EXHIBIT 4.1 CONVERTIBLE SENIOR SUBORDINATED NOTE PURCHASE AGREEMENT

 

                                                                     EXHIBIT 4.1

 

 

                                                                  EXECUTION COPY

 

 

 

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                               STARCRAFT CORPORATION

 

 

 

                                   $15,000,000

 

 

           Convertible Subordinated Promissory Notes due July 1, 2009

 

 

 

 

                                ________________

 

 

                      CONVERTIBLE SENIOR SUBORDINATED NOTE

 

                               PURCHASE AGREEMENT

 

 

                                ________________

 

 

 

 

                               Dated July 12, 2004

 

 

 

 

 

 

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                              STARCRAFT CORPORATION

                                  P.O. BOX 7903

                            1123 SOUTH INDIANA AVENUE

                              GOSHEN, INDIANA 46526

                             Telephone: (574) 534-7827

                            Facsimile: (574) 534-1238

 

 

 

         8.5% Convertible Subordinated Promissory Notes due July 1, 2009

 

 

 

                                                                   July 12, 2004

 

To Each of the Purchasers Listed in

  the Attached Schedule A

 

Ladies and Gentlemen:

 

     Starcraft Corporation,   a corporation organized under the laws of the State

of Indiana (the   "Company"),   agrees with each of the   purchasers   listed in the

attached Schedule A (the "Purchasers") as follows:

 

ARTICLE 1. AUTHORIZATION OF ISSUANCE OF NOTES.

 

     The   Company   has   authorized   the   issue   and   sale to the   Purchasers   of

$15,000,000 in aggregate   principal amount of its 8.5% Convertible   Subordinated

Promissory   Notes due July 1, 2009 (the notes   being   referred   to herein as the

"Notes").   The Notes   shall be   substantially   in the form set out in Exhibit 1,

with such changes   therefrom,   if any, as may be approved by each   Purchaser and

the   Company.   The Notes shall bear the legend set forth on the form of the Note

set out in   Exhibit   1 and   shall   include   such   other   notations,   legends   or

endorsements   as required by law. The Notes are   convertible   into shares of the

Company's Common Stock,   without par value (the "Common Shares").   The terms and

provisions   contained in the Notes shall   constitute,   and are hereby   expressly

made, a part of this Agreement and, accordingly,   each of the Purchasers and the

Company, by its respective   execution and delivery of this Agreement,   expressly

agree to the terms and provisions thereof and to be bound thereby.

 

ARTICLE 2.         SALE AND PURCHASE OF NOTES.

 

     Sale and   Purchase.   Subject to the terms and   conditions   of this purchase

agreement   (the "Purchase   Agreement"),   the Company will issue and sell to each

Purchaser,   and each   Purchaser   will purchase   from the Company,   the aggregate

principal   amount   of the   Notes   set forth   opposite   the   Purchaser's   name on

Schedule   A at a purchase   price   equal to 100% of the   principal   amount of the

Notes (the "Purchase   Price").   The obligations   hereunder of each Purchaser are

several and not joint,   and each of the Purchasers   shall have no obligation and

no liability to any Person for the   performance or   nonperformance   hereunder by

any other Purchaser.

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     Section 2.1 Restricted   Securities.   Each   Purchaser,   and each   subsequent

holder of any Securities (as defined in Section 6.1, below), by such Purchaser's

or the subsequent   holder's   acceptance   thereof agrees that no transfer or sale

(including, without limitation, by pledge or hypothecation) of Securities by any

holder of   Securities   which is   otherwise   permitted   hereunder,   other   than a

transfer or sale to the Company, shall be effective, unless the transfer or sale

is made:

 

          (a)   pursuant   to   an   effective    registration   statement   under   the

     Securities   Act of 1933,   as amended (the   "Securities   Act"),   and a valid

     qualification under applicable state securities or "blue sky" laws; or

 

          (b)   without   the   registration   or   qualification   as a result of the

     availability   of an exemption   therefrom   and, if requested by the Company,

     counsel for such holder of Securities shall have furnished the Company with

     an opinion,   satisfactory   in form and   substance   to the   Company,   to the

     effect that no registration is required   because of the   availability of an

     exemption from the registration requirements of the Securities Act.

 

     Section 2.2   Registration   Rights.   Each   Purchaser will be entitled to the

benefits   of   a   Registration   Rights   Agreement   dated   the   Closing   Date   (as

hereinafter   defined) between the Company and the Purchasers (the   "Registration

Rights   Agreement"),   pursuant   to   which   the   Company   agrees   to file a Shelf

Registration   Statement (as defined in the Registration   Rights   Agreement) with

the U.S. Securities and Exchange   Commission (the "Commission")   registering the

resale by each   Purchaser of the Common Shares   issued to it upon   conversion of

the Notes or as payment thereon under Rule 415 of the Securities Act.

 

ARTICLE 3. CLOSING.

 

     The sale and purchase of the Notes   contemplated   hereby shall occur at the

offices   of   Messerli   & Kramer   P.A.,   150   South   Fifth   Street,   Suite   1800,

Minneapolis,   Minnesota at 9:00 a.m.   (Central Time), (the "Closing") or on such

other   business day as may be agreed upon by the Company and the   Purchasers   in

writing. At the Closing, the Company will deliver to each Purchaser the Notes to

be   purchased   by the   Purchaser   in a single Note dated the date of the Closing

(the "Closing Date") and made payable to the Purchaser,   against delivery by the

Purchaser to the Company of the Purchaser's   Purchase Price, by wire transfer of

immediately   available   funds for the   account   of the   Company   to the   account

specified to the Purchasers in writing by the Company.

 

ARTICLE 4. CONDITIONS TO CLOSING; TERMINATION.

 

     Section 4.1 Conditions to Purchaser's Obligation to Close. Each Purchaser's

obligation to purchase and pay for the Notes to be sold to that Purchaser at the

Closing is subject to the fulfillment to the Purchaser's satisfaction,   prior to

or at the Closing of the following conditions:

 

          (a)   The   representations   and   warranties   of   the   Company   in   this

     Agreement shall be correct when made and at the time of the Closing.

<PAGE>

 

          (b) The Company shall have   delivered   the Notes and the   Registration

     Rights    Agreement    (together   with   this   Agreement,    the    "Transaction

     Documents"), duly executed by the Company.

 

          (c) The Company shall have obtained the Required   Consents (as defined

     in Section 5.4(c)).

 

          (d) The   Company   shall have paid Gary S.   Kohler and Scot W.   Malloy,

     together,   a $225,000   cash   origination   fee   related to the   transactions

     contemplated hereby.

 

          (e) Barnes & Thornburg LLP,   legal counsel to the Company,   shall have

     delivered an opinion to the Purchasers   with respect to such matters and in

     such   form   as   is   acceptable   to   the   Purchasers   in   their    reasonable

     discretion.

 

ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

     The   Company    represents   and   warrants   the   following   to   each   of   the

Purchasers, as of the date hereof:

 

     Section 5.1 Organization; Power and Authority. The Company is a corporation

duly organized and validly existing under the laws of the State of Indiana.   The

Company's only   subsidiaries   are the   subsidiaries   listed on Schedule 5.1 (the

"Subsidiaries").   Except as indicated on Schedule 5.1,   each   Subsidiary is duly

organized, validly existing and, as applicable, in good standing, under the laws

of its   jurisdiction of   organization.   Each of the Company and the Subsidiaries

has the respective corporate, limited liability company or partnership power and

authority to own or hold under lease the   properties   it purports to own or hold

under lease, to transact the business it transacts or proposes to transact.   The

Company has the requisite   corporate   power and authority to execute and deliver

the Transaction   Documents,   to sell and issue the Common Shares upon conversion

of the Notes and to   perform   the   provisions   hereof and   thereof.   Each of the

Company and the   Subsidiaries is duly qualified and is authorized to do business

and, as applicable, is in good standing in each jurisdiction in which the nature

of its respective   activities and of its respective   properties   (both owned and

leased) makes such qualification   necessary,   except for those   jurisdictions in

which failure to be so qualified   would not have a materially   adverse effect on

the Company and its   Subsidiaries   or their   businesses,   operations,   financial

condition,   assets or   properties   taken as a whole   (referred to hereafter as a

"Material" adverse effect).

 

     Section 5.2   Capitalization.   The Company is authorized to issue   2,000,000

shares of Preferred Stock, no par value, of which no shares are outstanding, and

20,000,000   shares of Common Stock, no par value, of which 8,853,191   shares are

issued and outstanding.   Except as set forth on Schedule 5.2 or in the Company's

current,   quarterly, annual and other periodic filings (the "SEC Reports") filed

with the Commission or in other   documents   delivered to the   Purchasers,   their

attorneys   or agents in   connection   herewith,   the Company   has no   outstanding

options,   warrants or other rights to acquire any capital   stock,   or securities

convertible   or   exchangeable   for capital   stock or for   securities   themselves

convertible   or    exchangeable    for   capital   stock    (together,    "Convertible

Securities").   Except as set forth on Schedule   5.2 or in the SEC   Reports,   the

Company   has no other   agreement   or   commitment   to sell or issue any shares of

capital stock or

 

 

<PAGE>

 

Convertible   Securities.   All issued   and   outstanding   shares of the   Company's

capital stock (i) have been duly authorized and validly   issued,   (ii) are fully

paid and nonassessable, (iii) are free from any preemptive and cumulative voting

rights and (iv) were issued   pursuant   to an   effective   registration   statement

filed   with the   Commission   and   applicable   state   securities   authorities   or

pursuant to valid exemptions under federal and state securities laws.   Except as

set forth on   Schedule   5.2,   or in the SEC   Reports,   there are no   outstanding

rights of first refusal or voting or shareholder agreements of any kind relating

to any of the Company's   securities to which the Company or any of its executive

officers   and   directors   is a party or as to which the   Company   otherwise   has

knowledge.   When issued in   compliance   with the   conversion   provisions   of the

Notes, the Common Shares will be validly issued,   fully paid and   nonassessable,

and   will be free of any   liens or   encumbrances;   provided,   however,   that the

Common   Shares may be subject to   restrictions   on transfer   under state   and/or

federal   securities   laws as set forth herein or as   otherwise   required by such

laws at the time a transfer is   proposed.   Notwithstanding   the   foregoing,   the

issuance   of Common   Shares in payment of   interest   or   principal   on the Notes

pursuant   to   the   provisions   of   Article   9   thereof   is   subject   to   further

authorization   of such   issuance   at the   time by the   Board of   Directors   or a

committee thereof.

 

     Section 5.3 Authorization; Binding Obligations. All corporate action on the

part of the Company, its officers,   directors and shareholders necessary for the

authorization of the Transaction   Documents,   the performance of all obligations

of the Company   hereunder and   thereunder at the Closing and the   authorization,

sale,   issuance and delivery of the Common   Shares upon   conversion of the Notes

has been taken.   The   Transaction   Documents   have been duly   authorized   by all

necessary   corporate   action   on   the   part   of the   Company,   and   each   of the

Transaction Documents constitutes,   and upon execution and delivery thereof each

will   constitute,    a   legal,   valid   and   binding   obligation   of   the   Company

enforceable   against the Company in   accordance   with its terms,   except as such

enforceability   may   be   limited   by   (a)   applicable   bankruptcy,    insolvency,

reorganization,   moratorium or other similar laws   affecting the   enforcement of

creditors' rights generally and (b) general   principles of equity (regardless of

whether the   enforceability   is considered in a proceeding in equity or at law).

The sale of the Common   Shares upon   conversion of the Notes is not and will not

be subject to any preemptive rights or rights of first refusal.   Notwithstanding

the foregoing, the issuance of Common Shares in payment of interest or principal

on the Notes   pursuant   to the   provisions   of   Article 9 thereof   is subject to

further   authorization of such issuance at the time by the Board of Directors or

a committee thereof.

 

     Section 5.4 Compliance with Laws and Other Instruments. Except as disclosed

in the SEC Reports,   the Company is not in violation of any applicable   statute,

rule, regulation, order or restriction of any Governmental Authority (as defined

in Section   5.5) in respect of the conduct of its   business or the   ownership of

its   properties   that would   Materially   and adversely   affect the Company.   The

Company   has   all   franchises,   permits,   licenses   and   any   similar   authority

necessary for the conduct of its business as now being conducted by it, the lack

of which would   Materially   and   adversely   affect the Company,   and the Company

believes it can obtain any similar   authority for the conduct of its business as

planned to be conducted.

 

     Except as disclosed in the SEC Reports,   the Company is not in violation or

default of any term of its Articles of Incorporation   or Code of By-laws,   or of

any provision of any

 

 

<PAGE>

 

mortgage, indenture, contract, agreement,   instrument or contract to which it is

party or by which it is bound or of any judgment, decree, order, writ or, to its

knowledge,   any statute,   rule or   regulation   applicable   to the Company   which

violation would, in any such case,   Materially and adversely affect the Company.

The   execution,   delivery   and   performance   by the   Company of the   Transaction

Documents,   and the sale and issuance of Common   Shares upon   conversion   of the

Notes, will not (with or without the passage of time or giving of notice):

 

          (a) violate,   result in any breach of, or constitute a default   under,

     or result in the creation of, any mortgage,   pledge, lien, encumbrance,   or

      charge in respect of any property of the Company;

 

          (b)   cause   the   suspension,   revocation,   impairment,   forfeiture   or

     nonrenewal of any permit, license, authorization or approval applicable to,

     the Company, its business or operations or any of its assets or properties;

 

          (c) except as expressly described in Schedule 5.4, require the consent

     of any third   party   (the   "Required   Consents"),   with   respect to (i) any

     indenture,   loan or   credit   agreement,   mortgage,   deed of   trust or other

     agreement   or   instrument   to which   the   Company   is bound or by which the

     Company   or any of its   properties   may be   bound,   in   each   case   that is

     Material or (ii) the   Articles of   Incorporation   or Code of By-laws of the

     Company;

 

          (d) violate or result in a breach of any of the terms,   conditions   or

     provisions   of any   order,   judgment,   decree,   or   ruling   of   any   court,

     arbitrator   or   Governmental   Authority (as defined in Section 5.5) that is

     applicable and Material to the Company; or

 

          (e) violate any   provision of any statute or other rule or   regulation

     of any   Governmental   Authority   that is   applicable   and   Material   to the

     Company.

 

     Section   5.5    Governmental    Authorizations.    No   consent,    approval   or

authorization of, or registration,   filing or declaration with, any Governmental

Authority is required in connection with the execution,   delivery or performance

by the Company of Transaction   Documents,   other than   customary   notice filings

under Commission   Regulation D and applicable blue sky laws and the registration

of the Common Shares as contemplated in the Registration   Rights Agreement.   For

purposes of this Agreement "Governmental   Authority" means the government of (a)

the   United   States   of   America   or any   state or other   political   subdivision

thereof, or (b) any jurisdiction in which the Company or any of its subsidiaries

conducts all or any part of its business, or which asserts jurisdiction over any

properties of the Company or any of its subsidiaries.

 

     Section 5.6   Disclosures.   The Company's Annual Report on Form 10-K for the

fiscal year ended   September   28, 2003 (the "Most Recent   Annual   Report"),   the

Company's   Quarterly Reports on Form 10-Q for the fiscal quarters ended December

28, 2003 and March 28, 2004 (the "Quarterly   Reports," with March 28, 2004 being

the "Latest Statement Date" and the consolidated financial statements at and for

the three months then ended being the "Latest   Financial   Statements"),   and the

Company's   Current   Reports on Form 8-K, in each case filed with the   Commission

pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act")

(but excluding information contained in any Current Reports on Form 8-K that was

furnished   but not

 

 

<PAGE>

 

filed with the   Commission)   (collectively   the "Exchange   Act Filings")   fairly

describe,   in all   Material   respects,   the general   nature of the   business and

principal   properties   of the   Company.   None   of this   Agreement   or any of the

Exchange Act Filings   contains any untrue   statement of a Material fact or omits

to state   any   Material   fact   necessary   to make   the   statements   therein   not

misleading in light of the   circumstances   under which they were made. Except as

expressly   described in Schedule 5.6 or in the SEC Reports or in other documents

delivered to the Purchasers,   their attorneys or agents in connection   herewith,

since   March 28,   2004,   there has been no   change in the   financial   condition,

operations, business or properties of the Company that is Material. There are no

facts that (individually or in the aggregate) Materially and adversely affecting

the Company that have not been set forth in the Transaction   Documents,   the SEC

Reports or in other   documents   delivered to the   Purchaser or its   attorneys or

agents in connection herewith.

 

     Section   5.7   Financial   Statements.   The   Company's   audited   consolidated

financial   statements   filed as part of the Most   Recent   Annual   Report and the

Company's   unaudited   consolidated   financial   statements   filed   as part of the

Quarterly   Reports   (including   in each case the   related   schedules   and notes)

fairly present in all material respects the consolidated   financial   position of

the Company and its   Subsidiaries   as of the   respective   dates   thereof and the

consolidated   results   of their   operations   and cash   flows for the   respective

periods   so   specified   and have been   prepared   in   accordance   with   generally

accepted   accounting   principles   ("GAAP")   consistently   applied throughout the

periods involved except as set forth in the notes thereto (subject,   in the case

of any interim   financial   statements,   to normal year-end   adjustments)   and in

accordance with the rules and regulations of the Commission.

 

     Section 5.8   Liabilities.   The Company has no Material   liabilities and, to

the   best   of   its   knowledge,   the   Company   knows   of no   Material   contingent

liabilities,   not disclosed in the Latest   Financial   Statements or SEC Reports,

except   current   liabilities    incurred   in   the   ordinary   course   of   business

subsequent   to the   Latest   Statement   Date that   have not   been,   either in any

individual case or in the aggregate, Materially adverse.

 

     Section 5.9 Certain Agreements and Actions. Except as disclosed on Schedule

5.6 or in the   SEC   Reports,   the   Company   has   not (i)   declared   or paid   any

dividends,   or authorized or made any   distribution   upon or with respect to any

class or series of its   capital   stock,   (ii) since the Latest   Statement   Date,

incurred any indebtedness   for money borrowed or any other material   liabilities

out of the ordinary course of business,   (iii) made any loans or advances to any

person,   other than ordinary   advances for travel or   entertainment   expenses or

(iv) sold, exchanged or otherwise disposed of any of its assets or rights, other

than in the ordinary course of business.

 

     Section 5.10 Obligations of or to Related   Parties.   Except as disclosed on

Schedule 5.10 or in the SEC Reports,   there are no obligations of the Company to

officers, directors,   shareholders,   employees or consultants of the Company, or

to any members of their immediate   families or other affiliates,   other than (i)

for   payment of salary   for   services   rendered   since the   commencement   of the

Company's most recent payroll period, (ii) reimbursement for expenses reasonably

incurred on behalf of the Company and (iii) for other standard employee benefits

made generally   available to all employees   (including   stock option   agreements

outstanding   under any stock   option plan   approved by the Board of Directors of

the Company).   Except as disclosed on Schedule 5.10 or in the

 

 

<PAGE>

 

SEC   Reports,   none   of the   officers,   directors,   shareholders,   employees   or

consultants of the Company,   or any members of their immediate families or other

affiliates, are indebted to the Company or have any direct or indirect ownership

interest   in any firm,   corporation   or other   entity   with which the Company is

affiliated or with which the Company has a business   relationship,   or any firm,

corporation or other entity that competes with the Company.   Except as disclosed

in the SEC Reports, no officer, director, shareholder, employee or consultant of

the   Company,   or, to the   Company's   knowledge,   any member of their   immediate

families or other   affiliates,   is,   directly or indirectly,   interested in or a

party to any Material contract with the Company. Except as disclosed on Schedule

5.10 or in the SEC Reports,   the Company is not a guarantor or indemnitor of any

indebtedness of any other person, firm or corporation.

 

     Section 5.11 Title to Properties and Assets;   Liens. Except as set forth on

Schedule 5.11 or in the SEC Reports,   the Company has good and marketable   title

to its properties and assets,   including the properties and assets   reflected in

the Latest Financial Statements and good title to its leasehold estates, in each

case subject to no mortgage,   pledge, lien, lease,   encumbrance or charge, other

than (i) those   resulting from taxes that have not yet become   delinquent,   (ii)

minor liens and   encumbrances   that do not materially   detract from the value of

the property subject thereto or materially   impair the operations of the Company

(iii) those that have otherwise   arisen in the ordinary   course of business,   or

(iv) liens   securing   Senior   Indebtedness   (as defined in Section   7.6(a)(xxii)

below).   All facilities,   machinery,   equipment,   fixtures and other   properties

owned,   leased or used by the Company are in good operating condition and repair

and are   reasonably   fit and   usable for the   purposes   for which they are being

used, reasonable wear and tear excepted.

 

     Section 5.12 Patents and   Trademarks.   Except as set forth on Schedule 5.12

or in the SEC Reports,   the Company   owns or licenses   all patents,   trademarks,

service marks,   trade names,   copyrights,   trade secrets,   information and other

proprietary rights and processes necessary for its business as now conducted and

as proposed to be   conducted,   without any known   infringement   of the rights of

others.   The Company is not aware that any of its   employees is obligated   under

any contract   (including   licenses,   covenants or   commitments of any nature) or

other   agreement,   or subject to any   judgment,   decree or order of any court or

administrative   agency, that would interfere with their duties to the Company or

that would conflict with the Company's business as proposed to be conducted. The

Company does not believe it is or will be   necessary to utilize any   inventions,

trade secrets or   proprietary   information of any of its employees made prior to

their   employment   by the   Company,   except   for   inventions,   trade   secrets or

proprietary information that have been assigned to the Company.

 

     Section 5.13 Litigation.   Except as disclosed in the SEC Reports,   there is

no action,   suit,   proceeding   or   investigation   pending   or, to the   Company's

knowledge,   currently threatened against the Company that questions the validity

of this Agreement or the other   agreements   contemplated   hereby or the right of

the   Company   to   enter   into   any of   such   agreements,   or to   consummate   the

transactions   contemplated   hereby or thereby.   Except as   disclosed   in the SEC

Reports,   there is no   action,   suit,   proceeding   or   investigation   or, to the

Company's knowledge, currently threatened against the Company that might result,

either   individually or in the aggregate,   in any Material adverse change in the

assets, condition,   affairs or prospects of the Company, financial or otherwise,

or any change in the current equity ownership of the Company, nor is the Company

aware that

 

 

<PAGE>

 

there   is   any   basis   for   the   foregoing.   The   foregoing   includes,    without

limitation,   actions   pending or threatened   (or any basis therefor known to the

Company)   involving the prior employment of any of the employees of the Company,

their use in   connection   with the   Company's   business   of any   information   or

techniques   allegedly   proprietary   to any of their   former   employers   or their

obligations   under any agreements with prior   employers.   Except as disclosed in

the SEC Reports,   the Company is not a party or subject to the provisions of any

order, writ,   injunction,   judgment or decree of any Governmental Authority that

is, an any such case, Material to the Company or its operations.

 

     Section 5.14 Tax Returns and Payments. The Company has timely filed all tax

returns   (federal,   state and local) required to be filed by it. All taxes shown

to be due and payable on such   returns,   any   assessments   imposed,   and, to the

Company's knowledge, all other taxes due and payable by the Company on or before

the   Closing   have   been   paid or will be paid   prior   to the time   they   become

delinquent.   The   Company   has not been   advised   (i)   that any of its   returns,

federal, state or other, have been or are being audited as of the date hereof or

(ii) of any   deficiency   in   assessment   or proposed   adjustment to its federal,

state or other taxes.   The Company has no knowledge of any   liability of any tax

to be imposed   upon the   properties   or assets of the   Company as of the date of

this Agreement that is not adequately provided for.

 

     Section 5.15 Employees. The Company has no collective bargaining agreements

with any of its employees.   There is no labor union organizing   activity pending

or, to the Company's knowledge,   threatened with respect to the Company.   Except

as set   forth   on   Schedule   5.15 or in the SEC   Reports,   no   employee   has any

agreement or contract,   written or oral,   regarding   his   employment.   Except as

disclosed on Schedule 5.15 or in the SEC Reports,   the Company is not a party to

or bound by any currently effective employment contract,   deferred   compensation

arrangement,   bonus plan,   incentive   plan,   profit   sharing plan or   retirement

agreement in which executive   officers can participate   that is not available to

employees generally. To the Company's knowledge, no employee of the Company, nor

any   consultant   with whom the Company has   contracted,   is in   violation of any

material term of any employment contract,   proprietary   information agreement or

any other agreement   relating to the right of any such individual to be employed

by, or to contract with, the Company because of the nature of the business to be

conducted   by the   Company;   and,   to the   Company's   knowledge,   the   continued

employment by the Company of its present   employees,   and the performance of the

Company's   contracts with its   independent   contractors,   will not result in any

such   violation.   The Company has not received any notice alleging that any such

violation   has   occurred.   Except as   disclosed   on Schedule   5.15 or in the SEC

Reports,   no employee of the   Company   has been   granted the right to   continued

employment by the Company or to any Material compensation   following termination

of employment with the Company. The Company is not aware that any officer or key

employee,   or that any   group   of key   employees,   intends   to   terminate   their

employment   with the Company,   nor does the Company have a present   intention to

terminate the employment of any officer, key employee or group of key employees.

 

     Section   5.16   Registration   Rights.   Except as   required   pursuant   to the

Registration Rights Agreement or as disclosed in the SEC reports, the Company is

presently not under any obligation,   and has not granted any rights, to register

(as defined in the Registration Rights Agreement) any of the Company's presently

outstanding securities or any of its securities that may hereafter be issued.

<PAGE>

 

     Section 5.17   Environmental and Safety Laws. Except as disclosed in the SEC

Reports,   to the   Company's   knowledge,   the Company is not in   violation of any

applicable    statute,    law   or   regulation    relating   to   the   environment   or

occupational   health and safety,   and to the   Company's   knowledge,   no material

expenditures   are or will be required in order to comply with any such   existing

statute,   law or   regulation.   Without   limiting   the   foregoing,   and except as

disclosed in the SEC Reports:

 

     (a) with respect to any real property owned,   leased or otherwise   utilized

by the Company ("Real Property"), the Company is not or has not in the past been

in violation of any Hazardous   Substance Law which violation could reasonably be

expected to result in a Material   liability to the Company or its properties and

assets;

 

     (b) neither the Company nor, to the   knowledge   of the   Company,   any third

party has used, released, generated,   manufactured,   produced or stored, in, on,

under,   or about any Real   Property,   or transported   thereto or therefrom,   any

Hazardous Substances that could reasonably be expected to subject the Company to

Material liability, under any Hazardous Substance Law;

 

     (c) to the   knowledge   of the   Company,   there   are no   underground   tanks,

whether   operative or   temporarily or   permanently   closed,   located on any Real

Property   that could   reasonably   be expected to subject the Company to Material

liability under any Hazardous Substance Law;

 

     (d) to the   knowledge   of the Company,   there are no   Hazardous   Substances

used,   stored or   present   at or on,   the   Company's   Real   Property   that could

reasonably   be   expected   to   migrate   onto any other Real   Property,   except in

compliance with Hazardous Substance Laws; and

 

     (e) to the   knowledge   of the   Company,   there   neither is nor has been any

condition,   circumstance,   action,   activity or event that could   reasonably   be

expected to be a Material   violation by the Company of any   Hazardous   Substance

Law,   or to result in Material   liability   to the   Company   under any   Hazardous

Substance Law.

 

     For purposes hereof,   "Hazardous   Substances" means (statutory acronyms and

abbreviations   having   the   meaning   given   them   in   the   definition   below   of

"Hazardous   Substances   Laws")   substances   defined as   "hazardous   substances,"

"pollutants" or   "contaminants"   in Section 101 of the CERCLA;   those substances

defined as "hazardous waste," "hazardous materials" or "regulated substances" by

the RCRA; those   substances   designated as a "hazardous   substance"   pursuant to

Section 311 of the CWA;   those   substances   defined as "hazardous   materials" in

Section 103 of the HMTA;   those   substances   regulated   as a hazardous   chemical

substance or mixture or as an imminently hazardous chemical substance or mixture

pursuant   to   Sections   6   or   7   of   the   TSCA;   those   substances   defined   as

"contaminants"   by Section 1401 of the SDWA, if present in excess of permissible

levels;   those   substances   regulated by the Oil Pollution Act; those substances

defined as a pesticide   pursuant to Section 2(u) of the FIFRA;   those substances

defined as a source, special nuclear or by-product material by Section 11 of the

AEA; those substances defined as "residual   radioactive material" by Section 101

of the   UMTRCA;   those   substances   defined   as "toxic   materials"   or   "harmful

physical agents"

 

<PAGE>

 

pursuant to Section 6 of the OSHA; those substances   defined as hazardous wastes

in 40 C.F.R. Part 261; those substances   defined as hazardous waste constituents

in 40 C.F.R. Part 260, specifically including Appendix VII and VIII of Subpart D

of 40 C.F.R. Part 261; those substances designated as hazardous substances in 40

C.F.R. ss.ss. 116.4 and 302.4; those substances defined as hazardous   substances

or hazardous   materials in 49 C.F.R. ss. 171.8;   those   substances   regulated as

hazardous materials, hazardous substances, or toxic substances in 29 C.F.R. Part

1910; any chemical,   material, toxin, pollutant, or waste regulated by or in any

other Hazardous Substances Laws; and in the regulations adopted and publications

promulgated    pursuant   to   said   laws,   whether   or   not   such   regulations   or

publications are   specifically   referenced   herein,   as may be applicable to the

Company.

 

     "Hazardous   Substances Law" means any of the following as applicable to the

Company:

 

     (i) the Comprehensive Environmental Response,   Compensation,   and Liability

Act of 1980, as amended (42 U.S.C. Section 9601 et seq.) ("CERCLA");

 

     (ii) the Federal   Water   Pollution   Control Act (33 U.S.C.   Section 1251 et

seq.) ("Clean Water Act" or "CWA");

 

     (iii) the Solid Waste   Disposal Act, as amended (42 U.S.C.   Section 6901 et

seq.) ("RCRA");

 

     (iv)   the   Atomic   Energy   Act of 1954   (42   U.S.C.   Section   2014 et seq.)

("AEA");

 

     (v) the Clean Air Act (42 U.S.C. Section 7401 et seq.) ("CAA");

 

     (vi) the   Emergency   Planning and   Community   Right to Know Act of 1986 (42

U.S.C. Section 11001 et seq.) ("EPCRA");

 

     (vii) the Federal   Insecticide,   Fungicide,   and   Rodenticide Act (7 U.S.C.

Section 136 et seq.) ("FIFRA");

 

     (viii) the Oil   Pollution   Act of 1990 (33   U.S.C.A.   Section 2701 et seq.)

(the "Oil Pollution Act");

 

     (ix) the Safe   Drinking   Water Act in the   Public   Health   Service   Act (42

U.S.C. Sections 300f et seq.) ("SDWA");

 

     (x) the   Surface   Mining   Control   and   Reclamation   Act of 1974 (30 U.S.C.

Sections 1201 et seq.) ("SMCRA");

 

     (xi) the Toxic   Substances   Control   Act (15 U.S.C.   Section   2601 et seq.)

("TSCA");

 

     (xii) the Hazardous Materials Transportation Act (49 U.S.C. Section 5101 et

seq.) ("HMTA");

 

     (xiii) the Uranium Mill Tailings   Radiation   Control Act of 1978 (42 U.S.C.

Section 7901 et seq.) ("UMTRCA");

 

     (xiv) the   Occupational   Safety and Health   Act (29 U.S.C.   Section   651 et

seq.) ("OSHA"); and

<PAGE>

 

     (xv) all other   federal,   state and local   governmental   rules which govern

Hazardous Substances,   and the regulations adopted and publications   promulgated

pursuant to all such foregoing laws.

 

     Section   5.18   Private   Offering   by the   Company.   Assuming   the truth and

correctness of the representations and warranties of the Purchasers set forth in

Article 6, the sale of the Notes hereunder is exempt from the   registration   and

prospectus delivery   requirements of the Securities Act of 1933, as amended (the

"Securities   Act"), and will have been registered or qualified (or exempted from

registration and qualification) under the registration,   permit or qualification

requirements of the State of Minnesota.

 

     Section   5.19   Insurance.   The   Company   has   fire and   casualty   insurance

policies   with   coverage   customary   for   companies   similarly   situated   to the

Company.

 

     Section 5.20   Investment   Company Act. The Company is not, and will not use

the   proceeds   from the   Notes   in a   manner   so as to   become,   an   "investment

company,"   or a company   "controlled"   by an   "investment   company,"   within the

meaning of the Investment Company Act of 1940, as amended.

 

     Section 5.21 Nasdaq   Compliance.   The Company's   Common Stock is registered

pursuant to Section   12(g) of the   Exchange   Act,   and is listed on the SmallCap

Market   administered by The Nasdaq Stock Market,   Inc. (the "SmallCap   Market").

The   Company has taken no action   designed   to, or likely to have the effect of,

and the transactions contemplated by this Agreement will not have the effect of,

terminating   the   registration   of the Common   Stock under the   Exchange   Act or

de-listing   of the Common   Stock from the SmallCap   Market.   The Company has not

received any   notification   that the   Commission,   the National   Association   of

Securities   Dealers,   Inc.,   the   SmallCap   Market or any other   self-regulatory

organizational   body is contemplating   terminating such registration or listing.

Without limiting the foregoing,   the Transaction   Documents and the transactions

contemplated   by them   require   no   shareholder   approval   under   the   rules   or

interpretations of the SmallCap Market.

 

     Section 5.22 Reporting Status. The Company has filed in a timely manner all

documents   that the Company was   required to file under the   Exchange Act during

the 12 months preceding the date of this Agreement.   As of the date hereof,   the

Company satisfies the eligibility requirements for the use of Form S-2 under the

Securities Act.

 

     Section 5.23 No Manipulation of Stock.   Neither the Company, nor any of its

directors,    officers   or   controlling   persons,   has   taken,   in   violation   of

applicable law, any action   designed to or that might   reasonably be expected to

cause or result in, or which has   constituted,   stabilization or manipulation of

the   price   of the   Common   Shares   to   facilitate   the   sale or   resale   of the

securities   issued or issuable in connection with the transactions   contemplated

hereunder.

 

     Section 5.24 Foreign Corrupt Practices; Sarbanes-Oxley.

 

          (a) Neither the Company,   nor to the   knowledge   of the   Company,   any

     agent or other person acting on behalf of the Company,   has (i) directly or

     indirectly,   used any   corrupt   funds for   unlawful   contributions,   gifts,

     entertainment   or other   unlawful   expenses   related to foreign or domestic

     political   activity,   (ii) made any unlawful payment to foreign or domestic

     government   officials or

 

 

<PAGE>

 

     employees or to any foreign or domestic political parties or campaigns from

     corporate funds,   (iii) failed to disclose fully any   contribution   made by

     the   Company   (or made by any   person   acting   on its   behalf   of which the

     Company is aware)   which is in   violation   of law, or (iv)   violated in any

     material   respect any   provision of the Foreign   Corrupt   Practices   Act of

     1977, as amended.

 

          (b) The Company is in   compliance   in all material   respects   with all

     provisions of the   Sarbanes-Oxley   Act of 2002 that are applicable to it as

     of the Closing Date.

 

     ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.

 

     Each   Purchaser   severally   represents   and warrants   the   following to the

Company:

 

     Section 6.1 Purchase for Investment.   Such Purchaser is purchasing its Note

or the   securities   acquired   pursuant to its Note   (including the Common Shares

issued upon conversion of its Note) (collectively,   the "Securities") solely for

its own account and not as nominee or agent for any other   person and not with a

view to, or for   offer or sale in   connection   with,   any   distribution   thereof

(within the meaning of the   Securities   Act) that would be in   violation   of the

securities   laws of the   United   States of America   or any state   thereof.   Such

Purchaser understands that its Note has not been registered under the Securities

Act and may be resold   only if   registered   pursuant   to the   provisions   of the

Securities Act or if an exemption from   registration is available,   except under

circumstances   where neither such registration nor such exemption is required by

law, and that the Company is not required to register such Purchaser's Note.

 

     Section   6.2   Accredited    Investor.    Such   Purchaser   is    knowledgeable,

sophisticated and experienced in business and financial matters.   Such Purchaser

acknowledges   that the Securities have not been registered   under the Securities

Act and understands   that the Securities must be held   indefinitely   unless they

are   subsequently   registered   under the Securities Act or the sale is permitted

pursuant to an   available   exemption   from the   registration   requirement.   Such

Purchaser   (a) is able to   bear   the   economic   risk   of its   investment   in the

Securities and is presently able to afford the complete loss of the   investment;

(b) is an   Accredited   Investor as defined in Rule   501(a)   under   Regulation   D

promulgated by the   Commission;   and (c) has been afforded access to information

about the Company and its financial   condition and business sufficient to enable

it to evaluate its investment in the Securities.

 

     Section 6.3   Authorization.   Such Purchaser has taken all actions necessary

to authorize it (a) to execute, deliver and perform all of its obligations under

this Agreement,   (b) to perform all of its obligations   under the Securities and

(c) to   consummate   the   transactions   contemplated   hereby   and   thereby.   This

Agreement   is   a   legally   valid   and   binding    obligation   of   such   Purchaser

enforceable against it in accordance with this Agreement's terms, except as such

enforceability   may   be   limited   by   (i)   applicable   bankruptcy,    insolvency,

reorganization,   moratorium or other similar laws   affecting the   enforcement of

creditors' rights generally and (ii) general principles of equity (regardless of

whether the enforceability is considered in a proceeding in equity or at law).

<PAGE>

 

ARTICLE 7. COVENANTS OF THE COMPANY.

 

     Section   7.1 Filing of Form 8-K.   Within five (5)   business   days after the

Closing   Date,   the Company shall file with the   Commission a Current   Report on

Form 8-K in compliance with the   requirements   thereof   disclosing the execution

and delivery of this Agreement.

 

     Section 7.2 Financial and Business   Information.   The Company shall deliver

to each Purchaser (or any other holder of the Notes):

 

          (a)   Quarterly   Statements   --   within   45 days   after the end of each

     quarterly   fiscal period in each fiscal year of the Company (other than the

     last quarterly   fiscal period of each such fiscal year),   duplicate   copies

     of,

 

               (i) a consolidated   balance sheet of the Company as at the end of

          such quarter, and

 

               (ii) consolidated   statements of income, changes in shareholders'

           equity and cash flows of the   Company,   for such   quarter   and (in the

          case of the second and third   quarters)   for the portion of the fiscal

          year   ending   with   such   quarter,   setting   forth   in   each   case   in

          comparative   form the   figures   for the   corresponding   periods in the

          previous fiscal year, all in reasonable detail, prepared in accordance

          with GAAP and Commission rules and regulations applicable to quarterly

          financial statements   generally,   and certified by the Chief Financial

          Officer as fairly presenting,   in all Material respects, the financial

          position   of the   companies   being   reported   on and their   results of

          operations and cash flows,   subject to changes resulting from year-end

          adjustments,   provided that the filing with the Commission   within the

          time period specified above of the Company's   Quarterly Report on Form

          10-Q prepared in compliance   with the   requirements   therefor shall be

          deemed to satisfy the requirements of this Section 7.2(a);

 

          (b) Annual   Statements   -- within 90 days after the end of each fiscal

     year of the Company, duplicate copies of,

 

               (i) a consolidated balance sheet of the Company, as at the end of

          such year, and

 

               (ii) consolidated   statements of income, changes in shareholders'

          equity and cash flows of the Company,   for such year, setting forth in

          each case in   comparative   form the   figures for the   previous   fiscal

          year, all in reasonable detail,   prepared in accordance with GAAP, and

          accompanied   by an opinion   thereon of   independent   certified   public

          accountants of recognized national standing, which opinion shall state

          that   such   financial   statements   present   fairly,   in   all   material

          respects,   the financial position of the companies being reported upon

          and their results of operations   and cash flows and have been prepared

          in conformity with GAAP and Commission rules and regulations, and that

          the examination of such   accountants in connection with such financial

          statements   has   been   made   in   accordance   with   generally   accepted

          auditing   standards,   and that such audit provides a reasonable   basis

          for such opinion in the   circumstances;   provided that the

 

<PAGE>

 

          filing with the Commission   within the time period   specified above of

          the Company's Annual Report on Form 10-K for such fiscal year prepared

          in   accordance   with the   requirements   therefor   shall be   deemed   to

          satisfy the requirements of this Section 7.2(b);

 

               (c)   Shareholder   Written   Communications   --   promptly   upon the

          mailing thereof to shareholders,   a copy of any written   communication

          mailed to shareholders of the Company   generally,   including any proxy

          statement related to any management   solicitation of shareholder votes

          or   consents   or any   information   statement   related to any annual or

          special   meeting   of   shareholders,   as well as the   Company's   annual

          report to shareholders,   if any, prepared pursuant to Rule 14a-3 under

          the Exchange Act;   provided that the filing with the Commission within

          the   required   time   period    therefor   and   in   compliance   with   the

          requirements   therefor   of any such   written   communications   shall be

          deemed to satisfy the requirements of this Section 7.2(c).

 

               (d) Requested   Information -- with   reasonable   promptness,   such

          other   data and   information   relating   to the   business,   operations,

          affairs,   financial condition,   assets or properties of the Company or

          relating   to the   ability of the   Company to perform   its   obligations

          hereunder   and under the Notes as from time to time may be   reasonably

          requested by any such holder of the Notes.

 

     Section 7.3   Reservation of Common   Shares.   The Company shall at all times

reserve and keep   available out of its   authorized   but unissued   Common Shares,

solely for the purpose of issuance upon the conversion of the Notes,   the number

of Common Shares   issuable upon the   conversion of the Notes.   All Common Shares

that are so issuable shall, when issued, be duly and validly issued,   fully paid

and nonassessable and free from all taxes, liens and charges.   The Company shall

take all such actions as may be necessary to assure that all such Common   Shares

may be so   issued   without   violation   of   any   applicable   law or   governmental

regulation or any   requirements of any domestic   securities   exchange upon which

the Common Shares may be listed   (except for official   notice of issuance   which

shall be immediately transmitted by the Company upon issuance).

 

     Section 7.4 Transactions   with Affiliates.   The Company will not enter into

directly or indirectly   any Material   transaction   or Material   group of related

transactions (including without limitation the purchase, lease, sale or exchange

of properties of any kind or the rendering of any service) with any   individual,

partnership,   corporation,   limited liability compa