SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
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, 1997
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)
1565 First Avenue N.W., New Brighton, Minnesota 55112
(Address of principal executive offices)(Zip Code)
Issuer's telephone number, including area code: (612) 697-5500
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, $.0l 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. [ X ]
Issuer's revenues for its most recent fiscal year: $14,077,841
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of December 11, 1997 was approximately $11,047,785 based upon the
average high and low bid prices of the Registrant's Common Stock on such date.
There were 6,798,637 shares of Common Stock, $.0l par value, outstanding as of
December 11, 1997.
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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 1998 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]
<PAGE>
INDEX
Description Page
PART I........................................................................1
ITEM 1. DESCRIPTION OF BUSINESS............................................1
ITEM 2. DESCRIPTION OF PROPERTY............................................7
ITEM 3. LEGAL PROCEEDINGS..................................................7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................7
PART II.......................................................................8
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OR OPERATION..........9
ITEM 7. FINANCIAL STATEMENTS..............................................15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...............................33
PART III.....................................................................33
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT........33
ITEM 10.EXECUTIVE COMPENSATION............................................34
ITEM 11.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....34
ITEM 12.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................35
ITEM 13.EXHIBITS AND REPORTS ON FORM 8-K..................................35
<PAGE>
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 products include Cruz, La Canasta and La Campana Paradiso
tortillas, La Canasta, La Campana Paradiso and Mexitos tortilla chips, La
Canasta, and Chapala 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 retail products primarily for food
distributors, including Crystal Farms Refrigerated Distribution Company which
distributes its products to retail stores in 21 states and Marigold Foods, Inc.
which distributes its products in 7 states. The company produces private label
sauce products utilizing the customer's proprietary recipes. Private label
products include Ken Davis and Rudolph's barbecue sauces. In addition, the
Company supplies its products to restaurants and other food service
establishments through distributors that include Catalina Specialty Foods, Inc.,
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, Perkins, Friendly's and Carlos O'Kelly.
The Company is capitalizing on the significant growth in the sale of
tortilla products which has occurred in the United States over the past decade.
In 1996 tortillas sales in the United States were approximately $2.5 billion and
according to the Tortilla Industry Association, a not-for-profit organization,
tortilla sales are estimated to reach $4.0 billion by the year 2000. Management
believes that this growth is partially a result of Mexican food products
becoming less ethnic due to strong general 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 and non-Mexican items such as tortilla wraps.
Business Strategy
The Company's goal is to become a leading producer of tortillas in the
United States. The Company's goal is to derive approximately 80% of its revenues
from tortilla sales by the year 2000. The Company plans to achieve its goal by
continuing to capitalize on the expected growth in tortilla sales, and by
expanding its product marketing and sales activity and broadening its
distribution patterns. The Company plans to direct greater marketing and sales
resources to increase brand awareness of its tortilla products, including
tortilla chips, in each product's respective target market.
<PAGE>
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, sales of tortillas
in the United States were approximately 2.5 billion in 1996 and are expected to
reach 4.0 billion by the year 2000.
The increase in past sales may be partially attributable to the growth
in the United States Hispanic population. 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 feature Mexican-style foods on their menus. According to the
Tortilla Industry Association, sales of tortillas increased 67% from 1992 to
1994 in the North Central Region of the United States, which includes Indiana,
Illinois, Iowa, Michigan, Ohio and Wisconsin.
Products and Marketing
General. The 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,
1997, 1996 and 1995, 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:
<TABLE>
<CAPTION>
Year Ended September 30,
Products 1997 1996 1995
- -------- ---- ---- ----
<S> <C> <C> <C>
Tortillas 72% 70% 63%
Corn tortilla chips 16% 17% 20%
Barbecue sauces, salsas and all other products 12% 13% 17%
</TABLE>
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. During fiscal 1997,
the Company began manufacturing and distributing seven new tortilla chips under
the La Canasta brand label, four new flavored flour tortilla wraps under the
Cruz brand label for retail sale and flavored flour tortilla wraps for sale to
food service establishments.
The Company distributes its products through distribution centers
primarily in the Midwestern United States and into Western Canada. During the
fiscal years ended September 30, 1997, 1996 and 1995, 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:
<PAGE>
Year Ended September 30,
Market Segment 1997 1996 1995
- -------------- ---- ---- ----
Food service
establishments 54% 54% 51%
Branded retail 32% 29% 31%
Private label and
ingredients 14% 17% 18%
Food Service. The Company's products are currently served in
restaurants and other food service establishments and are approved for use in
the food service operations of such restaurants as McDonald's, Chili's, Carlos
O'Kelly, Friendly's and Perkins. Sales to Catalina Specialty Foods, Inc., a
distributor to McDonald's, accounted for approximately 12% of the Company's
sales in fiscal year 1997. 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. These
distributors include Alliant Food Service, Inc., J. P. Food Services, Inc. and
Sysco Corporation, who on a combined basis accounted for approximately 29% of
the Company's food service sales in its fiscal year ended September 30, 1997.
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.
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 21 states, Marigold Foods, Inc. which distributes
products in retail stores in 7 states and Bradley Distributing, Inc. which
distributes products to approximately 160 retail stores in the 13 county
Minneapolis/St. Paul metropolitan area. Sales to Crystal Farms Refrigerated
Distributor Company, accounted for approximately 23% of the Company's sales in
fiscal year 1997. The Company has an agreement with Crystal Farms Refrigerated
Distribution Company, which expires in the year 2004. 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 the distributor's own private labels,
using the Company's recipes or recipes provided by such distributors. The
Company manufactures barbecue sauces for Ken Davis Products, Inc., Rudolph's
<PAGE>
Licensing, Inc., and others. 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.
Manufacturing and Supplies
The Company manufactures its products on 14 production lines at its
principal place of business located at 1565 First Avenue N.W., New Brighton,
Minnesota. These lines include: (i) a hand stretched flour tortilla line; (ii) a
die-cut flour tortilla line; (iii) five 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 1998 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 materials 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 enable it 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 Company estimates that its retail sales of tortillas give it
approximately a 50% share of the 13 county Minneapolis/St. Paul metropolitan
market, and that its principal competition comes from Resers Foods and Azteca
Foods, which supply much of the remaining market. The Company believes, based on
an independent consumer marketing study of the twelve primary consumer markets
in the Midwest, that it is the third largest seller of tortillas in the Midwest,
based upon its combined tortilla sales in 4 of the 12 markets in the Midwest.
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.
<PAGE>
Many of the makers and distributors of these competing products for
retail distribution are better capitalized than 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.
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 compete in other
metropolitan area markets because of its ability to fulfill a distributor's
needs with a broad line of quality tortilla and tortilla chips which are
approved by selected restaurant chains.
Trademarks
The principal trade names that the Company currently utilizes are CRUZ,
LA CAMPANA PARADISO and LA CANASTA in the retail sale of its tortillas; LA
CANASTA, in the retail sale of tortilla chips; and LA CANASTA and CHAPALA in the
retail sale of salsas. The Company also uses the trade names LA CANASTA, CRUZ
and MEXITOS in connection with food service sales. Except as discussed below,
all of these trade names or their associated logos are believed to be owned by
the company.
The Company's CRUZ logo used in connection with tortillas is the
subject of a federal trademark registration which expires January 2000. The mark
CHAPALA used in connection with salsas is the subject of a federal trademark
registration which expires November 2004. The Company owns a federal trademark
registration for its MEXITOS logo used in connection with tortillas, tortilla
chips and hot sauce which expires May 2005. All of the Company's trademark
registrations are subject to renewal rights and may terminate prior to their
respective expiration dates due to cancellation, disclaimer or surrender.
The Company's trademarks provide an identity between the Company and
its products. In the absence of federal trademark registrations, 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. In addition, the above federal
trademark registrations provide rights in their respective marks throughout the
United States and create some legal presumptions should the registered trademark
be infringed.
<PAGE>
The mark LA CAMPANA PARADISO is 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 (3%) of the gross
sales of products sold under the LA CAMPANA PARADISO mark.
Under concurrent use agreements, the Company may not use the LA CANASTA
mark or related logos in 14 western states and has assigned its rights to those
marks in those states to La Canasta Mexican Food Products, Inc. La Canasta
Mexican Food Products, Inc. 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 or other trademarks
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, the U.S. Food and Drug Administration and 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. The Company believes
it 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, 1997 the Company employed a total of 138 persons. Of
these full-time employees, 4 serve in an executive capacity, 123 are engaged in
manufacturing, shipping, quality control and plant supervision, 4 are engaged in
sales and marketing, and 7 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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases offices and manufacturing facilities
located at 1565 First Avenue N.W., New Brighton, Minnesota, leases warehouse
space at 2085 Ellis Avenue, St. Paul, Minnesota, and owns a facility at 21725
Hanover, Lakeville, Minnesota. The New Brighton office and manufacturing
facilities consists of a total of 112,000 square feet, approximately 16,000
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 $37,000 per month, plus taxes. The monthly
base rent increases to approximately $41,000 starting September 1, 2002 and
increases again to approximately $45,000 on September 1, 2007 until the end of
the lease term on August 31, 2012.
<PAGE>
The Company-owned Lakeville 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. The Company has listed the
property for sale with a real estate broker.
The Company also subleases approximately 13,800 square feet in a
warehouse facility for dry storage. 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 of 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 1997.
<PAGE>
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 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, 1995 $0.875 $0.250
March 31, 1996 1.500 0.375
June 30, 1996 2.250 1.063
September 30, 1996 2.000 1.313
December 31, 1996 $1.500 $0.875
March 31, 1997 1.250 0.813
June 30, 1997 1.500 0.750
September 30, 1997 2.000 1.250
At December 11, 1997 the published high and low bid price for the
Company's Common Stock was $1.625 per share. At December 11, 1997, there were
issued and outstanding 6,798,637 shares of Common Stock of the Company held by
180 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.
On July 18, 1997, the Company issued 20,000 shares of Common Stock to
an accredited investor who exercised a Warrant to purchase such shares at $0.50
per share. The Company claimed an exemption from registration under Section 3(b)
of the Securities Act of 1933.
On August 28, 1997, the Company issued 9,080 shares of Common Stock to
an accredited investor who exercised a Warrant to purchase such shares at $0.50
per share. The Company claimed an exemption from registration under Section 3(b)
of the Securities Act of 1933.
<PAGE>
On September 30, 1997, the Company issued 11,629 shares of Common Stock
to an accredited investor who exercised a Warrant to purchase such shares at
$0.50 per share. The Company claimed an exemption from registration under
Section 3(b) of the Securities Act of 1933.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OR OPERATION
Overview
La Canasta of Minnesota, Inc. ("La Canasta"), the predecessor of Sparta
Foods, Inc. (the "Company"), and now a wholly-owned subsidiary of the Company,
began producing limited volumes of hand stretched tortillas, corn tortillas and
corn tortilla chips shortly following its organization in 1981, primarily for
sale to restaurants. The Company was organized under the laws of the State of
Minnesota in 1988, originally under the name of "Sparta Corp." for the purposes
of raising capital for the acquisition of, or investment in, a business. In
January 1991, the Company acquired all of the outstanding capital stock of La
Canasta. During the period 1991 through 1993 the Company completed acquisitions
which expanded its trademark retail brands to include Cruz, Chapala, Mexitos and
La Campana Paradiso, its food service customers to include McDonald's
restaurants and its retail distribution network to include Bradley Distributing,
Inc. In 1995 the Company relocated its Lakeville, Minnesota production
operations to its St. Paul manufacturing facility. The Company leased the
Lakeville facility in 1996 for a period of 10 years. Effective September 1, 1997
the Company signed a 15-year lease to relocate all operations to an office and
manufacturing facility in New Brighton, Minnesota. The current facility in St.
Paul has been sublet for the remainder of its lease term.
Results of Operations
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September 30,
1996.
During fiscal 1997, the Company had net sales of $14,077,841, an
increase of $1,415,022, or 11%, compared to net sales of $12,662,819 in fiscal
1996. This increase in net sales resulted primarily from new customers in the
foodservice industry as well as expansion into new territories through its
primary retail distributors, Crystal Farms Refrigerated Distribution Company and
Marigold Foods, Inc.
Gross profit as a percentage of net sales for fiscal 1997 was 30%
compared to 27% for fiscal 1996. This increase in fiscal 1997 was primarily due
to more favorable operating efficiencies and significant cost savings achieved
by certain purchases of raw materials.
<PAGE>
Selling, general and administrative expenses were $3,209,798 for fiscal
1997, an increase of $241,229 or 8%, as compared to $2,968,569 in fiscal 1996.
Selling, general and administrative expenses as a percentage of net sales were
23% for both fiscal 1997 and 1996. A nonrecurring charge to operating income of
$375,126 was recorded in fiscal 1997 in connection with the Company's relocation
to New Brighton, Minnesota from St. Paul, Minnesota. This charge was comprised
of the unamortized portion of leasehold improvements at the Company's former
manufacturing facility in St. Paul and the moving charges incurred with this
relocation.
Interest expense was $320,435 for fiscal 1997, a decrease of $111,306
compared to $431,741 in 1996. This lower interest expense reflects primarily the
effect of interest rate reductions and lower levels of bank borrowings through
most of the fiscal year.
The Company recorded other income of $106,807 during fiscal 1997
compared to $86,018 in fiscal 1996. This income results primarily from the
rental of the Company's Lakeville property. The Company has minimal income tax
expense due to the utilization of net operating loss carryforwards. The Company
continues to reflect a valuation allowance on remaining net operating loss
carryforwards of approximately $2.1 million as realization is dependent on
sufficient future taxable income, which is not assured. Net income for fiscal
1997 was $435,729 compared to net income in fiscal 1996 of $105,307 for the
reasons set forth above.
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.
<PAGE>
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 International Food
Products' 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.
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 nonrecurring charge of $302,612 reflecting
management's estimate of the excess of the property's net book value over the
then 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.
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 1997 net cash provided by operating activities was
$1,049,353, consisting principally of net income of $435,729 adjusted for
non-cash depreciation and amortization expenses of $628,089, a non-cash loss on
disposal of equipment of $294,213 and an increase in accounts payable and
accrued expenses of $326,504, offset by increases in accounts receivable,
inventories and prepaid expenses of $635,182. The increase of inventories of
$417,598 was primarily due to the buildup in finished goods to ensure
fulfillment of customer orders during the relocation of production equipment to
New Brighton from St. Paul which began in September of 1997 and continued
through November of 1997.
Net cash used in investing activities in fiscal 1997 was $3,627,303,
primarily the result of the purchase of new production equipment and the
renovation of the office and manufacturing facility in New Brighton. During
fiscal 1997 net cash provided by financing activities was $2,577,950 due mainly
to borrowings associated with the purchase of equipment and renovations for New
Brighton as detailed below.
At September 30, 1997, the Company had a negative working capital of
$1,271,962.
On July 1, 1997, the Company and its bank signed an Amendment to their
Credit Agreement which adjusted various financial covenants and made available
additional revolving credit borrowings of $800,000 through January 1, 1998, at
which time this additional borrowing may be converted into a five-year term
loan. The Company estimates that at September 30, 1997, there was an additional
<PAGE>
$400,000 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 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.
On July 2, 1997, in conjunction with the relocation of the Company's
corporate office and manufacturing facility, the Company signed a $1,950,000
credit agreement with the Minnesota Agricultural and Economic Development Board
("Board") for new equipment financing. The Board issued tax-exempt revenue bonds
under its Small Business Development Loan Program and loaned the proceeds to the
Company to purchase new equipment. The effective interest rate is 5.79% per
annum, and the loan matures on August 1, 2008. The Company is subject to various
financial covenants, and the Board received a security interest in the
equipment. At September 30, 1997 the outstanding borrowings were $1,916,250.
The Company's ability to achieve its growth objectives is dependent
upon its ability to fund its working capital requirements. The Company believes
that the additional borrowings, its bank credit facilities and cash flow from
operations will be sufficient to meet its working capital requirements through
fiscal 1998, assuming (i) the Company's fiscal 1998 sales equal or exceed fiscal
1997 sales; (ii) there are no significant increases in expenses in fiscal 1998,
and (iii) the Company is able to keep its bank credit facilities operative. The
Company's failure to completely satisfy its working capital conditions listed
(i) through (iii) above, may require the Company to obtain additional financing
to fund its working capital requirements. The Company's ability to raise
additional working capital is significantly restricted, and if obtainable, would
be on terms less favorable to the Company and may result in substantial dilution
to shareholders.
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
Statements of the Financial Accounting Standards Board. 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 4-12 months,
depending on current pricing, to ensure the availability of the type of flour
and corn best suited for the Company's products. These purchase orders are
placed directly with the suppliers.
<PAGE>
Accounting Standard Issued and Not Yet Adopted
The Financial Accounting Standards Board has issued Statement No. 128
(SFAS No. 128), Earnings Per Share (EPS), which supersedes Accounting Principles
Board Opinion No. 15. SFAS No. 128 requires the presentation of EPS of
outstanding common stock and potential common stock, such as options, warrants,
and convertible securities that trade in a public market. A dual presentation of
EPS, basic and diluted with restated comparative periods' data, is required on
the statement of income. The Statement is effective for annual and interim
financial statements issued for periods ending after December 15, 1997; earlier
application is not permitted, but disclosure is required.
Outlook
The Company's plan in fiscal 1998 will be to utilize its new equipment
to increase sales 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." Management believes that
its major computer applications which are critical to the Company's operations
are either year 2000 compliant or require nonmaterial resources to make them
year 2000 compliant.
Statements relating to the Company's goal and business objectives
contained in the section entitled Description of "Business - Business Strategy,"
estimates relating to its bank line of credit, assumption relating to the
Company's working capital and operating requirements, and its future growth
contained in the Management's Discussion and Analysis of Financial Condition and
Results of Operations and the President's statements relating to the growing
non-ethnic use of tortillas, management's optimism of the Company's future and
its growth potential and the intent to leverage the Company's brand name
strength contained in the President's Letter to Shareholders attached to the
Company's 1998 Annual Report to Shareholders are forward-looking statements that
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:
Sufficiency of Working Capital. At September 30, 1997, the Company had
a negative working capital of $1,271,962. At September 30, 1997, there was an
estimated $400,000 which could have been drawn under the Company's Line of
Credit. The amount available fluctuates daily based upon the Company's eligible
accounts receivable and inventory. In addition, the Company's ability to obtain
additional equity capital is very restricted, and, if obtainable at all, would
result in substantial dilution. Therefore, the Company's ability to fund its
working capital requirements in fiscal 1998 will be almost entirely dependent on
generating sales which equal or exceed the Company's fiscal 1997 sales. In
addition, any unforeseen expense of a material nature would materially and
adversely affect the Company's ability to fund ongoing operations.
<PAGE>
Reliance on Principal Customers. During 1997, sales to Crystal Farms
Refrigerated Distribution Company ("Crystal Farms") and Catalina Specialty
Foods, Inc. accounted for approximately 23% and 12% respectively of the
Company's sales and management expects Crystal Farms to account for a greater
percentage of the Company's sales in the future. Crystal Farms is the Company's
largest single distributor of its retail products and has a significant impact
on the Company's growth in the retail market. Although the Company and Crystal
Farms operate under a distribution agreement, the loss of Crystal Farms as a
customer would have a material and adverse effect on the Company's sales and
profitability and future growth.
Competition. The Mexican-style food manufacturing and distribution
industry is highly competitive. The Company is in competition with a number of
manufacturers and distributors of Mexican-style food products and, to a limited
extent, manufacturers of "snack foods," many of which are better capitalized
than the Company. The Company will also be subject to future competition from
other manufacturers, distributors and retailers who enter into the Mexican-style
food and distribution industry. In the retail market, many of these competitors
engage in extensive local and national advertising and marketing, and the brand
names for products distributed by those competitors are significantly more
recognizable to the consumer than the Company's brand names. In addition,
competition for shelf space in retail grocery stores is intense. In the food
service market, the Company is competing with a number of regional and national
producers of Mexican-style food products. Many of these competitors are better
capitalized than the Company and have established sales organizations. No
assurance can be given that the Company will be able to compete as it expands
its markets.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Sparta Foods, Inc.
New Brighton, Minnesota
We have audited the accompanying consolidated balance sheets of Sparta Foods,
Inc. and Subsidiary (the Company) as of September 30, 1997 and 1996, and the
related consolidated statements of income, 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, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Minneapolis, Minnesota
November 14, 1997
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS (Note 3) 1997 1996
- --------------------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
Current Assets
Cash $ 600 $ 600
Accounts receivable, less allowances of $49,500 in
1997 and $52,000 in 1996 (Note 6) 833,467 639,934
Inventories:
Finished goods 566,212 241,959
Raw materials and packaging 531,358 438,013
Prepaid expenses 156,466 132,415
-------------------- --------------------
Total current assets 2,088,103 1,452,921
-------------------- --------------------
Property and Equipment (Note 2) 7,488,786 5,983,245
Less accumulated depreciation 2,371,131 2,115,810
-------------------- --------------------
5,117,655 3,867,435
-------------------- --------------------
Other Assets
Restricted cash (Note 3) 1,893,967 --
Goodwill, less accumulated amortization of $72,564 and
$102,358, respectively 440,808 457,533
Covenants not-to-compete, less accumulated
amortization of $40,772 and $235,366, respectively 69,228 98,134
Rental property held for resale, less accumulated
depreciation of $38,728 and $15,984, respectively
(Note 1) 906,422 924,016
Other 381,162 206,974
-------------------- --------------------
3,691,587 1,686,657
-------------------- --------------------
$10,897,345 $7,007,013
==================== ====================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- --------------------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
Current Liabilities
Note payable, bank (Note 3) $ 834,209 $ 294,811
Current maturities of long-term debt 700,388 567,905
Accounts payable:
Trade 861,120 658,575
Construction 428,315 --
Accrued expenses 536,033 412,074
-------------------- --------------------
Total current liabilities 3,360,065 1,933,365
-------------------- --------------------
Long-Term Debt, less current maturities (Note 3) 4,051,212 2,063,613
-------------------- --------------------
Commitments (Note 4)
Stockholders' Equity (Notes 3 and 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 6,765,758 and
6,679,049 shares in 1997 and 1996, respectively 67,657 66,790
Additional paid-in capital 4,950,507 4,911,070
Accumulated deficit (1,532,096) (1,967,825)
-------------------- --------------------
3,486,068 3,010,035
-------------------- --------------------
$10,897,345 $7,007,013
==================== ====================
</TABLE>
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------ --------------------
<S> <C> <C>
Net sales (Note 6) $ 14,077,841 $12,662,819
Cost of sales 9,821,560 9,238,220
-------------------- --------------------
Gross profit 4,256,281 3,424,599
Selling, general, and administrative expenses (Note 8) 3,209,798 2,968,569
Nonrecurring charge (Note 4) 375,126 --
-------------------- --------------------
Operating income 671,357 456,030
Other Income, net (Note 1) 106,807 86,018
Interest expense (320,435) (431,741)
-------------------- --------------------
Income before income taxes 457,729 110,307
Income tax expense (Note 5) (22,000) (5,000)
-------------------- --------------------
Net income $ 435,729 $ 105,307
==================== ====================
Net income per common and common equivalent share:
Primary $ 0.06 $ 0.02
Fully diluted 0.05 0.01
Weighted-average common and common equivalent shares:
Primary 9,483,290 7,428,736
Fully diluted 9,483,290 7,617,432
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock
----------------------------- Additional
Shares Paid-In Accumulated
Outstanding Par Value Capital Deficit Total
- --------------------------------------------------------- --------------- ------------- -------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1995 4,062,799 $ 40,627 $ 3,777,317 $ (2,073,132) $ 1,744,812
Common stock issued, net of costs of $148,209 2,560,000 25,600 1,106,191 -- 1,131,791
Common stock issued in satisfaction of consulting
services 40,000 400 19,600 -- 20,000
Common stock issued upon exercise of warrants
and options 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
Common stock issued upon exercise of warrants
and options, net of costs of $3,050 86,709 867 39,437 -- 40,304
Net income -- -- -- 435,729 435,729
--------------- ------------- -------------- ---------------- ------------
Balance, September 30, 1997 6,765,758 $ 67,657 $ 4,950,507 $ (1,532,096) $ 3,486,068
=============== ============= ============== ================ ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------ ------------------- ------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 435,729 $ 105,307
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 547,790 506,856
Amortization 80,299 89,853
Loss on disposal of property and equipment 294,213 10,630
Changes in assets and liabilities:
Accounts receivable (193,533) 38,524
Inventories (417,598) 181,147
Prepaid expenses (24,051) (25,970)
Accounts payable and accrued expenses 326,504 (489,620)
------------------- ------------------
Net cash provided by operating activities 1,049,353 416,727
------------------- ------------------
Cash Flows From Investing Activities
Increase in restricted cash (1,893,967) --
Purchases of property, equipment, and other (1,656,933) (131,936)
Proceeds from the sale of property and equipment 61,025 14,500
Increase in deposits and other assets (137,428) (155,066)
------------------- ------------------
Net cash used in investing activities (3,627,303) (272,502)
------------------- ------------------
Cash Flows From Financing Activities
Net borrowings (payments) on line of credit 539,398 (702,910)
Long-term borrowings 2,730,667 --
Payments of long-term debt (610,585) (650,198)
Short-term borrowings -- 400,000
Issuance of common stock, net of costs 40,304 808,620
Deferred financing costs (121,834) --
------------------- ------------------
Net cash provided by (used in) financing activities 2,577,950 (144,488)
------------------- ------------------
Net change in cash -- (263)
Cash
Beginning 600 863
------------------- ------------------
Ending $ 600 $ 600
=================== ==================
</TABLE>
(Continued)
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------ ------------------- ------------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 319,017 $ 444,599
Income taxes 23,050 5,000
=================== ==================
Supplemental Schedule of Noncash Investing and Financing
Activities
Facility improvements financed with accounts payable $ 428,315 $ --
Conversion of bridge financing to common stock -- 350,000
Conversion of accounts payable to common stock -- 20,000
Reclassification of deferred private placement costs to equity
upon issuance of common stock -- 18,704
=================== ==================
</TABLE>
See Notes to Consolidated Financial Statements.
<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. The Company grants credit on an individual customer basis.
Consolidation: The financial statements of Sparta Foods, Inc. have been
consolidated with its wholly-owned subsidiary, La Canasta (together herein
referred to as the Company). All significant intercompany balances and
transactions have been eliminated.
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.
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.
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.
The financial statements include the following financial instruments: cash,
trade accounts receivable, accounts payable, notes payable, and a line of
credit. At September 30, 1997, 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.
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.
<PAGE>
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 net 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 to 15 years.
Accounting for long-lived assets: In accordance with Statement of Financial
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, property and equipment, and rental property periodically to
determine potential impairment by comparing the carrying value of the assets
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 (estimated discounted cash flows
or appraisal of assets) of the assets. To date, management has determined that
no impairment of long-lived assets exists.
Rental property: Rental property consists of a facility in Lakeville, Minnesota,
which was previously used in the manufacturing of the Company's products. The
property is recorded at estimated fair market value, which is lower than cost.
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 approximately $11,000, plus taxes and utilities.
Rental income under this lease was approximately $130,000 and $92,000 for the
years ended September 30, 1997 and 1996, respectively, and is included in other
income in the statements of income. The Company commenced depreciating the
rental property over its remaining 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.
<PAGE>
Net income per common and common equivalent share: Net income per common share
is computed based upon the weighted-average number of common shares and common
share equivalents (stock options and warrants) outstanding during each year.
Common stock equivalents, assumed to have been exercised, are included in the
computation using the treasury stock method when their inclusion has a dilutive
effect. Fully diluted earnings per common share reflect the maximum dilution
that would have resulted from the exercise of the equivalents.
Issued but not yet adopted standard: The FASB has issued Statement No. 128 (SFAS
No. 128), Earnings Per Share, which supersedes APB Opinion No. 15. SFAS No. 128
requires the presentation of earnings per share by all entities that have common
stock or potential common stock, such as options, warrants, and convertible
securities, outstanding that trade in a public market. Those entities that have
only common stock outstanding are required to present basic earnings-per-share
amounts. All other entities are required to present basic and diluted per-share
amounts. Diluted per-share amounts assume the conversion, exercise, or issuance
of all potential common stock instruments unless the effect is to reduce a loss
or increase the income per common share from continuing operations. All entities
required to present earnings-per-share amounts must initially apply SFAS No. 128
for annual and interim periods ending after December 15, 1997. Earlier
application is not permitted, but disclosure is required.
If the Company had applied SFAS No. 128 in the accompanying financial
statements, the following amounts would have been reported:
<TABLE>
<CAPTION>
September 30
-------------------------------------------
1997 1996
- ------------------------------------------------------------------------- --------------------- ---------------------
<S> <C> <C>
Weighted-average outstanding shares 6,692,100 5,778,550
Pro forma basic earnings per share $ 0.07 $ 0.02
Weighted-average dilutive securities options and warrants 1,796,212 1,392,323
Weighted-average diluted shares 8,488,312 7,170,873
Pro forma diluted earnings per share $ 0.05 $ 0.01
</TABLE>
Reclassifications: Certain amounts on the consolidated balance sheet for the
year ended September 30, 1996, have been reclassified to be consistent with the
classifications adopted as of September 30, 1997, with no effect on previously
reported stockholders' equity.
<PAGE>
Note 2. Property and Equipment
Property and equipment consists of:
<TABLE>
<CAPTION>
September 30
Estimated -------------------------------------------
Useful Lives 1997 1996
- --------------------------------------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
Factory equipment 3-18 $ 5,141,085 $ 4,765,838
Office and other equipment 3-12 356,231 322,562
Leasehold improvements -- -- 762,089
Packaging printing plates 5 155,470 132,756
Construction in progress -- 1,836,000 --
--------------------- ---------------------
$ 7,488,786 $ 5,983,245
===================== =====================
</TABLE>
Note 3. Financing Agreements
Line of credit: The Company has a line of credit with a bank, secured by all
assets. Maximum borrowings under the credit agreement are determined by a
borrowing base calculation or $1,200,000, whichever is less. Borrowings bear
interest at prime plus 0.25 percent (8.75 percent at September 30, 1997). At
September 30, 1997, $834,209 was outstanding under the line of credit. The
Company is to maintain certain minimum 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.
State of Minnesota loan: On July 1, 1997, the Minnesota Agricultural and
Economic Development Board issued $1,950,000 in Series 1997D tax-exempt Bonds,
the proceeds of which issue were loaned to the Company to finance new equipment
(see Note 4). The underlying loan from the state is due in monthly installments
which vary in accordance with the maturity dates of the related revenue bonds,
plus interest at rates varying from 4.5 to 6.0 percent. The effective rate of
interest to the Company is 5.79 percent per annum. At September 30, 1997,
$1,916,250 is outstanding. The Company is to maintain certain minimum net worth
and debt service coverage levels.
In connection with the loan, the Company is required to maintain a debt service
reserve fund and a construction fund. The debt service reserve fund will remain
until all loan obligations have been satisfied. The construction fund represents
undisbursed loan proceeds that are available for approved improvement and
equipment expenditures. These amounts have been reflected on the consolidated
balance sheet as restricted cash as of September 30, 1997, as follows:
Debt service reserve fund, U.S. government securities
due within one year $ 195,000
Construction fund, money market funds 1,698,967
-------------
$ 1,893,967
=============
<PAGE>
Long-term debt: Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30
-----------------------------------------
1997 1996
-------------------- --------------------
<S> <C> <C>
State of Minnesota loan (described above) $ 1,916,250 $
--
Term and equipment notes payable to bank, secured by all
assets of the Company, due in monthly installments of
$21,658 and $6,342, respectively, plus interest at prime
plus 0.5% to December 31, 1999, when the remaining balance is due 1,397,075 1,623,315
Term note payable to bank, secured by all assets of the Company,
due in monthly installments of one-sixtieth of the
principal balance outstanding as of November 1, 1997, commencing
on December 31, 1997, plus interest at prime plus 0.5% to
December 31, 1999, when the remaining balance is due 651,778 --
Notes payable to a trust and to an individual, secured by rental
property held for resale, subordinated to bank financing,
interest-only payments at prime plus 4%, through January 1, 1998,
thereafter combined monthly installments of $16,565, including
interest, to January 1, 2003 736,322 736,322
Other notes payable 50,175 271,881
-------------------- --------------------
4,751,600 2,631,518
Less current maturities 700,388 567,905
-------------------- --------------------
$ 4,051,212 $ 2,063,613
==================== ====================
</TABLE>
Aggregate maturities of long-term debt at September 30, 1997, are as follows:
Years ending September 30:
1998 $ 700,388
1999 738,994
2000 1,433,086
2001 315,446
2002 346,471
Later years 1,217,215
--------------------
$ 4,751,600
====================
Note 4. Leases and Other Commitments
Manufacturing facility move and expansion, and operating leases: During fiscal
1997, the Company moved its operations to a new office and manufacturing
facility. The Company's commitment to relocate these facilities caused a charge
to current operations of $375,126 related to the unamortized cost of leasehold
improvements at its former facility and specific costs related to the move. The
lease for the new facility requires monthly base rentals plus the payment of
real estate taxes and operating expenses of the building through August 31,
2012.
<PAGE>
The lease on the Company's former facility is still in existence, requires
monthly base rentals plus the payment of 88 percent of the real estate taxes and
operating expenses of the building, and expires on May 31, 2000. The Company has
entered into a sublease agreement whereby the sublessee is required to pay
substantially all of the base rental, real estate taxes, and operating expenses
on the facility for the remainder of the lease term. The total minimum sublease
rentals to be received are approximately $688,000.
In addition to the relocation, the Company is in the process of expanding its
manufacturing capabilities through facility improvements and the purchase of new
equipment. The estimated cost is approximately $3,200,000. To finance this
activity, the Company has obtained a $1,950,000 loan from the State of Minnesota
and an additional $750,000 capital equipment loan from its current bank. The
remaining $500,000 in improvements will be financed through operations. The
total costs incurred through September 30, 1997, were $1,836,000.
Total rent expenses for all facilities and equipment were $577,500 and $518,500
for 1997 and 1996, respectively.
Minimum future obligations required under operating leases, excluding the former
facility lease, at September 30, 1997, are as follows:
Years ending September 30:
1998 $ 648,000
1999 607,000
2000 593,200
2001 578,000
2002 544,300
Later years 5,226,000
---------------------
$ 8,196,500
=====================
License agreements: In connection with a business acquisition, the Company
entered into a license agreement expiring 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 paid a fee equal to 1
percent of all retail sales made under the "Cruz" label until January 1, 1997,
and is required to pay 3 percent of net sales of "Chapala" products through
2007. Expenses relating to these arrangements were $23,450 and $42,878 in 1997
and 1996, respectively.
Purchase agreements: The Company does not enter into futures contracts. It does,
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 with the suppliers for the delayed delivery of corn
and flour for a period of 4 to 12 months, depending on current pricing, to
insure the availability of the type of corn and flour best suited for its
products. At September 30, 1997, the Company had outstanding purchase orders of
approximately $744,000. 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 were accruable as of September 30,
1997 and 1996.
<PAGE>
Note 5. Income Taxes
The income tax expense for 1997 and 1996 consisted of:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
Current:
Federal (net of $133,000 and $18,900 in 1997 and 1996,
respectively, of net operating loss carryforward benefits) $ 8,000 $ --
State (net of $58,000 and $-0- in 1997 and 1996, respectively,
of state net operating loss carryforward benefits) 14,000 5,000
-------------------- --------------------
$ 22,000 $ 5,000
==================== ====================
</TABLE>
A reconciliation between income tax expense computed at the federal statutory
rate and the Company's effective income tax rate for 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
Federal statutory rate (34.0)% (34.0)%
State income taxes, net of federal benefit (6.5) (4.5)
Nondeductible expenses (0.9) (5.6)
Benefit of graduated tax rate -- 3.2
Utilization of net operating loss carryforward 36.6 36.4
-------------------- --------------------
Effective income tax rate (4.8)% (4.5)%
==================== ====================
</TABLE>
Temporary differences that give rise to the net deferred tax assets and
liabilities at September 30, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
Net current deferred tax assets (liabilities):
Receivable allowances $ 15,000 $ 15,700
Vacation accrual 23,000 17,000
Inventory costs 15,300 15,900
Bonus accrual 14,200 1,200
Lease deferred income (17,000) (19,000)
Less valuation allowance (50,500) (30,800)
-------------------- --------------------
$ -- $ --
==================== ====================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
Net noncurrent deferred tax assets (liabilities):
Depreciation $ (470,000) $ (544,500)
Property and equipment valuation allowance 89,200 90,800
Net operating loss carryforwards 642,000 873,900
AMT credit carryforwards 42,000 38,000
Intangible assets 34,200 31,900
Less valuation allowance (337,400) (490,100)
-------------------- --------------------
$ -- $ --
==================== ====================
</TABLE>
As of September 30, 1997 and 1996, the Company recorded valuation allowances of
$387,900 and $520,900, respectively, against net deferred tax assets to reduce
the totals to amounts that management believed would ultimately be realized.
Realization of deferred tax assets is dependent upon sufficient future taxable
income during the period when deductible temporary differences and carryforwards
are expected to be available to reduce taxable income. There was no activity
other than the utilization of net operating loss carryforwards in the valuation
allowance account during 1997 or 1996.
The net operating loss carryforwards of $2,141,000 at September 30, 1997, will
expire as follows:
Years Amount
- -------------------------------------------------------- ------------------
2009 $ 662,000
2010 1,277,000
2011 202,000
The alternative minimum tax (AMT) credit carryforwards may be carried forward
indefinitely to reduce future regular federal income taxes payable.
Note 6. Major Customers
The Company had sales to one customer which accounted for 23 and 20 percent of
sales for fiscal years 1997 and 1996, respectively. As of September 30, 1997,
accounts receivable from this customer were $158,000.
In addition, the Company had sales to a second customer through a distributor
which accounted for 12 and 16 percent of sales for fiscal years 1997 and 1996,
respectively. As of September 30, 1997, accounts receivable from this
distributor were $79,000.
<PAGE>
Note 7. Options and Warrants
Stock options: The Company has a stock option plan, as amended, pursuant to
which qualified and nonqualified stock options for up to 1,300,000 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.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized for grants under the plan.
Had compensation cost for the plan been determined based on the fair values of
options granted (using the method described in Statement No. 123), reported net
income and net income per common share on a pro forma basis as compared to
actual results would have been as follows:
1997 1996
- ---------------------------------------- -------------------- -----------------
Net income:
As reported $ 435,729 $ 105,307
Pro forma 345,324 78,747
Primary earnings per share:
As reported 0.06 0.02
Pro forma 0.06 0.01
Fully diluted earnings per share:
As reported 0.05 0.01
Pro forma 0.05 0.01
For purposes of the aforementioned pro forma information, the fair value of each
option is estimated at the grant date using the Black-Scholes option pricing
model with the following weighted-average assumptions for grants in 1997 and
1996, respectively: dividend rate of zero for both years; price volatility of
99.49 and 106.20 percent; risk-free interest rate of 5.92 and 6.15 percent; and
expected lives of approximately 4 and 5 years.
The pro forma effects of applying Statement No. 123 are not indicative of future
amounts since, among other reasons, the pro forma requirements of the statement
have been applied only to options granted after September 30, 1995.
<PAGE>
Additional information relating to all outstanding options as of September 30,
1997 and 1996, is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- ---------------------------------
Weighted-Average Weighted-Average
Exercise Exercise
Shares Price Shares Price
- -------------------------------------------------- ---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 723,584 $ 1.76 693,499 $ 2.30
Options exercised (40,000) 0.50 (11,250) 0.50
Options expired (43,499) 1.60 (235,665) 2.76
Options granted 322,500 1.07 277,000 1.19
---------------- --------------- ---------------- ----------------
Options outstanding at end of year 962,585 $ 1.58 723,584 $ 1.76
================ =============== ================ ================
Weighted-average fair value of options,
granted during the year $ 0.76 $ 0.97
=============== ================
</TABLE>
The following table summarizes information about stock options outstanding at
September 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ------------------------------------
Weighted-Average
Number Remaining Number
Outstanding at Contractual Weighted-Average Exercisable at Weighted-Average
Range of September 30, Life Exercise September 30, Exercise
Exercise Prices 1997 (Years) Price 1997 Price
- ----------------------- ------------------ ------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C>
$0.50-0.88 233,750 3.2 $ 0.52 115,250 $ 0.53
1.06-1.75 564,500 4.3 1.26 101,000 1.48
2.00-2.94 45,000 2.0 2.42 27,500 2.51
4.32-5.00 119,335 0.7 4.88 99,334 4.87
------------ ------------------ ------------------ ------------------ ----------------- ------------------
$0.50-5.00 962,585 2.6 $ 1.58 343,084 $ 2.23
============= ================== ================== ================== ================= ==================
</TABLE>
Stock warrants: A summary of warrants follows:
<TABLE>
<CAPTION>
Price Range Shares
- ------------------------------------------- ------------------------- ------------------------
<S> <C> <C>
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
Exercised 0.50 (46,709)
------------------------- ------------------------
Outstanding, September 30, 1997 $ 0.50 - 4.50 3,665,837
========================= ========================
</TABLE>
<PAGE>
Warrants expire as follows:
Expiration Date Shares
- --------------------------------------------- ---------------------
October 10, 1998 400,000
October 31, 1998 610,537
February 2, 1999 2,560,000
December 9, 1999 15,300
February 2, 2001 80,000
---------------------
3,665,837
=====================
Note 8. Related-Party Transactions
The Company purchased marketing and advertising services from an organization
owned by a member of the Board of Directors. Total expenditures for these
services were approximately $113,500 in 1997.
<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 held as of December 1, 1997 are as follows:
Name Age Position with Company
Joel P. Bachul 55 President and Chief Executive Officer
A. Merrill Ayers 51 Vice President, Treasurer, Chief
Financial Officer and Secretary
Thomas C. House 51 Vice President of Operations
William J. Schuch 44 Vice President of Sales
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.
<PAGE>
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, purchasing and product distribution.
William J. Schuch has been employed by the Company since October 1997 as
the Vice President of Sales. Prior to joining the Company, Mr. Schuch was
Director of Marketing and Foodservice for Federated Group, Inc. from January
1995 until July 1997. From July 1992 through January 1995, Mr. Schuch was Sales
Training Manager for CPC Foodservice and from 1978 through July 1992, Mr. Schuch
held various sales positions including Vice President of Sales, West, at LeGout
Foods which was acquired by CPC in 1992.
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 1998 Annual Meeting of Shareholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated herein by reference to
the section labeled "Executive Compensation" which appears in the Registrant's
definitive Proxy Statement for its 1998 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 1998 Annual
Meeting of Shareholders.
<PAGE>
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 1998 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 1997 fiscal year.
<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 19, 1997 By: /s/ Joel P. Bachul
Jack P. Bachul, President
Dated: December 19, 1997 By: /s/ A. Merrill Ayers
A. Merrill Ayers, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 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 19, 1997
Michael J. Kozlak, Director
/s/ Larry Arnold December 19, 1997
Larry Arnold, Director
/s/ Joel P. Bachul December 19, 1997
Joel P. Bachul, Director
December ___, 1997
Edward Jorgensen, Director
December ___, 1997
Richard H. Leepart, Director
/s/ R. Dean Nelson December 19, 1997
R. Dean Nelson, Director
<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 10KSB/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 10KSB/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** Amended and Restated Stock Option Plan.
10.2 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.)*
10.3 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). *
- ---------------------
* 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>
Exhibit
Number Description
- ------- -----------
10.4 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.)*
10.5 Concurrent Ownership and Usage Agreement dated November 16, 1990,
between La Canasta Mexican Food Products, Inc. and U 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.)*
10.6 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.)*
10.7 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. 33-24394C) on Form S-18 dated August 6, 1992.)
10.8 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.)*
10.9 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.)*
10.10 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>
Exhibit
Number Description
- ------- -----------
10.11 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.)*
10.12 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.)*
10.13 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.)*
10.14 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 10KSB for the period ended September 30,
1994.)*
10.15 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 10KSB for the period ended September 30,
1994.)*
10.16 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.)*
10.17 $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.)*
10.18 $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.)*
- ---------------------
* 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>
Exhibit
Number Description
- ------- -----------
10.19 $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.)*
10.20 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.)*
10.21 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.)
10.22 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.)
10.23 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.)*
10.24 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.)*
10.25 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.)*
10.26 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.)*
- ---------------------
* 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>
Exhibit
Number Description
- ------- -----------
10.27 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.)*
10.28 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.)*
10.29 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.)*
10.30** Salary Continuation Agreement dated August 1995 between the
Registrant and Joel P. Bachul (Incorporated by reference to
Exhibit 10.39 to the Company's Form 10-KSB for the year ended
September 30, 1996).*
10.31** Salary Continuation Agreement dated August 1995 between the
Registrant and A. Merrill Ayers (Incorporated by reference to
Exhibit 10.40 to the Company's Form 10-KSB for the year ended
September 30, 1996).*
10.32** Salary Continuation Agreement dated August 1995 between the
Registrant and Thomas C. House (Incorporated by reference to
Exhibit 10.41 to the Company's Form 10-KSB for the year ended
September 30, 1996).*
10.33 Fourth Amendment to Credit and Security Agreement dated December
20, 1996 between the Company and Norwest Bank Minnesota, National
Association (Incorporated by reference to Exhibit 10.42 to the
Company's Form 10-QSB for the period ended December 31, 1996).*
10.34 Manufacturing Agreement between the Company and Ken Davis Products,
Inc. (Incorporated by reference to Exhibit 10.43 to the Company's
Form 10-QSB for the period ended December 31, 1996).*
10.35 Amendment to Consultant Agreement dated December 20, 1996 between
the Company and Catalina Specialty Foods, Inc. (Incorporated by
reference to Exhibit 10.44 to the Company's Form 10-QSB for the
period ended December 31, 1996).*
- ---------------------
* 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>
Exhibit
Number Description
- ------- -----------
10.36 Distribution Agreement dated February 14, 1997 between the Company
and Marigold Foods, Inc. (Incorporated by reference to Exhibit
10.45 to the Company's Form 10-QSB for the period ended March 31,
1997.*
10.37 Commercial Lease between First Industrial L.P. and Sparta Foods,
Inc., effective September 1, 1997 for a 15-year period
(Incorporated by reference to Exhibit 10.46 to the Company's
Form 10-QSB for the period ended June 30, 1997).*
10.38 Employment Agreement dated November 14, 1997 between the Company
and William J. Schuch.
10.39 Fifth Amendment to Credit Agreement and Security Agreement
dated as of July 1, 1997 between the Company and Norwest Bank
Minnesota, National Association.
10.40 Loan Agreement dated as of July 1, 1997 between the Company and
Minnesota Agricultural and Economic Development Board.
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.
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 10.38
EMPLOYMENT AGREEMENT
It is hereby agreed by and between Sparta Foods, Inc. ("Sparta") and
William J. Schuch ("Schuch") as follows:
WHEREAS, Schuch wishes to be employed with Sparta and Sparta wishes to
employ Schuch as Vice President of Sales as set forth in this Agreement.
WHEREAS, Schuch acknowledges that he will have access to confidential and
trade secret information of Sparta, which, if disclosed or used for the benefit
of any other person or entity, would cause harm to the business and/or
competitive position of Sparta.
WHEREAS, Schuch acknowledges his obligation during his employment with
Sparta, and at all times thereafter, not to use or disclose confidential or
trade secret information of Sparta for the benefit of any other person or
entity;
WHEREAS, the parties wish to set forth the terms of their agreement in
writing.
NOW, THEREFORE, in consideration of the foregoing and the mutual promises
and covenants contained herein, and for other good and valuable consideration
the receipt and sufficiency of which is specifically acknowledged by the
parties, Sparta and Schuch agree as follows:
1. Employment. Sparta hereby employs Schuch and Schuch hereby accepts
employment upon the terms and conditions set forth in this Agreement.
2. Term. The term of this Agreement shall commence on October 20, 1997 and
shall continue until terminated by either Schuch or Sparta in accordance with
Paragraph 9 of this Agreement.
3. Duties. Schuch shall serve as Sparta's Vice President of Sales. Schuch
shall devote his entire time, attention, energy and best efforts to the business
of Sparta during the term of this Agreement. Schuch shall discharge all duties
and responsibilities as determined in the discretion of President and CEO and/or
the Board of Directors of Sparta.
4. Annual Salary. Sparta shall pay to Schuch a salary on an annualized
basis of $85,000, which shall be increased to $90,000 on an annualized basis
after ninety (90) days of employment should Sparta be satisfied with Schuch's
performance. Salary shall be paid on a bi-weekly basis, less appropriate payroll
deductions. Further increases, if any, are at the sole discretion of the Board
of Directors.
<PAGE>
5. Bonus. Sparta shall pay Schuch a bonus for the fiscal year ending
September 30, 1998 in the amount of $21, 250, less appropriate payroll
deductions, if Schuch is an employee in good standing as of September 30, 1998.
Additional amounts or future bonuses, if any, are at the sole discretion of the
Board of Directors.
6. Benefits. Sparta shall provide to Schuch all benefits in the same
amounts and upon the same conditions as are provided for other employees of
Sparta at his level in accordance with applicable plan documents.
7. Vacation. Schuch shall be entitled to four weeks during the first year
of his employment and for any subsequent years in which he is employed with
Sparta. Unused vacation may not be carried over into the next year.
8. Automobile. Schuch shall be eligible for a company-leased vehicle on the
same terms as are available to other employees.
9. Termination or Resignation. Either party may terminate the employment of
Schuch for any reason or no reason, with or without cause, upon 90 days' written
notice to the other party. The parties agree that Schuch may continue to work
during the 90-day notice period or may receive, in lieu thereof, his regular
salary through the 90-day period. Such decision shall be in Sparta's sole
discretion. If either party terminates the employment of Schuch as set forth in
this Paragraph 9, Schuch shall be entitled to his regular salary through the
last date of the notice period together with any accrued and unused vacation for
the year in which he is terminated or resigns, and any severance to which he is
entitled in accordance with Paragraph 10 of this Agreement. Schuch shall not be
entitled to any further payments of any kind, except as may be due under any
pension, profit sharing or benefit plan in which Schuch is a participant.
10. Severance. Sparta shall, unless Schuch is terminated for cause, for a
period of one year after Schuch's termination or resignation under Paragraph 9,
pay Schuch severance at the rate of his last annual salary (excluding any
bonuses or other payments), less appropriate payroll deductions, to be paid
according to the bi-weekly payroll schedule. If Sparta is terminated for cause,
he shall not be entitled to any severance payments and shall only be entitled to
his regular salary through the last date of the notice period as set forth in
Paragraph 9, together with any accrued and unused vacation for the year in which
he is terminated or resigns. Schuch shall not be entitled to any further
payments of any kind, except as may be due under any pension, profit sharing or
benefit plan in which Schuch is a participant.
Cause shall be defined as conduct detrimental to Sparta's business
reputation or good will; misrepresentation or dishonesty in any dealing between
Schuch and Sparta or between Schuch and Sparta's customers or prospective
customers; abuse of alcohol or use of controlled substances while on the job;
refusal to comply with Sparta's directives, rules, regulations or policies; or
the violation of any term of this Agreement.
<PAGE>
11. Confidentiality. Schuch acknowledges and agrees that he will not,
during his employment or at any time thereafter, directly or indirectly, use or
disclose to any other entity or person, any confidential information of Sparta,
without the prior written approval of Sparta's Board of Directors. For purposes
of this Agreement, the term "confidential information" shall include any
information of Sparta, whether in print, or on a computer disk, or tape or
otherwise, including a formula, pattern, compilation, program, device, method,
technique, or process which (a) derives independent economic value, actual or
potential, from not being generally known to the public or to other persons who
can obtain economic value from its disclosure or use; and (b) is the subject of
efforts that are reasonable under the circumstances to maintain its secrecy.
Schuch acknowledges that such confidential information includes, but is not
limited to, customer lists and information, information regarding active and
inactive accounts, methods of operation, financial information, and marketing or
strategic plans or information.
12. Noncompetition. In consideration of his employment and the covenants
herein, and for other good and valuable consideration the receipt and
sufficiency of which is specifically acknowledged by Schuch, Schuch acknowledges
and agrees that, during the period of his employment and for a period of one
year after his termination or resignation from employment at any time, for any
reason or no reason, with or without cause, and whether such termination or
resignation is voluntary or involuntary, he shall not, on behalf of himself or
for any other person or entity:
a. Directly or indirectly, as an employee, proprietor, agent, stockholder,
partner, officer, director or otherwise, participate or engage in, manage,
work for, broker for, operate, control, render advice or assistance to or
be connected in any way with any other person or entity engaged in the
business of the manufacture or distribution of tortillas and/or
tortilla-related products;
b. Directly or indirectly, contact or solicit any actual, potential or past
customer of Sparta for the purpose of selling tortilla's and/or
tortilla-related products;
c. For any reason influence or solicit, or attempt to influence or solicit,
either directly or indirectly, any employee of Sparta to terminate his or
her employment with Sparta or to work for any person or entity other than
Sparta.
13. Return of Property. Schuch, immediately upon his resignation or
termination from employment, whether such termination or resignation is
voluntary or involuntary, shall return to Sparta all documents or other items,
whether in print, on computer disk, tape or otherwise, and all copies thereof,
within his possession or control, belonging to Sparta, or in any manner relating
to the business of, or the services provided by Sparta, or the duties and
services performed by Schuch on behalf of Sparta, including but not limited to,
any confidential or trade secret information of Sparta.
<PAGE>
14. Remedy Upon Violation. In the event of a violation or violations of the
terms of Paragraphs 11, 12 or 13 of this Agreement by Schuch, Schuch
acknowledges and agrees that Sparta shall be entitled, in addition to any other
remedy it may have at law or equity, to an injunction with the posting of a
minimal bond or other security, enjoining or restraining Schuch from any
violation or violations of this Agreement, and Schuch hereby consents to the
issuance of such injunction upon an appropriate showing under applicable law. If
any of the rights or restrictions contained in this Agreement shall be deemed by
a Court of competent jurisdiction to be unenforceable by reason of the extent,
duration or geographic scope, or other provision of this Agreement, the parties
contemplate that the Court shall modify such extent, duration, geographic scope
or other provision of this Agreement and enforce this Agreement in its modified
form for all purposes in the manner contemplated by this Agreement.
15. Other Agreements. Schuch, by his signature to this Agreement, confirms
and warrants that he does not have any noncompetition, confidentiality or other
agreements with or obligations to any other person or entity which would prevent
or interfere with his employment or duties and responsibilities with Sparta.
16. Successors and Assigns. This Agreement shall inure to the benefit of
the successors and assigns of Sparta.
17. Entire Agreement. This Agreement states the entire agreement of the
parties with respect to the subject matter hereof and merges all prior
negotiations, agreements, and understandings, if any. No modification, release,
discharge, or waiver, of any provision of this Agreement shall be of any force
or effect unless made in writing and signed by the parties hereto, and
specifically identified as a modification, release, or discharge, of this
Agreement. If any term, clause, or provision, of this Agreement shall for any
reason be adjudged invalid, unenforceable, or void, the same shall not impair or
invalidate any of the other provisions of the Agreement, all of which shall be
performed in accordance with their respective terms. This Agreement contains the
entire agreement of the parties. It may not be changed orally but only by an
agreement in writing signed by the parties against whom enforcement of any
waiver, change, modification, extension or discharge is sought.
18. Governing Law. This Agreement shall be governed, construed and
interpreted in accordance with the laws of the State of Minnesota.
<PAGE>
Dated: __________, 1997 _____________________________
William J. Schuch
SPARTA FOODS, INC.
Dated: __________, 1997 By __________________________
Its _________________________
Exhibit 10.39
FIFTH AMENDMENT TO CREDIT AND
SECURITY AGREEMENT
This Fifth Amendment, dated as of July 1, 1997, is made by and among
LaCANASTA OF MINNESOTA, INC., a Minnesota corporation (the "Borrower"), SPARTA
FOODS, INC., a Minnesota corporation ("Sparta") and NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION, a national banking association (the "Lender").
Recitals
The Borrower, Sparta and the Lender are parties to the Credit and Security
Agreement dated as of December 9, 1994, as supplemented by the First Supplement
to Credit Agreement dated as of December 13, 1994, as amended by a First
Amendment to Credit Agreement dated as of April 14, 1995, a Second Amendment to
Credit Agreement dated as of September 21, 1995, a Third Amendment to Credit
Agreement dated as of April 23, 1996, and a Fourth Amendment to Credit and
Security Agreement dated as of December 20, 1996 (as amended, the "Credit
Agreement"). All capitalized terms used in these Recitals shall have the
meanings given to them in the Credit Agreement.
Pursuant to the Credit Agreement, the Lender has made Advances, a Term Loan
and a Capital Expenditure Loan to the Borrower. The Borrower's obligations to
pay the Advances is presently evidenced by the Revolving Note of the Borrower
dated December 9, 1994, payable to the order of the Lender in the original
principal amount of $1,200,000. The Borrower's obligations to pay the Term Loan
is presently evidenced by the Term Note of the Borrower dated December 9, 1994,
payable to the order of the Lender in the original principal amount of
$1,784,800. The Borrower's obligations to pay the Capital Expenditure Loan is
presently evidenced by the Capital Expenditure Note of the Borrower dated
December 20, 1996, payable to the order of the Lender in the original principal
amount of $473,333. The current outstanding principal balance of the Revolving
Note is $791,174. The current outstanding principal balance of the Term Note is
$1,135,385. The current outstanding principal balance of the Capital Expenditure
Note is $235,281. The Advances, the Term Loan and the Capital Expenditure Loan
and all other obligations of the Borrower owing to the Lender are secured, among
other things, pursuant to the Credit and Security Agreement of the Borrower
dated as of December 9, 1994.
The Borrower has requested that the Lender increase the amount of the
Commitment under Revolving Note, extend a new term loan in the amount of
$750,000 for the relocation to the New Brighton facility, change the interest
rate on the Notes and amend the definition of Borrowing Base. The Lender is
willing to grant the Borrower's request subject to the terms of this Fifth
Amendment.
<PAGE>
Accordingly, the Borrower and the Lender hereby agree as follows:
1. Defined Terms. Terms used in this Fifth Amendment which are defined in
the Credit Agreement shall have the same meanings as defined therein, unless
otherwise defined herein. In addition, Section 1.01 of the Credit Agreement is
amended by adding or amending, as the case may be, the following new
definitions:
"`Borrowing Base' means, at any time and subject to change from time
to time in the Lender's sole discretion, the lessor of:
(a) The Revolving Credit Facility Maximum Amount, or
(b) the sum of (1) up to eighty-two percent (82%) of Eligible
Accounts, plus (2) up to fifty percent (50%) of Eligible Inventory,
plus (3) $750,000 for the period beginning on the Fifth Amendment
Effective Date through November 1, 1997, less (4) the total advances
under Term Loan B, less (5) the amount of any deductible with respect
to any insurance coverage insuring the Accounts in effect from time to
time (which deductible is $15,000 as of the date of the Fifth
Amendment)."
"`Capital Expenditure Loan' has the meaning as given in Section 2.2(b)
hereof."
"`Capital Expenditure Loan Note' means that certain promissory note of
the Borrower in the amount of $473,333 to the Lender dated as of December
20, 1996.
"`Fifth Amendment' means the Fifth Amendment to Credit and Security
Agreement dated as of July 1, 1997, among the Borrower, Sparta and the
Lender."
"`Fifth Amendment Effective Date' means the date that all of the
conditions in Section 6 of Fifth Amendment have been satisfied."
"`Lakeville Real Estate' means the commercial property of the Borrower
located in Lakeville, Minnesota."
"`Revolving Credit Facility Maximum Amount' shall mean (i) $2,000,000
less the total advanced under the Term Loan B facility for the period
beginning on the Fifth Amendment Effective Date through October 31, 1997
and (ii) $1,200,000 for the period beginning November 1, 1997 and
thereafter."
<PAGE>
"`Revolving Loan Spread' means the percentage set forth below opposite
the range of Leverage Ratio in which the Borrower's Leverage Ratio falls.
Reductions and increases in the percentage will be determined quarterly
upon receipt of the Borrower's financial statements as required under
Section 6.1(b) of the Credit Agreement, but such reductions and increases
will be applied retroactively to the beginning of the quarter immediately
following the quarter for which the determination was made. From the
beginning of each fiscal quarter until such determination is made with
respect to that quarter, the Borrower shall pay interest as if the
percentage were unchanged from the percentage applicable at the end of the
preceding fiscal quarter. If the percentage is determined to have increased
and the Borrower has thus underpaid interest since the beginning of that
fiscal quarter, the Borrower shall pay such deficiency on demand. If the
percentage is determined to have decreased and the Borrower has thus
overpaid interest since the beginning of that fiscal quarter, the Lender
shall credit such overpayment, first, as a prepayment of accrued but unpaid
interest on the Revolving Note, and, second, as a prepayment of interest
thereafter accruing on the Revolving Note. Notwithstanding the foregoing,
no reduction in the percentage will be made if a Default or an Event of
Default has occurred and is continuing at the time that such reduction
would otherwise be made.
Leverage Ratio Percentage
3.01 to 1.00 or more 1.00%
2.51 to 1.00 or more, but 0.50%
less than 3.01 to 1.00
1.01 to 1.00 or more, but 0.25%
less than 2.51 to 1.00
1.00 to 1.00 or below 0.00%
As of the March 31, 1997, the Borrower's Leverage Ratio was 1.19 to 1.00;
therefore, as of the Fifth Amendment Effective Date, the Lender will reduce
the Revolving Loan Spread to 0.25%."
"`Revolving Note' means the $2,000,000 promissory note of the Borrower
to the Lender in substantially the form of Exhibit A to the Fifth
Amendment."
"`Term Loans' means any or all of the Term Loan A, the Term Loan B or
the Capital Expenditure Loan."
"`Term Loan A' has the meaning specified in Section 2.2(a) hereof."
<PAGE>
"`Term Loan A Note' means that certain promissory note of the Borrower
in the amount of $1,784,800 to the Lender dated as of December 9, 1994."
"`Term Loan B' has the meaning specified in Section 2.2(d) hereof."
"`Term Loan B Note' means that certain promissory note of the Borrower
in the amount of $750,000 to the Lender in substantially the form of
Exhibit B attached to the Fifth Amendment."
"`Term Loan Notes' means any or all of the Term Loan A Note, the Term
Loan B Note or the Capital Expenditure Loan Note."
"`Term Loan Spread' means the percentage set forth below opposite the
range of Leverage Ratio in which the Borrower's Leverage Ratio falls.
Reductions and increases in the percentage will be determined quarterly
upon receipt of the Borrower's financial statements as required under
Section 6.1(b) of the Credit Agreement, but such reductions and increases
will be applied retroactively to the beginning of the quarter immediately
following the quarter for which the determination was made. From the
beginning of each fiscal quarter until such determination is made with
respect to that quarter, the Borrower shall pay interest as if the
percentage were unchanged from the percentage applicable at the end of the
preceding fiscal quarter. If the percentage is determined to have increased
and the Borrower has thus underpaid interest since the beginning of that
fiscal quarter, the Borrower shall pay such deficiency on demand. If the
percentage is determined to have decreased and the Borrower has thus
overpaid interest since the beginning of that fiscal quarter, the Lender
shall credit such overpayment, first, as a prepayment of accrued but unpaid
interest on the Term Loan Note, and, second, as a prepayment of interest
thereafter accruing on the Term Loan Note. Notwithstanding the foregoing,
no reduction in the percentage will be made if a Default or an Event of
Default has occurred and is continuing at the time that such reduction
would otherwise be made.
Leverage Ratio Percentage
3.01 to 1.00 or more 1.25%
2.51 to 1.00 or more, but 0.75%
less than 3.01 to 1.00
1.01 to 1.00 or more, but 0.50%
less than 2.51 to 1.00
1.00 to 1.00 or below 0.25%
As of the March 31, 1997, the Borrower's Leverage Ratio was 1.19 to 1.00;
therefore, as of the Fifth Amendment Effective Date, the Lender will reduce
the Term Loan Spread to 0.50%."
"`Termination Date' means December 31, 1999."
<PAGE>
2. Term Loan and Capital Expenditure Loans. Section 2.2 of the Credit
Agreement is amended in its entirety to read as follows:
"Section 2.2 Term Loans and Capital Expenditure Loans.
(a) Term Loan A. The Lender has made a term loan to the Borrower
before the date of the Fifth Amendment, the Borrower's obligations to pay
which are evidenced by the promissory note of the Borrower dated December
9, 1994, payable to the order of the Lender in the original principal
amount of $1,784,800 (the "Term Loan A Note"). The principal amount of the
Term Loan shall be payable in thirty-six (36) consecutive monthly
installments of Twenty-One Thousand Six Hundred Fifty-Eight Dollars
($21,658), commencing on January 1, 1997, with a payment of all unpaid
principal and other obligations on the earliest of termination of the
Revolving Credit Facility, demand by the Lender or the Termination Date.
(b) Capital Expenditure Loan. The Lender has made a capital
expenditure loan to the Borrower before the date of the Fifth Amendment
(the "Capital Expenditure Loan"), the Borrower's obligations to pay which
are evidenced by the promissory note of the Borrower dated December 20,
1996, payable to the order of the Lender in the original principal amount
of $473,333 (the "Capital Expenditure Loan Note"). The principal amount of
the Capital Expenditure Loan shall be payable in thirty-six (36)
consecutive monthly installments of Six Thousand Three Hundred Forty-Two
Dollars ($6,342), commencing on January 1, 1997, with a payment of all
unpaid principal and other obligations on the earliest of termination of
the Revolving Credit Facility, demand by the Lender or the Termination
Date.
(c) Procedures for Capital Expenditure Loan Advances. At any time
prior to December 31, 1997, and upon the terms and conditions set forth
below, the Lender agrees to make Advances to the Borrower under the Capital
Expenditure Loan to finance new acquisitions by the Borrower of equipment
to be located at the Leased Premises and used in the Borrower's business,
in an aggregate amount not to exceed the lesser of (i) Two Hundred Thousand
Dollars ($200,000.00) or (ii) the lesser of (A) eighty percent (80%) of the
net invoice hard cost to Borrower for such newly purchased equipment (net
of insurance, freight, delivery, shipping interest, taxes, installation,
licenses or any similar cost or expense, and less any discounts, rebates,
refunds or other reductions in price), or (B) the actual value of such
equipment, in the Lender's sole determination. Upon fulfillment of the
applicable conditions set forth below for which the Lender shall have a
reasonable period of time to review, and upon Lender's determination to
make an Advance under the Capital Expenditure Loan, the Lender shall
disburse the amount of the Advance by crediting the same to the Borrower's
demand deposit account specified in Section 2.1(c) hereof, unless the
Borrower and the Lender shall agree in writing to another manner of
<PAGE>
disbursement. The Capital Expenditure Loan is not a revolving facility and
any voluntary or mandatory prepayment thereof may not be reborrowed
hereunder. The Borrower agrees to comply with the following procedures in
requesting Advances under this Section 2.2(c):
(1) The Lender shall make, and the Borrower shall request, no
more than two (2) Advances under this Section 2.2(c), with each of the
requested Advances to be in an amount of at least Fifty Thousand
Dollars ($50,000.00), and the aggregate of both requested Advances
shall not exceed Two Hundred Thousand Dollars ($200,000.00).
(2) The request for an Advance under this Section 2.2(c) shall be
made in writing, specifying the date of the requested Advance which
shall not be prior to the Lender's review of the documents described
below, and the amount thereof, and shall be by (i) any officer of the
Borrower; (ii) any Person designated as the Borrower's agent by any
officer of the Borrower in a writing delivered to the Lender; or (iii)
any Person reasonably believed by the Lender to be an officer of the
Borrower or such a designated agent. Any request for an Advance under
this Section 2.2(c) shall be deemed to be a representation by the
Borrower that (i) the conditions set forth in Section 2.2(c) hereof
have been met, and (ii) the conditions set forth in Section 4.2 hereof
have been met as of the time of the request. The Borrower shall be
obligated to repay all Advances under this Section 2.2(c)
notwithstanding the fact that the Person requesting the same was not
in fact authorized to do so.
(3) Such request shall be accompanied by (A) the actual invoice
and purchase order for the newly acquired equipment; (B) a description
of such equipment; (C) evidence of (i) delivery of such equipment to
the Borrower and the acceptance thereof by the Borrower, together with
the dates and place of acceptance and delivery, (ii) title to such
equipment in the name of Borrower, (iii) payment therefor or a letter
from the Borrower directing the Lender to disburse the Advance
proceeds to the equipment vendor directly, (iv) the Lender's first
priority security interest in such equipment, (v) insurance on such
equipment in form and substance acceptable to the Lender; and (D) such
other documentation or information as the Lender may require.
(d) Term Loan B. The Lender has committed to make a term loan to the
Borrower as of the date of the Fifth Amendment, the Borrower's obligations
to pay which are evidenced by a promissory note of the Borrower dated June
__, 1997, payable to the order of the Lender in the original principal
amount of $750,000 (the "Term Loan B Note"), substantially in the form of
Exhibit B to the Fifth Amendment and shall be secured pursuant to the
Credit Agreement and the Security Documents as therein defined. The
principal amount of the Term Loan B shall be payable in consecutive monthly
installments amounting to one-sixtieth (1/60th) of the principal balance
outstanding as of November 1, 1997, commencing on December 1, 1997, with a
payment of all unpaid principal and other obligations on the earliest of
termination of the Revolving Credit Facility, demand by the Lender or the
Termination Date."
<PAGE>
(e) Procedures for Term Loan B Advances. At any time prior to November
1, 1997, and upon the terms and conditions set forth below, including, but
not limited to the delivery by the Borrower to the Lender of an updated
orderly liquidation value appraisal on equipment and a fair market value
appraisal on the Lakeville Real Estate, which appraisals shall be performed
by an appraisal firm approved by the Lender and the costs of which shall be
paid by the Borrower, the Lender agrees to make a single Advance to the
Borrower under the Term Loan B, provided no Default or an Event of Default
has occurred or will occur as a result of the Advance, in an aggregate
amount not to exceed the lesser of (i) Seven Hundred Fifty Thousand Dollars
($750,000.00) or (ii) the sum of (A) eighty percent (80%) of orderly
liquidation value of existing machinery and equipment, plus (B)
seventy-five percent (75%) of the fair market value of the Lakeville Real
Estate, less (C) the outstanding balance and unfunded commitments under
Term Loan A, less (D) the outstanding balance and unfunded commitment under
the Capital Expenditure Loan. Upon fulfillment of the applicable conditions
and upon Lender's determination to make an Advance under the Term Loan B,
the Lender shall disburse the amount of the Advance by crediting the same
to the Borrower's demand deposit account specified in Section 2.1(c)
hereof, unless the Borrower and the Lender shall agree in writing to
another manner of disbursement. The Term Loan B is not a revolving facility
and any voluntary or mandatory prepayment thereof may not be reborrowed
hereunder.
3. Interest. Section 2.4(a) of the Credit Agreement is hereby amended in
its entirety and replaced with the following:
"Section 2.4 Interest. (a) The principal of the Advances outstanding
during any month under the Revolving Credit Facility shall bear interest at
the Revolving Note Rate, and all other Obligations shall bear interest at
the Term Note Rate; provided, however, that from the first day of any month
during which any Default or Event of Default occurs or exists at any time,
in the Lender's discretion and without waiving any of its other rights and
remedies, the principal of the Advances outstanding and the unpaid
principal balance of the Term Loan A, the Capital Expenditure Loan and the
Term Loan B and any other Obligations outstanding from time to time shall
bear interest at the applicable Default Rate; and provided, further, that
in any event no rate change shall be put into effect which would result in
a rate greater than the highest rate permitted by law. Interest accruing on
<PAGE>
the principal balance of the Advances under the Revolving Credit Facility,
the Capital Expenditure Loan, the Term Loan A, the Term Loan B, and any
other Obligations outstanding from time to time shall be payable on the
first day of the next succeeding month and on the Termination Date or
earlier demand or prepayment in full. All interest (including interest at
the Default Rate) shall be computed on the basis of actual days elapsed in
a three hundred sixty (360) day year."
4. Use of Proceeds. Section 2.10 of the Credit Agreement is amended in its
entirety as follows:
"Section 2.10 Use of Proceeds. The proceeds of Advances under the
Revolving Credit Facility, the Term Loans and the Capital Expenditure Loan
shall be used by the Borrower as interim financing of leasehold
improvements and capital equipment and for ordinary working capital
purposes."
5. Financial Covenants. Sections 6.12 and 6.13 of the Credit Agreement are
deleted in their entirety and replaced, as follows:
"Section 6.12 Tangible Net Worth. The Borrower, on a consolidated
basis with Sparta, shall maintain at all times during each fiscal month in
each period set forth below (calculated at the end of each fiscal month
during each period set forth below) its Tangible Net Worth at or above the
level set forth below opposite each such period:
October 1, 1996 through
August 31, 1997 $1,500,000
September 1, 1997 through
August 31, 1998 $1,600,000
September 1, 1998 through
August 31, 1999 $2,100,000
September 1, 1999 through
December 31, 1999 $2,400,000
"Section 6.13 Maximum Leverage Ratio. The Borrower, on a consolidated
basis with Sparta, shall maintain at all times during each fiscal month in
each period set forth below (calculated at the end of each fiscal month
during each period set forth below) its Leverage Ratio at or below the
level set forth below opposite each such period:
<PAGE>
June 30, 1997 through
August 31, 1997 2.00 to 1.00
September 1, 1997 through
August 31, 1998 2.25 to 1.00
September 1, 1998 through
August 31, 1999 1.75 to 1.00
September 1, 1999 through
December 31, 1999 1.75 to 1.00
6. Expenditures for Fixed Assets. Section 7.10 of the Credit Agreement is
amended in its entirety to read as follows:
"Section 7.10 Capital Expenditures. Sparta will not make any Capital
Expenditures. During each period set forth below, the Borrower will not
expend or contract to expend for Capital Expenditures more than the amount
set forth below opposite each such period:
Period beginning
October 1, 1996, and $3,250,000
ending September 30, 1998
Fiscal year ended
September 30, 1999 $500,000
October 1, 1999 through
Termination Date $500,000
7. No Other Changes. Except as explicitly amended by this Fifth Amendment,
all of the terms and conditions of the Credit Agreement and Revolving Note shall
remain in full force and effect and shall apply to any Advance thereunder.
8. Conditions Precedent. This Fifth Amendment shall be effective upon
receipt by the Lender of an executed original hereof, together with each of the
following, each in substance and form acceptable to the Lender in its sole
discretion:
( a) The new Revolving Note duly executed by the Borrower.
( b) The new Term Loan B Note duly executed by the Borrower.
( c) A Certificate of the Secretary of the Borrower certifying as to
(i) the resolutions of the board of directors of the Borrower approving the
execution and delivery of this Fifth Amendment, the Revolving Note and the
Term Loan B Note, (ii) the fact that the Articles of Incorporation and
Bylaws of the Borrower, which were previously delivered to the Lender
continue in full force and effect and have not been amended or otherwise
modified except as set forth in the Certificate to be delivered, and (iii)
the incumbency of the officers and agents of the Borrower authorized to
sign and to act on behalf of the Borrower and setting forth the sample
signatures of each of the officers and agents of the Borrower authorized to
execute and deliver this Fifth Amendment, the Revolving Note and the Term
Loan B Note and all other documents, agreements and certificates on behalf
of the Borrower.
<PAGE>
( d) Evidence that the Borrower has received final approval for bond
financing from the State of Minnesota on terms satisfactory to the Lender.
( e) Such other matters as the Lender may require.
9. Representations and Warranties. The Borrower hereby represents and
warrants to the Lender as follows:
( a) The Borrower has all requisite power and authority to execute
this Fifth Amendment, the Revolving Note and the Term Loan B Note and to
perform all of its obligations thereunder, and this Fifth Amendment has
been duly executed and delivered by the Borrower and constitutes the legal,
valid and binding obligation of the Borrower, enforceable in accordance
with its terms.
( b) The execution, delivery and performance by the Borrower of this
Fifth Amendment, the Revolving Note and the Term Loan B Note have been duly
authorized by all necessary corporate action and do not (i) require any
authorization, consent or approval by any governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
(ii) violate any provision of any law, rule or regulation or of any order,
writ, injunction or decree presently in effect, having applicability to the
Borrower, or the articles of incorporation or by-laws of the Borrower, or
(iii) result in a breach of or constitute a default under any indenture or
loan or credit agreement or any other agreement, lease or instrument to
which the Borrower is a party or by which it or its properties may be bound
or affected.
( c) All of the representations and warranties contained in Article IV
of the Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such representations
and warranties relate solely to an earlier date.
( d) The recitals set forth on the first page hereof are true and
correct.
10. References. All references in the Credit Agreement to "this Agreement"
shall be deemed to refer to the Credit Agreement as amended hereby; and any and
all references in the Mortgage or any Guaranty to the Credit Agreement shall be
deemed to refer to the Credit Agreement as amended hereby.
<PAGE>
11. Release. The Borrower hereby absolutely and unconditionally releases
and forever discharges the Lender, and any and all participants, parent
corporations, subsidiary corporations, affiliated corporations, insurers,
indemnitors, successors and assigns thereof, together with all of the present
and former directors, officers, agents and employees of any of the foregoing,
from any and all claims, demands or causes of action of any kind, nature or
description, whether arising in law or equity or upon contract or tort or under
any state or federal law or otherwise, which the Borrower has had, now has or
has made claim to have against any such person for or by reason of any act,
omission, matter, cause or thing whatsoever arising from the beginning of time
to and including the date of this Fifth Amendment, whether such claims, demands
and causes of action are matured or unmatured or known or unknown.
12. Costs and Expenses. The Borrower hereby reaffirms its agreement under
the Credit Agreement to pay or reimburse the Lender on demand for all costs and
expenses incurred by the Lender in connection with the Credit Agreement and all
other documents contemplated thereby, including without limitation all
reasonable fees and disbursements of legal counsel. Without limiting the
generality of the foregoing, the Borrower specifically agrees to pay all fees
and disbursements of counsel to the Lender for the services performed by such
counsel in connection with the preparation of this Fifth Amendment and the
documents and instruments incidental hereto. The Borrower hereby agrees that the
Lender may, at any time or from time to time in its sole discretion and without
further authorization by the Borrower, make a loan to the Borrower under the
Credit Agreement, or apply the proceeds of any loan, for the purpose of paying
any such fees, disbursements, costs and expenses.
13. Miscellaneous. This Fifth Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original and all of which counterparts, taken together, shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amendment to
be duly executed as of the day and year first above written.
LaCANASTA OF MINNESOTA, INC. NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By____________________________________ By__________________________________
A. Merrill Ayers _______________________________
Its Chief Financial Officer Its___________________________
SPARTA FOODS, INC.
By____________________________________
A. Merrill Ayers
Its Chief Financial Officer
<PAGE>
REVOLVING NOTE
$2,000,000 Minneapolis, Minnesota
July 1, 1997
For value received, the undersigned, LaCANASTA OF MINNESOTA, INC., a
Minnesota corporation (the "Borrower"), hereby promises to pay on the
Termination Date, or on such earlier date as provided in the Credit and Security
Agreement (defined below) to the order of NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, a national banking association (the "Lender"), at its main office
in Minneapolis, Minnesota, or at any other place designated at any time by the
holder hereof, in lawful money of the United States of America and in
immediately available funds, the principal sum of TWO MILLION DOLLARS
($2,000,000.00) or, if less, the aggregate unpaid principal amount of all
advances made by the Lender to the Borrower hereunder or under the Revolving
Credit Facility, as defined in that certain Credit and Security Agreement of
even date herewith by and among the Lender, the Borrower and Sparta Foods, Inc.,
(the "Credit Agreement") together with interest on the principal amount
hereunder remaining unpaid from time to time, computed on the basis of the
actual number of days elapsed and a three hundred sixty (360) day year, from the
date hereof until this Note is fully paid at the Revolving Note Rate or Default
Rate (if applicable) from time to time in effect. The principal hereof and
interest accruing thereon shall be due and payable as provided in the Credit
Agreement. This Note may be prepaid only in accordance with the Credit
Agreement. All capitalized terms not otherwise defined herein shall have the
meanings ascribed thereto in the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit Agreement,
which provides, among other things, for acceleration hereof. This Note is the
Revolving Note referred to in the Credit Agreement.
This Note is secured, among other things, pursuant to the Credit Agreement
and the Security Documents as therein defined, and may now or hereafter be
secured by one or more other security agreements, mortgages, deed of trust,
assignments or other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection, including
attorneys' fees and legal expenses in the event this Note is not paid when due,
whether or not legal proceedings are commenced.
<PAGE>
Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.
This Note is issued in substitution for and replacement of, but not in
satisfaction of, the Revolving Note of the Borrower dated December 9, 1994,
payable to the order of the Lender in the original principal amount of
$1,200,000.
LaCANASTA OF MINNESOTA, INC.
By_______________________________
Its_____________________________
<PAGE>
TERM LOAN B NOTE
$750,000 Minneapolis, Minnesota
July 1, 1997
For value received, the undersigned, LaCANASTA OF MINNESOTA, INC., a
Minnesota corporation (the "Borrower"), hereby promises to pay in accordance
with the terms of the Credit Agreement (defined below), to the order of Norwest
Bank Minnesota, National Association, a national banking association (the
"Lender"), at its main office in Minneapolis, Minnesota, or at any other place
designated at any time by the holder hereof, in lawful money of the United
States of America and in immediately available funds, the principal sum of SEVEN
HUNDRED FIFTY THOUSAND DOLLARS ($750,000) or, if less, the aggregate unpaid
principal balance of the Term Loan B made by the Lender to the Borrower under
that certain Credit and Security Agreement of even date herewith by and among
the Lender, the Borrower and Sparta Foods, Inc. (the "Credit Agreement"),
together with interest on the principal amount hereunder remaining unpaid from
time to time, computed on the basis of the actual number of days elapsed and a
360-day year, from the date hereof until this Note is fully paid, at the Term
Note Rate or, if applicable, the Default Rate, as such terms are defined in the
Credit Agreement. The principal hereof and the interest accruing thereon shall
be due and payable as provided in the Credit Agreement. This Note may be prepaid
only in accordance with the Credit Agreement. All capitalized terms not
otherwise defined herein shall have the meanings ascribed thereto in the Credit
Agreement.
Interest accruing each month shall be due and payable on the first day of
the next succeeding month and otherwise as provided in the Credit Agreement.
Principal hereof shall be paid in monthly installments and otherwise as provided
in Article I and II of the Credit Agreement, and in one final installment on the
Termination Date, when the entire unpaid principal balance hereof shall be due
and payable in full.
This Note is issued pursuant, and is subject, to the Credit Agreement,
which provides, among other things, for acceleration hereof. This Note is the
Term Loan B Note referred to in the Credit Agreement.
This Note is secured, among other things, pursuant to the Credit Agreement
and the Security Documents, except for the Mortgage, as therein defined, and may
now or hereafter be secured by one or more other security agreements, mortgages,
deeds of trust, assignments or other instruments or agreements.
<PAGE>
The Borrower hereby agrees to pay all costs of collection, including
attorneys' fees and legal expenses, in the event this Note is not paid when due,
whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.
LaCANASTA OF MINNESOTA, INC.
By______________________________
Its____________________________
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT OF GUARANTOR
The undersigned, a guarantor of the indebtedness of LaCANASTA OF MINNESOTA,
INC. (the "Borrower") to NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION (the
"Lender") pursuant to a separate Guaranty dated as of December 9, 1994 (the
"Guaranty"), hereby (i) acknowledges receipt of the foregoing Fifth Amendment to
Credit and Security Agreement, the Revolving Note and the Term Loan B Note each
dated July 1, 1997; (ii) consents to the terms and execution thereof; (iii)
reaffirms its obligations to the Lender pursuant to the terms of its Guaranty;
and (iv) acknowledges that the Lender may amend, restate, extend, renew or
otherwise modify the Credit Agreement and any indebtedness or agreement of the
Borrower, or enter into any agreement or extend additional or other credit
accommodations, without notifying or obtaining the consent of the undersigned
and without impairing the liability of the undersigned under its Guaranty for
all of the present and future indebtedness of the Borrower to the Lender.
SPARTA FOODS, INC.
By__________________________________________
A. Merrill Ayers
Its Chief Financial Officer
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT
OF A. MERRILL AYERS AND JOEL BACHUL
-----------------------------------
The undersigned, A. Merrill Ayers executed and delivered a certain
Performance Agreement dated as of December 9, 1994, and the undersigned Joel
Bachul executed and delivered a certain Performance Agreement dated as of April
14, 1995 (such Performance Agreements collectively called the "Agreement"), in
favor of Norwest Bank Minnesota, N.A. (the "Lender") with respect to LaCanasta
of Minnesota, Inc. (the "Borrower"), and each of the undersigned hereby (i)
acknowledges receipt of the foregoing Fifth Amendment to Credit and Security
Agreement, the Revolving Note and the Term Loan B Note each dated July 1, 1997;
(ii) consents to the terms and execution thereof; (iii) reaffirms his
obligations to the Lender pursuant to the terms of his Agreement; and (iv)
acknowledges that the Lender may amend, restate, extend, renew or otherwise
modify the Credit Agreement and any indebtedness or agreement of the Borrower,
or enter into any agreement or extend additional or other credit accommodations,
without notifying or obtaining the consent of the undersigned and without
impairing the liability of the undersigned under his Agreement.
--------------------------------
A. Merrill Ayers
--------------------------------
Joel Bachul
MINNESOTA AGRICULTURAL AND ECONOMIC
DEVELOPMENT BOARD
and
SPARTA FOODS, INC.
-----------------------
LOAN AGREEMENT
-----------------------
Dated as of July 1, 1997
Relating to: Minnesota Energy and Economic Development Authority's* Minnesota
Small Business Development Loan Program.
- -----------------------
*The Minnesota Agricultural and Economic Development Board is the
statutory successor to the Minnesota Energy and Economic
Development Authority.
<PAGE>
TABLE OF CONTENTS
ARTICLE I - DEFINITIONS
Section I.1. Definitions............................................ 3
ARTICLE II - REPRESENTATIONS AND COVENANTS
Section II.1. Representations and Covenants of the Board............. 15
Section II.2. Representations and Covenants of the Borrower.......... 15
Section II.3. Tax Representations and Covenants of the Borrower...... 17
Section II.4. Covenant with Bondholders.............................. 20
Section II.5. General Guaranty Fund Right of Reimbursement........... 21
Section II.6. Board Right of Reimbursement........................... 21
ARTICLE III - AGREEMENT TO ISSUE SINGLE LOT BONDS AND TO LOAN PROCEEDS
THEREOF; BORROWER'S CONTRIBUTION TO COSTS OF PROJECT
Section III.1. Issuance of Single Lot Bonds; Deposit of Bond Proceeds. 22
Section III.2. Agreement to Make Loan................................. 22
Section III.3. Need For Borrower's Contribution to Costs of Project... 22
ARTICLE IV - DEVELOPMENT OF THE PROJECT; APPLICATION OF MONEYS
IN CONSTRUCTION ACCOUNT, COST OF ISSUANCE ACCOUNT
AND CAPITALIZED INTEREST ACCOUNT
Section IV.1. Prior Acquisition of Land.............................. 24
Section IV.2. Acquisition and Installation of the Project............ 24
Section IV.3. Application of Moneys in Construction Account.......... 25
Section IV.4. Certificate of Completion.............................. 27
Section IV.5. Completion by Borrower................................. 27
Section IV.6. Net Proceeds of Insurance.............................. 28
Section IV.7. Remedies to be Pursued Against Contractors and
Subcontractors And their Sureties...................... 28
Section IV.8. Application of Moneys in Cost of Issuance Account...... 28
Section 4.9. Application of Moneys in Capitalized Interest Account.. 28
ARTICLE V - REPAYMENT PROVISIONS; SECURITY CLAUSES
Section V.1. Repayment of Loan...................................... 29
Section V.2. Other Amounts Payable.................................. 30
Section V.3. Obligations of Borrower Hereunder Unconditional........ 32
Section V.4. Security Clauses....................................... 32
Section V.5. Investment of Funds and Accounts; Consent to Elections. 33
<PAGE>
ARTICLE VI - MAINTENANCE, MODIFICATIONS, TAXES AND INSURANCE
Section VI.1. Maintenance of Property by Borrower.................... 34
Section VI.2. Installation of Additional Equipment................... 34
Section VI.3. Taxes, Assessments and Utility Charges................. 34
Section VI.4. Insurance Required..................................... 35
Section VI.5. Additional Provisions Respecting Insurance............. 36
Section VI.6. Application of Net Proceeds of Insurance............... 36
Section VI.7. Right of Board to Pay Taxes, Insurance Premiums and
Other Charges................................... 36
ARTICLE VII - DAMAGE, DESTRUCTION AND CONDEMNATION
Section VII.1. Damage or Destruction.................................. 37
Section VII.2. Condemnation........................................... 39
Section VII.3. Condemnation of Borrower-Owned Property Other Than
Security Property............................... 41
ARTICLE VIII - SPECIAL COVENANTS
Section VIII.1. Qualification in the State............................. 42
Section VIII.2. Hold Harmless Provisions............................... 42
Section VIII.3. Maintenance of Existence; Conditions Under Which
Exceptions Permitted................................... 42
Section VIII.4. Agreement to Provide Information....................... 43
Section VIII.5. Books of Record and Account; Financial Statements...... 43
Section VIII.6. Borrower to File Statements With Internal Revenue
Service......................................... 44
Section VIII.7. Release of Equipment................................... 44
Section VIII.8. Certificate of No Default.............................. 46
Section VIII.9. Notice of Default...................................... 46
Section VIII.10. Assignment and Leasing................................. 46
Section VIII.11. Right to Inspect the Project and Security Property..... 48
Section VIII.12. Compliance With Orders, Ordinances, etc................ 48
Section VIII.13. Liens and Encumbrances................................. 48
Section VIII.14. Identification of Equipment............................ 49
Section VIII.15. Relocation of the Equipment............................ 49
Section VIII.16. Security Instruments Covenants......................... 49
Section VIII.17. Covenant Against Discrimination........................ 49
<PAGE>
Section VIII.18. Employment Records..................................... 50
Section VIII.19. Financial Covenants ................................... 51
Section 8.20 Covenant Against Loans, Transfers, etc................. 51
Section 8.21 Covenant Against Sale, Gift, Purchase or Redemption
of Stock.......................................... 51
Section 8.22 Vacant Positions....................................... 51
Section 8.23 Prevailing Wages....................................... 51
Section 8.24 Covenant Against Loans, Dividends, etc................. 52
Section 8.25 Covenant Against Unreasonable Compensation............. 52
Section 8.26 Job Creation........................................... 52
ARTICLE IX - PLEDGE OF CERTAIN INTERESTS
Section IX.1. Pledge of Certain Interests to Bondholders............. 53
ARTICLE X - EVENTS OF DEFAULT AND REMEDIES
Section X.1. Events of Default Defined.............................. 54
Section X.2. Remedies on Default.................................... 55
Section X.3. Remedies Cumulative.................................... 57
Section X.4. Agreement to Pay Attorneys' Fees and Expenses.......... 57
Section X.5. No Additional Waiver Implied by One Waiver............. 57
ARTICLE XI - EARLY TERMINATION OF AGREEMENT; PREPAYMENT OF LOAN
Section XI.1. Early Termination of Agreement......................... 58
Section XI.2. Conditions to Early Termination of Agreement........... 58
Section XI.3. Discharge of Lien...................................... 59
Section XI.4. Prepayment of Loan in Part............................. 59
Section XI.5. Refunding Consent...................................... 60
ARTICLE XII - MISCELLANEOUS
Section XII.1. Notices................................................ 61
Section XII.2. Binding Effect......................................... 61
Section XII.3. Severability........................................... 62
Section XII.4. Amendments, Changes and Modifications.................. 62
Section XII.5. Data Privacy Disclosure................................ 62
Section XII.6. Execution of Counterparts.............................. 63
Section XII.7. Applicable Law......................................... 63
Section XII.8. Recording and Filing................................... 63
<PAGE>
Section XII.9. Survival of Obligations................................ 63
Section XII.10. Table of Contents and Section Headings Not Controlling. 63
Section XII.11. Limited Liability...................................... 63
Schedule I - Promissory Note.............................................. I-1
Exhibit A - Legal Description of Land..................................... A-1
Exhibit B - Description of Equipment...................................... B-1
Exhibit C - Draw Request .............................................. C-1
<PAGE>
THIS LOAN AGREEMENT, dated as of July 1, 1997 (the "Agreement"), is by and
between the Minnesota Agricultural and Economic Development Board (as statutory
successor to the Minnesota Energy and Economic Development Authority),
constituted as an authority to act on behalf of the State of Minnesota and
created and existing by virtue of the laws of the State (together with any legal
successor thereto, herein referred to as the "Board"), and Sparta Foods, Inc., a
Minnesota corporation, which is engaged in the business of manufacturing food in
the State of Minnesota (as defined herein in more detail, the "Borrower").
W I T N E S S E T H :
WHEREAS, the Board (as the legal successor of the Minnesota Small Business
Finance Agency) was created by the Laws of 1980, Chapter 547, as amended and
supplemented and Minnesota Statutes, 1986 Chapter 116M and presently set forth
in Minnesota Statutes, Chapter 41A (the "Act"), to act on behalf of the State of
Minnesota (the "State") within the scope of powers granted to it in the Act to
implement loan programs and to provide financial assistance under the economic
development fund created under Minnesota Statutes 1986, Section 116M.06 of the
Act (the "Economic Development Fund") by which the Board, alone or in
cooperation with cities, towns, counties and private or public lenders, may
provide adequate funds or incentives to financing such as guarantees or
insurance with respect thereto on sufficiently favorable terms to assist and
encourage the establishment, maintenance and growth of businesses and eligible
small businesses and employment opportunities in the State and to reduce to a
manageable level the cost of the control of pollution and disposal of waste
resulting from the operation of businesses and eligible small businesses; and
WHEREAS, to provide financial assistance to businesses and eligible small
businesses to encourage their establishment, maintenance and growth and to
reduce the cost of the control of pollution and disposal of waste resulting from
the operation of businesses and eligible small businesses, the Board has
established its Minnesota Small Business Development Loan Program (the
"Program"); and
WHEREAS, in accordance with the Program, the Board on September 26, 1984
adopted its Minnesota Small Business Development Loan Program Revenue Bonds
General Bond Resolution, as supplemented and amended (the "General Bond
Resolution"), pursuant to which General Bond Resolution (and lot resolutions to
be adopted from time to time by the Board as supplemented resolutions thereto),
the Board intends to issue revenue bonds (the "Bonds"), and to loan the proceeds
thereof to "businesses" or "eligible small businesses" within the meaning of the
Act to finance capital facilities, as described within Minnesota Statutes 1986,
Section 116M.03, Subd. 11 or Subd. 19 of the Act and "pollution control
facilities" as described within Minnesota Statutes 1986, Section 116M.03, Subd.
14 of the Act, for use by them in connection with their business operations
(such "businesses" and "eligible small businesses" collectively referred to
herein as "Businesses"); and
<PAGE>
WHEREAS, such Bonds, as provided in the General Bond Resolution, shall be
special obligations of the Board, the principal or redemption price, if any, of
and interest on which are payable solely from and secured solely by the
revenues, funds and other property or assets of the Board described in the
General Bond Resolution (and the lot resolutions) and pledged therefor; and
WHEREAS, it is the further purpose of the Board with respect to its Program
to provide additional financial assistance to the Businesses participating
therein by creating an account within the Economic Development Fund to be known
as the "General Guaranty Fund", transferring certain moneys from the Economic
Development Fund and from other sources to the General Guaranty Fund and
pledging and allocating the moneys on deposit in the General Guaranty Fund to
guarantee the payment of debt service payments and certain mandatory prepayments
payable on or with respect to the Bonds; and
WHEREAS, pursuant to a resolution adopted by the Board on September 26,
1984 (the "General Guaranty Fund Resolution"), the Board created and established
the General Guaranty Fund as an account within and of the Economic Development
Fund and pursuant to a General Guaranty Fund Pledge and Escrow Agreement, dated
as of September 26, 1984 (the "General Guaranty Fund Pledge and Escrow
Agreement") by and between the Board and First National Bank of Minneapolis, as
escrow holder (together with First Bank National Association and its successors,
the "Escrow Holder") the Board provided for the holding, investment,
application, disposition of and use of moneys in the General Guaranty Fund and
various other matters related thereto with respect to the governance of the
General Guaranty Fund; and
WHEREAS, the Borrower (referred to herein, together with its permitted
successors and assigns, as the "Borrower") has applied to the Board for
assistance under the Program in connection with the financing of a project to
consist of the acquisition and installation of equipment (the "Project") to be
used primarily for the manufacture of food in the City of New Brighton, Ramsey
County, Minnesota; and
WHEREAS, by resolution adopted by the Board on May 15, 1997, the Board has
found that the Borrower is an "eligible small business" under the Act and that
the Project qualifies for financial assistance under the Act and has determined
to provide such financial assistance by the inclusion of the Project in the
Program; and
WHEREAS, to implement this determination the Board proposes (i) to issue a
lot of bonds within a series issued under the General Bond Resolution and its
Single Lot Resolution and (ii) to loan the proceeds of the sale of the said
Bonds to the Borrower to finance a portion of the cost of the Project, upon the
terms and conditions hereinafter set forth in this Agreement;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants hereinafter contained, the parties hereto hereby formally covenant,
agree and bind themselves as follows, and, as to the Borrower, Sparta Foods,
Inc., agrees and binds itself, to-wit:
<PAGE>
ARTICLE I
DEFINITIONS
Section 1.1. Definitions. Capitalized terms used herein but not defined
herein shall have the meaning given thereto in the General Bond Resolution
unless the context or use indicates another or different meaning or intent. The
following words and terms as used in this Agreement shall have the following
meanings unless the context or use indicates another or different meaning or
intent:
"Accountant" means a firm of independent public accountants of recognized
standing, selected by the Borrower.
"Act" means the act of the legislature of the State enacted as Chapter 547
of the Laws of Minnesota for 1980, as amended and supplemented from time to
time, known as the "Minnesota Energy and Economic Development Authority Act" and
set forth Minnesota Statutes 1986, Chapter 116M (notwithstanding the repeal
thereof and Minnesota Statutes, Chapter 41A).
"Additional Guarantor" means any Person who becomes a guarantor pursuant to
Section 2.9 and 3.10 of the Guaranty.
"Agreement" means this Loan Agreement, dated as of July 1, 1997, by and
between the Board and the Borrower, as the same may be amended from time to
time.
"Appraised Value" means the value established by an independent appraiser
acceptable to the Board.
"Authorized Representative" means, in the case of the Board, the Chair, the
Administrator or the Executive Director of the Board; in the case of the
Borrower, an officer; and, in the case of both, such additional persons as, at
the time, are designated to act in behalf of the Board or Borrower, as the case
may be, by written certificate furnished to the Trustee and the Board or
Borrower, as the case may be, containing the specimen signature of each such
person and signed on behalf of (i) the Board by the Chair, the Administrator or
the Executive Director of the Board, and (ii) an officer of the Borrower.
"Board" means the Minnesota Agricultural and Economic Development Board,
constituted as an authority to act on behalf of the State within the scope of
the powers granted to it in the Act and created by the Act, or any successor
thereto, and constituting the legal successor of the Minnesota Energy and
Economic Development Authority and the Minnesota Small Business Finance Agency.
"Board Resolution" means the General Bond Resolution and the Single Lot
Resolution.
<PAGE>
"Bonds" means any of the Board's Minnesota Small Business Development Loan
Program Bonds issued from time to time under the General Bond Resolution and
then outstanding.
"Bond Counsel" means Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota,
or any attorney or firm of attorneys of recognized standing in the field of
municipal law, duly admitted to the practice of law before the highest court of
any state of the United States of America, appointed from time to time by the
Attorney General of the State with respect to the Program.
"Bond Payment Date" means each date on which interest or both a Principal
Installment and interest shall be payable on the Single Lot Bonds in accordance
with its terms.
"Bond Proceeds" means the amount, including accrued interest, if any,
received by the Board as the purchase price of the Single Lot Bonds, and
deposited by the Trustee in accordance with the provisions of the Board
Resolution into certain funds and accounts created thereunder.
"Bond Rate" means, as of any date of calculation and with respect to any
period, the highest rate of interest payable on any of the Single Lot Bonds
determined as of such date with respect to such period (including any
fluctuations of rate, if any).
"Bond Year" means, for the Single Lot Bonds, the 12-month period beginning
on August 1 of any year and ending on July 31 of the succeeding year; provided,
however, that the initial Bond Year shall begin on the date in which such Bonds
are delivered and end on the next succeeding July 31.
"Bondholder" or "Holder" or "Holders of Bonds" or similar term, when used
with respect to a Bond or Bonds, means any person who shall be the registered
owner of any outstanding Bond registered as to both principal and interest in
accordance with the provisions of the General Bond Resolution.
"Borrower" means (i) Sparta Foods, Inc., a Minnesota corporation which is
engaged in the business of operating a manufacturing plant in the State of
Minnesota, and its successors and assigns and (ii) any surviving, resulting or
transferee as provided in Section 8.3 hereof.
"Buildings" means all those buildings, improvements, structures or
renovations to existing buildings, improvements or structures and other related
facilities (i) affixed or attached, or to be affixed or attached, to the Land,
(ii) financed with the proceeds of the Single Lot Bonds or of any payment by the
Borrower pursuant to Section 3.3 or Section 4.5 hereof, and (iii) not part of
the Equipment, all as they may exist from time to time.
<PAGE>
"Business Loan Reserve Account" means the Account so designated which is
created and established by Section 4.1 of the Single Lot Resolution pursuant to
the General Bond Resolution.
"Business Loan Reserve Account Requirement" means, as of any date of
calculation, with respect to the Single Lot Bonds that sum which is equal to the
lesser of ten percent of the original aggregate principal amount of the Single
Lot Bonds or the maximum aggregate payments of principal and interest for any
Bond Year over the period from the date of calculation to (and including) the
final maturity date of such Single Lot Bonds.
"Capitalized Interest Account" means the Account so designated which is
created and established by Section 4.1 of the Single Lot Resolution, pursuant to
the General Bond Resolution.
"Capitalized Lease Obligations" means all lease obligations which have been
or should be, in accordance with generally accepted accounting principles,
capitalized on the books of the Lessee.
"Closing Date" means the date of sale and delivery of the Single Lot Bonds.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and the regulations, proposed, temporary or final, of the Department of
the Treasury promulgated under the Prior Code or under the Code from time to
time.
"Completion Date" means the date of completion of the acquisition,
construction and installation of the Project, as certified to pursuant to
Section 4.4 of this Agreement.
"Condemnation" means the taking of title to, or the use of, Property under
the exercise of the power of eminent domain by any governmental entity or other
Person acting under governmental authority.
"Construction Account" means the Account so designated which is created and
established by Section 4.1 of the Single Lot Resolution, pursuant to the General
Bond Resolution.
"Construction Period" means, with respect to the Project, the period (a)
beginning on the earlier of (i) the date of commencement of acquisition or
construction of such Project, or (ii) the Closing Date with respect to the
Single Lot Bonds, and (b) ending on the Completion Date with respect to such
Project.
<PAGE>
"Cost of Issuance" means all items of expense payable or reimbursable
directly or indirectly by the Board and related to the authorization, sale and
issuance of Bonds, which items of expense shall include but not be limited to
printing costs, costs of reproducing documents, filing and recording fees,
initial fees and charges of any fiduciary appointed under the General Bond
Resolution, initial letter of credit fees, surety obligation fees or other
similar fees, municipal bond insurance premiums or the cost of providing any
other credit enhancement, legal fees and charges, professional consultants'
fees, costs of credit ratings, fees and charges for execution, transportation
and safekeeping of Bonds, underwriter discount or placement fees, costs and
expenses of refunding and other costs, charges and fees in connection with the
original issuance of Bonds.
"Continuing Disclosure Agreement" means the Continuing Disclosure Agreement
dated as of July 1, 1997 between the Board and the Trustee allocable to the
Single Lot Bonds
"Cost of the Project" means all those items of cost and expenses as set
forth below:
(i) The cost of preparing the Plans and Specifications for the Project
(including any preliminary study or planning of the Project or any aspect
thereof other than a financial feasibility study);
(ii) Costs of acquiring, constructing, equipping and installing the
Project (including architectural, engineering and supervisory services with
respect thereto);
(iii) Any expenses of the Borrower in enforcing any remedy against any
contractor, subcontractor or equipment supplier in accordance with Section
4.7 hereof;
(iv) The cost of all premiums (A) for any title insurance on the Land
paid during the Construction Period and (B) for all insurance maintained
pursuant to Section 6.4 hereof during the Construction Period for the
Project;
(v) Any taxes, assessments and other charges specified in Section 6.3
hereof during the Construction Period for the Project;
(vi) Fees, taxes, charges and other expenses for recording or filing,
as the case may be, this Agreement, any other agreements contemplated
hereby, the Security Instruments, the Single Lot Resolution, any financing
statements and any other documents that the Board or the Trustee may deem
desirable in order to perfect or protect any security interest contemplated
by this Agreement, the Security Instruments or the Single Lot Resolution;
(vii) Capitalized interest owing on the Single Lot Bonds during the
Construction Period (pursuant to Section 5.1 of this Agreement); and
(viii) Reimbursement to the Borrower for any of the above enumerated
costs and expenses paid by it, whether paid from funds of the Borrower or
from the proceeds of interim construction borrowings.
<PAGE>
"Debt Service Payment" means, with respect to any Bond Payment Date, (i)
the interest payable on the Single Lot Bonds on such Bond Payment Date, plus
(ii) the principal, if any, payable on the Single Lot Bonds on such Bond Payment
Date, plus (iii) the premium, if any, payable on the Single Lot Bonds on such
Bond Payment Date.
"Determination of Taxability" means the final administrative determination
or judicial decision that the interest on any of the Single Lot Bonds is (or
was), for purposes of Federal income taxation includible, for any reason other
than a determination that interest received by a particular taxpayer (other than
a Substantial User of the Project or a Related Person) constitutes an item of
tax preference for the purpose of calculating an alternative minimum tax or some
similar tax, in gross income of the holder thereof. Such an administrative
determination shall not be deemed to be final for the purposes hereof until the
expiration of all periods for judicial review or appeal, as the case may be.
"Equipment" means all machinery, equipment and other personal property
which (a) is used in connection with the Project, (b) is (or will be) acquired
with the proceeds of the Single Lot Bonds or of any payment by the Borrower
pursuant to Section 3.3 or Section 4.5 hereof (which property is described
generally in Exhibit B annexed to this Agreement), together with such
replacements and substitutions therefor, pursuant to Section 8.7 hereof, as may
exist from time to time in accordance with the provisions of this Agreement but
excluding additions pursuant to Section 6.2 hereof and (c) is used as the
Borrower's equity contribution as described in Section 4.3 hereof.
"Escrow Holder" means First Bank National Association (formerly First
National Bank of Minneapolis) appointed as the escrow holder under the General
Guaranty Fund Pledge and Escrow Agreement, and its successor and successors, and
any other corporation or association which may at any time be substituted in its
place as Escrow Agent pursuant to the General Guaranty Fund Pledge and Escrow
Agreement.
"Funded Indebtedness" means, for any Person, all Indebtedness which matures
by its terms more than one year from the Closing Date or matures within one year
from such date but is unconditionally renewable or extendible, at the option of
the debtor, by its terms or by the terms of any instrument or agreement relating
thereto, to a date more than one year from such date or arises under a revolving
credit or similar agreement which obligates the lender or lenders to extend
credit over a period of more than one year from such date or, if created after
the Closing Date, matures by its terms more than one year from the date of
creation.
"General Bond Resolution" means the Minnesota Small Business Development
Loan Program Revenue Bonds, General Bond Resolution adopted by the Board on
September 26, 1984, as the same may be amended or supplemented from time to time
by any supplemental resolution thereunder.
<PAGE>
"General Guaranty Fund" means that account of the Economic Development Fund
that has been created by the Board in accordance with the Act pursuant to the
General Guaranty Fund Resolution of the Board and is governed by the provisions
of the General Guaranty Fund Pledge and Escrow Agreement.
"General Guaranty Fund Payments" means any payments made by the Escrow
Holder to the Trustee for deposit in accordance with the provisions of the
General Bond Resolution to discharge the guaranty obligation of the General
Guaranty Fund with respect to the debt service payments on or the prepayment of
the Bonds that correspond to unpaid payments of principal and interest then due
on the loans to businesses or exempt small businesses financed by such Bonds,
whether due upon scheduled payment dates or upon acceleration prior to the
occurrence of such scheduled payment dates.
"General Guaranty Fund Pledge and Escrow Agreement" means that escrow
agreement dated as of September 26, 1984, by and between the Board and the
Escrow Holder, pursuant to which the Board has provided for the holding,
investment and application, disposition and use of the moneys transferred by the
Board into the General Guaranty Fund from the Economic Development Fund and from
other sources, and pursuant to which the Board has provided for such other
matters as may be provided for with respect to the General Guaranty Fund and the
moneys transferred thereto, all in accordance with the Act.
"General Guaranty Fund Reimbursement Amount" means, as of any date of
calculation, with respect to any Lot of Bonds, an amount equal to the aggregate
of all of the General Guaranty Fund Payments paid from the General Guaranty Fund
to discharge the guarantee obligation of the General Guaranty Fund with respect
to said Bonds less those sums that have been applied, or are then available
under the provisions of the General Bond Resolution to be applied, to reimburse
the General Guaranty Fund for the aggregate of all such General Guaranty Fund
Payments, plus, with respect to such unpaid General Guaranty Fund Payments, such
additional amounts equal to the sum of interest accruing on the amount of such
unpaid General Guaranty Fund Payments at the interest rate borne by said Bonds
for any period during which such General Guaranty Fund Payments are unpaid.
"General Guaranty Fund Resolution" means that certain Resolution No. 84-205
of the Board adopted by the Board on September 26, 1984, pursuant to which the
Board created the General Guaranty Fund as an account of the Economic
Development Fund.
"Guarantor" means La Canasta of Minnesota, Inc. and its successors and
assigns.
"Guaranty" means the agreement by the Guarantor in favor of the Board,
dated as of the date of this Agreement, by which the Guarantor guarantees to the
Board the full and prompt payment, when due, of all amounts payable by the
Borrower under this Agreement and the Note when and as the same become due,
whether by any acceleration or otherwise and the performance obligations of the
Borrower thereunder.
<PAGE>
"Holding Account" means the Account so designated which is created and
established by Section 4.1 of the Single Lot Resolution, pursuant to the General
Bond Resolution.
"Indebtedness" means, for any Person, (i) all indebtedness or other
obligations of such Person for borrowed money or for the deferred purchase price
of property or services (but not including current accounts payable) (ii) all
indebtedness or other obligations of any other person for borrowed money or for
the deferred purchase price of property or services the payment or collection of
which such Person has guaranteed (except by reason of endorsement for collection
in the ordinary course of business) or in respect of which such Person is
liable, contingently or otherwise, including, without limitation, liable by way
of agreement to purchase, to provide funds for payment, to supply funds to or
otherwise to invest in such other persons, or otherwise to assure a creditor
against loss, (iii) all indebtedness or other obligations of any other person
for borrowed money or for the deferred purchase price of property or services
secured by (or for which the holder of such indebtedness has an existing right,
contingent or otherwise, to be secured by) any mortgage, deed of trust, pledge,
lien, security interest or other charge or encumbrance upon or in property
(including, without limitation, accounts and contract rights) owned by such
Person, whether or not such Person has assumed or become liable for the payment
of such indebtedness or obligations and (iv) Capitalized Lease Obligations of
such Person.
"Indemnified Parties" means the Board and its members, officers, employees
and agents and the Department of Trade and Economic Development and its
Commissioner, employees and agents.
"Independent Counsel" means an attorney or attorneys or firm or firms of
attorneys duly admitted to practice law before the highest court of any state of
the United States of America or in the District of Columbia and not an employee
of the Board, the Borrower or the Trustee.
"Land" (i) means the real estate described in Exhibit A attached hereto on
which is located or is to be located the Buildings and the Equipment, with such
additions thereto and substitutions therefor as may exist from time to time in
accordance with the provisions of this Agreement.
"Lien" means any interest in Property securing an obligation owed to a
Person, whether such interest is based on the common law, statute or contract,
and including but not limited to the security interest arising from a mortgage,
encumbrance, pledge, conditional sale or trust receipt or a Uniform Commercial
Code security interest, lease, consignment or bailment for security purposes.
The term "Lien" includes reservations, exceptions, encroachments, easements,
rights of way, covenants, conditions, restrictions, leases and other similar
title exceptions and encumbrances, including but not limited to mechanics',
materialmen's, warehousemen's, carriers' and other similar encumbrances,
affecting real property. For the purposes of this Agreement, a Person shall be
deemed to be the owner of any Property which it has acquired or holds subject to
a conditional sale agreement or other arrangement pursuant to which title to the
Property has been retained by or vested in some other Person for security
purposes.
<PAGE>
"Loan" means the loan made by the Board to the Borrower pursuant to Section
3.2 of this Agreement and as evidenced by the Note.
"Loan Term" means the period commencing with the Closing Date and
continuing until all the Single Lot Bonds and interest thereon have been paid in
full or provision for such payment has been made pursuant to Article XI of the
General Bond Resolution.
"Lot Loan Fiduciary Payments" means, for any Bond Year (or any ratable
portion thereof), the reasonable fees and expenses of the Trustee (and
Depositaries and Paying Agents, as defined in the General Bond Resolution) for
the Bond Year in connection with duties performed by them with respect to the
Single Lot Resolution, this Agreement, the Security Instruments, the Project and
the Borrower and under the General Bond Resolution and the General Guaranty Fund
Pledge and Escrow Agreement with respect to the foregoing.
"Net Proceeds" means so much of the gross proceeds with respect to which
such term is used as remain after payment of all expenses, costs and taxes
(including attorneys' fees) incurred in obtaining such gross proceeds.
"Net Worth" means, at any date, the Tangible Assets of a Person which would
be shown, in accordance with generally accepted accounting principles, on its
balance sheet, minus liabilities (other than capital stock and surplus or its
equivalent but including all reserves for contingencies and other potential
liabilities) which would be shown, in accordance with generally accepted
accounting principles, on such balance sheet.
"Note" means the promissory note of the Borrower dated as of the date of
the Single Lot Bonds, evidencing the Borrower's obligations pursuant to this
Agreement, substantially in the form of Appendix I hereto.
"Official Action Resolution" means that resolution adopted by the Board on
May 15, 1997 with respect to the Borrower and entitled "RESOLUTION GIVING
PRELIMINARY APPROVAL TO A PROJECT WITH SPARTA FOODS, INC., A MINNESOTA
CORPORATION AND GIVING PRELIMINARY APPROVAL, WITH CONDITIONS, FOR THE ISSUANCE
OF SMALL BUSINESS DEVELOPMENT LOAN PROGRAM REVENUE BONDS TO FINANCE THE PROJECT
AND PROVIDING FOR OTHER MATTERS RELATED THERETO."
"Optional Redemption Account" means the Account so designated which is
created and established by Section 4.1 of the Single Lot Resolution, pursuant to
the General Bond Resolution.
"Original Purchasers" means Dougherty Dawkins LLC and Piper Jaffray Inc.
<PAGE>
"Permitted Encumbrances" means (i) this Agreement, the Security
Instruments, the Board Resolution and any security interest created thereunder
and (ii) a loan in the amount not to exceed $250,000 from Ramsey County.
"Person" means an individual, partnership, corporation, trust or
unincorporated organization or a government or any agency, instrumentality,
program, account, fund, political subdivision or corporation thereof.
"Plans and Specifications" means the plans and specifications for the
Project, including a schedule detailing the components of the Project and their
respective costs or proposed costs, filed by the Borrower with the Trustee, as
the same may be implemented and detailed from time to time and as the same may
be revised from time to time in accordance with Section 4.2 of this Agreement.
The Plans and Specifications shall include a list of all the Equipment that the
Borrower will acquire with respect to the Project.
"Pledge" means the pledge by the Board of the rights and interests of the
Board in and to this Agreement, the Note and the Security Instruments, including
all rights to receive payment thereunder, such pledge by the Board being made
pursuant to Section 1.04 of the General Bond Resolution and Section 6.1 of the
Single Lot Resolution to the Trustee on behalf of Bondholders for the payment of
the principal or redemption price of and interest on the Bonds in accordance
with their terms.
"Principal Installment" means an installment of principal payable on the
Single Lot Bonds, whether as the maturity date of serial or term bond or as
sinking fund installments payable with respect to such Bonds.
"Principal User" means any Person constituting a "principal user" within
the meaning of Section 144(a) of the Code.
"Prior Code" means the Internal Revenue Code of 1954, as amended and in
effect on the day prior to the enactment of the Internal Revenue Code of 1986.
"Program" means the Board's program of acquiring business loans under the
General Bond Resolution with the proceeds of Bonds, the repayment of debt
service payments and certain mandatory redemptions which are guaranteed by the
General Guaranty Fund in accordance with the provisions of the General Guaranty
Fund Pledge and Escrow Agreement, which program has been designated by the Board
as the "Minnesota Small Business Development Loan Program".
"Program Expense Fund" means the Fund so designated, which is created and
established by Section 5.01 of the General Bond Resolution.
<PAGE>
"Project" means the the Equipment to be used in connection with the Land in
the Building, and to be acquired and installed by the Borrower with the Bond
Proceeds or any payment by the Borrower pursuant to either Sections 3.3 or 4.5
hereof, with such additions thereto and substitutions therefor as may exist from
time to time in accordance with the provisions of this Agreement.
"Project Municipality" means the City of New Brighton, Ramsey County,
Minnesota within the corporate borders of which the Project is, or is to be,
located.
"Property" means any interest in any kind of property or asset, whether
real, personal or mixed, or tangible or intangible.
"Rebate Account" means the Account so designated which is created and
established by Section 4.1 of the Single Lot Resolution, pursuant to the General
Bond Resolution.
"Reconstruction Account" means the Account so designated which is created
and established by Section 4.1 of the Single Lot Resolution, pursuant to the
General Bond Resolution. "Redemption Price" means, when used with respect to the
Single Lot Bonds, the principal amount thereof plus the applicable premium, if
any, payable upon the prior redemption thereof pursuant to the Single Lot
Resolution.
"Reimbursement Account" means the Account so designated which is created
and established by Section 4.1 of the Single Lot Resolution, pursuant to the
General Bond Resolution. "Related Person" means any Person constituting a
"related person" within the meaning of Section 144(a)(3) of the Code.
"Restoration" means the repair, replacement, restoration or rebuilding of
the Property or any part thereof following any taking, damage to or destruction
of the same, as nearly as possible to its respective size, floor area, type and
character immediately prior to such taking, damage or destruction, within, in
the case of any restoration by the Borrower, such alterations as may be made at
the Borrower's election, together with any temporary repairs and property
protection pending completion of the work.
"Restricted Costs of Issuance" means all costs incurred in connection with
the authorization, issuance, sale and delivery of the Single Lot Bonds and the
authorization, issuance and making of the Loan (collectively, the "Borrowing"),
including in general, all costs that are treated as costs of issuance under the
Treasury Department regulations; examples of such Restricted Costs of Issuance
include (but are not limited to)--
<PAGE>
(1) underwriters' spread (whether realized directly or derived through
purchase of the Single Lot Bonds at a discount below the price at which
they are expected to be sold to the public);
(2) counsel fees (including Bond Counsel, Underwriter's counsel,
Board's counsel, Borrower's counsel, Trustee's counsel, as well as any
other specialized counsel fees incurred in connection with the Borrowing);
(3) financial advisor fees incurred in connection with the Borrowing;
(4) rating agency fees;
(5) Trustee fees incurred in connection with the Borrowing;
(6) paying agent and certifying and authenticating agent fees related
to issuance of the Single Lot Bonds;
(7) accountant fees (e.g. account verifications in the case of advance
refundings) related to issuance of the Single Lot Bonds;
(8) printing costs (for the Single Lot Bonds and of preliminary and
final offering materials);
(9) costs incurred in connection with the required public approval
process (e.g., publication costs for public notices generally and costs of
the public hearing or voter referendum); and
(10) costs of title insurance, engineering and feasibility studies
necessary to the issuance of the Single Lot Bonds (as opposed to such
studies related to completion of the Project, but not related to the
Borrowing).
"Revenue Account" means the Account so designated which is created and
established by Section 4.1 of the Single Lot Resolution, pursuant to the General
Bond Resolution.
"Security Agreement" means the Security Agreement dated as of July 1, 1997
from the Borrower to the Board.
"Security Instruments" means the Security Agreement and the Guaranty.
"Security Property" means all Property subject to any mortgage or security
interest described in Section 5.4 of this Agreement.
"Series 1997D Bonds" means the Bonds of the series designated by the Board
as the "Series 1997D Bonds" in the Single Lot Resolution of the Board and
consisting of the Single Lot Bonds plus the additional lots being issued
pursuant to separate lot resolutions.
<PAGE>
"Single Lot Bonds" means the Board's Minnesota Small Business Development
Loan Program Revenue Bonds, Series 1997D, Lot 1 in the aggregate principal
amount of $1,950,000 authorized to be issued by the Board Resolution.
"Single Lot Resolution" means the Single Lot Bonds resolution of the Board
authorizing the issuance of the Single Lot Bonds adopted by the Board on June
11, 1997 pursuant to the General Bond Resolution.
"Special Redemption Account" means the Account so designated which is
created and established by Section 4.1 of the Single Lot Resolution, pursuant to
the General Bond Resolution.
"State" means the State of Minnesota.
"Subordinated Indebtedness" means, with respect to any Person, all
Indebtedness which by its terms states that payment of principal and interest
thereof is subordinate to the payment of principal and interest of the Loan. A
payment of principal or interest on Subordinated Indebtedness is subordinate to
payment of principal and interest on the Loan if by its terms such payment shall
not be made by the Borrower or received by or on behalf of the holder of the
Subordinated Indebtedness if and for so long as (a) the Borrower is delinquent
in the payment of principal, premium, if any, or interest on the Loan as and
when any such payment on the Loan is due, whether by reason of regularly
scheduled payments, maturity, mandatory, special or extraordinary redemption or
acceleration, (b) the Borrower is not in violation with the covenants contained
in Section 8.19 of the Loan Agreement for (i) the most recent fiscal year and,
(ii) if such payment is made after the first 3 months of a fiscal year for the
year-to-day period through the most recently completed fiscal quarter or (c) an
event of default has occurred and is continuing under (i) this Agreement or (ii)
the Security Instruments.
"Substantial User" means any Person constituting a "substantial user"
within the meaning of Section 147(a) of the Code.
"Tangible Assets" means total assets except: (i) that portion of deferred
assets and prepaid expenses (other than prepaid insurance, prepaid rent and
prepaid taxes) which do not mature or, in accordance with generally accepted
accounting principles, are not amortizable within one year from the date of
calculation, and (ii) trademarks, trade names, good will, and other similar
intangibles.
"Trustee" means First Bank National Association (formerly known as First
National Bank of Minneapolis), appointed by the Board as Trustee under the Board
Resolution, and its successor or successors and any other corporation or
association at any time substituted in its place as trustee pursuant to the
General Bond Resolution.
<PAGE>
ARTICLE II
REPRESENTATIONS AND COVENANTS
Section 2.1. Representations and Covenants of the Board. The Board makes
the following representations and covenants as the basis for the undertakings on
its part herein contained:
(a) The Board is duly established and existing and is constituted as an
authority to act on behalf of the State and created and existing by virtue of
the laws of the State and has the power to enter into the transactions
contemplated by this Agreement and the Security Instruments and to adopt the
Board Resolution, and to carry out its obligations hereunder and thereunder. The
Project is of a nature that qualifies under the Act for the financial assistance
provided by the Program. By proper official action the Board has been duly
authorized to execute and deliver or accept this Agreement and the Security
Instruments and has duly adopted the Board Resolution.
(b) Neither the execution and delivery or acceptance of this Agreement, or
the Security Instruments or the adoption of the Board Resolution, the
consummation of the transactions contemplated hereby or thereby nor the
fulfillment of or compliance with the provisions of this Agreement or the
Security Instruments and the Board Resolution will conflict with or result in a
breach of any of the terms, conditions or provisions of the Act, or any
restriction, agreement or instrument to which the Board is a party or by which
it is bound, or will constitute a default under any of the foregoing, or will
result in the creation or imposition of any Lien upon any of the Property of the
Board under the terms of any such instrument or agreement (other than as
contemplated by this Agreement, the Security Instruments and the Board
Resolution).
(c) The Board will lend to the Borrower the sum of $1,950,000 pursuant to
this Agreement to finance (i) a portion of the cost of the acquisition,
construction and installation of the Project, (ii) a deposit into the Business
Loan Reserve Account required under the provisions of the General Bond
Resolution, (iii) certain Costs of Issuance with respect to the issuance of the
Single Lot Bonds, and (iv) capitalized interest with respect to the Single Lot
Bonds, all in furtherance of the purposes of the Act.
(d) To finance a portion of the Cost of the Project and the other costs
described in Section 2.1(c), the Board will issue its Single Lot Bonds which
will mature, bear interest, be redeemable and have the other terms and
conditions as set forth in the Board Resolution.
Section 2.2. Representations and Covenants of the Borrower. The Borrower
makes the following representations and covenants as the basis for the
undertakings of the Borrower as herein contained:
<PAGE>
(a) The Borrower, which is a Minnesota corporation duly created and validly
existing under the laws of the State, is not in violation of any provision of
its articles of incorporation, as amended, has the power to enter into this
Agreement, the Note and the Security Instruments and to borrow money pursuant
hereto and who has duly executed and delivered this Agreement, the Note and the
Security Instruments. The Borrower constitute an "eligible small business" and a
"business" as defined in the Act and are eligible for "special assistance" as
defined in the Act.
(b) Neither the execution and delivery of this Agreement, the Note and the
Security Instruments, the consummation of the transactions contemplated hereby
nor the fulfillment of or compliance with the provisions of this Agreement, the
Note and the Security Instruments will conflict with or result in a material
breach of any of the terms, conditions or provisions of any restriction or any
agreement or instrument to which the Borrower is a party or by which it is
bound, or will constitute an event of default under any of the foregoing, or
result in the creation or imposition of any Lien of any nature upon any of the
Property of the Borrower under the terms of any such instrument or agreement,
which conflict, breach, default or Lien would have a material adverse effect on
the Loan, Note, any Properties of the Borrower or its financial condition. No
event has occurred and no condition exists which, upon the passage of time or
the giving of notice, would constitute such an event of default under any such
agreement or instrument.
(c) There has been no material adverse change in the financial condition of
the Borrower since the last annual and interim financial statements and reports
furnished by the Borrower to the Board in the Borrower's application dated April
28, 1997 and the information contained in said statements fairly presents the
financial condition of the Borrower as of the dates of such financial statements
and reports.
(d) The Borrower has all requisite power and authority and all necessary
authorizations, licenses and permits, without unusual restrictions or
limitations, to own and operate their Properties and to carry on their business
as now conducted, and are duly authorized to do business in each jurisdiction
where the character of their Properties or the nature of their activities makes
such qualification necessary or in which the failure to qualify will not have a
material adverse affect on the Properties, business, prospects, profits or
condition (financial or otherwise) of the Borrower or the ability of the
Borrower to perform their obligations under this Agreement.
(e) The Borrower has no contingent liabilities other than those disclosed
in the financial statements described in Section 2.2(c) hereof.
(f) No material event of default has occurred and is continuing in any
agreement as to any outstanding indebtedness of the Borrower for money borrowed
and no condition, event or act exists which, with notice or lapse of time, or
both, would constitute such an event of default under any such agreement.
<PAGE>
Section 2.3. Tax Representations and Covenants of the Borrower. The
Borrower makes the following representations and covenants as the basis for the
undertakings of the Borrower herein contained:
(a) So long as any of the Single Lot Bonds shall be outstanding, the
Borrower will not take any action, or fail to take any action, or cause, suffer
or permit others (other than the Board or Trustee) to take or fail to take
action, which would (i) cause the Project not to qualify under the Act for the
financial assistance provided by the Program (as such Act is in effect on the
Closing Date) or (ii) adversely affect the tax-exempt status of the interest
payable on any of the Single Lot Bonds then outstanding.
(b) The "construction", "reconstruction", "improvement" and "acquisition"
of the Project did not "commence" prior to the date of adoption of the Board's
Official Action Resolution within the meanings ascribed to such quoted terms
under Section 144 of the Code.
(c) No other bonds, notes or other obligations the interest on which is, or
is claimed to be, exempt from federal taxation by reason of Section 144 of the
Code or Section 103(b)(6) of the Prior Code are outstanding the proceeds of
which have been used to finance facilities located, in whole or in part, in the
Project Municipality, the Principal User of which is any of the Borrower or one
or more Related Persons thereof, except as set forth in Section 2.3(p).
(d) To the extent financed with Bond Proceeds, the Project consists, and
will at all times consist, entirely of property owned for federal income tax
purposes by the Borrower and which is of a character subject to the allowance
for depreciation by the Borrower as provided in Section 167 of the Code.
(e) In addition to payment of Costs of Issuance, substantially all (at
least 95%) of the net proceeds of the Single Lot Bonds will be expended on
costs, properly capitalized or to be capitalized by the Borrower for Federal
income tax purposes (or which would be so capitalized but for (or with) a proper
election by the Borrower), incurred with respect to the acquisition and
improvement of land and acquisition and construction of facilities and
acquisition and installation of Equipment owned for federal tax purposes by the
Borrower and classified as depreciable property pursuant to the applicable
provisions of the Code.
(f) No part of the Project was "placed in service" by the Borrower, any
other Principal User or a Related Person to the Borrower or any Principal User
(determined in accordance with the provisions of Sections 144(a) and 147(b) of
the Code) more than one year prior to the date of issue of the Single Lot Bonds.
(g) The Project is located entirely within the Project Municipality, which
is an "incorporated municipality" within the meaning of Section 144(a)(2)(A) of
the Code.
<PAGE>
(h) The findings and determinations made by the Board in the Official
Action Resolution concerning the Borrower and the Project are true and correct.
In particular, the financing of the acquisition of the Project will not have the
effect of a transfer of jobs from one area of the State to another.
(i) The availability of the financial assistance by the Board as provided
in this Agreement, in the Board Resolution and the General Guaranty Fund Pledge
and Escrow Agreement and by the Program has been a substantial inducement to the
Borrower to undertake the Project and to locate the Project in the State.
(j) To our knowledge (the Borrower is a publicly held company) no officer
or official of the Board or the State Departments of Finance or Trade and
Economic Development has any interest (financial, employment or other) in the
Borrower or, to the knowledge of the Borrower, the transactions contemplated by
this Agreement.
(k) No expense for supervision by the Borrower or any director, officer or
employee of the Borrower and no expense for work done by any such director,
officer or employee in connection with the Project is or will be included in the
Cost of the Project.
(l) Except the Security Instruments, the Borrower has not entered into any
lease or assignment with respect to any portion of the Project and no Person
other than the Borrower has any right to the use or possession thereof.
(m) Neither the Borrower nor any Related Persons to the Borrower operate
any facility in any county or incorporated municipality which shares a common
border with the Project Municipality, which facility is contiguous with that
part of the Project described in Exhibit A hereto and the Principal User of
which is or will be the same person or 2 or more persons (determined in
accordance with Section 144(a)(4)(B) of the Code).
(n) The Project as designed will comply with all presently applicable
environmental, building, zoning and subdivision laws, ordinances, rules and
regulations.
(o) The Borrower reasonably estimate that the aggregate Cost of the Project
will be at least $2,625,100 which sum includes (i) interest on the Single Lot
Bonds to be paid out of Bond Proceeds during the Construction Period of the
Project in the approximate amount of $-0-, (ii) amounts derived from Bonds and
required to be deposited into the Business Loan Reserve Account ($195,000) and
(iii) amounts required to pay Costs of Issuance with respect to the issuance of
the Single Lot Bonds (presently estimated as $90,100).
<PAGE>
(p) The Borrower and all Related Persons thereto do not presently intend to
enter into any agreement or arrangement which would be used to or would tend to
secure, in whole or in part, any "tax-exempt facility-related bonds" within the
meaning of Section 144(a)(10) of the Code other than the Series 1997D Bonds. In
addition, the Borrower and all Related Persons thereto do not presently intend
to occupy, in whole or in part, any facilities which facilities would be
financed, in whole or in part, by "tax-exempt facility-related bonds" within the
meaning of Section 144(a)(10) of the Code other than the Series 1997D Bonds and
the obligations (if any) described in the next sentence. The Borrower has never
entered into a transaction pursuant to which were issued on behalf of the
Borrower "tax-exempt facility-related bonds" within the meaning of Section
144(a)(10) of the Code.
(q) The "average maturity" of the Series 1997D Bonds is 6.61389 years and
120% of the "average reasonably expected economic life" of the Project is 12
years (as such quoted terms are derived pursuant to Section 147(b) of the Code,
calculating for the average reasonably expected economic life of the facilities
being financed with the net proceeds of the Single Lot Bonds from the date on
which the Single Lot Bonds are being issued). The "average reasonably expected
economic life" of the facilities financed with the net proceeds of the Single
Lot Bonds as used in the preceding sentence was established consistent with
Section 147(b)(2) of the Code. Accordingly, 120% of the average reasonably
expected economic life of the Project exceeds the average maturity of the Single
Lot Bonds.
(r) None of the proceeds of the Single Lot Bonds shall be used directly or
indirectly to provide residential real property for family units. In addition,
no more than 25% of the proceeds of the Single Lot Bonds shall be used to
provide a Project the primary purpose of which is one of the following: retail
food and beverage services, automobile sales or service, or the provision of
recreation or entertainment within the meaning of Section 144(a)(8) of the Code.
In addition, no portion of the proceeds of the Single Lot Bonds shall be used to
provide any of the following: any private or commercial golf course, country
club, massage parlor, tennis club, skating facility (including rollerskating,
skateboard and ice skating), racquet sports facility (including any handball or
racquetball court), hot tub facility, sun tan facility or racetrack within the
meaning of Section 144(a)(8) of the Code. In addition, no portion of the
proceeds of the Single Lot Bonds shall be used to provide any of the following:
any airplane, skybox, or other private luxury box, any health club facility, any
facility primarily used for gambling, or any store the principal business of
which is the sale of alcoholic beverages for consumption off premises within the
meaning of Section 147(e) of the Code. In addition, no more than 25% of the
proceeds of the Single Lot Bonds will be used for the acquisition of "land" or
an interest therein within the meaning of Section 147(c) of the Code and the
issuance of the Single Lot Bonds will not cause the aggregate principal amount
of small issue exemption industrial development revenue bonds, exempt pursuant
to Section 103(a) and 144(a)(4) of the Code, issued with respect to any
building, an enclosed shopping mall, or a strip of offices, stores or warehouses
using substantial common facilities to exceed $10,000,000 without regard to
ownership or use of such building or other facilities or any portion thereof.
(s) There is no action or proceeding pending or, to the knowledge of the
Borrower threatened, against the Borrower, before any court, administrative
agency or arbitration board that may materially and adversely affect the
Properties, business, prospects, profits or condition (financial or otherwise)
of the Borrower or the ability of the Borrower to perform their respective joint
and several obligations under this Agreement or which, if determined adversely
to the Borrower, would result in a determination that the Borrower violated
environmental laws, rules or administrative orders.
<PAGE>
(t) None of the proceeds of the Single Lot Bonds shall be used directly or
indirectly for the acquisition of land (or an interest therein) to be used for
farming purposes within the meaning of Section 147(c) of the Code.
(u) No person is a "test-period beneficiary" with respect to the Project
within the meaning of Section 144(a)(10) of the Code, except the Borrower. As of
the date of issuance of the Single Lot Bonds, the Borrower, and its Related
Persons do not have "allocated" to them the face amount of the Single Lot Bonds
and all other outstanding tax-exempt facility-related bonds "allocated" to such
"test-period beneficiary" and Related Persons in an amount in excess of
$40,000,000 (all as such quoted terms are defined in Section 144(a)(10) of the
Code).
(v) The only Principal Users of the Project are and will be the Borrower.
(w) No more than two percent of the aggregate face amount of the Series
1997D Bonds will be used directly or indirectly to pay Restricted Costs of
Issuance.
(x) No more than 3% of the Bond Proceeds will be used, directly or
indirectly, as working capital or to finance inventory or property of any kind
or character the first use of which, within the meaning of Section 147(d) of the
Code, will be by some person other than the Borrower (that is, among other
things, all property acquired with Bond Proceeds will be "new" rather than
"used" property).
(y) At least 95% of the proceeds of the Bonds which remain after the
deposit to the Business Loan Reserve Account will be used to directly finance
manufacturing facilities within the meaning of Section 144(a)(12)(C) of the
Code, including (i) at least 75% of such proceeds which shall be applied for
costs for "core" manufacturing activities directly constituting the manufacture
or production of tangible personal property so as to result in a change in
condition of such property, and (ii) the remainder of such facilities not
described in clause (i) shall nonetheless be directly related and ancillary to
the facilities described in clause (i) and shall (a) be located on the same
site; (b) not require advances of more than 25% of the net proceeds of the
Bonds; and (c) be ancillary facilities which are subordinate and integral to the
manufacturing activity. All of such facilities will be used for such intended
manufacturing purposes for the entire period that the Single Lot Bonds remain
Outstanding.
Section 2.4. Covenant with Bondholders. The Board and the Borrower agree
that this Agreement is executed in part to induce the purchase by others of the
Single Lot Bonds. Accordingly, subject to the provisions of Section 2.5 and
Section 2.6 of this Agreement, all covenants and agreements on the part of the
Board and the Borrower set forth in this Agreement are hereby declared to be for
the benefit of the holders from time to time of such Single Lot Bonds.
<PAGE>
Section 2.5. General Guaranty Fund Right of Reimbursement. In the event of
the acceleration of the Loan hereunder, if any General Guaranty Fund Payments
are made from the General Guaranty Fund with respect to the Single Lot Bonds,
there shall arise hereunder a right of reimbursement against the Borrower and
accruing to the General Guaranty Fund equal to the sum of the unsatisfied
General Guaranty Fund Reimbursement Amount with respect to the Single Lot Bonds.
Such right of reimbursement in favor of the General Guaranty Fund shall require
payment of such sum by the Borrower to the Board immediately upon the creation
of such right and shall be secured as provided in Section 5.4 of this Agreement
and enforced and reduced as provided in Section 10.2 of this Agreement and, in
each case, as may be provided in the General Bond Resolution; provided, however,
that such right of reimbursement shall be subordinate to the rights of the
Bondholders described in Section 2.4 of this Agreement and as further provided
in the General Bond Resolution.
Section 2.6. Board Right of Reimbursement. In the event of the acceleration
of the Loan hereunder, if the Board elects to redeem the Single Lot Bonds in
whole or in part from any moneys available to the Board for such purpose from
any source other than the General Guaranty Fund (and other than those sources
pledged to pay Bonds pursuant to Section 1.04 of the General Bond Resolution),
there shall arise hereunder a right of reimbursement against the Borrower and
accruing to the Board equal to the amount so paid by the Board with respect to
the Single Lot Bonds. Such right of reimbursement in favor of the Board requires
payment of such sum by the Borrower to the Board immediately upon the creation
of such right and shall be secured as provided in Section 5.4 of this Agreement
and enforced and reduced as provided in Section 10.2 of this Agreement and, in
each case, as provided in the General Bond Resolution; provided, however, that
such right of reimbursement shall be subordinate to the rights of Bondholders
described in Section 2.4 of this Agreement and as further provided in the
General Bond Resolution.
<PAGE>
ARTICLE III
AGREEMENT TO ISSUE SINGLE LOT BONDS AND TO LOAN
PROCEEDS THEREOF; BORROWER'S CONTRIBUTION TO COSTS OF PROJECT
Section 3.1. Issuance of Single Lot Bonds; Deposit of Bond Proceeds. In
order to provide funds for (i) payment of the Cost of the Project, together with
other payments and incidental expenses in connection therewith, (ii) a deposit
into the Business Loan Reserve Account required under the provisions of the
General Bond Resolution, (iii) certain Costs of Issuance with respect to the
issuance of the Single Lot Bonds and (iv) capitalized interest with respect to
the Single Lot Bonds, the Board agrees that it will issue and sell the Single
Lot Bonds and cause the Bond Proceeds to be delivered to the Trustee.
Section 3.2. Agreement to Make Loan. The Board agrees that, upon (i) the
sale and delivery of the Single Lot Bonds and (ii) satisfaction of the terms and
conditions set forth in this Section, it will and does hereby lend the Borrower
the sum of $1,950,000 in accordance with the provisions of this Agreement, such
loan to be evidenced by the Note. The obligation of the Board to make said loan
shall be discharged and the obligation of the Borrower hereunder and in the Note
shall arise and become effective, when the following sums, totaling $1,911,000
($1,950,000 less $39,000 discount) are deposited in the following funds and
accounts established under the Board Resolution in accordance with the
provisions of the Board Resolution, or are otherwise directly applied for
certain purposes, in any case, in the following amounts:
(a) To the Business Loan Reserve Account, $195,000;
(b) To the Costs of Issuance Account with respect to the Series 1997D
Bonds as a discount from the par amount of the Series 1997D Bonds, the
amount of $39,000 (for a portion of the underwriters' discount on the
Series 1997D Bonds);
(c) To pay interest on the Single Lot Bonds to the Capitalized
Interest Account the amount of $-0-; and
(d) To the Construction Account, $1,716,000 being the cash balance of
the Bond Proceeds (other than amounts representing accrued interest on the
Single Lot Bonds), to pay the Cost of the Project.
Section 3.3. Need For Borrower's Contribution to Costs of Project.
(a) The Borrower hereby represents that the amount of the Loan deposited
into the Construction Account ($1,716,000) to pay for the Cost of the Project is
less than the total Cost of the Project (other than interest payable on the
Single Lot Bonds during the Construction Period of the Project) ($2,340,000) by
an amount equal to approximately $624,000. $39,000 of Bond Proceeds will be
applied to pay Cost of Issuance as provided in Section 3.2(b) above, $-0- of
Bond Proceeds will be applied to pay capitalized interest from the Capitalized
<PAGE>
Interest Account as provided in Section 3.2(c) above, and $195,000 of Bond
Proceeds will be deposited in the Business Loan Reserve Account as provided in
Section 3.2(a) above. Pursuant to the loan criteria for its Program, the Board
hereby requires the Borrower to make an equity contribution of not less than
$624,000 to pay for the remaining deficiency in the cost of the Equipment, such
equity contribution to take the form of evidence satisfactory to the Board of
payment of not less than $624,000 of other costs of the Equipment from
Borrower's funds derived from a source other than the Single Lot Bonds. Prior to
the final disbursement from the Construction Account, the Borrower shall provide
the Trustee with evidence of payment of not less than $624,000 of costs of the
Equipment.
(b) If the Cost of Issuance Account is insufficient to pay any claim or
cost incurred in connection with the Single Lot Bonds for any reason, the
Borrower shall deposit on demand by the Board's Executive Director or the
Trustee an amount sufficient to pay any remaining Costs of Issuance.
<PAGE>
ARTICLE IV
DEVELOPMENT OF THE PROJECT;
APPLICATION OF MONEYS IN CONSTRUCTION ACCOUNT;
COSTS OF ISSUANCE ACCOUNT AND CAPITALIZED INTEREST ACCOUNT
Section 4.1. Prior Acquisition of Land. The Borrower heretofore has leased
the Land and Building in order to permit the installation and operation of the
Project thereon.
Section 4.2. Acquisition and Installation of the Project. The Borrower
agrees to acquire and install the Project or cause the Project to be acquired
and installed on the Land and in the Building.
(b) Attached hereto as Exhibit B is a list of Equipment to be purchased
with the proceeds of the Bonds. With the consent of the Board, the Borrower may
revise the Exhibit B from time to time; provided, however, that no material
change shall be made in the Exhibit B which would alter the proposed use of the
Project or materially reduce the Cost of the Project, unless the Trustee shall
be furnished with an unqualified opinion of Bond Counsel that construction of
the Project in accordance with the revised Exhibit B will not adversely affect
the tax-exempt status of the interest payable on the Single Lot Bonds.
(c) The cost of such acquisition and installation of the Project shall be
paid from the Construction Account in the manner and to the extent provided in
Section 4.3 hereof and the General Bond Resolution. The Borrower shall not be
entitled to any moneys in the Construction Account, nor shall the Borrower
submit a requisition, for any item of property which constitutes collateral
under another security agreement, or is otherwise subject to any other Lien or
encumbrance whatsoever, except for Permitted Encumbrances.
(d) The Borrower hereby covenants and agrees to proceed with due diligence
to make, execute, acknowledge and deliver any contracts, orders, receipts,
writings and instructions with any other persons, firms or corporations and in
general do all things which may be requisite or proper, all for acquiring and
installing the Project. The Borrower agrees to acquire and to install the
Project with all reasonable dispatch, and to use reasonable efforts to cause
such acquisition, construction and installation to be completed by March 1,
1998, or as soon thereafter as may be practicable and, in all events by no later
than July 2, 2000; but if for any reason such acquisition and installation are
not completed by either said date, there shall be no resulting liability on the
part of the Board and no diminution in or postponement of the payments required
in Section 5.1 hereof to be paid by the Borrower.
(e) The Borrower shall obtain all necessary approvals from any and all
governmental agencies requisite to the acquiring and installing the Project, and
the Project shall be acquired and installed in compliance with all federal,
State and local laws, ordinances and regulations applicable thereto. The
Borrower agrees that the Project will not violate applicable use or other
restrictions contained in zoning ordinances or regulations. Upon completion of
the Project, the Borrower shall obtain all required occupancy permits and
authorizations from appropriate authorities, if any be required, authorizing the
occupancy and uses of the Project for the purpose contemplated hereby.
<PAGE>
(f) THE BOARD MAKES NO WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO THE
CONDITION, TITLE, DESIGN, OPERATION, MERCHANTABILITY OR FITNESS OF THE PROJECT
OR THAT IT IS OR WILL BE SUITABLE FOR ANY OF THE BORROWER'S PURPOSES OR NEEDS.
Section 4.3. Application of Moneys in Construction Account.
(a) Moneys in the Construction Account may be disbursed in order to pay, or
to reimburse the Borrower for the payment of, any item of Cost of the Project
permitted by the Act which, under generally accepted accounting principles,
constitutes necessary capital expenditures in connection with the Project and
subject to the limitations in Section 2.3 hereof and Section 5.02(b) of the
General Bond Resolution.
Provided, however, no moneys in the Construction Account shall be used
directly or indirectly to pay Costs of Issuance except and only to the extent
that such moneys are directly derived from an equity contribution of the
Borrower (as provided in Section 4.3(c) herein).
Notwithstanding anything contained herein to the contrary,
(i) Except as permitted in Section 4.3(a)(ii) or Section 8.13(b), the
Trustee shall make no advances from the Construction Account (for other
than Costs of Issuance or debt service on the Single Lot Bonds) while there
is any Lien or encumbrance upon the Project, nor will the Trustee make any
advances from the Construction Account while there is any charge, question
or claim of any kind whatsoever, whether of record or not, which, in the
opinion of counsel for Trustee, may have priority over the Board's or
Trustee's interest in the Project or in any way render the Board's or
Trustee's position insecure;
(ii) The Trustee shall make no advances from the Construction Account
with respect to particular items to be acquired as Equipment hereunder
until the Trustee (A) is satisfied that the specific requisitions for
disbursements from the Construction Account to pay for specific items of
property to be acquired as Equipment hereunder correspond in fact to
specific items of Equipment enumerated in Exhibit B, (B) has received a
UCC-1 filing has been made by the Borrower to the Board and assigned to the
Trustee, (C) is presented with reasonable proof satisfactory to the Trustee
that all of the items to be acquired as Equipment for that advance
hereunder have been acquired, installed and accepted and are all free and
clear of all security interests, liens and encumbrances of any kind
whatsoever, the Trustee may rely on the Board's determination that the
Board is satisfied with the above provisions, provided, however an advance
for the tortilla line can be made when it has been delivered, (D) has
<PAGE>
received an opinion of counsel to the Borrower that the Equipment is free
and clear of all liens except the lien of the Security Instruments and the
security interest by the Board in the Equipment has been perfected and is
valid, provided, however that (D) shall be required only when the Borrower
has submitted requests in the aggregate amounts of $750,000, $1,500,000 and
$1,716,000 in total requests, (E) has received a UCC search showing no
existing interest in the Equipment and (F) has received proof satisfactory
to the Trustee and the Board that the Borrower has satisfied the
requirements in this Section relating to their equity contribution of
$624,000 including meeting the requirements of (B), (C), (D) and (E)
relating to their equity contribution;
(iii) The Trustee shall make no advances out of Bond Proceeds from the
Construction Account to reimburse the Borrower for any Costs of the Project
paid from the cash deposits paid or equity contribution made pursuant to
Section 3.3(a) or Section 4.3(ii);
(iv) The Trustee shall make no advances from the Construction Account
(for other than Costs of Issuance or interest on Single Lot Bonds) unless
the Borrower shall deposit with the Trustee reasonable proof satisfactory
to the Trustee that 26.67% of the cost of Equipment theretofore acquired
and installed has been paid directly by or on behalf of the Borrower as
required by Section 3.3(a) hereof as Borrower's equity so that such Costs
of the Project constituting Borrower's equity have not been and will not be
the subject of any requisition submitted pursuant to Section 4.3(a) of this
Agreement.
In connection with Section 4.3(a)(i), 4.3(a)(ii), 4.3(a)(iii), and
4.3(a)(iv) above and the preconditions established therein, the Trustee may
request that counsel to the Borrower certify to the Trustee the existence of
such preconditions in connection with making any advances from the Construction
Account and the Trustee shall be entitled to conclusively rely upon such
certification. The Trustee may rely on an opinion of counsel to the Borrower to
the extent such certification covers matters of law, including the validity and
perfection of any security interest contemplated by the Security Instruments. In
addition, in making any such payment from the Construction Account the Trustee
may rely on such requisitions and proof delivered to it and the Trustee shall be
relieved of all liability with respect to making such payments if such payments
are made in accordance with the foregoing. The Borrower hereby agrees to pay all
reasonable costs of filing or submitting such requisitions and proof delivered
to the Trustee and to its counsel.
The Trustee shall keep and maintain adequate records pertaining to the
Construction Account and all disbursements therefrom, and after the Project has
been completed and the Borrower has filed with the Board a certificate of
completion of the Project as otherwise provided, the Trustee thereafter shall
file an accounting with respect to the Construction Account and all
disbursements therefrom with the Board and with the Borrower.
<PAGE>
(b) Upon the earlier of (i) completion of the Project as certified to
pursuant to Section 4.4 hereof; (ii) the acceleration of the Loan pursuant to
Section 10.2(a)(i) of this Agreement; or (iii) failure to satisfy the
requirements for disbursement of moneys from the Construction Account by July 2,
2000 (or such later date as the Board, in its unilateral discretion, may
designate); any moneys remaining in the Construction Account, except for amounts
to be paid pursuant to the draw made upon completion or those retained therein
for the payment of incurred and unpaid items of the Cost of the Project, shall
be applied in accordance with Section 5.02(b) of the General Bond Resolution.
(c) Pursuant to Section 5.02(b) of the General Bond Resolution, moneys in
the Construction Account which are derived from the Borrower's equity
contribution required by Section 3.3(a)(i) shall be paid by the Trustee to or
upon the order of the Board. The Board may use such funds first, to the extent
necessary to comply with requirements of the Program, including satisfaction of
requirements of the Code, the General Bond Resolution or the Act, second, any
amounts due under Section 10.4 hereof and third, to the Borrower.
Section 4.4. Certificate of Completion. Completion of the Project shall be
evidenced by a certificate signed by an Authorized Representative of the
Borrower stating that (i) the acquisition and installation of the Project has
been completed in accordance with the Plans and Specifications therefor and (ii)
except for amounts to be retained in the Construction Account as provided in
Section 4.3(b) hereof, all costs and expenses of acquiring and installing the
Project have been paid or provided for and that having attached thereto a
certificate of the Borrower or such other evidence satisfactory to the Board to
the effect there exist no Liens or encumbrances with respect to the Project
other than Permitted Encumbrances or Liens and encumbrances which the Board has
waived.
Section 4.5. Completion by Borrower. To the extent that the Bond Proceeds
that are deposited into the Construction Account are not sufficient to pay in
full all costs of acquiring, constructing and installing the Project, the
Borrower agrees to pay all such sums as may be necessary to so complete the
Project. At the Trustee's request, the Borrower will provide the Trustee with
evidence satisfactory to the Trustee as to whether or not the remaining moneys
in the Construction Account available to pay the Costs of the Project shall be
sufficient to pay the remaining Costs of the Project. In the event that the
Trustee shall reasonably determine at any time that the remaining moneys in the
Construction Account available for payment of the remaining Costs of the Project
shall not be sufficient to pay the costs thereof in full, the Trustee shall give
written notice thereof to the Borrower and the Borrower shall promptly pay to
the Trustee for deposit into the Construction Account moneys sufficient to pay
the Costs of the Project as may be in excess of the moneys available therefor in
the Construction Account. The Trustee shall be required to make such
<PAGE>
determination at any time that the Plans and Specifications are materially
revised in accordance with Section 4.2 of this Agreement. The Trustee may rely
on the Board's determination. No payment by the Borrower pursuant to this
Section 4.5 shall entitle the Borrower to any diminution or abatement of the
other amounts payable by the Borrower under this Agreement or the Note. Section
4.6. Net Proceeds of Insurance. The Net Proceeds from any insurance, if
received prior to the Completion Date of the Project, shall be delivered to the
Trustee and deposited in the Construction Account and, if received thereafter,
shall be delivered to the Trustee and deposited in the Special Redemption
Account.
Section 4.7. Remedies to be Pursued Against Contractors and Subcontractors
and their Sureties. In the event of default of any contractor or subcontractor
under any contract made by it in connection with the Project or in the event of
a breach of warranty with respect to any materials, workmanship, or performance
guaranty, the Borrower shall promptly proceed, either separately or in
conjunction with others, to exhaust the remedies of the Borrower against the
contractor or subcontractor so in default and against each surety for the
performance of such contract. The Borrower agrees to advise the Board of the
steps they intend to take in connection with any such default. The Borrower may
prosecute or defend any action or proceeding or take any other action involving
any such contractor, subcontractor or surety which the Borrower deems reasonably
necessary. The Net Proceeds of any amounts recovered pursuant to this Section
4.7, if received prior to the Completion Date, shall be delivered to the Trustee
and deposited in the Construction Account and, if received thereafter, shall be
(i) delivered to the Trustee and deposited to the extent attributable to Bond
Proceeds, to the credit of the Special Redemption Account and (ii) to the extent
attributable to the Borrower's equity required by Section 3.3 or Section 4.5
hereof, paid over to the Borrower free and clear of any provision of this
Agreement.
Section 4.8. Application of Moneys in Cost of Issuance Account. $51,100
will be deposited by the Borrower in the Cost of Issuance Account on the Closing
Date. $51,100 of the amount deposited by the Borrower in the Cost of Issuance
Account shall be used to pay Restricted Costs of Issuance in excess of $39,000.
$9,750 will be paid to the Underwriters on the Closing Date for a portion of
their fee due under the Bond Purchase Agreement. If the Cost of Issuance Account
is insufficient to pay any claim or cost incurred in connection with the Single
Lot Bonds for any reason, the Borrower shall deposit on demand by the Trustee an
amount sufficient to pay any remaining Costs of Issuance.
Section 4.9. Application of Moneys in Capitalized Interest Account. $-0- of
Bond Proceeds will be deposited in the Capitalized Interest Account by the
Trustee on the Closing Date.
<PAGE>
ARTICLE V
REPAYMENT PROVISIONS; SECURITY CLAUSES
Section 5.1. Repayment of Loan.
(a) Principal on the Loan shall be paid by the Borrower on the dates and in
the amounts provided in the Note. Interest on the unpaid balance of the Loan
shall be payable at the times stated in the Note at the rates provided in the
Note. All such amounts to be so paid shall be paid by the Borrower to the
Trustee on behalf of the Board. It is the intention of the parties hereto that
the Borrower shall be liable hereunder and under the Note.
(b) The Note shall provide that interest thereon shall accrue from the date
thereof and shall be payable thereon on the first day of the following month and
thereafter on the first day of each month until the principal sum of the Loan is
discharged, each such payment to include interest payable in advance due to and
including the first day of the next succeeding month. The principal amount of
the Loan shall be payable thereon at the same times and manner as interest.
Principal and interest payments on the Loan shall be made in monthly
installments through the date of final maturity of the Note, applied first to
the payment of interest then due on the unpaid principal amount of the Loan, and
the remaining balance of each such installment applied to the payment and
reduction of the unpaid principal amount of the Loan. The monthly installments
to be paid on the Loan shall be an amount equal to (i) one-sixth of the interest
installment due on the Single Lot Bonds on the next succeeding Bond Payment Date
(taking into account such in-advance payments) and (ii) one-twelfth of the
Principal Installment due on the Single Lot Bonds on the next succeeding Bond
Payment Date on which a Principal Installment is due (taking into account such
in-advance payments), such installments to be reduced such that on or before the
Bond Payment Date on which a Principal Installment is due any amounts then on
deposit in the Holding Account plus the monthly installment then to be paid on
the Loan shall equal the Debt Service Payment on the Single Lot Bonds due on
such Bond Payment Date. Notwithstanding the foregoing, amounts in the
Capitalized Interest Account shall reduce the monthly installments set forth
above. Notwithstanding the foregoing, the number and amount of proportional
payments of the monthly installments to be paid on the Loan shall be adjusted in
accordance with the date of the Note and the dates of the initial interest
payment and initial payment of the Principal Installment due on the Single Lot
Bonds. All payments on the Note by the Borrower shall be made to the Trustee at
the address set forth in Section 12.1 of this Agreement.
At the request of the Borrower, pending disbursement or application of
amounts in the Construction Account, such amounts shall be invested so as to
make interest earnings available monthly to be applied as credits against the
required loan repayments.
(c) If on any Bond Payment Date of the Single Lot Bonds the amount then on
deposit in the Holding Account shall not be sufficient to pay the interest and
Principal Installment due on the Single Lot Bonds as of such Bond Payment Date,
the Borrower shall forthwith pay any such deficiency into the Revenue Account
for transfer into the Holding Account.
<PAGE>
(d) The Borrower shall have the option to make payments designated as and
representing advance loan payments on the Note under and pursuant to this
Agreement (or Section 5.2 of this Agreement) to the Trustee for deposit in the
Revenue Account. Such payments shall not in any way alter or suspend any
obligations of the Borrower under the terms of this Agreement (i) except to the
extent that such payment shall be transferred by the Trustee under the
provisions of the Board Resolution to the Holding Account and shall result in a
credit against payments on the Note as provided in Section 5.1(b) of this
Agreement or the retirement of principal amounts of the Single Lot Bonds,
pursuant to these provisions, or (ii) except to the extent that such payments
shall otherwise be transferred by the Trustee in accordance with the provisions
of Section 5.06(a) of the General Bond Resolution and shall result in a credit
against payments as provided in Section 5.2 of this Agreement; and the Borrower
shall, in either case, continue to perform and be responsible for the
performance of all the terms and provisions of this Agreement.
(e) If at any time the amount held by the Trustee in the Holding Account
and the Business Loan Reserve Account shall be sufficient to pay, together with
any interest earning to be realized, at the times required the principal of,
premium, if any, and interest on the Single Lot Bonds then unpaid, the Borrower
shall not be obligated to make any further payments under the foregoing
provisions.
(f) If the Borrower should fail to make the payments of an amount required
under this Section 5.1, the amount so in default shall continue as an obligation
of the Borrower until it shall have been fully paid, and the Borrower shall pay
the same with interest thereon at the Bond Rate until paid.
(g) The Borrower agrees to make the above-mentioned payments without any
further notice, in lawful money of the United States of America which, at the
time of payment, shall be legal tender for the payment of public and private
debts.
Section 5.2. Other Amounts Payable.
(a) The Borrower shall pay to the Trustee for deposit by the Trustee in the
Revenue Account, the following amounts (in addition to those amounts described
in Section 5.1(b) of this Agreement) at the times set forth below:
(i) On August 1 and February 1 of each year during the Loan Term, the
Lot Loan Fiduciary Payments due with respect to the Bond Year then ended;
provided, however, that, to the extent that on any August 1 there are
amounts in the Revenue Account in excess of the amounts required to be
deposited therein pursuant to Section 5.1, Section 5.2(a)(i), Section
5.2(a)(ii) and Section 5.2(a)(iii) of this Agreement, the amount required
to be paid by the Borrower pursuant to this Section 5.2(a)(i) shall be
reduced by the amount of such excess;
<PAGE>
(ii) On each Bond Payment Date, a sum sufficient to satisfy any
outstanding General Guaranty Fund Reimbursement Amount with respect to the
Single Lot Bonds as provided in Section 2.5;
(iii) On each Bond Payment Date, a sum sufficient so that amounts then
on deposit in the Business Loan Reserve Account shall not be less than the
Business Loan Reserve Account Requirement with respect to the Single Lot
Bonds.
(b) Notwithstanding anything contained in this Agreement to the contrary,
any amount payable as and for an outstanding General Guaranty Fund Reimbursement
Amount under Section 5.2(a)(ii) of this Agreement shall not be payable as and
for unpaid amounts due under Section 5.1(b) and Section 5.1(f) of this
Agreement.
(c) Notwithstanding anything contained in this Agreement to the contrary,
any amount payable pursuant to Section 5.2(a)(iii) of this Agreement shall not
be payable as and for unpaid amounts due under Section 5.1(b) and Section 5.1(f)
of this Agreement.
(d) In addition to the foregoing payments, the Borrower shall make such
reports and shall pay during the Loan Term the annual fees required to maintain
the secondary market trading of the Single Lot Bonds in the State. Such fees
shall be paid directly by the Borrower to Minnesota State Treasurer by the time
required by law each year, with the Borrower to provide evidence satisfactory to
the Board that each such payment has been made.
(e) In addition to the foregoing payments, the Borrower shall pay any fees
of the Board under the Continuing Disclosure Agreement.
(f) No later than the fifteenth day after the first day of any Bond Year,
or at such other times as the Board shall indicate as necessary or appropriate
pursuant to Section 148(f)(3) of the Code, the Trustee shall cause to be
determined (i) a sum equal to such amounts as are described in Section
148(f)(2)(A) and (B) of the Code with respect to all funds and Related Lot
Accounts pertaining to the Single Lot Bonds and (ii) determine the amounts then
actually on deposit in the Rebate Account (or that were previously paid therefor
to the United States of America as rebate payments) and notify the Borrower in
writing of the costs associated with such determination (including the fees and
expenses of any rebate consultant, Counsel or Accountant fees incurred in
connection therewith) and the excess of amounts described in clause (i) of this
subsection over the amounts described in clause (ii) of this subsection. Upon
receipt of such notification, the Borrower shall within ten (10) days of such
receipt pay an amount equal to (A) all of the costs associated with such
determination and (B) the excess of the amounts described in such clause (i)
over the amounts described in such clause (ii). This covenant of the Borrower as
set forth in this Section 5.2(e), 5.2(f) shall survive the Loan Term,
notwithstanding anything contained herein to the contrary.
<PAGE>
Section 5.3. Obligations of Borrower Hereunder Unconditional. The
obligations of the Borrower to make the payments required by this Agreement and
the Note and to perform and observe any and all of the other covenants and
agreements on its part contained herein shall be general obligations of the
Borrower, shall be absolute and unconditional irrespective of any defense or any
rights of setoff, recoupment or counterclaim it may otherwise have against the
Board or the Trustee or any Holders of the Bonds. The Borrower agrees that it
will not (i) suspend, discontinue or abate any payment required by this
Agreement and the Note or (ii) fail to observe any of its other covenants or
agreements in this Agreement, the Note or any Security Instruments, (iii) seek
judicial or other relief from the obligation to make any payment required by, or
to perform any covenant in, this Agreement and the Note or (iv) except as
provided in Section 11.1 hereof, terminate this Agreement for any cause
whatsoever including, without limiting the generality of the foregoing, failure
to complete the Project, failure of the Borrower to use the Project as
contemplated in this Agreement or otherwise, any defect in the title, design,
operation, merchantability, fitness or condition of the Project or in the
suitability of the Project for the Borrower's purposes or needs, failure of
consideration, destruction of or damage to the Project, commercial frustration
of purpose, or the taking by Condemnation of title to or the use of all or any
part of the Project, any change in the tax or other laws of the United States of
America or of the State or any political subdivision of either, or any failure
of the Board to perform and observe any agreement, whether expressed or implied,
or any duty, liability or obligation arising out of or in connection with this
Agreement. Nothing contained in this Section 5.3 shall be construed to release
the Board from the performance of any of the agreements on its part contained in
this Agreement.
Section 5.4. Security Clauses. In order to secure the payment of this
Agreement, the Note and the Bonds according to their tenor and effect, and to
secure the right of reimbursement of the General Guaranty Fund provided for in
Section 2.5 of this Agreement and the right of reimbursement of the Board
provided for in Section 2.6 of this Agreement and to secure the performance by
the Borrower of all covenants expressed or implied in this Agreement, as of the
Closing Date, the Borrower shall grant and deliver (i) a security lien to the
Board in the Equipment purchased with proceeds of the Bonds and other equity
requirements, which Security Instruments is to be pledged by the Board to the
Trustee for the benefit of Bondholders pursuant to the Board Resolution as
security for the Bonds and the Single Lot Bonds. Contemporaneous with the
delivery of the Security Instruments, the Borrower shall cause to be delivered a
legal opinion on behalf of the Borrower as to the due authorization and
execution of this Agreement, the Note and any other Security Instruments and as
to the legality, validity and enforceability of such instruments in such form
and substance satisfactory to the Board and Bond Counsel. The Security
Instruments shall be subject only to Permitted Encumbrances.
<PAGE>
Section 5.5. Investment of Funds and Accounts; Consent to Elections. (a)
Notwithstanding anything contained in this Agreement to the contrary, any moneys
at any time in the Business Loan Reserve Account, the Construction Account,
Holding Account, Optional Redemption Account, Rebate Account, Reconstruction
Account, the Reimbursement Account, the Revenue Account, the Special Redemption
Account or any other fund or account created under, or authorized by, the
General Bond Resolution or the Single Lot Resolution may be invested and
reinvested by the Board as provided in Section 5.16 of the General Bond
Resolution and any letter of instruction issued by the Board to the Trustee
thereunder, to which such investment and reinvestment, the Borrower hereby
consents. Neither the Board nor its members, officers or employees shall be
liable for any rate of interest achieved or not achieved on such investment or
for any depreciation in the value of, or for any loss arising from, any such
investment. Investment income earned from money deposited in any such funds and
accounts shall be applied by the Trustee in the manner provided for in the Board
Resolution.
(b) The Borrower hereby consents to the elections made by the Board in
Section 5.5 of the Single Lot Resolution with respect to the Series 1997D, Lot 1
Bonds.
<PAGE>
ARTICLE VI
MAINTENANCE, MODIFICATIONS, TAXES AND INSURANCE
Section 6.1. Maintenance of Property by Borrower. (a) The Borrower agrees
that during the Loan Term Borrower will, at Borrower's own expense, (i) keep the
Security Property in as reasonably safe condition as its operations shall
permit; (ii) make all necessary repairs and replacements to the Security
Property (whether ordinary or extraordinary, structural or nonstructural,
foreseen or unforeseen); and (iii) operate the Security Property in a sound and
economic manner.
(b) The Borrower from time to time may, at Borrower's own expense, make any
structural additions, modifications or improvements to the Security Property or
any part thereof which it may deem desirable. All such structural additions,
modifications or improvements so to the Security Property made by the Borrower
shall become a part of the Security Property. The Borrower agrees to deliver to
the Board all documents which may be necessary or appropriate to convey to the
Board a lien of the priority described in Section 5.4 of this Agreement, or
other satisfactory security interest in, such Security Property.
Section 6.2. Installation of Additional Equipment. Subject to the
provisions of Section 5.4 of this Agreement, the Borrower from time to time may,
at Borrower's own expense, install additional machinery, equipment or other
personal property in the Project (which may be attached or affixed to the
Security Property), and such machinery, equipment or other personal property
shall not become, or be deemed to become, a part of the Security Property. The
Borrower shall keep appropriate records of all of such machinery, equipment or
other personal property constitutingthe Security Property sufficient to identify
the same. The Borrower from time to time may remove or permit the removal of
such machinery, equipment and other personal property constituting the Security
Property and may create or permit to be created any Lien on such machinery,
equipment or other personal property; provided that any such removal of such
machinery, equipment or other personal property shall not adversely affect the
structural integrity of the Security Property or impair the overall operating
efficiency of the Security Property for the purposes for which it is intended
and provided further that if any damage is occasioned to the Security Property
by such removal, the Borrower agrees to promptly repair such damage at its own
expense.
Section 6.3. Taxes, Assessments and Utility Charges.
(a) The Borrower agrees to pay, as the same respectively become due, and
subject to Section 6.3(b), (i) all taxes and governmental charges of any kind
whatsoever which may at any time be lawfully assessed or levied against or with
respect to (1) the Security Property, (2) any machinery, equipment or other
property installed or brought by the Borrower therein or thereon (including
without limitation any sale or use taxes), (3) worker's compensation taxes with
respect to the employees of the Borrower, and (4) the income or revenues of the
Borrower from the Project, (ii) all utility and other charges, including
"service charges", incurred or imposed for the operation, maintenance, use,
upkeep and improvement of the Security Property, and (iii) all assessments and
charges of any kind whatsoever lawfully made by any governmental body for public
improvements; provided that, with respect to special assessments or other
governmental charges that may lawfully be paid in installments over a period of
years, the Borrower shall be obligated under this Agreement to pay only such
installments as are required to be paid during the Loan Term.
<PAGE>
(b) The Borrower may in good faith contest any such taxes, assessments and
other charges. In the event of any such contest, the Borrower may permit the
taxes, assessments or other charges so contested to remain unpaid during the
period of such contest and any appeal therefrom, provided that a reserve in an
amount satisfactory to the Board has been established with respect thereto with
the Trustee. If the Board or the Trustee shall notify the Borrower that by
nonpayment of any such items as to any part of the Security Property will be
materially endangered or the Security Property or any part thereof will be
subject to loss or forfeiture, however, such taxes, assessments or charges shall
be paid promptly or secured by posting a bond in form and substance satisfactory
to the Board and the Trustee.
Section 6.4. Insurance Required. At all times throughout the Loan Term,
including without limitation during any period of acquisition and installation
of the Project, the Borrower shall, at its own expense, maintain or cause to be
maintained insurance against such risks and for such amounts as are customarily
insured against by businesses of like size and type paying, as the same become
due and payable, all premiums in respect thereto, including, but not necessarily
limited to:
(a) Commercial general liability insurance, fire and special form insurance
coverage insuring the Land, the Buildings and the Equipment, boiler and
machinery insurance, if appropriate, including business interruption (including
rental interruption only if the Building is subleased), or extra expense
coverage for a period of not less than one year and such other insurance, flood
insurance, if the Land is located in a HUD-designated special flood hazard area,
as the Board may reasonably require from time to time. All such insurance shall
be obtained from such companies, in such amounts (which shall be the amounts as
required by this Agreement) and with such provisions as the Board may deem
necessary or desirable to protect its interests and shall contain a waiver of
subrogation clause (except worker's compensation insurance), non-contributory
standard mortgage clauses and 30-day notice to the Board and the Trustee of
cancellation or material change clause. In the event of loss in excess of
$50,000 of Equipment, the Borrower will give immediate notice by mail to the
Board, and each insurance company concerned is hereby authorized and directed to
make payment for such loss with respect to Security Property in excess of
$50,000 directly to the Board and the Trustee as their interests appear instead
of to the Borrower and the Board jointly, and except as may be hereinafter
provided, the application of the proceeds of any insurance award shall be
governed by Article VII hereunder.
<PAGE>
(b) Worker's compensation insurance and each other form of insurance which
the Borrower is required by law to provide, covering loss resulting from injury,
sickness, disability or death of employees of the Borrower who are located at or
assigned to the Project.
Section 6.5. Additional Provisions Respecting Insurance. (a) All insurance
required by Section 6.4 hereof shall be procured and maintained in financially
sound and generally recognized responsible insurance companies selected by the
Borrower and authorized to write such insurance in the State. Such insurance may
be written with deductible amounts acceptable to the Board. All policies
evidencing such insurance shall provide for (i) payment of the losses to the
Borrower, the Board and the Trustee as their respective interests may appear,
and (ii) at least thirty (30) days written notice of the proposed cancellation
thereof to the Borrower and the Trustee. The policies required by Section 6.4(a)
hereof shall contain standard loss payee clauses requiring that all Net Proceeds
of insurance resulting from any claim in excess of $50,000 for loss or damage
covered thereby be paid to the Trustee.
(b) All such policies of insurance, or a certificate or certificates of the
insurers that such insurance is in force and effect, shall be deposited with the
Trustee on or before the Closing Date. Prior to expiration of any such policy,
the Borrower shall within five (5) days of such expiration furnish the Trustee
evidence that the policy has been renewed or replaced or is no longer required
by this Agreement.
Section 6.6. Application of Net Proceeds of Insurance. The Net Proceeds of
the insurance carried pursuant to (i) Section 6.4(a) hereof shall be applied as
provided in Section 7.1 hereof and (ii) Section 6.4(b) hereof shall be applied
toward extinguishment or satisfaction of the liability with respect to which
such insurance proceeds may be paid.
Section 6.7. Right of Board to Pay Taxes, Insurance Premiums and Other
Charges. If the Borrower fails (i) to pay any tax prior to delinquency,
assessment or other governmental charge required to be paid by Section 6.3
hereof or (ii) to maintain any insurance required to be maintained by Section
6.4 hereof, the Board or the Trustee may pay such tax, assessment or other
governmental charge or the premium for such insurance. No such payment by the
Board or the Trustee shall affect or impair any rights of the Board under this
Agreement, the Note, and the Security Instruments or of the Board or the Trustee
under the Board Resolution arising as a consequence of such failure by the
Borrower. The Borrower shall reimburse the Board or the Trustee, as the case may
be, for any amount so paid by the Board or the Trustee, as the case may be,
pursuant to this Section 6.7, together with interest thereon from the date of
payment by the Board at the Bond Rate.
<PAGE>
ARTICLE VII
DAMAGE, DESTRUCTION AND CONDEMNATION
Section 7.1. Damage or Destruction.
(a) If the Security Property shall be damaged or destroyed (in whole or in
part) at any time during the Loan Term:
(i) The Board shall have no obligation to replace, repair, rebuild or
restore the Security Property;
(ii) There shall be no abatement or reduction in the amounts payable
by the Borrower under this Agreement (whether or not the Security Property
is replaced, repaired, rebuilt or restored); and
(iii) Except as otherwise provided in Section 7.1(b), the Borrower
shall promptly replace, repair, rebuild or restore the Security Property to
substantially the same condition and value as an operating entity as
existed prior to such damage or destruction, with such changes, alterations
and modifications as may be desired by the Borrower, provided that such
changes, alterations or modifications do not (A) so change the nature of
the Project that it does not qualify under the Act for the financial
assistance provided by the Program or (B) adversely affect the tax-exempt
status of the interest payable on the Bonds.
Except as otherwise provided in Section 7.1(b), the Borrower shall apply to
the replacement, repair, rebuilding or restoration of the Project so much as may
be necessary of any Net Proceeds of insurance resulting from claims for such
losses.
If the claim for loss resulting from such damage or destruction exceeds
$50,000, all Net Proceeds of insurance shall be paid to and held by the Trustee
in the Reconstruction Account. All Net Proceeds so deposited shall be applied as
provided below.
If the Borrower determines that the Security Property shall be repaired,
replaced or restored in whole, the Board hereby authorizes and directs the
Trustee, subject to the conditions set forth herein, to make payments from the
Reconstruction Account for such purposes or to reimburse the Borrower for costs
paid by it in connection therewith by disbursements in accordance with
commercially reasonable procedures for payment of costs upon incurrence thereof.
In addition, the final disbursement of moneys in such Reconstruction Account
shall be withheld until a final certificate of completion is delivered to the
Board and the Trustee.
<PAGE>
The Trustee may not make any payments from the Reconstruction Account to
repair, restore, replace, modify or improve the Security Property pursuant to
this Section 7.1 unless the Borrower has (i) first, obtained a fixed price
construction contract or purchase order for the repair, restoration,
replacement, modification or improvement of the Security Property, specifying a
Completion Date therefore, and (ii) caused the deposit to the Reconstruction
Account an amount which, together with the Net Proceeds and all interest to be
earned thereon through the Completion Date established in clause (i) above, will
be sufficient to pay all costs of repair, restoration, modification and
improvement of the Security Property. Thereafter the Trustee, upon receipt of a
certificate of an Authorized Representative of the Borrower that payments are
required for such purpose, shall apply so much as may be necessary of the Net
Proceeds of such insurance to the payment of the costs of such replacement,
repair, rebuilding or restoration, such moneys to be applied either on
completion thereof or as the work progresses, at the option of the Board.
In the event the Borrower has elected to rebuild or restore, and amounts in
the Reconstruction Account are not sufficient to pay in full the costs of such
replacement, repair, rebuilding or restoration, the Trustee shall request the
Borrower to pay into the Reconstruction Account an amount which, together with
Net Proceeds available for such purposes, shall be sufficient to pay all such
costs, and, upon receipt of such request, the Borrower shall forthwith pay such
amount to the Trustee. In the event that the Borrower fails to pay any such
amounts into the Reconstruction Account, then the Single Lot Bonds shall be
prepaid in accordance with Section 7.1(b) of this Agreement.
All such replacements, repairs, rebuilding or restoration made pursuant to
this Section 7.1, whether or not requiring the expenditure of the Borrower's
contribution, shall automatically become a part of the Security Property as if
the same were specifically described herein.
Any balance of such Net Proceeds remaining after payment of all the costs
of such replacement, repair, rebuilding or restoration shall be deposited in the
Special Redemption Account held by the Trustee and used only to prepay the
Single Lot Bonds as provided in Section 5.11(a) of the General Bond Resolution.
(b) In the event that the Borrower shall fail or elect not to replace,
repair or restore the Security Property, or if an Event of Default under Section
10.1 hereof shall have occurred and be continuing and the Single Lot Bonds have
been accelerated, then at the direction of the Board the Net Proceeds of the
insurance shall be transferred from the Reconstruction Account to the Special
Redemption Account or otherwise paid to the Trustee for deposit into the Special
Redemption Account. To the extent that such Net Proceeds so transferred into the
Special Redemption Account are not sufficient to pay the Single Lot Bonds in
whole pursuant to Section 2.8 of the Single Lot Resolution, the Borrower shall
forthwith pay the sum of such deficiency to the Trustee for deposit into the
Special Redemption Account.
<PAGE>
(c) The Borrower shall not be obligated to replace, repair, rebuild or
restore the Project, and all such Net Proceeds shall be paid to the Borrower for
its purposes, if the Single Lot Bonds and interest thereon have been paid in
full and all other amounts due and owing hereunder, under the Note and the
Security Instruments have been paid in full.
(d) The Borrower may adjust all claims under any policies of insurance
required by Section 6.4(a) hereof; provided, however, that no such claim with
respect to an insured event as to which the Board or the Trustee may be or is
alleged to be liable may be adjusted without the prior written consent of the
Board or the Trustee, as the case may be.
Section 7.2. Condemnation.
(a) If at any time during the Loan Term the whole or any part of title to,
or the use of, the Security Property shall be taken by Condemnation, the Board
shall have no obligation to restore or replace the Security Property and there
shall be no abatement or reduction in the amounts payable by the Borrower under
this Agreement (whether or not the Security Property is restored or replaced).
Except as otherwise provided in this Section 7.2(b), the Borrower shall
promptly:
(i) Restore the Security Property (excluding any Land taken by
Condemnation) to substantially the same condition and value as an operating
entity as existed prior to such Condemnation; or
(ii) Upon receipt by the Borrower of written approval of the Trustee
and the Board as to the location thereof (which approval shall not be
unreasonably withheld), acquire, by construction or otherwise, facilities
of substantially the same nature and value as an operating entity as the
Security Property (hereinafter referred to in this Section 7.2 as
"Substitute Facilities"). Such Substitute Facilities shall (A) be of such
nature so as to qualify under the Act for the financial assistance provided
by the Program, (B) not adversely affect the tax-exempt status of the
interest payable on the Single Lot Bonds or any of the Bonds, and (C) be
subject to no Liens prior to the Security Instruments or the security
interest created by Sections 5.4(b) and 5.4(c) of this Agreement other than
Permitted Encumbrances.
The Borrower shall cause all Net Proceeds of any award in any Condemnation
proceeding to be paid to the Trustee which shall hold such moneys in the
Reconstruction Account. All Net Proceeds so deposited shall be applied as
provided below:
If the Borrower determines that the Security Property shall be repaired,
replaced or restored in whole or Substitute Facilities are to be acquired, the
Board hereby authorizes and directs the Trustee, subject to the conditions set
forth herein, to make payments from the Reconstruction Account for such purposes
or to reimburse the Borrower for costs paid by it in connection therewith by
disbursements through a title insurance company with commercially reasonable
procedures for payment of costs upon incurrence thereof to the extent approved
<PAGE>
by an inspecting architect and subject to issuance of insurance of the absence
of mechanics or materialman liens affecting the Security Property or Substitute
Facilities, as applicable (all at no cost to the Board or the Trustee). In
addition, the final disbursement of moneys in such Reconstruction Account shall
be withheld until a final certificate of occupancy is delivered to the Board and
the Trustee.
The Trustee may not make any payments from the Reconstruction Account to
repair, restore, replace, modify or improve the Security Property or acquire the
Substitute Facilities, as applicable, pursuant to this Section 7.2 unless the
Borrower has (i) first, obtained a fixed price construction contract or purchase
order for the repair, restoration, replacement modification or improvement of
the Security Property or the acquisition of Substitute Facilities, as
applicable, specifying a Completion Date therefore, and (ii) caused the deposit
to the Reconstruction Account an amount which, together with the Net Proceeds
and all interest to be earned thereon through the Completion Date established in
clause (i) above, will be sufficient to pay all costs of repair, restoration,
modification and improvement of the Security Property or the acquisition of
Substitute Facilities, as applicable. Thereafter, the Trustee, upon receipt of a
certificate of an Authorized Representative of the Borrower that payments are
required for such purpose, shall apply so much as may be necessary of such Net
Proceeds to the payment of the costs of the restoration of the Security Property
or the acquisition of Substitute Facilities at the option of the Borrower, such
moneys to be applied either on completion thereof or as the restoration or
acquisition progresses, at the option of the Board.
In the event amounts in the Reconstruction Account are not sufficient to
pay in full the costs of such restoration of the Security Property or such
acquisition of Substitute Facilities, the Trustee shall request the Borrower to
pay into the Reconstruction Account an amount sufficient to pay all such costs,
and, upon receipt of such request, the Borrower shall forthwith pay such amount
to the Trustee. In the event that the Borrower fails to pay any such amounts
into the Reconstruction Account, then the Single Lot Bonds shall be prepaid in
accordance with Section 7.2(b) of this Agreement.
The Security Property, as so restored, or the Substitute Facilities,
whether or not requiring the expenditure of the Borrower's contribution, shall
automatically become part of the Security Property as if the same were
specifically described herein.
Any balance of such Net Proceeds of any Condemnation award remaining after
payment of all costs of such restoration or acquisition shall be deposited in
the Special Redemption Account held by the Trustee and used only to prepay the
Single Lot Bonds as provided in Section 5.11(a) of the General Bond Resolution.
<PAGE>
(b) In the event that the Borrower shall fail or elect not to replace,
repair or restore the Security Property or to acquire Substitute Facilities, or
if an Event of Default under Section 10.1 hereof shall have occurred and be
continuing and the Single Lot Bonds have been accelerated, then at the direction
of the Board the Net Proceeds of the Condemnation Award shall be transferred
from the Reconstruction Account to the Special Redemption Account or otherwise
paid to the Trustee for deposit into the Special Redemption Account. To the
extent that such Net Proceeds so transferred into the Special Redemption Account
are not sufficient to pay the Single Lot Bonds in whole pursuant to Section 2.8
of the Single Lot Resolution, the Borrower shall forthwith pay the sum of such
deficiency to the Trustee for deposit into the Special Redemption Account.
(c) The Borrower shall not be obligated to restore the Project or to
acquire Substitute Facilities, and all such Net Proceeds shall be paid to the
Borrower, if the Single Lot Bonds and interest thereon have been paid in full
and all other amounts due and owing hereunder, under the Note and Security
Instruments have been paid in full.
(d) The Board shall cooperate fully with the Borrower in the handling and
conduct of any Condemnation proceeding with respect to the Security Property.
Section 7.3. Condemnation of Borrower Owned Property Other Than Security
Property. The Borrower shall be entitled to the proceeds of any Condemnation
award or portion thereof made for damage to or taking of any Property which, at
the time of such damage or taking, is not part of the Security Property and
which is owned by the Borrower.
<PAGE>
ARTICLE VIII
SPECIAL COVENANTS
Section 8.1. Qualification in the State. Throughout the Loan Term, the
Borrower shall continue to be duly authorized to do business in the State.
Section 8.2. Hold Harmless Provisions. (a) The Borrower during the Loan
Term hereby releases the Indemnified Parties from, agrees that the Indemnified
Parties shall not be liable for and agrees to indemnify and hold the Indemnified
Parties harmless from and against any and all liability arising from or expense
incurred by the Board's making the loan to the Borrower pursuant to this
Agreement, including without limiting the generality of the foregoing, all
causes of action and reasonable attorneys' fees and any other expenses incurred
in defending any suits or actions which may arise as a result thereof, provided
that any such liabilities or expenses of the Indemnified Parties are not
incurred or do not result from the gross negligence, the intentional or willful
wrongdoing of the Indemnified Parties or any of their members, agents or
employees.
(b) Notwithstanding any provision of this Agreement or the Board Resolution
to the contrary, the Borrower shall be liable for, and shall hold the
Indemnified Parties harmless against, any liability for any failure by any
Person to comply with the requirements of Section 103 and Sections 140 through
150, inclusive of the Code, including, without limitation, the failure to make
rebate payments due to the United States of America under Section 148 of the
Code with respect to the Single Lot Bonds. Further, the Borrower specifically
agrees that Indemnified Parties shall not be held liable, or in any way
responsible, for any investment of any Fund or Account or the General Guaranty
Fund or other "gross proceeds" (as defined in Section 148 of the Code) under the
control or custody of the Board or the Trustee or the Escrow Holder or for any
mistake or error in the filing of any rebate payments required pursuant to
Section 148 of the Code or the determination of any amount due to the United
States of America or for any consequences resulting from any such mistake or
error.
Section 8.3. Maintenance of Existence; Conditions Under Which Exceptions
Permitted. The Borrower covenants and agrees to maintain its corporate
existence, will not dissolve or otherwise dispose of all or substantially all of
its assets, and will not consolidate with or merge into another corporation or
permit one or more corporations to consolidate with or merge into it; provided,
however, that any mortgages and security interests in personal property entered
into by the Borrower in the ordinary course of business with respect to any of
its Property shall not be deemed to constitute a disposition of assets for
purposes of this Section 8.3 and provided further that, if no Event of Default
under this Agreement shall have occurred and is continuing, the Borrower may
consolidate with or merge into another domestic corporation organized and
existing under the laws of one of the states of the United States of America, or
permit one or more such domestic corporations to consolidate with or merge into
it, or sell or otherwise transfer to another such domestic corporation all or
substantially all of its assets as an entirety and thereafter dissolve, provided
that:
<PAGE>
(a) the surviving, resulting, or transferee corporation, as the case may
be, is incorporated under the laws of the State or qualifies to do business in
the State;
(b) the surviving, resulting or transferee corporation, as the case may be,
assumes in writing all of the obligations of and restrictions on the Borrower
hereunder and any other agreement securing the Borrower's performance of its
obligations hereunder;
(c) the consummation of the transaction will not adversely affect the
tax-exempt status of the interest payable on the Single Lot Bonds or any of the
Bonds then outstanding;
(d) immediately after the consummation of the transaction, and after giving
effect thereto, the surviving, resulting or transferee corporation, as the case
may be, complies with the financial covenants of Section 8.19(a), 8.19(b) and
8.19(c); and
(e) as of the date of such consolidation, merger, sale or transfer, the
Board and Trustee shall be furnished with (i) an opinion of Independent Counsel
opining as to the compliance with Sections 8.3(a) and 8.3(b), (ii) an opinion of
Bond Counsel opining as to the compliance with Section 8.3(c), (iii) an opinion
of an Accountant opining as to the compliance with Section 8.3(d) and (iv) a
certificate, dated the effective date of such consolidation, merger, sale of
transfer, signed by the chief executive officer and the chief financial officer
of the Borrower and of the surviving, resulting of transferee corporation, as
the case may be, to the effect that immediately after the consummation of the
transaction, and after giving effect thereto, no event of default exists under
this Agreement (as set forth in Section 10.1 hereof) and no event exists which,
with notice or lapse of time or both, would become such an Event of Default and
that the provisions of Section 8.3(d) hereof are and will be satisfied.
Section 8.4. Agreement to Provide Information. The Borrower agrees,
whenever requested by the Trustee or the Board, to provide and certify or cause
to be provided and certified such information concerning the Borrower, its
finances, and such other topics as the Trustee or the Board from time to time
reasonably considers necessary or appropriate, including, but not limited to
such information as may be necessary to enable the Board to make any reports
required by the Act, any other law or governmental regulation or to enable the
Board to issue additional lots of Bonds under the General Bond Resolution and
publicly or privately market the same.
<PAGE>
Section 8.5. Books of Record and Account; Financial Statements.
(a) The Borrower agrees to maintain proper accounts, records and books in
which full and correct entries shall be made, in accordance with generally
accepted accounting principles, of business and affairs of the Borrower. The
Board, the Legislative Auditor and the Trustee or their designated agents or
representatives shall have the right to inspect such accounts, records and books
upon reasonable advance notice during normal business hours.
(b) Within 120 days after the close of each fiscal year of the Borrower,
during the Loan Term, the Borrower shall furnish to the Board and the Trustee, a
consolidated balance sheet, a consolidated statement of income and retained
earnings, and a consolidated statement of changes in financial position of the
Borrower, for the immediately preceding fiscal year, all in reasonable detail
including footnotes to such financial statements, such financial statements to
be audited and accompanied by the report of an Accountant. In addition to the
foregoing, such financial statements shall be accompanied by (i) a report
containing all of the calculations required by Section 8.19 to determine whether
or not the Borrower is in compliance with the requirements of Section 8.19, such
calculations to be prepared by an Accountant from the then-current audited
financial statements of the Borrower and (ii) a report to be prepared by an
Accountant as to whether any payments on Subordinated Debt have been made
contrary to the provisions of this Agreement or the Loan Agreement.
Section 8.6. Borrower to File Statements With Internal Revenue Service. The
Borrower agrees to file, and to cause all Principal Users to file, with the
Internal Revenue Service of the United States Treasury Department or any other
authorized governmental agency any and all statements or other instruments which
may be required by Section 103 and Sections 140 to 150 of the Code, at the times
required therein.
Section 8.7. Release of Equipment.
(a) The Borrower shall have the right at any time or from time to time to
sell or otherwise dispose of all or any part of the Equipment subject, however,
to all of the following terms and conditions:
(i) The Borrower shall, prior to or simultaneously, with any such sale
or other disposition of any Equipment, cause to be substituted therefor
equipment which is determined by the Board to have a value substantially
equal to the value of the item of Equipment so sold or otherwise disposed
of at the time said item of Equipment was sold or disposed by the Borrower
pursuant to the terms hereof, but which equipment may, however, be of a
different kind or type or have a different function or purpose;
(ii) The security interest granted pursuant to the Security
Instruments shall attach to the equipment so substituted upon its
acquisition by the Borrower and its installation on the Land and prior to
the sale or other disposition of the Equipment originally subject to such
security interest;
<PAGE>
(iii) The Borrower shall execute any and all documents, instruments,
agreements or other writings (including, but not limited to, one or more
Uniform Commercial Code financing statements) and otherwise do all acts and
things which the Board shall reasonably deem necessary or advisable to
perfect or continue perfection of a security interest in the equipment so
substituted;
(iv) The Borrower shall pay any and all reasonable expenses
(including, but not limited to, any applicable filing fees) incurred by the
Board or the Trustee in connection with the perfection or continuation of
such security interest; and
(v) The Borrower shall, not less than fifteen days prior to the
consummation of any such sale or disposition, furnish the Board with a
certificate signed by the Authorized Representative of the Borrower setting
forth (1) a description of the item of Equipment which the Borrower
proposes to sell or otherwise dispose of, which description has been
previously set forth in the copy of Exhibit B hereto maintained by the
Trustee in accordance with Section 8.4 of the Single Lot Resolution, (2) a
description of the equipment to be proposed to be substituted for the item
of Equipment sold or otherwise disposed of, which description shall be
sufficient for the creation and perfection of a security interest in said
equipment under the Uniform Commercial Code of the State, (3) a statement
to the effect that the equipment proposed to be so substituted is now owned
by the Borrower and in the possession of the Borrower and is free and clear
of all security interests, liens, and encumbrances of any kind whatsoever
(other than Permitted Encumbrances), and (4) a submission of reasonable
proof satisfactory to the Board that such equipment proposed to be
substituted is now owned by the Borrower and in possession of the Borrower
and is free and clear of all security interest, liens and encumbrances of
any kind whatsoever (other than Permitted Encumbrances).
The description of substituted equipment provided for in Section 8.7(a)
above shall, when furnished to the Board, constitute an amendment or supplement
to Exhibit B hereof. Items of Equipment replaced and substituted pursuant to the
terms of this Section 8.7(a) shall be deleted from Exhibit B by the Board.
The Borrower shall not substitute or replace any item of Equipment pursuant
to this Section 8.7(a) for any property which is not free and clear of all
security interests, liens and encumbrances of any kind whatsoever (other than
Permitted Encumbrances).
(b) The Borrower will from time to time, upon the written request of the
Board or the Trustee, file with the Board and the Trustee a list of Equipment
currently on the Land and in the Building, which list shall further identify
said items of equipment substituted pursuant to Section 8.7(a) hereof and the
date and reason for substitution. The Borrower shall have sixty days in which to
respond to each such request, but shall be obligated to respond to such request
no more than twice each calendar year.
<PAGE>
(c) Notwithstanding the provisions set forth in Section 8.7(a) of this
Agreement, the Borrower shall have the right at any time or from time to time to
sell or otherwise dispose of all or any part of the Equipment free and clear of
the security interest created by the Security Instruments, without being
obligated to substitute new equipment therefor, if:
(i) All of the items of Equipment so disposed during the term of the
Loan have an aggregate Appraised Value at the time of disposition of less
than $50,000 (the Borrower is to furnish to the Board written evidence of
such Appraised Value for each item of Equipment so disposed); or
(ii) The ratio of the outstanding principal amount of the Loan to the
Appraised Value of the Security Property (excluding the items of Equipment
to be so disposed) at the time of proposed disposition shall not exceed
seventy five percent (75%) (the Borrower are to furnish to the Board
written evidence of such Appraised Value of the Security Property); or
(iii) The amount of the Appraised Value of the items of Equipment to
be disposed of, to the extent such Appraised Value exceeds the amount
described in clause (i), is deposited in the Special Redemption Account.
Section 8.8. Certificate of No Default. The Borrower agree to deliver to
the Trustee and to the Board within 120 days after the close of each fiscal year
of the Borrower, a certificate of an Authorized Representative of the Borrower
(a) to the effect that the Borrower is not aware of any condition, event or act
which constitutes an Event of Default hereunder or under the Security
Instruments, and no condition, event or act which, with notice of lapse of time,
or both, would constitute such an Event of Default, or if any such condition,
event or acts exists, specifying the same, and (b) to the effect that an
Authorized Representative of the Borrower is not aware of any failure in the
payment of any part of the principal of or interest on any outstanding
indebtedness of the Borrower for money borrowed and as the same shall become due
and payable, whether at the stated maturity of such indebtedness or at a date
fixed for redemption or otherwise, or the acceleration of the maturity of any
such indebtedness following a default under the terms of any agreement or
instrument relating to any such indebtedness.
Section 8.9. Notice of Default. The Borrower will forthwith, upon the
occurrence of an Event of Default hereunder or under the Security Instruments or
upon the occurrence of a condition, event or act which, with notice or lapse of
time, or both, would constitute such an Event of Default, notify in writing the
Trustee and the Board of the occurrence of such Event of Default.
<PAGE>
Section 8.10. Assignment and Leasing.
(a) This Agreement may be assigned in whole or in part and the Project may
be sold or leased as a whole or in part by the Borrower only with the prior
written consent of the Board and provided further that:
(i) No assignment (other than pursuant to Section 8.3 hereof) or sale
or lease shall relieve the Borrower from primary liability for any of its
obligations hereunder;
(ii) The assignee, transferee or lessee shall assume the obligations
of the Borrower hereunder to the extent of the interest assigned,
transferred or leased, except no such assumption shall be required if the
subject lease is a true lease for federal tax purposes;
(iii) The Borrower shall, within ten (10) days after the delivery
thereof, furnish or cause to be furnished to the Board and to the Trustee a
true and complete copy of each such assignment, instrument of transfer or
lease, as the case may be, and the instrument of assumption (where
required);
(iv) The tax-exempt status of the interest on the Bonds then
outstanding shall not be adversely affected thereby;
(v) The assignment, transfer or lease shall be subject and subordinate
to the Lien of this Agreement, the Security Instruments and the Pledge; and
(vi) Neither the validity nor the enforceability of this Agreement,
the Security Instruments or any security interest created thereunder shall
be adversely affected thereby.
(b) As of the purported effective date of any assignment, transfer or lease
pursuant to Section 8.10(a), the Borrower shall furnish the Trustee with an
opinion, in form and substance satisfactory to the Board, (i) of Bond Counsel
opining that the tax-exempt status of the interest on the Bonds will not be
adversely affected thereby, (ii) if required by the Board, of Independent
Counsel that the assignment, transfer or lease is subject and subordinate to the
Lien of the Security Instruments and the Pledge, (iii) of Independent Counsel
that neither the validity nor the enforceability of this Agreement, the Note and
the Security Instruments will be adversely affected thereby and (iv) of
Independent Counsel opining that the assumption of obligations of the Borrower
by any Person pursuant to Section 8.10(a)(ii) hereof will constitute a valid and
legally enforceable assumption by such Person.
(c) Any reassignment, transfer or sublease in turn of any assignment,
transfer or lease entered into pursuant to Section 8.10(a) shall comply with and
be subject to all the provisions of Sections 8.10(a) and 8.10(b). Any sublease
in turn of a lease entered into pursuant to Section 8.10(a) shall be subject and
subordinate to such original lease or sublease.
<PAGE>
Section 8.11. Right to Inspect the Project and Security Property. The
Board, the Trustee and the duly authorized agents of either of them shall have
the right at all reasonable times and upon reasonable advance notice, to inspect
the Project and the Security Property.
Section 8.12. Compliance With Orders, Ordinances, etc.
(a) The Borrower agrees throughout the Loan Term to promptly comply with
all statutes, codes, laws, acts, ordinances, orders, judgments, decrees,
injunctions, rules, regulations, permits, licenses, authorizations, directions
and requirements of all federal, state, county, municipal and other governments,
departments, commissions, boards, companies or associations insuring the
premises, courts, authorities, officials and officers, foreseen or unforeseen,
ordinary or extraordinary, which now or at any time hereafter may be applicable
to the Security Property or any part thereof, or to any use, manner of use or
condition of the Security Property or any part thereof.
(b) Notwithstanding the provisions of Section 8.12(a), the Borrower may in
good faith contest the validity or the applicability of any requirement of the
nature referred to in such subsection (a). In such event, the Borrower may fail
to comply with the requirement or requirements so contested during the period of
such contest and any appeal therefrom, unless the Board or the Trustee shall
notify the Borrower that by failure to comply with such requirement or
requirements the Lien of the Security Instruments or the security interest
created by Section 5.4(a) and 5.4(b) of this Agreement as to any part of the
Security Property may be materially endangered or the Security Property or any
part thereof may be subject to loss or forfeiture, in which event the Borrower
shall promptly take such action with respect thereto as shall be satisfactory to
the Trustee.
Section 8.13. Liens and Encumbrances.
(a) During the Loan Term and subject to the provisions of Section 5.4 of
this Agreement, the Borrower shall not permit or create or suffer to be
permitted or created any Lien, except for Permitted Encumbrances, upon the
Security Property or any part thereof, nor may the Borrower assign, sell or
otherwise dispose of the Security Property or any part thereof, without the
prior written consent of the Board, which shall not be unreasonably withheld.
Any such Lien, if nonetheless created or permitted, shall be discharged by the
Borrower forthwith.
(b) Notwithstanding the provisions of Section 8.13(a), the Borrower may in
good faith contest any Lien upon the Security Property or any part thereof by
reason of any labor, services or materials rendered or supplied or claimed to be
rendered or supplied with respect to the Project or any part thereof. In such
event, the Borrower may permit the items so contested to remain undischarged and
unsatisfied during the period of such contest and any appeal therefrom, unless
the Board shall notify the Borrower that by nonpayment of any such item or items
the Lien of the Security Instruments or the security interest created by Section
5.4(a) and 5.4(b) of this Agreement may be materially endangered or the Security
Property or any part thereof may be subject to loss or forfeiture, in which
event the Borrower shall promptly secure payment of all such unpaid items by
filing a bond, in form and substance and in such amount satisfactory to the
Trustee, thereby causing a Lien to be removed.
<PAGE>
(c) Upon the request of the Board or the Trustee, the Borrower shall
provide the Board and the Trustee, within sixty (60) days of such request, with
proof satisfactory to the Trustee that all items of Security Property continue
to be free and clear of all Liens (other than Permitted Encumbrances).
Section 8.14. Identification of Equipment. All Equipment shall be properly
identified by the Borrower by appropriate records, including computerized
records.
Section 8.15. Relocation of the Equipment. The Borrower covenants and
agrees that during the Loan Term it will not remove the Equipment (except in
accordance with the terms of Section 8.7 hereof) from the Land to a new location
either within or outside of the State, without first obtaining the express
written consent of the Board with respect to such removal and relocation.
Section 8.16. Security Instruments Covenants. The Borrower covenants and
agrees to perform all of the obligations and covenants imposed upon it pursuant
to the Security Instruments and the Borrower agrees that any failure to perform
such covenants shall, after the lapse of any applicable cure periods therein
expressly provided, constitute a default for purposes of this Agreement.
Section 8.17. Covenant Against Discrimination. The Borrower covenants and
agrees that in the performance of this Agreement the Borrower will not
discriminate or permit discrimination against any person or group of persons on
the grounds of race, color, religion, national origin or sex in any manner
prohibited by the laws of the United States of America or of the State.
Section 8.18. Employment Records. Within sixty (60) days after the close of
each calendar year, the Borrower shall furnish a written report to the Board of
the total number of employees at the Project, and shall separately indicate: (a)
the number of permanent new jobs which was estimated to be created by the
Project on the Borrower's application to the Board, with job descriptions and
annual salaries; (b) which of these permanent new jobs are currently filled; and
(c) the average number of full-time, part-time or seasonal employees at the
Project within the three (3) categories of (i) professional, managerial,
technical, (ii) skilled, and (iii) semi-skilled or unskilled for the current
reporting period. In addition, such report shall contain information with
respect to employment at the Project that is specified by the Board as being
required to be contained in the employment reports described in Minnesota
Statutes, Section 469.154, Subd. 7.
<PAGE>
Section 8.19. Certain Financial Covenants.
(a) For the fiscal year of the Borrower beginning September 30, 1997 and
thereafter, during the Loan Term and as of the date of any calculation, the
Borrower shall maintain a ratio of (i) earnings before paying interest on all
Indebtedness, taxes and making allowances for depreciation and amortization (all
in accordance with generally accepted accounting principles) plus capitalized
interest on the Bonds to (ii) regularly scheduled payments of principal and
interest on all Funded Indebtedness of the Borrower averaged for the last three
(3) full fiscal years for the Borrower of at least 1.5 to 1.0; provided that the
year ending September 30, 1995 shall not be included in the calculations. The
outstanding principal amount of all Series 1997D, Lot 1 Bonds shall constitute
Funded Indebtedness of the Borrower for purposes of this Section.
(b) During the Loan Term, the Borrower shall maintain at all times during
each fiscal month in each period set forth below (calculated at the end of each
fiscal month during each period set forth below) its Net Worth at or above the
level set forth below opposite each such period:
October 1, 1996, through
August 31, 1997 $1,500,000
September 1, 1997, through
August 31, 1998 $1,600,000
September 1, 1998, through
August 31, 1999 $2,100,000
September 1, 1999 and
thereafter $2,400,000
(c) During the Loan Term, the Borrower shall maintain at all times during
each fiscal month in each period set forth below (calculated at the end of each
fiscal month during each period set forth below) its Indebtedness to Net Worth
ratio at or below the level set forth below opposite each such period:
October 1, 1996, through
August 31, 1997 2.00 to 1.00
September 1, 1997, through
August 31, 1998 2.25 to 1.00
September 1, 1998 and
thereafter 1.75 to 1.00
<PAGE>
(b) Notwithstanding anything contained herein to the contrary, the failure
by the Borrower to comply with the provisions of either Section 8.19(a), (b) or
(c) of this Agreement shall not constitute an Event of Default under this Loan
Agreement, but shall result in the following requirements of the Borrower during
the continuance of such failure:
(i) The Borrower shall not, without the prior written consent of the
Board, incur any Funded Indebtedness other than Subordinated Indebtedness
and other than purchase money indebtedness for real or personal property
usable in the business of the Borrower.
(ii) The Borrower shall not, without the prior written consent of the
Board, pay any annual increases in total compensation (excluding insurance,
health, dental and pension benefits) to the shareholders, directors and
officers of the Borrower, or any person who is related by blood or
marriage, any of such shareholders, directors and officers in excess of 7%
per annum.
(c) Failure to comply with the provisions of Sections 8.19(d) shall
constitute an Event of Default hereunder.
(d) The calculations required by this Section 8.19 shall be prepared and
certified by an Accountant and submitted to the Board and the Trustee annually
pursuant to Section 8.5.
Section 8.20. Covenant Against Loans, Transfers, etc. The Borrower
covenants and agrees that it will not, without the prior written consent of the
Board, make any loans or transfer title to any of its assets to any officer,
member or stockholder of the Borrower unless the loan or transfer is determined
to be the same as if it were at arm's length, between unrelated parties, in an
amount or at fair market value in the aggregate in excess of $10,000 in any
single fiscal year of the Borrower.
Section 8.21. Covenant Against Sale, Gift, Purchase or Redemption of Stock.
The Borrower covenants and agrees that it will not, without the prior written
consent of the Board, gift, purchase, sell or redeem any capital stock of the
Borrower or purchase any treasury stock of the Borrower, if, after giving effect
to such transaction, (a) the Borrower would not be in compliance with Section
8.19(a), (b) or (c) of this Loan Agreement.
Section 8.22. Vacant Positions. The Borrower agrees to list any vacant new
positions with the job services of the Commissioner of Jobs and Training or a
local service units as required by Minnesota Statutes Section 268.66.
<PAGE>
Section 8.23. Prevailing Wages. The Board hereby notifies the Borrower that
the Loan made pursuant to the Loan Agreement constitutes "financial assistance"
from a "state agency" within the meaning of Article 10, Section 7 of Chapter
604, Minnesota Laws (1990) and, therefore, the requirements of subdivision (2)
and the penalties of subdivision (3) of such statute apply to Borrower and the
Project except as and to the extent that it is determined that the exception set
forth in subdivision (5) of such statute is applicable. The Board makes no
representation as to the applicability or meaning of such exception and the
Borrower hereby agrees to comply with such statute to the extent and in the
manner provided by law.
Section 8.24. Covenant Against Dividends, etc. The Borrower covenants and
agrees that it will not, without the prior written consent of the Board, pay or
declare any dividends on any class of its capital stock to any officer or
stockholder of the Borrower, in an amount or at fair market value in the
aggregate in excess of $-0- in any single fiscal year of the Borrower.
Section 8.25. Covenant Against Unreasonable Compensation. The Borrower
covenants and agrees that it will not pay directors' and officers' salaries or
provide any form of compensation to its directors and officers in excess of that
reasonable for services rendered.
Section 8.26. Job Creation. The Borrower will create 15 new jobs which pay
more than mminimum wage exclusive of all benefits and taxes from the Closing
Date to January 15, 2000.
<PAGE>
ARTICLE IX
PLEDGE OF CERTAIN INTERESTS
Section 9.1. Pledge of Certain Interests to Bondholders. (a) The Board
under Section 1.04 of the General Bond Resolution and under Section 6.1 of the
Single Lot Resolution has Pledged all of its rights and interest and all
provisions of this Agreement and the Note (except pursuant to Section 8.2
hereof), and the Security Instruments as security for the payment of the
principal of, premium, if any, and interest on the Bonds and the Single Lot
Bonds. Such Pledge shall in no way impair or diminish any obligation of the
Borrower under this Agreement, the Note and the Security Instrumentsor the
Guarantor and the Guaranty. The Borrower hereby consent to such Pledge by the
Board.
(b) Except as provided in this Section 9.1 and in Article X of this
Agreement and except as otherwise expressly provided in this Agreement, the Note
and the Security Instruments, the Board shall not sell, assign, transfer, convey
or otherwise dispose of its interest in or its rights under this Agreement, the
Note and the Security Instruments, without the prior written consent of the
Borrower.
<PAGE>
ARTICLE X
EVENTS OF DEFAULT AND REMEDIES
Section 10.1. Events of Default Defined.
(a) The following shall be "Events of Default" under this Agreement and the
terms "Event of Default" or "Default" shall mean, whenever they are used in this
Agreement, any one or more of the following events:
(i) The failure by the Borrower to pay or cause to be paid, when due,
the amounts specified to be paid pursuant to Section 5.1, Section 5.2(a) or
Section 11.1(a) hereof and the Note; or
(ii) The failure by the Borrower to observe and perform any covenant
contained in Section 8.3 hereof; or
(iii) The failure by the Borrower to observe and perform any covenant,
condition or agreement hereunder or the Security Agreement on its part to
be observed or performed (except obligations referred to in Sections
10.1(a)(i), 10.1(a)(ii), 10.1(a)(iv), 10.1(a)(v) and 10.1(a)(vi) hereof) on
the earlier of (A) written notice thereof specifying such failure in the
event that the failure is not of the type or nature which the Board
reasonably believes can be remedied within thirty (30) days or (B) the
thirty-first (31st) day after written notice, specifying such failure and
requesting that it be remedied, given to the Borrower by the Board or the
Trustee; or
(iv) The dissolution or liquidation of the Borrower or Guarantor or
the filing by the Borrower or Guarantor of a voluntary petition in
bankruptcy, or the failure by the Borrower or Guarantor within sixty (60)
days to lift any execution, garnishment or attachment of such consequence
as will impair such Person's ability to carry on its operations at the
Project, or the commission by the Borrower or Guarantor of any act of
bankruptcy, or the adjudication of the Borrower or Guarantor as a bankrupt,
or the assignment of assets by the Borrower or Guarantor for the benefit of
its creditors, or the entry by the Borrower or Guarantor into an agreement
of composition with such Person's creditors, or the approval by a court of
competent jurisdiction of a petition applicable to the Borrower or
Guarantor in any proceeding for its reorganization instituted under the
provisions of any state or Federal bankruptcy or similar law, or
appointment by final order, judgment or decree of a court of competent
jurisdiction of a receiver of the whole or a substantial portion of the
Properties of the Borrower or Guarantor (unless such receiver is removed or
discharged within sixty (60) days of the date of his qualification). The
term "dissolution or liquidation" of the Borrower or the Guarantor as used
in this subsection shall not be construed to include any transaction
permitted by Section 8.3 hereof; or
<PAGE>
(v) The failure in the payment of any part of the principal of or
interest on any Indebtedness of the Borrower or Guarantor for money
borrowed having an outstanding principal amount of $100,000 or more, when
and as the same shall become due and payable, whether at the stated
maturity of such Indebtedness or at a date fixed for redemption or
otherwise, which failure results in the acceleration of the maturity of any
such indebtedness following a default under the terms of any agreement or
instrument relating to any such indebtedness; or
(vi) The occurrence and continuance of an "event of default" under the
Security Instruments; or
(vii) The failure of Borrower to comply with the requirements of
Section 4.2 or Section 5.4 hereof as and when applicable; or
(b) Notwithstanding the provisions of Section 10.1(a), if by reason of
force majeure either party hereto shall be unable in whole or in part to carry
out its obligations under this Agreement and if such party shall give notice and
full particulars of such force majeure in writing to the other party and to the
Trustee within a reasonable time after the occurrence of the event or cause
relied upon, the obligations under this Agreement of the party giving such
notice, so far as they are affected by such force majeure, shall be suspended
during the continuance of the inability, which shall include a reasonable time
for the removal of the effect thereof. The suspension of such obligations for
such period pursuant to this subsection (b) shall not be deemed an Event of
Default under this Section 10.1. Notwithstanding anything to the contrary in
this subsection (b), an event of force majeure shall not excuse, delay or in any
way diminish the obligations of the Borrower to make the payments required by
Section 5.1, Section 5.2 and Section 11.1(a) hereof, to obtain and continue in
full force and effect the insurance required by Section 4.6 and Section 6.4
hereof, to provide the indemnity required by Section 8.2 hereof and to comply
with the provisions of Sections 2.3(a), 2.3(d), 2.3(e), 2.3(p), 2.3(q), 2.3(r),
2.3(t), 2.3(w), 2.3(x), 2.3(y), 4.3, 5.2(e), 5.2(f), 5.3, 6.3, 6.5, 6.6, 6.7,
8.3, 8.4, 8.5, 8.6, 8.7, 8.8, 8.9, 8.10, 8.11, 8.12, 8.13, 8.15, 8.16, 8.17,
8.18, 8.19, 8.20, 8.21, 8.22, 8.23, 8.24, 8.25 and 8.26 hereof. The term "force
majeure" as used herein shall include, without limitation, acts of God, strikes,
lockouts or other industrial disturbances, acts of public enemies, orders of any
kind of the government of the United States of America or of the State or any of
their departments, agencies, governmental subdivisions, or officials, or any
civil or military authority, insurrections, riots, epidemics, landslides,
lightning, earthquakes, fire, hurricanes, storms, floods, washouts, droughts,
arrests, restraint of government and people, civil disturbances, explosions,
breakage or accident to machinery, transmission pipes or canals, partial or
entire failure of utilities, or any other cause or event not reasonably within
the control of the party claiming such inability.
<PAGE>
Section 10.2. Remedies on Default.
(a) Whenever any Event of Default shall have occurred, the Board or the
Trustee may take any one or more of the following remedial steps:
(i) Declare, by written notice to the Borrower, to be immediately due
and payable, whereupon the same shall become immediately due and payable
and so accelerated: (A) all unpaid amounts payable pursuant to Section 5.1
hereof, and pursuant to the Note (constituting principal on the Loan and
accrued but unpaid interest thereon) and (B) all other payments due under
this Agreement and pursuant to the Note (whether or not constituting
principal on the Loan and accrued but unpaid interest thereon);
(ii) Terminate the disbursement of any moneys in the Construction
Account in accordance with Section 4.3 hereof and, upon acceleration of the
Loan pursuant to Section 10.2(a)(i) of this Agreement, transfer such moneys
to the Special Redemption Account;
(iii) Foreclose and otherwise enforce the Security Instruments on, and
any security interest in and the Equipment;
(iv) As provided in the Security Instruments, take possession of the
Equipment and for that purpose the Borrower agrees that (a) the Borrower
will, when so requested by the Board or the Trustee assemble the Equipment
and make it available to the Board or the Trustee on the premises on which
it is located and (b) the Board and the Trustee, their employees, agents
and representatives shall have the right to peacefully enter upon any
premises in the possession of the Borrower wherein the Equipment or any
part thereof may be located and take possession of and remove such
Equipment without interference or hindrance from the Borrower, the
officers, agents or employees or any person associated therewith;
(v) Upon fifteen (15) calendar days' notice to the Borrower (which the
Borrower hereby agree is commercially reasonable) the Board or Trustee may
proceed to sell or otherwise dispose of the Equipment or any part thereof
by public or private sale in any commercially reasonable manner (and
without intending to limit the generality of the foregoing, the Borrower
hereby agrees that the sale of such property at a public auction conducted
by a reputable auctioneer in the manner in which such auctions are usually
conducted is commercially reasonable); and
(vi) Take any other action at law or in equity which may appear
necessary or desirable to collect the payments then due or thereafter to
become due and to enforce the obligations, agreements or covenants of the
Borrower under this Agreement and the Note or the Guarantor under the
Guaranty.
<PAGE>
(b) Any sums realized as a consequence of any action taken pursuant to
Section 10.2(a) shall be paid to the Trustee and shall be applied by the
Trustee, subject to the provisions of Section 7.04 of the General Bond
Resolution, in accordance with the provisions of Section 6.06(d) of the General
Bond Resolution, to which such application the Borrower hereby consents.
Section 10.3. Remedies Cumulative. No remedy herein conferred upon or
reserved to the Board is intended to be exclusive of any other available remedy,
but each and every such remedy shall be cumulative and in addition to every
other remedy given under this Agreement or now or hereafter existing at law or
in equity. No delay or omission to exercise any right or power accruing upon any
default shall impair any such right or power or shall be construed to be a
waiver thereof, but any such right and power may be exercised from time to time
and as often as may be deemed expedient. In order to entitle the Board to
exercise any remedy reserved to it in this Article X, it shall not be necessary
to give any notice, other than such notice as may be herein expressly required
in this Agreement and the Note or required by law.
Section 10.4. Agreement to Pay Attorneys' Fees and Expenses. In the event
the Board or the Trustee should employ attorneys or incur other expenses in
response to any request of the Borrower or for the collection of amounts payable
hereunder or the implementation or enforcement of performance or observance of
any obligations or agreements on the part of the Borrower herein contained,
including without limitation obligations and agreements under this Section, the
Borrower shall, on demand therefor, pay to the Board or the Trustee the
reasonable fees of such attorneys (determined at their usual and customary
rates) and such other expenses so incurred. Commencement of a lawsuit to recover
any amount payable under this Agreement or the Note shall be deemed a demand for
payment of all expenses incurred in the course of such lawsuit, including
without limitation attorneys' fees incurred in connection with such lawsuit.
Section 10.5. No Additional Waiver Implied by One Waiver. In the event any
agreement contained herein should be breached by either party and thereafter
waived by the other party, such waiver shall be limited to the particular breach
so waived and shall not be deemed to waive any other breach hereunder including
without limitation a subsequent breach or subsequent breaches of the same
provision of this Agreement.
<PAGE>
ARTICLE XI
EARLY TERMINATION OF AGREEMENT;
PREPAYMENT OF LOAN
Section 11.1. Early Termination of Agreement.
(a) The Borrower shall terminate this Agreement and shall comply with the
requirements set forth in Section 11.2 hereof within 150 days after a
Determination of Taxability. The obligation of the Borrower to comply with the
requirements of this Section 11.1(a) shall be absolute and unconditional to the
same extent as provided in Sections 5.1 and 5.3 of this Agreement. Section 12.9
shall apply to any such termination.
(b) The Borrower shall have an option to terminate this Agreement upon
filing with the Board and the Trustee a certificate signed by an Authorized
Representative of the Borrower stating the Borrower's intention to do so on the
next succeeding Bond Payment Date pursuant to this Section 11.1(b) and complying
with the requirements of Section 3.02(b) of the General Bond Resolution and upon
further compliance with the requirements set forth in Section 11.2 hereof.
Section 11.2. Conditions to Early Termination of Agreement. In the event
the Borrower exercises its right or is required to terminate this Agreement in
accordance with any provision of Section 11.1 hereof, the Borrower shall comply
with the requirements set forth in the following three subsections:
(a) The following payments shall be made:
(i) To the Trustee for the account of the Board: at least thirty days
prior to the Bond Payment Date, an amount certified by the Trustee which,
when added to the total amount on deposit with the Trustee for the account
of the Board and the Borrower and available for such purpose, will be
sufficient (A) to pay, for deposit into the Special Redemption Account, the
amount required by Section 2.8(a) of the Single Lot Resolution as the
Redemption Price for the Single Lot Bonds in connection with the redemption
in whole of such Bonds, if such termination is pursuant to Section 11.1(a)
hereof, or (B) to pay, for deposit into the Optional Redemption Account,
the Redemption Price of the Single Lot Bonds in connection with the
redemption in whole of such Bonds, in accordance with the terms of Section
2.7(a) of the Single Lot Resolution, together with all interest on such
Single Lot Bonds which will accrue to the date of prepayment (which shall
be the next succeeding Bond Payment Date for which the Trustee may give
notice pursuant to Section 3.03 and Section 3.04 of the General Bond
Resolution), if such termination is pursuant to Section 11.1(b) hereof;
<PAGE>
(ii) To the Board: an amount certified by the Board sufficient to pay
all unpaid fees and expenses of the Board incurred under this Agreement and
the Board Resolution; and
(iii) To the appropriate Person: an amount sufficient to pay all other
fees, expenses or charges, if any, due and payable or to become due and
payable under this Agreement and the Board Resolution and not otherwise
paid or provided for.
(b) The certificate required to be filed pursuant to Section 11.1(b), shall
specify the date upon which the payments pursuant to Section 11.2(a) shall be
made, which date shall not be less than ninety (90) nor more than one hundred
twenty (120) days from the date such certificate is filed with the Board and the
Trustee.
Section 11.3. Discharge of Lien. If the Borrower shall pay or cause to be
paid, or there shall otherwise be paid, to the Holders of all outstanding Single
Lot Bonds or to the Trustee with respect thereto, the principal or Redemption
Price, if applicable, and interest due or to become due at the times and in the
manner stipulated therein, then the rights in the Security Property hereby
granted and all covenants, agreements and other obligations of the Borrower
hereunder to the Board and the Trustee shall thereupon cease, terminate and
become void and be discharged and satisfied. In such event, the Board and the
Trustee shall cancel and discharge the Lien of the Security Instruments and the
security interest in the Equipment created by the Security Instruments and
execute and deliver to the Borrower all such instruments as may be appropriate
to evidence such discharge and satisfaction of such liens. After payment in full
of the Single Lot Bonds and the interest thereon and the payment of all fees,
charges, expenses and other amounts required to be paid under this Agreement,
the Note and the Single Lot Resolution, all amounts on deposit with the Trustee
for the account of the Board and the Borrower under this Agreement, the Note and
the Single Lot Resolution, if any, shall be applied by the Trustee in accordance
with the provisions of Section 5.21 of the General Bond Resolution.
Section 11.4. Prepayment of Loan in Part.
(a) The Borrower shall have the Option to prepay the Loan in part upon
filing with the Board and Trustee a certificate signed by an Authorized
Representative stating the Borrower's intention to do so pursuant to this
Section and complying with the requirements of Section 2.7(a) of the Single Lot
Resolution and Section 3.02(b) of the General Bond Resolution. Such certificate
shall specify the date (which shall be a Bond Payment Date) and amount of the
partial prepayment of the Loan, which date shall not be more than one hundred
twenty (120) days nor less than ninety (90) days after such notice.
(b) Upon the filing of such certificate, the Borrower shall pay to the
Trustee for the account of the Board a sum sufficient to pay, for deposit into
the Optional Redemption Account, the Redemption Price of the amount of the
Single Lot Bonds to be redeemed (from the amounts to be prepaid on the Loan as
certified in Section 11.4(b) of this Agreement) in accordance with the terms of
Section 2.7(a) of the Single Lot Resolution, together with all interest on such
Single Lot Bonds which will accrue to the date of prepayment.
<PAGE>
Section 11.5. Refunding Consent. If after August 1, 1997 the Board
certifies to the Borrower that it wishes to refund the Single Lot Bonds in order
to permit the Board to amend the provisions of the General Bond Resolution or
the General Guaranty Fund Pledge and Escrow Agreement without the necessity of
obtaining Bondholder consent, the Borrower hereby consents to the issuance of a
Lot of refunding Bonds to refund the Single Lot Bonds at the then prevailing
rates of interest (provided that the interest payable on such refunding Bonds
shall continue the tax-exempt status of the Single Lot Bonds, if any), provided,
however, that Borrower will continue to make the same payments due on the Note
as established in the Single Lot Resolution as of the Date of Issuance and under
this Agreement and that any increase or decrease in payments shall be paid to or
received by the Board. In connection with any such refunding, the Borrower
hereby covenants to amend or supplement this Agreement and the Security
Instruments (and shall cause the Guarantor to amend the Guaranty), to such
extent, or to provide substitute documents therefor, as in the opinion of the
Board shall be necessary to effect such refunding, including the payment of debt
service on such refunding Bonds when and as due and at the rate of interest set
forth therein. The Borrower hereby consents, in connection with such refunding,
to any deposit by the Board of all or part of the proceeds of such refunding
Bonds (i) into the Special Redemption Account to prepay in whole the Single Lot
Bonds or (ii) to be held by the Trustee to defease the Single Lot Bonds in
accordance with the provisions of Section 11.02 and Section 11.03 of the General
Bond Resolution.
<PAGE>
ARTICLE XII
MISCELLANEOUS
Section 12.1. Notices. All notices, other than interest billing notices,
certificates or other communications hereunder shall be in writing and shall be
sufficiently given and shall be deemed given when delivered and, if delivered by
mail, shall be sent by certified or registered mail, postage prepaid, return
receipt requested, addressed as follows:
To the Board: Minnesota Agricultural and
Economic Development Board
500 Metro Square
121 7th Place East
Saint Paul, Minnesota 55101
Attention: Financial Management Division
(Department of Trade and Economic Development)
To the Borrower: Sparta Foods, Inc.
2570 Kasota Avenue
St. Paul, Minnesota 55108
Attention: Merrill Ayers
To the Trustee: First Bank National Association
c/o First Trust National Association
180 East Fifth Street
St. Paul, Minnesota 55101
Attention: Corporate Trust Administration
A duplicate copy of each notice, certificate and other communication given
hereunder by either the Board or the Borrower to the other shall also be given
to the Trustee. The Board, the Borrower and the Trustee may, by notice given
hereunder, designate any further or different addresses to which subsequent
notices, certificates and other communications shall be sent.
Section 12.2. Binding Effect. This Agreement shall inure to the benefit of
and shall be binding upon the Board, the Borrower and their respective personal
representatives, heirs, devisees, successors and assigns (as applicable) and
shall create no rights in any other parties except as may be specifically set
forth elsewhere in this Agreement.
Section 12.3. Severability. In the event any provision of this Agreement
shall be held invalid or unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provision
hereof.
<PAGE>
Section 12.4. Amendments, Changes and Modifications. This Agreement, the
Security Instruments and the Note may not be amended, changed, modified, altered
or terminated without the concurring written consent of the Bondholders, except
as provided in Section 6.08 of the General Bond Resolution. Wherever the consent
or approval of the Board or the Trustee is required or permitted under this
Agreement, the Note or the Security Instruments, such consent or approval shall
not be unreasonably withheld (based upon the standards set forth in the General
Bond Resolution) and shall be promptly given (but this provision shall not be
deemed to require any special meetings by the Board).
Section 12.5. Data Privacy Disclosure. The Borrower understands that the
data which the Borrower provides pursuant to the Agreement, including, but not
limited to, information required under Section 8.3, Section 8.4, Section 8.5,
Section 8.6, Section 8.8 and Section 8.19 will be used by the Board to:
(a) Assess Borrower's financial status;
(b) Make any reports required by the Act, any other law or government
regulation in accordance with Minnesota Statutes Section 13.77;
(c) Provide such information to the public, including, but not limited
to, potential purchasers of its Bonds, Bondholders, Bond Counsel and the
Board's underwriters and placement agents, as is needed in connection with
the sale, issuance and payments of Bonds;
(d) Enforce this agreement and any mortgage or other security
instrument between the Borrower and the Board; and
(e) Operate and evaluate its Program.
The Borrower further understands that there is a possibility that the data might
constitute a public record and may be examined by anyone. The Borrower hereby
consents to the use of such data as described above and to its public
disclosure. Failure to provide the required data may constitute an Event of
Default under Section 10.1. In the event a Person other than the Trustee,
investment bankers representing the Board or any agent thereof requests the
information described in Sections 8.4, 8.5, 8.18 or 8.19, the Board shall
exercise its best efforts to provide the Borrower advance notice of its
intention to provide such information to such Person.
<PAGE>
Section 12.6. Execution of Counterparts. This Agreement may be executed in
several counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
Section 12.7. Applicable Law. This Agreement shall be governed exclusively
by the applicable laws of the State.
Section 12.8. Recording and Filing. (a) The financing statements perfecting
the security interests created by the Security Instruments or by this Agreement
in all amounts payable hereunder shall be recorded or filed, as the case may be,
in such office or offices as may at the time be provided by law as the proper
place for the recordation or filing thereof. The Borrower shall be responsible
for such recording and filing and shall bear the expense associated therewith
and in connection with the continued validity and perfection thereof.
(b) The Board and the Borrower shall execute and deliver all instruments
and shall furnish all information necessary or appropriate to perfect or protect
any security interest created or contemplated by this Agreement, the Security
Instruments or the Board Resolution.
Section 12.9. Survival of Obligations. This Agreement and the Note shall
remain in full force and effect until the Series 1997D Bonds, together with all
interest thereon, and all amounts payable under this Agreement, the Security
Instruments and the Note and the Board Resolution shall have been paid in full.
However, the obligations of the Borrower to make the payments required by
Section 5.1 and Section 5.2 hereof and Article XI hereof, and to provide the
indemnity required by Section 8.2 hereof and payment of attorney fees required
by Section 10.4 hereof, shall survive the termination of this Agreement and the
full payment of the Single Lot Bonds.
Section 12.10. Table of Contents and Section Headings Not Controlling. The
Table of Contents and the headings of the several Sections in this Agreement
have been prepared for convenience of reference only and shall not control,
affect the meaning of or be taken as an interpretation of any provision of this
Agreement.
Section 12.11. Limited Liability. The Act prescribes and the parties intend
that by reason of making this Agreement, by reason of the issuance of the Single
Lot Bonds, by reason of the performance of any act required of the Board by this
Agreement, or by reason of the performance of any act requested of the Board by
the Borrower, no indebtedness or charge against the general credit or taxing
powers, if any, of the Board within the meaning of any constitutional or
statutory limitation shall occur.
<PAGE>
IN WITNESS WHEREOF, the Board and the Borrower have caused this Loan
Agreement to be executed in their respective names as of July 1, 1997.
MINNESOTA AGRICULTURAL AND
ECONOMIC DEVELOPMENT BOARD
By ________________________________
Its Chair
ATTEST:
By ____________________________
Its Executive Director
SPARTA FOODS, INC.
By _________________________________
Its______________________________
<PAGE>
Schedule I
SPARTA FOODS, INC.
PROMISSORY NOTE
No. 1 $1,950,000
Sparta Foods, Inc., a Minnesota corporation, acknowledges itself indebted
and for value received hereby promises to pay to the order of the Minnesota
Agricultural and Economic Development Board as the statutory successor to the
Minnesota Energy and Economic Development Authority (the "Board") and its
successors and assigns, the principal sum of ONE MILLION NINE HUNDRED THOUSAND
DOLLARS ($1,950,000) together with interest on the unpaid principal balance of
this Note until the Borrower's obligation with respect to the payment of such
sum shall be discharged at a rate of interest identical to the stated rates of
interest on the Series 1997D Bonds referred to below (taking into account the
different rates for the different maturities and principal amounts of the Series
1997D Bonds) but payable not as provided in the Series 1997D Bonds but as
provided below and in the Loan Agreement referred to below.
This Note is issued to evidence the obligation of Sparta Foods, Inc. under
and pursuant to, and shall be governed by and construed in accordance with the
terms and conditions of, the Loan Agreement dated as of July 1, 1997 (the "Loan
Agreement") between the Board and Sparta Foods, Inc., for the repayment of the
loan made by the Board to Sparta Foods, Inc., thereunder from the proceeds of
the Board's $1,950,000 principal amount of Minnesota Small Business Development
Loan Program Revenue Bonds, Series 1997D, Lot 1 (the "Bonds") and the payment of
interest thereon, including provision for prepayment of said loan in certain
cases, and for the satisfaction of a certain right of reimbursement of the
General Guaranty Fund as provided in the Loan Agreement under certain
circumstances and for the satisfaction of a certain right of reimbursement of
the Board as provided in the Loan Agreement under certain circumstances. This
Note is secured by the Security Agreement, dated as of July 1, 1997 (the
"Security Agreement") made by Sparta Foods, Inc. to the payee in certain
property, as provided in the Loan Agreement and the Security Agreement and
granted by the maker to the payee as provided in the Loan Agreement and a
Guaranty dated as of July 1, 1997 by La Canasta of Minnesota, Inc. to the Board.
The Loan Agreement (together with this Note) and the Security Agreement have
been pledged to the Holders of the Bonds from time to time issued under the
Minnesota Small Business Development Loan Program Revenue Bond General Bond
Resolution (the "General Bond Resolution") adopted by the Board on September 26,
1984 and thereafter amended and restated from time to time pursuant to its
terms.
<PAGE>
As provided in the Loan Agreement and subject to the provisions thereof,
payments hereon are to be made in lawful money of the United States of America
at the place and in the manner provided in the Loan Agreement, in monthly
installments of principal and interest, commencing August 1, 1997, and payable
thereafter on the first day of each month, such installments to be applied first
to the payment of interest then due on this Note, and the remaining balance
thereof to reduce the unpaid principal amount of this Note, with each
installment payable as interest to include interest payable in advance due to
and including the first day of the next succeeding month from the month in which
the installment is payable and with each installment payable as principal to be
similarly paid in advance. The monthly installments to be paid on this Note
shall be an amount equal to for the period commencing on August 1, 1997 and on
the first day of each month thereafter (1) one-sixth of the interest installment
due on the Bonds on the next succeeding bond payment date thereof (taking into
account such in-advance payments) and (2) one-twelfth of the principal
installment due on the Bonds on the next succeeding bond payment date on which a
principal installment thereon is due (taking into account such in-advance
payments), such installments to be reduced by that sum or sums such that on or
before the bond payment date on which a principal installment is due thereon any
amounts then on deposit in the Holding Account created with respect to the Bonds
pursuant to the provisions of the General Bond Resolution plus the monthly
installment then to be paid on this Note shall equal the debt service payment on
the Bonds due on such bond payment date.
This Note may be prepaid in whole or in part in accordance with the
provisions of the Loan Agreement. In addition, upon the occurrence of a
"Determination of Taxability" (as defined in the Loan Agreement), this Note
shall be mandatorily prepaid at the price and time specified in the Loan
Agreement and the Loan Agreement shall be terminated in accordance with the
provisions of Article XI of the Loan Agreement (and in particular, Section
11.1(a) and Section 11.2(a)(i)(A) thereof).
Sparta Foods, Inc. agrees to make the payments on this Note on the dates
and in the amounts specified herein and in the Loan Agreement and in addition
agrees to make such other payments at such times and upon such conditions as are
required pursuant to the Loan Agreement. In the "Event of Default", as defined
in the Loan Agreement, the principal of and interest on this Note may be
declared immediately due and payable as provided in the Loan Agreement. This
Note may be cancelled, amended or supplemented as provided in the Loan
Agreement.
Presentment for payment, notice of dishonor, protest and notice of protest
are hereby waived by the makers hereof.
<PAGE>
IN WITNESS WHEREOF, Sparta Foods, Inc. has caused this Note to be executed
in its respective name and on its behalf by the manual signature of its
President, all as of July 1, 1997.
SPARTA FOODS, INC.
By ____________________________________
Its Chief Financial Officer
<PAGE>
EXHIBIT A TO
LOAN AGREEMENT
LEGAL DESCRIPTION OF LAND
Tract A, Registered Land Survey No. 405, Files of Registrar of Titles, County of
Ramsey.
Being registered land as is evidence by Certificate of Title No. 320168
AND
The Northerly 107.21 feet of the Westerly 406.3 feet of the South Half of the
Northwest Quarter of Section 21, Township 30 North, Range 23 West.
AND
The Northerly 150 feet of that part of the Northwest Quarter of Section 21,
Township 30 North, Range 23 West, lying Westerly of the Westerly right-of-way
line of Interstate Highway No. 35 W, and Southerly of the following described
line:
Beginning at a point on the Westerly line of said Section 21 a distance of 975
feet Northerly of the Southwest corner of said Northwest Quarter; thence
Easterly parallel to the Northerly line of said Section, to the Easterly line of
said Northwest Quarter and there terminating, subject to Cleveland Avenue and
State Trunk Highway No. 8-63.
Certificate of Title No. 283343
<PAGE>
EXHIBIT B TO
LOAN AGREEMENT
DESCRIPTION OF EQUIPMENT
Total Cost
----------
Lawrence Equipment Mega Line
- ----------------------------
Production Line 1,193,848
UBE Bagger 80,286
Box Taper 2,950
Conveyors 20,650
Doboy B450 Packager 31,430
Safeline Metal Detector 22,563
------
Sub Total 1,351,727
Opal Line Proofer Chain 24,727
Opal Line Kwik Lok Bag Clipper 15,054
Opal Line TechPack Conveyor 7,479
Flour Dept Safeline Metal Detector 22,638
Floor Scale 6,330
Flour Dept Stretch Wrapper 13,520
Bulk Flour Storage System 198,043
Boiler 70,725
Hot Water & Softening System 28,240
Plant Racking 44,275
Freezer Racking 121,500
Clark HWD 30 Rider Pallet Truck 11,921
Sauce Temperatur Recorders 9,475
Mixer Water Meters (4) 12,570
Corn Dept Mixer 31,300
Corn Dept Safeline Metal Detector 22,638
Dynequip Corn Transfer System 41,143
Dynequip Corn Storage System 50,924
Voice/data cabling, paging system 13,078
Telephone system upgrade 7,389
Fork lift Truck 30,652
Computer Hardware 5,077
HVAC 108,948
-------
Total 2,249,371
<PAGE>
EXHIBIT C
$1,950,000
Minnesota Agricultural and Economic Development Board
Minnesota Small Business Loan Program Revenue Bonds
Series 1997D, Lot 1
DISBURSEMENT REQUEST NO. ____ FOR DISBURSEMENT
OF FUNDS FROM THE CONSTRUCTION ACCOUNT
TO: First Bank National Association
Corporate Trust Administration
180 East Fifth Street
St. Paul, Minnesota 55101
I, a duly authorized representative of Sparta Foods, Inc. (the "Borrower")
and the obligor under a Loan Agreement, dated as of July 1, 1997 (the "Loan
Agreement), between the Minnesota Agricultural and Economic Development Board
(the "Board") and the Borrower, hereby certify on behalf of the Borrower
pursuant to Section 4.3 thereof as follows:
1. I have reviewed appropriate records and documents of the Borrower
relating to the matters covered by this Request. All capitalized terms used in
this Request shall have the meaning given them in the Loan Agreement.
2. This certificate accompanies the Borrower's request number for advances
under the Loan Agreement dated July 1, 1997 between Borrower and the Minnesota
Agricultural and Economic Development Board (the "Board"). Prior to this request
for advance the Borrower has received advances of $ of Bond Proceeds and $-0- of
Borrower's equity contribution (to the extent such equity was deposited in the
Construction Account pursuant to Section 3.3 of the Loan Agreement).
3. The presently pending request for advance seeks $ (73.33% of the cost of
the Equipment) in Bond Proceeds from the Construction Account and $-0- in
Borrower's equity contribution.
4. As of this date, the Equipment acquired or to be acquired with
Borrower's equity contribution deposited in the Construction Fund have been
and/or will be applied as follows:
<PAGE>
5. The Trustee may rely upon the foregoing certifications in approving any
advance requested by Borrower.
6. Each item for which payment or reimbursement is hereby requested (a) has
been paid or incurred or is now due and payable and (b) is or was necessary in
connection with the acquisition and installation of the Project.
7. No item hereby requested to be paid or reimbursed has been included in
any Request previously filed by the Borrower with the Trustee under Section 4.3
of the Loan Agreement.
8. No default by the Borrower under the Loan Agreement or Security
Agreement has occurred which has not been cured.
9. The amount remaining in the Construction Account (together with any
anticipated investment income to be credited thereto) will, after payment of the
amount requested by this Request, be sufficient to pay the remaining costs of
the Project.
10. Payment of the amounts requested herein will not result in a violation
by the Borrower of any of its representations as set forth in the Loan
Agreement.
11. Attached hereto is a UCC-1 filing relating to the Equipment listed on
Schedule A hereto which has been recorded with the Secretary of State.
12. The Equipment listed on Schedule A hereto has been acquired, installed
and accepted and is free and clear of all security interests, liens and
encumbrances of any kind whatsoever.
13. Attached hereto is a UCC search showing no existing interest in the
Equipment.
14. Attached hereto is an opinion of counsel to the Borrower that the
Equipment is free and clear of all liens except the lien of the Security
Instruments and the security interest of the Board in the Equipment has been
perfected and is valid.*
You are hereby requested to advance and disburse from the Construction
Account seventy three and one-third percent (73.33%) of the amounts set forth in
Section 4 hereof and to reimburse the Borrower for such costs of the Equipment.
- -------------------
*For the Disbursement Requests for which the Borrower reaches $750,000,
$1,500,000 and $1,716,000 in total amounts disbursed from the Construction Fund.
<PAGE>
WITNESS my hand this ___ day of ___________, 199_.
SPARTA FOODS, INC.
By___________________________________
Its_________________________________
Approved:
Minnesota Agricultural and Economic
Development Board
By______________________________
Its Executive Director
<PAGE>
Schedule A
The Borrower has incurred the following costs in constructing and
equipping, or in supplying materials, labor or services for, the Project:
General Nature of Item Amount Incurred Contractor of Supplier
- ---------------------- --------------- ----------------------
<PAGE>
Schedule B
Nature of Name and Address of Amount to
Item Supplier of Item Be Paid
- --------- ------------------- ----------
<PAGE>
Attachment A
Opinion of Company Counsel required for Draw Request
Exhibit 11
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
For the years ended
September 30
--------------------------------------------------------
1997 1996
---- ----
<S> <C> <C>
Net Income $ 435,729 $ 105,307
- ---------- --------- ---------
Primary earnings per share
Adjusted net income under treasury
stock method (reduced interest
expense, net of tax) $ 566,430 $ 137,458
--------- ---------
Shares:
Weighted average number of
common shares outstanding 6,692,100 5,778,550
Shares issuable for the assumed
exercise of options and warrants which
are in excess of 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) 2,791,190 1,650,186
--------- ---------
Weighted average number of
common and common equivalent
shares 9,483,290 7,428,736
--------- ---------
Primary earnings per share $ .06 $ .02
-------------------------- ----- -----
Fully diluted earnings per share
- ---------------------------------
Adjusted net income under treasury stock method
(reduced interest
expense, net of tax, 1997) $ 475,426 $ 105,307
--------- ---------
Shares:
Weighted average number of common
shares outstanding 6,692,100 5,778,550
Shares issuable for the assumed
exercise of options and warrants which
are in excess of 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) 2,791,190 1,838,882
--------- ---------
Weighted average number of common
and common equivalent shares 9,483,290 7,617,432
--------- ---------
Fully diluted earnings per share $ .05 $ .01
-------------------------------- ----- -----
</TABLE>
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 14,
1997, relating to the financial statements of Sparta Foods, Inc. and Subsidiary
as of September 30, 1997 and 1996, which report appears in the September 30,
1997, annual report on Form 10-KSB of Sparta Foods, Inc.
/s/ McGladrey & Pullen, LLP
Minneapolis, Minnesota
December 19, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-KSB FOR THE YEAR
ENDED SEPTEMBER 30, 1997, 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-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 600
<SECURITIES> 0
<RECEIVABLES> 882,967
<ALLOWANCES> (49,500)
<INVENTORY> 1,097,570
<CURRENT-ASSETS> 2,088,103
<PP&E> 7,488,786
<DEPRECIATION> (2,371,131)
<TOTAL-ASSETS> 10,897,345
<CURRENT-LIABILITIES> 3,360,065
<BONDS> 4,051,212
0
0
<COMMON> 67,657
<OTHER-SE> 3,418,411
<TOTAL-LIABILITY-AND-EQUITY> 10,897,345
<SALES> 14,077,841
<TOTAL-REVENUES> 0
<CGS> 9,821,560
<TOTAL-COSTS> 3,209,798
<OTHER-EXPENSES> 268,319
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 320,435
<INCOME-PRETAX> 457,729
<INCOME-TAX> 22,000
<INCOME-CONTINUING> 435,729
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 435,729
<EPS-PRIMARY> .06
<EPS-DILUTED> .05
</TABLE>
