U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X Quarterly Report under Section 13 or 15 (d) of the
------- Securities Exchange Act of 1934.
For the quarterly period ended March 31, 1999.
------- Transition Report under Section 13 or 15 (d) of the
Exchange Act.
For the transition period from __________________ to ________________________.
Commission File Number 000-19318
SPARTA FOODS, INC,
(exact name of small business issuer as specified in its charter)
Minnesota 41-1618240
(state or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1565 First Avenue NW, New Brighton, MN 55112
(Address of principal executive offices)
(651) 697-5500
(Issuer's telephone number)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No _______
State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practicable date:
10,191,416 of Common Stock at April 28, 1999.
Transitional Small Business Disclosure Format: Yes _____ No X
<PAGE>
SPARTA FOODS, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets
At March 31, 1999 and September 30, 1998 3
Condensed Consolidated Statements of
Operations for the three-month periods
and the six-month periods ended
March 31, 1999 and 1998 4
Condensed Consolidated Statements of
Cash Flows for the six-month periods
ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements - March 31, 1999 6
Item 2. Management's Discussion and Analysis or 8
Plan of Operation
PART II. OTHER INFORMATION
Item 2. Changes in Securities 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBIT INDEX 14
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPARTA FOODS, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31 September 30
1999 1998
----------------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2,460,201 $ 1,131,255
Accounts receivable, less allowances of $30,000 762,970 877,752
Deposits receivable 359,902 -
Inventories:
Finished goods 516,362 436,784
Raw materials and packaging 687,593 396,396
Prepaid expenses 323,442 198,752
Income tax receivable 1,746 4,746
Deferred tax asset 43,000 43,000
- -------------------------------------------------------------------------------------------------------------------------------
Total current assets 5,155,216 3,088,685
- -------------------------------------------------------------------------------------------------------------------------------
Property and Equipment 9,393,633 9,045,342
Less accumulated depreciation 3,182,340 2,788,399
- -------------------------------------------------------------------------------------------------------------------------------
6,211,293 6,256,943
- -------------------------------------------------------------------------------------------------------------------------------
Other Assets
Restricted cash 202,645 242,059
Covenants not-to-compete, less accumulated amortization of
$42,754 and $39,424, respectively 57,246 60,576
Goodwill, less accumulated amortization of $91,824 and $85,404, respectively 421,549 427,968
Deferred financing costs, less accumulated amortization of
$77,232 and $64,778, respectively 122,490 133,256
Deferred tax asset 227,000 227,000
Other 203,724 284,698
- -------------------------------------------------------------------------------------------------------------------------------
1,234,654 1,375,557
- -------------------------------------------------------------------------------------------------------------------------------
$ 12,601,163 $ 10,721,185
===============================================================================================================================
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Current maturities of long-term debt $381,795 $ 367,377
Accounts payable 665,333 506,874
Accrued expenses 423,020 469,448
- -------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,470,148 1,343,699
- -------------------------------------------------------------------------------------------------------------------------------
Long-term Debt, less current maturities 2,471,474 2,667,623
- -------------------------------------------------------------------------------------------------------------------------------
Stockholders Equity
Preferred Stock, authorized 1,000,000 shares, $1,000 par value;
issued and outstanding 2,500 shares 2,500,000 2,500,000
Common Stock, authorized 15,000,000 shares, $0.01 par value; issued and outstanding
10,191,416 and 7,037,172 shares, respectively 101,914 70,371
Additional paid-in capital 7,100,150 4,977,092
Accumulated deficit (1,042,523) (837,600)
- -------------------------------------------------------------------------------------------------------------------------------
8,659,541 6,709,863
- -------------------------------------------------------------------------------------------------------------------------------
$ 12,601,163 $ 10,721,185
===============================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
3
<PAGE>
SPARTA FOODS, INC.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
For the three months For the six months
ended ended
March 31 March 31
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 3,430,866 $ 3,265,503 $ 7,105,890 $ 7,077,660
Cost of sales 2,545,010 2,453,627 5,138,873 5,217,129
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit 885,856 811,876 1,967,017 1,860,531
Selling, general, and administrative expenses 1,095,849 807,362 2,138,960 1,811,437
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (209,993) 4,514 (171,943) 49,094
Other income, net 36,809 37,760 69,061 75,992
Interest expense (48,443) (110,580) (99,041) (202,262)
- ----------------------------------------------------------------------------------------------------------------------------------
Loss before income tax (221,627) (68,306) (201,923) (77,176)
Provision for income tax (4,900) 50 3,000 1,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net loss (216,727) (68,356) (204,923) (78,176)
Preferred dividends (31,250) (11,986) (62,500) (11,986)
- ----------------------------------------------------------------------------------------------------------------------------------
Net loss available to common shareholders (247,977) (80,292) (267,423) (90,162)
==================================================================================================================================
Basic and Diluted loss per share $ (.03) $ (.01) $ (.03) $ (.01)
==================================================================================================================================
Weighted average number of common shares outstanding 9,358,909 6,798,637 8,504,500 6,791,435
==================================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
4
<PAGE>
SPARTA FOODS, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
For the six months
ended March 31
------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities
Net Loss $ (204,923) $ (78,176)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and Amortization 414,944 302,475
(Gain) Loss on the Sale of Equipment 1,457 (512)
Changes in assets and liabilities:
Accounts receivable 114,782 64,006
Deposits receivable (359,902) -
Inventories (370,775) 138,715
Prepaid expenses (124,690) (63,745)
Income tax receivable 3,000 -
Accounts payable and accrued expenses 112,031 (943,493)
- ------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (414,076) (580,730)
- ------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Decrease in restricted cash 39,414 1,594,067
Purchases of equipment (350,236) (1,734,309)
Proceeds from the sale of equipment - 11,675
Change in deposits and other assets 80,974 (51,833)
- ------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (229,848) (180,400)
- ------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net payments on the line of credit - (834,209)
Net borrowings (payments) on Long-term Debt (181,731) 182,231
Issuance of Common Stock, net of costs 2,154,601 10,763
Issuance of Preferred Stock, net of costs - 2,356,441
Deferred financing costs - (4,812)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,972,870 1,710,414
- ------------------------------------------------------------------------------------------------------------
Net increase in cash 1,328,946 949,284
Cash and cash equivalents
Beginning of period 1,131,255 600
- ------------------------------------------------------------------------------------------------------------
End of period $ 2,460,201 $ 949,884
============================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $100,503 $ 208,280
Income taxes - 4,500
============================================================================================================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
5
<PAGE>
Sparta Foods, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
(Unaudited)
NOTE 1. GENERAL
The unaudited condensed consolidated balance sheet at March 31, 1999, the
condensed consolidated statements of operations for the three-month and
six-month periods ended March 31, 1999 and 1998, and the condensed
consolidated statements of cash flows for the six-month periods ended March
31, 1999 and 1998, include all adjustments which in the opinion of
management are necessary in order to make the financial statements not
misleading and are not necessarily indicative of results of operations to
be expected for the entire fiscal year ending September 30, 1999.
The unaudited financial statements should be read in conjunction with the
audited financial statements for the years ended September 30, 1998 and
1997, contained in Form 10-KSB and Management's Discussion and Analysis or
Plan of Operation contained herein.
NOTE 2. FINANCING AGREEMENTS
The Company has a line of credit (the "Line of Credit") and term loan (the
"Term Loan") with a bank, secured by certain assets. Maximum borrowings
under the Line of Credit are determined by a borrowing base calculation or
$1,200,000, whichever is less. Borrowings bear interest at prime (7.75
percent at March 31, 1999). At March 31, 1999 and September 30, 1998, $0
is outstanding on the Line of Credit and $1,131,602 and $1,243,333,
respectively, is outstanding on the Term Loan. The Company is to maintain
certain minimum net worth and debt service coverage levels.
The Company has a loan acquired through the State of Minnesota related to a
revenue bond issuance. The loan is due in monthly installments that vary in
accordance with the maturity dates of the related revenue bonds, plus
interest at rates varying from 4.5 to 6.0 percent. At March 31, 1999,
$1,721,667 is outstanding. The Company is to maintain certain net worth and
debt service coverage levels. In addition certain dividend restrictions are
stipulated and a debt service reserve fund has been established. The debt
service reserve fund will remain until all loan obligations have been
satisfied and is reflected on the consolidated balance sheet as restricted
cash.
In March of 1999, the Company entered into a seven year operating lease
agreement for certain new factory equipment to a maximum of $1,229,350.
As of March 31, 1999, the Company made deposits totaling $359,902 on
equipment subject to the lease agreement. In April 1999, the deposits
were returned and lease payments will commence in May. These deposits
are reflected on the March 31, 1999 consolidated balance sheet as
deposits receivable.
6
<PAGE>
NOTE 3. INCOME TAX
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, net of deferred tax
liabilities for temporary differences. Due to losses, for the three-month
and six-month periods ended March 31, 1999 and 1998, the provisions for
income taxes are based upon a state minimum income tax.
NOTE 4. PREFERRED STOCK
In February of 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% annually or, at the option of the Company,
dividends of shares of additional Preferred Stock at the rate of 7.5%
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, semi-annually on January 1st and July 1st.
At March 31, 1999, cumulative and undeclared cash dividends totaled
$137,500 or $55 per share of preferred stock.
NOTE 5. NET LOSS PER COMMON SHARE
The Company is complying with "Statement of Financial Accounting Standards
No. 128, Earnings per Share" (FAS 128). FAS 128 requires the presentation
of basic earnings or losses per share (EPS) and diluted earnings or losses
per share amounts. Basic EPS is the net income or loss related to the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects potential dilution assuming the issuance of common
stock for stock options and warrants exercisable under the treasury stock
method and also considers the potential conversion of convertible preferred
stock.
For the three-month and six-month periods ended March 31, 1999 and 1998,
diluted EPS does not include the assumed conversion of option, warrants and
preferred stock due to an antidilutive impact.
7
<PAGE>
ITEM 2. 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 and Marigold Foods, Inc.
and its food service customers to include McDonald's, Perkins, Friendly's
and Carlos O'Kelly restaurants.
Results of Operations
The Company's net sales of $7,105,890 increased $28,230 (0.4%) for the six
months ended March 31, 1999, as compared to the six months ended March 31,
1998. Net sales of $3,430,866 increased $165,363 (5.1%) for the three
months ended March 31, 1999, as compared to the three months ended March
31, 1998. These increases are caused by a growth in sales to established
and new customers. This growth is offset by the loss of a significant
private label barbecue sauce customer. Net sales to the lost customer
totaled approximately $0 and $350,000 (4.9%) for the six-month periods
ended March 31, 1999 and 1998, respectively.
Gross profit, as a percentage of net sales, for the six months ended March
31, 1999, was 27.7% compared to 26.3% for the six months ended March 31,
1998. Gross profit, as a percentage of net sales, for the three months
ended March 31, 1999, was 25.8% compared to 24.9% for the three months
ended March 31, 1998. These increases are primarily due to more favorable
operating efficiencies.
Selling, general and administrative expenses increased by $327,523 or 18.1%
during the six months ended March 31, 1999, as compared to the six months
ended March 31, 1998. These expenses increased by $288,487 or 35.7% during
the three months ended March 31, 1999, as compared to the three months
ended March 31, 1998. These increases are due mainly to the hiring of
additional sales personnel and consultants to implement the Company's
long-term sales growth objectives. In addition, increased advertising and
promotional expenses have been incurred on new and existing products in an
effort to penetrate new markets.
Interest expense decreased by $103,221 (51.0%) for the six months ended
March 31, 1999 compared to the six months ended March 31, 1998. Interest
expense decreased by $62,137 (56.2%) for the three months ended March 31,
1999 compared to the three months ended March 31, 1998. These decreases are
due to significant debt reductions as a result of the use of proceeds from
the issuance of preferred stock and the sale of rental property in fiscal
1998.
8
<PAGE>
Due to losses for the six-month periods ended March 31, 1999 and 1998, the
Company has recorded provisions for income taxes equal to a state minimum
income tax.
For the reasons discussed above, the net loss for the six-months ended
March 31, 1999 was $204,923 compared to a net loss of $78,176 for the same
period in 1998. The net loss for the three-months ended March 31, 1999 was
$216,727 compared to a net loss of $68,356 for the same period in 1998.
Liquidity and Capital Resources
The Company financed its current activities primarily through cash
generated from the issuance of common stock resulting from the exercise of
warrants.
Cash used in operating activities during the six months ended March 31,
1999 was $414,076 consisting principally of a net loss of $204,923 and an
increase in deposits receivable, inventories and prepaid expenses of
$855,367 offset by depreciation and amortization of $414,944, a decrease in
accounts receivable of $114,782 and an increase in accounts payable and
accrued expenses of $112,031. Cash used in investing activities was
$229,848 consisting principally of the purchase of equipment of $350,236
offset by the utilization of restricted cash of $39,414 and a decrease in
deposits and other assets of $80,974. Cash provided by financing activities
was $1,972,870 consisting of $2,154,601 in net proceeds from the issuance
of common stock upon exercise of outstanding warrants offset by a $181,731
reduction in long-term debt.
During October of 1998, the Company received an aggregate of $401,937 and
issued an aggregate of 803,873 shares of common stock related to warrants
with expiration dates of October 20, 1998 and October 31, 1998. During
February of 1999, the Company received an aggregate of $1,755,000 and
issued an aggregate of 2,340,000 shares of common stock related to warrants
with expiration dates of February 2, 1999.
During March of 1999, the Company entered into an operating lease agreement
for certain new factory equipment to a maximum of $1,229,350. As of March
31, 1999, no equipment had been leased; however, the Company plans to
fully utilize this agreement during the second half of fiscal 1999.
At March 31, 1999, the Company had cash and cash equivalents of $2,460,201
and working capital of $3,685,068. The Company believes that its available
cash, cash equivalents, cash flow from operations and existing bank credit
facilities 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.
9
<PAGE>
Raw Material Cost Fluctuations
The Company does not enter into futures contracts as defined by SFAS 80. It
does, however, enter into purchase orders for delayed delivery of raw
materials, generally 30 days for raw materials other than flour and corn.
The Company enters into purchase orders for delayed delivery of flour and
corn for a period of 2-18 months, depending on current pricing, to ensure
the availability of the type of flour and corn best suited for the
Company's products. These purchase orders are placed directly with the
suppliers.
Outlook
The Company's plan in fiscal 1999 is 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.
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.
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 has upgraded its software and hardware systems to make such systems
Year 2000 compliant. Costs associated with the upgrade were immaterial. 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 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.
The foregoing statements contained in this Outlook section of Management's
Discussion and Analysis or Plan of Operation and those relating to the
Company's operating requirements through fiscal 1999 contained in
Management's Discussion and Analysis or Plan of Operation are forward
looking statements that involve a number of risks and uncertainties. Some
additional factors that could cause actual results to differ materially
include but are not limited to seasonality of its sales and raw materials
cost fluctuations, which are discussed above, and the following:
10
<PAGE>
Reliance on Principal Customers. During 1998, sales to Crystal Farms
Refrigerated Distribution Company ("Crystal Farms") and Catalina Specialty
Foods, Inc. accounted for approximately 25% and 12%, respectively, of the
Company's sales. Crystal Farms is the Company's largest single distributor
of its retail products and has a significant impact on the Company's growth
in the retail market. Although the Company and Crystal Farms operate under
a distribution agreement, the loss of Crystal Farms as a customer would
have a material and adverse effect on the Company's sales and
profitability and future growth.
Competition. The Mexican-style food manufacturing and distribution industry
is highly competitive. The Company is in competition with a number of
manufacturers and distributors of Mexican-style food products and, to a
limited extent, manufacturers of "snack foods," many of which are better
capitalized than the Company. The Company will also be subject to future
competition from other manufacturers, distributors and retailers who enter
into the Mexican-style food and distribution industry. In the retail
market, many of these competitors engage in extensive local and national
advertising and marketing, and the brand names for products distributed by
those competitors are significantly more recognizable to the consumer than
the Company's brand names. In addition, competition for shelf space in
retail grocery stores is intense. In the food service market, the Company
is competing with a number of regional and national producers of
Mexican-style food products. Many of these competitors are better
capitalized than the Company and have established sales organizations. No
assurance can be given that the Company will be able to compete as it
expands its markets.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the quarter ended March 31, 1999, the Company sold securities without
registration under the Securities Act of 1933, as follows:
<TABLE>
<CAPTION>
Aggregate
Number
of Shares
of Total
Common Purchase Exemption
Date Stock or Options Purchaser Price Relied Upon
---- ---------------- --------- ----- -----------
<S> <C> <C> <C> <C>
2/2/99 2,340,000 Common Stock issued to existing $ 1,755,000 Section 4(2)
security holders upon exercise of
warrants
2/25/99 35,000 Non-qualified stock options issued at $ 0(1) Section 4(2)
market price to certain management
employees
(1) In consideration for service rendered to the Company as an employee.
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Equipment Lease Agreement dated March 5, 1999 between the Company
and Firstar Equipment Finance Corporation.
11 Computation of Loss Per Common Share.
27 Financial Data Schedule (filed only in electronic format).
(b) Reports on Form 8-K
A report on Form 8-K was not filed during the quarter ended March 31, 1999.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SPARTA FOODS, INC.
(Registrant)
Dated: April 28, 1999 By: /s/ Joel P. Bachul
Joel P. Bachul,
President and Chief Executive Officer
Dated: April 28, 1999 By: /s/ A. Merrill Ayers
A. Merrill Ayers
Treasurer, Secretary and
Chief Financial Officer
13
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.1 Equipment Lease Agreement dated March 5, 1999 between the
Company and Firstar Equipment Finance Corporation.
11 Computation of Loss Per Common Share.
27 Financial Data Schedule (filed only in electronic format).
14
Lease No. 08789
Date: February 23, 1999
Sparta Foods, Inc.
1565 First Avenue N.W.
New Brighton, MN 55112-1988 (hereinafter "Lessee")
We are pleased to inform you that your application for a Master Equipment Lease
has been accepted by Firstar Equipment Finance Corporation ("Lessor") subject to
the following terms and conditions:
1. Equipment to be Leased: Various New Food Processing Equipment.
All Equipment must be satisfactory to Lessor.
2. Cost of Equipment: Not to exceed $1,229,350.00, including applicable
freight and handling charges.
3. Term of Lease: Eighy-four (84) months
4. Commencement Date: If the Equipment is delivered and funded by the
Lessor between the 5th and the 20th of the month, the Commencement Date will be
the fifth of the following month. If the Equipment is delivered and funded by
the Lessor between the 21st and the of the month, the Commencement Date will be
the fifteenth of the following month.
5. Rent: The Lessee will make eighty-four (84) consecutive monthly
payments in advance equal to 1.32827% of the Equipment Cost.
The rental percentage(s) stated above are based on current money market
rates and will be adjusted, if necessary, to preserve Lessor's anticipated
economic return.
6. Termination Options:
(a) Lessee may continue to lease the Equipment for an amount equal to
its fair market rental value on a year-to-year basis for no more than two (2)
<PAGE>
years. Each such lease renewal will be subject to the approval of Lessor's
investment committee.
(b) Lessee shall have the option to purchase all but not less than all
of the Equipment at a cost equal to 18% of the total Equipment Cost, this being
the Lessor's estimate of the fair market value at the Expiration Date. Payment
for purchase of the Equipment must be received on or before the Expiration Date.
(c) Lessee, at its sole risk and expense, shall immediately return all
but not less than all of the Equipment under such expired Schedule(s) A to
Lessor pursuant to Section 18 of the Master Equipment Lease and in the condition
set forth in the Equipment Condition Addendum, at such location and at such time
as Lessor shall designate.
7. Early Buyout Option:
So long as no Event of Default has occurred and is continuing, Lessee has one
(1) early purchase option at the end of the sixtieth (60th) month. Upon receipt
of the sixtieth (60th) monthly rental payment, Lessee has the option to purchase
the Equipment described herein by paying Lessor 46.5% of the original Equipment
Cost.
8. Receipt of a Commitment Fee in the amount of: $5,000.00 (received)
9. Execution of the following Cargill Leasing Documents and/or receipt
of the following prior to Lessor's funding the Equipment ("Effective Date") with
respect to each Item of Equipment:
a) Commitment Letter
b) Master Lease Agreement
c) Uniform Commercial Code Filing
d) Schedule A to Master Lease Agreement
<PAGE>
e) Written evidence of insurance coverage
f) Acceptance Certificate
g) Receipt of all necessary documentation transferring title
free of any and all encumbrances in the Equipment to Lessor.
h) Board Resolution, Secretary's Certificate, Certificate of
Incumbency, or other acceptable document authorizing Lessee
and Guarantor (if any) to enter into the Lease and setting
forth authorized signatory.
i) Execution of Equipment Condition Addendum.
j) Execution of Agreement for Progress Payments.
k) Execution of Assignment of Purchase Agreement.
l) Execution of Confirming Purchase Order Agreement.
m) Receipt of proof of payment on all down payments to be
reimbursed to Lessee.
10. The conditions specified in paragraph 9 and 10 must be completed to
Lessor's sole satisfaction as of or before (a) the execution of a Delivery and
Acceptance Certificate with respect to any Item of Equipment, or (b) May 31,
1999, whichever occurs first. If any one of the items enumerated in paragraph 10
is omitted or not completed to Lessor's sole satisfaction by such date, this
acceptance will become null and void and Lessor shall have no obligations or
liabilities to Lessee whatsoever with respect to such Equipment. Lessee agrees
to defend, indemnify and save Lessor harmless from any claim, cause of action,
loss, damage, liability, cost or expense (including reasonable attorney fees)
which may be incurred in any manner by or for the account of any of them
relating to Lessee's omitting one or more of such enumerated items or to
Lessee's failing to complete one or more of such enumerated items to Lessor's
sole satisfaction.
11. Lessee further agrees to inform Lessor immediately in writing,
supported by accounting evidence, of any adverse changes in Lessee's financial
condition. Any such change could subject the outstanding part of this commitment
to termination (stipulated in following paragraph) or to changes in terms or
conditions.
<PAGE>
12. Lessor may, at its option, terminate its obligation under this
letter as to all items of Equipment for which required schedules and documents
have not been executed if (a) the Equipment has not been delivered and accepted
by Lessee prior to the expiration date of this commitment as evidenced by
Lessee's execution and Lessor's receipt of a Delivery and Acceptance
Certificate; or (b) there is (prior to said expiration date), in Lessor's
opinion, an adverse change in Lessee's financial condition; or (c) THERE IS, IN
LESSOR'S OPINION, A CHANGE IN THE TAX LAWS OR REGULATIONS AFFECTING THIS
TRANSACTION. Lessee agrees to indemnify, protect and save harmless Lessor, its
agents, officers, directors, employees, successors and assigns from and against
any and all liabilities, obligations, liens, losses, damages, injuries, claims,
demands, penalties, actions, costs and expenses, including reasonable attorney
fees of whatsoever kind and nature arising out of or incurred as a result of the
termination of Lessor's obligations under this letter for any reason whatsoever
as to all or any of the Items of Equipment. If Lessor elects to terminate its
obligations hereunder, Lessee agrees to purchase from Lessor at its cost, plus
expenses, the Items of Equipment for which required schedules and documents have
not been executed and which Lessor has purchased or has become obligated to
purchase hereunder.
13. This letter shall cease to be of any force and effect as to any
Item of Equipment on the Effective Date of the Lease relating to such Item of
Equipment.
This commitment is effective only if it is accepted in writing as provided
below. Please retain a copy of this letter and immediately return the original
to Lessor, together with any commitment fee required by this commitment.
LESSOR: FIRSTAR EQUIPMENT FINANCE CORPORATION
The undersigned hereby accepts this commitment and: (1) agrees to be fully bound
by the terms and conditions thereof, (2) covenants that all facts and
circumstances pertaining to the application are and shall be as represented and
(3) further agrees to comply with and execute all documents and return them to
Lessor as soon as possible.
LESSEE: SPARTA FOODS, INC.
<PAGE>
MASTER LEASE AGREEMENT NO. 08789
THIS MASTER LEASE AGREEMENT ("MLA") by and between FIRSTAR EQUIPMENT FINANCE
CORPORATION ("Lessor"), whose address is 400 Hwy. 169 South, Suite 300, St.
Louis Park, MN 55426, and SPARTA FOODS, INC. ("Lessee"), whose address is 1565
First Avenue N.W., New Brighton, MN 55112-1988.
1. DEFINITIONS. For purposes of this MLA: (a) "Schedule" shall mean
each Lease Schedule executed by the parties now or hereafter, and all riders and
attachments thereto; (b) "Equipment" shall mean all units of equipment and other
property described in the Schedule(s), and all accessories, upgrades, additions,
substitutions, replacement parts, tools, software licenses, contract rights,
subleases, permits, licenses, chattel paper, warranty and maintenance agreements
and general intangibles pertaining thereto now or hereafter arising, and all
proceeds from any of the foregoing (including any insurance proceeds); and (c)
"MLA" shall mean this Master Lease Agreement and all Schedules, riders, and
attachments thereto, and any other written agreements by and between Lessor and
Lessee with respect to this MLA, the Schedule(s) or the Equipment plus any
insurance agreements regarding the Equipment, any opinions of counsel, any
disclaimers regarding the Equipment, and any guaranties and/or letters of credit
relating to Lessee's obligations under the MLA, and any amendments to any of the
foregoing.
2. LEASE OF EQUIPMENT. Subject to the conditions set forth herein,
Lessee agrees to lease from Lessor the Equipment described in each Schedule.
Lessee shall be deemed to have unconditionally accepted the Equipment upon
Lessee's execution of each Schedule. If Lessee shall fail to accept any within
sixty (60) days from delivery, Lessor has the right to decline to lease such
Equipment to Lessee and Lessee shall be solely responsible (on its own account)
to satisfy all obligations to the manufacturer/vendor regarding such
non-accepted Equipment (and regardless of the non-conformity of such Equipment).
In the event Lessor orders the Equipment on behalf of Lessee, Lessor shall have
no liability to Lessee for any delay or failure by the manufacturer/vendor to
deliver any of the Equipment to Lessee. Notwithstanding anything to the contrary
herein, Lessor is not obligated to lease any item of Equipment to Lessee in the
event: (a) Lessee has not obtained the appropriate license, permit, and
certificate as required under federal, state or local environmental laws; or (b)
delivery, installation and/or testing expenses for any item of Equipment exceed
ten (10) percent of the total cost of such Equipment. To the extent Lessor has
reason to believe the Equipment is being used in violation of applicable
environmental laws, Lessor has the right to enter the premises where the
Equipment is located and conduct an environmental audit of Lessee's operation of
the Equipment and the handling of any materials or effluents associated
therewith; and Lessee agrees to cooperate fully with such environmental audit
and bear all costs associated therewith.
3. TERM OF LEASE AND RENT. The term of each lease of the Equipment is
described in each Schedule and commences upon the date Lessee accepts the
Equipment in accordance with Section 2 above. The rent for the Equipment is
designated in each Schedule. Lessee shall pay Lessor said rent at the times set
forth in each Schedule and at the office of Lessor (unless Lessor designates in
writing otherwise). All payments received by Lessor shall first be applied to
<PAGE>
any accrued late charge(s) and other non-rental obligations owed by Lessee
hereunder, and then to any unpaid rents. Time is of the essence as to the
payment of rent and all other monies due Lessor hereunder. This MLA and each
Schedule are non-cancelable and non-terminable by either party except as
expressly set forth herein, and Lessee may not prepay any rents or other
obligations hereunder without the written consent of Lessor.
4. USE, MAINTENANCE, AND MODIFICATION OF EQUIPMENT. (a) Lessee shall
use the Equipment in a careful manner, within its recommended capacities and
only for the purpose(s) for which it is designed. Lessee shall comply with a ll
laws, regulations and ordinances relating to the possession and use of the
Equipment (including, without limitation, job safety, health, fire and
environmental laws). At Lessee's expense, Lessee shall keep the Equipment in
good repair and working order (including, without limitation, providing any and
all parts, mechanisms, environments and software required or recommended by the
manufacturer and/or supplier of the Equipment). Lessor shall have no obligation
to deliver, install, test, adjust, maintain or service the Equipment or provide
substitute or replacement Equipment; and Lessee shall arrange for and bear the
full cost of all such matters. At any time upon Lessor's request, Lessee shall
provide Lessor with a satisfactory certificates) from a qualified third party
that the Equipment has been properly maintained and complies with all applicable
health, safety and environmental laws. (b) Without the prior written consent of
Lessor, Lessee shall not make any alterations, additions or improvements to the
Equipment unless such modifications do not: (i) impair the originally intended
function or use of any unit of Equipment; (ii) impair any maintenance
agreement(s), warranties or licenses with respect to any unit of Equipment; or
(iii) cause material damage to any unit of Equipment upon removal ("Permitted
Modifications"). Lessee also grants Lessor a right of first refusal as to the
lease of any upgrades or additions to the Equipment. Lessee shall remove all
Permitted Modifications upon return of the Equipment without damage to the
Equipment; all Permitted Modifications and other additions to the Equipment not
so removed shall be deemed the sole property of Lessor.
5. OWNERSHIP AND INSPECTION OF EQUIPMENT. The Equipment shall at all
times remain the exclusive property of Lessor. Lessee shall have no right, title
or interest in the Equipment except as expressly set forth herein. Lessee shall
<PAGE>
give Lessor immediate notice of any attempt by third parties to seize any unit
of Equipment. Lessee shall not change or remove any insignia lettering or
identification on the Equipment; and shall keep for safe-keeping any manuals,
drawings, specifications, computer disks, maintenance agreements and records or
any other written information regarding the Equipment (and any associated
hardware or software). Lessor may supply Lessee with labels or other markings
stating that the Equipment is owned by Lessor, and Lessee shall promptly affix
same to the Equipment in a prominent place. Lessee shall maintain the Equipment
as removable personal property notwithstanding the fact that the Equipment (or
any part thereof) may become attached to, imbedded in, or resting on any real
property or any building thereon. At any time during Lessee's ordinary business
hours, Lessor shall have the right to enter the premises where the Equipment is
located to inspect and/or test the Equipment, and show the Equipment to
prospective purchasers and lessees; and Lessee shall cooperate with Lessor in
conducting such activities. Lessee shall not impose any restrictions on Lessor's
access to the Equipment.
6. LOSS OF AND DAMAGE TO THE EQUIPMENT (STIPULATED LOSS VALUE). Until
such time as Lessor accepts physical surrender of the Equipment from Lessee in
writing, Lessee hereby assumes the entire risk of loss and damage to the
Equipment from every cause whatsoever (notwithstanding the existence of any
insurance on the Equipment in favor of Lessor). If any unit of Equipment is
damaged, Lessee shall place such Equipment in good repair and working order to
the satisfaction of Lessor. If any unit of Equipment is determined by Lessor to
be lost, stolen or damaged beyond repair, Lessee shall (at Lessor's option): (i)
replace such Equipment with equipment of equivalent value, utility and
characteristics; or (ii) pay Lessor in cash the greater of the fair market value
of such Equipment or the "Stipulated Loss Value" for such unit of Equipment as
set forth in the Schedule. Upon Lessee's payment in good funds of the amount
required, this MLA shall terminate with respect to such unit of Equipment and
Lessee shall be deemed the owner of such Equipment "AS IS" and "WHERE IS"
WITHOUT ANY WARRANTY (EXPRESS OR IMPLIED) BY LESSOR WITH RESPECT TO ANY MATTER
WHATSOEVER (INCLUDING MERCHANTABILITY OR FITNESS FOR A PARTICULAR EXCEPT THAT
LESSOR HAS NOT CAUSED ANY SECURITY INTEREST, LIEN OR ENCUMBRANCE TO ATTACH
AGAINST SUCH EQUIPMENT.
<PAGE>
7. INSURANCE. Lessee shall insure the Equipment to Lessor's
satisfaction against all risks of loss and damage, and shall carry comprehensive
public liability and property damage insurance satisfactory to Lessor as
provided in Attachment B to each Schedule. Lessee shall pay the premiums for all
such insurance, and shall deliver to Lessor satisfactory written evidence of the
required insurance coverage at the time Lessee accepts the Equipment. Lessor
shall have the exclusive right, and Lessee hereby appoints Lessor as Lessee's
attorney-in-fact (coupled with an interest), to make and settle any claims
under, receive any payments on, and execute and endorse any documents, checks or
drafts respecting any insurance (and proceeds therefrom) regarding the
Equipment. In the event any insurance proceeds are paid or payable with respect
to any unit of Equipment, such insurance proceeds shall be applied (at Lessor's
option) toward: (i) the replacement, restoration or repair of such Equipment; or
(ii) satisfaction of Lessee's obligations hereunder.
8. PAYMENT OF TAXES, FEES & LESSOR'S EXPENSES. (a) Lessee shall keep
the Equipment free and clear of all security interests, liens, encumbrances and
claims of any kind; and Lessee shall promptly pay all municipal, state an d
federal taxes (including unitary taxes, receipts taxes, and apportionment
taxes), assessments and/or charges (including any governmental charges to audit
Lessor's records regarding this MLA or the Equipment except Lessor's income tax
records) which may now or hereafter be imposed regarding the acquisition,
ownership, lease, sale, possession, use or transfer of the Equipment; excluding
any federal or Wisconsin taxes imposed on or measured by Lessor's general income
except to the extent provided in each Schedule. At Lessee's own expense, Lessee
shall obtain, prepare and deliver to Lessor: (i) all returns and/or filings
required by applicable law pertaining to such governmental taxes, assessments,
and/or charges; and, (ii) all licenses, certificates, registrations and/or
permits required for the ownership, possession and/or use of the Equipment
("Certificates"). Lessee shall maintain and renew all such Certificates, and
shall take all necessary steps necessary to avoid the cancellation, suspension
and/or revocation of such Certificates, and/or any material adverse amendment
<PAGE>
thereto. b) Lessee shall promptly pay all costs, charges, expenses and
obligations of every kind and nature (including reasonable attorneys' fees of
outside and in-house counsel) incurred by or on behalf of Lessor regarding the
exportation, importation, shipment, delivery, possession, use, lease, tax
treatment, return, repossession, storage and transfer of any unit of Equipment
whenever and however arising, and for any termination and/or amendment of this
MLA or any Schedule, and for the exercise of any rights or remedies with respect
to MLA. In the event Lessee fails to procure or maintain the insurance required
under Section 7 above, or fails to promptly pay any amounts required to be paid
by Lessee herein, Lessor shall have the right (but shall not be obligated) to
procure such insurance and/or pay such amounts on behalf of Lessee. In such
event, Lessee shall promptly reimburse Lessor for the amount thereof on demand.
If Lessee fails to pay any amount(s) when due hereunder, such amount(s) shall
accrue interest until paid at 6% per annum plus the prime rate as announced by
Firstar Bank Milwaukee, N.A. from time to time or the highest rate permitted by
law (whichever is lower).
9. WARRANTIES. (a) Lessee warrants that it is duly organized and in
good standing under the laws of its state of incorporation; that Lessee is
qualified to do business in those states wherein the Equipment is located; that
the execution of this MLA and each Schedule has been duly authorized; and that
the execution and performance of this MLA or any Schedule by Lessee will not
cause Lessee to be in default under any material agreements or in violation of
any applicable laws.
(b) LESSEE REPRESENTS TO LESSOR THAT LESSEE HAS SELECTED THE TYPE,
QUANTITY AND SUPPLIER OF THE EQUIPMENT; AND THAT THE EQUIPMENT IS OF A DESIGN,
SIZE, QUALITY AND CAPACITY REQUIRED BY LESSEE, AND IS SUITABLE FOR LESSEE'S
PURPOSES. LESSOR IS NOT A MANUFACTURER OR SUPPLIER OF THE EQUIPMENT NOR AN AGENT
OF THE MANUFACTURER OR SUPPLIER OF THE EQUIPMENT, AND LESSOR DOES NOT ENDORSE OR
PROMOTE ANY ITEM OF EQUIPMENT. NO REPRESENTATIONS OR PROMISES MADE BY ANY
MANUFACTURER, SUPPLIER OR DISTRIBUTOR OF THE EQUIPMENT SHALL BE BINDING ON
LESSOR. LESSOR MAKES NO WARRANTY OR REPRESENTATION (EITHER EXPRESS OR IMPLIED)
TO LESSEE AS TO THE FITNESS, QUALITY, DESIGN, CONDITION, CAPACITY, SAFETY,
SUITABILITY, MERCHANTABILITY OR PERFORMANCE OF THE EQUIPMENT (INCLUDING ITS
CONFORMITY WITH APPLICABLE LAW AND REGULATIONS), TITLE TO THE EQUIPMENT, OR ANY
OTHER MATTER WHATSOEVER. LESSEE AGREES THAT THE EQUIPMENT IS LEASED "AS IS" AND
<PAGE>
"WHERE IS" AND THAT ALL RISKS REGARDING THE EQUIPMENT ARE TO BE BORNE SOLELY BY
LESSEE INCLUDING, WITHOUT LIMITATION, ANY LOSSES OR DAMAGES DUE TO ACTS OF GOD,
STRIKES, GOVERNMENTAL ACTION OR OBSOLESCENCE. LESSOR SHALL NOT BE LIABLE TO
LESSEE OR ANY OTHER PARTY FOR ANY CLAIM OR MATTER PERTAINING TO THE EQUIPMENT
WHATSOEVER INCLUDING, WITHOUT LIMITATION, ANY LOSS OR DAMAGE (DIRECT, INDIRECT
OR CONSEQUENTIAL) FROM BUSINESS INTERRUPTION, LOSS OF PROFITS, NONDELIVERY OR
LATE DELIVERY OF THE EQUIPMENT, IMPROPER INSTALLATION OR DESIGN OF THE
EQUIPMENT, FAILURE OR IMPROPER OPERATION OF THE EQUIPMENT, BREACH OF ANY
WARRANTY OR REPRESENTATION MADE BY THE MANUFACTURER AND/OR SUPPLIER OF THE
EQUIPMENT, OR ANY INJURY TO PERSONS OR PROPERTY. Lessor makes no
representations, warranties or promises with regard to the tax or accounting
treatment of this Lease or Lease Schedule, or the interests of Lessor and Lessee
as regards the Equipment.
(c) Lessee acknowledges that it has reviewed and approved all contracts
and agreements pertaining to Lessor's acquisition of the Equipment prior to
leasing the Equipment, and that Lessee accepts the terms and limitations of any
warranties, license and/or provisions contained therein. To the extent
assignable by Lessor, all warranties and licenses made by the manufacturer
and/or supplier of the Equipment are hereby assigned to Lessee for the lease
term applicable to such Equipment. At Lessee's sole expense and in Lessee's own
name only, Lessor hereby authorizes Lessee to enforce any such warranties or
licenses made with respect to the Equipment upon written notice to Lessor; and
Lessor is under no obligation to enforce any warranties or license regarding the
Equipment. Notwithstanding the foregoing, Lessee shall not commence any legal
proceedings to enforce any warranty or license except upon the prior written
consent of Lessor (which consent shall not be unreasonably withheld). Lessor
makes no representations or warranties as to the existence, sufficiency or
enforceability of any warranties or licenses regarding the Equipment; and
Lessee's and Sub-Lessee's sole remedy for any defect in or nonconformity of the
Equipment is against the manufacturer/vendor thereof.
10. INDEMNITY. Notwithstanding the existence of any insurance in favor
of Lessor, Lessee shall promptly defend, indemnify and save Lessor harmless from
and against: (a) any and all loss of or damage to the Equipment (except ordinary
wear and tear resulting from proper use of the Equipment); and (b) any claim,
action, demand, proceeding, or liability for any damage, loss, injury, cost or
<PAGE>
expense (including reasonable attorney's fees) which Lessor may be subject to:
(i) relating to the construction, importation, exportation, delivery,
installation, ownership, sale, lease, transfer, storage, nonacceptance,
rejection, return, or repossession of the Equipment (or any part thereof); (ii)
resulting from the use, maintenance, repair, replacement, operation or condition
of the Equipment (or any part thereof); (iii) arising by reason of any act or
omission of Lessee or Lessee's violation of any law, regulation or ordinance
pertaining to the Equipment; (iv) as a result of any claim for patent,
copyright, trademark or other proprietary right infringement relating to the
Equipment or the use thereof; (v) as a result of any tort, negligence or strict
liability claim respecting the Equipment and/or the use thereof (including,
without limitation, any contribution and/or subrogation claims relating
thereto); or (vi) as a result of any third party claim to the Equipment. The
foregoing collectively called the "Indemnity Claims." Lessee agrees to give
Lessor prompt written notice of any Indemnity Claims described in this Section
10. Notwithstanding the foregoing, Lessee shall not be obligated to indemnify
Lessor for any Indemnity Claim caused proximately by the willful misconduct of
Lessor.
11. RETURN OF EQUIPMENT. Upon the termination or cancellation of this
MLA or of any Schedule (as applicable) whether by passage of time or otherwise,
Lessee shall promptly return to Lessor all (and only all) of the Equipment
subject to this MLA or the Schedule (as applicable) in good repair and working
order (excepting only ordinary wear and tear resulting from the proper use of
the Equipment) assembled and packed for shipment per the manufacturer's
specifications, and containing all engineering and product changes prescribed or
recommended by the manufacturer thereof prior to return of the Equipment. Upon
request by Lessor and at Lessee's expense, Lessee shall deliver such Equipment
to any place designated by Lessor within the continental United States. At
Lessor's option, Lessee shall permit Lessor to store such Equipment (or any unit
thereof) at its then existing location at no charge to Lessor. If for any reason
Lessee shall fail to return any unit of Equipment as specified by Lessor, Lessee
shall pay to Lessor rent equal to 150% of the Base Rate set forth in the
applicable Schedule(s) for each month or fraction thereof that such Equipment
remains unreturned. Lessee agrees that such Post-Termination is not a penalty,
but liquidated damages for Lessor's inability to take possession of the
Equipment for reletting or resale, and for the increased risk of damage to and
loss of the Equipment. Acceptance by Lessor of any Post-Termination Rent shall
not constitute a renewal of this MLA or the applicable Schedule, nor a waiver of
any default under this MLA or the applicable Schedule, nor a waiver of any of
Lessor's rights and remedies.
<PAGE>
12. DEFAULT. Any of the following shall constitute an event of default
hereunder: (a) Lessee's failure to pay any amounts when due; (b) the
unauthorized removal of any unit of Equipment from the location(s) described in
the Schedule(s); (c) Lessee's unpermitted assignment of any interest in this MLA
or in the Equipment; (d) Lessee (or any guarantor of Lessee's obligations
hereunder) making an assignment for the benefit of its creditors, or becoming
subject to any proceedings under the U.S. Bankruptcy Code or any state
reorganization, receivership, insolvency or dissolution proceedings; (e) the
filing of any lien, levy attachment or judgment affecting the Equipment which
has not been released or stayed on appeal within ten (10) business days of
Lessee's knowledge thereof, or for which a bond satisfactory to Lessor in the
full amount of such lien, levy attachment or judgment has not been obtained in
favor of Lessor within ten (10) business days of Lessee's knowledge thereof; (f)
Lessee's failure to cure any breach of any other provision of this MLA within
ten (10) business days of Lessee's knowledge thereof or of Lessee's receipt of
Lessor's written notice thereof (whichever occurs earlier); (g) Lessee (or any
guarantor of Lessee's obligations hereunder) making any misrepresentations to
Lessor now or hereafter; (h) Lessee being in default under any material
agreement for the payment of money which has not been cured as provided; or (i)
any adverse material change in Lessee's financial condition or business
operations (or that of any guarantor of Lessee's obligations hereunder), or any
material change in the ownership of Lessee. Upon the occurrence of an event of
default, this MLA shall be deemed unconditionally terminated or canceled (at
Lessor's option) and expired.
13. REMEDIES. (a) Upon the occurrence of an event of default hereunder,
Lessor shall have the non-exclusive option to: (i) declare the present value of
the aggregate rents or the Stipulated Loss Values payable under any or all of
the Schedules immediately due and payable; (ii) declare all other amount(s) due
Lessor hereunder immediately due and payable; (iii) declare the present value of
the residual value of all the Equipment to be immediately due and payable (the
"residual value" of the Equipment for these purposes is deemed to be twenty
percent (20%) of the Equipment's original cost or the appraised fair market
value of the Equipment at the end of the originally scheduled lease term,
<PAGE>
whichever is greater); (iv) take possession of the Equipment and remove same
from its existing location(s) without notice to or consent of Lessee; and store
and/or dispose (by public sale or otherwise) of the Equipment at its then
existing location(s) at no charge to Lessor; or (v) assert any ot her remedies
available to Lessor at law or in equity (including, without limitation, under
the Uniform Commercial Code). For purposes of computing present value hereunder,
the discount rate shall be a rate per annum equal to the highest published Ask
Yield of any U.S. Treasury Bond, Note or Bill set forth in The Wall Street
Journal, Treasury Bonds, Notes and Bills section, having a maturity date closest
to the originally scheduled termination date of the applicable Schedule. Any
return and/or repossession of the Equipment shall not waive or impair any of
Lessor's rights or remedies. Except as otherwise provided for herein or by law,
all amount(s) due Lessor after an event of default shall be due and payable
without any notice or demand by Lessor, and without regard to any action taken
by Lessor regarding the Equipment. All amounts payable herein by Lessee after an
event of default shall bear interest until paid at the rate of 3% per annum plus
the prime rate as announced from time to time by Firstar Bank Milwaukee, N.A. or
the highest rate permitted by law (whichever is lower). Lessee releases Lessor
from any requirement to post a bond or surety regarding any repossession or
disposition of the Equipment.
(b) In the event Lessor accepts in writing return of any unit of
Equipment, Lessor shall use its best efforts for a period of sixty (60) days
thereafter to sell and/or release such Equipment, and Lessee agrees that such
attempt shall fully satisfy Lessor's obligation to mitigate its damages. After
deducting all expenses of retaking, repairing, holding, transporting, selling
and/or reletting the Equipment, the net proceeds (if any) from such sale or
reletting by Lessor shall be applied against Lessee's obligations hereunder
(without regard to the fact that each Schedule constitutes a separate lease of
property). The proceeds of any sale, re-lease or other disposition (if any)
shall be applied in the following priorities: (i)First, to pay all Lessor's
costs, charges and expenses in taking, removing, holding, repairing, selling,
<PAGE>
re-leasing and disposing of the Equipment; (ii) second, to the extent not
previously paid by Lessee (or by a guarantor of Lessee's obligations hereunder)
to pay Lessor all amounts due from Lessee hereunder; (iii) third, to reimburse
to Lessee (or any guarantor) any sums previously paid as damages to Lessor by
Lessee (or such guarantor); and (iv) lastly, any surplus shall be retained by
Lessor (except as to Equipment leased under Schedules incorporating Rider 1,
wherein any surplus shall be retained by Lessee). Lessor shall have the right to
seek a deficiency from Lessee notwithstanding Lessor's repossession or
abandonment of the Equipment, or Lessor's sale or reletting the Equipment to a
third party. After an event of default, Lessee hereby irrevocably appoints
Lessor as its attorney-in-fact (coupled with an interest) to do all things
necessary to carryout Lessee's obligations under this MLA and with respect to
the Equipment. All remedies granted to Lessor herein and at law are cumulative,
and may be exercised concurrently or separately. No right or remedy is exclusive
of any other right or remedy. Notwithstanding any repossession, reletting or
sale of any unit of Equipment by Lessor and/or termination of this MLA, Lessee
shall remain fully liable for the performance of its obligations herein.
(c) Lessee acknowledges that Lessor's sole obligation hereunder, so
long as Lessee not in default hereunder, is not to interfere with Lessee's quiet
enjoyment of the Equipment. Lessee's sole and exclusive remedy if Lessor shall
breach such covenant (and not cure same in a reasonable period of time) is to
terminate Lessee's obligation to pay any additional rents for the affected
Equipment; provided such termination shall only be effective after Lessee has
paid all outstanding obligations prior to the effective date of termination and
has returned the affected Equipment as provided for herein and the applicable
Schedule. In all other respects and to the extent permitted by law, Lessee
unconditionally and irrevocably waives any and all rights and remedies against
Lessor at law or in equity (including, without limitation, any rights and
remedies granted Lessee under Article 2A of the Uniform Commercial Code and/or
the right to reject any Equipment or repudiate this MLA).
14. ASSIGNMENT. This MLA shall inure to the benefit of, and shall be
binding upon, the successors and assigns of the parties hereto (whether by
operation of law or by agreement) except as provided for herein. Upon written
notice to Lessee, any or all of Lessor's rights and obligations under this MLA
(or any part thereof) and/or any or all of the Lessor's rights and interest in
the Equipment (or any part thereof) may be sold, assigned or pledged to a third
party without the consent of Lessee. Lessee acknowledges that any such sale,
<PAGE>
assignment, or pledge of any or all of Lessor's rights and/or obligations
hereunder and/or rights and interests in the Equipment shall not be deemed to
materially change Lessee's duties or obligations hereunder nor increase the
burdens or risks imposed on Lessee for purposes of Article 2A of the Uniform
Commercial Code. Notwithstanding the foregoing, no sale, assignment, or transfer
by Lessor of this MLA (or any part thereof) or the Equipment (or any part
thereof) shall interfere with Lessee's right of quiet enjoyment under this MLA
except in the event of a default hereunder. No breach or default by Lessor
hereunder shall excuse the full and timely performance by Lessee o f its
obligations under this MLA to any successor or assignee of Lessor. Lessee agrees
to execute a written acknowledgment of the matters set forth herein in favor of
(and to the satisfaction of such successor or assignee) upon request. EXCEPT AS
IS EXPRESSLY PROVIDED FOR HEREIN, LESSEE SHALL NOT ASSIGN, TRANSFER, OR PLEDGE
ANY RIGHT, INTEREST OR OBLIGATION UNDER THIS MLA (OR ANY PART THEREOF) OR ANY
RIGHT OR INTEREST IN THE EQUIPMENT (OR ANY PART THEREOF), NOR PERMIT THE
EQUIPMENT (OR ANY PART THEREOF) TO BE SUBLEASED OR USED BY ANY PARTY OTHER THAN
LESSEE AND ITS EMPLOYEES. UPON ANY SUCH UNPERMITTED ASSIGNMENT, TRANSFER,
PLEDGE, OR USE, THIS MLA SHALL IMMEDIATELY TERMINATE OR BE CANCELED AND LESSEE
SHALL BE DEEMED IN DEFAULT HEREUNDER. TO THE EXTENT THIS MLA IS ASSIGNABLE OR
ASSUMABLE BY OPERATION OF LAW WITHOUT THE CONSENT OF LESSOR, THIS MLA MUST BE
ASSIGNED AND/OR ASSUMED IN ITS ENTIRETY. At Lessor's sole discretion and without
notice to or the consent of Lessee, Lessor may sell a participation in this MLA
and/or any Schedule (or any part thereof),to a participant on terms satisfactory
to Lessor.
15. NET LEASE. THIS MLA CONSTITUTES A NET LEASE, AND LESSEE'S
OBLIGATION TO PAY THE RENTS AND OTHER AMOUNTS DUE HEREUNDER (AND THE CONTINUING
EFFECTIVENESS AND ENFORCEABILITY OF THIS MLA) ARE ABSOLUTE, UNCONDITIONAL AND
INDE PENDENT OBLIGATIONS NOT SUBJECT TO ABATEMENT, DIMINUTION, SUSPENSION,
DEFERMENT OR REDUCTION OF, OR OFFSET AGAINST, LESSEE'S OBLIGATIONS HEREUNDER FOR
ANY REASON INCLUDING WITHOUT LIMITATION: (1) ANY CLAIMS OF LESSEE AGAINST
LESSOR, OR THE MANUFACTURER OR SUPPLIER OF THE EQUIPMENT; (2) ANY DEFECT IN,
DAMAGE TO, OR LOSS OR DESTRUCTION OF ANY UNIT OF EQUIPMENT HOWEVER ARISING; OR
(3) ANY INTERFERENCE WITH LESSEE'S USE OF ANY UNIT OF EQUIPMENT BY ANY THIRD
PARTY (INCLUDING ANY GOVERNMENTAL BODY) EXCEPT AS EXPRESSLY SET FORTH HEREIN. IT
IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT ALL RENTS AND OTHER AMOUNTS
PAYABLE BY LESSEE TO LESSOR HEREUNDER SHALL CONTINUE TO BE PROMPTLY AND
UNCONDITIONALLY PAID IN ALL EVENTS (EXCEPT ONLY AS LESSEE'S OBLIGATION TO PAY
RENT MAY BE TERMINATED PURSUANT TO SECTION 6 ABOVE).
16. LATE PAYMENT CHARGE/RESUMPTION OF MLA. Notwithstanding Section 12.
above, in the event Lessee fails to make any payment required hereunder or under
any Schedule when due, termination of this MLA shall be rescinded and the
nonpayment default deemed cured only if (a) Lessor receives the amount of such
late payment within five (5) days of the payment due date; or (b) if the payment
is more than five (5) days (but less than thirty (30) days) past due, Lessor
receives the amount of such late payment, plus a late payment charge of the
greater of 5 percent of the amount of such late payment or $25.00.
17. ADDITIONAL DOCUMENTS. Lessee shall execute and deliver to Lessor
such other documents as Lessor may reasonably deem necessary to evidence or
protect Lessor's interests in the Equipment and under this MLA. Upon request by
Lessor, Lessee shall verify in writing the exact location of the Equipment and
identify any unit of Equipment moved since the date of any previous
verification, and provide Lessor with a current set of Lessee's financial
statements and with maintenance information regarding the Equipment.
18. GOVERNING LAW & CONSTRUCTION. (a) THIS MLA AND EACH SCHEDULE
REPRESENTS THE ENTIRE AGREEMENT OF THE PARTIES AND THEIR PROVISIONS SHALL NOT BE
MODIFIED, SUPPLEMENTED OR WAIVED IN ANY MANNER EXCEPT BY THE WRITTEN CONSENT OF
THE PARTIES. This MLA shall be construed without regard to any presumption or
rule requiring construction against the party causing this MLA to be drafted. If
more than one Lessee is named in this MLA (or any Schedule), the liability of
such Lessees shall be joint and several. If any provision of this MLA or the
application thereof to any party is held invalid or unenforceable for any
reason, the other provisions of this MLA and their application shall be
unaffected thereby, and shall remain in full force and effect. No delay on the
<PAGE>
part of Lessor in exercising any right, power, or remedy hereunder shall operate
as a waiver thereof; and no single or partial exercise of any right, power or
remedy by Lessor hereunder shall preclude any further exercise thereof (or the
exercise of any other right, power, or remedy). THE VALIDITY, INTERPRETATION AND
ENFORCEMENT OF THIS MLA SHALL BE GOVERNED BY THE LAWS OF THE STATE OF WISCONSIN
(IRRESPECTIVE OF SUCH STATE'S CHOICE OF LAWS RULES). THE PARTIES AGREE THAT THE
MLA AND EACH SCHEDULE ARE DEEMED TO BE EXECUTED, EFFECTIVE AND PERFORMED IN THE
STATE OF WISCONSIN BY VIRTUE OF LESSOR EXECUTING AND ACCEPTING THE MLA AND EACH
SCHEDULE IN SUCH STATE AND ALL RENTAL PAYMENTS BEING PAID TO LESSOR IN SUCH
STATE. ALL CLAIMS AND OTHER MATTERS RELATING TO THIS MLA AND THE EQUIPMENT (AS
BETWEEN LESSOR AND LESSEE) SHALL BE HEARD IN ANY STATE OR FEDERAL COURT LOCATED
IN MILWAUKEE COUNTY, WISCONSIN; AND THE PARTIES HEREBY CONSENT TO THE EXCLUSIVE
PERSONAL JURISDICTION OF SUCH COURTS, AND WAIVE TRIAL BY JURY. Nothing in
this section shall affect or impair Lessor's right to serve legal process in any
manner or Lessor's right to bring any action or proceeding against Lessee or the
Equipment in the courts of any other jurisdiction.
(b) LESSEE'S OBLIGATIONS TO LESSOR HEREUNDER ARE SECURED BY ALL THE
EQUIPMENT (TO THE EXTENT NOT OWNED BY LESSOR), NOTWITHSTANDING THE INDEPENDENCE
OF THE INDIVIDUAL SCHEDULES OR THE DATE OF THEIR EXECUTION.
19. NOTICES/NOTICE OF RELATIONSHIP. The giving of all notices required
herein shall be sufficient if made in writing and delivered personally, sent via
facsimile (transmission confirmed) or mailed to the party involved at the
address hereinafter set forth (or at such other address as each party may
provide in writing). If mailed, such notice shall be deemed given when deposited
in the U.S. mail fully addressed with postage prepaid. YOU HAVE ENTERED INTO A
TRANSACTION WITH ONE OF THE FIRSTAR BANKS OR COMPANIES OR ONE OF THE ELAN
COMPANIES. THIS IS TO ADVISE YOU THAT ALL FIRSTAR BANKS AND COMPANIES AND ALL
ELAN COMPANIES IN THE FINANCIAL SERVICES BUSINESS ARE RELATED. YOU MAY NOT BE
COMPELLED TO BUY ANY PRODUCT OR SERVICE FROM ANY OF THESE BANKS OR COMPANIES IN
ORDER TO PARTICIPATE IN THIS TRANSACTION. IF YOU FEEL THAT YOU HAVE BEEN
COMPELLED TO BUY ANY PRODUCT OR SERVICE FROM ANY OF THESE RELATED BANKS OR
COMPANIES IN ORDER TO PARTICIPATE IN THIS TRANSACTION, YOU SHOULD CONTACT EITHER
THE OFFICE OF THE COMMISSIONER OF BANKING, P.O. BOX 7876, MADISON, WISCONSIN,
53707 OR FIRSTAR CORPORATION, 777 EAST WISCONSIN AVENUE, MILWAUKEE, WISCONSIN
53202, ATTENTION: MEMBER BANK ADMINISTRATION.
20. SURVIVAL OF OBLIGATIONS. The indemnity and reimbursement
obligations set forth in this MLA shall survive termination of this MLA and
satisfaction of Lessee's obligations hereunder.
Dated at St. Louis Park, Minnesota, this 5TH day of March, 1999.
Lessee: SPARTA FOODS, INC.
Lessor: FIRSTAR EQUIPMENT FINANCE CORPORATION
Exhibit 11
COMPUTATION OF LOSS PER COMMON SHARE
(unaudited)
<TABLE>
<CAPTION>
For the three months For the six months
ended ended
March 31 March 31
------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Loss per share:
Net loss $(216,727) $ (68,306) $(204,923) $(78,176)
Less Cumulative Preferred Stock
Dividends 31,250 11,986 62,500 11,986
Income available to Common
Stockholders (247,977) (80,292) (267,423) (90,162)
--------- -------- --------- --------
Weighted-average number of
Common shares outstanding 9,358,909 6,798,637 8,504,500 6,791,435
--------- --------- --------- ---------
Basic Loss per share $ (.03) $ (.01) $ (.03) $ (.01)
Diluted Loss per share (Note) $ (.03) $ (.01) $ (.03) $ (.01)
</TABLE>
Note
For the three-month and six-month periods ended March 31, 1999 and 1998,
diluted EPS does not include the assumed conversion of option, warrants and
preferred stock due to an antidilutive impact.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,460,201
<SECURITIES> 0
<RECEIVABLES> 1,152,872
<ALLOWANCES> 30,000
<INVENTORY> 1,203,955
<CURRENT-ASSETS> 5,155,216
<PP&E> 9,393,633
<DEPRECIATION> 3,182,340
<TOTAL-ASSETS> 12,601,163
<CURRENT-LIABILITIES> 1,470,148
<BONDS> 2,471,474
0
2,500,000
<COMMON> 101,914
<OTHER-SE> 6,057,627
<TOTAL-LIABILITY-AND-EQUITY> 12,601,163
<SALES> 7,105,890
<TOTAL-REVENUES> 7,105,890
<CGS> 5,138,873
<TOTAL-COSTS> 5,138,873
<OTHER-EXPENSES> 2,138,960
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 99,041
<INCOME-PRETAX> (201,923)
<INCOME-TAX> 3,000
<INCOME-CONTINUING> (204,923)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (204,923)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
