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, 1998
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. [ ]
Issuer's revenues for its most recent fiscal year: $14,963,157
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of December 11, 1998 was approximately $5,667,936 based upon the
average high and low bid prices of the Registrant's Common Stock on such date.
There were 7,841,045 shares of Common Stock, $.0l par value, outstanding as of
December 11, 1998.
-------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference pursuant to Rule 12b-23: Portions of the
Registrant's Proxy Statement for its 1999 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.......................................................................2
ITEM 1. DESCRIPTION OF BUSINESS...........................................2
ITEM 2. DESCRIPTION OF PROPERTY...........................................8
ITEM 3. LEGAL PROCEEDINGS.................................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............8
PART II......................................................................9
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........10
ITEM 7. FINANCIAL STATEMENTS.............................................15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.............................................35
PART III....................................................................35
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT.....................................................35
ITEM 10. EXECUTIVE COMPENSATION..........................................36
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..36
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................37
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K................................37
<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 and stone
ground and corn flour tortilla chips which are distributed under the Company's
own brand names. The Company also markets salsas and picante sauces and barbecue
sauce. The Company's brand names and products include Cruz, La Canasta and La
Campana Paradiso tortillas, La Canasta tortilla chips and La Canasta and Chapala
salsas and picante sauces.
The Company's branded retail products are sold in supermarkets located
primarily in the Midwestern United States. 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 28
states and Marigold Foods, Inc. which distributes its products in 7 states. 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 U.S. 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
Sparta's goal is to become one of the premier manufacturing companies
of high quality tortillas nationwide. The Company plans to grow the business by
expanding its retail grocery and foodservice sales. In connection with its
retail grocery products, Sparta intends to focus on the refrigerated tortilla as
the primary product and selectively expand the distribution of this product in
new geographic areas, such as the midwest, east and southeast regions of the
United States, where Sparta believes it can establish a significant market
position. In connection with Sparta's foodservice products, Sparta intends to
target its sales to chain foodservice operators and expand geographically into
expected high growth markets. Sparta believes it is well positioned to continue
to capitalize on the expected growth in tortilla sales nationwide. Sparta plans
to grow its sales internally, through joint ventures or acquisitions of
compatible manufacturing facilities or regional brands and through the
development of new distribution relationships.
<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.
Products and Marketing
General. The food products manufactured and/or 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 (including picante sauces) for distribution to retail food
stores and food service establishments. The Company also manufactures or markets
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, 1998, 1997 and 1996, 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 1998 1997 1996
- -------- ---- ---- ----
<S> <C> <C> <C>
Tortillas 79% 72% 70%
Corn tortilla chips 15% 16% 17%
Barbecue sauces, salsas and all other products 6% 12% 13%
</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 1998,
the Company began contracting with third party manufacturers to produce
barbecue, salsas and picante sauces previously manufactured by the Company.
The Company distributes its products through distribution centers
primarily in the Midwestern United States. During the fiscal years ended
<PAGE>
September 30, 1998, 1997 and 1996, the Company's percentage of sales for
distribution to food service establishments, to retail stores under its own
brand names, and under private label, compared to total Company sales, were as
follows:
Year Ended September 30,
Market Segment 1998 1997 1996
- -------------- ---- ---- ----
Food service
establishments 58% 54% 54%
Branded retail 35% 32% 29%
Private label and
ingredients 7% 14% 17%
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 1998. 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 conducted through
distributors who carry product inventory at their distribution centers. These
distributors include Alliant Food Service, Inc., U.S. Food Services, Inc. and
Sysco Corporation, who on a combined basis accounted for approximately 35% of
the Company's food service sales in its fiscal year ended September 30, 1998.
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 28 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
Distribution Company, accounted for approximately 25% of the Company's sales in
fiscal year 1998. The Company has a distribution 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.
<PAGE>
Private Label and Ingredients. During fiscal year 1998, the Company
ceased manufacturing salsas, picante sauces and barbecue and other sauces and
contracted with third parties to manufacture such products for the Company. The
Company markets the products under its own labels and private labels. During
fiscal year 1998 the Company ceased its manufacturing relationship with its
largest barbecue sauce customer which accounted for the decrease in sales under
Private Label and Ingredients as a percentage of total Company sales.
Manufacturing and Supplies
The Company manufactures its products on 11 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; and (v) two stone ground corn
tortilla chip lines.
The principal ingredients for the Company's manufactured products are
corn, wheat flour, corn flour, corn and soybean oils. 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 1999 of corn and
flour 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 54% 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.
<PAGE>
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.
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 tortillas 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 name CRUZ 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
Company's federal registration for the mark CRUZ used in connection with
tortillas expires January 2008. 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.
<PAGE>
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.
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 currently requires the payment of three percent (3%) of
the gross sales of products sold under the LA CAMPANA PARADISO mark. The Company
is currently negotiating an extension of this license agreement and is
optimistic such an extension can be obtained, but there can be no assurance that
an extension can be negotiated on terms acceptable to the Company.
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. 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 2, 1998 the Company employed a total of 143 persons. Of
these full-time employees, 5 serve in an executive capacity, 124 are engaged in
manufacturing, shipping, quality control and plant supervision, 7 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 health, dental, disability and life
insurance programs. The Company's management believes that its relations with
its employees are good.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases an office and manufacturing facility
located at 1565 First Avenue N.W., New Brighton, Minnesota. It 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.
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 1998.
<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.
<TABLE>
<CAPTION>
Common Stock
--------------------------------------------------------------------
Fiscal Quarter Ended High Bid Low Bid
- ---------------------------------------- -------------------------------------- -----------------------------
<S> <C> <C>
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
December 31, 1997 $1.938 $1.500
March 31, 1998 1.719 1.125
June 30, 1998 1.657 1.375
September 30, 1998 1.500 1.000
</TABLE>
At December 11, 1998 the published high and low bid price for the
Company's Common Stock was $1.00 and $0.875 per share. At December 11, 1998,
there were issued and outstanding 7,841,045 shares of Common Stock of the
Company held by 182 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
credit agreement precludes the Company from declaring or paying dividends on its
Common Stock without the creditor's approval.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF 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. Since 1991 the Company has completed acquisitions and secured new
broker and distributor relationships which has expanded its trademark retail
brands to include Cruz, Chapala, Mexitos and La Campana Paradiso, its retail
distribution network to include Crystal Farms Refrigerated Distribution Company,
Marigold Foods, Inc. and Bradley Distributing, Inc. and its food service
customers to include McDonald's, Perkins, Friendly's and Carlos O'Kelly
restaurants.
Results of Operations
Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended
September 30, 1997
During fiscal 1998, the Company had net sales of $14,963,157, an increase of
$885,316, or 6%, compared to net sales of $14,077,841 in fiscal 1997. This
increase resulted primarily from higher sales volumes to existing restaurants
and distributors and by adding new customers in the foodservice industry as well
as expansion into new territories through the Company's primary retail
distributors, Crystal Farms Refrigerated Distribution Company and Marigold
Foods, Inc. This increase was offset by a reduction in private label sales due
to the loss of the Company's primary barbecue sauce customer.
Gross profit as a percentage of net sales for fiscal 1998 was 29% compared to
30% for fiscal 1997. This decrease was primarily due to additional manufacturing
costs incurred in the first and seconds quarters of fiscal 1998 associated with
the relocation of the Company to its new manufacturing facility in New Brighton,
Minnesota.
Selling, general and administrative expenses were $3,706,283 for fiscal 1998, an
increase of $496,485 or 15%, as compared to $3,209,798 in fiscal 1997. This
increase is the result of the net sales growth and also reflects higher levels
of selling expenses incurred during the year. The additional selling expenses
consisted of increased advertising and other expenditures to promote the
Company's retail product lines and increased staffing of sales personnel to
implement the Company's long-term sales growth objectives.
<PAGE>
Interest expense was $333,778 for fiscal 1998, an increase of $13,343 compared
to $320,435 in fiscal 1997. This increase is due primarily to higher levels of
bank borrowings during the first and second quarters of fiscal 1998 to finance
the cost of installing new manufacturing equipment. This was offset by a
reduction in bank and other borrowings beginning late in the second quarter and
continuing through the rest of fiscal 1998, resulting from the proceeds received
from the issuance of preferred stock and the sale of rental property.
The Company recorded other income of $159,077 during fiscal 1998 compared to
$106,807 in fiscal 1997. This income consists primarily of rental and interest
income. The growth in other income is due mainly to increased interest income
from the short-term investment of the Company's cash and cash equivalents during
the third and fourth quarters of fiscal 1998.
Income tax benefit was $265,000 for fiscal 1998 compared to an income tax
expense of $22,000 for fiscal 1997. The benefit is the result of reversing a
valuation allowance of approximately $400,000 on a deferred tax asset associated
with the Company's net operating loss carryforwards from prior years. The
valuation allowance was recorded in prior years due to the uncertainty of
generating sufficient future taxable income. Due to the Company's expectation
that it will be able to generate sufficient future taxable income, this
valuation allowance was eliminated during fiscal 1998. The benefit is offset by
a current year income tax expense resulting from the Company's Income before
income taxes of $429,496 during fiscal 1998.
Net income for fiscal 1998 was $694,496 compared to net income in fiscal 1997 of
$435,729 for the reasons set forth above.
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.
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.
<PAGE>
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
reflected a valuation allowance on remaining net operating loss carryforwards of
approximately $2.1 million as realization was dependent on sufficient future
taxable income, which was 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.
Liquidity and Capital Resources
The Company has financed its current activities primarily through cash
generated from its operations, bank and other debt and the issuance of
convertible preferred stock.
Cash provided by operating activities during fiscal 1998 was $920,250
consisting principally of net income of $694,496, depreciation and amortization
of $752,118, and a decrease in inventories of $264,390 offset by an increase in
accounts receivable and prepaid expenses of $91,317, an increase in deferred
income tax assets of $270,000 and a decrease in accounts payable and accrued
expenses of $420,831. Cash provided by investing activities was $253,527
consisting principally of proceeds from the sale of rental property and the
utilization of restricted cash related to and offset by the purchase of property
and equipment in the Company's new manufacturing facility. Cash used in
financing activities was $43,122 consisting principally of $2,529,299 in
proceeds from the issuance of common stock due to certain warrant exercises and
the issuance of preferred stock through a private placement during the second
quarter, offset by repayments of $2,550,809 in short-term borrowings under the
Company's line of credit and mortgage-related long-term borrowings associated
with the rental property that was sold during the third quarter.
At September 30, 1998, the Company had cash and cash equivalents of
$1,131,255 and working capital of $1,744,986. The Company believes that its bank
credit facilities and cash flow from operations will be sufficient to meet its
operating requirements through fiscal 1999.
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 and salsa during the summer
months. This seasonality may cause quarterly results of operations to fluctuate.
<PAGE>
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.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures About Segments of an Enterprise and Related Information. This
statement requires public enterprises to report selected information about
operating segments in annual and interim reports issued to shareholders. It is
effective for financial statements for fiscal years beginning after December 15,
1997, but it is not required to be applied to interim financial statements in
the initial year of its application. The statement will have no effect on the
Company's basic financial statements, but management is reviewing if additional
disclosures will be required.
Outlook
The Company's plan in fiscal 1999 is to continue to grow the business
by increasing sales and expanding its presence in new geographic territories.
The Company plans to grow the business internally as well as through joint
ventures and/or acquisitions and through the development of new distribution
relationships. See Item One "Description of Business - Business Strategy."
The Company relies on computer software and hardware systems to manage
its information and portions of its manufacturing. The Company is aware of the
computer software and hardware issues associated with the programming code in
existing computer software programs and non-information technology such as
micro-controllers found in computer hardware. The issue is whether systems will
properly recognize date sensitive information. Much of the computer software and
hardware in use today are unable to recognize a year that begins with "20"
instead of "19." Many computers will be unable to recognize the Year 2000 and,
as a result, could generate erroneous data or cause a computer to fail. Some
computer systems may begin to operate improperly sooner for failure to read
other dates such as September 9, 1999.
The Company has completed an assessment of its exposure to the Year
2000 issue by evaluating its software and hardware systems. The Company's
assessment revealed that its exposure to the Year 2000 issue is nominal, and it
is currently upgrading its software and hardware systems to make such systems
Year 2000 compliant. The cost of such upgrade is expected to be less than
$10,000. In addition to evaluating its own systems, the Company has inquired of
its major customers and suppliers as to their exposure to the Year 2000 issue to
<PAGE>
determine the extent to which the Company is indirectly vulnerable to the Year
2000 issues from such customers and suppliers. Many of the Company's customers
and suppliers have responded that they believe they are or will be Year 2000
compliant. The Company plans to continue to assess its exposure to the Year 2000
issue and develop plans to address any developments associated with the Year
2000 issue that could have an adverse effect on the Company and its operations.
Statements relating to the Company's (a) goals and business objectives
contained in the section entitled "Description of Business - Business Strategy;"
(b) Year 2000 assessment and its future growth contained in the Management's
Discussion and Analysis or Plan of Operations and (c) the President's statements
relating to management's optimism regarding the Company's future, its projected
growth potential, the ability of the Company's management team, operating and
administrative infrastructure to support more than $20 million in net sales for
fiscal year ended September 2002 and the intent to leverage the Company's brand
name strength contained in the President's Letter to Shareholders attached to
the Company's 1999 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 (i)
seasonality of its sales and raw materials cost fluctuations, which are
discussed above; (ii) a decline in national sales growth of tortillas; (iii)
failure of the Company's sales force to achieve its annual sales objectives;
(iv) failure of the Company to continue to produce high quality tortillas; (v)
the inability of the Company to grow its business due to competitive factors;
and (vi) the loss of any significant customers or distributors. In addition, any
unforeseen expense of a material nature would materially and adversely affect
the Company's ability to grow its operations.
<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, 1998 and 1997, 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, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Minneapolis, Minnesota
November 12, 1998
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS (Note 3) 1998 1997
- --------------------------------------------------------------------------- ------------------- ------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 1,131,255 $ 600
Accounts receivable, less allowances of $30,000 in 1998 and
$49,500 in 1997 (Note 7) 877,752 833,467
Inventories:
Finished goods 436,784 566,212
Raw materials and packaging 396,396 531,358
Prepaid expenses 198,752 155,416
Income tax receivable 4,746 1,050
Deferred tax asset (Note 6) 43,000 -
------------------- ------------------
Total current assets 3,088,685 2,088,103
------------------- ------------------
Property and Equipment (Note 2) 9,045,342 7,488,786
Less accumulated depreciation 2,788,399 2,371,131
------------------- ------------------
6,256,943 5,117,655
------------------- ------------------
Other Assets
Restricted cash (Note 3) 242,059 1,893,967
Goodwill, less accumulated amortization of $85,404 and
$72,564, respectively 427,968 440,808
Covenants not-to-compete, less accumulated amortization
of $39,424 and $40,772, respectively 60,576 69,228
Rental property held for resale, less accumulated depreciation -
of $38,728 (Note 1) 906,422
Deferred financing costs, less accumulated amortization of
$64,778 and $54,518, respectively 133,256 132,460
Deferred tax asset (Note 6) 227,000 -
Other 284,698 248,702
------------------- ------------------
1,375,557 3,691,587
=================== ==================
$ 10,721,185 $ 10,897,345
=================== ==================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------------------------------------------------- ------------------- ------------------
<S> <C> <C>
Current Liabilities
Note payable, bank (Note 3) $ - $ 834,209
Current maturities of long-term debt 367,377 700,388
Accounts payable:
Trade 506,874 861,120
Construction - 428,315
Accrued expenses 469,448 536,033
------------------- ------------------
Total current liabilities 1,343,699 3,360,065
------------------- ------------------
Long-Term Debt, less current maturities (Note 3) 2,667,623 4,051,212
------------------- ------------------
Commitments (Notes 4 and 5)
Stockholders' Equity (Note 8)
Preferred stock, authorized 1,000,000 shares, $1,000 par value; issued and
outstanding 2,500 shares and -0- shares in
1998 and 1997, respectively 2,500,000 -
Common stock; authorized 15,000,000 shares, $0.01 par value;
issued and outstanding 7,037,172 and 6,765,758 shares
in 1998 and 1997, respectively 70,371 67,657
Additional paid-in capital 4,977,092 4,950,507
Accumulated deficit (837,600) (1,532,096)
------------------- ------------------
6,709,863 3,486,068
=================== ==================
$ 10,721,185 $ 10,897,345
=================== ==================
</TABLE>
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------- ------------------- ------------------
<S> <C> <C>
Net sales (Note 7) $ 14,963,157 $ 14,077,841
Cost of sales 10,652,677 9,821,560
------------------- ------------------
Gross profit 4,310,480 4,256,281
Selling, general, and administrative expenses 3,706,283 3,209,798
Nonrecurring charge (Note 4) - 375,126
------------------- ------------------
Operating income 604,197 671,357
Other income, net (Note 1) 159,077 106,807
Interest expense (333,778) (320,435)
------------------- ------------------
Income before income taxes 429,496 457,729
Income tax benefit (expense) (Note 6) 265,000 (22,000)
=================== ==================
Net income $ 694,496 $ 435,729
=================== ==================
Net income $ 694,496 $ 435,729
Preferred dividends (75,000) -
------------------- ------------------
Net income available to common shareholders $ 619,496 $ 435,729
=================== ==================
Earnings per share (Note 10)
Basic $ 0.09 $ 0.07
Diluted 0.08 0.05
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Preferred Stock
--------------------------------------
Shares Outstanding Par Value
- --------------------------------------------------------------------------- ------------------- ------------------
<S> <C> <C>
Balance, September 30, 1996 - $ -
Common stock issued upon exercise of warrants and options,
net of costs of $3,050 - -
Net income - -
------------------- ------------------
Balance, September 30, 1997 - -
Preferred stock issued, net of costs of $158,735 2,500 2,500,000
Common stock issued upon exercise of warrants and options - -
Net income - -
=================== ==================
Balance, September 30, 1998 2,500 $ 2,500,000
=================== ==================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common Stock Additional
Shares Paid-In Accumulated
Outstanding Par Value Capital Deficit Total
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
6,679,049 $ 66,790 $ 4,911,070 $ (1,967,825) $ 3,010,035
86,709 867 39,437 - 40,304
- - - 435,729 435,729
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
6,765,758 67,657 4,950,507 (1,532,096) 3,486,068
- - (158,735) - 2,341,265
271,414 2,714 185,320 - 188,034
- - - 694,496 694,496
========================= ====================== ======================= ====================== ======================
7,037,172 $ 70,371 $ 4,977,092 $ (837,600) $ 6,709,863
========================= ====================== ======================= ====================== ======================
</TABLE>
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------- ------------------- ------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 694,496 $ 435,729
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 687,095 547,790
Amortization 65,023 80,299
Deferred income taxes (270,000) -
(Gain) loss on disposal of property and equipment (8,606) 294,213
Changes in assets and liabilities:
Accounts and income tax receivable (47,981) (193,533)
Inventories 264,390 (417,598)
Prepaid expenses (43,336) (24,051)
Accounts payable and accrued expenses (420,831) 326,504
------------------- ------------------
Net cash provided by operating activities 920,250 1,049,353
------------------- ------------------
Cash Flows From Investing Activities
(Increase) decrease in restricted cash 1,651,908 (1,893,967)
Purchases of property, equipment, and other (2,386,237) (1,656,933)
Proceeds from the sale of property and equipment and rental 927,728 61,025
property held for resale
(Increase) decrease in deposits and other assets 60,128 (137,428)
------------------- ------------------
Net cash provided by (used in) investing activities 253,527 (3,627,303)
------------------- ------------------
Cash Flows From Financing Activities
Net borrowings (payments) on line of credit (834,209) 539,398
Long-term borrowings 1,293,353 2,730,667
Payments of long-term debt (3,009,953) (610,585)
Issuance of common stock, net of costs 188,034 40,304
Issuance of preferred stock, net of costs 2,341,265 -
Deferred financing costs (21,612) (121,834)
------------------- ------------------
Net cash provided by (used in) financing activities (43,122) 2,577,950
------------------- ------------------
Net change in cash and cash equivalents 1,130,655 -
Cash and Cash Equivalents
Beginning 600 600
=================== ==================
Ending $ 1,131,255 $ 600
=================== ==================
(Continued)
</TABLE>
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------- ------------------- ------------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 353,168 $ 319,017
Income taxes 9,545 23,050
=================== ==================
Supplemental Schedule of Noncash Investing and Financing Activities
Facility improvements financed with accounts payable $ - $ 428,315
=================== ==================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Sparta Foods, Inc., through its wholly-owned subsidiary, La
Canasta of Minnesota, Inc. (La Canasta) formulates, manufactures and markets a
broad line of tortillas, tortilla products, and salsas under its own brand names
and markets sauces for others under private labels.
The Company's customers are principally retail food stores and food 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 and
cash equivalents, trade accounts receivable, accounts payable, notes payable,
and a line of credit. At September 30, 1998, 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 and cash equivalents: The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. Cash equivalents consist primarily of investments in money market
accounts. 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.
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Property and equipment: Property and equipment are carried at cost and are being
depreciated over their useful lives on a straight-line basis. Leasehold
improvements are being depreciated over the shorter of the estimated useful life
of the asset or the life of the lease.
Intangibles: Costs in excess of net assets acquired (goodwill) are being
amortized over 40 years. Covenants not-to-compete are being amortized over 15
years, the term of the agreements. Deferred financing costs are being amortized
over the lives of the agreements, which are 5 to 10 years.
Accounting for long-lived assets: 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. To date, management has determined that no impairment of
long-lived assets exists.
Rental property: Rental property consisted of a facility in Lakeville,
Minnesota, which was previously used in the manufacturing of the Company's
products. The property was recorded at estimated fair market value, which was
lower than cost.
The Company leased this facility under an operating lease in 1998 and 1997. The
lease called for monthly payments of approximately $11,000, plus taxes and
utilities. Rental income under this lease was approximately $80,000 and $130,000
for the years ended September 30, 1998 and 1997, respectively, and is included
in other income in the statements of income. The Company sold the property in
May 1998 at approximately the recorded value.
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.
Preferred stock: On February 24, 1998, the Company issued 2,500 shares of
preferred stock, series 1998. The shares are convertible at any time at the rate
of 606.06 shares of common stock for each share of preferred stock. The holders
of the preferred stock have the right to require the Company to repurchase the
stock in the event of a change in control authorized by the Board of Directors
or if the Company is in default with certain covenants as defined in the
agreement. The holders of the preferred stock are entitled to receive, when, as,
and if declared by the Company's Board of Directors, cash dividends at the rate
of 5 percent annually or, at the option of the Company, dividends of shares of
additional preferred stock at the rate of 7.5 percent annually. Dividends are
fully cumulative, accumulate without interest from the date the preferred stock
was originally issued and, if declared by the Board of Directors, are payable,
semiannually on January 1 and July 1. At September 30, 1998, cumulative and
undeclared cash dividends totaled $75,000 or $30 per share.
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Recent accounting pronouncements: As of October 1, 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income. Statement No. 130 establishes new rules for the reporting
and display of comprehensive income and its components. Statement No. 130
requires unrealized gains or losses on available-for-sale securities and certain
other items, which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income. The Company has no
comprehensive income as defined by SFAS No. 130.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. This
statement requires public enterprises to report selected information about
operating segments in annual and interim reports issued to shareholders. It is
effective for financial statements for fiscal years beginning after December 15,
1997, but it is not required to be applied to interim financial statements in
the initial year of its application. The statement will have no effect on the
Company's basic financial statements, but management is reviewing if additional
disclosures will be required.
Note 2. Property and equipment
<TABLE>
<CAPTION>
Property and equipment consists of:
Estimated
Useful Lives September 30
-------------------------------------
1998 1997
- --------------------------------------------------------------- ----------------- ------------------ ------------------
<S> <C> <C> <C>
Factory equipment 3-18 $ 6,726,731 $ 5,141,085
Office and other equipment 3-12 387,562 356,231
Leasehold improvements 15 1,734,807 -
Packaging printing plates 5 186,742 155,470
Construction in progress - 9,500 1,836,000
-------------------------------------
$ 9,045,342 $ 7,488,786
================== ==================
</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 (8.25 percent at September 30, 1998). The agreement expires
May 30, 2000. At September 30, 1998, there were no borrowings under the line of
credit. The Company is to maintain certain minimum net worth and debt service
coverage levels.
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.
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 maturity dates of the revenue
bonds are through August
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Financing Agreements (Continued)
2008. The effective rate of interest to the Company is 5.79 percent per annum.
At September 30, 1998, $1,791,667 is outstanding. The Company is to maintain
certain minimum net worth, debt service coverage levels, and has restrictions on
the payment of dividends.
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, 1998 and 1997, as follows:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------- ------------------------ ------------------------
<S> <C> <C>
Debt service reserve fund, money market funds $ 197,412 $ 195,000
Construction fund, money market funds 44,647 1,698,967
-------------------------------------------------
$ 242,059 $ 1,893,967
======================== ========================
</TABLE>
<TABLE>
<CAPTION>
Long-term debt: Long-term debt consists of the following:
September 30
------------------------------------------
1998 1997
- --------------------------------------------------------------------------- --------------------- --------------------
<S> <C> <C>
State of Minnesota loan (described above) $ 1,791,667 $ 1,916,250
Term note payable to bank, secured by substantially all assets
of the Company, due in monthly installments of $26,535, including interest at
the prime rate (8.25% as of September 30, 1998), to June 30, 2003, when the
remaining balance is
due (1) 1,243,333 -
Term and equipment notes payable to bank, paid in June, 1998 - 2,048,853
Notes payable to a trust and to an individual, paid in May, 1998 - 736,322
Other notes payable - 50,175
--------------------- --------------------
3,035,000 4,751,600
Less current maturities 367,377 700,388
------------------------------------------
$ 2,667,623 $ 4,051,212
===================== ====================
(1) The loan agreement requires, among other things, the Company maintain
certain minimum net worth and debt service coverage levels.
</TABLE>
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Financing Agreements (Continued)
Aggregate maturities of long-term debt at September 30, 1998, are as follows:
Years ending September 30:
1999 $ 367,000
2000 396,000
2001 422,000
2002 454,000
2003 396,000
Later years 1,000,000
------------------------
$ 3,035,000
========================
Note 4. Lease Commitments and Rental Expense
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 1997 operations of $375,126 related to the unamortized cost
of leasehold improvements at its former facility and specific costs related to
the move.
The Company has leased its new office and factory building under a noncancelable
operating lease agreement which expires on August 31, 2012, and requires minimum
monthly rentals of $37,360, which increase in the fifth and tenth year of the
lease, plus the payment of property taxes, normal maintenance, and insurance on
the property. The total rental commitment is recognized as rent expense on a
straight-line basis over the life of the lease. Accordingly, the Company has
recorded accrued rent of $50,188 as a liability at September 30, 1998. In
September 1998, the Company subleased a portion of the building to another
company under a noncancelable agreement which expires March 2000 and requires
annual rentals of $34,800, plus additional amounts for utilities and other
services which are determined on a per-hour basis.
In addition, the Company had leased various items of factory and office
equipment under noncancelable leases.
Approximate minimum future obligations required under operating leases, (net of
the sublease), at September 30, 1998, are as follows:
Years ending September 30:
1999 $ 591,000
2000 597,000
2001 594,000
2002 544,000
2003 569,000
Later years 4,657,000
------------------
$ 7,552,000
==================
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Lease Commitments and Rental Expense (Continued)
Total rent expenses for all facilities and equipment during the years ended
September 30, 1998 and 1997, were approximately $626,000 and $447,500, net of
$80,000 and $130,000 of sublease and other rental income, respectively.
Note 5. Agreements and Commitments
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, 1998, the Company had outstanding purchase orders of
approximately $630,000. 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,
1998 and 1997.
Self-funded insurance: The Company provides medical insurance for its employees
under a self-funded plan. The Company estimates expenses under this plan and
recognizes the liability as estimates are made. The Company has purchased
stop-loss insurance for the plan, which limits the Company's liability to
$10,000 per individual per year and also has certain annual aggregate limits.
Note 6. Income Taxes
The income tax benefit (expense) for 1998 and 1997 consisted of:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------- --------------------- ---------------------
<S> <C> <C>
Current:
Federal (net of $-0- and $133,000 in 1998 and 1997,
respectively, of net operating loss carryforward benefits) $ - $ (8,000)
State (net of $-0- and $58,000 in 1998 and 1997, respectively,
of state net operating loss carryforward benefits) (5,000) (14,000)
Deferred 270,000 -
-------------------------------------------
$ 265,000 $ (22,000)
===================== =====================
</TABLE>
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES AND CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Income Taxes (Continued)
A reconciliation between income tax benefit (expense) computed at the federal
statutory rate and the Company's effective income tax rate for 1998 and 1997 is
as follows:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------- --------------------- ---------------------
<S> <C> <C>
Federal statutory rate (34.0)% (34.0)%
State income taxes, net of federal benefit (6.5)% (6.5)%
Valuation allowance 90.3% -
Nondeductible expenses (0.8)% (0.9)%
Benefit of graduated tax rate 12.7% -
Utilization of net operating loss carryforward - 36.6%
--------------------- ---------------------
Effective income tax rate 61.7% (4.8)%
===================== =====================
</TABLE>
Temporary differences that give rise to the net deferred tax assets and
liabilities at September 30, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
Net current deferred tax assets (liabilities)
Receivable allowances $ 9,000 $ 15,000
Vacation accrual 23,000 23,000
Inventory costs 10,000 15,300
Bonus accrual - 14,200
Charitable contributions 1,000 -
Leased deferred income - (17,000)
Less valuation allowance - (50,500)
-------------------- -------------------
$ 43,000 $ -
==================== ===================
</TABLE>
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
Net current deferred tax assets (liabilities):
Depreciation $ (554,000) $ (470,000)
Property and equipment valuation allowance - 89,200
Net operating loss carryforwards 703,000 642,000
AMT credit carryforwards 38,000 42,000
Intangible assets 40,000 34,200
Less valuation allowance - (337,400)
-------------------- -------------------
$ 227,000 $ -
==================== ===================
</TABLE>
As of September 30, 1997, the Company recorded a valuation allowance of $387,900
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
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Income Taxes (Continued)
when deductible temporary differences and carryforwards are expected to be
available to reduce taxable income. During the year ended September 30, 1998,
management reduced the valuation allowance recorded in prior years, as they
believe there will be sufficient future taxable income to utilize all deductible
temporary differences and carryforwards.
The federal net operating loss carryforwards of $2,343,000 at September 30,
1998, will expire as follows:
Years Amount
- -------------------------------------------------------- --------------------
2009 $ 662,000
2010 1,277,000
2011 202,000
2018 202,000
The future use of the federal net operating losses can be subject to annual
limits in the event of ownership changes. The alternative minimum tax (AMT)
credit carryforwards may be carried forward indefinitely to reduce future
regular federal income taxes payable.
Note 7. Major Customers
The Company had sales to one customer which accounted for approximately 25 and
23 percent of sales for fiscal years 1998 and 1997, respectively. As of
September 30, 1998, accounts receivable from this customer were approximately
$158,800.
In addition, the Company had sales to a second customer through a distributor
which accounted for approximately 12 percent of sales for fiscal years 1998 and
1997, respectively. As of September 30, 1998, accounts receivable from this
distributor were approximately $82,000.
Note 8. Options, Warrants, and Subsequent Events
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 market 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.
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Options, Warrants, and Subsequent Events (Continued)
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 at September 30:
1998 1997
- ------------------------------------------ ----------------- ------------------
Net income:
Basic:
As reported $ 619,496 $ 435,729
Pro forma 390,704 345,324
Diluted:
As reported 694,496 435,729
Pro forma 465,704 345,324
Basic earnings per share:
As reported 0.09 0.07
Pro forma 0.06 0.06
Diluted earnings per share:
As reported 0.08 0.05
Pro forma 0.06 0.05
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 1998 and
1997, respectively: dividend rate of -0- for both years; price volatility of
77.44 and 99.49 percent; risk-free interest rate of 5.83 and 5.92 percent; and
expected lives of approximately 6 and 4 years. The weighted-average fair values
of options granted during 1998 and 1997 were $0.53 and $0.76, respectively.
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>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Options, Warrants, and Subsequent Events (Continued)
Additional information relating to all outstanding options as of September 30,
1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------- --------------------------------
Weighted-Average Weighted-Average
Exercise Price Exercise Price
Shares Shares
- ----------------------------------------------- --------------- ------------------ -- --------------- ----------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 962,585 $ 1.76 723,584 $ 1.76
Options exercised (19,750) 1.02 (40,000) 0.50
Options expired (95,585) 3.49 (43,499) 1.60
Options granted 253,000 1.52 322,500 1.07
--------------- ------------------ -- --------------- ----------------
Options outstanding at end of year 1,100,250 $ 1.41 962,585 $ 1.58
=============== ================== == =============== ================
Options exercisable at end of year 488,125 $ 1.60 343,084 $ 2.23
=============== ================== == =============== ================
</TABLE>
The following table summarizes information about stock options outstanding at
September 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ------------------------------
Weighted Average
Remaining
Number Contractual Weighted-Average Number Weighted-Average
Range of Exercise Outstanding at Life Exercise Exercisable at Exercise
Prices September 30, 1998 (Years) Price September 30, 1998 Price
- ------------------- ------------------- ------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C> <C>
$ 0.50-0.88 221,250 2.08 $ 0.53 165,750 $ 0.53
1.00-1.44 525,500 3.84 1.20 186,125 1.27
1.56-1.75 248,500 3.57 1.62 37,500 1.75
2.00-2.94 45,000 0.95 2.42 38,750 2.49
4.95 60,000 0.08 4.95 60,000 4.95
- ------------------- ------------------- ------------------- ------------------ ------------------- -------------------
$ 0.50-4.95 1,100,250 3.10 $ 1.41 488,125 $ 1.60
=================== =================== =================== ================== =================== ===================
</TABLE>
Stock warrants: A summary of warrants follows:
<TABLE>
<CAPTION>
Price Range Shares
- ------------------------------------------------------------ ---------------------------- ----------------------------
<S> <C> <C>
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
Exercised 0.50-0.75 (251,664)
---------------------------- ----------------------------
Outstanding, September 30, 1998 $ 0.50-4.50 3,414,173
============================ ============================
</TABLE>
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Options, Warrants, and Subsequent Events (Continued)
Warrants expire as follows:
Expiration Date Shares
- ----------------------------------------------------- ------------------------
October 20, 1998 400,000 (1)
October 31, 1998 528,873 (2)
February 2,1999 2,390,000
December 9, 1999 15,300
February 2, 2001 80,000
---------
3,414,173
(1) Subsequent to year end, warrants for 395,000 shares of the Company's
common stock were exercised for $197,500. In addition, warrants for
5,000 shares of the Company's common stock expired.
(2) Subsequent to year end, warrants for 408,873 shares of the Company's
stock were exercised for $204,437. In addition, warrants for 120,000
shares of the Company's common stock expired.
Note 9. Related-Party Transactions
The Company purchased marketing and advertising services from two organizations
owned by members of the Board of Directors. Total expenditures for these
services were approximately $99,000 and $113,000 for 1998 and 1997,
respectively.
The Company purchased certain raw materials from a vendor that is also a
Preferred Stock shareholder. Total purchases for these materials were
approximately $273,000 and $197,000 for fiscal years 1998 and 1997,
respectively.
Note 10. Earnings Per Share
The Financial Accounting Standards Board 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.
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Earnings Per Share (Continued)
The Company initially applied SFAS No. 128 for the year ended September 30, 1998
and, as required by the statement, has restated all per share information for
the prior year.
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------- ------------------------ ------------------------
<S> <C> <C>
Earnings:
Net income $ 694,496 $ 435,729
Less preferred stock dividends (75,000) -
------------------------ ------------------------
Income available to common stockholders $ 619,496 $ 435,729
======================== ========================
Weighted-average shares:
Basic weighted-average shares 6,882,453 6,692,100
Adjustments for dilutive shares:
Options and warrants 968,896 1,230,680
------------------------ ------------------------
Diluted weighted-average shares 7,851,349 7,922,780
======================== ========================
Basic earnings per share $ 0.09 $ 0.07
======================== ========================
Diluted earnings per share $ 0.08 $ 0.05
======================== ========================
</TABLE>
For the year ended September 30, 1998, the conversion of preferred stock has not
been assumed due to an antidilutive impact on the calculation of diluted
earnings per share.
<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 11, 1998 are as follows:
Name Age Position with Company
Joel P. Bachul 56 President and Chief
Executive Officer
A. Merrill Ayers 52 Senior Vice President,
Treasurer, Chief Financial
Officer and Secretary
Thomas C. House 52 Vice President of
Corporate Planning
William J. Schuch 45 Vice President of Sales
Joel P. Bachul, has been the Chief Executive Officer and President of
the Company 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 served as Treasurer, Chief Financial Officer and
Secretary of the Company since November 9, 1994 and as Senior Vice President of
Finance and Administration since October 1998. Prior to joining the Company, Mr.
Ayers served as Senior Vice President of ITT Consumer Financial Corp. from June
1992 until February 1994.
Thomas C. House, has served as Vice President of Operations from March
1993 through October 1998 and as Vice President of Corporate Planning since
October 1998. 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.
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 1999 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 1999 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 sections labeled "Principal Shareholders" and "Management Shareholdings"
which appear in the Registrant's definitive Proxy Statement for its 1999 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
definite Proxy Statement for its 1999 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 1998 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 16, 1998 By: /s/ Joel P. Bachul
--------------------------------
Jack P. Bachul, President
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/ Joel P. Bachul December 16, 1998
- ----------------------------------------
Joel P. Bachul, President and Director
(Principal Executive Officer)
/s/ A. Merrill Ayers December 16, 1998
- -----------------------------------------
A. Merrill Ayers, Chief Financial Officer
(Principal Accounting Officer)
/s/ Larry P. Arnold December 16, 1998
- -----------------------------------------
Larry P. Arnold, Director
/s/ Edward K. Jorgensen December 16, 1998
- -----------------------------------------
Edward K. Jorgensen, Director
/s/ John D. Johnson December 16, 1998
- -----------------------------------------
John D. Johnson, Director
/s/ Michael J. Kozlak December 16, 1998
- -----------------------------------------
Michael J. Kozlak, Director
/s/ R. Dean Nelson December 16, 1998
- -----------------------------------------
R. Dean Nelson, Director
<PAGE>
SPARTA FOODS, INC.
EXHIBIT INDEX TO FORM 10-KSB
Exhibit
Number Description
3.1 Articles of Incorporation, as amended to date. (Incorporated by
reference to Exhibit 3(i)(5) of the Company's Report on Form 8-K
dated February 24, 1998.)*
3.2 By-Laws, as amended to date.
4.1 Form of Certificate for Common Stock of Sparta Foods, Inc.
(Incorporated by reference to the Company's Form 10-QSB for the
quarter ended March 31, 1994.)*
10.1** Amended and Restated Stock Option Plan. (Incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on Form
10-KSB for the period ended September 30, 1996.)*
10.2 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 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. 1,341,156). (Incorporated by reference
to the Company's Form 10-K for the period ended December 31, 1990.)*
10.4 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 Form 10-K for the period ended December 31, 1990.)*
10.5 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 Report on Form 8-K with a Date of
Report of October 28, 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
10.6 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 Form 10-KSB for the period ended
September 30, 1993.)*
10.7 Addendum No. 1 to Distributor 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.)*
10.8 Distributor Agreement dated January 2, 1996, between Catalina
Specialty Foods, Inc. and the Company. (Incorporated by reference
to Exhibit 10.40 to the Company's Form 10-QSB for the period ended
March 31, 1996.)*
10.9 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.)*
10.10 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.)*
10.11** 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).*
10.12** 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).*
10.13** 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).*
10.14 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.*
- ------------------------------
* 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
10.15 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).*
10.16** Employment Agreement dated November 14, 1997 between the Company
and William J. Schuch. (Incorporated by reference to Exhibit 10.38
to the Company's Form 10-KSB for the period ended September 30,
1997.)*
10.17 Loan Agreement dated as of July 1, 1997 between the Company and
Minnesota Agricultural and Economic Development Board.
(Incorporated by reference to Exhibit 10.40 to the Company's Form
10-KSB for the period ended September 30, 1997.)*
10.18 Stock Purchase Agreement dated February 23, 1998 between the
Company and Harvest States Cooperatives. (Incorporated by reference
to Exhibit 10.40 to the Company's Form 8-K dated February 24,
1998.)*
10.19 Term Loan and Credit Agreement, Security Agreement and Guaranty
Agreement dated June 24, 1998 between the Company and Norwest
Bank Minnesota, National Association. (Incorporated by
reference to Exhibit 10.1 to the Company's Form 10-QSB for the
period ended June 30, 1998.)
11 Sparta Foods, Inc. Computation of Net Income per Common Share.
21 Subsidiaries of Registrant. (Incorporated by reference to Exhibit 21
to the Company's Form 8-K dated February 24, 1998.)
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 3.2
BYLAWS
OF
SPARTA CORP.
ARTICLE I
OFFICES
The registered office of the corporation shall be that set forth in the
Articles of Incorporation dated July 5, 1988, filed with the Secretary of State
of Minnesota on July 7, 1988, or in the most recent amendment thereof, or in a
statement of the Board of Directors filed with the Secretary of State of the
State of Minnesota changing the registered office in the manner prescribed by
law. The corporation may also have offices and places of business at such other
locations as the Board of Directors may from time to time designate, or the
business of the corporation may require.
ARTICLE II
SHAREHOLDER'S MEETINGS
Section 2.1. Time and Place of Meetings. Regular or special meetings of
the shareholders, if any, shall be held on the date and at the time and place
fixed by the President/Chief Executive Officer or the Board of Directors, except
that a meeting called by, or at the demand of a shareholder or shareholders,
pursuant to Minnesota Statutes, Section 302A.431, Subd. 2, shall be held in the
county where the principal executive office is located.
Section 2.2. Regular Meetings. An annual meeting of the shareholders
shall be held at such place as the Board of Directors shall designate, either
within or without the State of Minnesota, and on such date and at such time as
may be determined by the Board of Directors and communicated to the shareholders
according to the requirements set forth herein, for the purpose of electing
directors and for the transaction of any other business which may properly come
before it. Additional regular meetings of the shareholders may be held on a less
frequent periodic basis. No meeting shall be considered a regular meeting unless
specifically designated as such in the notice of meeting or unless all the
shareholders are present in person or by proxy and none of them objects to such
designation. Any business appropriate for action by the shareholders may be
transacted at a regular meeting.
Section 2.3. Special Meetings. Special meetings of the shareholders may
be held for any purpose or purposes, unless otherwise prescribed by statute.
Such a meeting may be called by the President/Chief Executive Officer, the Chief
Financial Officer or two or more directors and shall be called by the
President/Chief Executive Officer at the request in writing of shareholders
owning not less than ten percent (10%) or more of the voting stock of the
corporation.
<PAGE>
Section 2.4. Notice of Meetings. Written notice of a meeting of the
shareholders stating the time and place thereof shall be mailed at least five
(5) days but not more than sixty (60) days prior to the meeting, except as
otherwise provided by statute, to each shareholder entitled to vote thereat to
the last known address of such shareholder as the same appears upon the books of
the corporation.
Every notice of any special meeting shall state the purpose or purposes
for which the meeting has been called, and the business transacted at all
special meetings shall be confined to the purpose stated in the call, unless all
of the shareholders are present in person or by proxy and none of them objects
to consideration of a particular item of business.
Section 2.5. Record Date. The determination of shareholders entitled to
vote at a regular or special meeting shall be made on the date fixed by the
Board of Directors for closing of the books of the corporation. If no date is
fixed by the Board, the date for such determination shall be the date five (5)
days before the date of such meeting.
Section 2.6. Waiver of Notice. Notice of the time, place and purpose of
any meeting of shareholders, whether required by statute, the Articles of
Incorporation or these Bylaws, may be waived by any shareholder. Such waiver may
be given before, at, or after the meeting, and may be given in writing, orally
or by attendance.
Section 2.7. Action without Meeting. Any action which may be taken at a
meeting of the shareholders may be taken without a meeting, if authorized in
writing or writings signed by all shareholders who would be entitled to notice
of a meeting for such purpose.
Section 2.8. Quorum. The presence at any meeting, in person or by
proxy, of the holders of a majority of the shares entitled to vote, shall
constitute a quorum for the transaction of business. If, however, such majority
shall not be present in person or by proxy at any meeting of the shareholders,
those present shall have the power to adjourn the meeting from time to time,
without notice other than by announcement at the meeting, until the requisite
amount of voting shares shall be represented. At any such adjourned meeting at
which the required number of voting shares shall be represented, any business
may be transacted which might have been transacted at the meeting as originally
noticed.
Section 2.9. Voting. At all meetings of the shareholders, each
shareholder having the right to vote shall be entitled to vote in person or by
proxy, duly appointed by an instrument in writing subscribed by such
shareholder. Each shareholder shall have one (1) vote for each share having
voting power standing in his name on the books of the corporation. Upon the
demand of any shareholder, the vote for directors or the vote upon any question
before the meeting shall be by ballot. All elections shall be had and all
questions decided by a majority vote except as otherwise required by these
Bylaws, the Articles of Incorporation, any applicable shareholder agreement, or
statute.
<PAGE>
Section 2.10. Proxies. At all meetings of shareholders, a shareholder
may vote by proxy executed in writing by the shareholder or by his duly
authorized attorney-in-fact. Such proxy shall be filed with the Secretary of the
corporation at or before the time of the meeting. A proxy shall be valid for the
period specified in the proxy or, if no expiration date is provided in the
proxy, for a period not to exceed eleven months from the date of its execution.
A proxy's authority shall not be revoked by the death or incapacity of the maker
unless, before the vote is cast and the authority exercised, written notice of
such death or incapacity is given to the corporation.
ARTICLE III
BOARD OF DIRECTORS
Section 3.1. Election of Directors. The business and affairs of this
corporation shall be managed by its Board of Directors. The number of directors
shall be the number last elected by a majority vote of the shareholders or by
the Board of Directors, which number shall not be less than two (2) nor more
than eight (8) directors. Directors need not be shareholders. Each of the
directors shall hold office until the regular meeting of the shareholders next
held after his election, until a successor shall have been elected and shall
qualify, or until he shall resign or shall have been removed as hereinafter
provided.
Section 3.2. Board Meetings; Place and Notice. Meetings of the Board of
Directors may be held from time to time at any place within or without the State
of Minnesota that the Board of Directors may designate. In the absence of
designation by the Board of Directors, Board meetings shall be held at the
principal executive office of the corporation, except as may be otherwise
unanimously agreed orally or in writing or by attendance. Any director may call
a meeting of the Board of Directors by giving two (2) days notice to all
directors of the date and time of the meeting. The notice need not state the
purpose of the meeting. Notice may be given by mail, telephone, telegram or in
person. If a meeting schedule is adopted by the Board of Directors, or if the
date and time of a Board of Directors meeting has been announced at a previous
meeting, no notice is required.
Section 3.3. Waiver of Notice. Notice of the time, place and purpose of
any meeting of the Board of Directors, whether required by statute, the Articles
of Incorporation, or these Bylaws, may be waived by any director. Such waiver
may be given before, at, or after the meeting and may be given in writing,
orally or by attendance. The attendance of a director at a meeting and
participation therein shall constitute waiver of notice of such meeting unless
the director attends for the express purpose of objecting to the transaction of
business because the meeting is not lawfully called or convened, the director so
states at the meeting, and the director does not thereafter participate in the
meeting.
Section 3.4. Quorum and Action of Board. At all meetings of the Board
of Directors, a majority of the directors shall be necessary and sufficient to
constitute a quorum for the transaction of business; provided, that if less than
a majority of the directors are present, a majority of those present may adjourn
the meeting from time to time without notice other than an announcement at the
meeting at which adjournment is taken.
<PAGE>
The directors present at a duly called or held meeting at which a
quorum is present may continue to transact business until adjournment,
notwithstanding the withdrawal of enough directors to leave less than a quorum.
The act of a majority of the directors present at any meeting at which
a quorum is present, or at any meeting at which a quorum was present and at
which the remaining directors are authorized under this Section to continue to
transact business shall be the act of the Board of Directors.
Section 3.5. Electronic Communications. A conference among directors by
any means of communication through which the directors may simultaneously hear
each other during the conference constitutes a board meeting, if the same notice
is given of the conference as required by these Bylaws for a meeting, and if the
number of directors participating in the conference would be sufficient to
constitute a quorum at a meeting. Participation in a meeting by such electronic
means of communication constitutes presence in person at the meeting.
Section 3.6. Vacancies. Any vacancy occurring on the Board of Directors
by reason of death, resignation, disqualification, or increase in the number of
directors, may be filled by a majority of the remaining directors, though less
than a quorum, at any regular or special meeting, except that vacancies on the
Board resulting from newly created directorships may only be filled by a
majority vote of the directors serving at the time of the increase. Each
director so elected shall hold office until the next regular or special
shareholder meeting or until his or her successor is elected and qualified.
Section 3.7. Resignations. Any director of the corporation may resign
at any time by giving written notice to the Chairman of the Board or to the
President/Chief Executive Officer or Secretary of the corporation. Unless a
later date is specified in the notice of resignation as the effective date of
resignation, resignation shall take effect on the date of receipt of the written
notice by the Chairman, President/Chief Executive Officer, or Secretary. Unless
otherwise specified in such notice, the acceptance of the resignation shall not
be necessary to make it effective.
Section 3.8. Removal. At a meeting of shareholders called expressly for
that purpose, any director or the entire Board of Directors may be removed, with
or without cause, by a vote of the holders of a majority of the shares then
entitled to vote at an election of directors.
Section 3.9. Absent Directors. A director may give advance written
consent or opposition to a proposal to be acted on at a Board meeting. If the
director is not present at the meeting, consent or opposition to a proposal does
not constitute presence for purposes of determining the existence of a quorum,
but consent or opposition stated in writing and delivered to the President/Chief
Executive Officer or the officer or director presiding at the meeting shall be
counted as a vote in favor of or against the proposal if the proposal acted on
at the meeting is substantially the same or has substantially the same effect as
the proposal to which the director has consented or objected. Such written
consent or opposition shall be entered in the minutes or other record of action
at the meeting.
<PAGE>
Section 3.10. Action without Meeting. Any action which is required or
may be taken at a meeting of the Board of Directors may be taken without a
meeting if a consent in writing, setting forth the action so taken, is signed by
a majority of all the directors entitled to vote with respect to the subject
matter thereof, except as to matters that require shareholder approval, in which
case such consent in writing must be signed by all of the directors. Action
taken by such written consent shall be effective on the date when signed by the
required number of directors, or such earlier effective date as set forth
therein. When written action is permitted to be taken by less than all of the
directors, all directors shall be notified immediately of its text and effective
date. Failure to provide the notice shall not invalidate the written action. A
director who does not sign or consent to the written action shall have no
liability for the action or actions taken thereby.
Section 3.11. Presumption of Assent. For purposes of any liability as a
director, a director of the corporation who is present at a meeting of the Board
of Directors at which action on any corporate matter is taken shall be presumed
to have assented to the action taken unless:
(a) He objects at the beginning of the meeting to the
transaction of business because the meeting is not lawfully called or
convened and does not thereafter participate in the meeting;
(b) He votes against the action at the meeting; or
(c) He is prohibited from voting at the meeting due to a
conflict of interest.
Section 3.12. Committees. The Board of Directors may, by a majority
vote, designate two or more of their number to constitute an executive
committee, which, to the extent determined by the Board and allowed by law,
shall have and exercise the authority of the Board in the management of the
business of the corporation. Such executive committee shall act only in the
interval between meetings of the Board and shall be subject at all times to the
control and direction of the Board. The Board of Directors by a majority vote
may also appoint one or more natural persons who need not be Board members to
serve on such other committees as the Board may determine. Such other committees
shall have powers and duties as shall from time to time be prescribed by the
Board. A majority of the members of any committee present at a meeting is a
quorum for the transaction of business. All committees shall keep accurate
minutes of their meetings, which minutes shall be made available upon request to
members of that committee and to any director.
Section 3.13. Chairman. The Board may elect one of their number to
serve as Chairman, who shall preside, when present, at all meetings of the
Board.
Section 3.14. Compensation. The directors of the corporation and all
members of committees shall serve without salary, unless ordered by the
directors; however, they shall be paid the necessary expenses incurred in the
execution of their duties. Nothing herein shall preclude the paying by the
corporation of a salary or other compensation to an officer or employee who is
also a director.
<PAGE>
Section 3.15. Limitation of Liability. Except as expressly provided in
Minnesota Statutes, Section 302A.251, Subd. 4, a member of the Board of
Directors of this corporation shall have no personal liability to this
corporation or to the shareholders for monetary damages for breach of fiduciary
duty as a member of the Board of Directors. Amendment or repeal of Section 4.6
of the Articles of Incorporation of this corporation shall not adversely affect
any limitation of liability of a director with respect to any liability or
alleged liability arising out of any act or omission occurring prior to such
amendment or repeal.
ARTICLE IV
OFFICERS
Section 4.1. Election of Officers. The Board of Directors shall, from
time to time, elect a President/Chief Executive Officer and a Treasurer/Chief
Financial Officer. The Board of Directors may, but shall not be required to,
elect a Secretary and one (1) or more Vice Presidents, as they may determine,
one of whom may be designated as an Executive Vice President. In addition, the
Board of Directors may elect such other officers and agents as it may determine
necessary, including Assistant Secretaries and Assistant Treasurers. Such
officers shall exercise such powers and perform such duties as are prescribed by
the Articles of Incorporation or the Bylaws or as may be otherwise determined
from time to time by the Board of Directors. Any number of offices or functions
of those officers may be held or exercised by the same person.
Section 4.2. Terms of Office. The officers of the corporation shall
hold office for such terms as shall be determined from time to time by the Board
of Directors or until their successors are chosen and qualify in their stead.
Any officer elected or appointed by the Board of Directors may be removed by the
affirmative vote of a majority of the whole Board of Directors with or without
cause.
Section 4.3. Salaries. The salaries of all officers and agents of the
corporation shall be determined by the Board of Directors.
Section 4.4. President/Chief Executive Officer. The President/Chief
Executive Officer shall be the chief executive officer of the corporation, and
shall have the general direction of the affairs of the corporation. He shall
preside at all meetings of the shareholders and of the Board of Directors. He
shall direct general active management of the business of the corporation, and
shall see that all orders and resolutions of the Board of Directors are carried
into effect. He shall execute all contracts, mortgages and other instruments of
the corporation, and may appoint and discharge agents and employees. He shall be
ex officio a member of any executive committee which may be constituted
hereunder, and all other standing committees, and shall perform all such other
duties as are incident to his office, or are properly required of him by the
Board of Directors. As used herein or in other writings of, or documents
delivered on behalf of, the corporation, the titles "President" and "Chief
Executive Officer" shall mean one and the same person and shall be
interchangeable.
<PAGE>
Section 4.5. Vice Presidents. The Vice Presidents in the order
designated by the Board of Directors shall perform the duties and exercise the
powers of the President/Chief Executive Officer in his absence or incapacity.
The Vice Presidents shall perform such other duties as the Board of Directors
shall from time to time prescribe.
Section 4.6. Secretary and Assistant Secretaries. The Secretary shall
attend all sessions of the Board of Directors and all meetings of the
shareholders, and record all votes and minutes for all proceedings in a book
kept for that purpose, and shall perform like duties for the standing committees
when required. He shall give or cause to be given notice of all meetings of the
shareholders and of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or the President/Chief Executive
Officer under whose supervision he shall be. He shall keep in safe custody the
seal, if any, of the corporation, and shall affix the same to any instrument
requiring it.
The Assistant Secretary shall, in the absence or disability of the
Secretary, perform the duties and exercise the powers of the Secretary, and
shall perform such other duties as the Board of Directors shall prescribe.
Section 4.7. Treasurer/Chief Financial Officer and Assistant
Treasurers. The Treasurer/Chief Financial Officer shall have the custody of the
corporate funds and securities, and shall keep full and accurate account of
receipt and disbursements in books belonging to the corporation, and shall
deposit all moneys and other valuable effects in the name and to the credit of
the corporation in such depositories as may be designated from time to time by
the Board of Directors; he shall disburse the funds of the corporation in
discharge of corporate liabilities and obligations as may be ordered by the
Board of Directors from time to time, taking the proper vouchers for such
disbursements, and shall render to the President and the Board of Directors
whenever they may require the same, an account of all of his transactions and of
the financial condition of the corporation; he shall give the corporation a
bond, if required by the Board of Directors, in such sum as the Board of
Directors may by resolution determine; and with one (1) or more sureties
satisfactory to the Board of Directors for the faithful performance of the
duties of his office, and for the restoration to the corporation in case of
death, resignation, retirement or removal from office of all books, vouchers,
papers, money and other property of whatsoever kind in his possession or under
his control belonging to the corporation. As used herein or in other writings
of, or documents delivered on behalf of, the corporation, the titles "Treasurer"
and "Chief Financial Officer" shall mean one and the same person and shall be
interchangeable.
The Assistant Treasurer shall, in the absence or disability of the
Treasurer/Chief Financial Officer, perform the duties and exercise the powers of
the Treasurer/Chief Financial Officer, and shall perform such other duties as
the Board of Directors shall prescribe.
Section 4.8. Vacancies. If the office of any officer or agent becomes
vacant by reason of death, resignation, retirement, disqualification, removal
from office or otherwise, the Board of Directors, by a majority vote, shall
choose a successor or successors who shall hold office for the unexpired term in
respect of which such vacancy occurred.
<PAGE>
Section 4.9. Delegation of Authority. An officer elected or appointed
by the Board of Directors may delegate some or all of the duties or powers of
his office to other persons, provided that such delegation is in writing.
Section 4.10. Contract Rights. The election or appointment of a person
as an officer or agent does not, of itself, create contract rights.
ARTICLE V
INDEMNIFICATION
To the full extent permitted or required by Section 302A.521 of the
Minnesota Business Corporation Act, as now enacted or hereinafter amended, or by
other provisions of law, each person who was or is a party or is threatened to
be made a party to any threatened, pending, or pleaded action, suit, or
proceeding, whenever brought, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director, officer or
agent of the corporation, or he is or was serving at the specific request of the
corporation as a director, officer, employee, fiduciary, or agent of another
corporation, partnership, joint venture, trust or other entity or enterprise,
shall be indemnified by the corporation against expenses, including attorneys'
fees, judgments, fines, and amounts paid in settlement, actually and reasonably
incurred by him in connection with such action, suit, or proceeding; provided,
however, that the indemnification with respect to a person who is or was serving
as a director, officer, employee, fiduciary, or agent of another corporation,
partnership, joint venture, trust, or other enterprise shall apply only to the
extent such person is not indemnified by such other corporation, partnership,
joint venture, trust, or other entity or enterprise. Indemnification provided by
this paragraph shall continue as to a person or agent and shall inure to the
benefit of the heirs, executors, and administrators of such person and shall
apply whether or not the claim against such person arises out of matters
occurring before the adoption of this paragraph.
To the full extent permitted by the Minnesota Business Corporation Act,
as now enacted or hereinafter amended, the corporation shall have the authority
to purchase and maintain insurance for officers, directors, employees and agents
against liability arising out of their status as such.
Further, to the full extent permitted by the Minnesota Business
Corporation Act, as now enacted or hereinafter amended, the corporation shall
have the authority to enter into such agreements as the Board of Directors deem
appropriate for the indemnification of present or future directors and officers
of the corporation in connection with their service to, or status with, the
corporation or any other corporation, entity or enterprise with which such
person is serving at the express written request of the corporation.
<PAGE>
ARTICLE VI
SHARES
Section 6.1. Issuance of Shares. The Board of Directors is authorized
and empowered to issue shares of the capital stock of the corporation to the
full amount authorized by the Articles of Incorporation and all amendments
thereto in such amounts and at such times as may be determined by the Board of
Directors and as permitted by law.
Section 6.2. Certificates. Certificates for shares of the capital stock
of the corporation shall be in such form or forms as may be determined by the
Board of Directors or those actually used in the event the Board fails to act.
There shall be no uncertificated shares. Each shareholder shall be entitled to a
certificate representing his or her shares of stock, signed by the
President/Chief Executive Officer or a Vice President, and by the Secretary or
an Assistant Secretary, if one has been elected or appointed, otherwise (or if
the Treasurer and the President/Chief Executive Officer are the same person), by
the Treasurer/Chief Financial Officer or an Assistant Treasurer; provided,
however, that where a certificate is countersigned by a transfer agent or an
assistant transfer agent or by a transfer clerk acting on behalf of the
corporation and registered by a registrar, the signatures of said officers on
such certificates for shares may be facsimiles. If a person signs or has a
facsimile signature placed upon a certificate while an officer, transfer agent,
or registrar of the corporation, the certificate may be issued by the
corporation even if the person has ceased to have that capacity before the
certificate is issued with the same effect as if the person had that capacity at
the date of its issue. All certificates for shares shall be consecutively
numbered or otherwise identified, and shall state the name of the corporation,
that it is organized under the laws of the State of Minnesota, the name of the
person to whom the shares are issued, the number and class of shares, and the
designation of the series, if any, that the certificate represents. The name of
the person to whom the shares are issued with the number of shares and date of
issue shall be entered on the books of the corporation.
Section 6.3. Transfer of Shares. The shares of stock of the corporation
shall be transferable upon its books only by persons named in the certificates
or by attorney lawfully constituted in writing, and upon surrender to the
corporation of the old stock certificates, properly endorsed, to the person in
charge of the stock and transfer books and designate, by whom they shall be
cancelled. New certificates for the shares shall thereupon be issued to the
person entitled to such new certificates. A record shall be made of each
transfer, and whenever a transfer shall be made for collateral security, and not
absolutely, it shall be so expressed in the entry of the transfer.
Section 6.4. Lost Certificates. Any shareholder claiming a certificate
of shares to be lost, stolen or destroyed shall make an affidavit or affirmation
of that fact in such form as the Board of Directors may require, and shall, if
the Board of Directors so requires:
(a) advertise such fact in such manner as the Board of
Directors may require;
(b) give to the corporation and its transfer agent and
registrar, if any, a bond of indemnity in open penalty as to amount or
in such other sum as the Board of Directors may direct, in form
satisfactory to the Board of Directors and to the transfer agent and
registrar of the corporation, if any, and with or without such sureties
as the Board of Directors with the approval of the transfer agent and
registrar, if any, may prescribe; and
<PAGE>
(c) satisfy such other requirements as may be imposed by the
Board.
If notice by the shareholder of the loss, destruction, or wrongful
taking of a certificate is received by the corporation before the corporation
has received notice that the shares represented by such certificate have been
acquired by a bona fide purchaser, and if the foregoing requirements imposed by
the Board are satisfied, then the Board of Directors shall authorize the
issuance of a new certificate for shares of the same tenor and for the same
number of shares as the one alleged to have been lost or destroyed.
Section 6.5. Dividends. The Board of Directors may declare dividends to
the extent permitted by Section 302A.551 of the Minnesota Business Corporation
Act as and when it deems expedient. Before declaring any dividend, there may be
reserved out of the accumulated profits such sums as the Board of Directors from
time to time, in its discretion, thinks proper for working capital or as a
reserve fund to meet contingencies or for equalizing dividends, or for such
other purposes as the Board of Directors shall think conducive to the interests
of the corporation.
Shareholders entitled to payment of such dividend shall be those
shareholders of record on the date fixed by the Board for closing of the books
of the corporation. If no date for closing of the books is fixed by the Board,
the shareholders entitled to payment of the dividend shall be the shareholders
of record on the date on which the resolution declaring such dividend is adopted
by the Board.
ARTICLE VII
MISCELLANEOUS
Section 7.1. Books of Account. The corporation shall keep such books of
account as are required by Section 302A.461 of the Minnesota Business
Corporations Act and every shareholder shall have a right to examine such books,
in person or by agent or attorney, to the extent provided in such Section.
Section 7.2. Corporate Seal. If so directed by the Board of Directors,
the corporation may use a corporate seal. The failure to use such seal, however,
shall not affect the validity of any documents executed on behalf of the
corporation. The seal need only include the word "seal", but it may also
include, at the discretion of the Board of Directors, such additional wording as
is permitted by law.
Section 7.3. Checks and Documents. All checks or demands for money and
notes of the corporation and all other instrument, documents or needs of every
kind, nature and description required to be executed in the name and in behalf
of the corporation shall be signed by such of the officers or agents of the
corporation as the Board of Directors may from time to time by resolution
designate and determine.
<PAGE>
Section 7.4. Fiscal Year. The fiscal year of this corporation shall be
as determined by resolution of the Board of Directors.
Section 7.5. Amendments to Bylaws. These Bylaws may be amended or
altered by the vote of a majority of the Board of Directors present at any
meeting provided that notice of such proposed amendments shall have been given
in the notice given to the directors of such meeting. Such authority of the
Board of Directors is subject to the power of the shareholders to change or
repeal such Bylaws as prescribed by statute and subject to any other limitations
on such authority prescribed by statute.
THESE BYLAWS WERE ADOPTED ON
July 7, 1988
BY RESOLUTION OF THE BOARD OF DIRECTORS OF
SPARTA CORP.
/s/ Jeffrey D. Anderson
Jeffrey D. Anderson,
Secretary
Exhibit 11
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
For the years ended
September 30
--------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Basic Earnings per share:
Net Income $ 694,496 $ 435,729
Less Cumulative Preferred Stock
Dividends 75,000 -
------ ------
Income available to Common
Stockholders 619,496 435,729
------- -------
Weighted-average number of
common shares outstanding 6,882,453 6,692,100
--------- ---------
Basic Earnings per share $ .09 $ .07
--------- ---------
Diluted Earnings per share:
Income available to Common Stock-
holders (from above) 619,496 435,729
Add back cumulative preferred
stock dividends Note -
------- -------
Income available to Common and
Common Equivalent Stockholders 619,496 435,729
------- -------
Weighted-average number of common
shares outstanding 6,882,453 6,692,100
Excess of shares issuable for the
assumed exercise of options and
warrants over the number of shares possible
of repurchase using the proceeds from the exercise
of such options and
warrants at the average
market price (treasury stock method) 968,896 1,230,680
Shares issuable for the assumed conversion
of convertible preferred stock Note -
------ ---------
Weighted-average number of common and
common equivalent shares outstanding 7,851,349 7,922,780
--------- ---------
Diluted Earnings per share $ .08 $ .05
--------- ---------
Note: For the year ended September 30, 1998, the conversion of preferred stock
has not been assumed due to an antidilutive impact on the calculation of diluted
earnings per share.
</TABLE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statements (No. 333-02465 and No. 333-44243) 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 12, 1998, relating to the financial statements of Sparta Foods, Inc.
and Subsidiary as of September 30, 1998 and 1997, which report appears in the
September 30, 1998, annual report on Form 10-KSB of Sparta Foods, Inc.
/s/ McGladrey & Pullen, LLP
Minneapolis, Minnesota
December 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,131,255
<SECURITIES> 0
<RECEIVABLES> 907,752
<ALLOWANCES> 30,000
<INVENTORY> 833,180
<CURRENT-ASSETS> 3,088,685
<PP&E> 9,045,342
<DEPRECIATION> 2,788,399
<TOTAL-ASSETS> 10,721,185
<CURRENT-LIABILITIES> 1,343,699
<BONDS> 2,667,623
0
2,500,000
<COMMON> 70,371
<OTHER-SE> 4,139,492
<TOTAL-LIABILITY-AND-EQUITY> 10,721,185
<SALES> 14,963,157
<TOTAL-REVENUES> 0
<CGS> 10,652,677
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,706,283
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 333,778
<INCOME-PRETAX> 429,496
<INCOME-TAX> (265,000)
<INCOME-CONTINUING> 694,496
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 694,496
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.08
</TABLE>
