SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Schedule 13D
Under the Securities Exchange Act of 1934
(Amendment No. )*
Sparta Foods, Inc.
(Name of Issuer)
Common Stock, $.01 Par Value
(Title of Class of Securities)
846573301
(CUSIP Number)
T. F. Baker, Group Vice President--Finance
Harvest State Cooperatives
1667 North Snelling, P.O. Box 64594, St. Paul, Minnesota, 55164
(612) 646-9433
(Name, Address and Telephone Number of Person Authorized to Receive Notices and
Communications)
February 24, 1998
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box
[ ].
Note: Schedules filed in paper format shall include a signed original and five
copies of the schedule, including all exhibits. See Rule 13d-7(b) for other
parties to whom copies are to be sent.
The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter the
disclosures provided in a prior cover page.
The information required in the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
(Continued on following page(s))
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CUSIP NO. 846573301 SCHEDULE 13D
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1 NAMES OF REPORTING PERSON, IRS IDENTIFICATION NOS. OF ABOVE PERSONS
Harvest States Cooperatives
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2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ]
(b) [ ]
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3 SEC USE ONLY
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4 SOURCE OF FUNDS
WC
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5 CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [ ]
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6 CITIZENSHIP OR PLACE OF ORGANIZATION
Minnesota
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7 SOLE VOTING POWER
NUMBER OF 1,515,152
SHARES --------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY 0
EACH --------------------------------------------------
REPORTING 9 SOLE DISPOSITIVE POWER
PERSON 1,515,152
WITH --------------------------------------------------
10 SHARED DISPOSITIVE POWER
0
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11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,515,152
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12 CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*[ ]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
18.2% (based on 6,798,637 shares outstanding on January 21, 1998 plus the
shares to be outstanding upon conversion of convertible preferred stock)
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14 TYPE OF REPORTING PERSON*
CO
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<PAGE>
This Schedule 13D of Harvest States Cooperatives, a Minnesota
corporation, relates to the common stock, $.01 par value, of Sparta Foods, Inc.,
a Minnesota corporation.
Item 1. Security and Issuer.
The class of securities to which this statement relates is the common
stock, $0.01 par value, (the "Common Stock") of Sparta Foods, Inc., a Minnesota
corporation (the "Issuer"), with its principal executive offices located at 1565
First Avenue N.W., New Brighton, Minnesota 55112.
Item 2. Identity and Background.
(a-c, f) This statement is being filed by Harvest States Cooperatives, a
Minnesota corporation (the "Harvest States"). Its primary business is
merchandising and processing grain. The address of its principal business and
principal office is 1667 North Snelling, St. Paul, Minnesota 55164.
The following information is provided with respect to each director of
Harvest States:
Name Business Address
---- ----------------
Steven Burnet 94699 Monkland Lane, Moro, OR, 97039-9705
Steve Carney P.O. Box 1122, Scobey, MT, 59263-1122
Edward Ellison RR 1, Box 46, Elbow Lake, MN 56531-9740
Sheldon Haaland RR 2, Box 55, Hanley Falls, MN 56245-9731
Jerry Hasnedl RR 1, Box 39, St. Hilaire, MN 56754
Edward Hereford 1902 Cashup Flat Road, Thornton, WA
99176-9710
Gerald Kuster RR 1, Box 46, Reynolds, ND 58275-9742
Leonard Larson 5128 11th Avenue North, Granville, ND
58741-9595
Tyrone Moos HCR 1, Box 1, Phillip, SD 57567-9601
Duane Risan 7452 37th Street Northwest, Parshall, ND
58770-9703
Duane Stenzel RR 2, Box 173, Wells, MN 56097
Russell Twedt P.O. Box 296, Rudyard, MT 59540-0296
Merlin Van Walleghen 24106 408th Avenue, Letcher, SD 57359-6021
William Zarak 3711 124th Ave. S.W., South Heart, ND,
58655-9767
Each director is an agricultural producer and is self-employed.
The following information is provided with respect to each executive
officer of Harvest States:
Title at Harvest States
-----------------------
Name (Principal Occupation)
---- ----------------------
John D. Johnson President and Chief Executive Officer
Thomas F. Baker Group Vice President--Finance
Michael H. Bergeland Group Vice President--Grain &
Agricultural Services
Garry A. Pistoria Group Vice President--Wheat Milling
James Tibbetts Group Vice President--Oilseed Processing &
Packaging
<PAGE>
The executive officers have the same business address which is: c/o
Harvest State Cooperatives, 1667 North Snelling, P.O. Box 64594, St. Paul,
Minnesota 55164.
All directors and executive officers of Harvest States are citizens of
the United States of America.
(d-e) During the last five years, neither Harvest States nor, to the best of
its knowledge, any director or executive officer has been convicted in a
criminal proceeding (excluding traffic violations or similar misdemeanors) or
has been a party to a civil proceeding of a judicial or administrative body of
competent jurisdiction and as a result of such proceeding was or is subject to a
judgment, decree or final order enjoining future violations of, or prohibiting
or mandating activities subject to, federal or state securities laws or finding
any violation with respect to such laws.
Item 3. Source and Amount of Funds or Other Consideration.
On February 24, 1998, Harvest States and the Issuer entered into a
Stock Purchase Agreement (the "Stock Purchase Agreement"), pursuant to which
Harvest States agreed to buy, and the Issuer agreed to sell, 2,500 shares of the
Preferred Stock, Series 1998, $1,000.00 par value per share (the "Preferred
Stock"), at $1,000.00 per share ($2,500,000, in the aggregate). The Stock
Purchase Agreement was closed the same day, and Harvest States used its general
working capital to purchase the Preferred Stock. Pursuant to the terms of the
Certification of Designations for the Preferred Stock (the "Certificate of
Designations"), the Preferred Stock is convertible into shares of Common Stock
at the option of Harvest States at any time at the rate of 606.06 shares of
Common Stock for each share of Preferred Stock. See Item 6 for a description of
the Stock Purchase Agreement and the Certificate of Designations, which are
incorporated herein by reference.
Item 4. Purpose of Transaction.
Harvest States began discussions with the Issuer regarding the possible
acquisition of the Issuer by Harvest States in August 1997. Harvest States and
Issuer signed a Confidentiality Agreement with respect to information provided
to Harvest States by the Issuer on August 21, 1997. At that time Harvest States
began receiving documents and other information from the Issuer as a part of
Harvest States's due diligence review. From August 1997 through November 1997,
Harvest States and the Issuer participated in discussions regarding the possible
acquisition of the Issuer by Harvest States.
In November 1997, Harvest States suspended discussions with the Issuer
as well as its due diligence review because Harvest States concluded that
continuing discussions would conflict with other opportunities it was pursuing
and it had been unable to make the necessary progress in its discussions.
Harvest States, however, remained interested in a possible acquisition
with the Issuer and, on February 24, 1998, entered into the Stock Purchase
Agreement. Harvest States purchased the Preferred Stock of the Issuer for
general investment purposes, to secure an equity position in the Issuer, to
pursue certain favorable terms of agreement should Harvest States seek to
acquire the Issuer in the future and to fund the Issuer's need for additional
working capital.
<PAGE>
Harvest States considers the Issuer as a potential acquisition target.
Harvest States believes that any acquisition would take place within the next
three years and that it is unlikely that any acquisition would take place after
that time. Considerations relevant to any decision may include then current
market and economic conditions, the Issuer's then current and prospective
financial performance and Harvest States's strategic plans and objectives. See
Item 6 for a description of the Stock Purchase Agreement and the Certificate of
Designations, which are incorporated herein by reference.
Item 5. Interest in Securities of the Issuer.
(a) Pursuant to the terms of the Stock Purchase Agreement and the
Certificate of Designations, Harvest States beneficially owns
and has the right to acquire 1,515,512 shares of Common Stock,
which would constitute 18.2% of the shares of Common Stock
issued and outstanding as of January 21, 1998 after giving
effect to the conversion.
(b) Harvest States would have sole voting power and sole
dispositive power as to the shares that could be acquired
pursuant to the terms of the Preferred Stock.
(c) Except for the transactions to which this Schedule 13D
relates, no transactions with respect to the Common Stock have
been effected during the past 60 days by Harvest States or, to
the best knowledge of Harvest States, by any executive officer
or director of Harvest States.
(d) No other person is known by Harvest States to have the right
to receive or the power to direct the receipt of dividends
from, or proceeds from the sale of, the securities covered by
this Schedule 13D.
(e) Not applicable.
Item 6. Contracts, Arrangements, Understandings or Relationships with Respect
to Securities of the Issuer.
Harvest States has, pursuant to Section 8(h) of the Stock Purchase
Agreement, certain rights with respect to a sale of Issuer's business.
Specifically, the Issuer must (i) inform Harvest States in writing of the
existence of discussions or negotiations in connection with an Acquisition
Proposal (as defined in the Stock Purchase Agreement) and any request or inquiry
for information about the Issuer if it reasonably believes such inquiry or
request is in connection with an Acquisition Proposal, (ii) furnish information
or provide access with respect to the Issuer to such extent such information is
furnished or access is provided to outside parties, (iii) if requested by
Harvest States, negotiate with Harvest States for a period of one month
commencing the day after Harvest States receives written notice pursuant to
clause (i) of any Acquisition Proposal, (iv) give a reasonable opportunity to
Harvest States to make an Acquisition Proposal, (v) not enter into any exclusive
arrangement, lockup or other similar device prior to the expiration of such
one-month period and (vi) keep Harvest States reasonably informed of the status
of any such request, inquiry or Acquisition Proposal. In addition, pursuant to
Section 8(s)
<PAGE>
of the Stock Purchase Agreement, Harvest States has the right, so long as it
owns more than 10% of the outstanding shares of Preferred Stock, to designate
one person as a director of the Issuer. The Issuer has also agreed, pursuant to
the Stock Purchase Agreement, that (i) at its next annual shareholder meeting
(not to be later than March 31, 1999), it will recommend to its shareholders and
use its best efforts to obtain shareholder approval for an amendment to its
articles of incorporation to opt out of Section 302A.671 of the Minnesota
Business Corporation Act, (ii) it will not consolidate with or merge into or
transfer or lease substantially all of its properties and assets to another
entity unless the successor entity assumes the Stock Purchase Agreement, (iii)
it will not distribute with respect to the shares of Common Stock any rights to
acquire other securities of the Issuer that may be commonly considered a part of
a shareholder rights or similar plan, (iv) it will not amend its articles or
incorporation or bylaws or designate any series of preferred stock so as to
adversely affect the rights of Harvest States as a shareholder of the Issuer,
(v) it will not enter into any agreement with any holder or prospective holder
of any securities of the Issuer or issue any securities of the Issuer which
grants such holder special voting rights, (vi) it will not issue, grant or sell
any Common Stock or other securities (or convertible securities) in any
transactions such that the purchaser(s) would own 10% or more of all of the
securities entitled to vote generally for the election of directors, and (vii)
during the five years ending September 30, 2002, it will not issue options,
warrants or similar rights to purchase more than 200,000 shares of Common Stock
or securities convertible into or exercisable for Common Stock, in any year on a
cumulative basis, to employees, officers, directors or consultants to the Issuer
or any subsidiary of the Issuer, and any exercise or conversion price will not
be less than the fair market value on the date of grant. The Issuer is also
subject to other terms and conditions pursuant to the Stock Purchase Agreement
that have not been described herein.
The Certificate of Designations provides that the Preferred Stock is
convertible at any time at Harvest States's option at the rate of 606.06 shares
of Common Stock for each share of Preferred Stock (the "Conversion Rate"),
subject to adjustment as provided in Section 8 of the Certificate of
Designations. Section 8 of the Certificate of Designations provides, in part,
that, in the event, at any time prior to February 23, 2001, the Issuer (i),
except pursuant to (A) 1,103,667 options and 3,634,208 warrants outstanding as
of the date of the Stock Purchase Agreement or (B) securities issued in
compliance with Section 9(d) of the Stock Purchase Agreement, issue or sell any
shares of its Common Stock for a consideration per share less than the
Conversion Price in effect immediately prior to the time of such issuance or
sale, (ii), except for securities issued in compliance with Section 9(d) of the
Stock Purchase Agreement, issue or sell any warrants, options or other rights to
acquire shares of its Common Stock at a purchase price less than the Conversion
Price in effect immediately prior to the time of such issuance or sale, or (iii)
issue or sell any other securities that are convertible into shares of Common
Stock for a purchase or exchange price less than the Conversion Price in effect
immediately prior to the time of such issuance or sale then, upon such issuance
or sale, the Conversion Rate shall be increased by reducing the Conversion Price
(which is defined as $1,000.00 divided by the Conversion Rate) to the price at
which such shares of Common Stock are being issued or sold by the Issuer or the
price at which such other securities are exercisable or convertible into shares
of the Common Stock, and then adjusting the Conversion Rate to $1,000.00 divided
by the new Conversion Price. The Stock Purchase Agreement also contains
anti-dilution provisions enabling Harvest States to maintain its percentage
ownership
<PAGE>
of the Common Stock into which the Preferred Stock is convertible in the event
of a subdivision, split, combination or reclassification of the Common Stock.
The Certificate of Designations provides that the Preferred Stock is
redeemable at the option of the Issuer on or after February 23, 2001 at the rate
of $1,100.00 per share plus accumulated and unpaid dividends on the Preferred
Stock, and the Preferred Stock is redeemable at the option of Harvest States
upon the occurrence of a Put Event, which is defined in the Certificate of
Designations as (i) a Change on Control (as defined in Section 9 of the
Certificate of Designations) or (ii) an Event of Default as such term is defined
in Section 11 of the Stock Purchase Agreement. The Stock Purchase Agreement
provides Harvest States with demand and incidental registration rights.
The foregoing summary of the Stock Purchase Agreement and the
Certificate of Designations does not purport to be complete and is qualified in
its entirety by reference to the Stock Purchase Agreement and related exhibits,
which are incorporated herein by reference.
Item 7. Materials to be Filed as Exhibits.
Exhibit A Stock Purchase Agreement, dated February 24, 1998 between
Sparta Foods, Inc. and Harvest States Cooperatives
<PAGE>
SIGNATURES
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: March 5, 1998 HARVEST STATE COOPERATIVES
By /s/ T. F. Baker
---------------------------
T. F. Baker
Group Vice President--Finance
Exhibit A
STOCK PURCHASE AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into as of
February 23, 1998, between SPARTA FOODS, INC., a Minnesota corporation (the
"Company"), and HARVEST STATES COOPERATIVES, a Minnesota corporation ("Harvest
States").
WHEREAS, the Company wishes to raise additional capital for its general
corporate purposes; and
WHEREAS, the Company has 1,000,000 authorized shares of undesignated
preferred stock; and
WHEREAS, Harvest States desires to purchase shares of a series of the
Company's preferred stock having the characteristics described herein.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Authorization of Securities. The Company proposes to authorize,
issue and sell an aggregate of 2,500 shares of a series of its preferred stock
designated "Preferred Stock, Series 1998" of the par value $1,000.00 per share
(the "Preferred Stock") and having the relative rights and preferences set forth
in Exhibit A. On or before the closing date, the Company shall cause a statement
of designations in the form of Exhibit A to be filed with the Secretary of State
of the State of Minnesota.
2. Purchase of Preferred Stock. Subject to the terms and conditions of
this Agreement, the Company agrees to sell to Harvest States, and Harvest States
agrees to purchase from the Company, 2,500 shares of the Preferred Stock at a
purchase price equal to $1,000.00 per share (an aggregate purchase price of
$2,500,000).
3. Closing. The closing of the purchase and sale of the Preferred Stock
hereunder (the "Closing") will be held at the offices of Dorsey & Whitney LLP,
220 South Sixth Street, Minneapolis, Minnesota 55402 on February 24, 1998 or at
such other place and at such time and date as the Company and Harvest States may
agree (the "Closing Date").
4. Conditions to Closing.
(a) Conditions to Harvest States's Obligations. The obligation of
Harvest States to consummate the transactions contemplated by this Agreement is
subject to the satisfaction of the following conditions on or before the Closing
Date:
<PAGE>
(i) The representations and warranties set forth in Section 5
hereof shall be true and correct in all material respects at and as of
the Closing Date as though then made and as though the Closing Date had
been substituted for the date of this Agreement throughout such
representations and warranties, except that any such representation or
warranty made as of a specified date (other than the date hereof) shall
only need to have been true on and as of such date;
(ii) The Company shall have performed in all material respects
all of the covenants and agreements required to be performed and
complied with by it under this Agreement prior to the Closing;
(iii) The Company shall have filed with the Secretary of State
of the State of Minnesota a certificate of designations describing the
rights and preferences of the Preferred Stock purchased by the Company
pursuant to this Agreement;
(iv) Harvest States shall have received from counsel for the
Company a written opinion, dated as of the Closing Date, addressed to
Harvest States and satisfactory to Harvest States's counsel, in form
and substance substantially as set forth in Exhibit B;
(v) On the Closing Date, the Company shall have delivered to
Harvest States all of the following:
(1) certificates of the officers of the Company or
other persons satisfactory to Harvest States, dated the
Closing Date, stating that the conditions precedent set forth
in subsections (i) and (ii) above have been satisfied;
(2) a duly issued certificate dated the Closing Date
and registered in the Company's name representing the
Preferred Stock.
(vi) Such other certificates, documents and instruments as
Harvest States reasonably requests related to the transactions
contemplated hereby.
(b) Conditions to the Company's Obligations. The obligations of the
Company to consummate the transactions contemplated by this Agreement are
subject to the satisfaction of the following conditions on or before the Closing
Date:
(i) The representations and warranties set forth in Section 6
hereof will be true and correct in all material respects at and as of
the Closing as though then made and as though the Closing Date had been
substituted for the date of this Agreement throughout such
representations and warranties, except that any such representation or
warranty made as of a specified date
<PAGE>
(other than the date hereof) shall only need to have been true on and
as of such date;
(ii) Harvest States shall have performed in all material
respects all the covenants and agreements required to be performed by
it under this Agreement prior to the Closing;
(iii) Harvest States will pay to the Company an aggregate
purchase price of $2,500,000 by certified check or wire transfer.
5. Representations and Warranties of the Company. The Company hereby
makes the following representations and warranties to Harvest States:
(a) Organization, Standing, Etc. The Company is a corporation
duly organized, validly existing and in good standing under the laws of
the State of Minnesota, is qualified to do business and is in good
standing as a foreign corporation in each jurisdiction where it is
required to be qualified and has all requisite corporate power and
authority to carry on its business as now conducted, to own, lease and
operate its properties and to authorize, issue and sell the Preferred
Stock as contemplated by this Agreement and to enter into and carry out
the provisions of this Agreement.
(b) Minnesota Business Corporation Act. As contemplated by
Minnesota Statutes, Section 302A.673, the Company has formed a
committee composed of all of the Board's disinterested directors, which
Committee has approved the acquisition of Preferred Stock to be made
pursuant to this Agreement on the Closing Date and thereafter, and
accordingly, such Section does not impose any limitation on a business
combination or other transaction contemplated thereby with Harvest
States.
(c) Subsidiaries, Etc. The Company owns all of the outstanding
shares of capital stock of La Canasta of Minnesota, Inc. ("La
Canasta"). As of the date hereof, the Company does not have any direct
or indirect ownership interest in any other corporation, partnership,
joint venture, association or other business enterprise. Each of the
representations and warranties set forth in this Section 5, paragraphs
(a), (h), (m), (n), (o), (p), (q), (u), (v), (w) and (y) are made with
respect to La Canasta.
(d) Corporate Authorization. This Agreement has been
authorized by all necessary corporate action, has been duly and validly
executed and delivered by the Company and is a valid and binding
agreement of the Company enforceable against the Company in accordance
with its terms. All corporate action necessary to the authorization,
creation, issuance and delivery of the Preferred Stock has been taken
by the Company. The Preferred Stock, when issued and paid for pursuant
to the terms of this Agreement, will be duly authorized, validly issued
and outstanding, fully paid and
<PAGE>
nonassessable, free from preemptive rights and shall be free from any
pledge, lien, encumbrance or restriction known to or caused or created
by the Company other than restrictions on transfer under state and/or
federal securities laws and issued in compliance with all state and
federal securities laws. Upon conversion of the Preferred Stock into
common stock, $.01 par value per share, of the Company (the "Common
Stock") in accordance with the terms of the Preferred Stock, the Common
Stock will be duly authorized, validly issued and outstanding, fully
paid and nonassessable and free from any pledge, lien, encumbrance or
restriction known to or caused or created by the Company other than
state and/or federal securities laws.
(e) Consents; Approvals. The execution, delivery and
performance by the Company of this Agreement and the consummation of
the transactions contemplated hereby by the Company require no action
by, notices to or filing with any governmental body, agency, official
or authority or any third party.
(f) Non-Contravention. The authorization, issuance and sale of
the Preferred Stock and the execution, delivery and performance by the
Company of this Agreement does not and will not (i) contravene or
conflict with the articles of incorporation or bylaws of the Company,
(ii) contravene or conflict with or constitute a violation of any
provision of any law, regulation, judgment, injunction, order or decree
binding upon or applicable to the Company or any of its properties or
assets, (iii) constitute a default under or give rise to a right of
termination, cancellation, restriction or acceleration of any right or
obligation of the Company or to a loss of any benefit to which the
Company is entitled under any provision of any agreement, contract or
other instrument binding upon or applicable to the Company or any of
its properties or assets or any license, franchise or permit or other
similar authorization held by or applicable to the Company or (iv)
result in the creation of imposition of any Lien on any asset of the
Company. For purposes of this Agreement, "Lien" means, with respect to
any asset, any mortgage, lien, pledge, charge, security interest,
encumbrance or restriction of any kind in respect of such asset.
(g) Capitalization. The authorized capital stock of the
Company consists of 15,000,000 shares of Common Stock of which
6,798,637 shares are issued and outstanding as of the date hereof
(without giving effect to this Agreement and the transactions
contemplated thereby) and 1,000,000 shares of undesignated preferred
stock, 2,500 shares of which are designated Preferred Stock, Series
1998, none of which are outstanding as of the date hereof. As of the
date hereof, 266,333 shares of Common Stock are reserved for issuance
pursuant to the Company's Amended and Restated Stock Option Plan (the
"Plan"), pursuant to which options to purchase 1,033,667 shares of
Common Stock are outstanding. In addition, options to purchase 70,000
shares of Common Stock are outstanding but not issued pursuant to a
plan. As of the
<PAGE>
date hereof, 3,634,208 shares of Common Stock are reserved for issuance
pursuant to the exercise of outstanding warrants. All applicable
provisions of such warrants are contained in exhibits as incorporated
by reference to the Company's annual report on Form 10-KSB for its
fiscal year ended September 30, 1997 ("1997 10-KSB"), and, except for
the options not issued under the Plan, all outstanding stock options
are in the form contained in Exhibit 10-1 to the 1997 10-KSB. All
outstanding shares of Common Stock are duly authorized, validly issued,
fully paid and nonassessable, are free from preemptive rights and were
issued in compliance with all state and federal securities laws. Except
as set forth in this section, there are outstanding (i) no other shares
of capital or other voting securities of the Company, (ii) no
securities of the Company convertible into or exchangeable for shares
of capital stock or voting securities of the Company and (iii) no other
options or other rights to stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities
of the Company (the items in clauses (i), (ii) and (iii) being referred
to collectively as the "Company Securities"). There are no outstanding
obligations of the Company to repurchase, redeem or otherwise acquire
any Company Securities.
(h) Outstanding Debt. Except for borrowings of $5,925,093
outstanding as of February 23, 1998 incurred in the ordinary course of
business, the Company does not have any indebtedness incurred as the
result of a direct borrowing of money. The Company is not in default in
the payment of the principal of or interest or premium on any such
indebtedness, and no event has occurred or is continuing under the
provisions of any instrument, document or agreement evidencing or
relating to any such indebtedness which with the lapse of time or the
giving of notice, or both, would constitute an event of default
thereunder.
(i) SEC Filings.
(a) The Company has filed all reports, schedules,
forms, statements and other documents required to be filed by
the Company with the Securities and Exchange Commission (the
"SEC") since October 1, 1994. The Company has delivered to
Harvest States true and correct copies of (i) its 1997 10-KSB,
(ii) its quarterly report on Form 10-QSB for the three-month
period ended December 31, 1997, (iii) its proxy statement for
the next regular meeting of shareholders, (iv) its last annual
report to shareholders and (v) all of its other reports,
statements, schedules and registration statements filed by the
Company with the SEC since September 30, 1997 (including all
exhibits filed therewith or incorporated by reference therein,
except exhibits 11, 23, 24 and 27) (collectively, "SEC
Reports").
(b) Except to the extent that information contained
in any SEC Report has been revised or superseded by a
later-filed SEC Report, as of the date of this Agreement, none
of the SEC Reports contains any untrue
<PAGE>
statement of a material fact or omits to state any material
fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances
under which they were made, not misleading. As of their
respective dates, the SEC Reports complied as to form in all
material respects with the requirements of the Securities Act
of 1933, as amended (the "Securities Act"), or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as the
case may be, and the rules and regulations of the SEC
promulgated thereunder applicable to such SEC Reports.
(j) Financial Statements. Except to the extent that
information contained in any SEC Report has been revised or superseded
by a later-filed SEC Report, the audited financial statements and
unaudited interim financial statements of the Company included in its
annual reports on Form 10-KSB and the quarterly reports on 10-QSB are
true and correct and fairly present, in conformity with generally
accepted accounting principles (except that the unaudited interim
financial statements may not contain all notes), applied on a
consistent basis (except as may be indicated on the notes thereto), the
financial position of the Company as of the dates thereof and results
of operations and cash flows for the periods then ended (subject to
non-material normal year-end adjustments in the case of any interim
financial statements). For the purposes of this Agreement, "Balance
Sheet" means the Company's balance sheet as of September 30, 1997,
including the notes thereto, as set forth in the Company's Form 10-KSB
and "Balance Sheet Date" means the date of the Balance Sheet. Except
and to the extent set forth in the Balance Sheet, the Company does not
have any liability or obligation of any nature (whether accrued,
absolute, contingent or otherwise), except for liabilities and
obligations incurred after the Balance Sheet Date in the ordinary
course of business.
(k) Tax Returns and Audits. All required federal, state and
local tax returns have been filed, and all federal, state and local
taxes required to be paid with respect to such returns have been paid.
The Company is not delinquent in the payment of any such tax or in the
payment of any assessment or governmental charge. The Company has not
received notice of any tax deficiency proposed or assessed against it,
and it has not executed any waiver of any statute of limitations on the
assessment or collection of any tax. None of the Company's tax returns
has been audited by governmental authorities in a manner to bring such
audits to the Company's attention. The Company does not have any tax
liabilities except those reflected on the Balance Sheet or incurred
since the Balance Sheet Date in the ordinary course of business.
(l) Title to Properties and Encumbrances. Except as set forth
in the SEC Reports, the Company has good and marketable title to all of
its properties and assets, except for property disposed of in the
ordinary course of business, and such properties and assets are not
subject to any lien, except (a)
<PAGE>
those that are shown on the Balance Sheet, (b) liens for taxes and
assessments or governmental charges or levies not at the time due or in
respect of which the validity thereof shall currently be contested in
good faith by appropriate proceedings or (c) those which do not
materially affect the value of or interfere with the use made of such
properties and assets. The Company occupies leased property under valid
and binding leases.
(m) Conditions of Properties. The property, plant and
equipment of the Company have been kept in good condition and repair in
the ordinary course of business.
(n) Intellectual Property. Except as described in the SEC
Reports, the Company (a) owns or has the right to use, free and clear
of all liens, all patents, trademarks, service marks, trade names,
copyrights, licenses and rights with respect to the foregoing, used in
the conduct of its business as now conducted without infringing upon or
otherwise acting adversely to the right or claimed right of any person
under or with respect to any of the foregoing, (b) is not obligated or
under any liability whatsoever to make any payments of a material
nature by way of royalties, fees or otherwise to any owner of, licensor
of, or other claimant to, any patent, trademark, trade name, copyright
or other intangible asset, with respect to the use thereof or in
connection with the conduct of its business or otherwise, (c) owns or
has the unrestricted right to use all trade secrets, including
know-how, customer lists, inventions, designs, processes, computer
programs and technical data necessary to the development, operation and
sale of all products and services sold or proposed to be sold by it,
free and clear of any rights, liens or claims of others, and (d) is not
using any confidential information or trade secrets of others.
(o) Licenses. The Company possesses from the appropriate
agency, commission, board and government body and authority, whether
state, local or federal, all material licenses, permits,
authorizations, approvals, franchises and rights that are necessary for
it to engage in the business currently conducted by it. The Company has
no reason to believe that it will not be able to obtain all licenses,
permits, authorizations, approvals, franchises and rights that may be
required for any business the Company proposes to conduct.
(p) Litigation; Governmental Proceedings. There are no legal
actions, suits, arbitrations or other legal, administrative or
governmental proceedings or investigations pending or, to the knowledge
of the Company, threatened against the Company, or its properties or
business, and the Company is not aware of any facts which are likely to
result in or form the basis for any such action, suit or other
proceeding, except as described in the SEC Reports. The Company is not
in default with respect to any judgment, order or decree of any court
or any governmental agency or instrumentality. The Company has not been
threatened with any action or proceeding under any business or zoning
ordinance, law or regulation.
<PAGE>
(q) Insurance Coverage. There are in full force and effect
policies of insurance issued by insurers of recognized responsibility
insuring the Company and its properties and business against such
losses and risks, and in such amounts, as in the Company's best
judgment, after advice from its insurance broker, are acceptable for
the nature and extent of such business and its resources.
(r) Nasdaq SmallCap Market. The issuance and sale of the
Preferred Stock as contemplated by this Agreement complies with
applicable Nasdaq governance standards.
(s) Waiver of Dividend Prohibition. The Company has obtained
written waivers of any prohibition against the declaration or payment
of dividends contained in any agreement to which it is a party or
subject.
(t) No Material Adverse Change. Since the Balance Sheet Date,
except as disclosed in the SEC Reports, there has not been any material
adverse change or any development involving a prospective material
adverse change in or affecting the earnings, business, management,
properties, assets, rights, operations, condition (financial or
otherwise), or prospects of the Company, whether or not occurring in
the ordinary course of business, and there has not been any material
transaction entered into or any material transaction that is probable
of being entered into by the Company, other than transactions in the
ordinary course of business.
(u) Compliance With Other Instruments. The Company is not, and
with the giving of notice or lapse of time or both, would not be, in
violation of or in default under its articles of incorporation or
bylaws or under any agreement, lease, contract, indenture or other
instrument or obligation to which it is a party or by which it, or any
of its properties, is bound.
(v) Books and Records. The Company maintains a system of
internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with
management's general or specific authorization, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted
only in accordance with management's general or specific authorization
and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(w) ERISA. To the best knowledge of the Company, it is in
compliance with all applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA"); no "reportable event"
(as
<PAGE>
defined in ERISA) has occurred with respect to any "pension plan" (as
defined in ERISA) for which the Company would have any liability; the
Company has not incurred and does not expect to incur liability under
(i) Title IV of ERISA with respect to termination of, or withdrawal
from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and
published interpretations thereunder (the "Code"); and each "pension
plan" for which the Company would have any liability that is intended
to be qualified under Section 401(a) of the Code is so qualified in all
material respects and nothing has occurred, whether by action or by
failure to act, which would cause the loss of such qualification.
(x) Share Reservation. The Company has reserved 1,515,152
shares of Common Stock for issuance upon conversion of the Preferred
Stock.
(y) Environmental, Health and Safety Laws. To the best
knowledge of the Company, there does not exist any violation by the
Company or any applicable federal, state or local law, rule or
regulation or order of any government, governmental department, board,
agency or other instrumentality relating to environmental, pollution,
health or safety matters which will or threatens to impose a material
liability on the Company or which would require a material expenditure
by the Company to cure. The Company has not received any notice to the
effect that any part of its operations or properties is not in material
compliance with any such law, rule, regulation or order or notice that
it or its property is the subject of any governmental investigation
evaluating whether any remedial action is needed to respond to any
release of any toxic or hazardous waste or substance into the
environment.
(z) Disclosure. The Company has not knowingly withheld from
Harvest States any material facts relating to the assets, business,
operations, financial condition or prospects of the Company. No
representation or warranty in this Agreement or in any certificate,
schedule, statement or other document furnished or to be furnished to
Harvest States pursuant hereto or in connection with the transactions
contemplated hereby contains or will contain any untrue statement of a
material fact or omits or will omit to state any material fact required
to be stated herein or therein or necessary to make the statements
herein or therein not misleading.
(aa) No Brokers or Finders. No person, firm or corporation has
or will have, as a result of any act or omission of the Company, any
right, interest or valid claim against the Company for any commission,
fee or other compensation as a finder or broker in connection with the
transactions contemplated by this Agreement exceeding $125,000 in the
aggregate.
<PAGE>
6. Representations and Warranties of Harvest States. Harvest States
hereby makes the following representations and warranties to the Company:
(a) Investment Intent. The Preferred Stock is being purchased
for investment for Harvest States's own account and not with the view
to, or for resale in connection with, any distribution or public
offering thereof. Harvest States understands that the Preferred Stock
has not been registered under the Securities Act or any state
securities laws by reason of its contemplated issuance in transactions
exempt from the registration requirements of the Securities Act and
applicable state securities laws, and that the reliance of the Company
and others upon these exemptions is predicated in part upon this
representation by Harvest States. Harvest States further understands
that the Preferred Stock may not be transferred or resold without (i)
registration under the Securities Act and any applicable state
securities laws, or (ii) an exemption from the requirements of the
Securities Act and applicable state securities laws.
(b) Location of Principal Office, Qualification as an
Accredited Investor, Etc. Harvest States's principal office is located
is the state of Minnesota. Harvest States qualifies as an "accredited
investor" for purposes of Regulation D promulgated under the Securities
Act. Harvest States acknowledges that the Company has made available to
it at a reasonable time prior to the execution of this Agreement the
opportunity to ask questions and receive answers concerning the terms
and conditions of the sale of securities contemplated by this Agreement
and to obtain any additional information (which the Company possesses
or can acquire without unreasonable effort or expense) as may be
necessary to verify the accuracy of information furnished to it.
Harvest States (a) is able to bear the loss of its entire investment in
the Preferred Stock without any material adverse effect on its
business, operations or prospects, and (b) has such knowledge and
experience in financial and business matters that it is capable of
evaluating the merits and risks of the investment to be made by it
pursuant to this Agreement.
(c) Corporate Acts and Proceedings. This Agreement has been
duly authorized by all necessary corporate action on behalf of Harvest
States, has been duly executed and delivered by Harvest States and is a
valid and binding agreement of Harvest States enforceable against
Harvest States in accordance with its terms.
(d) No Brokers or Finders. No person, firm or corporation has
or will have, as a result of any act or omission by Harvest States, any
right, interest or valid claim against the Company for any commission,
fee or other compensation as a finder or broker, or in any similar
capacity, in connection with the transactions contemplated by this
Agreement.
<PAGE>
7. Covenant of Harvest States. Harvest States agrees that if, contrary
to its intentions set forth in Section 6 above, it should later desire to
dispose of or transfer any of the Preferred Stock in any manner, it will not do
so without first obtaining (i) an opinion of counsel satisfactory to the Company
that such proposed disposition or transfer may be made lawfully without the
registration of such Preferred Stock pursuant to the Securities Act and
applicable state laws or (ii) registration of such Preferred Stock pursuant to
the Securities Act and applicable state laws.
8. Affirmative Covenants of the Company. The Company agrees as follows:
(a) Corporate Existence. The Company will maintain its
corporate existence in good standing, its qualification to do business
in requisite jurisdictions and its rights and privileges and will use
its best efforts to comply with all material laws and regulations of
the United States or of any state or political subdivision thereof and
of any government authority applicable to it.
(b) Books of Account and Reserves. The Company will keep books
of record and account in which full, true and correct entries are made
of all of its dealings, business and affairs, in accordance with
generally accepted accounting principles. The Company will employ
certified public accountants selected by the Board of Directors of the
Company who are "independent" within the meaning of the accounting
regulations of the SEC. The Company will have annual audits made by
such independent public accountants in the course of which such
accountants shall make such examinations, in accordance with generally
accepted auditing standards, as will enable them to give such reports
or opinions with respect to the financial statements of the Company as
will satisfy the requirements of the SEC in effect at such time with
respect to reports or opinions of accountants.
(c) Furnishing of Financial Statements and Information. The
Company will deliver to Harvest States:
(i) as soon as available, but in any event within 30
days after the close of each month, an unaudited balance sheet
of the Company as of the end of such month, together with the
related statements of consolidated operations for each such
month, which statements of consolidated operations shall
include a comparison of actual results of operations to budget
on a monthly and a year-to-date basis;
(ii) as soon as available, but in any event within 90
days after the end of each fiscal year, a balance sheet of the
Company, as of the end of such fiscal year, together with the
related statements of operations, shareholders' equity and
cash flows for such fiscal year, all in reasonable detail and
duly certified by the Company's independent
<PAGE>
public accountants, which accountants shall have given the
Company an opinion, unqualified as to the scope of the audit,
regarding such statements;
(iii) within 15 days after the Company learns of the
commencement of any material suit, legal or equitable, or of
any material administrative, arbitration or other proceeding
against the Company or its business, assets or properties,
written notice of the nature and extent of such suit or
proceeding;
(iv) promptly after the submission thereof to the
Company, copies of all reports and recommendations submitted
by independent public accountants in connection with any
annual or interim audit of the accounts of the Company made by
such accountants;
(v) promptly upon transmission thereof, copies of all
reports, proxy statements, registration statements and
notifications filed by it with the SEC pursuant to any act
administered by the SEC or furnished to shareholders of the
Company or to any national securities exchange;
(vi) concurrently with the delivery in each year of
the financial statements referred to in Section 8(c)(ii), a
statement and report signed by the independent public
accountants who certified such financial statements to the
effect that they have read this Agreement and that in the
course of the audit upon which such certificate was based they
have become aware of no condition or event which constituted
an Event of Default under Section 11 or which, after notice or
lapse of time or both, would constitute an Event of Default or
if such accountants did become aware of such condition or
event, specifying the nature and period of existence thereof;
(vii) with reasonable promptness, such other
financial data relating to the business, affairs and financial
condition of the Company as is available to the Company and as
from time to time Harvest States may reasonably request,
except for any pricing information or financial data
reasonably related to Harvest States's ongoing customer
relationship with the Company.
Any requirement pursuant to this paragraph (c) may be satisfied by
delivery of any filings made with the SEC to the extent such filings
contain information satisfying the requirement of this paragraph.
(d) Inspection. The Company will permit Harvest States,
through its representatives designated by it, to visit and inspect, at
Harvest States's expense, any of the properties of the Company,
including its books and records (and to make photocopies thereof or
make extracts therefrom), and to
<PAGE>
discuss its affairs, finances and accounts with its officers, lawyers
and accountants, except with respect to engineering data and other
technical information that is not public knowledge, all to such
reasonable extent and at such reasonable times and intervals as Harvest
States may reasonably request. Notwithstanding the foregoing, the
Company shall not provide to Harvest States any pricing information or
financial data reasonably related to Harvest States's ongoing customer
relationship with the Company. That certain Confidentiality Agreement
dated August 22, 1997 (the "Confidentiality Agreement") shall be
applicable to all information obtained by Harvest States or its
representatives under Section 8(c) or 8(d), except paragraphs 2 and 3
on page 2 and paragraph 1 on page 3 of the Confidentiality Agreement
which, up to the Closing of this Agreement shall be of no further force
and effect. Any information received by designees of Harvest States or
the holders of the Preferred Stock in their capacities as directors may
be disclosed to Harvest State; PROVIDED, HOWEVER, that if the Company
provides to such designees an opinion of counsel that any proposed
disclosure pertaining to any current case or controversy may jeopardize
the attorney-client privilege pertaining thereto, then such designees
shall not disclose such information to Harvest States.
(e) Closing Conditions. The Company shall take no action that
would result in the failure to satisfy a closing condition for the
purchase of any securities and shall use its best efforts to assure
that all conditions to the purchase of any securities hereunder are
satisfied.
(f) Shareholder Meeting. At a meeting to be held no later than
March 31, 1999, the Company will recommend to its shareholders, and
will use its best efforts to obtain the approval of its shareholders at
such meeting for, an amendment to its articles of incorporation to opt
out of Section 302A.671 of the Minnesota Business Corporation Act. In
connection therewith, an appropriate proxy statement will be prepared
by the Company that will comply in all material respects with the
provisions of the Exchange Act and the rules and regulations
thereunder.
(g) Listing and Reservation of Shares. As soon as practicable
after the receipt of a written request by Harvest States, the Company
will apply for, and use its best efforts to obtain, listing on the
Nasdaq SmallCap Market of all shares of Common Stock that may be issued
upon conversion of the Preferred Stock. The Company will reserve at all
times a sufficient number of shares of Common Stock for issuance upon
conversion of the then outstanding Preferred Stock.
(h) Sale of Company. In its discretion, the Company may enter
into any discussions or negotiations with, or disclose directly or
indirectly any information concerning its business and properties to,
or afford any access to its properties, books and records to, any
corporation, partnership or other
<PAGE>
person or group in connection with any possible proposal (an
"Acquisition Proposal") regarding a sale of all or any part of the
Company's capital stock or a merger, consolidation or statutory share
exchange involving the Company or any subsidiary of the Company or sale
or spin-off of all or a substantial portion of the assets of the
Company or any subsidiary of the Company which is material to the
Company and its subsidiary taken as a whole, or a liquidation or a
recapitalization of the Company, or any similar transaction provided
that the Company will (i) inform Harvest States in writing of the
existence of discussions or negotiations in connection with an
Acquisition Proposal and any request or inquiry for information about
the Company if it reasonably believes such inquiry or request is in
connection with an Acquisition Proposal, (ii) furnish information or
provide access with respect to the Company to such extent such
information is furnished or access is provided to outside parties,
(iii) if requested by Harvest States, negotiate with Harvest States for
a period of one month commencing the day after Harvest States receives
written notice pursuant to clause (i) of any Acquisition Proposal, (iv)
give a reasonable opportunity to Harvest States to make an Acquisition
Proposal, (v) not enter into any exclusive arrangement, lockup or other
similar device prior to the expiration of such one-month period and
(vi) keep Harvest States reasonably informed of the status of any such
request, inquiry or Acquisition Proposal.
(i) Company May Consolidate, Etc., Only on Certain Terms. The
Company shall not consolidate with or merge into any other person or
convey, transfer or lease its properties and assets substantially as an
entirety to any person, and the Company shall not permit any person to
consolidate with or merge into the Company or convey, transfer or lease
its properties and assets substantially as an entirety to the Company,
unless:
(i) in case the Company shall consolidate with or
merge into another corporation, trust or entity or convey,
transfer or lease its properties and assets substantially as
an entirety to any person, the person formed by such
consolidation or into which the Company is merged or the
person which acquires by conveyance or transfer, or which
leases, the properties and assets of the Company substantially
as an entirety (the "Acquiror") shall be a trust, corporation
or other entity organized and existing under the laws of the
United States of America, any State thereof or the District of
Columbia and shall expressly assume, by a supplemental
agreement to this Agreement, this Agreement and in form
reasonably satisfactory to Harvest States and its counsel and
the performance of every covenant of this Agreement in the
part of the Company to be performed or observed.
(ii) immediately after giving effect to such
transaction, the Company shall remain in compliance with this
Agreement.
<PAGE>
Upon any consolidation or merger of the Company with or into
any other corporation, trust or other entity or any conveyance,
transfer or lease of the properties and assets of the Company
substantially as an entirety to any person in accordance with this
Section 8(j), the successor person formed by such consolidation or into
which the Company is merged or to which such conveyance, transfer or
lease is made shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Agreement
with the same effect as if such successor person had been named as the
Company herein, and thereafter the predecessor person shall be relieved
of all obligations and covenants under this Agreement.
(j) Insurance. The Company will maintain in force and effect
such property damage, public liability, business interruption, product
liability, product recall, worker's compensation, indemnity bonds and
other types of insurance as the Company, after consultation with an
accredited insurance broker, shall determine to be necessary or
appropriate to protect the Company from the insurable hazards or risks
associated with the conduct of the Company's business.
The Company shall use its best efforts to keep in effect
directors' and officers' liability insurance on terms substantially as
favorable to its directors as its existing coverage.
All such insurance policies shall be maintained in at least
such amounts and to such extent as shall be determined to be reasonable
by the Board of Directors. All such insurance shall be effected and
maintained in force under a policy or policies issued by insurers of
recognized responsibility, except that the Company or any subsidiary
may effect worker's compensation or similar insurance in respect of
operations in any state or other jurisdiction either through an
insurance fund operated by such state or other jurisdiction or by
causing to be maintained a system or systems of self-insurance which is
in accord with applicable laws.
(k) Taxes and Assessments. The Company will pay and discharge
and will cause its subsidiary to pay and discharge, before the same
become delinquent and before penalties accrue thereon, all taxes,
assessments and governmental charges upon or against the Company or its
subsidiary, or any of their respective properties, and all other
material liabilities at any time existing, except to the extent and so
long as (i) the same are being contested in good faith and by
appropriate proceedings in such manner as not to cause any material
adverse effect upon the financial condition of the Company or its
subsidiaries, or the loss of any right of redemption from any sale
thereunder and (ii) the Company or its subsidiary shall have set aside
on its books adequate reserved with respect thereto.
<PAGE>
(l) Governmental Consents. To the extent not already obtained,
the Company will obtain all consents, approvals, licenses and permits
required by federal, state, local and foreign law to carry on its
business.
(m) SEC Reports. So long as the Company is subject to the
periodic reporting requirements under the Exchange Act, the Company
shall file all reports required by the Exchange Act in a timely manner.
(n) Regulation D Filings. The Company will file on a timely
basis all notices of sale required to be filed with the SEC pursuant to
Regulation D under the Securities Act with respect to the transactions
contemplated by this Agreement.
(o) Rule 144. The Company will comply with the current public
information requirements of Rule 144(c)(1) under the Securities Act. At
all such times as Rule 144 is available for use by Harvest States, the
Company will furnish Harvest States upon request with all information
within the possession of the Company required for the preparation and
filing of Form 144.
(p) Shareholder Rights Plan. The Company shall not distribute
with respect to the shares of the Common Stock any rights to acquire
any other securities of the Company which may be commonly considered a
part of a shareholder rights or similar plan.
(q) Listing Requirements. The Company will use its best
efforts to preserve the listing of its shares of Common Stock on the
Nasdaq SmallCap Market or another national market or exchange.
(r) Subsidiaries. The Company shall cause its subsidiary
corporation to comply with the covenants set forth in this Section 8,
paragraphs (a), (b), (i), (j), (k) and (m).
(s) Right to Appoint One Director. The maximum number of
directors has been increased by the Company's board of directors to
eight directors, six director positions of which will be filled at the
annual meeting of shareholders to be held February 26, 1998 (the
"Annual Meeting"). Immediately following the Annual Meeting, the
Company will elect Harvest States's designee as a director. For so long
as Harvest States owns no less than 10% of the outstanding Preferred
Stock, the Company agrees to use its best efforts to nominate as a
director and elect Harvest States's nominee as a director.
9. Negative Covenants of the Company.
(a) The Company will not:
<PAGE>
(i) amend its Articles of Incorporation or Bylaws in
any manner that adversely affects, directly or indirectly,
Harvest States;
(ii) unless approved by the Board of Directors of the
Company, engage in any business other than businesses engaged
in by the Company on the date hereof or businesses similar
thereto;
(iii) unless approved by the Board of Directors of
the Company, sell, lease or otherwise dispose of any material
assets other than in the ordinary course of business;
(iv) enter into any new agreement or amend any
existing agreement that by its terms would impair the
Company's performance of its obligations pursuant to this
Agreement or any agreement contemplated hereby;
(v) enter into any agreement with any holder or
prospective holder of any securities of the Company granting
to such holder preemptive rights or special voting rights; or
(vi) amend its articles of incorporation and bylaws
to adversely affect the limitation of liability or the
indemnification rights now afforded directors of the Company.
(b) Issuances of Voting Securities.
(i) Other than a bona fide public offering, an
acquisition or similar transaction involving a going concern
or pursuant to options and warrants outstanding on the date
hereof, for a period of two years from the date of this
Agreement, the Company shall not issue, grant or sell any
Common Stock or other securities entitled to vote generally
for the election of directors ("Voting Securities"), or
securities convertible into Voting Securities, or options,
warrants or other rights to acquire Voting Securities ("Rights
to Acquire Voting Securities") in any transaction where the
purchaser together with its affiliates and other persons
acting in concert with such purchaser, including, but not
limited to, all members of a "group" as defined in Section
13(d)(3) of the Exchange Act (a "Group"), other than Harvest
States and its affiliates, would, after the completion of such
transaction, own ten percent (10%) or more, in the aggregate,
of all outstanding Voting Securities (assuming the exercise of
all outstanding Rights to Acquire Voting Securities held by
such purchaser, its affiliates and other persons acting in
concert with such purchaser, including, but not limited to,
all members of a Group).
<PAGE>
(ii) All Voting Securities shall (1) be convertible
into Common Stock at a conversion ratio at the time of
issuance of not less than one share of Common Stock for each
share of such Voting Security and (2) not have more than one
vote per share.
(c) Status of Dividends. The Company shall not take any action
that would require or permit, or could reasonably be expected to
require or permit, the Company to treat the dividends on the Common
Stock or any part thereof as deductible interest payments on its books
or its federal, state or local income tax returns and shall take no
such action which would require or permit, or could reasonably be
expected to require or permit, the Company to treat the dividends on
the Common Stock or any part thereof as deductible under any provision
of the Code, whether now in effect or hereafter enacted or adopted,
unless, in either case, such action would not result in denial of the
dividends received deduction presently provided by Section 243(a)(1) of
the Code (the "Dividends Received Deduction") or any successor
dividends received deduction provided by a similar successor provision
of the Code (a "Successor Dividends Received Deduction") to any holder
of Preferred Stock who would otherwise be eligible to claim such
deduction. In addition, the Company shall not take any action that
could reasonably be expected to cause the Dividends Received Deduction
or a Successor Dividends Received Deduction to be eliminated or reduced
with respect to dividends on the Common Stock. The agreements contained
in this section shall be inapplicable if the Code shall be amended
after delivery of the Preferred Stock in such a manner as to provide
that dividends on the Common Stock may not be treated as dividends for
federal income tax purposes or to permit all or a portion of the
dividends on the Preferred Stock to be deducted by the Company without
causing the Dividends Received Deduction or a Successor Dividends
Received Deduction to be unavailable to any holder of Preferred Stock.
(d) Limitation on Option Grants. During the five years ending
September 30, 2002, the Company will not issue options, warrants or
similar rights to purchase more than 200,000 shares of Common Stock or
securities convertible into or exercisable for Common Stock, in any
year on a cumulative basis, to employees, officers, directors or
consultants to the Company or its subsidiary, and any exercise or
conversion price shall not be less than fair market value on the date
of grant.
10. Registration Rights.
(a) Demand Registration. If, at any time after the first
anniversary of the Closing Date, the Company receives a written request
therefor from the holders of a majority of the Preferred Stock, the
Company shall prepare and file a registration statement under the
Securities Act covering the Preferred Stock and the shares of Common
Stock into which the shares of Preferred
<PAGE>
Stock are convertible (the "Purchased Shares") and shall use its best
efforts to cause such registration statement to become effective. The
Company shall be obligated to prepare, file and cause to become
effective only one (1) registration statement pursuant to this Section
10(a). In the event that (i) Harvest States determines for any reason
not to proceed with a registration at any time before the registration
statement has been declared effective by the SEC, and Harvest States
requests the Company to withdraw such registration statement, if
theretofore filed with the SEC, with respect to the Purchased Shares
covered thereby and (ii) Harvest States agrees to reimburse the Company
for the expenses incurred by it attributable to the registration of
such Purchased Shares, then Harvest States shall not be deemed to have
exercised its right to require the Company to register Purchased Shares
pursuant to this Section 10(a).
(b) Incidental Registration. Each time the Company shall
determine to proceed with the actual preparation and filing of a
registration statement, on Forms S-1, SB-2 or S-3, excluding
post-effective amendments to Company registration statements currently
effective, under the Securities Act in connection with the proposed
offer and sale for money of any of its securities by it or any of its
security holders, the Company will give written notice of its
determination to Harvest States. Upon the written request of Harvest
States given within 30 days after receipt of any such notice from the
Company, the Company will, except as herein provided, cause all such
shares of Purchased Shares, Harvest States has so requested
registration thereof, to be included in such registration statement,
all to the extent requisite to permit the sale or other disposition by
Harvest States to be so registered; provided, however, that (i) nothing
herein shall prevent the Company from, at any time, abandoning or
delaying any such registration initiated by it and (ii) if the Company
determines not to proceed with a registration after the registration
statement has been filed with the SEC and the Company's decision not to
proceed is primarily based upon the anticipated public offering price
of the securities to be sold by the Company, the Company shall promptly
complete the registration for the benefit of Harvest States if it
wishes to proceed with a public offering of its securities and Harvest
States will bear all expenses in excess of $25,000 incurred by the
Company as the result of such registration after the Company has
decided not to proceed. If any registration pursuant to this section
shall be underwritten in whole or in part, the Company may require that
the Purchased Shares requested for inclusion pursuant to this section
be included in the underwriting on the same terms and conditions as the
securities otherwise being sold through the underwriters. In the event
that the Purchased Shares requested for inclusion pursuant to this
section would constitute more than twenty-five percent (25%) of the
total number of shares to be included in a proposed underwritten public
offering, and if in the good faith judgment of the managing underwriter
of such public offering the inclusion of all of the Purchased Shares
originally covered by a request for registration would reduce the
number of shares to be offered by the Company
<PAGE>
or interfere with the successful marketing of the shares of stock
offered by the Company, the number of shares of Purchased Shares
otherwise to be included in the underwritten public offering may be
reduced; provided, however, that after any such required reduction the
Purchased Shares to be included in such offering shall constitute at
least twenty-five percent (25%) of the total number of shares to be
included in such offering. Those shares of Purchased Shares which are
thus excluded from the underwritten public offering shall be withheld
from the market by Harvest States thereof for a period, not to exceed
90 days, which the managing underwriter reasonably determines is
necessary in order to effect the underwritten public offering.
(c) Registration Procedures. If and whenever the Company is
required by the provisions of Section 10(a) or 10(b) to effect the
registration of any Purchased Shares under the Securities Act, the
Company shall:
(i) prepare and file with the SEC a registration
statement with respect to such securities, and use its best
efforts to cause such registration statement to become and
remain effective for such period as may be reasonably
necessary to effect the sale of such securities, not to exceed
three (3) months;
(ii) prepare and file with the SEC such amendments to
such registration statement and supplements to the prospectus
contained therein as may be necessary to keep such
registration statement effective for such period as may be
reasonably necessary to effect the sale of such securities,
not to exceed three (3) months;
(iii) furnish to Harvest States and to the
underwriters of the securities being registered such
reasonable number of copies of the registration statement,
preliminary prospectus, final prospectus and such other
documents as Harvest States and underwriters may reasonably
request in order to facilitate the public offering of such
securities;
(iv) use its best efforts to register or qualify the
securities covered by such registration statement under such
state securities or blue sky laws of the State of Minnesota
and five other states, except that Harvest States may request
such other states in which the Company will register and bear
such fees and expenses in connection with such registration,
as Harvest States may reasonably request within 20 days
following the original filing of such registration statement,
except that the Company shall not for any purpose be required
to execute a general consent to service of process or to
qualify to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified;
<PAGE>
(v) notify Harvest States participating in such
registration, promptly after it shall receive notice thereof,
of the time when such registration statement has become
effective or a supplement to any prospectus forming a part of
such registration statement has been filed;
(vi) notify Harvest States promptly of any request by
the SEC for the amending or supplementing of such registration
statement or prospectus or for additional information;
(vii) prepare and file with the SEC, if necessary,
promptly upon the request of Harvest States, any amendments or
supplements to such registration statement or prospectus
which, in the opinion of counsel for Harvest States (and
concurred in by counsel for the Company), is required under
the Securities Act or the rules and regulations thereunder in
connection with the distribution of the Purchased Shares by
Harvest States;
(viii) prepare and promptly file with the SEC, if
necessary, and promptly notify Harvest States of the filing of
such amendment or supplement to such registration statement or
prospectus as may be necessary to correct any statements or
omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities
Act, any event shall have occurred as the result of which any
such prospectus or any other prospectus as then in effect
would include an untrue statement of a material fact or omit
to state any material fact necessary to make the statements
therein, in the light of the circumstances in which they were
made, not misleading;
(ix) advise Harvest States, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance of
any stop order by the SEC suspending the effectiveness of such
registration statement or the initiation or threatening of any
proceeding for that purpose and promptly use its best efforts
to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued;
(x) not file any amendment or supplement to such
registration statement or prospectus to which Harvest States
shall have reasonably objected on the grounds that such
amendment or supplement does not comply in all material
respects with the requirements of the Securities Act or the
rules and regulations thereunder, after having been furnished
with a copy thereof at least five business days prior to the
filing thereof, unless in the opinion of counsel for the
Company the filing of such amendment or supplement is
reasonably necessary to protect the Company from any
liabilities under any applicable federal or state law and such
filing will not violate applicable law; and
<PAGE>
(xi) at the request of Harvest States, furnish on the
effective date of the registration statement and, if such
registration includes an underwritten public offering, at the
closing provided for in the underwriting agreement: (a)
opinions, dated such respective dates, of the counsel
representing the Company for the purposes of such
registration, addressed to the underwriters, if any, and to
Harvest States making, covering such matters as such
underwriters and Harvest States may reasonably request, in
which opinion such counsel shall state (without limiting the
generality of the foregoing) that (1) such registration
statement has become effective under the Securities Act; (2)
to the best of such counsel's knowledge no stop order
suspending the effectiveness thereof has been issued and no
proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act; (3) the
registration statement and each amendment or supplement
thereto comply as to form in all material respects with the
requirements of the Securities Act and the applicable rules
and regulations of the SEC thereunder (except that such
counsel need express no opinion as to financial statements
contained therein); (4) to the best of the knowledge of such
counsel neither the registration statement nor any amendment
nor supplement thereto contains any untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading (except that such counsel need express no opinion
as to financial statements contained therein); (5) the
description in the registration statement or any amendment or
supplement thereto of legal and governmental proceedings and
contracts are accurate and fairly present the information
required to be shown; and (6) such counsel does not know of
any legal or governmental proceedings, pending or threatened,
required to be described in the registration statement or any
amendment or supplement thereto which are not described as
required nor of any contracts or documents or instruments of
the character required to be described in the registration
statement or amendment or supplement thereto or to be filed as
exhibits to the registration statement, which are not
described or filed as required; and (b) letters, dated such
respective dates, from the independent certified public
accountants of the Company, addressed to the underwriters, if
any, and to Harvest States making such request, covering such
matters as such underwriters and Harvest States may reasonably
request, in which letters such accountants shall state
(without limiting the generality of the foregoing) that they
are independent certified public accountants within the
meaning of the Securities Act and that in the opinion of such
accountants the financial statements and other financial data
of the Company included in the registration statement or any
amendment or supplement thereto comply in all material
respects with the applicable accounting requirements of the
Securities Act.
<PAGE>
(d) Expenses. With respect to any registration, including
registrations pursuant to Form S-3, requested pursuant to section 10(a)
(except as otherwise provided in such section with respect to
registrations voluntarily terminated at the request of Harvest States
and except with respect to any underwriter's expense on any
registration using Form S-3 that is underwritten) and with respect to
each inclusion of shares of Purchased Shares in a registration
statement pursuant to section 10(b) (except as otherwise provided in
section 10(b) with respect to registrations terminated by the Company),
the Company shall bear the following fees, costs and expenses: all
registration, filing and NASD fees, printing expenses, fees and
disbursements of counsel and accountants for the Company, fees and
disbursements of counsel for the underwriter or underwriters of such
securities (if the Company and/or Harvest States are required to bear
such fees and disbursements), all internal Company expenses, the
premiums and other costs of policies of insurance against liability
arising out of the public offering, and all legal fees and
disbursements and other expenses of complying with state securities or
blue sky laws of any jurisdictions in which the securities to be
offered are to be registered or qualified. Fees and disbursements of
counsel and accountants for Harvest States, underwriting discounts and
commissions and transfer taxes for Harvest States and any other
expenses incurred by Harvest States not expressly included above shall
be borne by Harvest States.
(e) Indemnification. In the event that any Purchased Shares
are included in a registration statement under sections 10(a) or 10(b):
(i) The Company will indemnify and hold harmless
Harvest States and any underwriter (as defined in the
Securities Act) for Harvest States and each person, if any,
who controls Harvest States or such underwriter within the
meaning of the Securities Act, from and against any and all
loss, damage, liability, cost and expense to which Harvest
States or any such underwriter or controlling person may
become subject under the Securities Act or otherwise, insofar
as such losses, damages, liabilities, costs or expenses are
caused by any untrue statement or alleged untrue statement of
any material fact contained in such registration statement,
any prospectus contained therein or any amendment or
supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which
they were made, not misleading; provided, however, that the
Company will not be liable in any such case to the extent that
any such loss, damage, liability, cost or expense arises out
of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission so made in
conformity with information furnished by Harvest States, such
underwriter or such controlling person.
<PAGE>
(ii) Harvest States will indemnify and hold harmless
the Company, any controlling person and any underwriter from
and against any and all loss, damage, liability, cost or
expense to which the Company or any controlling person and/or
any underwriter may become subject under the Securities Act or
otherwise, insofar as such losses, damages, liabilities, costs
or expenses are caused by any untrue or alleged untrue
statement of any material fact contained in such registration
statement, any prospectus contained therein or any amendment
or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which
they were made, not misleading, in each case to the extent,
but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was so made
in reliance upon and in strict conformity with information
furnished by Harvest States.
(iii) Promptly after receipt by an indemnified party
pursuant to the provisions of paragraph (a) or (b) of this
section of notice of the commencement of any action involving
the subject matter of the foregoing indemnity provisions, such
indemnified party will, if a claim thereof is to be made
against the indemnifying party pursuant to the provisions of
said paragraph (a) or (b), promptly notify the indemnifying
party of the commencement thereof; but the omission to so
notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise
than hereunder. In case such action is brought against any
indemnified party and it notifies the indemnifying party of
the commencement thereof, the indemnifying party shall have
the right to participate in, and, to the extent that it may
wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party; provided, however, if
the defendants in any action include both the indemnified
party and the indemnifying party and there is a conflict of
interest which would prevent counsel for the indemnifying
party from also representing the indemnified party, the
indemnified party or parties shall have the right to select
separate counsel to participate in the defense of such action
on behalf of such indemnified party or parties. After notice
from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying
party will not be liable to such indemnified party pursuant to
the provisions of said paragraph (a) or (b) for any legal or
other expense subsequently incurred by such indemnified party
in connection with the defense thereof other than reasonable
costs of investigation, unless (a) the indemnified party shall
have employed counsel in accordance with the proviso of the
preceding sentence, (b) the indemnifying party shall not
<PAGE>
have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after
the notice of the commencement of the action or (c) the
indemnifying party has authorized the employment of counsel
for the indemnified party at the expense of the indemnifying
party.
(f) Registration Rights of Transferees. The registration
rights granted to Harvest States pursuant to this Section 10 shall also
be for the benefit of, and enforceable by, any subsequent holder of
Purchased Shares, whether or not any express assignment of such rights
to any such subsequent holder is made, so long as such subsequent
holder acquires at least twenty percent (20%) of the Purchased Shares
then outstanding.
11. Default.
(a) Events of Default. An Event of Default means a default in
the due and punctual performance or observance of any covenant
contained in Sections 8, 9 and 10 of this Agreement continuing for a
period of no less than 15 days after written notice thereof is
delivered to the Company by any holder of the Preferred Stock.
(b) Notice of Defaults. When any default has occurred or
exists, the Company shall give written notice within three business
days of such default to each holder of Preferred Stock. If the holder
of any Preferred Stock shall give any notice or take any other action
in respect of a claimed Event of Default, the Company shall promptly
give written notice thereof to all other holders of Preferred Stock,
describing such notice or action and the nature of the claimed Event of
Default.
(c) Suits for Enforcement. In addition to any rights they may
have under the Company's articles of incorporation, in case any one or
more Events of Default shall have occurred and be continuing, unless
such Events of Default shall have been waived in the manner provided in
Section 12, the holders of a majority of the Preferred Stock may
proceed to protect and enforce their rights under this Section 11 by
suit in equity or action at law. It is agreed that in the event the
holders of Preferred Stock prevail in such action, such holders of
Preferred Stock shall be entitled to receive all reasonable fees, costs
and expenses incurred, including without limitation such reasonable
fees and expenses of attorneys (whether or not litigation is commenced)
and reasonable fees, costs and expenses of appeals.
(d) Remedies Cumulative. No right, power or remedy conferred
upon any holder of Preferred Stock shall be exclusive, and each such
right, power or remedy shall be cumulative and in addition to every
other right, power or remedy, whether conferred hereby or by any such
security or now or hereafter available at law or in equity or by
statute or otherwise.
<PAGE>
(e) Remedies Not Waived. No course of dealing between the
Company or any holder of the Preferred Stock and no delay in exercising
any right, power or remedy conferred hereby or by any such security or
now or hereafter existing at law or in equity or by statute or
otherwise, shall operate as a waiver of or otherwise prejudice any such
right, power or remedy; PROVIDED, HOWEVER, that this section shall not
be construed or applied so as to negate the provisions and intent of
any statute which is otherwise applicable.
12. Miscellaneous.
(a) Entire Agreement. This Agreement and the other documents
referenced herein contain the entire agreement between the parties with
respect to the subject matter hereof and supersede any and all prior
arrangements and understandings, both written and oral, with respect
thereto.
(b) Waivers, Amendments and Approvals. With the written
consent of a majority of the holders of the Preferred Stock, the
obligations of the Company under this Agreement may be waived or
Harvest States and the Company may enter into a supplementary agreement
for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of this Agreement or of any
supplemental agreement or modifying in any manner the rights and
obligations of Harvest States under the terms of this Agreement;
PROVIDED, HOWEVER, that no such waiver or supplemental agreement shall
amend the terms of the Preferred Stock. Written notice of any such
waiver, consent or agreement of amendment, modification or supplement
shall be given pursuant to this Section 14.
(c) Changes, Waivers, Etc. Neither this Agreement nor any
provision hereof may be changed, waived, discharged or terminated
orally, but only by a statement in writing signed by the party against
which enforcement of the change, waiver, discharge or termination is
sought, except to the extent provided in Section 12(b).
(d) Survival of Representations and Warranties, Etc. All
representations and warranties contained herein shall survive the
execution and delivery of this Agreement, any investigation at any time
made by Harvest States or on its behalf, and the sale and purchase of
the Preferred Stock and payment therefor. All statements contained in
any certificate, instrument or other writing delivered by or on behalf
of the Company pursuant to this Agreement (other than legal opinions)
or in connection with or in contemplation of the transactions herein
contemplated shall constitute representations and warranties by the
Company hereunder.
<PAGE>
(e) Headings. The headings of the articles and sections of
this Agreement have been inserted for convenience of reference only and
do not constitute a part of this Agreement.
(f) Severability. It is the desire and intent of the parties
that the provisions of this Agreement be enforced to the fullest extent
permissible under the law and public policies applied in each
jurisdiction in which enforcement is sought. Accordingly, in the event
that any provision of this Agreement would be held in any jurisdictions
to be invalid, prohibited or unenforceable for any reason, such
provision, as to such jurisdiction, shall be ineffective, without
invalidating the remaining provisions of this Agreement or affecting
the validity or enforceability of such provision in any other
jurisdiction. Notwithstanding the foregoing, if such provision could be
more narrowly drawn so as not to be invalid, prohibited or
unenforceable in such jurisdiction, it shall, as to such jurisdiction,
be so narrowly drawn without invalidating the remaining provisions of
this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction.
(g) Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, provided that except by
operation of law and as permitted by the Company pursuant to Section
8(i) of this Agreement, no party may assign, delegate or otherwise
transfer any of its rights or obligations under this Agreement without
obtaining the prior written consent of the other party hereto.
(h) Dilution. In the event of a subdivision, split,
combination or reclassification of the Common Stock, the share and
price numbers and calculations set forth in this Agreement shall be
appropriately adjusted.
(i) Governing Law. This Agreement shall be construed in
accordance with and governed by the law of the State of Minnesota,
without giving effect to the principles of conflict of laws thereof.
(j) Counterparts; Effectiveness. This Agreement may be signed
in any number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereof and hereto were upon the
same instrument. This Agreement shall become effective when each party
hereto shall have received counterparts hereof signed by all of the
other parties hereto.
(k) Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given upon receipt if (i)
delivered personally, by courier or by mail or (ii) transmitted by
facsimile, and in each case, addressed to the parties at the following
addresses (or at such other address for a party as shall be specified
by like notice):
<PAGE>
(i) if to the Company, to:
Sparta Foods, Inc.
1565 First Avenue N.W.
New Brighton, MN 55112
Telecopy: (612) 697-0600
Attention: A. Merrill Ayers
with copies to:
Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, Minnesota 55402-3397
Telecopy: (612) 347-7077
Attention: Thomas R. King
(ii) if to Harvest States, to
Harvest States Cooperatives
1667 North Snelling Avenue
St. Paul, Minnesota 55108
Telecopy: (612) 641-6832
Attention: Thomas F. Baker
Debra A. Thornton
with a copy to
Dorsey & Whitney LLP
220 South 6th Street
Minneapolis, Minnesota 55402
Telecopy: (612) 340-8738
Attention: William B. Payne, Esq.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
SPARTA FOODS, INC.
By /s/ Joel P. Bachul
----------------------------------
Its President and CEO
-------------------------------
HARVEST STATES COOPERATIVES
By /s/ T. F. Baker
-----------------------------------
Its Group Vice President--Finance
-------------------------------
<PAGE>
Exhibit A
SPARTA FOODS, INC.
------------------
CERTIFICATE OF DESIGNATIONS
FOR
PREFERRED STOCK, SERIES 1998
------------------
The undersigned, being the Chief Executive Officer of Sparta Foods,
Inc., a Minnesota corporation (the "Company"), in accordance with Minnesota
Statutes, Section 302A.401, Subd. 3(b), certifies that:
Pursuant to the authority vested in the Board of Directors of the
Company by the Articles of Incorporation of the Company, the Board of Directors
on February 11, 1998, in accordance with Minnesota Statutes, Section 302A.401,
Subd. 3, duly adopted the following resolution establishing a series of the
Company's Preferred Stock, to be designated as its Preferred Stock, Series 1998:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Company (the "Board of Directors") by the Articles of
Incorporation of the Company, the Board of Directors hereby establishes a series
of Preferred Stock of the Company and hereby states the designation and number
of shares, and fixes the relative rights and preferences, of such series of
shares as follows:
PREFERRED STOCK, SERIES 1998
SECTION 1. DESIGNATION; NUMBER OF SHARES. The shares of such series
shall be designated as "Preferred Stock, Series 1998" (the "Preferred Stock"),
and the number of shares constituting the Preferred Stock shall be 2,500.
SECTION 2. PAR VALUE; NO CUMULATIVE VOTING; NO PREEMPTIVE RIGHTS. The
Preferred Stock shall have a par value of $1,000.00 per share. As provided in
Article III, Sections 3.4 and 3.6, of the Company's Articles of Incorporation,
holders of Preferred Stock shall not be entitled to cumulate their votes in any
election of directors in which they are entitled to vote and shall not be
entitled to any preemptive rights to acquire shares of any class or series of
capital stock of the Company.
SECTION 3. RANK. The Preferred Stock shall rank prior to all of the
Company's Common Stock, par value $.01 per share (the "Common Stock"), now
outstanding or hereafter issued, both as to payment of dividends and as to
distributions of assets
<PAGE>
upon the liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary.
SECTION 4. DIVIDENDS AND DISTRIBUTIONS. The holders of shares of
Preferred Stock shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for such purpose, cash
dividends at the rate of 5% per annum per share, or, at the option of the
Company, dividends of shares of Preferred Stock at the rate of 7.5% (based on
the liquidation preference of the Preferred Stock) per annum per share;
provided, however, after a Change of Control (as defined in Section 9) or such
time as there ceases to be a majority of the Board of Directors comprised as
Continuing Directors (as defined in this Section 9) (other than pursuant to an
agreement or arrangement authorized, approved or acquiesced in by the Company's
Board of Directors), the dividend rate shall be 15% per annum, in cash. Such
dividends shall be fully cumulative, shall accumulate without interest from the
date of original issuance of the Preferred Stock and shall be payable
semi-annually in arrears in cash on each January 1 and July 1 commencing July 1,
1998 (provided, that if any such date is a Saturday, Sunday or legal holiday in
the place where such dividend is to be paid, then such dividend shall be payable
without interest on the next day that is not a Saturday, Sunday or legal
holiday) to holders of record as they appear on the stock books of the Company
on such record dates as shall be fixed by the Board of Directors. Such record
dates shall be not more than 60 nor less than 10 days preceding the respective
dividend payment dates. The amount of dividends payable per share of Preferred
Stock for each full semi-annual dividend period shall be computed by dividing
the annual dividend amount by two. The amount of dividends payable for the
initial dividend period and for any other period shorter than a full semi-annual
dividend period shall be computed on the basis of a 360-day year of twelve
30-day months. No dividends or other distributions, other than dividends payable
solely in shares of Common Stock or other capital stock of the Company ranking
junior as to payment of dividends to the Preferred Stock (such Common Stock and
other capital stock being referred to herein collectively as "Junior Dividend
Stock"), shall be paid or set apart for payment on, and no purchase, redemption
or other acquisition shall be made by the Company of, any shares of Junior
Dividend Stock unless and until all accumulated and unpaid dividends on the
Preferred Stock, including the full dividend for the then-current semi-annual
dividend period, shall have been paid or declared and set apart for payment.
No full dividends shall be paid or declared and set apart for payment
on any capital stock of the Company ranking, as to payment of dividends, on a
parity with the Preferred Stock (such capital stock being referred to herein as
"Parity Dividend Stock") for any period unless full cumulative dividends have
been, or contemporaneously are, paid or declared and set apart for payment on
the Preferred Stock for all dividend periods terminating on or prior to the date
of payment of such
<PAGE>
full cumulative dividends. No full dividends shall be paid or declared and set
apart for payment on the Preferred Stock for any period unless full cumulative
dividends have been, or contemporaneously are, paid or declared and set apart
for payment on any Parity Dividend Stock for all dividend periods terminating on
or prior to the date of payment of such full cumulative dividends. When
dividends are not paid in full upon the Preferred Stock and any Parity Dividend
Stock, all dividends paid or declared and set apart for payment upon shares of
Preferred Stock and Parity Dividend Stock shall be paid or declared and set
apart for payment pro rata, so that the amount of dividends paid or declared and
set apart for payment per share on the Preferred Stock and the Parity Dividend
Stock shall in all cases bear to each other the same ratio that accumulated and
unpaid dividends per share on the shares of Preferred Stock and Parity Dividend
Stock bear to each other.
Any reference to "distribution" contained in this Section 4 shall not
be deemed to include any distribution made in connection with a liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary.
SECTION 5. LIQUIDATION PREFERENCE. In the event of a liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary, the
holders of Preferred Stock shall be entitled to receive out of the assets of the
Company an amount equal to the dividends accumulated and unpaid thereon to the
date of final distribution to such holders, whether or not declared, without
interest, plus a sum equal to $1,000.00 per share, before any payment shall be
made or any assets distributed to the holders of Common Stock or any other
capital stock of the Company ranking junior as to liquidation rights to the
Preferred Stock (such Common Stock and other capital stock being referred to
herein collectively as "Junior Liquidation Stock"). The entire assets of the
Company available for distribution shall be distributed ratably among the
holders of the Preferred Stock as to liquidation rights with the Preferred Stock
in proportion to the respective preferential amounts to which each is entitled
(but only to the extent of such preferential amounts). After payment in full of
the liquidation preference of the shares of the Preferred Stock, the holders of
such shares shall not be entitled to any further participation in any
distribution of assets by the Company. Neither a consolidation or merger of the
Company with another corporation nor a sale or transfer of all or part of the
Company's assets for cash, securities or other property will be deemed a
liquidation, dissolution or winding up of the Company for purposes of this
Section 5.
SECTION 6. REDEMPTION AT OPTION OF THE COMPANY. (a) The Company, at its
option, may, on or after February 23, 2001, redeem at any time all, or from time
to time any portion, of the Preferred Stock on any date set by the Board of
Directors, at a cash price equal to $1,100.00 per share plus, in each case, an
amount per share in cash equal to all dividends on the Preferred Stock
accumulated and unpaid on such
<PAGE>
share, whether or not declared, to the date fixed for redemption (such sum being
hereinafter referred to as the "Redemption Price").
In case of the redemption of less than all of the then outstanding
Preferred Stock, the Company shall designate by lot, or in such other manner as
the Board of Directors may determine, the shares to be redeemed, or shall effect
such redemption pro rata. Notwithstanding the foregoing, the Company shall not
redeem less than all of the Preferred Stock at any time outstanding until all
dividends accumulated and in arrears upon all Preferred Stock then outstanding
shall have been paid for all past dividend periods.
Not more than 60 nor less than 30 days prior to the redemption date,
notice by first class mail, postage prepaid, shall be given to the holders of
record of the Preferred Stock to be redeemed, addressed to such shareholders at
their last addresses as shown on the stock books of the Company. Each such
notice of redemption shall specify the date fixed for redemption; the redemption
price; the place or places of payment; the then-effective Conversion Rate (as
defined in Section 7); that the right of holders of Preferred Stock called for
redemption to exercise their conversion right pursuant to Section 7 shall expire
as to such shares at the close of business on the date fixed for redemption
(provided that there is no default in payment of the Redemption Price); that
payment of the Redemption Price will be made upon presentation and surrender of
certificates representing the shares of Preferred Stock; that accumulated but
unpaid dividends to the date fixed for redemption will be paid on the date fixed
for redemption; that accumulated but unpaid dividends will not be paid in the
case of a conversion of Preferred Stock; and that on and after the redemption
date, dividends will cease to accumulate on such shares.
(b) In the case of a Change of Control (as defined in Section 9
herein), the Company may redeem not less than all of the Preferred Stock no
earlier than the date on which there is a Change of Control, at a cash price
equal to the Redemption Price (the "Change of Control Redemption") provided that
notice has been given as provided herein.
Not more than 60 nor less than 30 days prior to the date the Company
reasonably believes will be the date upon which a Change of Control will be
effected, notice by first class mail, postage prepaid, shall be given to the
holders of record of the Preferred Stock, addressed to such shareholders at
their last addresses as shown on the stock books of the Company. Each such
notice of redemption shall specify the prospective redemption date; the
redemption price; the place or places of payment; the then-effective Conversion
Rate (as defined in Section 7); that the prospective redemption date may be
canceled at any time with proper notice by the Company (as set forth herein);
that the right of holders of Preferred Stock called for
<PAGE>
redemption to exercise their conversion right pursuant to Section 7 shall expire
as to such shares on the redemption date (provided that there is no default in
payment of the Redemption Price); that payment of the Redemption Price will be
made upon presentation and surrender of certificates representing the shares of
Preferred Stock; that accumulated but unpaid dividends to the date fixed for
redemption will be paid on the date fixed for redemption; that accumulated but
unpaid dividends will not be paid in the case of a conversion of Preferred
Stock; and that on and after the redemption date, dividends will cease to
accumulate on such shares. A holder of the Preferred Stock shall be permitted to
make a conversion election conditional on and effective immediately prior to any
such redemption.
If the Company determines that the Change of Control will not be
effected, not more than ten days following such date, notice by first class
mail, postage prepaid, shall be given to the holders of record of the Preferred
Stock to be redeemed, addressed to such shareholders at their last addresses as
shown on the stock books of the Company. Each notice shall state that the
Company cancels its Change of Control Redemption and that the rights and
preferences of the holders of record of the Preferred Stock shall continue with
respect to the Preferred Stock.
(c) Any notice that is mailed as herein provided shall be conclusively
presumed to have been duly given, whether or not a holder of the Preferred Stock
receives such notice; and failure so to give such notice, or any defect in such
notice, to the holders of any shares designated for redemption shall not affect
the validity of the proceedings for the redemption of any other shares of
Preferred Stock. On or after the date fixed for redemption as stated in such
notice, each holder of the shares called for redemption (other than shares that
have been duly surrendered for conversion at or before the close of business on
the date fixed for redemption) shall surrender the certificate or certificates
evidencing such shares to the Company at the place designated in such notice and
shall thereupon be entitled to receive payment of the Redemption Price. If fewer
than all the shares represented by any such surrendered certificate or
certificates are redeemed, a new certificate shall be issued representing the
unredeemed shares. If, on the date fixed for redemption, funds necessary for the
redemption shall be available therefor and shall have been irrevocably deposited
or set aside, then, notwithstanding that the certificates evidencing any shares
so called for redemption shall not have been surrendered, the dividends with
respect to the shares so called shall cease to accumulate on and after the date
fixed for redemption, such shares shall no longer be deemed outstanding, the
holders thereof shall cease to be shareholders, and all rights whatsoever with
respect to such shares (except the right of the holders thereof to receive the
Redemption Price without interest upon surrender of their certificates) shall
terminate.
<PAGE>
SECTION 7. CONVERSION AT OPTION OF HOLDERS. Holders of Preferred Stock
may, at their option upon surrender of the certificates therefor, convert any or
all of their shares of Preferred Stock into fully paid and nonassessable shares
of Common Stock (and such other securities and property as they may be entitled
to, as hereinafter provided) at any time after issuance thereof; provided, that
such conversion right shall expire at the close of business on the date, if any,
fixed for the redemption of Preferred Stock in any notice of redemption given
pursuant to Section 6 hereof if there is no default in payment of the Redemption
Price. Each share of Preferred Stock shall be convertible at the office of any
transfer agent for the Preferred Stock, and at such other office or offices, if
any, as the Board of Directors may designate, into that number of fully paid and
nonassessable shares of Common Stock (calculated as to each conversion to the
nearest 1/100th of a share) as shall be equal to the Conversion Rate, determined
as hereinafter provided, in effect at the time of conversion. Each share of
Preferred Stock shall initially be converted into full shares of Common Stock at
the rate of 606.06 shares of Common Stock for each share of Convertible
Preferred Stock, subject to adjustment from time to time as provided in Section
8 (such conversion rate, as so adjusted from time to time, being referred to
herein as the "Conversion Rate"). The "Conversion Price" means $1,000.00 divided
by the Conversion Rate. Upon conversion, no adjustment or payment shall be made
in respect of accumulated and unpaid dividends on the Preferred Stock
surrendered for conversion.
The right of holders of Preferred Stock to convert their shares shall
be exercised by surrendering for such purpose to the Company or its agent, as
provided above, certificates representing shares to be converted, duly endorsed
in blank or accompanied by proper instruments of transfer. The Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issue and delivery of Common Stock or other securities or
property upon conversion of Preferred Stock in a name other than that of the
holder of the shares of Preferred Stock being converted, nor shall the Company
shall be required to issue or deliver any such shares or other securities or
property unless and until the person or persons requesting the issuance thereof
shall have paid to the Company the amount of any such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
A number of shares of the authorized but unissued Common Stock
sufficient to provide for the conversion of the Preferred Stock outstanding upon
the basis hereinbefore provided shall at all times be reserved by the Company,
free from preemptive rights, for such conversion, subject to the provisions of
the next paragraph. If the Company shall issue any securities or make any change
in its capital structure that would change the number of shares of Common Stock
into which each share of the Preferred Stock shall be convertible as herein
provided, the Company shall at the same time also make proper provision so that
thereafter there
<PAGE>
shall be a sufficient number of shares of Common Stock authorized and reserved,
free from preemptive rights, for conversion of the outstanding Preferred Stock
on the new basis.
Upon the surrender of certificates representing shares of Preferred
Stock to be converted, duly endorsed or accompanied by proper instruments of
transfer as provided above, the person converting such shares shall be deemed to
be the holder of record of the Common Stock issuable upon such conversion, and
all rights with respect to the shares surrendered shall forthwith terminate
except the right to receive the Common Stock or other securities, cash or other
assets as herein provided.
No fractional shares of Common Stock shall be issued upon conversion of
Preferred Stock but, in lieu of any fraction of a share of Common Stock which
would otherwise be issuable in respect of the aggregate number of such shares
surrendered for conversion at one time by the same holder, the Company shall pay
in cash an amount equal to the product of (a) the Closing Price of a share of
Common Stock (as defined in the next sentence) on the last trading day before
the conversion date and (b) such fraction of a share. The "Closing Price" for
each day shall be the last reported sale price regular way or, in case no sale
takes place on such day, the average of the closing bid and asked prices regular
way on such day, in either case as reported on the New York Stock Exchange
Composite Tape, or, if the Common Stock is not listed or admitted to trading on
such Exchange, on the principal national securities exchange on which the Common
Stock is listed or admitted to trading, or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, on the NASDAQ National
Market System, or, if the Common Stock is not admitted for quotation on the
NASDAQ National Market System, the average of the high bid and low asked prices
on such day as recorded by the National Association of Securities Dealers, Inc.
through NASDAQ, or, if the National Association of Securities Dealers, Inc.
through NASDAQ shall not have reported any bid and asked prices for the Common
Stock on such day, the average of the bid and asked prices for such day as
furnished by any New York Stock Exchange member firm selected from time to time
by the Company for such purpose, or, if no such bid and asked prices can be
obtained from any such firm, the fair market value of one share of the Common
Stock on such day as determined in good faith by the Board of Directors of the
Company.
SECTION 8. ADJUSTMENTS TO CONVERSION RATE. Notwithstanding anything in
this Section 8 to the contrary, no change in the Conversion Rate shall be made
until the cumulative effect of the adjustments called for by this Section 8
since the date of the last change in the Conversion Rate would change the
Conversion Rate by more than 1%. However, once the cumulative effect would
result in such a change, then the Conversion Rate shall be changed to reflect
all adjustments called for by this
<PAGE>
Section 8 and not previously made. Subject to the foregoing, the Conversion Rate
shall be adjusted from time to time as follows:
(a) In case of any consolidation or merger of the Company with
any other corporation (other than a wholly owned subsidiary of the
Company), or in case of any sale or transfer of all or substantially
all of the assets of the Company, or in case of any share exchange
pursuant to which all of the outstanding shares of Common Stock are
converted into other securities or property, the Company shall, prior
to or at the time of such transaction, make appropriate provision or
cause appropriate provision to be made so that holders of each share of
Preferred Stock then outstanding shall have the right thereafter to
convert such share of Preferred Stock into the kind and amount of
shares of stock and other securities and property receivable upon such
consolidation, merger, sale, transfer or share exchange by a holder of
the number of shares of Common Stock into which such share of Preferred
Stock could have been converted immediately prior to the effective date
of such consolidation, merger, sale, transfer or share exchange. If in
connection with any such consolidation, merger, sale, transfer or share
exchange, each holder of shares of Common Stock is entitled to elect to
receive either securities, cash or other assets upon completion of such
transaction, the Company shall provide or cause to be provided to each
holder of Preferred Stock the right to elect the securities, cash or
other assets into which the Preferred Stock held by such holder shall
be convertible after completion of any such transaction on the same
terms and subject to the same conditions applicable to holders of the
Common Stock (including, without limitation, notice of the right to
elect, limitations on the period in which such election shall be made
and the effect of failing to exercise the election).
(b) In case the Company shall (i) pay a dividend or make a
distribution on its Common Stock in shares of its capital stock, (ii)
subdivide its outstanding Common Stock into a greater number of shares,
(iii) combine the shares of its outstanding Common Stock into a smaller
number of shares, or (iv) issue by reclassification of its Common Stock
any shares of its capital stock, then in each such case the Conversion
Rate in effect immediately prior thereto shall be proportionately
adjusted so that the holder of any Preferred Stock thereafter
surrendered for conversion shall be entitled to receive, to the extent
permitted by applicable law, the number and kind of shares of capital
stock of the Company which such holder would have owned or have been
entitled to receive after the happening of such event had such
Preferred Stock been converted immediately prior to the record date for
such event (or if no record date is established in connection with such
event, the effective date for such action). An adjustment pursuant to
this subparagraph (b) shall become effective immediately after the
record date in the case of a stock dividend or
<PAGE>
distribution and shall become effective immediately after the effective
date in the case of a subdivision, combination or reclassification.
(c) In case the Company shall at any time prior to February
23, 2001 (i), except pursuant to (A) 1,103,667 options and 3,634,208
warrants outstanding as of the date hereof or (B) securities issued in
compliance with Section 9(d) of the Stock Purchase Agreement, dated
February 24, 1998, between the Company and Harvest States Cooperatives
(the "Stock Purchase Agreement"), issue or sell any shares of its
Common Stock for a consideration per share less than the Conversion
Price in effect immediately prior to the time of such issuance or sale,
(ii), except for securities issued in compliance with Section 9(d) of
the Stock Purchase Agreement, issue or sell any warrants, options or
other rights to acquire shares of its Common Stock at a purchase price
less than the Conversion Price in effect immediately prior to the time
of such issuance or sale, or (iii) issue or sell any other securities
that are convertible into shares of Common Stock for a purchase or
exchange price less than the Conversion Price in effect immediately
prior to the time of such issuance or sale then, upon such issuance or
sale, the Conversion Rate shall be increased by reducing the Conversion
Price to the price at which such shares of Common Stock are being
issued or sold by the Company or the price at which such other
securities are exercisable or convertible into shares of the Company's
Common Stock, and then adjusting the Conversion Rate to $1,000.00
divided by the new Conversion Price.
(d) In case the Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock evidences of its
indebtedness or assets (including securities, but excluding any rights
or warrants to purchase securities of the Company referred to in
subparagraph (c) above, any dividend or distribution paid in cash out
of the retained earnings of the Company and any dividend or
distribution referred to in subparagraph (b) above), then in each such
case the Conversion Rate then in effect shall be adjusted in accordance
with the formula
M
C(1) = C x -----
M - F
where
C(1) = the adjusted Conversion Rate.
C = the current Conversion Rate.
M = the Current Market Price per share of Common Stock on the
record date mentioned below.
F = the amount of such cash dividend and/or the fair market
value on the record date of the assets, securities, rights
or warrants to be distributed divided by the number of
shares of Common
<PAGE>
Stock outstanding on the record date. The Board of
Directors of the Company shall determine in good faith such
fair market value.
Such adjustment shall become effective immediately after the record
date for the determination of shareholders entitled to receive such
dividend or distribution.
(e) All calculations hereunder shall be made to the nearest
cent or to the nearest 1/100 of a share, as the case may be.
(f) In the event that at any time, as a result of an
adjustment made pursuant to subparagraph (a) or (b) above, the holder
of any Preferred Stock thereafter surrendered for conversion shall
become entitled to receive securities, cash or assets other than Common
Stock, the number or amount of such securities or property so
receivable upon conversion shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to
the provisions with respect to the Common Stock contained in
subparagraphs (a) through (e) above.
Except as otherwise provided above in this Section 8, no adjustment in the
Conversion Rate shall be made in respect of any conversion for share
distributions or dividends theretofore declared and paid or payable on the
Common Stock.
Whenever the Conversion Rate is adjusted, the Company shall give notice
by mail at the time of, and together with, the next dividend payment to the
holders of record of Preferred Stock, setting forth the adjustment and the new
Conversion Rate. Notwithstanding the foregoing notice provisions, failure by the
Company to give such notice or a defect in such notice shall not affect the
binding nature of such corporate action of the Company.
Whenever the Company shall propose to take any of the actions specified
in subparagraphs (a), (b), (c) or (d) of the first paragraph of this Section 8
which would result in any adjustment in the Conversion Rate, the Company shall
cause a notice to be mailed at least 30 days prior to the date on which the
books of the Company will close or on which a record will be taken for such
action to the holders of record of the outstanding Preferred Stock on the date
of such notice. Such notice shall specify the action proposed to be taken by the
Company and the date as of which holders of record of the Common Stock shall
participate in any such actions or be entitled to exchange their Common Stock
for securities or other property, as the case may be. Failure by the Company to
give such notice or any defect in such notice shall not affect the validity of
the transaction.
<PAGE>
Notwithstanding any other provision of this Section 8, no adjustment in
the Conversion Rate need be made (A) for a change in par value of the Common
Stock not involving a subdivision or combination described in clause (ii) or
(iii) of subparagraph (b) of the first paragraph of this Section 8 or (B) after
the Preferred Stock becomes convertible solely into cash (and no interest shall
accrue on the cash).
SECTION 9. PREFERRED STOCK REDEEMABLE AT OPTION OF HOLDERS. Not later
than 15 days following the occurrence of a Put Event (as defined in this Section
9), the Company shall provide written notice of such occurrence by first class
mail, postage prepaid addressed to each holder of record (at the close of
business on the business day next preceding the day on which the notice is
given) of shares of Preferred Stock (the "Put Event Notice"). At any time
following the delivery of the Put Event Notice, the Preferred Stock shall be
redeemable at the option of the holders of a majority of the then outstanding
shares of Preferred Stock in the manner and on the terms described herein below.
If at any time after the delivery of the Put Event Notice the holders
of a majority of the outstanding shares of Preferred Stock desire to have the
Company redeem the Preferred Stock, then such holders shall deliver to the
Company a written notice requesting redemption properly executed by the holders
of not less than a majority of the outstanding shares of Preferred Stock (the
"Redemption Election Notice"). Upon receipt of the Redemption Election Notice,
the Company shall redeem on the last day of the sixth full month following
receipt of such Redemption Election Notice (the "Required Redemption Date") 100%
of the outstanding shares of Preferred Stock. The redemption price with respect
to each share of Preferred Stock to be redeemed on each Required Redemption Date
shall be an amount equal to $1,000.00 per share plus, in each case, an amount
per share equal to all dividends on the Preferred Stock accumulated and unpaid
on such share, whether or not declared, to such Required Redemption Date (the
"Required Redemption Price").
Not more than 60 nor less than 30 days prior to the Required Redemption
Date, written notice (the "Required Redemption Notice") shall be given by the
Company by first class mail, postage prepaid, addressed to each holder of record
(at the close of business on the business day next preceding the day on which
the notice is given) of shares of Preferred Stock notifying such holder of the
redemption and specifying the Required Redemption Price, the Required Redemption
Date and the place where such Required Redemption Price shall be payable. The
Required Redemption Notice shall be addressed to each holder at such holder's
address as shown by the records of the Company. On or after the Required
Redemption Date, each holder of the shares called for redemption shall surrender
the certificate or certificates evidencing such shares to the Company at the
place designated in such notice and shall thereupon be entitled to receive
payment of the redemption price.
<PAGE>
Payment of the redemption price will only be made upon presentation and
surrender of certificates representing the shares of Preferred Stock. From and
after the close of business on the Required Redemption Date, unless there shall
have been a default in the payment of the Required Redemption Price, all rights
of holders of shares being redeemed (except the right to receive the Required
Redemption Price) shall cease with respect to such shares, and such shares shall
not thereafter be transferred on the books of the Company, or be deemed to be
outstanding for any purpose whatsoever.
If on any Required Redemption Date the funds of the Company legally
available for the redemption of shares of Preferred Stock are insufficient to
redeem the total number of outstanding shares subject to redemption, then the
holders of shares of the Preferred Stock shall share ratably in any funds
legally available for redemption of such shares according to the respective
amounts that would be payable with respect to the full number of shares owned by
them if all such shares to be redeemed were redeemed in full. The shares of
Preferred Stock not redeemed shall remain outstanding and entitled to all rights
and preferences provided herein. At any time thereafter, when additional funds
of the Company are legally available for the redemption of such shares of the
Preferred Stock, such funds will be used, at the end of the next succeeding
fiscal quarter, to redeem the balance of such shares, or such portion thereof,
for which funds are then legally available, on the basis set forth above.
Any notice that is mailed as herein provided shall be conclusively
presumed to have been duly given, whether or not a holder of the Preferred Stock
receives such notice; and failure so to give such notice, or any defect in such
notice, to the holders of any shares designated for redemption shall not affect
the validity of the proceedings for the redemption of any other shares of
Preferred Stock.
For purposes of this Section 9, "Put Event" shall mean (i) a Change of
Control (as defined in this Section 9) of the Company or (ii) an Event of
Default as such term is defined in the Stock Purchase Agreement.
"Change in Control" means a change in control of the Company of a
nature that would be required to be reported (assuming such event has not been
previously reported) in response to Item 1(a) of the Current Report on Form 8-K,
as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act") pursuant to an agreement or
arrangement authorized, approved or acquiesced in by the Company's Board of
Directors; provided, that, without limiting the foregoing, a "Change in Control"
shall be deemed to have occurred at such time as, pursuant to an agreement or
arrangement authorized, approved or acquiesced in by the Company's Board of
Directors (A) any person is or becomes a "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act),
<PAGE>
directly or indirectly, of 50 percent or more of the combined voting power of
Corporation's outstanding securities ordinarily possessing the right to vote for
the election of directors ("Voting Securities") or (B) the Company disposes of
all or substantially all of its assets. For purposes of this paragraph,
"Continuing Directors" shall mean individuals who on the date hereof constituted
the Board of Directors and any new director who subsequently was elected or
nominated for election by a Board of Directors the majority of which were
Continuing Directors.
SECTION 10. NO SINKING FUND. The Preferred Stock shall not be subject
to the operation of a purchase, retirement or sinking fund.
SECTION 11. VOTING RIGHTS. The holders of Preferred Stock shall not
have any voting rights except as set forth below or as otherwise from time to
time required by law.
(a) Whenever dividends on the Preferred Stock shall be in
arrears in an amount equal to one semi-annual dividend payment, the
holders of the Preferred Stock (voting separately as a single class)
will be entitled to vote for and elect one director (in addition to any
other rights any such holder may have). Such right of the holders of
Preferred Stock to vote for the election of such additional director
may be exercised at any annual meeting or at any adjournment thereof,
at any special meeting called for such purpose as hereinafter provided
or by unanimous written consent of the holders of the Preferred Stock,
until dividends in default on such outstanding shares of Preferred
Stock shall have been paid in full (or such dividends shall have been
declared and funds sufficient therefor set apart for payment), at which
time the term of office of the director elected pursuant to this
Section 11(b) shall terminate automatically (subject to revesting in
the event of each and every subsequent default of the character
specified in the preceding sentence). So long as such right to vote
continues, the Secretary of the Company shall call, upon the written
request of the holders of record of at least 10% of the outstanding
shares of Preferred Stock addressed to him or her at the principal
office of the Company or, if such a request is not made, upon his or
her own motion, a special meeting of the holders of such shares for the
election of such additional director, as provided herein. Such meeting
shall be held not less than 45 or more than 90 days after the accrual
of such right, at the place and upon the notice provided by law and in
the by-laws of the Company for the holding of meetings of shareholders.
No such special meeting or adjournment thereof shall be held on a date
less than 30 days before an annual meeting of shareholders or any
special meeting in lieu thereof; provided, that at such annual meeting
appropriate provisions are made to allow the holders of the Preferred
Stock to exercise such right at such meeting. If at any such annual or
special meeting or any adjournment thereof the
<PAGE>
holders of a majority of the then outstanding shares of Preferred Stock
entitled to vote in such election shall be present or represented by
proxy, then the authorized number of directors of the Company shall be
increased by two, and the holders of Preferred Stock (voting separately
as a single class) shall be entitled to elect such additional director.
The director so elected shall serve until the next annual meeting or
until their successors shall be elected and shall qualify, unless the
term of office of the person so elected as a director shall have
terminated by virtue of the payment in full of all dividends in arrears
(or such dividends shall have been declared and funds sufficient
therefor set apart for payment).
(b) If a director elected by the holders of Preferred Stock
pursuant to Section 11(a) shall cease to serve as a director before his
or her term shall expire, the holders of Preferred Stock then
outstanding and entitled to vote for such director may, at a special
meeting of such holders called as provided above, elect a successor to
hold office for the unexpired term of the director whose place shall be
vacant.
SECTION 12. CERTAIN ACTIONS NOT TO BE TAKEN WITHOUT VOTE OF HOLDERS OF
PREFERRED STOCK. Without the consent or affirmative vote of the holders of at
least two-thirds of the outstanding shares of Preferred Stock, voting separately
as a class, the Company shall not authorize, create or issue any shares of any
other class or series of capital stock ranking senior to the Preferred Stock as
to dividends or upon liquidation. The affirmative vote or consent of the holders
of at least two-thirds of the outstanding shares of the Preferred Stock, voting
separately as a class, shall be required for any amendment, alteration or
repeal, whether by merger or consolidation or otherwise, of the Company's
Articles of Incorporation (including any certificate of designations
establishing any class or series of preferred stock of the Company) if the
amendment, alteration or repeal adversely affects the rights or preferences of
the Preferred Stock; provided, however, that any increase in the authorized
preferred stock of the Company or the creation and issuance of any other capital
stock of the Company ranking junior to the Preferred Stock shall not be deemed
to materially affect such powers, preferences or special rights.
SECTION 13. OUTSTANDING SHARES. For purposes of this Certificate of
Designations, all shares of Preferred Stock shall be deemed outstanding except
for (a) shares of Preferred Stock held of record or beneficially by the Company
or any subsidiary of the Company; (b) from the date of surrender of certificates
representing Preferred Stock for conversion pursuant to Section 7, all shares of
Preferred Stock which have been converted into Common Stock or other securities
or property pursuant to Section 7; (c) from the date fixed for redemption
pursuant to Section 6, all shares of Preferred Stock which have been called for
redemption, provided that funds necessary for such redemption are available
therefor and have been
<PAGE>
irrevocably deposited or set aside for such purpose; and (d) from the date fixed
for redemption pursuant to Section 9, all shares of Preferred Stock for which
the holders have exercised its put option, provided that funds necessary for
such redemption are available therefor and have been irrevocably deposited or
set aside for such purpose.
SECTION 14. STATUS OF PREFERRED STOCK UPON RETIREMENT. Shares of
Preferred Stock that are acquired or redeemed by the Company or converted
pursuant to Section 7 shall return to the status of authorized and unissued
shares of preferred stock of the Company without designation as to series. Upon
the acquisition or redemption by the Company or conversion pursuant to Section 7
of all outstanding shares of Preferred Stock, all provisions of this Certificate
of Designations shall cease to be of further effect. Upon the occurrence of such
event, the Board of Directors of the Company shall have the power, pursuant to
Minnesota Statutes, Section 302A.135, Subd. 5 or any successor provision and
without shareholder action, to cause restated articles of incorporation of the
Company or other appropriate documents to be prepared and filed with the
Secretary of State of the State of Minnesota which reflect such removal of all
provisions relating to the Preferred Stock and/or the cancellation of this
Certificate of Designations.
IN WITNESS WHEREOF, Sparta Foods, Inc. has caused this certificate to
be signed this 24th day of February, 1998.
SPARTA FOODS, INC.
By
-------------------------------------
Its
----------------------------------
<PAGE>
Exhibit B
[FORM OF OPINION LANGUAGE]
1. Each of the Company and La Canasta of Minnesota, Inc. (the
"Subsidiary") is a corporation duly organized, validly existing and in good
standing under the laws of the State of Minnesota, is qualified to do business
and is in good standing as a foreign corporation in each jurisdiction where it
is required to be qualified and has all requisite corporate power and authority
to carry on its business as now conducted, to own, lease and operate its
properties and to authorize, issue and sell the Preferred Stock as contemplated
by the Purchase Agreement and to enter into and carry out the provisions of the
Purchase Agreement.
2. As contemplated by Minnesota Statutes, Section 302A.673, the Company
has formed a committee composed of all of the Board's disinterested directors,
which Committee has approved the acquisition of Preferred Stock to be made
pursuant to the Purchase Agreement on the Closing Date and thereafter, and
accordingly, such Section does not impose any limitation on a business
combination or other transaction contemplated thereby with Harvest States.
3. The Company owns all of the outstanding shares of capital stock of
the Subsidiary. To the best knowledge of such counsel, as of the date hereof,
the Company does not have any direct or indirect ownership interest in any other
corporation, partnership, joint venture, association or other business
enterprise.
4. The Purchase Agreement has been authorized by all necessary
corporate action, has been duly and validly executed and delivered by the
Company and is a valid and binding agreement of the Company enforceable against
the Company in accordance with its terms. All corporate action necessary to the
authorization, creation, issuance and delivery of the Preferred Stock has been
taken by the Company. The Preferred Stock has been duly authorized, validly
issued and outstanding, fully paid and nonassessable, free from preemptive
rights, and is free from any pledge, lien, encumbrance or restriction known to
or caused or created by the Company other than restrictions on transfer under
state and/or federal securities laws and has been issued in compliance with all
state and federal securities laws. Upon conversion of the Preferred Stock into
common stock, $.01 par value per share, of the Company (the "Common Stock") in
accordance with the terms of the Preferred Stock, the Common Stock will be duly
authorized, validly issued and outstanding, fully paid and nonassessable and
free from any pledge, lien, encumbrance or restriction known to or caused or
created by the Company other than state and/or federal securities laws.
5. The execution, delivery and performance by the Company of the
Purchase Agreement and the consummation of the transactions contemplated hereby
by the Company require no action by, notices to or filing with any governmental
body, agency, official or authority or any third party.
<PAGE>
6. The authorization, issuance and sale of the Preferred Stock and the
execution, delivery and performance by the Company of the Purchase Agreement
does not and will not (a) contravene or conflict with the articles of
incorporation or bylaws of the Company, (b) contravene or conflict with or
constitute a violation of any provision of any law, regulation, judgment,
injunction, order or decree binding upon or applicable to the Company or any of
its properties or assets, (c) constitute a default under or give rise to a right
of termination, cancellation, restriction or acceleration of any right or
obligation of the Company or to a loss of any benefit to which the Company is
entitled under any provision of any agreement, contract or other instrument
binding upon or applicable to the Company or any of its properties or assets and
known to such counsel (which shall include all SEC Reports (as defined in the
Purchase Agreement)) or any license, franchise or permit or other similar
authorization held by or applicable to the Company and known to such counsel
(which shall include all SEC Reports) or (d) result in the creation of
imposition of any Lien on any asset of the Company. For purposes of the Purchase
Agreement, "Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest, encumbrance or restriction of any kind in respect of
such asset.
7. The authorized capital stock of the Company consists of 15,000,000
shares of Common Stock of which 6,798,637 shares are issued and outstanding as
of the date hereof (without giving effect to the Purchase Agreement and the
transactions contemplated thereby) and 1,000,000 shares of undesignated
preferred stock, 2,500 of which are designated Preferred Stock, Series 1998,
none of which are outstanding as of the date hereof. As of the date hereof,
266,333 shares of Common Stock are reserved for issuance pursuant to the
Company's Amended and Restated Stock Option Plan, pursuant to which options for
1,033,667 shares of Common Stock are outstanding. In addition, options for
70,000 shares of Common Stock are outstanding but not issued pursuant to a plan.
As of the date hereof, 3,634,208 shares of Common Stock are reserved for
issuance pursuant to the exercise of outstanding warrants. All outstanding
shares of Common Stock are duly authorized, validly issued, fully paid and
nonassessable, are free from preemptive rights and were issued in compliance
with all state and federal securities laws. Except as set forth above, to the
best knowledge of such counsel, there are outstanding (i) no other shares of
capital or other voting securities of the Company, (ii) no securities of the
Company convertible into or exchangeable for shares of capital stock or voting
securities of the Company and (iii) no other options or other rights to stock,
voting securities or securities convertible into or exchangeable for capital
stock or voting securities of the Company (the items in clauses (i), (ii) and
(iii) being referred to collectively as the "Company Securities"). To the best
knowledge of such counsel, there are no outstanding obligations of the Company
to repurchase, redeem or otherwise acquire any Company Securities.
<PAGE>
8. To the best knowledge of such counsel, there are no legal actions,
suits, arbitrations or other legal, administrative or governmental proceedings
or investigations pending or, to the knowledge of the Company, threatened
against the Company or the Subsidiary, or its properties or business, and the
Company is not aware of any facts which are likely to result in or form the
basis for any such action, suit or other proceeding, except as described in its
1997 10-KSB (as defined in the Purchase Agreement). To the best knowledge of
such counsel, neither the Company nor the Subsidiary is in default with respect
to any judgment, order or decree of any court or any governmental agency or
instrumentality nor has the Company or the Subsidiary been threatened with any
action or proceeding under any business or zoning ordinance, law or regulation.
9. The issuance and sale of the Preferred Stock as contemplated by the
Purchase Agreement complies with applicable Nasdaq governance standards.
