights set forth in this Section shall be binding
upon the occupiers of the Mortgaged Property from the date of filing by
Mortgagee in the office where this Mortgage is recorded, in the county in which
the Mortgaged Property is located, of a notice of default in the terms and
conditions of this Mortgage beyond the expiration of any applicable cure period
and service of a copy of the notice upon the occupiers of the Mortgaged
Property. Enforcement hereof shall not cause Mortgagee to be deemed a mortgagee
in possession, unless it elects in writing to be so deemed. For the purpose
aforesaid, Mortgagee may enter and take possession of any portion of the
Mortgaged Property subject to any Lease, manage and operate the same and take
any action which, in Mortgagee's judgment, is necessary or proper to conserve
the value of such portion of the Mortgaged Property. Mortgagee may also take
possession of, and for these purposes use, any and all of the Property contained
in such portion of the Mortgaged Property.
The costs and expenses (including any receiver's fees and attorney's
fees) incurred by Mortgagee pursuant to the powers herein contained shall be
immediately reimbursed by Mortgagor to Mortgagee on demand, shall be secured
hereby and shall bear interest from the date incurred at the rate then payable
under the Note. Mortgagee shall not be liable to account to Mortgagor for any
action taken pursuant hereto, other than to account for any Rents actually
received by Mortgagee.
ARTICLE V
UNIFORM COMMERCIAL CODE
Section 5.01. Security Agreement; Fixture Filing. This Mortgage shall
constitute a security agreement as defined in the Minnesota Uniform Commercial
Code, Minnesota Statutes, Chapter 336 and all acts amendatory thereof and any
similar or replacement statute hereafter enacted (the "Code"), and, as to those
items described in this Mortgage that are or are to become fixtures related to
the real estate mortgaged herein, it is intended as to those items that this
Mortgage shall be effective as a financing statement filed as a fixture filing
from the date of its filing in the real estate records of the County where the
Mortgaged Property is situate. A carbon, photographic or other reproduction of
this Mortgage may also be filed as a financing statement. The name of the record
owner of said real estate is the Mortgagor as set forth in page one of this
mortgage. Information concerning the security interest created by this
instrument may be obtained from Mortgagee, as secured party, at its address as
set forth in page one of this Mortgage. The address of Mortgagor, as debtor, is
as set forth in page one of this Mortgage. Mortgagor's federal tax
identification number is 41-0974681. This document covers goods which are or are
to become fixtures. The fixtures Revenues and Income, and Plans, Licenses and
Permits are sometimes herein collectively called the "Collateral".
Section 5.02. Additional Agreements. Mortgagor agrees that:
(a) if notice to any party of the intended disposition of the
Collateral is required by law, such notice shall be deemed commercially
reasonable if given at least
<PAGE>
ten (10) days prior to such intended disposition and may be given by
advertisement in a newspaper accepted for legal publications either
separately or as part of a notice given to foreclose the real property
or may be given by private notice if such parties are known to
Mortgagee;
(b) Mortgagor will from time to time provide Mortgagee, upon
request (but not more than once in any three-year period), with
itemizations of all such Collateral;
(c) all fixtures comprising the Collateral are, and at all
times and for all purposes and in all proceedings both legal or
equitable shall be regarded as part of the real property mortgaged
hereunder irrespective of whether such item is physically attached to
the real property or any such item is referred to or reflected in a
financing statement; and
(d) Mortgagor shall give advance written notice of any
proposed change in Mortgagor's name, identity or structure and will
execute and deliver to Mortgagee prior to or concurrently with such
change all additional financing statements that Mortgagee may require
to establish and perfect the priority of Mortgagee's security interest.
ARTICLE VI
CERTAIN RIGHTS OF MORTGAGEE
Section 6.01 Right to Cure Default. If Mortgagor shall fail to comply
with any of the terms, covenants, agreements or conditions of this Mortgage or
the Note, Mortgagee may, but shall not be obligated to, upon prior written
notice to Mortgagor and the expiration of any applicable cure period and without
waiving or releasing Mortgagor from any obligation in this Mortgage contained,
remedy such failure, and Mortgagor agrees to pay upon demand all sums incurred
and the cost of performance by Mortgagee in remedying any such failure together
with interest on all such sums and the costs of such performance from the date
of such advance and performance at the rate equal to that specified in the Note.
All such sums and costs, together with interest as aforesaid, shall constitute a
portion of the Indebtedness, but no such advance or performance shall be deemed
to relieve Mortgagor from any failure hereunder.
Section 6.02 No Claim Against Mortgagee. Nothing contained in this
Mortgage shall constitute a consent or request by Mortgagee, express or implied,
for the performance of any labor or services or for the furnishing of any
materials or other property in respect of the Mortgaged Property, or any part
thereof, nor as giving Mortgagor or any party in interest with Mortgagor any
right, power or authority to contract for or permit the performance of any labor
or services or the furnishing of any materials or other property in such fashion
as would create any personal liability against Mortgagee in respect thereof or
would permit the making of any claim that any lien based on the performance of
such labor or services or the furnishing of any such materials or other property
is prior to the lien of this Mortgage.
Section 6.03 Inspection. Mortgagor shall permit Mortgagee's authorized
representatives to enter the Mortgaged Property at reasonable times and upon 48
hours notice for the purpose of inspecting the same; however, Mortgagee shall
have no duty to make such inspections and
<PAGE>
shall not incur any liability or obligation for making or not making any such
inspections. If Mortgagee makes any such inspection, Mortgagee shall not
interfere with Mortgagor's business operations and shall execute a
confidentiality agreement in a form then customarily used by Mortgagor.
Section 6.04 Waivers; Releases; Resort to Other Security. Without
affecting the liability of any party liable for payment of the Indebtedness or
performance of any obligation contained herein, and without affecting the rights
of Mortgagee with respect to any security not expressly released in writing,
Mortgagee may, at any time, and without notice to or the consent of Mortgagor or
any party in interest with the Mortgaged Property or the Note (a) release any
person liable for payment of all or any part of the Indebtedness or for
performance of any obligation herein, (b) make any agreement extending the time
or otherwise altering the terms of payment of all or any part of the
Indebtedness or modifying or waiving any obligation, or subordinating, modifying
or otherwise dealing with the lien or charge hereof, (c) accept any additional
security, (d) release or otherwise deal with any property, real or personal,
including any or all of the Mortgaged Property, including making partial
releases of the Mortgaged Property; or (e) resort to any security agreements,
pledges, contracts of guarantee, assignments of rents and leases or other
securities, and exhaust any one or more of said securities and the security
hereunder, either concurrently or independently and in such order as it may
determine.
Section 6.05 Rights Cumulative. Each right, power or remedy herein
conferred upon Mortgagee is cumulative and in addition to every other right,
power or remedy, express or implied, now or hereafter arising, available to
Mortgagee, at law or in equity, or under the Code, or under any other agreement,
and each and every right, power and remedy herein set forth or otherwise so
existing may be exercised from time to time as often and in such order as may be
deemed expedient by Mortgagee and shall not be a waiver of the right to exercise
at any time thereafter any other right, power or remedy. No delay or omission by
Mortgagee in the exercise of any right, power or remedy arising hereunder or
arising otherwise shall impair any such right, power or remedy or the right of
Mortgagee to resort thereto at a later date or be construed to be a waiver of
any default or Event of Default, as herein defined, under this Mortgage or any
of the Loan Documents.
Section 6.06 Subsequent Agreements. Any agreement hereafter made by
Mortgagor and Mortgagee pursuant to this Mortgage shall be superior to the
rights of the holder of any intervening lien or encumbrance.
Section 6.07 Waiver of Appraisement, Homestead, Marshaling. Mortgagor
hereby waives to the full extent lawfully allowed the benefit of any homestead,
appraisement, evaluation, stay and extension laws now or hereinafter in force.
Mortgagor hereby waives any rights available with respect to marshaling of
assets and Mortgagee shall not be required to separately sell any portion of the
Mortgaged Property, and Mortgagee shall not be required to exhaust its remedies
against a specific portion of the Mortgaged Property before proceeding against
the other. Mortgagor does hereby expressly consent to and authorize the sale of
the Mortgaged Property or any part thereof as a single unit or parcel or in such
other manner as Mortgagee may determine.
<PAGE>
ARTICLE VII
EVENTS OF DEFAULT AND REMEDIES
Section 7.01 Events of Default. It shall be an "Event of Default"
under this Mortgage if:
(a) Mortgagor or any guarantor or surety or a maker of the
Note shall fail to pay any principal of the Note, any prepayment
premium (if applicable) or interest on the Note, any other amount of
money required to be paid pursuant to the Note, or any other portion of
the Indebtedness when and as the same becomes due, whether at the
stated maturity or at a date fixed for any installment payment or any
accelerated payment date or otherwise and such failure shall continue
for ten days after written notice thereof; or
(b) Mortgagor shall fail to comply with or perform any other
term, covenant, agreement or condition of the Note, this Mortgage, or
any other document or instrument securing the payment of the Note and
such failure is not cured prior to the expiration of thirty (30) days
following written notice of such failure delivered by Mortgagee to
Mortgagor; or
(c) Mortgagee shall declare an Event of Default pursuant to
and in accordance with Section 1.11 hereof; or
(d) Mortgagor or any maker, guarantor or surety of the Note
shall:
(i) file a petition under any chapter of the
Bankruptcy Reform Act of 1978 (the "Bankruptcy Act") or any
similar law, state or federal, whether now existing or
hereafter enacted; or
(ii) in any involuntary bankruptcy case commenced
against any of them: (a) fail to file an answer within the
time prescribed by the Bankruptcy Act, (b) file an answer
admitting that it or he is generally not paying its or his
debts as such debts become due, (c) fail to obtain a dismissal
of such case within sixty (60) days of its commencement, (d)
convert the case from one chapter of the Bankruptcy Act to
another chapter of the Bankruptcy Act, or (e) be the subject
of an order for relief in such bankruptcy case; or
(iii) have a "custodian", as that term is defined in
the Bankruptcy Act, appointed for it or him, or consent to
such appointment, or have any Court take jurisdiction of its
or his property, or any material portion thereof, in any
voluntary proceeding for the purpose of reorganization,
arrangement, dissolution, or liquidation, if such custodian
shall not be discharged or if such jurisdiction shall not be
relinquished, vacated or stayed on appeal within sixty (60)
days of the appointment; or
(iv) make an assignment for the benefit of its or his
creditors; or
<PAGE>
(e) Mortgagor shall be dissolved, liquidated or wound up,
except in connection with a bona fide corporate reorganization pursuant
to which the surviving corporation assumes all of Mortgagor's
obligations under the Note and this Mortgage, or any guarantor or
surety of the Note shall die; or
(f) any representation or warranty made by Mortgagor in this
Mortgage or made in connection with the execution and delivery of this
Note and this Mortgage, or the making of any loans evidenced thereby or
secured hereby shall be incorrect or untrue in any material respect
when made; or
(g) An Event of Default shall occur under the Note or
instrument securing the obligations evidenced by any Note.
Section 7.02 Certain Remedies; Acceleration, Prepayment Premium and
Foreclosure. If an Event of Default shall occur, Mortgagee may, in addition to
all other rights and remedies permitted it under the Note, immediately declare
the entire unpaid principal balance of the Note, together with all other
portions of the Indebtedness to be immediately due and payable and thereupon all
such unpaid principal balance of the Note, together with all accrued interest
thereon, prepayment premium and all other portions of the Indebtedness evidenced
thereby and secured hereby shall be and become immediately due and payable.
Mortgagor expressly agrees that the term "Indebtedness" subject to and payable
upon acceleration pursuant to this Section 7.02 shall include without limitation
any prepayment premium applicable to the Note, whether the payment thereof is
occasioned by the occurrence of an Event of Default hereunder, Mortgagee's
exercise of its rights under this Section or otherwise.
If an Event of Default shall occur, then in every such case Mortgagee
may (a) proceed to protect and enforce its rights by a suit or suits in equity
or at law, either for the specific performance of any term, covenant, agreement
or condition contained herein or in the Note or in aid of the execution of any
power herein or therein granted for collection of the Note or the Indebtedness
or for the foreclosure of this Mortgage, or for the enforcement of any other
appropriate legal or equitable remedy, and/or (b) foreclose this Mortgage; and
Mortgagor hereby authorizes and fully empowers mortgagee to foreclose the lien
of this Mortgage by judicial proceedings in the manner prescribed by applicable
law, or by advertisement with full authority to sell the Mortgaged Property at
public auction and convey the same to the purchaser in fee simple all in
accordance with and in any manner prescribed by law, and out of the proceeds
arising from sale and foreclosure to retain the principal of the Note and
interest on the Note and all other portions of the Indebtedness together with
all such sums of money as Mortgagee shall have expended or advanced pursuant to
this Mortgage or pursuant to statute together with interest thereon as herein
provided and all costs and expenses of such foreclosure, including lawful
attorneys' fees, with the balance, if any, to be paid to the persons entitled
thereto by law. In case of any sale of the Mortgaged Property, or any part
thereof, pursuant to any judgment or decree of any court or otherwise in
connection with the enforcement of any of the terms of this Mortgage, Mortgagee
may become the purchaser, and for the purpose of making settlement for or
payment of the purchase price, shall be entitled to deliver and use the Note and
any claims for interest and prepayment premium matured and unpaid thereon,
together with all other portions of the Indebtedness, in order that there may be
credited as paid on the purchase price
<PAGE>
the sum then due under the Note (including the principal of the Note and
prepayment premium and interest thereof) and all other portions of the
Indebtedness.
Section 7.03 Receiver. If an Event of Default shall occur, Mortgagee
shall be entitled as a matter of right without notice and without giving bond
and without regard to the solvency or insolvency of the Mortgagor, or waste of
the Mortgaged Property or adequacy of the security of the Mortgaged Property, to
apply for the appointment of a receiver in accordance with the statutes and law
made and provided for, who shall have all the rights, powers and remedies as
provided by such statute or law, including, without limitation, the rights of a
receiver pursuant to Minn. Stat. ss.576.01, as the same may be amended and who
shall from the date of his appointment through any applicable period of
redemption collect the rents, profits and all other income of any kind; manage
the Mortgaged Property so to prevent waste; execute leases within or beyond the
period of the receivership; perform the terms of this Mortgage and apply the
rents, profits and other income to the payment of the expenses enumerated in
Minn. Stat. ss.576.01, subd. 2 in the priority mentioned therein and to all
expenses for the normal maintenance of the Mortgaged Property and to the costs
and expenses of the receivership and to the payment of the Indebtedness in such
order and manner as Mortgagee may elect and as further provided in any
assignment of rents executed by Mortgagor or Mortgagee (whether contained in
this Mortgage or in a separate instrument).
Section 7.04 Rights Under Uniform Commercial Code. In addition to the
rights available to a mortgagee of real property, Mortgagee shall also have all
the rights, remedies and recourse available to a secured party under the Code
including the right to proceed under the provisions of the Code governing
default as to any Collateral which may be included in the Mortgaged Property or
which may be deemed non-realty in a foreclosure of this Mortgage or to proceed
as to such Collateral in accordance with the procedures and remedies available
pursuant to a foreclosure of real estate.
Section 7.05 Right to Discontinue Proceeding. In the event Mortgagee
shall have proceeded to invoke any right, remedy or recourse permitted under
this Mortgage and shall thereafter elect to discontinue or abandon the same for
any reason, Mortgagee shall have the unqualified right to do so and in such
event Mortgagor and Mortgagee shall be restored to their former positions with
respect to the Indebtedness. This Mortgage, the Mortgaged Property and all
rights, remedies and recourse of Mortgagee shall continue as if the same had not
been invoked.
Section 7.06 Acknowledgment of Waiver of Hearing Before Sale. Mortgagor
understands and agrees that it an Event of Default occurs under the terms of
this Mortgage, Mortgagee has the right, inter alia, to foreclose this Mortgage
by advertisement pursuant to Minnesota Statutes, Chapter 580, as hereafter
amended, or pursuant to any similar or replacement statute hereafter enacted;
that if Mortgagee elects to foreclose by advertisement, it may cause the
Mortgaged Property, or any part thereof, to be sold at public auction; that
notice of such sale must be published for six (6) successive weeks at least once
a week in a newspaper of general circulation and that no personal notice is
required to be served upon Mortgagor. Mortgagor further understands that in the
event of such default Mortgagee may also elect its rights under the Code and
take possession of the Collateral, or any part thereof, and dispose of the same
by sale or otherwise in one or more parcels provided that at least ten (10)
days' prior notice of such
<PAGE>
disposition must be given all as provided for by the Code, as hereafter amended
or by any similar or replacement statute hereafter enacted. Mortgagor further
understands that under the Constitution of the United States and the
Constitution of the State of Minnesota it may have the right to notice and
hearing before the Mortgaged Property may be sold and that the procedure for
foreclosure by advertisement described above does not insure that notice will be
given to Mortgagor and neither said procedure for foreclosure by advertisement
nor the Code requires any hearing or other judicial proceeding. MORTGAGOR HEREBY
RELINQUISHES, WAIVES AND GIVES UP ANY CONSTITUTIONAL RIGHTS IT MAY HAVE TO
NOTICE AND HEARING BEFORE NONJUDICIAL SALE OF THE MORTGAGED PROPERTY AND
EXPRESSLY CONSENTS AND AGREES THAT THE MORTGAGED PROPERTY MAY BE FORECLOSED BY
ADVERTISEMENT AND THAT THE COLLATERAL MAY BE DISPOSED OR PURSUANT TO THE CODE,
ALL AS DESCRIBED ABOVE. MORTGAGOR ACKNOWLEDGES THAT IT IS REPRESENTED BY LEGAL
COUNSEL; THAT BEFORE SIGNING THIS DOCUMENT THIS SECTION AND MORTGAGOR'S
CONSTITUTIONAL RIGHTS WERE FULLY EXPLAINED BY SUCH COUNSEL AND THAT MORTGAGOR
UNDERSTANDS THE NATURE AND EXTENT OF THE RIGHTS WAIVED HEREBY AND THE EFFECT OF
SUCH WAIVER.
ARTICLE VIII
FINANCIAL COVENANTS
Section 8.01. Financial Statements. Mortgagor shall furnish Mortgagee
quarterly statements of Mortgagor's financial condition within sixty (60) days
after the end of each of Mortgagor's fiscal quarters. Within ninety (90) days
after each fiscal year, Mortgagor shall provide Mortgagee with audited financial
statements for Mortgagor, including a balance sheet and a statement of income
and expenses, for the immediately preceding fiscal year. All information so
submitted shall be in the same form as submitted to the Securities and Exchange
Commission.
Section 8.02 Additional information. Following Mortgagee's reasonable
request, Mortgagor shall furnish to Mortgagee additional financial information
in the form generated by mortgagor in the ordinary course of business; provided,
that, Mortgagor shall not be obligated to provide an information which it is
prohibited by law, code, statute or regulation from providing (or for which it
would be subject to penalty or liability to shareholders or any other party for
providing) and, provided, further, that Mortgagor shall have the right to
require that Mortgagee execute a confidentiality agreement in standard form
prior to Mortgagor providing any such information which constitutes confidential
information.
Section 8.03 Costs. The cost of providing the financial information
required in Sections 8.01 and 8.02 shall be the sole responsibility of
Mortgagor.
<PAGE>
ARTICLE IX.
MISCELLANEOUS
Section 9.01 Choice of Law. This Mortgage is made and executed under
the laws of the State of Minnesota and shall be governed by the laws of said
State.
Section 9.02 Change of Ownership. In the event that the ownership of
the Mortgaged Property becomes vested in a person or persons other than
Mortgagor, Mortgagee may continue to deal with Mortgagor without any obligation
to deal with such successor or successors in interest with reference to this
Mortgage and the Indebtedness until notified of such vesting and approval of
such successor or successors in accordance with the terms of Section 1.11
hereof. Upon such notification, Mortgagee may thereafter deal with such
successor in place of Mortgagor without any obligation to thereafter deal with
Mortgagor and without waiving any liability of Mortgagor hereunder or under the
Note. Mortgagor shall give immediate written notice to Mortgagee of any
conveyance, transfer or change of ownership of the Mortgaged Property but
nothing in this Section contained shall constitute the consent of Mortgagee to
any such conveyance, transfer or change or negate any provisions elsewhere in
this Mortgage giving Mortgagee the right to declare the entire unpaid balance of
the Indebtedness immediately due and payable.
Section 9.03 Successors and Assigns. This Mortgage and each and every
term, covenant, agreement, condition and other provision hereof shall be binding
upon Mortgagor and its successors and assigns including without limitation each
and every from time to time record owner of the Mortgaged Property or any other
person having an interest therein, shall run with the land and shall inure to
the benefit of Mortgagee and its successors and assigns. As used herein the
words "successors and assigns" shall also be deemed to include the heirs,
representatives, administrators and executors of any natural person who is a
party to this Mortgage.
Section 9.04 Unenforceability of Certain Clauses. The unenforceability
or invalidity of any provisions hereof shall not render any other provision or
provisions herein contained unenforceable or invalid.
Section 9.05 Captions and Headings. The captions and headings of the
various sections of this Mortgage are for convenience only and are not to be
construed as confining or limiting in any way the scope or intent of the
provisions hereof. Whenever the context requires or permits, the singular shall
include the plural, the plural shall include the singular and the masculine,
feminine and neuter shall be freely interchangeable.
Section 9.06 Notice. Any notice which any party hereto may desire or
may be required to give to any other party shall be in writing and the mailing
thereof by certified mail to their respective addresses as set forth in page one
of this Mortgage, or to such other places any party hereto may hereafter by
notice in writing designate, shall constitute service of notice hereunder. Any
notice, if mailed properly addressed, shall be deemed given on the second
business day after the placing thereof in the United States mail, postage
prepaid; any notice given in person or by Federal Express or similar service
shall be deemed given upon receipt.
<PAGE>
Section 9.07 Costs and Expenses. Mortgagor agrees to reimburse
Mortgagee upon demand for all reasonable out-of-pocket expenses (including
reasonable fees and expenses of counsel to Mortgagee) in connection with
Mortgagee's enforcement of the obligations of Mortgagor hereunder or under the
Note or any other document executed and delivered in connection therewith,
whether or not suit is commenced including, without limitation, attorneys' fees
and legal expenses in connection with any appeal of a lower court's order or
judgment.
Section 9.08 Entire Agreement; Amendments. This Mortgage represents the
entire agreement of the parties with respect to the subject matter covered
hereby and may not be modified in any respect except by written agreement signed
by all parties hereto.
IN WITNESS WHEREOF, Mortgagor has caused these presents to be executed
as of the date first above written.
GRIST MILL CO.
By: /s/ Daniel J. Kinsella
------------------------------
Its:
-------------------------
Daniel J. Kinsella
Grist Mill Co
Vice President
Chief Financial Officer
STATE OF MINNESOTA )
) ss:
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 29th day of
May, 1997, by Daniel J. Kinsella, the Vice President and Chief Financial Officer
of Grist Mill Co., a Delaware corporation.
/s/ A. L. Reichow
------------------------------
Notary Public
STAMP: A. L. Reichow
NOTARY PUBLIC - MINNESOTA
My Commission Expires Jan. 31, 2000
This instrument prepared by:
Fabyanske, Svoboda, Westra & Hart, P.A.
920 Second Avenue South #1100
Minneapolis, MN 55402
(612) 338-0115
<PAGE>
EXHIBIT A
Legal Description
Lots 1, 2 and 3, Block 1, Grist Mill Second Addition, according to the recorded
plat thereof on file and of record in the office of the County Recorder, Dakota
County, Minnesota.
<PAGE>
EXHIBIT B
PERMITTED ENCUMBRANCES
1. Real estate taxes and installments of special assessments due and
payable therewith payable in October 1997 and thereafter.
2. Drainage and utility easement(s) as shown on the recorded plat of
Airlake Industrial Park First Addition, Airlake Industrial Park Second
Addition, Grist Mill Addition and Grist Mill Second Addition.
3. Declaration of Restrictions, Covenants and Conditions dated November
11, 1982, filed of record December 14, 1982, as Document No. 613201.
4. Declaration of Restrictions, Covenants and Conditions dated November
27, 1985, filed of record December 16, 1985, as Document No. 710719.
5. Easement for transmission line in favor of Cooperative Power
Association as contained in Easement dated February 10, 1981, filed of
record February 12, 1981, as Document Nos. 576464 and 576465.
6. Conditional Use Permit filed of record November 23, 1987, as Document
No. 816510.
7. Conditional Use Permit filed of record July 3, 1985, as Document
No. 692136.
8. Amended and Restated Encroachment License dated October 20, 1987, filed
of record October 20, 1987, as Document No. 811530.
9. Development Contract dated August 20, 1996, filed of record October 23,
1996, as Document No. 1383552.
10. Development Contract dated August 20, 1996, filed of record November
15, 1996, as Document No. 1387996.
11. Declaration of Restrictions, Covenants and Conditions dated August 14,
1996, filed of record November 15, 1996, as Document No. 1387997.
12. Declaration of Easement dated August 20, 1996, filed of record November
15, 1996, as Document No. 1387998.
<PAGE>
[LOGO]
COMMONWEALTH COMMITMENT FOR
TITLE INSURANCE
COMMONWEALTH LAND TITLE INSURANCE COMPANY
Schedule A
1. Effective Date: May 8, 1997, at 8:00 A.M. File No. 40903C
2. Policy or Policies to be issued: Amount:
(a) [ ] ALTA Owner Policy - 1992 Not Applicable
Proposed Insured: Not Requested
(b) [X] ALTA Loan Policy - 1992 $5,900,000.00
Proposed Insured: Commerce Mortgage Company, a division of Commerce Financial
Group, Inc., and/or successors and assigns
3. The estate or interest in the land described or referred to in the Commitment
and covered herein is fee simple and is at the effective date hereof vested
in:
Grist Mill Co., a Delaware corporation
4. The land referred to in this Commitment is situated in the County of Dakota,
State of Minnesota, and is described as follows:
Lots 1, 2, and 3, Block l, Grist Mill Second Addition
Note for Information: Property is Abstract
BA
For further information regarding this Commitment please contact Diana
Siebenaler, Laurel A. Forrest, Judy Keiser, Gayle Hudak or Linda K. Peterson at
(612) 227-8571.
Countersigned: /s/ illegible
------------------------------------------
Authorized Officer
ALTA Commitment Issued by: Commonwealth Land Title Insurance Company
Schedule A
Valid Only if Schedule 3 and Cover Are Attached
EXHIBIT 10(i)
AMENDMENT
This Amendment No. 1 to that certain Employment Agreement dated June 1,
1994 by and between Grist Mill Co. ("Company") and Ronald K. Zuckerman
("Employee").
RECITALS
A. Company and Employee have previously entered into a Consulting
Agreement ("Agreement") dated June 1, 1994.
B. Company and Employee wish to amend the Agreement to extend the term
of the Agreement and to reduce the amount of compensation to be paid to
Employee.
NOW, THEREFORE, in consideration of the foregoing recitals (which
recitals are incorporated into this Agreement by reference) and other good and
valuable considerations, the parties agree as follows:
1. Amendment of Paragraph 2 - Term. The term of this Agreement shall
continue until May 31, 2001.
2. Amendment of Paragraph 4 - Compensation. The Company shall continue
to pay Employee the Base Salary Rate as described in the Agreement until May 31,
1998. Commencing June 1, 1998 the Base Salary Rate shall be reduced to
Seventy-Five Thousand Dollars ($75,000.00) per annum.
3. Confirmation. All other terms and conditions contained in the
Agreement except as amended by Paragraphs 1 and 2 hereof shall remain unchanged
and in full force and effect.
Date: June 3, 1997
GRIST MILL CO.
By: /s/ Glen S. Bolander
---------------------------------
/s/ Ronald K. Zuckerman
-------------------------------------
RONALD K. ZUCKERMAN
GRIST MILL CO.
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED MAY 31
-------------------------------
1997 1996 1995
------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C>
Primary earnings per share:
Net earnings applicable to common stock $ 2,833 $ 3,391 $ 4,563
======= ======= =======
Average number of common and common
equivalent shares outstanding:
Average common shares outstanding 6,753 6,717 6,621
Dilutive effect of stock options 15 145 252
------- ------- -------
6,768 6,862 6,873
======= ======= =======
Primary earnings per share $ 0.42 $ 0.49 $ 0.66
======= ======= =======
Fully diluted earnings per share:
Earnings for fully diluted computation $ 2,833 $ 3,391 $ 4,563
======= ======= =======
Average number of common and common
equivalent shares outstanding:
Average common shares outstanding 6,753 6,717 6,621
Dilutive effect of stock options 22 152 286
------- ------- -------
6,775 6,869 6,907
======= ======= =======
Fully diluted earnings per share $ 0.42 $ 0.49 $ 0.66
======= ======= =======
</TABLE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Dollars and shares in thousands, except per share data)
Year ended May 31, 1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $108,484 $98,429 $78,916 $56,179 $66,478 $65,917
Earnings before income taxes $ 4,539 $ 5,322 $ 7,130 $ 1,886 $ 6,350 $ 5,900
Net earnings $ 2,833 $ 3,391 $ 4,563 $ 1,208 $ 4,001 $ 3,717
Earnings per share $ 0.42 $ 0.49 $ 0.66 $ 0.16 $ 0.54 $ 0.51
Working capital $ 13,196 $10,778 $ 9,994 $14,934 $16,848 $14,330
Total assets $ 55,954 $50,186 $46,259 $45,600 $48,101 $46,882
Long term debt, including current portion $ 5,900 $ 3,164 $ 4,879 $ 8,033 $10,366 $12,607
Shareholder's equity $ 37,490 $35,367 $31,522 29,381 $29,216 $23,052
OTHER INFORMATION:
Gross profit as a percent of net sales 24.4% 24.4% 28.2% 28.4% 38.5% 37.8%
Operating profit as a percentage of
net sales 4.4% 5.7% 9.6% 4.5% 11.1% 10.9%
Net earnings as a percentage of net sales 2.6% 3.4% 5.8% 2.2% 6.0% 5.6%
Net return on average shareholders' equity 7.8% 10.1% 15.0% 4.1% 15.3% 17.6%
Common shares outstanding at year end 6,645 6,765 6,663 7,049 7,210 6,722
Book value per common share outstanding $ 5.64 $ 5.23 $ 4.74 $ 4.17 $ 4.05 $ 3.43
Current ratio 2.2 2.0 2.0 2.8 3.0 2.2
Number of employees at year-end 825 800 646 446 413 424
=================================================================================================================
</TABLE>
Share and per share amounts for 1992 have been restated to reflect the 3-for-2
stock split as of October 26, 1992.
[BAR CHART]
Return on Invested Capital
93 10.1%
94 3.2%
95 12.5%
96 8.8%
97 6.5%
[BAR CHART]
Total Capitalization
(in millions) Debt Equity
93 $39.6 $10.4 $29.2
94 $37.4 $ 8.0 $29.4
95 $36.4 $ 4.9 $31.5
96 $38.6 $ 3.2 $35.4
97 $43.4 $ 5.9 $37.5
The overall returns on invested capital have been below Grist Mill's long-term
goals. However, Grist Mill is hopeful of achieving improved operating
efficiencies which should increase return on invested capital.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
OVERVIEW: Sales in fiscal 1997 grew to $108.5 million, an increase of more than
10% from 1996. Earnings were $2.8 million, or $.42 per share compared to $3.4
million, or $.49 per share a year ago. Sales growth was the result of increased
grocery product sales offsetting a decline in contract manufacturing sales. 1997
earnings declined due to lower profit margins from contract manufacturing and
the impact of new grocery product introductions.
SALES: Grocery product sales grew by 32% in 1997 and 34% in 1996. The growth
rate achieved in 1997 was the result of significant sales increases in both the
wholesome snack bar and ready-to-eat cereal businesses. The wholesome snack bar
business increased 57% during fiscal 1997. The growth reflects sales from the
Company's new crisp rice marshmallow bar, a new line of low fat chewy granola
bars, and continued success of the Company's fruit-filled cereal bars. The
Company has been successful in expanding distribution of its wholesome snack bar
products with its store brand customers.
Sales of ready-to-eat cereals grew 37% in fiscal 1997 and 88% in 1996; these
increases are attributable to increased sales to existing store brand customers
and the addition of new customers.
Contract manufacturing sales declined 30% to $21 million in fiscal 1997 as
the Company's largest contract manufacturing customer experienced a decline in
consumer demand for its products. The Company currently expects that contract
manufacturing sales will decline further in 1998.
GROSS MARGIN: The gross profit margin was 24.4% of net sales for 1997, the
same as in 1996. The Company generates significantly higher gross profit margins
from its core grocery business than its contract business. In fiscal 1997 the
Company's mix of sales shifted to a higher percentage of sales from core grocery
products. However, the gross margin was unfavorably impacted by lower pricing
from contract manufacturing and the impact of new grocery products which have a
lower profit margin at introduction. The gross profit margin improved in the
Company's fiscal fourth quarter reflecting the Company's successful programs to
increase manufacturing efficiency, particularly on new snack bar and
ready-to-eat cereal products.
Gross profit declined in 1996 from 28.2% of net sales in 1995 to 24.4% in
1996. The gross profit margin was impacted by lower pricing on contract
manufacturing sales and start-up costs related to ready-to-eat cereal and new
bar products.
SELLING AND DELIVERY EXPENSES: The shift in sales mix from contract
manufacturing to grocery product sales has resulted in an increase in selling
and delivery expenses from 13.9% of net sales in 1996 to 15.9% in 1997. Grocery
products have higher selling and delivery costs such as broker commissions,
transportation and promotion. Additionally, the Company relocated its primary
distribution center during fiscal 1997 which added to distribution costs.
Selling and delivery expenses increased in 1996 to 13.9% of net sales from
12.5% in 1995 as result of the growth in grocery product sales.
GENERAL, ADMINISTRATIVE AND PRODUCT DEVELOPMENT EXPENSES: In 1997, general,
administrative and product development expenses decreased to 4.1% of net sales
from 4.7% in fiscal 1996. The decrease was a result of general and
administrative expense dollar levels remaining at approximately the same level
as in the prior year. Product development funding increased at the same rate as
sales. In 1996, general, administrative and product development costs declined
from 6.1% of net sales in 1995 to 4.7% as a result of lower spending on new
product development and overhead expense control.
13
<PAGE>
INTEREST INCOME AND EXPENSE: Net interest expense has declined over the past
several years to $187,000, down from $302,000 in 1996 and $419,000 in 1995. The
decline represents lower average levels of long-term debt.
INCOME TAXES: The effective tax rate was 37.6% for fiscal 1997 compared to
36.3% for fiscal 1996. The change was primarily the result of interest income in
fiscal 1996 that was not subject to tax.
NET INCOME: Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings Per Share," which is required to be adopted by the Company on May 31,
1998, requires a restatement of prior period earnings per share. The impact of
SFAS No. 128 is not material for the 1997 earnings per share calculation and
increases basic earnings per share by $.01 for 1996.
The Company has elected to account for stock-based compensation using
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Had compensation expense for the Company's stock option awards been
determined based upon SFAS No. 123, "Accounting for Stock-Based Compensation,"
net earnings would have been reduced by $158,000 or $.02 earnings per share for
1997 and $148,000 or $.02 per share for 1996.
LIQUIDITY AND CAPITAL INVESTMENTS
Cash increased during fiscal 1997 from $1.7 million to $2.6 million. Net cash
provided by operating activities was $7.5 million in 1997 compared to $2.6
million in 1996. Cash from earnings, adjusted for non-cash items totaled $8.7
million for the year partially offset by higher inventory levels. Increased
grocery product sales generated the need for higher inventory levels.
Net cash used in investing activities was $8.6 million compared to $2.7
million in fiscal 1996. In 1997, the Company invested in the expansion of its
corporate office facility and additional production capacity.
In fiscal 1997, the Company incurred new mortgage financing, which funded the
expansion of the Company's corporate office facility and new equipment to expand
ready-to-eat cereal capacity.
In December 1996, the Company's Board of Directors authorized a stock
repurchase program for up to 500,000 shares of the Company's common stock. The
Company repurchased 144,000 shares of common stock at a cost of $843,000 during
fiscal 1997.
Working capital increased to $13.2 million from $10.8 million while the
current ratio increased slightly to 2.2 from 2.0 in 1996. The Company has
available a $4 million line of credit which was not being utilized at the end of
the year. The Company has purchase commitments for approximately $6 million of
equipment for manufacturing capacity expansion. The line of credit is available
if required, but the Company anticipates that in 1997, cash flow from operations
will fund working capital and capital expenditure requirements.
14
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year ended May 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 108,484,000 $ 98,429,000 $ 78,916,000
Cost of products sold 82,038,000 74,437,000 56,632,000
- ------------------------------------------------------------------------------------------------------------------
Gross profit 26,446,000 23,992,000 22,284,000
Selling and delivery expenses 17,294,000 13,723,000 9,899,000
General, administrative and product development expenses 4,426,000 4,645,000 4,836,000
- ------------------------------------------------------------------------------------------------------------------
Operating profit 4,726,000 5,624,000 7,549,000
Interest expense (282,000) (418,000) (638,000)
Interest income 95,000 116,000 219,000
- ------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 4,539,000 5,322,000 7,130,000
Income tax expense 1,706,000 1,931,000 2,567,000
- ------------------------------------------------------------------------------------------------------------------
Net earnings $ 2,833,000 $ 3,391,000 $ 4,563,000
==================================================================================================================
Earnings per share $ 0.42 $ 0.49 $ 0.66
==================================================================================================================
Weighted average common shares outstanding 6,775,000 6,869,000 6,907,000
==================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
At May 31, 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,631,000 $ 1,654,000
Accounts receivable 9,772,000 9,743,000
Inventories 11,646,000 10,293,000
Prepaids and other 520,000 393,000
- ---------------------------------------------------------------------------------------
Total Current Assets 24,569,000 22,083,000
- ---------------------------------------------------------------------------------------
Property and equipment
Land and building 13,265,000 11,647,000
Machinery and equipment 48,879,000 41,989,000
- ---------------------------------------------------------------------------------------
62,144,000 53,636,000
Less accumulated depreciation (31,612,000) (26,897,000)
- ---------------------------------------------------------------------------------------
30,532,000 26,739,000
Deferred charges, less accumulated amortization
of $1,491,000 and $1,479,000, respectively 853,000 1,364,000
- ---------------------------------------------------------------------------------------
Total Assets $ 55,954,000 $ 50,186,000
=======================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Drafts payable $ 1,785,000 $ 2,342,000
Accounts payable 4,379,000 4,002,000
Accrued compensation and commissions 1,551,000 1,449,000
Accrued marketing expenses 1,894,000 1,214,000
Other accrued expenses 1,564,000 1,505,000
Current maturities of long term debt 200,000 793,000
- ---------------------------------------------------------------------------------------
Total Current Liabilities 11,373,000 11,305,000
- ---------------------------------------------------------------------------------------
Long-term debt 5,700,000 2,371,000
Deferred income taxes 1,391,000 1,143,000
Commitments and contingent liabilities
Shareholders' equity
Common stock, par value $.10 per share--
authorized 15,000,000
Issued and outstanding 6,645,000 and 6,765,000
shares at May 31, 1997 and 1996 respectively 665,000 676,000
Additional paid-in capital 8,767,000 9,466,000
Retained earnings 28,058,000 25,225,000
- ---------------------------------------------------------------------------------------
Total Shareholders' Equity 37,490,000 35,367,000
- ---------------------------------------------------------------------------------------
$ 55,954,000 $ 50,186,000
=======================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended May 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,833,000 $ 3,391,000 $ 4,563,000
Non-cash items included in earnings:
Depreciation 4,797,000 4,526,000 3,924,000
Amortization 939,000 605,000 377,000
Deferred income taxes 111,000 (205,000) (249,000)
Changes in operating assets and liabilities:
Accounts receivable (29,000) (3,698,000) (1,241,000)
Inventories (1,353,000) (3,416,000) (1,673,000)
Other assets (420,000) (864,000) (680,000)
Drafts Payable (557,000) 1,358,000 177,000
Accounts payable and other accrued expenses 1,227,000 883,000 2,059,000
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,548,000 2,580,000 7,257,000
- ---------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities:
Proceeds from short-term investments 3,539,000 5,760,000
Payments for property and equipment (8,588,000) (6,246,000) (7,165,000)
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,588,000) (2,707,000) (1,405,000)
- ---------------------------------------------------------------------------------------------------------------
Cash flows used in financing activities:
Proceeds from:
Mortgage 3,529,000
Exercise of stock options, net 124,000 225,000 83,000
Payments for:
Long-term obligations (793,000) (1,715,000) (3,154,000)
Purchase and retirement of common stock (843,000) (2,820,000)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 2,017,000 (1,490,000) (5,891,000)
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 977,000 (1,617,000) (39,000)
Cash and cash equivalents at beginning of year 1,654,000 3,271,000 3,310,000
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,631,000 $ 1,654,000 $ 3,271,000
===============================================================================================================
Supplemental disclosures of cash flow information:
Interest payments $ 296,000 $ 447,000 $ 666,000
Income tax payments $ 1,435,000 $ 1,950,000 $ 2,869,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
-------------------------
Additional
Number of Paid-In Retained
Shares Amount Capital Earnings Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at May 31, 1994 7,049,000 $ 705,000 $ 11,405,000 $ 17,271,000 $29,381,000
Stock options exercised 113,000 11,000 342,000 353,000
Shares surrendered for exercise and tax payments (25,000) (3,000) (267,000) (270,000)
Tax benefits related to stock options 315,000 315,000
Purchase and retirement of common stock (474,000) (47,000) (2,773,000) (2,820,000)
Net earnings 4,563,000 4,563,000
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at May 31, 1995 6,663,000 666,000 9,022,000 21,834,000 31,522,000
Stock options exercised 112,000 11,000 287,000 298,000
Shares surrendered for exercise and tax payments (10,000) (1,000) (72,000) (73,000)
Tax benefits related to stock options 229,000 229,000
Net earnings 3,391,000 3,391,000
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at May 31, 1996 6,765,000 676,000 9,466,000 25,225,000 35,367,000
Stock options exercised 24,000 3,000 121,000 124,000
Tax benefits related to stock options 9,000 9,000
Purchase and retirement of common stock (144,000) (14,000) (829,000) (843,000)
Net earnings 2,833,000 2,833,000
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 31, 1997 6,645,000 $ 665,000 $ 8,767,000 $ 28,058,000 $37,490,000
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1997, 1996, and 1995
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: The Company is in the business of manufacturing and
distributing store brand and value priced branded food products. Principal
products are ready-to-eat cereals, fruit snacks, wholesome snack bars and graham
cracker pie crusts. The Company also contract manufactures food products for
other packaged foods companies. The Company's products are marketed in the
continental United States, Canada and Puerto Rico.
BASIS OF PRESENTATION: The consolidated financial statements include the Company
and its subsidiary, which is wholly-owned. All material intercompany balances
and transactions have been eliminated in consolidation.
USE OF ESTIMATES: The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments
with a maturity of less than 90 days when purchased to be cash equivalents.
INVENTORIES: Inventories are stated at lower of cost, first-in, first-out (FIFO)
method, or market.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION: Property, plant and equipment
are stated at cost and are depreciated using the straight-line method over the
following estimated useful lives:
Building and improvements 3-30 years
Machinery and equipment 3-15 years
Accelerated depreciation is used by the Company for tax accounting purposes.
LONG-LIVED ASSETS: The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" in 1997. SFAS No. 121 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. There
was no financial impact to the Company upon adopting SFAS No. 121.
DEFERRED CHARGES: Expenditures for packaging design are recorded at cost and
amortized over an estimated useful life of up to three years. Certain
expenditures to obtain initial distribution of products, typically referred to
as slotting, are recorded at cost and amortized over a period of up to six
months.
INCOME TAXES: The provision for income taxes is based on earnings reported in
the financial statements. Deferred income taxes are provided for the tax effects
of differences between financial reporting and tax bases of assets and
liabilities.
EARNINGS PER SHARE: Earnings per share are based on weighted average number of
common shares outstanding and the dilutive effect of common stock options during
the year. SFAS No. 128 "Earnings per Share", which is required to be adopted by
the Company as of May 31, 1998, requires the Company to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact on 1997 earnings
per share calculation under SFAS 128 is not material while 1996 basic earnings
per share would increase $.01 from the primary earnings per share.
STOCK-BASED COMPENSATION: SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages but does not require companies to record compensation
cost for stock-based compensation plans at fair value. The Company has elected
to continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations. See Note H.
19
<PAGE>
NOTE B
INVENTORIES
At May 31, 1997 1996
-----------------------------
Finished goods $5,430,000 $3,507,000
Raw material and packaging 4,481,000 5,228,000
Work-in-process 1,735,000 1,558,000
------------------------------
$11,646,000 $10,293,000
==============================
NOTE C
CREDIT ARRANGEMENTS
The Company has a $4,000,000 line of credit arrangement with a bank which
expires October 31, 1997. Loans under the agreement bear interest at a floating
rate approximately equal to the bank's reference rate less 1/2%. There were no
balances outstanding at May 31, 1997 and 1996.
NOTE D
LONG-TERM DEBT
At May 31, 1997 1996
-------------------------
Mortgage payable in monthly installments of $59,000;
interest at 8.625%; adjusted every three years $5,900,000 $2,464,000
9.8% unsecured senior notes payable in semi-annual
installments of $700,000 through September 1996 700,000
Less current maturities (200,000) (793,000)
-------------------------
$5,700,000 $2,371,000
=========================
The remaining mortgage balance of $2,371,000 was rolled into a new mortgage
agreement to include the expansion of the office and production facility in May,
1997. The mortgage payable is collateralized by the Company's land and buildings
with a net book value of $8,036,000.
Maturities of long-term debt during the next five fiscal years are as follows:
1998-$200,000; 1999-$218,000; 2000-$238,000; 2001-$261,000; 2002-$289,000; 2003
and after-$4,694,000. The fair value of long-term debt approximates its carrying
value.
NOTE E
CAPITAL STOCK
On May 22, 1996, the Company adopted a shareholder rights plan which is designed
to give shareholders more alternatives in the event of an unsolicited takeover
attempt. Pursuant to the plan, the Company distributed one right per common
share to each shareholder of record effective June 11, 1996. The rights will
become exercisable with the occurrence of certain events involving the
acquisition of 15% or more of the Company's stock. Upon the occurrence of such
an event, each right converts into the right to purchase, upon payment of $.10
per share of common stock, a pro rata portion of the number of shares available
to be purchased from the Company. In connection with the plan, 3.4 million
shares of common stock have been reserved. The rights expire on May 22, 2006.
NOTE F
INCOME TAXES
The components of income tax expense follow:
Year ended May 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Current:
Federal $1,379,000 $1,879,000 $2,465,000
State 216,000 257,000 351,000
Deferred 111,000 (205,000) (249,000)
- --------------------------------------------------------------------------------
Total $1,706,000 $1,931,000 $2,567,000
===============================================================================
The following is a summary of the Company's deferred tax assets and liabilities:
Deferred Tax
Assets (Liabilities)
At May 31, 1997 1996
- -------------------------------------------------------------------------------
Depreciation and amortization $(1,471,000) $(1,250,000)
Asset reserves 234,000 169,000
Vacation not currently deductible 132,000 116,000
Medical self-insurance 216,000 202,000
Other (43,000) (58,000)
$ (932,000) $ (821,000)
===============================================================================
20
<PAGE>
A reconciliation of statutory federal income taxes to the actual income tax
expense provided on earnings is as follows:
1997 1996 1995
- -------------------------------------------------------------------------------
Income tax at statutory rate $1,543,000 $1,809,000 $2,424,000
State income taxes net of federal
benefit 151,000 153,000 218,000
Interest income not subject to tax (28,000) (79,000)
Other 12,000 (3,000) 4,000
- -------------------------------------------------------------------------------
$1,706,000 $1,931,000 $2,567,000
===============================================================================
NOTE G
OPERATING LEASES
The Company began leasing warehouse space in Minnesota during fiscal 1997. Rent
expense for 1997 was $263,000. Future minimum payments under the lease as of May
31, 1997 are as follows:
Fiscal years ending May 31, Leases
- ----------------------------------------------
1998 $ 458,000
1999 471,000
2000 199,000
- ----------------------------------------------
Total minimum lease payments $1,128,000
==============================================
NOTE H
STOCK OPTION PLANS
Under the 1986 Non-Qualified Stock Option Plan, the Company may grant options to
purchase up to 2,500,000 shares of common stock to officers, key employees,
directors, and consultants. The option price and terms of exercise are
determined by the Company's board of directors. Of the options outstanding under
the Non-Qualified Plan, 624,000, 488,000 and 443,000 were exercisable at May 31,
1997, 1996 and 1995 respectively. The number of shares of common stock reserved
for future grants under the Non-Qualified stock option plan was 630,000 at May
31, 1997, and 725,000 at May 31, 1996.
The 1984 Incentive Stock Option Plan was terminated during fiscal 1997 and no
options were outstanding as May 31, 1997.
The Company had a Stock Appreciation Rights Plan that was terminated during
1997. No SAR's had been granted.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" , and related interpretations, in accounting for its
stock-based plans. Accordingly, no compensation expense has been recognized for
its stock option awards. Had compensation expense for the Company's stock option
awards been determined based upon their grant date fair value consistent with
the methodology prescribed under SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net earnings would have been reduced by $158,000 or
$.02 earnings per share for 1997 and $148,000 or $.02 per share for 1996. These
amounts are not necessarily indicative of the amounts that will be reported in
the future. The fair value of the options at the grant date was estimated using
the Black-Sholes model with an expected life of 5 years, interest rate of 5.5%,
volatility of 28%, and 0% dividends for both 1997 and 1996. The weighted average
fair value of options granted in 1997 and 1996 was $2.11 and $2.88 per share
respectively.
Option activity for the last three years is as follows:
Weighted Avg
Exercise Price
Shares Per Share
- -----------------------------------------------------------------------------
Balance at May 31, 1994 537,000 $6.21
Granted 222,000 7.61
Exercised (113,000) 9.33
Canceled or expired (7,000) 5.93
- -----------------------------------------------------------------------------
Balance at May 31, 1995 639,000 $6.15
Granted 176,000 7.89
Exercised (112,000) 2.66
Canceled or expired (7,000) 5.10
- -----------------------------------------------------------------------------
Balance at May 31, 1996 696,000 7.16
Granted 160,000 5.79
Exercised (24,000) 5.04
Canceled or expired (66,000) 7.27
- -----------------------------------------------------------------------------
Balance at May 31, 1997 766,000 $6.93
=============================================================================
21
<PAGE>
The following table summarizes information concerning currently outstanding and
exercisable options:
Weighted Weighted Weighted
Avg Avg Avg
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- -------------------------------------------------------------------------------
$5.00 to $6.00 196,000 1.72 $5.51 134,000 $5.66
$6.00 to $7.00 253,000 3.50 6.23 231,000 6.24
$7.00 to $8.00 138,000 1.05 7.48 124,000 7.52
$8.00 to $9.75 179,000 3.02 9.05 135,000 8.95
===============================================================================
NOTE I
EMPLOYEE BENEFIT PLANS
The Company has an employee savings plan (Savings Plan) that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, qualifying employees may defer a portion of their pretax
earnings, up to 15%, or the Internal Revenue Service limits, whichever is less.
The Company matches 30% of the first 7% of each employee's contributions.
The Company's matching contributions to the Savings Plan in 1997, 1996, and 1995
were $176,000, $151,000 and $127,000, respectively.
Union employees of the Company's subsidiary participate in a multi-employer
defined benefit pension plan administered by the employees' union. Contributions
by the Company's subsidiary to this plan totaled $91,000, $75,000 and $61,000
for 1997, 1996, and 1995, respectively.
NOTE J
POSTRETIREMENT HEALTH BENEFITS
The Company's subsidiary provides self-insured supplemental postretirement
health care coverage to substantially all union employees and their dependent
spouses. Effective June 1, 1993, the Company adopted SFAS No. 106 "Employer's
Accounting for Postretirement Benefits Other than Pensions." SFAS No. 106
requires the accrual of the expected costs of providing these benefits during
the active service period of the employee. Previously, these cost were
recognized as an expense when the claims were paid. As permitted by the
Statement, the Company has elected to amortize the transition obligation over 20
years.
Employees become eligible for the benefits on retirement if they have reached
the age of 55 and have 15 years of service. In determining benefits, the plan
takes into consideration payments by Medicare and other coverages. Benefits for
existing retirees who have reached the age of 65, as well as all employees who
retire after December 31, 1992 are subject to a $10,000 lifetime benefit cap.
Employees retiring after December 31, 1992 share in the cost of the benefits.
The Company does not fund the retiree health care plan.
The components of the retiree health costs are shown below:
1997 1996 1995
- ------------------------------------------------------------------------------
Service cost of benefits earned $ 4,000 $ 5,000 $ 4,000
Interest cost on liability 39,000 49,000 47,000
Amortization of transition amount 23,000 34,000 33,000
- ------------------------------------------------------------------------------
$66,000 $88,000 $84,000
==============================================================================
The accumulated postretirement benefit obligation (APBO) at May 31, 1997 and
1996, respectively, was:
1997 1996
- -------------------------------------------------------------------------------
Current retirees $348,000 $371,000
Fully eligible active employees 60,000 56,000
All other employees 114,000 99,000
===============================================================================
APBO 522,000 526,000
Unrecognized net gain 207,000 203,000
Unrecognized transition obligation (547,000) (581,000)
- -------------------------------------------------------------------------------
Accrued postretirement benefit cost $182,000 $148,000
===============================================================================
22
<PAGE>
The accumulated postretirement benefit obligation was determined using an 8%
discount rate. The health care cost trend rates were assumed to be 11% and 9% in
1997 for pre-65 and post-65 benefits, respectively, gradually declining to 6.5%
after 11 years, and remaining at that level thereafter. A 1% increase in health
care trend rate would have an insignificant effect on the accumulated
postretirement benefit obligation and the net periodic cost for the year.
NOTE K
RELATED PARTY TRANSACTIONS
A director and principal shareholder of the Company is a partner in a law firm
retained by the Company for its legal counsel. The Company incurred charges of
approximately $244,000, $367,000, and $264,000 in 1997, 1996, and 1995,
respectively, for services provided.
NOTE L
MAJOR CUSTOMERS
Sales to customer A accounted for 18%, 29%, and 30% of consolidated net sales in
1997, 1996 and 1995, respectively. Sales to customer B accounted for 11% of
consolidated net sales in 1997 and less than 10% of consolidated net sales in
1996 and 1995.
NOTE M
COMMITMENTS
At May 31, 1997 the Company had purchase commitments for $6 million of equipment
for manufacturing capacity expansion.
NOTE N
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly data for 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------
1997
<S> <C> <C> <C> <C>
Net sales $27,392 $27,635 $25,418 $28,039
Gross profit $ 6,046 $ 6,064 $ 6,773 $ 7,563
Net income $ 587 $ 485 $ 549 $ 1,212
Earnings per share $ .09 $ .07 $ .08 $ .18
1996
Net sales $23,031 $21,539 $21,275 $32,584
Gross profit $ 5,972 $ 5,576 $ 5,653 $ 6,791
Net income $ 1,208 $ 747 $ 567 $ 869
Earnings per share $ .17 $ .11 $ .08 $ .13
===================================================================================================
</TABLE>
23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Grist Mill Co. and Subsidiary
We have audited the accompanying consolidated statements of financial position
of Grist Mill Co. and subsidiary as of May 31, 1997 and 1996, and the related
consolidated statements of earnings, changes in shareholders' equity and cash
flows for each of the three years in the period ended May 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Grist
Mill Co. and subsidiary at May 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
May 31, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
July 9, 1997
STOCK PRICES AND TRADING DATA
The Company's common stock trades in the Nasdaq National Market under the symbol
GRST. The following table sets forth the high and low bid prices as reported by
the Nasdaq National Market.
Fiscal 1997 High Bid Low Bid
- -------------------------------------------------------------------------------
First quarter $ 6.75 $4.88
Second quarter $ 6.50 $5.25
Third quarter $ 6.38 $5.00
Fourth quarter $ 7.25 $5.63
Fiscal 1996 High Bid Low Bid
- -------------------------------------------------------------------------------
First quarter $11.38 $8.75
Second quarter $10.63 $8.63
Third quarter $10.25 $5.63
Fourth quarter $ 6.88 $5.63
===============================================================================
As of July 31, 1997 there were approximately 1,300 shareholders of record of the
Company's common stock and an estimated 4,500 additional beneficial holders
whose stock was held in street name by brokerage houses.
The Company has never paid dividends on its common stock and does not anticipate
a change in this policy in the foreseeable future. The board of directors
currently intends to retain earnings to finance the Company's growth.
24
EXHIBIT 21
GRIST MILL CO.
LIST OF SUBSIDIARIES
MAY 31, 1997
Percentage
of Voting
State in Which Securities
Incorporated Owned
------------ ----------
Grist Mill Confections, Inc. . . . . . . . . . . . . Illinois 100%
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Grist Mill Company of our report dated July 9, 1997, included in the 1997
Annual Report to Shareholders of Grist Mill Company.
Our audits also included the financial statement schedule of Grist Mill Company
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
Numbers 33-17317 and 333-11107 on Form S-8 of our report dated July 9, 1997,
with respect to the consolidated financial statements incorporated herein by
reference, and our report included in the preceding paragraph with respect to
the financial statement schedule included in this Annual Report (Form 10-K) of
Grist Mill Company.
Minneapolis, Minnesota
August 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 2,631
<SECURITIES> 0
<RECEIVABLES> 9,772
<ALLOWANCES> 0
<INVENTORY> 11,646
<CURRENT-ASSETS> 24,569
<PP&E> 62,144
<DEPRECIATION> 31,612
<TOTAL-ASSETS> 55,954
<CURRENT-LIABILITIES> 11,373
<BONDS> 0
<COMMON> 665
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 55,954
<SALES> 108,484
<TOTAL-REVENUES> 108,484
<CGS> 82,038
<TOTAL-COSTS> 82,038
<OTHER-EXPENSES> 21,720
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 187
<INCOME-PRETAX> 4,539
<INCOME-TAX> 1,706
<INCOME-CONTINUING> 2,833
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,833
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
