SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
Commission File No.: 000-19318
SPARTA FOODS, INC.
(Name of Small Business Issuer as specified in its charter)
Minnesota 41-1618240
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2570 Kasota Avenue, St. Paul, Minnesota, 55108
(Address of principal executive offices)(Zip Code)
Issuer's telephone number, including area code: (612) 646-1888
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value per share
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [ X ] No
[ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B 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-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $12,662,819
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of December 16, 1996 was approximately $8,348,811 based upon the
average high and low bid prices of the Registrant's Common Stock on such date.
There were 6,679,049 shares of Common Stock, $.01 par value, outstanding as of
December 16, 1996.
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DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference pursuant to Rule 12b-23: Portions of the
Registrant's Proxy Statement for its 1997 Annual Meeting are incorporated by
reference into Items 9, 10, 11 and 12 of Part III.
Transitional Small Business Disclosure Format (check one). Yes [ ] No [ X ]
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I N D E X
Description Page
PART I
ITEM 1. DESCRIPTION OF BUSINESS........................................... 1
ITEM 2. DESCRIPTION OF PROPERTY........................................... 8
ITEM 3. LEGAL PROCEEDINGS................................................. 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS........................................................... 8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................... 8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION...................................................... 9
ITEM 7. FINANCIAL STATEMENTS.............................................. 15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE........................................................ 26
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT............................................... 26
ITEM 10. EXECUTIVE COMPENSATION............................................ 27
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................................. 27
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS...................................................... 27
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.................................. 27
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Sparta Foods, Inc. ("Sparta" or the "Company") manufactures a broad line of
Mexican food products which include corn and flour tortillas, stone ground and
corn flour tortilla chips, picante and other salsas and sauces. These products
are distributed under the Company's own brand names and under private labels.
The Company's own retail brands include La Canasta(R), La Campana Paradiso(R)
and Mexitos(R) tortilla chips, Cruz(R), La Canasta(R) and La Campana Paradiso(R)
press and die-cut flour tortillas, La Canasta(R), La Campana Paradiso(R) and
Chapala(R) salsas and picante sauces. The Company also manufactures barbecue
sauces and salsas for others under private label.
The Company's branded retail products are sold in supermarkets located
primarily in the midwestern United States, with selected products sold in
Western Canada. The Company also produces its Mexican-style products for other
food distributors under private labels, including Crystados(R) for Crystal Farms
Refrigerated Distribution Company which distributes its products to retail
stores in 23 states. Other private label products include Ken Davis(R) and
Rudolph's(R) barbecue sauces utilizing the customer's proprietary recipes. In
addition, the Company supplies over six thousand restaurants and other food
service establishments through distributors that include Alliant Food Service,
Inc., Sysco Corporation and J.P. Food Service, Inc. The Company places
significant emphasis on the development of the food service market and is
currently an approved supplier to such restaurants as McDonald's, Chili's,
Carlos O'Kellys and Perkins Restaurants.
The Company is capitalizing on the significant growth in the sale of
Mexican food products which has occurred in the United States over the past
decade. Over the fifteen-year period ended in 1995, sales of soft tortillas in
the United States grew from approximately $300 million to approximately $2.5
billion. Management believes that this growth is partially a result of Mexican
food products becoming less ethnic due to strong consumer acceptance. This is
evidenced by the large number of non-Mexican restaurants currently offering such
Mexican items as nachos, chips and salsa, fajitas, quesadillas, burritos and
taco salads.
Prior to 1994, the Company spent significant time and resources through
acquisition and internal product development to expand its production
capabilities and its line of authentic Mexican food products and to establish a
strong distribution network. Although these activities increased sales, they
negatively impacted the Company's net income. In fiscal 1994 and 1995 the
Company incurred net losses. The Company is now focusing its efforts on a return
to profitability by attempting to expand its existing business and enter
carefully selected new geographic areas in the branded retail, private label and
food service markets. The Company recorded net income of $105,307 for the year
ended September 30, 1996.
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Business Strategy
The Company's principal business objective is to improve profitability by
increasing sales and reducing costs. The Company plans to increase sales by
expanding its product marketing and sales activity and broadening its
distribution patterns and by placing greater emphasis on the production of
tortillas. The Company plans to direct greater marketing and sales resources to
increase brand awareness of its products, including tortilla chips, in each
product's respective target market. In addition, the Company plans to
concentrate its manufacturing resources on high volume branded retail products
that it believes will generate the highest gross profit margins. The Company is
also seeking to improve profitability by reducing and controlling excess
operating costs.
Industry and Market
Sales of Mexican-style food products such as corn and flour tortillas, corn
chips and salsas have increased substantially over the past decade in the United
States, through both restaurants and retail stores. Tortillas are becoming
increasingly popular as evidenced by their use in restaurant foods such as
fajitas, burritos, enchiladas, quesadillas, taco salads, and, most recently,
"wraps". According to a Tortilla Industry Association study, over the
fifteen-year period ended in 1995, sales for soft tortillas in the United States
grew from $300 million to approximately $2.5 billion.
The increase in past sales may be partially attributable to the growth in
the United States' Hispanic population, and a continued increase in the sale of
Mexican-style food products is not assured. However, the Company's management
believes that Mexican-style food products have become less "ethnic" and now
enjoy a greater consumer acceptance, as illustrated by the fact that non-Mexican
restaurants, such as McDonald's, feature Mexican-style foods on their menus.
Products and Marketing
General. The Mexican-style food products manufactured and marketed by the
Company include whole and pre-cut corn and flour tortillas (including die-cut,
hand stretched and press flour tortillas), stone ground corn and corn flour
tortilla chips and salsas (picante and thick and chunky) for distribution to
retail food stores, food service establishments and other manufacturers of
Mexican-style food products. The Company also manufactures products for other
food distributors to be sold under their own private labels using the customer's
or the company's proprietary recipes. During the fiscal years ended September
30, 1996, 1995 and 1994, the percentage of sales of tortillas, tortilla chips,
barbecue sauces, salsas and all other products as compared to all sales of the
Company were as follows:
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Year Ended September 30,
Products 1996 1995 1994
- -------- ----- ---- ----
Tortillas 70% 63% 55%
Corn tortilla chips 17% 20% 25%
Barbecue sauces, salsas and all other products 13% 17% 20%
The Company continually seeks to expand its product lines through the
development of new products for retail sale under the Company's own branded
labels and value-added products for the food service market. In November 1996,
the Company began manufacturing and distributing seven new retail tortilla chips
under the La Canasta(R) brand and flavored flour tortilla wraps to food service
establishments.
The Company distributes its products through distribution centers in 21
states and into Western Canada. During the fiscal years ended September 30,
1996, 1995 and 1994, the Company's percentage of sales for distribution to food
service establishments, to retail stores under its own brand names, and under
private label or as ingredients for other food manufacturers, compared to total
Company sales, were as follows:
Year Ended September 30,
Market Segment 1996 1995 1994
- -------------- ---- ---- ----
Food service 54% 51% 44%
establishments
Branded retail 29% 31% 33%
Private label and 17% 18% 23%
ingredients
Food Service. The Company's products are currently served in an estimated
six thousand restaurants and other food service establishments under La Canasta,
Mexitos, and Cruz labels, and are approved for use in the food service
operations of such restaurants as McDonald's, Chili's, Carlos O'Kellys and
Perkins Restaurants. The establishment of food service accounts with restaurant
chains, schools, in-plant feeders or other food service establishments is
initiated primarily through direct contact by the Company's sales personnel or
brokers. The Company pays food brokers a commission based upon the percentage of
the net sales of products sold. The Company is obligated to pay such commission
for as long as the broker continues to achieve specified minimum sales. Sales to
food service establishments are effected through distributors who carry product
inventory at their distribution centers located in nine midwestern states,
Florida and Canada. These distributors include Alliant Food Service, Inc., J. P.
Food Services, Inc. and Sysco Corporation, who on a combined basis accounted for
over 30% of the Company's food service sales in its fiscal year ended September
30, 1996. The Company's distributors provide continued sales and service to the
food service customer, while the Company's direct sales personnel and brokers
continue to solicit new restaurant customers and act as coordinators between the
Company and the distributors.
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Branded Retail. The Company's branded retail products are sold to retail
grocery chains and independent stores through distributors, such as Crystal
Farms Refrigerated Distribution Company which distributes refrigerated goods to
retail stores in 23 states and Bradley Distributing, Inc. which distributes
products to approximately 160 retail stores in the 13 county Minneapolis/St.
Paul metropolitan area. The Company's products appear in such grocery chains as
Cub Foods and Rainbow Foods and in independent stores such as Byerly's and
Lunds. Through its retail store distributors, the Company often establishes
incentives, such as volume sales discounts, which are offered to encourage
retail stores to prominently display the Company's products. The Company also
utilizes in-store demonstrations to promote its retail products. The Company's
distributors deal directly with the retail stores in soliciting orders to be
filled from local warehouses and assist in arranging shelf space and
implementing in-store promotions.
Private Label and Ingredients. The Company manufactures products for other
food distributors to be sold under their own private labels, using the Company's
recipes or recipes provided by such distributors. Since 1991, the Company has
been the sole manufacturer of Ken Davis(R) brand barbecue sauces for Ken Davis
Products, Inc., and in December 1993 began production of barbecue sauces for
Rudolph's Licensing, Inc., under the Rudolph's(R) brand name. The Company also
manufactures and sells tortillas to other manufacturers to be used as
ingredients for the production of Mexican food products. Two such manufacturers
are Arden International Kitchens and Schwan's Sales Enterprises, Inc. Arden uses
the Company's tortillas to manufacture its "Charritos" brand Mexican food items,
and Schwan uses the Company's tortillas in its frozen burritos which are sold
door to door by delivery truck in 48 states.
The Company believes that there are two principal factors which tend to
promote the Company's growing sales of private label products. First is its
manufacturing expertise, and second is its experience in both the food service
and retail markets. Sales to private label customers are initiated and
maintained directly by Company sales personnel.
Principal Customers
The Company's sales to significant customers during fiscal years 1996, 1995
and 1994 were as follows:
Year Ended September 30,
(In thousands)
Customer 1996 1995 1994
- -------- ---- ----- ----
Crystal Farms Refrigerated Distribution Company $2,557 $1,879 $1,780
Catalina Specialty Foods, Inc. $1,962 $1,617 $1,005
Bradley Distributing, Inc. $1,011 $1,162 $1,020
Ken Davis Products, Inc. $978 $1,112 $1,068
The Company has agreements with Crystal Farms Refrigerated Distribution Company,
Ken Davis Products, Inc. and Catalina Specialty Foods, Inc. a distributor to
McDonald's Corporation. The loss of any of these customers named above would
have an adverse effect on
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the Company's sales and operating results. As part of its marketing plan, the
Company is attempting to establish a strong brand recognition in key markets in
order to minimize the likelihood of any such loss.
Manufacturing and Supplies
The Company manufactures its products at its principal place of business
located at 2570 Kasota Avenue, St. Paul, Minnesota. The Company manufactures its
products on 12 production lines. These include: (i) a hand stretched flour
tortilla line; (ii) a die-cut flour tortilla line; (iii) three press flour
tortilla lines; (iv) two lines for the production of corn tortillas; (v) two
stone ground corn tortilla chip lines; and (vi) three lines for the production
of picante salsas, barbecue sauces and other tomato-based sauces.
The principal ingredients for the Company's manufactured products are corn,
wheat flour, corn flour, corn and soybean oils and tomato-based products. These
ingredients may be purchased by the Company from a number of sources and are
generally readily available under normal conditions. Samples of incoming
ingredients are tested to ensure that they meet the quality specifications
dictated by the Company. The Company has made contract purchases through the
first half of 1997 of corn, flour and oils to secure consistency in price and
quality and reasonable assurance of a supply of product ingredients. Although
the Company believes that such contracts help reduce the risk of unexpected and
unfavorable increases in raw material prices, the Company may be required to
purchase its raw material at a higher than current market price if current
market prices fall below the Company's contract price. The Company believes that
termination of one or more of its raw material contracts will not adversely
affect its ability to control its raw material costs as such contracts can be
replaced. The Company regularly maintains stores of corn, flour and other
ingredients in sufficient quantities at its plant to permit the Company to
fulfill one to two weeks of normal production, and cooking oil and other
ingredients in sufficient quantities to fulfill three or more weeks of
production.
Competition
The tortilla, tortilla chip, salsa and picante sauce industry in the United
States is comprised of a large number of small regional producers, many of which
have a limited line of products, and several dominant producers with broad
product lines.
The retail market for fried corn tortilla chips is dominated by Frito Lay,
which the Company believes is a market leader in the 13 county Minneapolis/ St.
Paul area market and the national market. The Company also competes with Old
Dutch and Barrel O'Fun brands. The Company estimates that it has less than a one
percent share of the national corn tortilla chip market. While national
manufacturers of snack foods have established recognizable brands such as Frito
Lay, shipping costs for the light and bulky tortilla chips provide the Company
certain pricing advantages in the local market area. In marketing its salsas and
picante sauces for retail distribution, the Company competes with such brands as
Pace, Old El Paso, Frito Lay and Chi Chi's. The Company believes that it
currently has less than a one percent share of the national salsa market. The
Company estimates that its retail sales of tortillas give it greater than a 50%
share of the 13 county Minneapolis/St. Paul metropolitan market, and that its
principal
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competition comes from Reser's Foods, Zapata and Azteca Foods, which supply most
of the remaining market.
Many of the makers and distributors of these competing products for retail
distribution are better capitalized that the Company and have the advantage of
intensive local and national advertising programs as well as greater brand name
recognition. In addition, competition for shelf space at retail food stores is
intense. While the Company's management believes that the quality of its
products is good and that the retail prices for its products are competitive,
the Company's ability to obtain retail shelf space is primarily dependent on its
distributors and brokers. Although sales of the Company's retail products
outside the Minneapolis/ St. Paul metropolitan area is increasing, particularly
with respect to the Cruz brand tortillas distributed by Crystal Farms, the
Company's market share of retail sales outside of that area is not currently
material.
In marketing its products to food service establishments, the Company is
competing with a number of regional and national producers of Mexican-style
products, including BecLin Foods, Inc., Lake Park, Minnesota; Mexican Originals
(Tyson Foods, Inc.), Fayetteville, Arkansas; and Mission Foods, Inc., Los
Angeles, California. Most of these competitors are better capitalized than the
Company and have well established sales organizations. While the Company is a
major suppler of Mexican-style tortillas and tortilla chips to restaurants,
corporate cafeterias and schools in the states of Iowa, Minnesota, North Dakota,
South Dakota, and Wisconsin, competition will continue to be strong. While
competition outside the Minneapolis/St. Paul area is expected to be more
intense, the Company's management believes it will be able to increase its
market share in other metropolitan area markets because of its ability to
fulfill a distributor's needs with a broad line of quality Mexican-style food
products and by having its products approved by selected restaurant chains.
Trademarks
The principal trade names that the Company currently utilizes are Cruz(R),
La Campana Paradiso(R) and La Canasta(R) in the retail sale of its tortillas; La
Canasta, Chapala(R), Mexitos(R), La Campana Paradiso(R) and Deli Style(R) in the
retail sale of tortilla chips; and La Canasta, La Campana Paradiso(R) and
Chapala(R) in retail sale of salsas. The Company also uses the trade names La
Canasta, Cruz and Mexitos in connection with food service sales. With the
exception of La Campana Paradiso and Paradiso, all of the trade names are owned
by the Company, and all of the principal trade names referred to above are the
subject of federal trademark registrations.
The Company has one registered trademark and two assignments of registered
trademarks for the name "La Canasta" that expire in June 2000; March 2007; and
October 2009, respectively. The name "Cruz" is the subject of a registered
trademark which expires in January 2000. The name "Chapala" is the subject of a
registered trademark which expires in November 2004. The Company has two
registered trademarks for the "Mexitos" name which expire in October 2003 and
May 2005. The name "Deli Style" is the subject of a registered trademark that
expires March 2009. All of the Company's registered trademarks are subject to
renewal rights and may terminate prior to their respective expiration dates due
to cancellation, disclaimer or surrender. The Company currently has no plans to
terminate any of its registered
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trademarks. The effect of these trademarks is to provide an identity between the
Company and its products. While prior use of a trademark may establish an
exclusive right to its use in connection with the sale of products in a
particular market area, registration with the U.S. Patent and Trademark Office
provides such right throughout the United States and a presumption of damage to
the Company should the trademark be infringed.
The trademarks "La Campana Paradiso" and "Paradiso" are licensed by the
Company from an affiliate of a former director of the Company. The License
Agreement expires December 31, 1999 and requires the payment of three percent of
the gross sales of products sold using the "La Campana Paradiso" or "Paradiso"
name. In addition, the Company pays a fee equal to one percent of all retail
sales made under the "Cruz" label to a third party until January 1, 1997 or an
aggregate of $220,000, whichever occurs earlier, of which approximately $75,000
has been paid through September 30, 1996.
The Company may not use the trade name La Canasta or the related trademarks
in 14 western states as those trade names may be used in those states only by La
Canasta Mexican Food Products, Inc., which is not affiliated with the Company
but is an affiliate of a principal shareholder and former director of the
Company.
There is no assurance that any of the trade names used by the Company,
whether or not registered, will be free from future challenge by others as to
prior use or as otherwise being unprotectable.
Government Regulation
The Company is subject to licensing, regulation and periodic inspection by
various local, state and federal agencies, including those administering health,
sanitation, environmental, building, safety and fire laws and regulations. These
agencies include, but are not limited to the Minnesota Department of Health,
City of St. Paul, the U.S. Food and Drug Administration, the Minneapolis/St.
Paul, Minnesota Metropolitan Waste Control Commission. As a result of recent
U.S. Food and Drug Administration rule changes, some of the Company's products
required changes in labeling. Nutritional testing has been completed on all
applicable products, and the results of such testing have been incorporated in
new packaging as required by those rules. To management's knowledge, the Company
is in substantial compliance with all applicable rules and regulations of the
above-referenced agencies. The costs associated with the Company's compliance
with environmental laws are minimal.
Personnel
As of December 1, 1996 the Company employed a total of 123 persons. Of
these full-time employees, four serve in an executive capacity, 109 are engaged
in manufacturing, shipping, quality control and plant supervision, three are
engaged in sales and marketing, and seven are engaged in administrative tasks.
None of the Company's employees are covered by a collective bargaining
agreement. The Company provides its employees with a health, dental, disability
and life insurance program. The Company's management believes that its relations
with its employees are good.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases an office and manufacturing facility located
at 2570 Kasota Avenue, St. Paul, Minnesota. The St. Paul office and
manufacturing facilities consists of a total of 66,000 square feet,
approximately 5,000 square feet of which is office space and the remainder of
which is devoted to manufacturing, and dry, freezer and refrigerated storage.
The Company currently pays a base rent of approximately $25,000 per month, plus
taxes, insurance and common area charges of approximately $10,000 per month. The
monthly base rent changes periodically over a period that began on April 1, 1996
and will end on May 31, 2000. The lease for the St. Paul facility terminates on
May 31, 2000. The Company also has an option to extend the lease for two
five-year periods on written notice given before November 1, 1999 for the first
five-year option and November 1, 2004 for the second five-year option.
The Company owns a facility at 21725 Hanover, Lakeville, Minnesota, which
facility consists of a one story steel frame building located on 2.5 acres of
land, containing 45,500 square feet of manufacturing and dry and freezer storage
space, and 1,500 square feet of office space. On February 1, 1996, the Company
leased the Lakeville facility to a manufacturing company for a period of ten
years with an option for the lessee to purchase the property during the first
five years. On November 22, 1996, the lessee delivered to the Company, notice of
its intent to exercise the purchase option. The Company anticipates it will
close the sale of the Lakeville facility in February 1997. If concluded, the
Company will record a small gain on the sale in fiscal 1997. There is no
assurance that the Company will close the sale of the facility.
The Company also sub-leases approximately 13,800 square feet for dry
storage in a warehouse facility located at 2085 Ellis Avenue, St. Paul,
Minnesota. The rent is approximately $6,000 per month, and the lease terminates
on March 31, 1998.
ITEM 3. LEGAL PROCEEDINGS
There are no material litigation or other legal proceedings pending against
the Company or any of its subsidiaries or any or their property.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders of the Company
during the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded in the over-the-counter market with
prices quoted on the Nasdaq SmallCap Market under the symbol "SPFO". Quotations
in the following
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table represent inter-dealer prices, without retail markup, markdown or
commission, and do not necessarily represent actual transactions.
Common Stock
Fiscal Quarter Ended High Bid Low Bid
December 31, 1994 $2 1/4 $1 1/2
March 31, 1995 2 1/8 7/8
June 30, 1995 1 1/4 5/8
September 30, 1995 1 1/16 5/8
December 31, 1995 $ 7/8 $ 1/4
March 31, 1996 1 1/2 3/8
June 30, 1996 2 1/4 1 1/16
September 30, 1996 2 1 5/16
At December 12, 1996, the published high and low bid price for the
Company's Common Stock was $1 1/4 per share. At December 12, 1996, there were
issued and outstanding 6,679,049 shares of Common Stock of the Company held by
188 shareholders of record. Record ownership includes ownership by nominees who
may hold for multiple owners.
The Company has paid no dividends on its Common Stock and does not
anticipate paying any such dividends in the foreseeable future. The Company's
current line of credit with a bank precludes the Company from declaring or
paying dividends on its Common Stock without the bank's approval.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Overview
La Canasta of Minnesota, Inc. ("La Canasta"), the Company's predecessor,
and now a wholly-owned subsidiary of the Company, began producing limited
volumes of hand stretched flour tortillas, corn tortillas and corn tortilla
chips shortly following its organization in 1981, primarily for sale to
restaurants. The Company was organized under the laws of the State of Minnesota
in 1988, originally under the name of "Sparta Corp.," for the purpose of raising
capital for the acquisition of, or investment in, a business. In January 1991,
the Company acquired all of the outstanding capital stock of La Canasta. The
shareholders of La Canasta entered into this transaction to obtain capital for
La Canasta and to facilitate La Canasta's plans to expand its product lines,
markets and production capabilities. Under the umbrella of the Company, La
Canasta had begun to expand its product mix in 1990 when it acquired food
processing equipment from SuperValu, Inc. in Hopkins, Minnesota, and started
producing Ken Davis barbecue sauces. This enabled La Canasta to expand into
other tomato-based products, such as Mexican salsas and picante sauces. In
January 1992, the Company continued this expansion by acquiring the business of
Cruz Distributing, Inc., a distributor of Cruz brand press
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flour tortillas to retail establishments and McDonald's restaurants. In November
1992, the Company also acquired from Chapala International, Inc. the Chapala
registered trademarks and trade names and certain other assets related to the
sale and distribution of Mexican-style foods to wholesalers and others for
retail sale, including product formulas for salsas and customer lists. In
October 1993, the Company acquired substantially all of the assets of
International Food Products, Inc. of Lakeville, Minnesota, which was engaged in
the manufacture and sale of tortillas and tortilla chips. This acquisition
provided the Company with additional manufacturing capabilities, the established
La Campana Paradiso and Mexitos brand names, and the retail and food service
distribution services of Bradley Distributing, Inc. and Sysco Corporation,
respectively.
The foregoing acquisitions were effected to improve the Company's capacity
to efficiently manufacture a broad line of Mexican-style food products and to
increase sales and market share by developing a broad-based responsive and
capable distribution network. While these acquisitions increased sales, the
Company incurred significant legal, accounting and debt-related expenses to
complete the transactions. As a result, the Company incurred substantial losses
in fiscal years 1994 and 1995.
In response to these years of loss, the ongoing problems of integrating the
Company's acquisitions and other corporate problems, the Board of Directors
adopted a restructuring plan in October 1994. In the first quarter of fiscal
1995, the Board of Directors hired Joel Bachul and Merrill Ayers as its new CEO
and CFO, respectively, and they were given the primary responsibility of
managing the restructuring process.
The focus of management's efforts to date has been to complete a
comprehensive financial restructuring and effectuate changes in connection with
its products and its production and distribution systems necessary to attain
profitability.
Results of Operations
Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended September 30,
1995.
During fiscal 1996, the Company had net sales of $12,662,819, an increase
of $670,831, or 6%, compared to net sales of $11,991,988 in fiscal 1995. This
increase in net sales resulted primarily from additional marketing efforts
relating to expansion of its existing customer base as well as into new
territories. Four customers accounted for 51% of net sales in fiscal 1996 and
48% of net sales in fiscal 1995.
Gross profit as a percentage of net sales for fiscal 1996 was 27% compared
to 26% for fiscal 1995. This increase in fiscal 1996 was primarily due to more
favorable operating efficiencies and discontinued sales of unprofitable
products. Overhead costs were reduced in certain areas to maximize product
margins. Even though the Company faced increasing pricing pressures from raw
material suppliers, it was able to minimize these cost increases by implementing
selective price increases. At the end of fiscal 1995 the Company consolidated
its production operations from its Lakeville facility to its St. Paul plant
resulting in additional cost savings achieved in fiscal 1996.
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Selling, general and administrative expenses were $2,968,569 for fiscal
1996, a decrease of $315,423 or 10%, as compared to $3,283,992 in fiscal 1995.
Selling, general and administrative expenses as a percentage of net sales for
fiscal 1996 were 23% compared to 27% for fiscal 1995. This decrease was
primarily attributable to the return to more normal expense levels which began
in fiscal 1995 following the costs associated with the IFP operating activities,
related integration costs of the acquisition and professional costs associated
with the withdrawn secondary public offering and bridge financing during fiscal
1994.
Interest expense was $431,741 for fiscal 1996, a decrease of $84,471
compared to $516,212 in 1995. This lower interest expense reflects primarily the
effect of interest rate and debt reductions associated with the completion of
the Company's private placement in February, 1996. See, "Liquidity and Capital
Resources."
The Company recorded other income of $86,018 during fiscal 1996 compared to
other expense of $279,450 in fiscal 1995. This income results primarily from the
rental of the Company's Lakeville property. Other expense in fiscal 1995 was
primarily the non-recurring charge of $302,612 reflecting management's estimate
of the excess of the property's net book value over current market value. Net
income for fiscal 1996 was $105,307 compared to a net loss in fiscal 1995 of
$943,778, for the reasons set forth above.
Fiscal Year Ended September 30, 1995 Compared to September 30, 1994
During fiscal 1995, the Company had net sales of $11,991,988, an increase
of $811,075, or 7% as compared to net sales of $11,180,913 in fiscal 1994. This
increase in net sales resulted primarily from additional marketing efforts
relating to expansion of its existing customer base as well as into new
territories. Four customers accounted for 48% of net sales in 1995 and 44% of
net sales in 1994. Fiscal 1994 sales included approximately $600,000 in products
with low volume and/or low margins as well as heavily discounted products. These
were not continued in fiscal 1995. Excluding these sales, sales on continuing
products increased approximately 13% in fiscal 1995. During fiscal 1995, the
Company expanded its food service business in Illinois, Indiana, Kansas,
Nebraska and Wisconsin and its retail business into Wisconsin, Illinois and
Iowa.
Gross profits as a percentage of net sales for fiscal 1995 was 26% compared
to 24% for fiscal 1994. This increase in fiscal 1995 was primarily due to more
favorable operating efficiencies and discontinued sales of unprofitable
products. Overhead costs were reduced in certain areas to maximize product
margins. Even though the Company faced increasing pricing pressures from flour,
corrugated and plastic material suppliers, it was able to minimize these cost
increases by implementing selective price increases. During fiscal 1995 the
Company consolidated its production operations from its Lakeville facility to
its St. Paul plant. Currently, other than USDA-related meat products produced by
outside suppliers, all of the Company's products are produced in-house.
Selling, general and administrative expenses were $3,283,992 for fiscal
1995, a decrease of $56,975, or 2%, as compared to $3,340,967 in fiscal 1994.
Selling, general and administrative expenses as a percentage of net sales for
fiscal 1995 were 27%, compared to 30% for fiscal 1994. This decrease was
primarily attributable to the return to more normal expense
11
<PAGE>
levels following the costs associated with the IFP operating activities, related
integration costs of the acquisition and costs associated with the withdrawn
secondary public offering and bridge financing during fiscal 1994.
Interest expense was $516,212 for fiscal 1995, a decrease of $155,683
compared to $671,895 in 1994. This reduced interest expense reflects primarily
the comprehensive financial restructuring in December 1994. See Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Liquidity and Capital Resources.
The Company incurred Other Expense of $279,450 during fiscal 1995 compared
to Other Income of $3,707 in fiscal 1994. This expense consists primarily of the
write-down as discussed above. Excluding this the net loss in fiscal 1995 would
have been $641,166 or an improvement of 46% over fiscal 1994's net loss of
$1,193,177.
Seasonality
The Company has historically had higher sales in its third and fourth
fiscal quarters which end June 30, and September 30, respectively, than in its
first and second quarters. Management believes that this is a result of seasonal
consumption patterns with respect to the Company's food products, such as
consumption of higher volumes of tortilla chips, salsa and barbecue sauces,
during the summer months. This seasonality may cause quarterly results of
operations to fluctuate.
Raw Material Cost Fluctuations
The Company does not enter into futures contracts as defined by SFAS 80. It
does, however, enter into purchase orders for delayed delivery of raw materials,
generally 30 days for raw materials other than flour and corn. The Company
enters into purchase orders for delayed delivery of flour and corn for a period
of 2-18 months, depending on current pricing, to ensure the availability of the
type of flour and corn best suited for the Company's products. These purchase
orders are place directly with the suppliers. At the end of each reporting
period, the Company evaluates the open purchase orders for corn to determine
whether a loss should be recognized.
Liquidity and Capital Resources
The Company has financed its activities to date primarily through debt,
cash generated from its operations and the issuance of securities.
During fiscal 1996 net cash provided by operating activities was $305,511,
consisting principally of net income of $105,307 adjusted for non-cash
depreciation and amortization expenses of $552,902 and a decrease in inventories
of $181,597, offset by a decrease of accounts payable and accrued expenses of
$489,620.
Net cash used in investing activities in fiscal 1996 was $161,286,
primarily the result of capitalized costs associated with the refurbishing of
production equipment and down payments on the construction of a freezer
expansion. During fiscal 1996 net cash used in financing
12
<PAGE>
activities was $144,488 due mainly to the issuance of additional Common Stock
for $808,620 net of costs, offset by net reductions in borrowings of $953,108.
The Company estimates that as of September 30, 1996, there is an additional
$470,000 which could be drawn under its bank line of credit. The amount
available under this line of credit fluctuates daily based upon the Company's
eligible accounts receivable and inventory. The line of credit, bank term note
and bank capital note are subject to various financial covenants, the violation
of which could result in termination of the loan agreements which would require
the Company to repay the loans in full. The Company had been in default of the
financial covenants in the past, and the bank has waived such defaults. It is
management's opinion that the Company will be able to meet the requirements of
these covenants in the future; however, there is no assurance that the Company
will not violate the financial covenants in the future or that the bank would
waive any violations.
At September 30, 1996, the Company had cash of $600 and a negative working
capital of $480,444.
On February 2, 1996, the Company raised $1,280,000 pursuant to a private
offering of 2,560,000 equity units, each unit consisting of one share of Common
Stock and a warrant, exercisable for three years, to purchase one share of
Common Stock at $0.75 per share. The Company filed a registration statement on
Form S-3, which has been declared effective by the Securities and Exchange
Commission, to register the possible resale by certain shareholders who
participated in the Company's December 1994 financial restructuring and February
2, 1996 private placement of an aggregate of 6,185,400 shares of Common Stock
including up to 2,978,900 shares that shareholders may acquire upon exercise of
outstanding warrants.
The Company believes that the additional capital raised, its bank credit
facilities and cash flow from operations will be sufficient to meet its
operating requirements through fiscal 1997, assuming (i) the Company's fiscal
1997 sales equal or exceed fiscal 1996 sales; (ii) there are no significant
increases in expenses in fiscal 1997; and (iii) the Company is able to keep its
bank credit facilities operative.
Accounting Standards Issued and Not Yet Adopted
The Financial Accounting Standards Board (FASB) has issued Statement No.
123 (SFAS 123), Accounting for Stock-Based Compensation. This statement is
effective for the Company's 1997 fiscal year. SFAS 123 establishes a fair
value-based method of accounting for stock-based compensation plans and
encourages, but does not require, entities to adopt that method for grants to
employees in place of APB Opinion No. 25, Accounting for Stock Issued to
Employees, which uses an intrinsic value-based accounting method. At this time,
the Company does not intend to adopt SFAS 123 in measuring expenses for grants
to employees. However, the Company must present pro forma net income (loss) and
related per share amounts as if SFAS 123 had been adopted, and such pro forma
amounts are expected to reflect higher amounts of expenses than amounts reported
in the financial statements.
13
<PAGE>
Outlook
Management believes the restructuring it began in October 1994 has
substantially been completed. Its plan in fiscal 1997 will be to increase
revenues and improve profitability by focusing on new markets and product brand
positioning of tortillas and tortilla chips in the retail and food service
markets to take advantage of strong industry growth patterns. See Item One -
"Description of Business Business Strategy."
The foregoing statements contained in this Outlook section of Management's
Discussion and Analysis of Financial Condition and Results of Operations and
other forward looking statements made in Part I "Description of Business -
Business Strategy" of this Form 10-KSB for the period ended September 30, 1996
involve a number of risks and uncertainties. Some of the factors that could
cause actual results to differ materially include but are not limited to
seasonality of its sales and raw materials cost fluctuations, which are
discussed above, and the following:
Reliance on Principal Customers. The Company has several customers who each
accounted for a significant percentage of the Company's sales in fiscal 1996.
During that period, sales to Crystal Farms Refrigerated Distribution Company,
Ken Davis Products, Inc., Catalina Specialty Foods, Inc. and Bradley
Distributing, Inc. accounted for approximately 20%, 8%, 15% and 8% of the
Company's sales, respectively. The loss of any of the foregoing customers could
have a material and adverse effect on the Company's sales and profitability.
Competition. The Mexican-style food manufacturing and distribution industry
is highly competitive. The Company is in competition with a number of
manufacturers and distributors of Mexican-style food products and, to a limited
extent, manufacturers of "snack foods," many of which are better capitalized
than the Company. The Company will also be subject to future competition from
other manufacturers, distributors and retailers who enter into the Mexican-style
food and distribution industry. In the retail market, many of these competitors
engage in extensive local and national advertising and marketing, and the brand
names for products distributed by those competitors are significantly more
recognizable to the consumer than the Company's brand names. In addition,
competition for shelf space in retail grocery stores is intense. In the food
service market, the Company is competing with a number of regional and national
producers or Mexican-style food products. Many of these competitors are better
capitalized than the Company and have established sales organizations. No
assurance can be given that the Company will be able to compete as it expands
its markets.
Product Liability. The Company may be subject to significant liability
should the consumption of any of its products cause injury, illness or death.
Although the Company carries product liability insurance in the aggregate amount
of $2,000,000, with limits per occurrence of $1,000,000, there can be no
assurance that this insurance will be adequate to protect the Company against
product liability claims, or that such insurance will continue to be available
to the Company on reasonable terms.
14
<PAGE>
Government Regulation. The Company's business is subject to various
federal, state and local environmental and health regulations. If the Company
were found not to be in compliance with such regulations, sanctions and
penalties could be imposed which could materially and adversely affect the
Company's business.
ITEM 7. FINANCIAL STATEMENTS
15
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Sparta Foods, Inc.
St. Paul, Minnesota
We have audited the accompanying consolidated balance sheets of Sparta Foods,
Inc. and Subsidiary (the Company) as of September 30, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial position of Sparta Foods, Inc.
and Subsidiary as of September 30, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Minneapolis, Minnesota /s/ McGladrey & Pullen
November 22, 1996 -----------------------
McGladrey & Pullen
16
<PAGE>
<TABLE>
<CAPTION>
SPARTA FOODS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
ASSETS (Note 3) 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash $ 600 $ 863
Accounts receivable, less allowances of $52,000 in 1996 and
$75,000 in 1995 (Note 6) 639,934 678,458
Inventories:
Finished goods 241,959 320,303
Raw materials and packaging 506,513 609,766
Prepaid expenses 63,915 37,495
---------------------------------------------
Total current assets 1,452,921 1,646,885
---------------------------------------------
Property and Equipment~ (Notes 2 and 5) 5,850,489 5,832,508
Less accumulated depreciation 2,115,810 1,733,420
---------------------------------------------
3,734,679 4,099,088
---------------------------------------------
Other Assets
Goodwill, less accumulated amortization of $102,358 and
$80,218, respectively 457,533 479,673
Covenants not-to-compete, less accumulated amortization
of $235,366 and $186,733, respectively 98,134 146,767
Rental property held for resale, less accumulated depreciation
of $15,984 and $-0-, respectively (Note 1) 924,016 940,000
Other 339,730 242,105
---------------------------------------------
1,819,413 1,808,545
---------------------------------------------
$ 7,007,013 $ 7,554,518
=============================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Note payable, bank (Note 3) $ 294,811 $ 997,721
Current maturities of long-term debt 567,905 594,803
Accounts payable 658,575 1,218,455
Accrued expenses 412,074 361,814
---------------------------------------------
Total current liabilities 1,933,365 3,172,793
---------------------------------------------
Long-Term Debt~, less current maturities (Notes 3 and 5) 2,063,613 2,636,913
---------------------------------------------
Commitments~ (Note 5)
Stockholders' Equity~ (Note 7)
Preferred stock, authorized 1,000,000 shares, no designated
par value; none issued - -
Common stock, authorized 15,000,000 shares, $0.01 par value;
issued and outstanding 6,679,049 and 4,062,799 shares
in 1996 and 1995, respectively 66,790 40,627
Additional paid-in capital 4,911,070 3,777,317
Accumulated deficit (1,967,825) (2,073,132)
---------------------------------------------
3,010,035 1,744,812
---------------------------------------------
$ 7,007,013 $ 7,554,518
=============================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPARTA FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30, 1996 and 1995
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales~ (Note 6) $ 12,662,819 $ 11,991,988
Cost of sales 9,238,220 8,901,490
---------------------------------------------
Gross profit 3,424,599 3,090,498
Selling, general, and administrative expenses (Note 8) 2,968,569 3,283,992
---------------------------------------------
Operating income (loss) 456,030 (193,494)
Other income (expense) (Notes 1 and 9) 86,018 (279,450)
Interest expense (431,741) (516,212)
---------------------------------------------
Income (loss) before income taxes 110,307 (989,156)
Income tax (expense) benefit~ (Note 4) (5,000) 45,378
---------------------------------------------
Net income (loss) $ 105,307 $ (943,778)
=============================================
Net income (loss) per common and common equivalent share:
Primary $ 0.02 $ (0.24)
Fully diluted 0.01 -
Weighted average common and common equivalent shares outstanding:
Primary 7,428,736 3,887,950
Fully diluted 7,617,432 -
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
SPARTA FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1996 and 1995
Number Additional
of Shares Paid-In Accumulated
Outstanding Amount Capital Deficit Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1994 3,151,089 $ 31,510 $ 2,696,092 $ (1,129,354) $ 1,598,248
Common stock issued, less costs of $282,658
(Note 7) 910,332 9,103 1,073,739 - 1,082,842
Common stock issued as compensation 1,378 14 7,486 - 7,500
Net loss - - - (943,778) (943,778)
------------------------------------------------------------------------------
Balance, September 30, 1995 4,062,799 40,627 3,777,317 (2,073,132) 1,744,812
Common stock issued, less costs of
$148,209 (Note 7) 2,560,000 25,600 1,106,191 - 1,131,791
Common stock issued in satisfaction of consulting
services (Note 8) 40,000 400 19,600 - 20,000
Common stock issued upon exercise of warrants
and options (Note 7) 16,250 163 7,962 - 8,125
Net income - - - 105,307 105,307
------------------------------------------------------------------------------
Balance, September 30, 1996 6,679,049 $ 66,790 $ 4,911,070 $ (1,967,825) $ 3,010,035
==============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
SPARTA FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1996 and 1995
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ 105,307 $ (943,778)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 463,049 453,191
Amortization 89,853 134,348
(Gain) loss on sale of property and equipment 10,630 (23,371)
Loss on impairment of property held for resale - 302,612
Changes in assets and liabilities:
Accounts receivable 38,524 97,251
Inventories 181,597 95,004
Prepaid expenses (26,420) 5,122
Other assets (67,409) (33,446)
Accounts payable and accrued expenses (489,620) 24,232
-----------------------------------------
Net cash provided by operating activities 305,511 111,165
-----------------------------------------
Cash Flows From Investing Activities
Equipment deposits paid (68,000) -
Purchases of property, equipment, and other (107,786) (549,801)
Proceeds from the sale of property and equipment 14,500 79,245
-----------------------------------------
Net cash used in investing activities (161,286) (470,556)
-----------------------------------------
Cash Flows From Financing Activities
Net payments on line of credit (702,910) (167,278)
Long-term borrowings - 2,184,800
Payments on long-term borrowings (650,198) (1,540,876)
Short-term borrowings 400,000 -
Deferred finance costs - (54,588)
Deferred private placement costs - (18,704)
Issuance of common stock, net of costs 808,620 (47,448)
-----------------------------------------
Net cash provided by (used in) financing activities (144,488) 355,906
-----------------------------------------
Net decrease in cash (263) (3,485)
Cash
Beginning 863 4,348
-----------------------------------------
Ending $ 600 $ 863
=========================================
(Continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPARTA FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended September 30, 1996 and 1995
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash (receipts) payments for:
Interest $ 444,599 $ 640,883
Income taxes 5,000 (47,476)
==========================================
Supplemental Schedule of Noncash Investing and Financing Activities
Conversion of long-term debt to common stock (Note 7) $ - $ 1,137,790
Conversion of accounts payable to long-term debt - 217,000
Conversion of bridge financing to common stock (Note 7) 350,000 -
Conversion of accounts payable to common stock (Note 8) 20,000 -
Debt forgiven on leased asset - 12,861
Reclassification of deferred private placement costs to equity upon
issuance of common stock 18,704 -
==========================================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Sparta Foods, Inc., through its wholly-owned subsidiary, La
Canasta of Minnesota, Inc. (La Canasta), formulates, manufactures, and markets a
broad line of Mexican-style foods under its own brand name and for private
labels, and barbecue sauces for others under private labels.
The Company's customers are principally retail food stores and distributors in
the Upper Midwest and Western Canada. The Company grants credit to its customers
on an individual basis.
Consolidation: The financial statements of Sparta Foods, Inc. have been
consolidated with its wholly- owned subsidiary, La Canasta. All significant
intercompany balances and transactions have been eliminated. The consolidated
operations are hereinafter referred to as the Company.
Management estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.
Stock-based compensation: The Financial Accounting Standards Board (FASB) has
issued Statement No. 123 (SFAS 123), Accounting for Stock-Based Compensation.
This statement is effective for the Company's 1997 fiscal year. SFAS 123
establishes a fair value-based method of accounting for stock- based
compensation plans and encourages, but does not require, entities to adopt that
method for grants to employees in place of APB Opinion No. 25, Accounting for
Stock Issued to Employees, which uses an intrinsic value-based accounting
method. At this time, the Company does not intend to adopt SFAS 123 in measuring
expenses for grants to employees. However, the Company must present pro forma
net income (loss) and related per share amounts as if SFAS 123 had been adopted,
and such pro forma amounts are expected to reflect higher amounts of expenses
than amounts reported in the financial statements.
Revenue recognition: Revenues are recognized at the time the product is shipped
to the customer. The Company records estimated allowances for sales returns and
promotions.
Cash: The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any losses
in such accounts.
Fair value of financial instruments: The Company has adopted FASB Statement No.
107, Disclosures About Fair Value of Financial Instruments, which requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. Statement No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. The aggregate fair
values of the financial instruments would not represent the underlying value of
the Company.
17
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The financial statements include the following financial instruments: cash,
trade accounts receivable, accounts payable, notes payable, and a line of
credit. At September 30, 1996, no separate comparison of fair values versus
carrying values is presented for the aforementioned financial instruments since
their fair values are not significantly different than their balance sheet
carrying amounts.
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.
Property and equipment: Property and equipment are carried at cost and are being
depreciated over their useful lives on a straight-line basis.
Intangibles: Costs in excess of assets acquired (goodwill) are being amortized
over 40 years. Covenants not-to-compete are being amortized over the terms of
the agreements, which are 5 years to 15 years. In accordance with Statement of
Financing Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company
reviews its intangibles periodically to determine potential impairment by
comparing the carrying value of the intangibles with estimated future cash flows
expected to result from the use of the assets, including cash flows from
disposition. Should the sum of the expected future cash flows be less than the
carrying value, the Company would recognize an impairment loss. An impairment
loss would be measured by comparing the amount by which the carrying value
exceeds the fair value of the intangible asset. To date, management has
determined that no impairment of intangibles exists.
Rental property: Rental property consists of a facility in Lakeville, Minnesota,
which was previously used in the manufacturing of the Company's products. In
fiscal 1995, the production equipment and operations of this facility were
consolidated into the Company's St. Paul location. The property is recorded at
the lower of cost or estimated fair market value.
The Company entered into an agreement with a third party during 1996 to lease
this facility under an operating lease that expires January 31, 2006. The lease
calls for monthly payments of $11,280, plus taxes and utilities. Rental income
under this lease was approximately $92,000 for the year ended September 30,
1996, and is included in other income (expense) in the statement of operations.
The Company commenced depreciating the rental property over its estimated useful
life of 37 years on a straight-line basis at the beginning of the lease.
Income taxes: Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
basis. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Net income (loss) per common and common equivalent share: Net income (loss) per
common share is computed based upon the weighted average number of common shares
and common share equivalents
18
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
outstanding during each year. Common stock equivalents are included in the
computation using the treasury stock method wherever their inclusion has a
dilutive effect. Common stock equivalents (options and warrants) were
antidilutive for the year ended September 30, 1995.
Note 2. Property and Equipment
<TABLE>
<CAPTION>
Property and equipment consists of:
Estimated September 30
Useful Life
-------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Factory equipment 12-18 $4,765,838 $4,743,245
Office and other equipment 5 322,562 327,174
Leasehold improvements 20-31 762,089 762,089
-------------------------------------------------
$5,850,489 $5,832,508
=================================================
</TABLE>
Note 3. Financing Agreements
Line of credit: At September 30, 1996, the Company has a line of credit with a
bank, secured by all assets. Maximum borrowings under the credit agreement are
determined by an accounts receivable and inventory borrowing base calculation or
$1,200,000, whichever is less. Borrowings bear interest at prime plus 2.0
percent (10.25 percent at September 30, 1996). At September 30, 1996, $294,811
was outstanding on the line of credit. The Company is to maintain certain
minimum net income, net worth, and debt service coverage levels. In addition, a
maximum debt to net worth ratio is specified, dividends and capital expenses are
restricted, and compensation and new options/warrants are also limited.
Long-term debt: Long-term debt consists of the following:
19
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
September 30
1996 1995
<S> <C> <C>
Term note and equipment note payable to bank, secured by all assets of the
Company, due in monthly installments of $21,658 and $6,667, respectively, plus
interest at prime plus 2.5%
to December 1, 1997, when the remaining balance is due $ 1,623,315 $ 1,963,211
Note payable, secured by land and building, subordinated to bank
financing, interest-only payments at prime plus 4% beginning January 1, 1995,
through January 1, 1998, thereafter monthly
installments of $11,886, including interest, to January 1, 2003 553,220 553,220
Note payable, Freedoon Anvary, secured by land and building,
subordinated to bank financing, interest-only payments at prime plus 4%
beginning January 1, 1995, through January 1, 1998, thereafter monthly
installments of $3,934, including
interest, to January 1, 2003 183,102 183,102
Note payable, attorney, subordinated to bank financing, monthly
installments of $8,500, including interest, at prime plus 1.5%,
to February 1, 1997 65,066 155,586
Capital lease obligations (see Note 5) 206,815 376,597
2,631,518 3,231,716
Less current maturities 567,905 594,803
-----------------------------------
2,063,613 2,636,913
===================================
</TABLE>
Aggregate maturities of long-term debt at September 30, 1996, are as follows:
Years ending September 30: $ 568,000
1997 1,394,000
1998 117,000
1999 129,000
2000 146,000
2001 278,000
-----------
Later years $2,632,000
===========
Note 4. Income Taxes
The income tax (expense) benefit for 1996 and 1995 consisted of:
20
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current:
Federal--net operating loss carried back to prior years $ - $ 45,378
State--minimum fees -5,000
$ -5,000 $ 45,378
</TABLE>
A reconciliation between the income tax (expense) benefit at the federal
statutory rate and the effective income tax rate for 1996 and 1995, is as
follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Federal statutory rates (34.0) % 34.0 %
State income taxes net of federal benefit -4.50 -4.40
Nondeductible expenses -5.60 -0.30
Net operating loss not utilized - -24.70
Benefit of graduated tax rate 3.20 -
Utilization of net operating loss carryforward 36.40 -
Effective income tax rate -4.50 % 4.6 %
</TABLE>
Temporary differences that give rise to the net deferred tax assets and
liabilities at September 30, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net current deferred taxes:
Receivable allowances $ 15,700 $ 22,500
Vacation accrual 17,000 22,000
Capitalized start-up costs - 1,900
Inventory costs 15,900 12,900
Bonus accrual 1,200 -
Lease deferred income -19,000 -
Valuation allowance -30,800 -59,300
$ $ -
1996 1995
Net noncurrent deferred taxes:
Depreciation $ -544,500 $ -459,300
Property and equipment valuation allowance 90,800 90,800
Net operating loss carryforwards 873,900 811,000
AMT credit carryforwards 38,000 38,000
Intangible assets 31,900 -
Valuation allowance -490,100 -480,500
$ - $ -
</TABLE>
21
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Income Taxes (Continued)
As of September 30, 1996 and 1995, the Company recorded valuation allowances of
$520,900 and $539,800, respectively, on the deferred tax assets to reduce the
total to an amount that management believes will ultimately be realized.
Realization of deferred tax assets is dependent upon sufficient future taxable
income during the period that deductible temporary differences and carryforwards
are expected to be available to reduce taxable income. There was no other
activity in the valuation allowance account during 1996 or 1995.
The net operating loss carryforwards of $2,913,000 at September 30, 1996, will
expire as follows:
Years Amount
2008 $ 268,000
2009 1,135,000
2010 1,276,000
2011 234,000
The alternative minimum tax (AMT) credit carryforwards may be carried forward
indefinitely to reduce future regular federal income taxes payable.
Note 5. Leases and Other Commitments
Capital leases: The Company leases property and equipment under capital leases
with terms in excess of one year. Minimum future obligations under capital
leases at September 30, 1996, are as follows:
Years ending September 30:
1997 $ 175,200
1998 42,600
1999 2,800
---------------------
Total future payments 220,600
Less amount representing interest 13,800
----------------------
Present value of future payments $ 206,800
=======================
Property and equipment includes assets held under capital leases, as follows:
September 30
----------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Cost $ 784,376 $ 825,859
Accumulated depreciation 331,108 265,944
----------------------------------------------
$ 453,268 $ 559,915
==============================================
Operating leases: The Company leases its office and manufacturing facility and
certain manufacturing equipment under operating leases. The facility lease
requires monthly base rentals plus the payment of 88 percent of real estate
taxes and operating expenses of the building, expires on May 31, 2000, and
contains two five-year renewal options.
22
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Leases and Other Commitments (Continued)
Total rent expenses for facilities and equipment were $518,500 and $447,100 for
1996 and 1995, respectively.
Minimum future obligations required under operating leases at September 30,
1996, are as follows:
Years ending September 30:
1997 $ 393,000
1998 344,000
1999 304,000
2000 207,000
2001 8,000
--------------------
$ 1,256,000
====================
License agreements: In connection with a business acquisition, the Company
obtained a license agreement which expires December 31, 1999, which requires the
payment of 3 percent of the gross sales of products sold using the "La Campana
Paradiso" or "Paradiso" name. In addition, the Company pays a fee equal to 1
percent of all retail sales made under the "Cruz" label until January 1, 1997,
or an aggregate of $220,000, whichever occurs earlier, and is required to pay 3
percent of net Chapala sales for 15 years. Expenses relating to these
arrangements were $42,878 and $35,717 in 1996 and 1995, respectively.
Purchase agreements: The Company does not enter into futures contracts. They do,
however, enter into purchase orders for delayed delivery of raw materials,
generally 30 days for raw materials other than corn and flour. The Company
enters into purchase orders for the delayed delivery of corn and flour for a
period of 2 to 18 months, depending on current pricing, to insure the
availability of the type of corn best suited for the Company's products. These
purchase orders are placed directly with the suppliers. At the end of each
reporting period, the Company evaluates the open purchase orders for corn and
flour to determine whether a loss should be recognized. No such losses are
accruable as of September 30, 1996 and 1995.
Note 6. Sales
The Company had sales to one customer which accounted for 20 percent of sales
for 1996 and 16 percent of sales for 1995. As of September 30, 1996, accounts
receivable from this customer were $80,616.
In addition, the Company also had sales to a second customer through one
distributor in 1996 and four separate distributors in 1995 which accounted for
16 percent of sales in 1996 and 13 percent of sales in 1995. As of September 30,
1996, accounts receivable from this distributor were $63,825.
Note 7. Stockholders' Equity
On October 20, 1995, the Company obtained $400,000 in bridge financing by
issuing convertible promissory notes and the granting of 400,000 warrants to
purchase shares of common stock at $0.50 per share. In February 1996, the
Company completed a private placement offering and obtained additional equity.
The following is a summary of the components of the private placement offering:
2,560,000 shares of common stock were issued for $930,000 in cash and
the conversion of $350,000 of bridge financing debt.
23
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A total of 2,640,000 in warrants were issued in connection with the
issuance of the additional common stock. The warrants have an exercise
price of $0.75, of which 2,560,000 expire on February 2, 1999, and the
remaining 80,000 expire on February 2, 2001.
Net proceeds from the private placement offering were used to pay off
$50,000 of bridge financing debt and $700,000 of the Company's line of
credit, with the remaining proceeds used to fund the continuing
operations of the Company.
In December 1994, the Company converted certain existing debt and obtained
additional equity. The following is a summary of the components of the
conversion:
Sort-term debt of $2,000,000 was repaid or converted to equity. Debt of
$969,000 was converted into 646,000 shares of common stock, and
$1,031,000 was repaid.
Additional equity of $396,500 was obtained from the sale of 264,332
shares of common stock and the conversion of certain notes and accounts
payable.
A total of 597,546 in warrants were issued in connection with the
conversion and issuance of additional equity.
Stock options: The Company has a stock option plan, as amended, pursuant to
which qualified and nonqualified stock options for up to 950,000 shares of the
Company's $0.01 par value common stock have been reserved for issuance under the
plan and may be granted to key employees and members of the Board of Directors.
The options are generally granted at exercise prices equal to or greater than
the fair value of the common stock at the date of grant, expire at varying dates
not to exceed ten years from the grant date, and are not transferable.
Note 7. Stockholders' Equity (Continued)
<TABLE>
<CAPTION>
Changes in stock options are summarized as follows:
Price Range Shares
<S> <C> <C>
Outstanding, September 30, 1994: $ 1.88 - 5.00 499,033
Granted .50 - 2.10 373,333
Canceled .50 - 5.00 -178,867
Outstanding, September 30, 1995: .50 - 5.00 693,499
Granted .50 - 1.44 277,000
Canceled .50 - 5.00 -235,665
Exercised .50 -11,250
Outstanding, September 30, 1996 $ .50 - 5.00 723,584
As of September 30, 1996, 231,792 options were exercisable.
</TABLE>
24
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Stock warrants: A summary of warrants follows:
Price Range Shares
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, September 30, 1994 $ 4.50 460,000
Granted 1.50 - 2.00 597,546
Cancelled 4.50 -380,000
------------------------------------------------------------
Outstanding, September 30, 1995 1.50 - 4.50 677,546
Granted 0.50 - 0.75 3,040,000
Exercised 0.50 -5,000
------------------------------------------------------------
Outstanding, September 30, 1996 $ 0.50 - 4.50 3,712,546
============================================================
</TABLE>
Expiration Date Amount
October 10, 1998 400,000
October 31, 1998 657,246
February 2, 1999 2,560,000
December 9, 1999 15,300
February 2, 2001 80,000
---------
3,712,546
=========
Note 8. Related-Party Transactions
The Company's former Chairman of the Board received consulting fees of $34,517
for 1995, pursuant to a consulting agreement with the Company dated August 15,
1994. This agreement obligated him to provide executive management and other
business services to the Company over the period from August 15, 1994, through
February 28, 1995, in exchange for a consulting fee of $8,333 per month. The
consulting agreement was terminated in January 1995.
The Company issued 40,000 shares of common stock to a member of the Board of
Directors to satisfy a $20,000 liability for consulting services provided and
recorded as of September 30, 1995.
Effective November 1, 1994, the Company entered into a broker agreement with a
principal stockholder and former officer and director of the Company which
provides an exclusive food broker arrangement on sales of the Company's food
products to certain designated accounts on a commission basis. Commissions paid
during fiscal 1996 and 1995 amounted to $8,799 and $4,512, respectively.
Note 9. 1995 Fourth Quarter Adjustment
During the fourth quarter of the year ended September 30, 1995, the Company
recorded a $302,612 write-down of the Lakeville property value based upon recent
negotiations for the sale of the facility. This write-down was necessary to
reflect the recorded value of this property at the lower of cost or fair market
value. During 1996, the Company entered into a lease agreement to rent this
property (see Note 1).
25
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names and ages of the executive officers of the Registrant and their
positions and offices presently held are as follows:
Name Age Position with Company
Joel P. Bachul 54 President and Chief Executive Officer
A. Merrill Ayers 50 Treasurer, Chief Financial Officer and
Secretary
Thomas C. House 50 Vice President of Operations
Joel P. Bachul, has been the Chief Executive Officer and President of the
Company, and its wholly-owned subsidiary, La Canasta of Minnesota, Inc. ("La
Canasta"), since December 1, 1994. From August 1991 until July 1994, Mr. Bachul
served as the Executive Vice President and Chief Operating Officer of Old Home
Foods, Inc., a food processing and distribution concern. From July 1990 until
July 1991, Mr. Bachul was the Executive Vice President and Chief Operating
Officer of Bell Cold Storage which provides public and cold storage services.
Mr. Bachul served as Senior Vice President of J.P. Foodservice, a foodservice
distributor, from July 1989 through February 1990. From 1980 until July 1989,
Mr. Bachul served as Vice President, Senior Vice President and Chief Operating
Officer of PYA/Monarch, also a foodservice distributor.
A. Merrill Ayers, has been the Treasurer, Chief Financial Officer and
Secretary of the Company since November 9, 1994. Prior to joining the Company,
Mr. Ayers served as Senior Vice President of ITT Consumer Financial Corp. from
June 1992 until February 1994. From December 1989 through June 1992 Mr. Ayers
was Vice President and Treasurer of Parsons, Brinckerhoff, Quade & Douglas,
Inc., an engineering firm.
Thomas C. House, has been employed by the Company since March 1993 as the
Vice President of Operations. From December 1988 until March 1993, Mr. House was
the plant manager at the Rosemount, Minnesota plant facilities of Continental
Nitrogen & Resource Corporation, a manufacturer of ammonium nitrate- based
products and fertilizers. Mr. House is currently responsible for the Company's
plant operations, quality control and plant expansion, as well as purchasing and
product distribution.
There are no family relationships among any of the Company's directors or
executive officers.
The information required by Item 9 relating to directors and compliance
with Section 16(a) of the Exchange Act is incorporated herein by reference to
the sections labeled "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance," respectively, which appear in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders.
26
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated herein reference to the
section labeled "Executive Compensation" which appears in the Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated herein by reference to
the section labeled "Principal Shareholders and Management Shareholdings" which
appears in the Registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated by reference to the
section labeled "Certain Transactions" which appears in the Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibits are numbered in accordance with Item 601 of
Regulation S-B. See "Exhibit Index" immediately following the
signature page of this Form 10-KSB.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last fiscal
quarter of the Registrant's 1996 fiscal year.
27
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SPARTA FOODS, INC.
Dated: December 20, 1996 By: /s/ Joel P.Bachul
Joel P. Bachul, President
Dated: December 20, 1996 By: /s/ A. Merrill Ayers
A. Merrill Ayers, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act 1934, this
Report has been signed by the following persons on behalf of the Company, in the
capacities, and on the dates, indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints JOEL P.
BACHUL and A. MERRILL AYERS as true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any or all
amendments to this Annual Report on Form 10-KSB and to file the same, with all
exhibits thereto, and other documents in connection thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Signature and Title Date
/s/ Michael J. Kozlak December 20, 1996
- ----------------------------
Michael J. Kozlak, Director
/s/ Larry Arnold December 20, 1996
- ----------------------------
Larry Arnold, Director
/s/ Joel P. Bachul December 20, 1996
- ----------------------------
Joel P. Bachul, Director
- ---------------------------- December __, 1996
Edward Jorgensen, Director
/s/ Richard H. Leepart December 20, 1996
- ----------------------------
Richard H. Leepart, Director
/s/ R. Dean Nelson December 20, 1996
- -----------------------------
R. Dean Nelson, Director
28
<PAGE>
SPARTA FOODS, INC.
EXHIBIT INDEX TO FORM 10-KSB
Exhibit
Number Description
3(i)(1) Articles of Incorporation. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the period ended
December 31, 1989.)*
3(i)(2) Articles of Amendment to Articles of Incorporation. (Incorporated
by reference to the Company's Annual Report on Form 10-K for the
period ending December 31, 1990.)*
3(i)(3) Articles of Amendment to Articles of Incorporation filed on
October 25, 1993. (Incorporated by reference to the Company's
Amendment No. 2 on Form 10-KSB/A to the Annual Report on Form
10-KSB for the period ended September 30, 1993.)*
3(i)(4) Articles of Amendment to Articles of Incorporation filed on April
15, 1994. (Incorporated by reference to the Company's Amendment
No. 2 on Form 10-KSB/A to the Annual Report on Form 10-KSB for
the period ended September 30, 1993.)*
3(ii) By-Laws. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the period ended December 31, 1989.)*
4.1 Form of Certificate for Common Stock of Sparta Foods, Inc.
(Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1994.)*
10.1 Registration Rights Agreement dated January 15, 1991, between
Carmen S. Abril-Lopez and Sparta Foods, Inc. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the
period ended December 31, 1990.)*
10.2 ** Amended and Restated Stock Option Plan.
10.3 Office/Warehouse Lease dated November 20, 1985 between The
Travelers Insurance Company and La Canasta of Minnesota, Inc., as
amended. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the period ended December 31, 1990.)*
10.4 Manufacturing Agreement dated September 20, 1989, between Ken
Davis Products, Inc. and La Canasta of Minnesota, Inc.
(Incorporated by reference to the Company's Annual Report on Form
10-K for the period ended December 31, 1990.)*
10.5 Concurrent Ownership and Usage Agreement dated November 16, 1990,
between La Canasta Mexican Food Products, Inc. and La Canasta of
Minnesota, Inc. (Reg. No. 1,560,808). (Incorporated by reference
to the Company's Annual Report on Form 10-K for the period ended
December 31, 1990.)*
10.6 Concurrent Ownership and Usage Agreement dated November 16, 1990,
between La Canasta Mexican Food Products, Inc. and La Canasta of
Minnesota, Inc. (Reg. No. 1,341,156). (Incorporated by reference
to the Company's Annual Report on Form 10-K for the period ended
December 31, 1990.)*
10.7 Concurrent Ownership and Usage Agreement dated November 16, 1990,
between La Canasta Mexican Food Products, Inc. and La Canasta of
Minnesota, Inc. (Reg. No. 1,434,854). (Incorporated by reference
to the Company's Annual Report on Form 10-K for the period ended
December 31, 1990.)*
- -------------
* Incorporated by reference - Commission File No. 000-19318 unless
otherwise indicated
** Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-KSB
<PAGE>
10.8 Amendment No. Four dated October 10, 1991 to Office/Warehouse
Lease dated November 20, 1985 between The Travelers Insurance
Company and La Canasta of Minnesota, Inc., as amended.
(Incorporated by reference to the Company's Annual Report on Form
10-K for the period ended September 30, 1991.)*
10.9 Form of Contingent Payment Agreement dated December 31, 1991
among Sparta Foods, Inc. and the shareholders of Cruz
Distributing Inc. (Incorporated by reference to the Company's
Post-Effective Amendment No. 1 to the Registration Statement (No.
33-24394C) on Form S-18 dated August 6, 1992.)
10.10 Amendment No. Five dated May 18, 1992 to Office/Warehouse Lease
dated November 20, 1985 among Advent Realty Limited Partnership
II (successor to The Travelers Insurance Company), La Canasta of
Minnesota, Inc. and Sparta Foods, Inc. (Incorporated by reference
to the Company's Post-Effective Amendment No. 1 to the
Registration Statement (No. 33-14394C) on Form S-18 dated August
6, 1992.)
10.11 Mortgage Note and Mortgage Deed of La Canasta of Minnesota, Inc.
in favor of Fredoon Anvary dated October 1, 1993. (Incorporated
by reference to the Company's Current Report on Form 8-K with a
Date of Report of October 28, 1993.)*
10.12 License Agreement between La Canasta of Minnesota, Inc. and
Mexican Foods, Inc., dated October 28, 1993, and relating to the
use of the trade name "La Campana Paradiso" and "Paradiso."
(Incorporated by reference to the Company's Current Report on
Form 8-K with a Date of Report of October 28, 1993.)*
10.13 Warrant issued to International Food Products, Inc. for purchase
of 120,000 shares of Sparta Foods, Inc.'s Common Stock and dated
October 28, 1993. (Incorporated by reference to the Company's
Current Report on Form 8-K with a Date of Report of October 28,
1993.)*
10.14 Warrant issued to Fredoon Anvary for purchase of 60,000 shares of
Sparta Foods, Inc.'s Common Stock and dated October 28, 1993.
(Incorporated by reference to the Company's Current Report on
Form 8-K with a Date of Report of October 28, 1993.)*
10.15 Option Agreement between Fredoon Anvary and Sparta Foods, Inc.,
granting Fredoon Anvary an option to purchase 300,000 shares of
Sparta Foods, Inc.'s Common Stock and dated October 28, 1993.
(Incorporated by reference to the Company's Current Report on
Form 8-K with a Date of Report of October 28, 1993.)*
10.16 Amendment No. 2 dated August 9, 1993 to Manufacturing Agreement
between Ken Davis Products, Inc. and La Canasta of Minnesota,
Inc. (Incorporated by reference to the Company's Amendment No. 2
on Form 10-KSB/A to the Annual Report on Form 10-KSB for the
period ended September 30, 1993.)*
10.17 Distributorship Agreement dated January 21, 1994 between Crystal
Farms Refrigerated Distribution Company and Sparta Foods, Inc.
(Incorporated by reference to the Company's Amendment No. 2 on
Form 10-KSB/A to the Annual Report on Form 10-KSB for the period
ended September 30, 1993.)*
- ------------
* Incorporated by reference - Commission File No. 000-19318 unless
otherwise indicated
** Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-KSB
<PAGE>
10.18 Amendment No. Six dated March 31, 1993 to Office/Warehouse Lease
dated November 30, 1985 among Advent Realty Limited Partnership
II (successor to The Travelers Insurance Company, La Canasta of
Minnesota, Inc. and Sparta Foods, Inc. (Incorporated by reference
to the Company's Annual Report on Form 10-KSB for the period
ended September 30, 1994.)*
10.19 Broker Agreement dated November 1, 1994 between Food Creators
International, Inc. and Sparta Foods, Inc. (Incorporated by
reference to the Company's Annual Report on Form 10- KSB for the
period ended September 30, 1994.)*
10.20 Registration Rights Agreement dated December 9, 1994 between IFP
Trust and Sparta Foods, Inc. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB for the period ended
September 30, 1994.)*
10.21 Amendment Modifying Subordinated Mortgage Notes and Security
Agreement dated December 9, 1994 by and among La Canasta of
Minnesota, Inc., IFP Trust and Fredoon Anvary (without exhibits).
(Incorporated by reference to the Company's Annual Report on Form
10-KSB for the period ended September 30, 1994.)*
10.22 Registration Rights Agreement dated December 9, 1994 by and among
Nicholas G. Grammas, Carmen S. Abril-Lopez and Sparta Foods,
Inc., among others. (Incorporated by reference to the Company's
Annual Report on Form 10-KSB for the period ended September 30,
1994.)*
10.23 Form of RAT-Series Warrants dated December 9, 1994 to purchase
Common Stock of Sparta Foods, Inc. at $2.00 per share and
expiring on October 31, 1998. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB for the period ended
September 30, 1994.)*
10.24 Form of RES-Series Warrants dated December 9, 1994 to purchase
Common Stock of Sparta Foods, Inc. at $4.50 per share and
expiring on October 31, 1998. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB for the period ended
September 30, 1994.)*
10.25 Credit and Security Agreement dated December 9, 1994 among
Norwest Bank Minnesota, N.A., Sparta Foods, Inc. and La Canasta
of Minnesota, Inc. (without exhibits). (Incorporated by reference
to the Company's Annual Report on Form 10-KSB for the period
ended September 30, 1994.)*
10.26 $1,200,000 Revolving Note dated December 9, 1994 issued by La
Canasta of Minnesota, Inc. in favor of Norwest Bank Minnesota,
N.A. (Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the period ended September 30, 1994.)*
10.27 $1,784,000 Term Note dated December 9, 1994 issued by La Canasta
of Minnesota, Inc. in favor of Norwest Bank Minnesota, N.A.
(Incorporated by reference to the Company's Annual Report on Form
10-KSB for the period ended September 30, 1994.)*
10.28 $400,000 Capital Note dated December 9, 1994 issued by La Canasta
of Minnesota, Inc. in favor of Norwest Bank Minnesota, N.A.
(Incorporated by reference to the Company's Annual Report on Form
10-KSB for the period ended September 30, 1994.)*
10.29 Guaranty dated December 9, 1994 issued by Sparta Foods, Inc. in
favor of Norwest Bank Minnesota, N.A. (Incorporated by reference
to the Company's Annual Report on Form 10-KSB for the period
ended September 30, 1994.)*
- -------------
* Incorporated by reference - Commission File No. 000-19318 unless
otherwise indicated
** Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-KSB
<PAGE>
10.30 Form of Indemnification Agreement between Sparta Foods, Inc. and
certain Selling Shareholders listed in Registration Statement on
Form SB-2. (Incorporated by reference to the Company's
Registration Statement on Form SB-2 (No. 33-89284) dated April
14, 1995.)
10.31 Amendment to Credit and Security Agreement dated December 9, 1994
among Norwest Bank Minnesota, N.A., Sparta Foods, Inc. and La
Canasta of Minnesota, Inc. (Incorporated by reference to the
Company's Registration Statement on Form SB-2 (No. 33-89284)
dated April 14, 1995.)
10.32 Addendum No. 1 to Distribution Agreement dated July 20, 1995
between Crystal Farms Refrigerated Distribution Company and
Sparta Foods, Inc. (Incorporated by reference to the Company's
Form 10-QSB for the period ended June 30, 1995.)*
10.33 Form of Convertible Promissory Note issued to certain accredited
investors who provided capital dated October 1995. (Incorporated
by reference to Exhibit 10.38 to the Company's Form 10- KSB for
the period ended September 30, 1996.)*
10.34 Form of Warrant issued to certain investors who provided capital
in form of convertible Promissory Notes dated October 1995.
(Incorporated by reference to Exhibit 10.39 to the Company's Form
10KSB for the period September 30, 1996.)*
10.35 Distribution Agreement dated January 2, 1996, between Catalina
Specialty Foods, Inc. and the Company. (Incorporated by reference
to Exhibit 10.40 to the Company's Form 10-QSB for the period
ended March 31, 1996.)*
10.36 Form of Warrant issued to certain investors who purchased units,
consisting of common stock and warrants, pursuant to the
Company's private placement dated February 3, 1996. (Incorporated
by reference to Exhibit 10.41 to the Company's Form 10-QSB for
the period ended March 31, 1996.)*
10.37 Registration Rights Agreement dated February 2, 1996, between and
among the company and certain shareholders who purchased units
pursuant to the Company's private placement. (Incorporated by
reference to Exhibit 10.42 to the Company's Form 10-QSB for the
period ended March 31, 1996.)*
10.38 Third Amendment to Credit Agreement dated April 23, 1996, by and
among Norwest Bank Minnesota, N.A., the Company and LaCanasta of
Minnesota, Inc. (Incorporated by reference to Exhibit 10.43 to
the Company's Form 10-QSB for the period ended March 31, 1996.)*
10.39 Salary Continuation Agreement between the Registrant and Joel P.
Bachul dated August 16, 1995.
10.40 Salary Continuation Agreement between the Registrant and A.
Merrill Ayers dated August 11, 1995.
10.41 Salary Continuation Agreement between the Registrant and Thomas
C. House dated August 14, 1995.
11 Sparta Foods, Inc. Computation of Net Income per Common Share.
21 Subsidiaries of Registrant. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the period ended
September 30, 1992.)*
23 Consent of independent public accountant.
- -------------
* Incorporated by reference - Commission File No. 000-19318 unless
otherwise indicated
** Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-KSB
<PAGE>
24 Power of Attorney (included on signature page of this Form
10-KSB)
27 Financial Data Schedule (filed in electronic format only)
- ---------------
* Incorporated by reference - Commission File No. 000-19318 unless
otherwise indicated
** Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-KSB
EXHIBIT 10.2
SPARTA FOODS, INC.
AMENDED AND RESTATED STOCK OPTION PLAN
SECTION 1.
DEFINITIONS
As used herein, the following terms shall have the meanings indicated
below:
(a) "Affiliates" shall mean a Parent or Subsidiary of the Company.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Committee" shall mean a Committee of two or more directors who
shall be appointed by and serve at the pleasure of the Board. In the
event the Company's securities are registered pursuant to Section 12 of
the Securities Exchange Act of 1934, as amended, each of the members of
the Committee shall be a "disinterested" person within the meaning of
Rule 16b-3, or any successor provision, as then in effect, of the
General Rules and Regulations under the Securities Exchange Act of 1934
as amended. As of the effective date of the Plan, a "disinterested"
person under Rule 16b-3 generally means a person who, among other
things, has not been, at any time within one year prior to his or her
appointment to the Committee (or, if shorter, during the period
beginning with the initial registration of the Company's equity
securities under Section 12 of the Securities Exchange Act of 1934, as
amended, and ending with the director's appointment to the Committee)
and who will not be, while serving on such Committee, granted or
awarded options under the Plan, or under any other plan of the Company
or any of its Affiliates entitling participants to acquire stock, stock
options, stock appreciation rights or similar rights that have an
exercise or conversion privilege or a value derived from equity
securities issued by the Company or its Affiliate, except to the extent
permitted by Rule 16b-3, or any successor provision.
(d) "Common Stock" shall mean common stock of the Company, par value
$0.01 per share.
(e) The "Company" shall mean Sparta Foods, Inc., a Minnesota
corporation.
(f) "Fair Market Value" of the Common Stock as of any applicable date
shall mean: (i) if such stock is reported in the national market system
or is listed upon an established exchange or exchanges, the reported
closing price of such stock in such national market system or on such
stock exchange or exchanges on the date the option is granted or, if no
sale of such stock shall have occurred on that date, on the preceding
day on which there was a sale of stock; (ii) if such stock is not so
reported in the national market system or listed upon an exchange, the
average of the closing "bid" and "asked" prices quoted by a recognized
specialist in the Common Stock of the Company on the date the option is
granted, or if there are no quoted "bid" and "asked" prices on such
date, on the preceding date for which there are such quotes; or (iii)
if such stock is not publicly traded as of the date the option is
granted, the per share value as determined by the Board, or the
Committee, in its sole discretion by applying principles of valuation
with respect to all such options.
(g) The "Internal Revenue Code" is the Internal Revenue Code of 1986,
as amended from time to time.
(h) "Option Agreement" shall mean a written stock option agreement
evidencing an option granted under the Plan.
(i) "Option Stock" shall mean Common Stock of the Company, $0.01 par
value (subject to adjustment as described in Section 13), reserved for
options pursuant to this Plan.
<PAGE>
(j) "Outside Director" shall mean a member of the Board who is not an
employee of the Company or any of its Affiliates.
(k) "Parent" shall mean any corporation which owns, directly or
indirectly in an unbroken chain, fifty percent (50%) or more of the
total voting power of the Company's outstanding stock.
(l) The "Plan" means the Sparta Foods, Inc. Amended and Restated Stock
Option Plan, as amended hereafter from time to time, including the form
of Option Agreements as they may be modified by the Board from time to
time.
(m) A "Subsidiary" shall mean any corporation of which fifty percent
(50%) or more of the total voting power of outstanding stock is owned,
directly or indirectly in an unbroken chain, by the Company.
SECTION 2.
PURPOSE
The purpose of the Plan is to promote the success of the Company and its
Subsidiaries by facilitating the employment and retention of competent personnel
and by furnishing incentive to officers, directors, employees, consultants and
advisors upon whose efforts the success of the Company and its Subsidiaries will
depend to a large degree.
It is the intention of the Company to carry out the Plan through the
granting of stock options which will qualify as "incentive stock options" under
the provisions of Section 422 of the Internal Revenue Code, or any successor
provision, and through the granting of "non- qualified stock options" pursuant
to Sections 10 and 11 of this Plan. Adoption of this Plan shall be and is
expressly subject to the condition of approval by the shareholders of the
Company within twelve (12) months after the Amendment Date. In no event shall
any stock options granted on or after the Amendment Date be exercisable prior to
the date the Plan is approved by the shareholders of the Company. If shareholder
approval of the Plan is not obtained within twelve (12) months after the
Amendment Date, any stock options previously granted shall be revoked.
SECTION 3.
EFFECTIVE DATE OF PLAN
The Plan is effective as of January 11, 1996, the date of its adoption by
the Board subject to approval by the shareholders of the Company.
SECTION 4.
ADMINISTRATION
The Plan shall be administered by the Committee if one is in existence or
if not, by the Board. The Board or the Committee, as the case may be, shall have
all of the powers vested in it under the provisions of the Plan, including but
not limited to exclusive authority (where applicable and within the limitations
described herein) to determine, in its sole discretion, whether an incentive
stock option or nonqualified stock option shall be granted, the individuals to
whom, and the time or times at which, options shall be granted, the number of
shares subject to each option and the option price and terms and conditions of
each option. The Board, or the Committee, shall have full power and authority to
administer and interpret the Plan, to make and amend rules, regulations and
guidelines for administering the Plan, to prescribe the form and conditions of
the respective stock option agreements (which may vary from optionee to
optionee) evidencing each option and to make all other determinations necessary
or advisable for the administration of the Plan. The Board's or the Committee's
interpretation of the Plan and all
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<PAGE>
actions taken and determinations made by the Board or the Committee pursuant to
the power vested in it hereunder, shall be conclusive and binding on all parties
concerned. No member of the Board or the Committee shall be liable for any
action taken or determination made in good faith in connection with the
administration of the Plan.
In the event the Board appoints a Committee as provided hereunder, any
action of the Committee with respect to the administration of the Plan shall be
taken pursuant to a majority vote of the Committee members or pursuant to the
written resolution of all Committee members.
SECTION 5.
PARTICIPANTS
The Board or the Committee, as the case may be, shall from time to time, at
its discretion and without approval of the shareholders, designate those
employees, directors, officers, consultants, and advisors of the Company or of
any Subsidiary to whom nonqualified stock options shall be granted under this
Plan; provided, however, that consultants or advisors shall not be eligible to
receive stock options hereunder unless such consultant or advisor renders bona
fide services to the Company or Subsidiary and such services are not in
connection with the offer or sale of securities in a capital raising
transaction; provided, further, that Outside Directors shall only be eligible to
receive nonqualified stock options pursuant to Section 11; and provided,
further, no director, other than an Outside Director or a director that is also
an employee of the Company, shall be eligible to be granted a stock option under
the Plan. The Board or the Committee, as the case may be, shall, from time to
time, at its discretion and without approval of the shareholders, designate
those employees of the Company or any Subsidiary to whom incentive stock options
shall be granted under this Plan. Except with respect to nonqualified stock
options granted to Outside Directors pursuant to Section 11, the Board or the
Committee may grant additional incentive stock options or nonqualified stock
options under this Plan to some or all participants then holding options or may
grant options solely or partially to new participants. In designating
participants, the Board or the Committee shall also determine the number of
shares to be optioned to each such participant. The Board may from time to time
designate individuals as being ineligible to participate in the Plan.
SECTION 6.
STOCK
The Stock to be optioned under this Plan shall consist of authorized but
unissued shares of Option Stock. Nine Hundred Thousand (950,000) shares of
Option Stock shall be reserved and available for options under the Plan;
provided, however, that the total number of shares of Option Stock reserved for
options under this Plan shall be subject to adjustment as provided in Section 13
of the Plan. In the event that any outstanding option under the Plan for any
reason expires or is terminated prior to the exercise thereof, the shares of
Option Stock allocable to the unexercised portion of such option shall continue
to be reserved for options under the Plan and may be optioned hereunder.
SECTION 7.
DURATION OF PLAN
Incentive stock options may be granted pursuant to the Plan from time to
time during a period of ten (10) years from the effective date as defined in
Section 3 of the Plan. Nonqualified stock options may be granted pursuant to the
Plan from time to time after the effective date of the Plan and until the Plan
is discontinued or terminated by the Board.
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<PAGE>
SECTION 8.
PAYMENT
Optionees may pay for shares upon exercise of options granted pursuant to
this Plan with cash, certified check, Common Stock of the Company valued at such
stock's then Fair Market Value, or such other form of payment as may be
authorized by the Board or the Committee. The Board or the Committee may, in its
sole discretion, limit the forms of payment available to the optionee and may
exercise such discretion any time prior to the termination of the option granted
to the optionee or upon any exercise of the option by the optionee.
SECTION 9.
TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS
Each incentive stock option granted pursuant to the Plan shall be evidenced
by an Option Agreement. The Option Agreement shall be in such form as may be
approved from time to time by the Board or Committee and may vary from optionee
to optionee; provided, however, that each inactive stock option granted under
this Plan and each related Option Agreement shall comply with and be subject to
the following terms and conditions:
(a) Number of Shares and Option Price. The Option Agreement shall state
the total number of shares covered by the incentive stock option. To
the extent required to qualify the option as an incentive stock option
under Section 422 of the Internal Revenue Code, or any successor
provision, the option price per share shall not be less than one
hundred percent (100%) of the Fair Market Value of the Common Stock per
share on the date the Board or the Committee, as the case may be,
grants the option; provided, however, that if an optionee owns stock
possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or of its Parent or any
Subsidiary, the option price per share of an incentive stock option
granted to such optionee shall not be less than one hundred ten percent
(110%) of the Fair Market Value of the Common Stock per share on the
date of the grant of the option. The Board or the Committee, as the
case may be, shall have full authority and discretion in establishing
the option price and shall be fully protected in so doing.
(b) Term and Exercisability of Incentive Stock Option. The term during
which any incentive stock option granted under the Plan may be
exercised shall be established in each case by the Board or the
Committee, as the case may be. To the extent required to qualify the
option as an incentive stock option under Section 422 of the Internal
Revenue Code, or any successor provision, in no event shall any
incentive stock option be exercisable during a term of more than ten
(10) years after the date on which it is granted; provided, however,
that if an optionee owns stock possessing more than ten percent (10%)
of the total combined voting power of all classes of stock of the
Company or of its Parent or any Subsidiary, the incentive stock option
granted to such optionee shall be exercisable during a term of not more
than five (5) years after the date on which it is granted. The Option
Agreement shall state when the incentive stock option becomes
exercisable and shall also state the maximum term during which the
option may be exercised. In the event an incentive stock option is
exercisable immediately, the manner of exercise of the option in the
event it is not exercised in full immediately shall be specified in the
Option Agreement. The Board or the Committee, as the case may be, may
accelerate the exercise date of any incentive stock option granted
hereunder which is not immediately exercisable as of the date of grant.
(c) Other Provisions. The Option Agreement authorized under this
Section 9 shall contain such other provisions as the Board or the
Committee, as the case may be, shall deem advisable. Any such Option
Agreement shall contain such limitations and restrictions upon the
exercise of the option as shall be necessary to ensure that such option
will be considered an "incentive stock option" as defined in Section
422 of the Internal Revenue Code or to conform to any change therein.
SECTION 10.
TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS
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<PAGE>
Each nonqualified stock option granted pursuant to the Plan shall be
evidenced by an Option Agreement. The Option Agreement shall be in such form as
may be approved from time to time by the Board or the Committee and may vary
from optionee to optionee; provided, however, that each nonqualified option
granted under this Section 10 and each related Option Agreement shall comply
with and be subject to the following terms and conditions:
(a) Number of Shares and Option Price. The Option Agreement shall state
the total number of shares covered by the nonqualified stock option.
Unless otherwise determined by the Board or the Committee, as the case
may be, the option price per share shall be one hundred percent (100%)
of the Fair Market Value of the Common Stock per share on the date the
Board or the Committee grants the option.
(b) Term and Exercisability of Nonqualified Stock Option. The term
during which any nonqualified stock option granted under the Plan may
be exercised shall be established in each case by the Board or the
Committee, as the case may be. The Option Agreement shall state when
the nonqualified stock option becomes exercisable and shall also state
the maximum term during which the option may be exercised. In the event
a nonqualified stock option is exercisable immediately, the manner of
exercise of the option in the event it is not exercised in full
immediately shall be specified in the stock option agreement. The Board
or the Committee, as the case may be, may accelerate the exercise date
of any nonqualified stock option granted hereunder which is not
immediately exercisable as of the date of grant.
(c) Withholding. The Company or its Subsidiary shall be entitled to
withhold and deduct from future wages of the optionee all legally
required amounts necessary to satisfy any and all federal, state and
local withholding and employment-related taxes attributable to the
optionee's exercise of a nonqualified stock option. In the event the
optionee is required under the Option Agreement to pay the Company, or
make arrangements satisfactory to the Company respecting payment of,
such federal, state and local withholding and employment-related taxes,
the Board or the Committee, as the case may be, may, in its discretion
and pursuant to such rules as it may adopt, permit the optionee to
satisfy such obligation, in whole or in part, by electing to have the
Company withhold shares of Common Stock otherwise issuable to the
optionee as a result of the option's exercise equal to the amount
required to be withheld for tax purposes. Any stock elected to be
withheld shall be valued at its Fair Market Value as of the date the
amount of tax to be withheld is determined under applicable tax law.
The optionee's election to have shares withheld for this purpose shall
be made on or before the date the option is exercised or, if later, the
date that the amount of tax to be withheld is determined under
applicable tax law. Such election shall also comply with such rules as
may be adopted by the Board or the Committee to assure compliance with
Rule 16b-3, or any successor provision, as then in effect, of the
General Rules and Regulations under the Securities Exchange Act of
1934, if applicable.
(d) Other Provisions. The Option Agreement authorized under this
Section 10 shall contain such other provisions as the Board, or the
Committee, as the case may be, shall deem advisable.
SECTION 11
NONQUALIFIED STOCK OPTIONS FOR OUTSIDE DIRECTORS
(a) Grant of Nonqualified Stock Options. All grants of nonqualified
stock options to Outside Directors under this Section 11 shall be
evidenced by an Option Agreement. The Option Agreement shall be in such
form as may be approved from time to time by the Board or Committee and
may vary from optionee to optionee; provided, however, that each
nonqualified stock option issued to an Outside Director shall be
automatic and nondiscretionary and shall be made strictly in accordance
with the following provisions:
(1) Automatic Grants. No person shall have any discretion to
select the Outside Directors that shall be eligible for
nonqualified stock options or to determine the number of
shares of Common Stock to be subject to such options, the
option price per share or the date of grant.
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<PAGE>
(2) Initial Grant. Each Outside Director who becomes an
Outside Director on or after May 12, 1995 shall be granted a
nonqualified stock option to purchase Fifteen Thousand
(15,000) shares of Common Stock.
(3) Annual Grants. Each Outside Director who is re-elected as
a director of the Company or whose term of office continues
after a meeting of shareholders at which directors are elected
shall, as of the date of such re-election or shareholders
meeting, be granted a nonqualified stock option to purchase
Two Thousand (2,000) shares of Common Stock so long as such
Outside Director continues to serve on the Board; provided,
that an Outside Director who receives an option pursuant to
paragraph (2) above shall not be entitled to receive an option
pursuant to this paragraph (3) until at least twelve (12)
months after the grant of an option pursuant to paragraph (2);
and provided, further, that no Outside Director shall receive
more than one option pursuant to this paragraph (3) in any one
fiscal year.
(b) Option Price. The option price per share for all nonqualified stock
options granted pursuant to Section 11(a) above shall be one hundred
percent (100%) of the Fair Market Value of a share of Common Stock.
(c) Duration and Exercise of Options.
(1)Duration of Options. Except as otherwise provided in this
Plan, the period during which any nonqualified stock option
granted to Outside Directors under this Section 11 may be
exercised shall be ten (10) years after the date that the
option is granted.
(2) Exercisability of Nonqualified Stock Options.
a. In no event shall any nonqualified stock options
granted to Outside Directors be exercisable prior to
the date that this Section 11 is approved by the
shareholders of the Company. If shareholder approval
of the Plan is not obtained within twelve (12) months
after the Amendment Date, any nonqualified stock
options previously granted to Outside Directors shall
be revoked.
b. All nonqualified stock options granted to Outside
Directors pursuant to Section 11(a)(2) shall be
exercisable to the extent of 3,000 shares immediately
and to the extent of an additional 3,000 shares on
each of the first, second, third and fourth
anniversaries of the date of grant, subject to the
provisions of Section 11(c)(2)(a). If the Outside
Director does not purchase in any year the full number
of shares which the Outside Director is entitled
to purchase in that year, the Outside Director shall
be entitled to purchase in any subsequent year such
previously unpurchased shares, subject to the
expiration of such nonqualified stock option as
specified in Section 11(c)(1) above.
c. All nonqualified stock options granted to Outside
Directors pursuant to Section 11(a)(3) shall be
immediately exercisable subject to the provisions of
Section 11(c)(2)(a).
(d) Payment of Option Price. Upon the exercise of any nonqualified
stock option granted to an Outside Director pursuant to this
Section 11, the purchase price for such shares of Common Stock
subject to such option shall be paid in cash or certified
check, by the transfer from the Outside Director to the
Company of previously acquired shares of Common Stock, or any
combination thereof. Any Common Stock so transferred shall be
valued at its fair market value. For purposes of this Section
11(d), "previously acquired shares of Common Stock" shall
include shares of Common Stock that are already owned by the
Outside Director at the time of exercise.
(e) Compliance with Rule 16b-3. All nonqualified stock options
granted to Outside Directors must comply with the applicable
provisions of Rule 16b-3, or its successor, of the General
Rules and Regulations of the Securities Exchange Act of 1934,
as amended.
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<PAGE>
(f) Termination of Status as a Director. In the event that an
Outside Director's membership on the
Board terminates, the following provisions shall apply:
(1)If the Outside Director's membership on the Board
terminates for any reason other than the Outside Director's
death or disability, the Outside Director shall be entitled
to exercise any nonqualified stock options granted to such
Outside Director pursuant to this Section 11 which were
exercisable at the time of such termination, until the
earlier of (i) the close of business on the 90th day after
such termination, and (ii) the expiration of the option as
provided in Section 11(c)(1) above. To the extent that the
Outside Director does not exercise such option within the
period specified in this Section 11(g)(1), all rights of
the Outside Director under such option shall be forfeited.
(2)If the Outside Director dies or becomes disabled (i) while
a member of the Board, or (ii) within the 90 day period
following the termination of the Outside Director's
membership on the Board as provided in Section 11(f)(1)
above, any nonqualified stock option granted to such
Outside Director may be exercised by the Outside Director's
estate or any person who acquired the right to exercise any
nonqualified stock option granted to such Outside Director
pursuant to this Section 11 by bequest or inheritance until
earlier of the expiration of the option as provided in
Section 11(c)(1) above or the close of business one year
after the date of the Outside Director's death.
SECTION 12
TRANSFER OF OPTION
No incentive stock option shall be transferable, in whole or in part, by
the optionee other than by will or by the laws of descent and distribution and,
during the optionee's lifetime, the incentive stock option may be exercised only
by the optionee. If the optionee shall attempt any transfer of any incentive
stock option granted under the Plan during the optionee's lifetime, such
transfer shall be void and the incentive stock option, to the extent not fully
exercised, shall terminate.
SECTION 13.
RECAPITALIZATION, SALE, MERGER, EXCHANGE
OR LIQUIDATION
In the event of an increase or decrease in the number of shares of Common
Stock resulting from a subdivision or consolidation of shares or the payment of
a stock dividend or any other increase or decrease in the number of shares of
Common Stock effected without receipt of consideration by the Company, the
number of shares of Option Stock reserved under Section 6 hereof and the number
of shares of Option Stock covered by each outstanding option and the price per
share thereof shall be adjusted by the Board to reflect such change. Additional
shares which may be credited pursuant to such adjustment shall be subject to the
same restrictions as are applicable to the shares with respect to which the
adjustment relates.
Unless otherwise provided in the Option Agreement, in the event of the sale
by the Company of substantially all of its assets and the consequent
discontinuance of its business, or in the event of a merger, consolidation,
exchange, reorganization, reclassification, extraordinary dividend, divestiture
(including a spin-off) or liquidation of the Company (collectively referred to
as a "transaction"), the Board may, in connection with the Board's adoption of
the plan for such transaction, provide for one or more of the following: (i) the
equitable acceleration of the exercisability of any outstanding options
hereunder; (ii) the complete termination of this Plan and cancellation of
outstanding options not exercised prior to a date specified by the Board (which
date shall give optionees a reasonable period of time in which to exercise the
options prior to the effectiveness of such transaction) and (iii) the
continuance of the Plan with respect to the exercise of options which were
outstanding as of the date
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<PAGE>
of adoption by the Board of such plan for such transaction and provide to
optionees holding such options the right to exercise their respective options as
to an equivalent number of shares of stock of the corporation succeeding the
Company by reason of such transaction. The grant of an option pursuant to the
Plan shall not limit in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure or to merge, exchange or consolidate or to dissolve,
liquidate, sell or transfer all or any part of its business or assets.
SECTION 14.
INVESTMENT PURPOSE
No shares of Common Stock shall be issued pursuant to the Plan unless and
until there has been compliance, in the opinion of Company's counsel, with all
applicable legal requirements, including without limitation, those relating to
securities laws and stock exchange listing requirements. As a condition to the
issuance of Option Stock to the optionee, the Board or the Committee may require
the optionee to (a) represent that the shares of Option Stock are being acquired
for investment and not resale and to make such other representations as the
Board, or the Committee, as the case may be, shall deem necessary or appropriate
to qualify the issuance of the shares as exempt from the Securities Act of 1933
and any other applicable securities laws, and (b) represent that the optionee
shall not dispose of the shares of Option Stock in violation of the Securities
Act of 1933 or any other applicable securities laws. The Company reserves the
right to place a legend on any stock certificate issued upon exercise of an
option granted pursuant to the Plan to assure compliance with this Section 14.
SECTION 15.
RIGHTS AS A SHAREHOLDER
An optionee (or the optionee's successor or successors) shall have no
rights as a shareholder with respect to any shares covered by an option until
the date of the issuance of a stock certificate evidencing such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other rights for which the
record date is prior to the date such stock certificate is actually issued
(except as otherwise provided in Section 13 of the Plan).
SECTION 16.
AMENDMENT OF THE PLAN
The Board may from time to time, insofar as permitted by law, suspend or
discontinue the Plan or revise or amend it in any respect; provided, however,
that no such revision or amendment, except as is authorized in Section 13, shall
impair the terms and conditions of any option which is outstanding on the date
of such revision or amendment to the material detriment of the optionee without
the consent of the optionee. Notwithstanding the foregoing, no such revision or
amendment shall (i) materially increase the number of shares subject to the Plan
except as provided in Section 13 hereof, (ii) change the designation of the
class of employees eligible to receive options, (iii) decrease the price at
which options may be granted, or (iv) materially increase the benefits accruing
to optionees under the Plan, unless such revision or amendment is approved by
the shareholders of the Company. Furthermore, the Plan may not, without the
approval of the shareholders, be amended in any manner that will cause incentive
stock options to fail to meet the requirements of Section 422 of the Internal
Revenue Code. In no event shall the Board or the Committee, either directly or
indirectly, amend the provisions of Section 11 relating to nonqualified stock
options that are granted to Outside Directors more frequently than once every
six (6) months, unless such amendment is required to comply with changes in the
Employee Retirement Income Security Act of 1974, as amended, and the regulations
thereunder, or with the Internal Revenue Code of 1986, and the regulations
thereunder.
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<PAGE>
SECTION 17.
NO OBLIGATION TO EXERCISE OPTION
The granting of an option shall impose no obligation upon the optionee to
exercise such option. Further, the granting of an option hereunder shall not
impose upon the Company or any Subsidiary any obligation to retain the optionee
in its employ for any period.
- 10 -
EXHIBIT 10.39
SALARY CONTINUATION AGREEMENT
This Employment Agreement (the "Agreement") is made effective as of August
16, 1995 by and between Sparta Foods, Inc. ("Sparta"), a Minnesota corporation,
and Joel P. Bachul ("Employee").
RECITALS:
1. Employee has been employed by Sparta since 1994 as President and
Chief Executive Officer and has performed such other duties as a key employee of
Sparta as the parties have agreed to from time to time, and Employee has
extensive knowledge and experience relating to Sparta's business.
2. Sparta and Employee desire to set forth in this Agreement their
understandings and agreements with respect to the continuation of Employee's
salary and the payment of certain other benefits in the event of a Change of
Control of Sparta and Employee's employment terminates.
DEFINITION:
1. Change of Control. Change of Control shall mean:
(a) The merger or consolidation of Sparta with or into another
corporation or other entity, other than a merger or consolidation in
which a majority in interest of the shareholders of Sparta immediately
prior to such merger or consolidation own a majority in interest of the
equity of the surviving entity.
(b) The sale of all or substantially all of Sparta's assets to
a corporation or other entity other, than a sale to a corporation or
other entity with respect to which a majority in interest of the
shareholders of Sparta immediately prior to such sale own a majority in
interest of the equity of the purchasing corporation or entity.
(c) The sale of all or substantially all of Sparta's stock to
an individual, corporation or other entity, other than to persons who
are shareholders of Sparta as of the date hereof and their affiliates
and other than sales of securities as part of the private placement or
public offering of Sparta's stock to investors.
AGREEMENTS:
1. Termination of Employment. Either Sparta or Employee may terminate
Employee's employment at any time and for any reason, with or without cause.
a. In the event of a Change of Control of Sparta and either
(i) Sparta or any successor entity (collectively referred to as
"Sparta") terminates Employee's employment for any reason, but
excluding a termination "for cause" as defined in Section 1(b) below,
or (ii) Employee terminates his employment with Sparta for "any
reason," Employee, or in the event of Employee's death, Employee's
estate, shall continue to receive Employee's base salary, payable
bi-weekly, for a period of twenty-four (24) months after the date of
Employee's termination. Employee shall also receive payment for any
unpaid reimbursements of Employee's out-of-pocket business expenses
incurred by Employee during the regular performance of his duties upon
providing receipts or other written verification of such business
expenses to Sparta, and shall be entitled to such bonuses, incentive
compensation or other employee benefits that may be available under the
terms and conditions of any benefit plans or programs adopted by Sparta
in which Employee participates.
Nothing in this Section 1(a) shall obligate Sparta to employ
Employee after the date of this Agreement for any period of time nor
interfere with Sparta's right to terminate Employee's employment for
any reason, including termination for "cause" pursuant to Section 1(b),
at any time during the Employee's employment, including any period
after the date of any written notice of termination provided by Sparta
to Employee but prior to the date of termination specified in such
notice. If Employee dies or
<PAGE>
Employee's employment is terminated by Sparta for "cause" under Section
1(b) after Sparta provides Employee with written notice of termination,
the terms of Section 1(b) shall control.
b. Sparta may terminate Employee's employment immediately for
"cause." In the event of Employee's death or termination of Employee's
employment by Sparta for cause, Employee (or, in the case of death,
Employee's estate) shall not be entitled to receive any base salary,
bonuses, incentive compensation or other employee benefit payments
following such termination, except for any unpaid reimbursements of
Employee's out-of-pocket business expenses incurred by Employee during
the regular performance of his duties upon providing receipts or other
written verification of such business expenses to Sparta, and except as
may be otherwise provided in this Section 1(b) or under the terms and
conditions of any benefit plans or programs adopted by Sparta in which
Employee participates.
For purposes of this Section 1(b), "cause" shall mean:
(i) Employee's conviction of a felony under federal or state
law, any act of dishonesty or disloyalty (including, but not limited
to, the willful misappropriation of Sparta's funds), or the commission
of any act involving moral turpitude;
(ii) Employee's willful and material breach of Sparta's
policies, or his willful and material failure, neglect or refusal to
perform any of the duties that may be assigned to him by mutual
agreement of the parties or to comply with any of the obligations set
forth in this Agreement;
(iii) Employee's willful failure to act subject to and in
accordance with the Confidential Information provisions set forth in
Section 2 of this Agreement;
(iv) Employee's willful misconduct that: (A) materially and
adversely effects the reputation of Sparta's business, (B) is contrary
to the best interests of Sparta or (C) conflicts with or is competitive
with the business activities of Sparta; or
(v) Employee's (A) physical or mental inability to
substantially perform his duties that has continued or can reasonably
be expected to continue for a period of sixty (60) consecutive days, as
determined by Sparta's Board of Directors in its sole discretion, or
(B) adjudication as an incompetent and the appointment of a conservator
for Employee's person or property by a court of competent jurisdiction;
provided, however, that, if Employee's employment is terminated for
cause pursuant to this Section 1(b)(v), Employee shall continue to
receive his base salary payable bi-weekly for a period of twelve (12)
months and benefits which Employee participates after the date of such
termination.
An act or failure to act by Employee shall not be "willful" unless it is
done, or omitted to be done, in bad faith and without any reasonable belief that
Employee's action or omission was in the best interests of Sparta. With respect
to the events listed in clause (ii), (iii) or (iv), Employee's employment shall
not be deemed to have been terminated for cause unless and until Sparta provides
Employee with a written notice that describes in detail the conduct supporting
such termination for cause and that grants Employee a period of at least ten
(10) days from the date of such notice to take whatever steps are necessary to
discontinue the conduct described therein or to correct the effects of
Employee's prior conduct to the satisfaction of Sparta. If Employee fails to
discontinue such conduct described in such written notice or cannot correct the
effects of such prior conduct within such ten-day period, Employee's employment
shall immediately terminate upon the expiration of such ten-day period, and such
termination shall be deemed to be for cause.
2. Confidential Information. The Employee recognizes that Sparta is engaged
in a competitive business, and that Sparta has and will develop and acquire
valuable, Confidential Information. Employee further recognizes that during the
course of his employment he will necessarily have access to and be required to
use Confidential Information, and that it is anticipated that his duties will
include the development and refinement of Confidential Information. Employee
further recognizes and acknowledges that Sparta will suffer irreparable harm if
Employee, after developing or becoming familiar with any such Confidential
Information, makes any unauthorized disclosure or communication of any such
Confidential Information to any third party or uses such Confidential
- 2 -
<PAGE>
Information wrongfully or in competition with Sparta while employed by Sparta.
Having recognized and acknowledged the foregoing facts and circumstances,
Employee hereby agrees as follows:
(a) For purposes of this Agreement, "Confidential Information"
means any information not generally known or held in the public domain
and proprietary to Sparta, and includes, without limitation, trade
secrets, purchasing, marketing, advertising, selling, accounting and
licensing. By way of illustration, but not a limitation, Confidential
Information may be contained in Sparta's marketing plans or proposals,
customer lists, the particular needs or requirements of customers and
the identity of customers and potential customers. Information shall be
treated as Confidential Information irrespective of its source.
However, the Company acknowledges that Employee has substantial
knowledge and expertise in food manufacturing and distribution and
management and that such knowledge and expertise acquired to the date
of Employees employment with Sparta shall not be deemed to be Sparta's
Confidential Information.
(b) The parties acknowledge and agree that Confidential
Information not generally known or held in the public domain is the
sole and exclusive property of Sparta. During the term of this
Agreement, Employee shall hold in its strictest confidence and shall
never, without the prior written authorization of Sparta, disclose,
divulge, assign, transfer, convey, communicate or use any Confidential
Information for his own or any third party's benefit or permit the same
to be used in competition with Sparta.
(c) Upon termination of Employee's employment with Sparta for
any reason, Employee shall promptly deliver to Sparta all records,
memoranda, notes, plans, records, reports or other documents and any
copies thereof obtained or prepared during a course of Employee's
employment and which contain or disclose any Confidential Information
or which pertain in any materially way to Sparta's business.
3. Vesting Stock Options. In the event of a Change of Control of Sparta,
all outstanding stock options granted to Employee shall vest immediately prior
to the effective date of such Change of Control and Employee shall have the
right to dispose of the shares Common Stock received upon exercise of such stock
options, subject to the federal and state securities and tax laws,
notwithstanding the restrictions imposed on optionees after exercise of stock
options under Section 7(g) of Sparta Foods, Inc. Incentive Stock Option Plan (as
amended on July 8, 1993 and March 18, 1994).
4. Withholding. Sparta shall have the right to deduct from any amounts
payable under this Agreement any state or federal taxes required by law to be
withheld with respect to such payments.
5. Severability. If the final determination of a court of competent
jurisdiction declares, after the expiration of the time within which judicial
review (if permitted) may be perfected, that any term or provision hereof is
invalid or unenforceable, (a) the remaining terms and provisions hereof shall be
unimpaired and (b) the invalid or unenforceable term or provision shall be
deemed replaced by a term or provision that is valid and enforceable and that
comes closest to expressing the intention of the invalid or unenforceable term
or provision.
6. Binding Agreement. This Agreement shall be binding upon, and inure to
the benefit of, the parties hereto, any successor to or assigns of Sparta, and
Employee's heirs and the personal representative of Employee's estate. The
parties agree that the rights and obligations contained in this Agreement may
not be delegated or assigned except as specifically provided herein.
7. Amendment; Waiver. This Agreement may not be modified, amended or waived
in any manner except by an instrument in writing signed by both parties hereto.
The waiver by either party of compliance with any provision of this Agreement by
the other party shall not operate or be construed as a waiver of any other
provision of this Agreement, or of any subsequent breach by such party of a
provision of this Agreement.
8. Specific Enforcement. Sparta and Employee acknowledge that, in the event
of a breach of this Agreement by Employee, money damages would be inadequate and
Sparta would have no adequate remedy at law. Accordingly, in the event of any
controversy concerning the rights or obligations under this Agreement, such
rights or obligations shall be enforceable in a court of equity by a decree of
specific performance. Employee further consents to the specific enforcement of
this Agreement by Sparta through an injunction or restraining order issued
- 3 -
<PAGE>
by the appropriate court. The remedies provided in this Section 8 shall be
cumulative and nonexclusive and shall be in addition to any other remedy to
which Sparta may be entitled.
9. Supersedes Previous Agreements. This Agreement supersedes all prior or
contemporaneous negotiations, commitments, agreements (written or oral) and
writings between Sparta and Employee with respect to the subject matter hereof.
All such other negotiations, commitments, agreements and writings will have no
further force or effect, and the parties to any such other negotiation,
commitment, agreement or writing will have no further rights or obligations
thereunder.
10. Governing Law. All matters affecting this Agreement, including the
validity thereof, are to be governed by, interpreted and construed in accordance
with the laws of the State of Minnesota.
11. Notices. Any notice hereunder by either party to the other shall be
given in writing by personal delivery, by telecopy (with confirmation of
transmission) or by certified mail, return receipt requested. If addressed to
Employee, the notice shall be delivered or mailed to Employee at the address
specified under Employee's signature hereto, or if addressed to Sparta, the
notice shall be delivered or mailed to Sparta at its executive offices to the
attention of its President and to the attention of its General Counsel. A notice
shall be deemed given, if by personal delivery or by telecopy, on the date of
such delivery or, if by certified mail, on the date shown on the applicable
return receipt.
12. Headings. The headings of Sections and paragraphs herein are included
solely for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
IN WITNESS WHEREOF, Sparta has caused the Agreement to be signed by its
officer pursuant to the authority of its Board of Directors, and Employee has
executed this Agreement, as of the day and year first above written.
SPARTA FOODS, INC.
By:
-----------------------------------------------
George Masko, Chairman of the Board of Directors
---------------------------------------------
Joel P. Bachul
- 4 -
EXHIBIT 10.40
SALARY CONTINUATION AGREEMENT
This Employment Agreement (the "Agreement") is made effective as of August
11, 1995 by and between Sparta Foods, Inc. ("Sparta"), a Minnesota corporation,
and A. Merrill Ayers ("Employee").
RECITALS:
1. Employee has been employed by Sparta since 1994 as Chief Financial
Officer and has performed such other duties as a key employee of Sparta as the
parties have agreed to from time to time, and Employee has extensive knowledge
and experience relating to Sparta's business.
2. Sparta and Employee desire to set forth in this Agreement their
understandings and agreements with respect to the continuation of Employee's
salary and the payment of certain other benefits in the event of a Change of
Control of Sparta and Employee's employment terminates.
DEFINITION:
1. Change of Control. Change of Control shall mean:
(a) The merger or consolidation of Sparta with or into another
corporation or other entity, other than a merger or consolidation in
which a majority in interest of the shareholders of Sparta immediately
prior to such merger or consolidation own a majority in interest of the
equity of the surviving entity.
(b) The sale of all or substantially all of Sparta's assets to
a corporation or other entity other, than a sale to a corporation or
other entity with respect to which a majority in interest of the
shareholders of Sparta immediately prior to such sale own a majority in
interest of the equity of the purchasing corporation or entity.
(c) The sale of all or substantially all of Sparta's stock to
an individual, corporation or other entity, other than to persons who
are shareholders of Sparta as of the date hereof and their affiliates
and other than sales of securities as part of the private placement or
public offering of Sparta's stock to investors.
AGREEMENTS:
1. Termination of Employment. Either Sparta or Employee may terminate
Employee's employment at any time and for any reason, with or without cause.
a. In the event of a Change of Control of Sparta and either
(i) Sparta or any successor entity (collectively referred to as
"Sparta") terminates Employee's employment for any reason, but
excluding a termination "for cause" as defined in Section 1(b) below,
or (ii) Employee terminates his employment with Sparta for "any
reason," Employee, or in the event of Employee's death, Employee's
estate, shall continue to receive Employee's base salary, payable
bi-weekly, for a period of twenty-four (24) months after the date of
Employee's termination. Employee shall also receive payment for any
unpaid reimbursements of Employee's out-of-pocket business expenses
incurred by Employee during the regular performance of his duties upon
providing receipts or other written verification of such business
expenses to Sparta, and shall be entitled to such bonuses, incentive
compensation or other employee benefits that may be available under the
terms and conditions of any benefit plans or programs adopted by Sparta
in which Employee participates.
Nothing in this Section 1(a) shall obligate Sparta to employ
Employee after the date of this Agreement for any period of time nor
interfere with Sparta's right to terminate Employee's employment for
any reason, including termination for "cause" pursuant to Section 1(b),
at any time during the Employee's employment, including any period
after the date of any written notice of termination provided
<PAGE>
by Sparta to Employee but prior to the date of termination specified in
such notice. If Employee dies or Employee's employment is terminated by
Sparta for "cause" under Section 1(b) after Sparta provides Employee
with written notice of termination, the terms of Section 1(b) shall
control.
b. Sparta may terminate Employee's employment immediately for
"cause." In the event of Employee's death or termination of Employee's
employment by Sparta for cause, Employee (or, in the case of death,
Employee's estate) shall not be entitled to receive any base salary,
bonuses, incentive compensation or other employee benefit payments
following such termination, except for any unpaid reimbursements of
Employee's out-of-pocket business expenses incurred by Employee during
the regular performance of his duties upon providing receipts or other
written verification of such business expenses to Sparta, and except as
may be otherwise provided in this Section 1(b) or under the terms and
conditions of any benefit plans or programs adopted by Sparta in which
Employee participates.
For purposes of this Section 1(b), "cause" shall mean:
(i) Employee's conviction of a felony under federal or state
law, any act of dishonesty or disloyalty (including, but not limited
to, the willful misappropriation of Sparta's funds), or the commission
of any act involving moral turpitude;
(ii) Employee's willful and material breach of Sparta's
policies, or his willful and material failure, neglect or refusal to
perform any of the duties that may be assigned to him by mutual
agreement of the parties or to comply with any of the obligations set
forth in this Agreement;
(iii) Employee's willful failure to act subject to and in
accordance with the Confidential Information provisions set forth in
Section 2 of this Agreement;
(iv) Employee's willful misconduct that: (A) materially and
adversely effects the reputation of Sparta's business, (B) is contrary
to the best interests of Sparta or (C) conflicts with or is competitive
with the business activities of Sparta; or
(v) Employee's (A) physical or mental inability to
substantially perform his duties that has continued or can reasonably
be expected to continue for a period of sixty (60) consecutive days, as
determined by Sparta's Board of Directors in its sole discretion, or
(B) adjudication as an incompetent and the appointment of a conservator
for Employee's person or property by a court of competent jurisdiction;
provided, however, that, if Employee's employment is terminated for
cause pursuant to this Section 1(b)(v), Employee shall continue to
receive his base salary payable bi-weekly for a period of twelve (12)
months and benefits which Employee participates after the date of such
termination.
An act or failure to act by Employee shall not be "willful" unless it is
done, or omitted to be done, in bad faith and without any reasonable belief that
Employee's action or omission was in the best interests of Sparta. With respect
to the events listed in clause (ii), (iii) or (iv), Employee's employment shall
not be deemed to have been terminated for cause unless and until Sparta provides
Employee with a written notice that describes in detail the conduct supporting
such termination for cause and that grants Employee a period of at least ten
(10) days from the date of such notice to take whatever steps are necessary to
discontinue the conduct described therein or to correct the effects of
Employee's prior conduct to the satisfaction of Sparta. If Employee fails to
discontinue such conduct described in such written notice or cannot correct the
effects of such prior conduct within such ten-day period, Employee's employment
shall immediately terminate upon the expiration of such ten-day period, and such
termination shall be deemed to be for cause.
2. Confidential Information. The Employee recognizes that Sparta is engaged
in a competitive business, and that Sparta has and will develop and acquire
valuable, Confidential Information. Employee further recognizes that during the
course of his employment he will necessarily have access to and be required to
use Confidential Information, and that it is anticipated that his duties will
include the development and refinement of Confidential Information. Employee
further recognizes and acknowledges that Sparta will suffer irreparable harm if
Employee, after developing or becoming familiar with any such Confidential
Information, makes any unauthorized
- 2 -
<PAGE>
disclosure or communication of any such Confidential Information to any third
party or uses such Confidential Information wrongfully or in competition with
Sparta while employed by Sparta. Having recognized and acknowledged the
foregoing facts and circumstances, Employee hereby agrees as follows:
(a) For purposes of this Agreement, "Confidential Information"
means any information not generally known or held in the public domain
and proprietary to Sparta, and includes, without limitation, trade
secrets, purchasing, marketing, advertising, selling, accounting and
licensing. By way of illustration, but not a limitation, Confidential
Information may be contained in Sparta's marketing plans or proposals,
customer lists, the particular needs or requirements of customers and
the identity of customers and potential customers. Information shall be
treated as Confidential Information irrespective of its source.
However, the Company acknowledges that Employee has substantial
knowledge and expertise in accounting and financial management and that
such knowledge and expertise acquired to the date of Employees
employment with Sparta shall not be deemed to be Sparta's Confidential
Information.
(b) The parties acknowledge and agree that Confidential
Information not generally known or held in the public domain is the
sole and exclusive property of Sparta. During the term of this
Agreement, Employee shall hold in its strictest confidence and shall
never, without the prior written authorization of Sparta, disclose,
divulge, assign, transfer, convey, communicate or use any Confidential
Information for his own or any third party's benefit or permit the same
to be used in competition with Sparta.
(c) Upon termination of Employee's employment with Sparta for
any reason, Employee shall promptly deliver to Sparta all records,
memoranda, notes, plans, records, reports or other documents and any
copies thereof obtained or prepared during a course of Employee's
employment and which contain or disclose any Confidential Information
or which pertain in any materially way to Sparta's business.
3. Vesting Stock Options. In the event of a Change of Control of Sparta,
all outstanding stock options granted to Employee shall vest immediately prior
to the effective date of such Change of Control and Employee shall have the
right to dispose of the shares Common Stock received upon exercise of such stock
options, subject to the federal and state securities and tax laws,
notwithstanding the restrictions imposed on optionees after exercise of stock
options under Section 7(g) of Sparta Foods, Inc. Incentive Stock Option Plan (as
amended on July 8, 1993 and March 18, 1994).
4. Withholding. Sparta shall have the right to deduct from any amounts
payable under this Agreement any state or federal taxes required by law to be
withheld with respect to such payments.
5. Severability. If the final determination of a court of competent
jurisdiction declares, after the expiration of the time within which judicial
review (if permitted) may be perfected, that any term or provision hereof is
invalid or unenforceable, (a) the remaining terms and provisions hereof shall be
unimpaired and (b) the invalid or unenforceable term or provision shall be
deemed replaced by a term or provision that is valid and enforceable and that
comes closest to expressing the intention of the invalid or unenforceable term
or provision.
6. Binding Agreement. This Agreement shall be binding upon, and inure to
the benefit of, the parties hereto, any successor to or assigns of Sparta, and
Employee's heirs and the personal representative of Employee's estate. The
parties agree that the rights and obligations contained in this Agreement may
not be delegated or assigned except as specifically provided herein.
7. Amendment; Waiver. This Agreement may not be modified, amended or waived
in any manner except by an instrument in writing signed by both parties hereto.
The waiver by either party of compliance with any provision of this Agreement by
the other party shall not operate or be construed as a waiver of any other
provision of this Agreement, or of any subsequent breach by such party of a
provision of this Agreement.
8. Specific Enforcement. Sparta and Employee acknowledge that, in the event
of a breach of this Agreement by Employee, money damages would be inadequate and
Sparta would have no adequate remedy at law. Accordingly, in the event of any
controversy concerning the rights or obligations under this Agreement, such
rights or obligations shall be enforceable in a court of equity by a decree of
specific performance. Employee further
- 3 -
<PAGE>
consents to the specific enforcement of this Agreement by Sparta through an
injunction or restraining order issued by the appropriate court. The remedies
provided in this Section 8 shall be cumulative and nonexclusive and shall be in
addition to any other remedy to which Sparta may be entitled.
9. Supersedes Previous Agreements. This Agreement supersedes all prior or
contemporaneous negotiations, commitments, agreements (written or oral) and
writings between Sparta and Employee with respect to the subject matter hereof.
All such other negotiations, commitments, agreements and writings will have no
further force or effect, and the parties to any such other negotiation,
commitment, agreement or writing will have no further rights or obligations
thereunder.
10. Governing Law. All matters affecting this Agreement, including the
validity thereof, are to be governed by, interpreted and construed in accordance
with the laws of the State of Minnesota.
11. Notices. Any notice hereunder by either party to the other shall be
given in writing by personal delivery, by telecopy (with confirmation of
transmission) or by certified mail, return receipt requested. If addressed to
Employee, the notice shall be delivered or mailed to Employee at the address
specified under Employee's signature hereto, or if addressed to Sparta, the
notice shall be delivered or mailed to Sparta at its executive offices to the
attention of its President and to the attention of its General Counsel. A notice
shall be deemed given, if by personal delivery or by telecopy, on the date of
such delivery or, if by certified mail, on the date shown on the applicable
return receipt.
12. Headings. The headings of Sections and paragraphs herein are included
solely for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
IN WITNESS WHEREOF, Sparta has caused the Agreement to be signed by its
officer pursuant to the authority of its Board of Directors, and Employee has
executed this Agreement, as of the day and year first above written.
SPARTA FOODS, INC.
By:
------------------------------
Joel Bachul, President and CEO
------------------------------
A. Merrill Ayers
- 4 -
EXHIBIT 10.41
SALARY CONTINUATION AGREEMENT
This Employment Agreement (the "Agreement") is made effective as of August
14, 1995 by and between Sparta Foods, Inc. ("Sparta"), a Minnesota corporation,
and Thomas C. House ("Employee").
RECITALS:
1. Employee has been employed by Sparta since 1993 as Vice President of
Operations and has performed such other duties as a key employee of Sparta as
the parties have agreed to from time to time, and Employee has extensive
knowledge and experience relating to Sparta's business.
2. Sparta and Employee desire to set forth in this Agreement their
understandings and agreements with respect to the continuation of Employee's
salary and the payment of certain other benefits in the event of a Change of
Control of Sparta and Employee's employment terminates.
DEFINITION:
1. Change of Control. Change of Control shall mean:
(a) The merger or consolidation of Sparta with or into another
corporation or other entity, other than a merger or consolidation in
which a majority in interest of the shareholders of Sparta immediately
prior to such merger or consolidation own a majority in interest of the
equity of the surviving entity.
(b) The sale of all or substantially all of Sparta's assets to
a corporation or other entity other, than a sale to a corporation or
other entity with respect to which a majority in interest of the
shareholders of Sparta immediately prior to such sale own a majority in
interest of the equity of the purchasing corporation or entity.
(c) The sale of all or substantially all of Sparta's stock to
an individual, corporation or other entity, other than to persons who
are shareholders of Sparta as of the date hereof and their affiliates
and other than sales of securities as part of the private placement or
public offering of Sparta's stock to investors.
AGREEMENTS:
1. Termination of Employment. Either Sparta or Employee may terminate
Employee's employment at any time and for any reason, with or without cause.
a. In the event of a Change of Control of Sparta and either
(i) Sparta or any successor entity (collectively referred to as
"Sparta") terminates Employee's employment for any reason, but
excluding a termination "for cause" as defined in Section 1(b) below,
or (ii) Employee terminates his employment with Sparta for "any
reason," Employee, or in the event of Employee's death, Employee's
estate, shall continue to receive Employee's base salary, payable
bi-weekly, for a period of twenty-four (24) months after the date of
Employee's termination. Employee shall also receive payment for any
unpaid reimbursements of Employee's out-of-pocket business expenses
incurred by Employee during the regular performance of his duties upon
providing receipts or other written verification of such business
expenses to Sparta, and shall be entitled to such bonuses, incentive
compensation or other employee benefits that may be available under the
terms and conditions of any benefit plans or programs adopted by Sparta
in which Employee participates.
Nothing in this Section 1(a) shall obligate Sparta to employ
Employee after the date of this Agreement for any period of time nor
interfere with Sparta's right to terminate Employee's employment for
any reason, including termination for "cause" pursuant to Section 1(b),
at any time during the Employee's employment, including any period
after the date of any written notice of termination provided
<PAGE>
by Sparta to Employee but prior to the date of termination specified in
such notice. If Employee dies or Employee's employment is terminated by
Sparta for "cause" under Section 1(b) after Sparta provides Employee
with written notice of termination, the terms of Section 1(b) shall
control.
b. Sparta may terminate Employee's employment immediately for
"cause." In the event of Employee's death or termination of Employee's
employment by Sparta for cause, Employee (or, in the case of death,
Employee's estate) shall not be entitled to receive any base salary,
bonuses, incentive compensation or other employee benefit payments
following such termination, except for any unpaid reimbursements of
Employee's out-of-pocket business expenses incurred by Employee during
the regular performance of his duties upon providing receipts or other
written verification of such business expenses to Sparta, and except as
may be otherwise provided in this Section 1(b) or under the terms and
conditions of any benefit plans or programs adopted by Sparta in which
Employee participates.
For purposes of this Section 1(b), "cause" shall mean:
(i) Employee's conviction of a felony under federal or state
law, any act of dishonesty or disloyalty (including, but not limited
to, the willful misappropriation of Sparta's funds), or the commission
of any act involving moral turpitude;
(ii) Employee's willful and material breach of Sparta's
policies, or his willful and material failure, neglect or refusal to
perform any of the duties that may be assigned to him by mutual
agreement of the parties or to comply with any of the obligations set
forth in this Agreement;
(iii) Employee's willful failure to act subject to and in
accordance with the Confidential Information provisions set forth in
Section 2 of this Agreement;
(iv) Employee's willful misconduct that: (A) materially and
adversely effects the reputation of Sparta's business, (B) is contrary
to the best interests of Sparta or (C) conflicts with or is competitive
with the business activities of Sparta; or
(v) Employee's (A) physical or mental inability to
substantially perform his duties that has continued or can reasonably
be expected to continue for a period of sixty (60) consecutive days, as
determined by Sparta's Board of Directors in its sole discretion, or
(B) adjudication as an incompetent and the appointment of a conservator
for Employee's person or property by a court of competent jurisdiction;
provided, however, that, if Employee's employment is terminated for
cause pursuant to this Section 1(b)(v), Employee shall continue to
receive his base salary payable bi-weekly for a period of twelve (12)
months and benefits which Employee participates after the date of such
termination.
An act or failure to act by Employee shall not be "willful" unless it is
done, or omitted to be done, in bad faith and without any reasonable belief that
Employee's action or omission was in the best interests of Sparta. With respect
to the events listed in clause (ii), (iii) or (iv), Employee's employment shall
not be deemed to have been terminated for cause unless and until Sparta provides
Employee with a written notice that describes in detail the conduct supporting
such termination for cause and that grants Employee a period of at least ten
(10) days from the date of such notice to take whatever steps are necessary to
discontinue the conduct described therein or to correct the effects of
Employee's prior conduct to the satisfaction of Sparta. If Employee fails to
discontinue such conduct described in such written notice or cannot correct the
effects of such prior conduct within such ten-day period, Employee's employment
shall immediately terminate upon the expiration of such ten-day period, and such
termination shall be deemed to be for cause.
2. Confidential Information. The Employee recognizes that Sparta is engaged
in a competitive business, and that Sparta has and will develop and acquire
valuable, Confidential Information. Employee further recognizes that during the
course of his employment he will necessarily have access to and be required to
use Confidential Information, and that it is anticipated that his duties will
include the development and refinement of Confidential Information. Employee
further recognizes and acknowledges that Sparta will suffer irreparable harm if
Employee, after developing or becoming familiar with any such Confidential
Information, makes any unauthorized
- 2 -
<PAGE>
disclosure or communication of any such Confidential Information to any third
party or uses such Confidential Information wrongfully or in competition with
Sparta while employed by Sparta. Having recognized and acknowledged the
foregoing facts and circumstances, Employee hereby agrees as follows:
(a) For purposes of this Agreement, "Confidential Information"
means any information not generally known or held in the public domain
and proprietary to Sparta, and includes, without limitation, trade
secrets, purchasing, marketing, advertising, selling, accounting and
licensing. By way of illustration, but not a limitation, Confidential
Information may be contained in Sparta's marketing plans or proposals,
customer lists, the particular needs or requirements of customers and
the identity of customers and potential customers. Information shall be
treated as Confidential Information irrespective of its source.
However, the Company acknowledges that Employee has substantial
knowledge and expertise in plant management, purchasing and product
distribution and that such knowledge and expertise acquired to the date
of Employees employment with Sparta shall not be deemed to be Sparta's
Confidential Information.
(b) The parties acknowledge and agree that Confidential
Information not generally known or held in the public domain is the
sole and exclusive property of Sparta. During the term of this
Agreement, Employee shall hold in its strictest confidence and shall
never, without the prior written authorization of Sparta, disclose,
divulge, assign, transfer, convey, communicate or use any Confidential
Information for his own or any third party's benefit or permit the same
to be used in competition with Sparta.
(c) Upon termination of Employee's employment with Sparta for
any reason, Employee shall promptly deliver to Sparta all records,
memoranda, notes, plans, records, reports or other documents and any
copies thereof obtained or prepared during a course of Employee's
employment and which contain or disclose any Confidential Information
or which pertain in any materially way to Sparta's business.
3. Vesting Stock Options. In the event of a Change of Control of Sparta,
all outstanding stock options granted to Employee shall vest immediately prior
to the effective date of such Change of Control and Employee shall have the
right to dispose of the shares Common Stock received upon exercise of such stock
options, subject to the federal and state securities and tax laws,
notwithstanding the restrictions imposed on optionees after exercise of stock
options under Section 7(g) of Sparta Foods, Inc. Incentive Stock Option Plan (as
amended on July 8, 1993 and March 18, 1994).
4. Withholding. Sparta shall have the right to deduct from any amounts
payable under this Agreement any state or federal taxes required by law to be
withheld with respect to such payments.
5. Severability. If the final determination of a court of competent
jurisdiction declares, after the expiration of the time within which judicial
review (if permitted) may be perfected, that any term or provision hereof is
invalid or unenforceable, (a) the remaining terms and provisions hereof shall be
unimpaired and (b) the invalid or unenforceable term or provision shall be
deemed replaced by a term or provision that is valid and enforceable and that
comes closest to expressing the intention of the invalid or unenforceable term
or provision.
6. Binding Agreement. This Agreement shall be binding upon, and inure to
the benefit of, the parties hereto, any successor to or assigns of Sparta, and
Employee's heirs and the personal representative of Employee's estate. The
parties agree that the rights and obligations contained in this Agreement may
not be delegated or assigned except as specifically provided herein.
7. Amendment; Waiver. This Agreement may not be modified, amended or waived
in any manner except by an instrument in writing signed by both parties hereto.
The waiver by either party of compliance with any provision of this Agreement by
the other party shall not operate or be construed as a waiver of any other
provision of this Agreement, or of any subsequent breach by such party of a
provision of this Agreement.
8. Specific Enforcement. Sparta and Employee acknowledge that, in the event
of a breach of this Agreement by Employee, money damages would be inadequate and
Sparta would have no adequate remedy at law. Accordingly, in the event of any
controversy concerning the rights or obligations under this Agreement, such
rights or obligations shall be enforceable in a court of equity by a decree of
specific performance. Employee further
- 3 -
<PAGE>
consents to the specific enforcement of this Agreement by Sparta through an
injunction or restraining order issued by the appropriate court. The remedies
provided in this Section 8 shall be cumulative and nonexclusive and shall be in
addition to any other remedy to which Sparta may be entitled.
9. Supersedes Previous Agreements. This Agreement supersedes all prior or
contemporaneous negotiations, commitments, agreements (written or oral) and
writings between Sparta and Employee with respect to the subject matter hereof.
All such other negotiations, commitments, agreements and writings will have no
further force or effect, and the parties to any such other negotiation,
commitment, agreement or writing will have no further rights or obligations
thereunder.
10. Governing Law. All matters affecting this Agreement, including the
validity thereof, are to be governed by, interpreted and construed in accordance
with the laws of the State of Minnesota.
11. Notices. Any notice hereunder by either party to the other shall be
given in writing by personal delivery, by telecopy (with confirmation of
transmission) or by certified mail, return receipt requested. If addressed to
Employee, the notice shall be delivered or mailed to Employee at the address
specified under Employee's signature hereto, or if addressed to Sparta, the
notice shall be delivered or mailed to Sparta at its executive offices to the
attention of its President and to the attention of its General Counsel. A notice
shall be deemed given, if by personal delivery or by telecopy, on the date of
such delivery or, if by certified mail, on the date shown on the applicable
return receipt.
12. Headings. The headings of Sections and paragraphs herein are included
solely for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
IN WITNESS WHEREOF, Sparta has caused the Agreement to be signed by its
officer pursuant to the authority of its Board of Directors, and Employee has
executed this Agreement, as of the day and year first above written.
SPARTA FOODS, INC.
By:
------------------------------
Joel Bachul, President and CEO
------------------------------
Thomas C. House
- 4 -
Exhibit 11
COMPUTATION OF EARNINGS PER COMMON SHARE
For the Year
Ended
September 30
1996 1995
Net income (loss) $105,307 $(943,778)
- -----------------
Primary earnings per share
Adjusted net income under treasury
stock method (reduced interest
expense) $137,459
Shares:
Weighted average number of
common shares outstanding 5,778,550 3,887,950
Excess of shares issuable for the
assumed exercise of options and
warrants over the number of shares
possible of repurchase using the
proceeds from the exercise of such
options and warrants, at the average
market price (treasury stock
method) 1,650,186
Weighted average number of
common and common equivalent
shares outstanding 7,428,736
Primary earnings (loss) per share $.02 $(.24)
- ---------------------------------
Fully diluted earnings per share
Shares:
Weighted average number of common
shares outstanding 5,778,550
Excess of shares issuable for the
assumed exercise of options and
warrants over the number of shares
possible of repurchase using the
proceeds from the exercise of such
options and warrants, at the closing
market price (treasury stock
method). 1,838,882
Weighted average number of common
and common equivalent shares
outstanding 7,617,432
Fully diluted earnings per share $.01
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Sparta Foods, Inc.
We hereby consent to the incorporation by reference in the registration
statement (No. 333-02465) on Form S-8 and in the registration statement (no.
333-04559) on Form S-3 of Sparta Foods, Inc. of our report dated November 22,
1996, relating to the financial statements of Sparta Foods, Inc. and Subsidiary
as of September 30, 1996 and 1995, which report appears in the September 30,
1996, annual report on Form 10-KSB of Sparta Foods, Inc.
/s/ McGladrey & Pullen, LLP
Minneapolis, Minnesota
December 23, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 1996,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 600
<SECURITIES> 0
<RECEIVABLES> 691,934
<ALLOWANCES> 52,000
<INVENTORY> 748,472
<CURRENT-ASSETS> 1,452,921
<PP&E> 5,850,489
<DEPRECIATION> 2,115,810
<TOTAL-ASSETS> 7,007,013
<CURRENT-LIABILITIES> 1,933,365
<BONDS> 2,063,613
0
0
<COMMON> 66,790
<OTHER-SE> 2,943,245
<TOTAL-LIABILITY-AND-EQUITY> 7,007,013
<SALES> 12,662,819
<TOTAL-REVENUES> 12,662,819
<CGS> 9,238,220
<TOTAL-COSTS> 9,238,220
<OTHER-EXPENSES> 2,968,569
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 431,741
<INCOME-PRETAX> 110,307
<INCOME-TAX> 5,000
<INCOME-CONTINUING> 105,307
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 105,307
<EPS-PRIMARY> .02
<EPS-DILUTED> .01
</TABLE>
