U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X Quarterly Report under Section 13 or 15 (d) of the Securities
- --------- Exchange Act of 1934.
For the quarterly period ended December 31, 1996.
- --------- Transition Report under Section 13 or 15 (d) of the Exchange Act.
For the transition period from ________________ to __________________
Commission File Number 000-19318
SPARTA FOODS, INC.
(exact name of small business issuer as specified in its charter)
Minnesota 41-1618240
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2570 Kasota Avenue, St. Paul, MN 55108
(Address of principal executive offices)
(612) 646-1888
(Issuer's telephone number)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes ____X_____ No __________
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date:
6,685,049 shares of Common Stock at January 21, 1997.
Transitional Small Business Disclosure Format: Yes _______ No ____X____
<PAGE>
SPARTA FOODS, INC.
FORM 10-QSB
QUARTER ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets at December 31, 1996
and September 30, 1996 3
Condensed Consolidated Statements of Operations for the
three-month periods ended December 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the
three-month periods ended December 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements -
December 31, 1996 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
EXHIBIT INDEX 12
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPARTA FOODS, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31 September 30
1996 1996
---------------------------------------------
(unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash $ 9,223 $ 600
Accounts receivable, less allowances of $53,000 and $52,000,
respectively 718,458 639,934
Inventories:
Finished goods 338,847 241,959
Raw materials and packaging 547,089 506,513
Prepaid expenses 90,654 63,915
--------- ---------
Total current assets 1,704,271 1,452,921
--------- ---------
Property and Equipment 6,011,707 5,850,489
Less accumulated depreciation 2,229,363 2,115,810
--------- ---------
3,782,344 3,734,679
--------- ---------
Other Assets
Goodwill, less accumulated amortization of $107,892 and
$102,358, respectively 451,998 457,533
Covenants not-to-compete, less accumulated amortization of
$247,653 and $235,366, respectively 85,847 98,134
Rental property held for resale, less accumulated depreciation of
$21,978 and $15,984, respectively 918,022 924,016
Other 274,277 339,730
--------- --------
1,730,144 1,819,413
--------- ---------
$7,216,759 $7,007,013
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Note payable, bank $ 905,916 $ 294,811
Current maturities of long-term debt 520,464 567,905
Accounts payable 393,427 658,575
Accrued expenses 321,480 412,074
--------- ----------
Total current liabilities 2,141,287 1,933,365
--------- ----------
Long-term Debt, less current maturities 1,951,853 2,063,613
--------- ----------
Stockholders Equity
Preferred Stock, authorized 1,000,000 shares, no
designated par value; none issued -- --
Common Stock, authorized 15,000,000 shares, $.01 par value; issued and
outstanding 6,685,049 and 6,679,049 shares,
respectively 66,850 66,790
Additional paid-in capital 4,913,459 4,911,070
Accumulated deficit (1,856,690) (1,967,825)
----------- ----------
3,123,619 3,010,035
----------- ----------
$7,216,759 $7,007,013
========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
SPARTA FOODS, INC.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
For the three months
ended December 31
------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
Net sales $ 3,111,222 $ 2,920,625
Cost of sales 2,191,121 2,154,317
--------- ---------
Gross profit 920,101 766,308
Selling, general and administrative
expenses 757,285 701,314
-------- ---------
Operating income 162,816 64,994
Other income (expense), net 32,037 4,112
Interest expense (82,467) (141,501)
-------- ---------
Income (loss) before income tax 112,386 (72,395)
Provision for income tax 1,250 ----
-------- ---------
Net income (loss) $ 111,136 $ (72,395)
======== =========
Net Income (loss) per common share $ .02 $ (.02)
======== =========
Weighted average number of common
shares outstanding 6,679,766 4,062,799
========= ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 4 -
<PAGE>
SPARTA FOODS, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
For the three months
ended December 31
-----------------------------------------
1996 1995
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 111,136 $ (72,395)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 145,658 129,471
Changes in assets and liabilities:
Accounts receivable (78,524) (101,790)
Inventories (137,464) 28,097
Prepaid expenses (26,739) (28,691)
Other assets 63,755 (15,527)
Accounts payable and accrued expenses (355,742) (24,913)
---------- ---------
Net cash used in operating activities (277,920) (85,748)
---------- ---------
Cash Flows from Investing Activities
Purchases of property and equipment (167,811) (23,444)
---------- ---------
Net cash used in investing activities (167,811) (23,444)
---------- ---------
Cash Flows From Financing Activities
Net short term borrowings 611,105 255,399
Payments on long-term borrowings (159,201) (146,520)
Issuance of Common Stock 2,450 ---
----------- ---------
Net cash provided by financing activities 454,354 108,879
----------- ---------
Net cash increase (decrease) 8,623 (313)
Cash Balance
Beginning of period 600 863
---------- ---------
End of period $ 9,223 $ 550
========== =========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 81,992 $ 135,884
Income taxes 1,250 ---
=========== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 5 -
<PAGE>
Sparta Foods, Inc.
Notes to Condensed Consolidated Financial Statements
December 31, 1996
(unaudited)
NOTE 1. GENERAL
The unaudited condensed consolidated balance sheet at December 31, 1996,
the condensed consolidated statements of operations for the three-month periods
ended December 31, 1996 and 1995, and the condensed consolidated statements of
cash flows for the three-month periods ended December 31, 1996 and 1995, include
all adjustments which in the opinion of management are necessary in order to
make the financial statements not misleading and are not necessarily indicative
of results of operations to be expected for the entire fiscal year ending
September 30, 1997.
The unaudited financial statements should be read in conjunction with the
audited financial statements for the years ended September 30, 1996 and 1995,
contained in Form 10-KSB and Form 10-KSB/A(No.1), and Management's Discussion
and Analysis of Financial Condition and Results of Operations contained herein.
NOTE 2. FINANCING AGREEMENT
The Company has a financing agreement with a bank which involves a line of
credit and term note. Under this agreement the Company is required to maintain
certain minimum net worth levels. In addition, a maximum debt to net worth ratio
is specified, and dividends and capital expenditures are restricted. Advances
are secured by the Company's accounts receivable, inventories and equipment.
Maximum borrowings under the line of credit are determined by an accounts
receivable and inventory borrowing base calculation or $1,200,000, whichever is
less. At December 31, 1996 such borrowings bear interest at prime plus 1 percent
(9.25 percent), and $905,916 was outstanding on the line of credit. On December
20, 1996 this agreement was amended to adjust various covenants, extend the
maturity and make available an additional $200,000 under the term note.
NOTE 3. INCOME TAX
The provision for income tax is based upon a minimum state tax. The
availability of tax benefits from prior years offsets any regular taxes.
NOTE 4. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is calculated based on the net income
and net loss for the respective period and the weighted average number of common
shares outstanding during the period. Common Stock equivalents (options and
warrants) are not dilutive and anti-dilutive for the respective three-month
periods ended December 31, 1996 and 1995.
- 6 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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. In 1991 and 1992, the Company completed acquisitions which expanded its
retail brands to include Cruz and Chapala trademark products and its customer
bases to include McDonald's restaurants. In 1993, the Company acquired
substantially all of the assets of International Food Products, Inc. ("IFP") of
Lakeville, Minnesota, which was engaged in the manufacture and sale of tortillas
and tortilla chips. This acquisition provided the Company with additional
manufacturing capabilities, the established La Campana Paradiso and Mexitos
brand names, and the retail and food service distribution services of Bradley
Distributing, Inc. and Sysco Corporation, respectively. 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 with a purchase option.
Results of Operations
The Company's net sales of $3,111,222 increased $190,597 (6.5%) for the
three months ended December 31, 1996, as compared to the three months ended
December 31, 1995. This increase primarily resulted from expansion of the
Company's existing customer base in the retail industry as well as expansion
into new territories through its primary retail distributor, Crystal Farms
Refrigerated Distribution Company.
Gross profit, as a percentage of net sales, for the three months ended
December 31, 1996, was 29.6% compared to 26.2 % for the three months ended
December 31, 1995. The higher percentage reflects significant cost savings
achieved by certain purchases of raw materials and packaging as well as the
effect of periodic price increases of the Company's products.
Selling, general and administrative expenses increased $55,971 or 8% in the
three months ended December 31, 1996, as compared to the same period in 1995.
This increase is the result of the sales increase for the period as well as
reflecting some additional expense incurred in introducing and promoting the
Company's new line of La Canasta tortilla chips into the retail market. Selling,
general and administrative expenses, as a percentage of net sales, remained at
24 % for the three months ended December 31, 1996, as compared to the same
period in 1995. Interest expense decreased $59,034 for the three-month period
ended December 31, 1996 compared to the three months ended December 31, 1995.
This is due primarily to interest rate reductions and lower levels of bank
borrowings.
- 7 -
<PAGE>
Liquidity and Capital Resources
The Company financed its current activities primarily through short-term
borrowings and cash generated from its operations.
Cash used in operating activities during the three months ended December
31, 1996 was $277,920 consisting principally of an increase in inventories of
$137,464, an increase in accounts receivable of $78,524 and a decrease in
accounts payable and accrued expenses of $355,742. This was offset by net income
of $111,136 and depreciation and amortization of $145,658. Cash used in
investing activities was $167,811, primarily the result of the purchase and
installation of a new freezer. Cash provided by financing activities was
$454,354 due mainly to a net increase in short-term borrowings under the
Company's Line of Credit.
The Company estimates that as of December 31, 1996, there is an additional
$117,000 which could be drawn under its bank Line of Credit. The amount
available under this Line of Credit fluctuates daily based upon the Company's
eligible accounts receivable and inventory. The Line of Credit, Bank Term Note
and Bank Capital Note are subject to various financial covenants, the violation
of which could result in termination of the loan agreements which would require
the Company to repay the loans in full. On December 20, 1996, the Bank and the
Company signed an amendment to their Credit Agreement adjusting various
financial covenants which thereby reduced the Company's interest rate on
borrowings effective October 1, 1996, extended the maturity of the facility from
December 7, 1997 to December 31, 1999 and made available a Capital Expenditure
Loan of up to $200,000. The Company had been in default of the financial
covenants in the past, and the bank had 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 such violations.
At December 31, 1996, the Company had cash of $9,223 and negative working
capital of $437,016.
The Company believes that its bank credit facilities and cash flow from
operations will be sufficient to meet its operating requirements through fiscal
1997, assuming the following: (i) the Company's fiscal 1997 sales equal or
exceed fiscal 1996 sales; (ii) there are no significant increases in expenses in
fiscal 1997; and (iii) the Company is able to keep its bank credit facilities
operative.
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.
- 8 -
<PAGE>
Raw Material Cost Fluctuations
The Company does not enter into futures contracts as defined by SFAS 80. It
does, however, enter into purchase orders for delayed delivery of raw materials,
generally 30 days for raw materials other than flour and corn. The Company
enters into purchase orders for delayed delivery of flour and corn for a period
of 2-18 months, depending on current pricing, to ensure the availability of the
type of flour and corn best suited for the Company's products. These purchase
orders are placed directly with the suppliers.
Outlook
Its plan in fiscal 1997 is to increase revenues and improve profitability
by focusing on new markets and product brand positioning of tortillas and
tortilla chips in the retail and food service markets to take advantage of
strong industry growth patterns.
The foregoing statements contained in this Outlook section of Management's
Discussion and Analysis of Financial Condition and Results of Operations,
including those relating to the Company's (i) ability to meet its covenant
requirements under its Credit Agreement and (ii) operating requirements through
fiscal 1997 contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations, involve a number of risks and
uncertainties. Some of the factors that could cause actual results to differ
materially include but are not limited to seasonality of its sales and raw
materials cost fluctuations, which are discussed above, and the following:
Reliance on Principal Customers. The Company has several customers who each
accounted for a significant percentage of the Company's sales in fiscal 1996.
During that period, sales to Crystal Farms Refrigerated Distribution Company,
Ken Davis Products, Inc., Catalina Specialty Foods, Inc. and Bradley
Distributing, Inc. accounted for approximately 20%, 8%, 15% and 8% of the
Company's sales, respectively. The loss of any of the foregoing customers could
have a material and adverse effect on the Company's sales and profitability.
Competition. The Mexican-style food manufacturing and distribution industry
is highly competitive. The Company is in competition with a number of
manufacturers and distributors of Mexican-style food products and, to a limited
extent, manufacturers of "snack foods," many of which are better capitalized
than the Company. The Company will also be subject to future competition from
other manufacturers, distributors and retailers who enter into the Mexican-style
food and distribution industry. In the retail market, many of these competitors
engage in extensive local and national advertising and marketing, and the brand
names for products distributed by those competitors are significantly more
recognizable to the consumer than the Company's brand names. In addition,
competition for shelf space in retail grocery stores is intense. In the food
service market, the Company is competing with a number of regional and national
producers or Mexican-style food products. Many of these competitors are better
capitalized than the Company and have established sales organizations. No
assurance can be given that the Company will be able to compete as it expands
its markets.
Sufficiency of Working Capital. As of December 31, 1996, the Company had a
cash balance of $9,223 and negative working capital of $437,016. As of December
31, 1996, there was an additional $117,000 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 severely restricted, and if
obtainable at all, would result in substantial dilution. Therefore, the
Company's ability to fund its working capital requirements in fiscal 1997 will
be almost entirely dependent on generating sales which equal or exceed the
Company's fiscal 1996 sales. In addition, any unforeseen expense of a material
nature would materially and adversely affect the Company's ability to fund
ongoing operations.
Government Regulation. The Company's business is subject to various
federal, state and local environmental and health regulations. If the Company
were found not to be in compliance with such regulations, sanctions and
penalties could be imposed which could materially and adversely affect the
Company's business.
- 9 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
10.42 Fourth Amendment to Credit and Security Agreement dated December 20,
1996 between the Registrant and Norwest Bank Minnesota, National
Association.
10.43 Manufacturing Agreement between the Registrant and Ken Davis Products,
Inc.
10.44 Amendment to Consultant Agreement dated December 20, 1996 between the
Registrant and Catalina Specialty Foods, Inc.
11 Computation of Earnings Per Common Share.
27 Financial Data Schedule (filed only in electronic format).
(b) Reports on Form 8-K
A report on Form 8-K was not filed during the quarter ended December 31,
1996.
- 10 -
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SPARTA FOODS, INC.
(Registrant)
Dated: February 6, 1997 By: /s/ Joel P. Bachul
------------------
Joel P. Bachul,
President and Chief Executive Officer
Dated: February 6, 1997 By: /s/ A. Merrill Ayers
--------------------
A. Merrill Ayers
Treasurer, Secretary and Chief Financial
Officer
- 11 -
<PAGE>
Sparta Foods, Inc.
Exhibit Index
Exhibit
Number Description
10.42 Fourth Amendment to Credit and Security Agreement dated December 20,
1996 between the Registrant and Norwest Bank Minnesota, National
Association.
10.43 Manufacturing Agreement between the Registrant and Ken Davis
Products, Inc.
10.44 Amendment to Consultant Agreement dated December 20, 1996 between the
Registrant and Catalina Specialty Foods, Inc.
11 Computation of Earnings Per Common Share.
27 Financial Data Schedule (filed only in electronic format).
- 12 -
FOURTH AMENDMENT TO CREDIT AND
SECURITY AGREEMENT
This Fourth Amendment, dated as of December 20, 1996, 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, and a Third Amendment to Credit
Agreement dated as of April 23, 1996 (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 9, 1994, payable to the order of the Lender in the original principal
amount of $400,000. The current outstanding principal balance of the Term Note
is $1,265,332.94. The current outstanding principal balance of the Capital
Expenditure Note is $273,333. 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 Notes are due and payable in full on December 9, 1997. The Borrower has
requested that the Lender extend the Termination Date of the Notes by an
additional two years, extend a new capital expenditure loan in the amount of
$200,000, change the interest rate on the Notes and modify the financial
covenants. The Lender is willing to grant the Borrower's request subject to the
terms of this Fourth Amendment.
Accordingly, the Borrower and the Lender hereby agree as follows:
1. Defined Terms. Terms used in this Fourth 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:
<PAGE>
"'Availability' means the difference of (i) the Borrowing Base and (ii) the
outstanding principal balance of the Revolving Note."
"'Fourth Amendment' means the Fourth Amendment to Credit and Security
Agreement dated as of December 20, 1996, between the Borrower and the Lender."
"'Leverage Ratio' means the ratio of Debt excluding Subordinated Debt to
Tangible Net Worth plus Subordinated Debt."
"'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 in which the determination is 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 Note, and, second, as a
prepayment of interest thereafter accruing on the 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
2.51 to 1.00 or more 2.50%
1.76 to 1.00 or more, but 2.00%
less than 2.51 to 1.00
1.26 to 1.00 or more, but 1.00%
less than 1.76 to 1.00
1.25 to 1.00 or below 0.50%
"'Revolving Note Rate' means Base Rate plus the Revolving Loan Spread."
"'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 in which the determination is 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 Note, and, second, as a
prepayment of interest thereafter accruing on the 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.
<PAGE>
Leverage Ratio Percentage
2.51 to 1.00 or more 3.00%
1.76 to 1.00 or more, but 2.50%
less than 2.51 to 1.00
1.26 to 1.00 or more, but 1.50%
less than 1.76 to 1.00
1.25 to 1.00 or below 1.00%
"'Term Note Rate' means the Base Rate plus the Term Loan Spread."
2. Eligible Inventory. Section 1.01 is further amended by deleting the
phrase "less a reserve of ten percent (10%) of such Eligible Inventory" as it
appears in the third line of the definition of "Eligible Inventory".
3. Termination Date. Section 1.01 is further amended by changing the date
"December 9, 1997" to "December 31, 1999" as it appears in the definition of
"Termination Date." The Revolving Note is amended by changing the date "December
9, 1997" to "December 31, 1999" as it appears in the second line thereof.
4. 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 Loan and Capital Expenditure Loans.
(a) Term Loan. The Lender has made a Term Loan to the Borrower before the
date of the Fourth Amendment, the Borrower's obligations to pay which are
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
"Term Note"). As of the date hereof, the outstanding principal balance of the
Term Note is $1,265,332.94. 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 Fourth Amendment, the Borrower's
obligations to pay which are evidenced by the Capital Expenditure Note of the
Borrower dated December 9, 1994, payable to the order of the Lender in the
original principal amount of $400,000 (the "Existing Capital Expenditure Note").
As of the date hereof, the outstanding principal balance of the Existing Capital
Expenditure Note is $273,333. The Lender agrees to make additional Capital
Expenditure Loans to the Borrower in the amount of $200,000, which shall be used
to finance capital expenditures through September 30, 1997 (the indebtedness
evidenced by the Existing Capital Expenditure Note, together with all new
advances made under this Section 2.2 may be referred to hereinafter collectively
as the "Capital Expenditure Loan"). The Borrower's obligation to pay the Capital
Expenditure Loan shall be evidenced by the Borrower's promissory note in the
original principal amount of $473,333 (the "Capital Expenditure Note"),
substantially in the form of Exhibit A to the Fourth Amendment and shall be
secured pursuant to the Credit Agreement and the Security Documents as therein
defined. 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. The Capital Expenditure Note is issued in substitution for and
replacement of, but not in payment of, the Existing Capital Expenditure Note.
<PAGE>
(c) Procedures for Capital Expenditure Loan Advances. At any time prior to
September 30, 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
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(b):
(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."
5. Prepayment Penalty. Section 2.6 of the Credit Agreement is amended in
its entirety and replaced as follows:
"Section 2.6 Voluntary Prepayment; Termination of Agreement by the
Borrower. Except as otherwise provided herein and subject to payment of the
prepayment fees set forth below, the Borrower may, in its discretion, prepay the
Advances in whole at any time or from time to time in part. If the Borrower
desires or decides to terminate this Agreement as of any date prior to December
31, 1999, or to prepay any Obligations with funds not generated solely from
Borrower's operations in the ordinary course of business, the Borrower shall (a)
provide the Lender with thirty (30) days' prior written notice of the Borrower's
intention to do so, and (b) unless the Borrower pays the Obligations (i) in full
with funds from the Lender or an affiliate of Lender, (ii) upon Lender's written
consent thereto with cash received from a stock offering of Sparta's common
stock or (iii) upon the Lender's written consent thereto with cash received from
the sale of the Owned Premises, pay the Lender a prepayment fee of one percent
(1%) of the Revolving Credit Facility Maximum Amount plus the average
outstanding principal balance of the Term Loan and the Capital Expenditure Loan
over the previous three (3) month period. Failure to provide the aforesaid
notice or to prepay the Obligations in full, will not relieve the Borrower of
its obligation to pay the prepayment fee. Upon compliance with the foregoing
requirements and subject to payment and performance of all the Borrower's
Obligations to the Lender, the Borrower may obtain any release or termination of
the Security Interest to which the Borrower is otherwise entitled by law."
<PAGE>
6. Fees. Subsection 2.13(c) of the Credit Agreement is amended by changing
the commitment fee rate from "one-half percent (0.5%) per annum" to "one-quarter
percent (0.25%) per annum" as it appears in the second line thereof and changing
the date "January 1, 1995" to "October 1, 1996" as it appears in the fifth line
thereof. Subsection 2.13(b) is amended in its entirety to read as follows:
"(b) The Borrower hereby agrees to pay the Lender, on demand, fees incurred
in connection with any audits or inspections by the Lender of any collateral or
the operations or business of the Borrower, whether conducted at the Borrower's
premises or at the Lender, which the Lender expects to conduct on a tri-annual
basis, unless a Default or an Event of Default occurs, in which case the Lender
expects to conduct such audits or inspections more frequently, at the rates of
$50 per hour per analyst, together with all actual out-of-pocket expenses
incurred in conducting any such audit or inspection; provided, however, that
beginning in fiscal-year 1998, if the Borrower's average daily Availability
during the most recently completed month is greater than $300,000, then the
frequency of such audits and inspections will be reduced to semi-annually;
further, provided, however, that so long as no Default or Event of Default has
occurred, the Borrower shall not have to reimburse the Lender for such fees,
costs and expenses to the extent they exceed $2,500 per audit."
7. Financial Covenants. Sections 6.12, 6.13, 6.14 and 6.15 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 $1,800,000
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:
October 1, 1996, through
August 31, 1997 1.65 to 1.00
September 1, 1997, through
August 31, 1998 1.25 to 1.00
September 1, 1998, through
August 31, 1999 1.20 to 1.00
September 1, 1999, through
December 31, 1999 1.15 to 1.00
8. 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. The Borrower will not expend or contract to expend for Capital
Expenditures more than $500,000 in any one fiscal year."
9. Amendment Fee. The Borrower agrees to pay the Lender a fully earned,
non-refundable fee in the amount of $1,000, or 0.5% of the capital expenditure
loan commitment increase, in consideration of the execution by the Lender of
this Fourth Amendment, payable upon the execution of this Amendment.
10. No Other Changes. Except as explicitly amended by this Fourth
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.
<PAGE>
11. Conditions Precedent. This Fourth 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 Capital Expenditure Note duly executed by the Borrower.
(b) 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 Fourth Amendment and the Capital Expenditure 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 Fourth Amendment and the Capital
Expenditure Note and all other documents, agreements and certificates on behalf
of the Borrower.
(c) Payment of the amendment fee of $1,000, which is 0.5% of the increase
in the capital expenditure loan commitment.
(d) Such other matters as the Lender may require.
12. 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
Fourth Amendment and the Capital Expenditure Note and to perform all of its
obligations thereunder, and this Fourth 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 Fourth
Amendment and the Capital Expenditure 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.
13. 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.
14. 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 Fourth Amendment, whether such claims, demands
and causes of action are matured or unmatured or known or unknown.
<PAGE>
15. 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 Fourth 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.
16. Miscellaneous. This Fourth 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 Fourth 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>
CAPITAL EXPENDITURE NOTE
$473,333
Minneapolis, Minnesota
December 20, 1996
For value received, the undersigned, LaCANASTA OF MINNESOTA, INC., a
Minnesota corporation (the "Borrower"), hereby promises to pay 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 Four
Hundred Seventy-Three Thousand Three Hundred Thirty-Three Dollars ($473,333) or,
if less, the aggregate unpaid principal amount of all Advances made by the
Lender to the Borrower under the Capital Expenditure Loan, as defined in and
pursuant to that certain Credit and Security Agreement dated as of December 9,
1994, by and between the Borrower and Lender (the "Principal Amount") together
with interest on the Principal Amount 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 rate set forth in
Section 2.4 of that Credit and Security Agreement, as supplemented by a certain
First Supplement to Credit Agreement dated as of December 13, 1994, and 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 of even date herewith (as amended, the "Credit
Agreement").
Interest accruing on the Principal Balance each month shall be payable on
the first day of the next succeeding month and at maturity or earlier prepayment
in full. The Principal Balance shall be payable in thirty-six (36) consecutive
monthly installments of $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.
This Note may be prepaid in whole at any time or from time to time in part
in accordance with the terms of the Credit Agreement, provided that any
prepayment in whole of this Note shall include accrued interest thereon.
This Note is issued pursuant to, and is subject to the Credit Agreement.
This Note is the Capital Expenditure Note referred to in the Credit Agreement.
This Note is secured, among other things, by 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, deeds of trust, assignments,
or other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection, including
reasonable attorneys' fees and legal expenses, in the event this Note is not
paid when due, whether or not legal proceedings are commenced.
If any payment of interest or principal is not made when due in accordance
with the terms and conditions of this Note, or an Event of Default shall occur
under the Credit Agreement or any instrument or document securing this Note and
shall be continuing, then the holder hereof may, at its option, by notice in
writing to the Borrower, declare immediately due and payable the entire
Principal Balance hereof and all interest accrued thereon and the same shall
thereupon be immediately due and payable without further notice or demand.
This Note shall also become immediately due and payable (including unpaid
interest accrued hereon) without demand or notice thereof upon filing of a
petition by or against the undersigned under the United States Bankruptcy Code.
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
payment of, the Capital Expenditure Note of the Borrower dated December 9, 1994,
payable to the order of the Lender in the original principal amount of $400,000.
LaCANASTA OF MINNESOTA, INC.
By _________________________
A. Merrill Ayers
Its Chief Financial Officer
SPARTA FOODS, INC.
MANUFACTURING AGREEMENT
EFFECTIVE DATE: January 1, 1996
PARTIES: Sparta Foods, Inc.
2570 Kasota Avenue
St. Paul, MN 55108-1505 ("Sparta")
Fax #: (612) 646-0711
Ken Davis Products, Inc.
4210 Park Glen Road
Minneapolis, MN 55416
Fax #: (612) 922-6087 ("KDPI")
RECITALS:
A. Sparta manufactures and sells Mexican and other food products under its
own trademarks and brand names and also manufactures food products for other
food companies.
B. KDPI is engaged in the wholesale marketing of a line of cooking sauces
under the name "Ken Davis" and desires to engage Sparta to manufacture such
products.
C. Sparta is willing to manufacture such products for KDPI on the terms and
subject to the conditions of this Agreement.
AGREEMENT:
In consideration of the mutual promises set forth herein and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Manufacture of Products.
a. Specifications. Sparta agrees to manufacture and package the line
of barbecue sauces identified on Exhibit A attached hereto (the
"Products") at Sparta's manufacturing facilities located at 2570
Kasota Avenue, St. Paul, Minnesota pursuant to purchase orders
submitted by KDPI and accepted by Sparta. Sparta agrees to
manufacture the Products in accordance with the ingredient
specifications and manufacturing methods provided by KDPI in
writing to Sparta (the "Specifications"). KDPI agrees to provide
Sparta with thirty (30) days prior written notice of any changes
to the Specifications. Sparta acknowledges that it shall use the
Specifications solely for the manufacture and sale of the
Products to KDPI pursuant to the terms of this Agreement and
shall not use the Specifications for any other purpose.
b. Quality Control. Sparta agrees to (i) maintain control samples of
each production run of Product manufactured for a period of three
(3) years after such manufacture, (ii) provide KDPI with a
written report of each day's production with Sparta's assigned
date code, and (iii) provide KDPI with a written quality control
report of each daily batch of Product manufactured.
2. Packaging Of Product.
a. Package Design and Product Labels. Sparta shall package the
Products using the packaging design and product labels provided
by KDPI. KDPI shall be entirely responsible for the development
and cost of such design and labels. KDPI will provide Sparta with
sufficient quantities of Product labels as requested from time to
time by Sparta.
<PAGE>
b. Purchase of Packaging Materials. Sparta will order packaging
(excluding Product labels) for the Products from its suppliers in
such reasonable quantities to minimize the price for such
packaging but not less than the minimum order size requirement of
the supplier. The price of such packaging is included in the
purchase price of the Products. KDPI shall pay Sparta for any
extra charges or assessments incurred by Sparta for
less-than-minimum or other non-standard size packaging orders
required by KDPI.
c. Discontinuance of Packaging. KDPI shall pay Sparta promptly for
any packaging purchased by Sparta for the Products if such
packaging is discontinued by KDPI for any reason whatsoever or
has remained unused by Sparta for a period of six (6) months.
3. Purchase of Products By KDPI.
a. Placement of Orders. KDPI shall place its orders for the Products
by delivery of a written purchase order to Sparta or by such
other method as approved by Sparta from time to time. Such
purchase orders must identify the Product to be manufactured, the
quantity and package size thereof, the shipping location and
shipping instructions, requested delivery dates and such other
information as Sparta may reasonably request from time to time.
KDPI shall not cancel orders for the Products or return any
Products ordered by it without Sparta's prior written consent.
Orders shall be binding upon Sparta only upon its acceptance of
the order by written acknowledgement or by delivery of the
Product. Sparta shall not be obligated to accept any purchase
order placed by KDPI which requests delivery of Products during a
one week period which exceeds historical weekly volumes for the
past two (2) years by more than one hundred twenty five percent
(125%).
b. Minimum Order Amounts. KDPI must order the Products from Sparta
in the minimum amounts established by Sparta from time to time,
and set forth on Exhibit B attached hereto, to facilitate
Sparta's ability to economically manufacture the Products. The
prices for the Products are predicated on these minimum order
amounts.
c. Terms of Orders. The terms and conditions in this Agreement shall
be the exclusive contract terms between the parties with respect
to KDPI's purchase of the Products. In the event of
inconsistencies between the terms of this Agreement and the terms
of any acceptance document, the terms of this Agreement shall
govern. Sparta objects to any terms set forth in KDPI's orders
for the Products which are different from or additional to the
provisions of this Agreement, and no such terms shall be binding
upon Sparta unless Sparta specifically consents thereto in
writing.
4. Price and Payment.
a. Price. The price for the Products are FOB Sparta's dock and are
set forth on Exhibit B attached hereto. Sparta may change such
prices by delivery of ninety (90) days prior written notice to
KDPI. KDPI shall pay any and all taxes, fees, duties or other
governmental charges and for any and all shipment and shipping
insurance costs relating to the ordered Products.
<PAGE>
b. Payment. KDPI shall pay Sparta for the Products within thirty
(30) days after the date of invoice, with a discount of one
percent (1%) if paid within twenty (20) days after the date of
invoice. If KDPI fails to make payment on any undisputed invoice
or any undisputed portion of a disputed invoice when due, and/or
fails to make payment on undisputed invoice(s) which exceed
$10,000 and such failure continues for a period of ten (10) days
after Sparta delivers written notice of such nonpayment to KDPI,
Sparta shall have the right to require payment in advance, by
COD, by letter of credit or by any other means upon notifying
KDPI of the change in credit terms. Any amounts not paid by KDPI
when due will be subject to a late payment fee computed daily at
a rate equal to eighteen percent (18%) per annum or at the
highest rate permitted under applicable usury law, whichever is
lower. In addition, KDPI shall be liable to Sparta for all costs
incurred by Sparta in its collection of any amounts owing by KDPI
which are not paid when due, including reasonable attorneys' fees
and expenses.
5. Delivery.
a. Delivery. Sparta will deliver the Products FOB Sparta's dock.
Sparta will make the Products available for pick up at its dock
by KDPI's carrier. KDPI will be responsible for selection and
retention of the carrier and direct payment for all shipping
charges. Title to and all risk of loss regarding the Products
shall pass to KDPI when Sparta tenders delivery to the designated
carrier who shall be solely the agent of KDPI.
b. Delivery Dates. Sparta will use its best efforts to fill KDPI's
orders in the ordinary course of its business, but all delivery
dates for the Products shall be estimates only. Sparta needs at
least seven (7) business days lead time to manufacture the
Products. Sparta shall not be in breach of this Agreement or
incur any liability to KDPI or any other person for failure to
meet a delivery date unless Sparta misses such delivery date by
more than three (3) business days, excluding events of force
majeure.
6. Warranties; Disclaimer of Warranties; Insurance.
a. Warranty and Indemnification By KDPI. KDPI represents and
warrants that it has full right and title to the Specifications
and the package design and Product labels and agrees that Sparta
shall have no liability to KDPI or to any third party for
manufacturing the Products in accordance with the Specification
or in packaging the Products using the package design and Product
labels supplied by KDPI. KDPI agrees to indemnify and hold Sparta
harmless from and against any and all claims (including, without
limitation, infringement claims), liabilities, damages, costs and
expenses (including reasonable attorneys' fees and legal
expenses) which Sparta may suffer or incur relating to or arising
out of, directly or indirectly, (i) use of the Specifications,
package design and/or Product labels supplied by KDPI for the
Products, (ii) use or consumption of any of the Products, unless
and solely to the extent such claim arise from the failure of
Sparta to follow the Specifications or the negligent or
intentional wrongdoing of Sparta or its employees. Sparta shall
notify KDPI of any third party claim made against it within ten
(10) days of knowledge of same if Sparta intends to seek
indemnity with respect to such claim under this paragraph. KDPI
shall have the right to undertake, conduct and control, through
counsel of its own choosing, the defense and settlement of any
such claim. Sparta shall have the right to be represented by
counsel of its own choosing, but at its own expense. So long as
is KDPI is contesting any such claim in good faith, Sparta shall
not pay or settle such claim.
b. Warranty By Sparta. Sparta warrants to KDPI that the Products
sold under this Agreement shall be manufactured in accordance
with the Specifications and shall be merchantable in accordance
with FDA standards at the time and point of delivery. The
exclusive remedy for breach of such warranty shall be, at
Sparta's option, to either (i) replace the defective Product or
(ii) refund the purchase price of the defective Product paid by
KDPI. No credits shall be taken by KDPI against its Product
invoices for alleged breaches of this warranty without the prior
written authorization of Sparta. EXCEPT AS EXPRESSLY PROVIDED
ABOVE, SPARTA MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND,
EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCTS, WHETHER AS TO
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE,
NONINFRINGEMENT, WARRANTIES ARISING FROM COURSE OR DEALING OR ANY
OTHER MATTER. No employee or representative of Sparta shall have
any authority to bind Sparta to any warranty or representation
except as expressly stated above. KDPI shall be exclusively
responsible for any warranty or representation which KDPI makes
to any customer.
<PAGE>
c. Indemnification By Sparta. Sparta agrees to indemnify, defend and
hold KDPI harmless from and against any and all third party
claims, liabilities, damages, costs and expenses (including
reasonable attorneys' fees and legal expenses) which KDPI may
suffer or incur relating to or arising out of Sparta's failure to
manufacture the Products in accordance with the Specification or
other negligent or intentional wrongdoing of Sparta or its
employees relating to the manufacture of the Products. KDPI shall
notify Sparta of any third party claim made against it within ten
(10) days of knowledge of same if KDPI intends to seek indemnity
with respect to such claim under this paragraph. Sparta shall
have the right to undertake, conduct and control, through counsel
of its own choosing, the defense and settlement of any such
claim. KDPI shall have the right to be represented by counsel of
its own choosing, but at its own expense. So long as is Sparta is
contesting any such claim in good faith, KDPI shall not pay or
settle such claim.
d. Insurance. Sparta shall maintain products liability insurance
covering the Products in a minimum amount of Two Million Dollars
($2,000,000). Sparta shall provide KDPI with insurance
certificates evidencing such insurance coverage at the request of
KDPI.
7. Independent Contractor KDPI is and shall remain an independent
contractor. Neither this Agreement nor the relationship between the parties
constitutes a partnership, franchise or joint venture between Sparta and KDPI.
Neither party shall have any authority or right under any circumstances
whatsoever to bind or purport to bind the other party in any manner or thing
whatsoever.
8. Confidentiality.
a. Definition. The term "Confidential Information" as used in this
Agreement means any information or compilation of information
which is proprietary to one of the parties to this Agreement and
relates to such party's existing or reasonably foreseeable
business, including, without limitation, trade secrets, the
Specifications, information relating to products of the
disclosing party, manufacturing techniques, recipes, data,
marketing strategies, product development, customer information
and any other information about the disclosing party's business
which is normally considered confidential or which is indicated
in writing to be confidential or trade secret. Confidential
Information shall not include any information:
i. which is part of the public domain or becomes part of the
public domain through no fault of the receiving party; or
ii. which was already in the receiving party's possession, as
evidenced by written documentation, prior to the disclosure
of such information to the receiving party by the disclosing
party; or
iii. which is specifically authorized by the disclosing party, in
writing, to be disclosed; or
iv. which is required to be disclosed by applicable law or order
of a court of competent jurisdiction in which case the
receiving party agrees to notify the disclosing party of
such requirement and to cooperate with the disclosing party
in an effort to narrow or avoid disclosure.
b. Nondisclosure. During the term of this Agreement and at all times
thereafter, the receiving party agrees to hold in strictest of
confidence and to never disclose, transfer, convey, make
assessable to any person or use in any way Confidential
Information of the disclosing party for its own or another's
benefit or permit the same to be used in competition with the
disclosing party. Sparta agrees to disclose the Specifications to
its employees only on a "need to know" basis. Sparta shall
require its production manager and quality control supervisor to
execute confidentiality agreements regarding the Specifications.
Each party agrees to take reasonable precautions to prevent its
employees, representatives, agents and others from disclosing or
appropriating for their own use any and all of the Confidential
Information of the other party.
<PAGE>
9. Term and Termination.
a. Term. This Agreement shall begin on the date inserted on the
front page hereof and shall continue until terminated in any
manner provided in subparagraph b below.
b. Termination. This Agreement may be terminated in any of the
following manners:
i. By either party by delivery of one hundred eighty (180) days
prior written notice of termination.
ii. By either party if the other party commits a material breach
of this Agreement and fails to cure such breach within
thirty (30) days after delivery of written notice from the
nonbreaching party describing the alleged breach. Nonpayment
by KDPI of any amounts owing to Sparta hereunder, breach of
the provisions of Section 6.a. and breach of the provisions
of Section 8 shall each be deemed to be material breaches of
this Agreement.
iii. By either party, effective immediately, by delivery of
written notice to the other party if the other party (A) is
unable to pay its debts as they mature or admits in writing
its inability to pay its debts as they mature, (B) makes a
general assignment for the benefit of creditors, (C) files a
voluntary petition for bankruptcy or has filed against it an
involuntary petition for bankruptcy, or (D) applies for the
appointment of a receiver or trustee for substantially all
of its assets or permits the assignment of any such receiver
or trustee who is not discharged within a period of ninety
(90) days after such appointment.
10. Effect of Termination.
a. Return of Confidential Information. Upon termination of this
Agreement, Each party shall within ten (10) days after the
termination of this Agreement (or such earlier time as request by
the other party) return to the other party all copies of
materials and documents or copies thereof containing any
Confidential Information of the other party.
b. Payment Obligations. Upon termination of this Agreement for any
reason, KDPI shall pay Sparta immediately for (i) all finished
inventory of Product, but not to exceed two (2) times the monthly
average of Products purchased by KDPI during the prior twelve
(12) month period, (ii) any Products already identified to any
order of KDPI, (iii) any ingredients, packaging or packaging
supplies for the Products already purchased by Sparta, (iv) any
ingredients, packaging or packaging supplies for the Products
which Sparta has ordered and cannot cancel without penalty, and
(v) any ingredients, packaging or packaging supplies for the
Products purchased by Sparta's supplier(s) which Sparta is bound
to pay the supplier; provided, however that KDPI will only be
required to purchase Product ingredients, packaging and packaging
supplies equal to not more than six (6) times the average monthly
usage of such items by Sparta in the manufacture of the Product
in the prior twelve (12) month period; and provided, that KDPI
shall have no obligation to purchase finished Product,
ingredients, packaging or packaging supplies after such
termination to the extent that KDPI can reasonably establish that
the specific finished Product, ingredients, packaging or
packaging supplies fails to meet the Specifications. Sparta shall
have the right to fill all open purchase orders for the Products
received from KDPI and accepted by Sparta prior to or as of the
effective date of termination.
c. Surviving Obligations. The provisions of Sections 4.b., 5 (as it
relates to Products shipped after termination pursuant to Section
10.b. above), 6, 8, 10 and 11 shall survive any termination of
this Agreement.
11. General Provisions.
a. Nonassignment; Binding Nature. Neither party shall transfer or
assign any of its rights or obligations under this Agreement
without the other party's prior written consent. Subject to the
foregoing, this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their permitted successors and
assigns.
<PAGE>
b. Limitation of Remedies. SPARTA SHALL HAVE NO LIABILITY TO KDPI OR
ANY OTHER PERSON FOR ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL OR
PUNITIVE DAMAGES OF ANY DESCRIPTION, WHETHER ARISING UNDER
WARRANTY OR OTHER CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER
TORT, OR OTHERWISE. THE PARTIES EXPRESSLY AGREE THAT THE
LIMITATIONS TO SPECIAL, INCIDENTAL, CONSEQUENTIAL AND PUNITIVE
DAMAGES SET FORTH HEREIN ARE AGREED ALLOCATIONS OF RISK AND SHALL
SURVIVE THE DETERMINATION OF ANY COURT OF COMPETENT JURISDICTION
THAT ANY REMEDY PROVIDED HEREIN FAILS OF ITS ESSENTIAL PURPOSE.
UNDER NO CIRCUMSTANCES SHALL SPARTA'S LIABILITY HEREUNDER FOR ANY
CAUSE EXCEED THE PURCHASE PRICE RECEIVED BY IT FOR THE PRODUCTS;
provided, however, such limitations shall not apply to a breach
by Sparta of the provisions of Section 6.c. or Section 8 or to
any intentional breach of any provision herein by Sparta.
c. Force Majeure. No party to this Agreement will be liable to any
other party or be in breach of this Agreement caused in whole or
in part by any event beyond such party's reasonable control,
including without limitation, acts of God, fire, war, strikes,
riots, acts of any government or any agency or subdivision
thereof, transportation delays, or shortage or inability to
secure labor, fuel, energy, raw materials, supplies or machinery
at reasonable prices from regular sources.
d. Entire Agreement. This Agreement, together with Exhibits A and B,
contains the entire contract between the parties as to the
subject matter hereof and supersedes any prior or contemporaneous
written or oral agreements between the parties with respect to
any business matter.
e. Modifications and Waivers. No purported amendment, modification
or waiver of any provision of this Agreement shall be binding
unless set forth in a written document signed by all parties (in
the case of amendments and modifications) or by the party to be
charged thereby (in the case of waivers). Any waiver shall be
limited to the circumstance or event specifically referenced in
the written waiver document and shall not be deemed a waiver of
any other term or provision of this Agreement or of the same
circumstance or event upon any recurrence thereof.
f. Notices. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been
duly delivered (i) when received if delivered by hand, (ii) the
next business day if delivered by facsimile or (iii) three (3)
business days after deposit, if placed in the mail for delivery
by registered or certified mail, return receipt requested,
postage pre-paid, and addressed to the appropriate party at the
addresses set forth on the first page hereof. If either party
should change its address or facsimile number, such party shall
give written notice of the other party of the new address or
facsimile in the manner set forth above, but any such notice
shall not be effective until received by the addressee.
g. Severability. In the event that any provision, or portion
thereof, is held to be unenforceable by final order of any court
of competent jurisdiction, such provision, or portion thereof,
shall be severed herefrom without effecting the validity or
enforceability of the remaining provisions.
h. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Minnesota.
The parties have executed this Agreement, in the manner appropriate to
each, to be effective as of the date on the first page hereof.
SPARTA FOODS, INC.
By ________________________
Its_______________________
KEN DAVIS PRODUCTS, INC.
By_________________________
Its_______________________
AMENDMENT TO CONSULTANT AGREEMENT
EFFECTIVE DATE: December 20, 1996
PARTIES:
Sparta Foods, Inc.
2570 Kasota Avenue
St. Paul, MN 55108
Fax Number: (612) 646-0711 ("Sparta")
Catalina Specialty Foods, Inc.
2550 Kasota Avenue
St. Paul, MN 55108
Fax Number: (612) 647-6855 ("Consultant")
RECITALS:
A. Sparta and Consultant are parties to that certain Consultant Agreement
dated January 1, 1996 (the "Agreement").
B. The parties desire to extend the term of the Agreement pursuant to the
terms and provisions contained herein.
AGREEMENT:
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Extension of Term. The parties hereby agree that the Agreement shall be
renewed for an additional one (1) year term to expire at the end of business on
December 31, 1997, unless terminated earlier pursuant to the terms of Section 10
of the Agreement.
2. Compensation. Section 4 of the Agreement is hereby amended in its
entirety to read as follows:
Sparta shall pay Consultant a base consulting fee of Eighty Thousand
Dollars ($80,000) for the calendar year January 1, through December 31,
1997. Such amount shall be paid every two weeks during calendar year
1997 (in the amount of $3,076.92), payable in arrears on the same date
as Sparta pays its employee payroll obligations. Any amount not paid
when due shall be subject to a late payment fee computed daily at a
rate equal to eighteen percent (18%) per annum or the highest rate
permitted under applicable usury law. Consultant shall be eligible
for a bonus of up to Twelve Thousand Five Hundred Dollars ($12,500) if the
bonus criteria set forth on Exhibit B attached hereto is met
(the "Bonus").
<PAGE>
3. Exhibit B. Exhibit B is hereby revised in its entirety and revised
Exhibit B attached hereto shall supersede and take the place of Exhibit B to the
Agreement.
4. Continuing Effect of Agreement. The Agreement shall continue in full
force and effect, without amendment, through December 31, 1996. For calendar
year 1997, the Agreement shall continue in full force and effect except as
expressly amended in this Amendment. All provisions contained in Section 12 and
Section 13 of the Agreement shall apply to this Amendment.
The parties hereto have caused this Amendment to be executed by their duly
authorized representative to be effective as of the day and year first above
written.
CATALINA SPECIALTY FOODS, INC.
("Consultant")
By____________________________
Mary Catherine Gooch, President
SPARTA FOODS, INC.
("Sparta")
By_____________________________
Joel P. Bachul, President and CEO
The undersigned does hereby agree to continue to be bound by the provisions
of Section 2(j), Section 6 and Section 11(c) of the Agreement as amended herein.
_________________________________
MARY CATHERINE GOOCH
<PAGE>
EXHIBIT B
TO
CONSULTANT AGREEMENT FOR CALENDAR YEAR 1997
Bonus
Consultant shall be eligible for a bonus of up to $12,500 during calendar
year 1997 pursuant to the following terms:
Crystal Farms Total Net Sales During Bonus Amount
Sparta's 1997 Fiscal Year (10-1-96 - 09-30-97)
$2,800,000 - $3,299,999 $2,500
$3,300,000 - $3,799,999 $5,000
$3,800,000 - $4,299,999 $7,500
$4,300,000 - $4,799,999 $10,000
$4,800,000 or more $12,500
The above bonus shall be calculated and paid by Sparta to Consultant on or
before December 31, 1997.
In addition to the above bonus, for every new Cruz item slotted through
Crystal Farms and shipped into a warehouse, based on Consultant's efforts,
Consultant will be paid an additional one time consulting fee of One Hundred
Dollars ($100) per slotted item, payable quarterly at the end of the fiscal
quarter during which such item was first shipped to a warehouse.
Exhibit 11
Computation of Earnings Per Common Share
Net income (loss) per common share is calculated based on the net income
and net loss for the respective period and the weighted average number
of common shares outstanding during the period. Common Stock
equivalents (options and warrants) are not dilutive and anti-dilutive
for the respective three-month periods ended December 31, 1996 and
1995.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from 10-QSB
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 9,223
<SECURITIES> 0
<RECEIVABLES> 771,458
<ALLOWANCES> 53,000
<INVENTORY> 885,936
<CURRENT-ASSETS> 1,704,271
<PP&E> 6,011,707
<DEPRECIATION> 2,229,363
<TOTAL-ASSETS> 7,216,759
<CURRENT-LIABILITIES> 2,141,287
<BONDS> 0
0
0
<COMMON> 66,850
<OTHER-SE> 3,056,769
<TOTAL-LIABILITY-AND-EQUITY> 7,216,759
<SALES> 3,111,222
<TOTAL-REVENUES> 3,111,222
<CGS> 2,191,121
<TOTAL-COSTS> 2,191,121
<OTHER-EXPENSES> 724,248
<LOSS-PROVISION> 1,000
<INTEREST-EXPENSE> 82,467
<INCOME-PRETAX> 112,386
<INCOME-TAX> 1,250
<INCOME-CONTINUING> 111,136
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 111,136
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
