As filed with the Securities and Exchange Commission on April 15, 1998
File No. 333-46643
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
INDUSTRIAL RUBBER PRODUCTS, INC.
(Name of small business issuer in its charter)
MINNESOTA 3532 41-1550505
(State of Incorporation) (Primary Standard Industrial (IRS Employer I.D.
Classification I.D. Number) Number)
3804 EAST 13TH AVENUE
HIBBING, MINNESOTA 55746
(218) 263-8831
(Address and telephone number of principal executive offices)
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3804 EAST 13TH AVENUE
HIBBING, MINNESOTA 55746
(218) 263-8831
(Address of principal place of business)
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DANIEL O. BURKES, PRESIDENT
INDUSTRIAL RUBBER PRODUCTS, INC.
3804 EAST 13TH AVENUE
HIBBING, MINNESOTA 55746
(218) 263-8831
(Name, address and telephone number of agent for service)
COPIES TO:
John Nys, Esq. Melodie R. Rose, Esq.
Johnson, Killen, Thibodeau & Seiler, P.A. Fredrikson & Byron, P.A.
811 Norwest Center 900 Second Avenue South, Suite 1100
Duluth, Minnesota 55802 Minneapolis, Minnesota 55402
(218) 722-6331 (612) 347-7000
Fax: (218) 722-3031 Fax: (612) 347-7077
APPROXIMATE DATE OF PROPOSED COMMENCEMENT OF SALE TO THE PUBLIC: From
time to time after the Registration Statement becomes effective.
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If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT OF SHARES OFFER PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED SHARE PRICE REGISTRATION FEE
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Common Stock ................ 1,610,000 $ 5.00 $8,050,000 $2,375
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The Registrant hereby amends the Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Acts of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION, DATED, APRIL 15, 1998
PROSPECTUS
1,400,000 SHARES
OF COMMON STOCK
INDUSTRIAL RUBBER PRODUCTS, INC.
All of the 1,400,000 shares of Common Stock (the "Shares") offered hereby (this
"Offering") are being sold by Industrial Rubber Products, Inc. ("Industrial
Rubber" or the "Company"). Prior to this Offering, there has been no public
market for the Common Stock of the Company. See "Underwriting" for the factors
considered in determining the initial public offering price. The Company has
applied for listing of its Common Stock on the Nasdaq SmallCap Market(TM) under
the symbol "INRB."
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THE COMMON STOCK OFFERED BY THIS PROSPECTUS IS SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK AND DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 5 AND
"DILUTION."
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share ......... $ 5.00 $ .3750 $ 4.625
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Total(3) .......... $7,000,000 $525,000 $6,475,000
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(1) The Company has agreed to pay R.J. Steichen & Company (the "Underwriter") a
nonaccountable expense allowance in an amount equal to 2.0% of the gross
proceeds of this Offering. The Company has also agreed to sell the
Underwriter, for a nominal price, a five-year warrant to purchase up to
140,000 shares of the Common Stock, exercisable at 120% of the Price to
Public (the "Underwriter's Warrant"). In addition, the Company has agreed to
indemnify the Underwriter against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $340,000
(including the Underwriter's nonaccountable expense allowance
referenced in Note 1 above). See "Underwriting."
(3) Assumes no exercise of a 45-day option the Company has granted to the
Underwriter to purchase up to 210,000 additional shares of Common Stock
solely to cover overallotments, if any. If such option is exercised in full,
the total Price to Public, Underwriting Discount and Proceeds to Company
will be $8,050,000, $603,750 and $7,446,250, respectively. See
"Underwriting."
The Shares are being offered by the Underwriter subject to prior sale, to
withdrawal, cancellation or modification of the offer without notice, to
delivery to and acceptance by the Underwriter and to certain other conditions.
It is expected that delivery of the Shares will be made on or about ___, 1998 in
Minneapolis, Minnesota.
[LOGO] R J STEICHEN & CO
The date of this Prospectus is ______, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[PHOTO]
Caption: HOME OFFICE AND PRODUCTION PLANT
Hibbing, Minnesota
Narrative Description: Photograph shows the exterior of a 30,000 square foot
single story office/factory building with attached space for high-bay overhead
door. Signs on far end of building face identify building.
[PHOTO]
Caption: STANDARD RUBBER PRODUCTS
Hibbing, Minnesota
Narrative Description: Outdoor photograph shows twelve pieces of steel pipe
varying in size from approximately four feet in diameter to 18 inches in
diameter. Three of the pieces are cyclones. All of the steel pipe pieces are
painted orange, have been rubber-coated on the inside and have flanges attached.
The rubber-coated inside surfaces are not featured and are partially obscured by
the exterior surfaces.
[PHOTO]
Caption: PRODUCTION FACILITY
Clearfield, Utah
Narrative Description: Photograph shows a tractor-trailer truck backing into the
bay of a 60,000 square foot, white, two-story industrial building. The trailer
of the truck is loaded with four pieces of raw steel pipe approximately four
feet in diameter. The building features two bays, both open, and windows looking
out onto the paved yard.
[PHOTO]
Caption: STORAGE AND SETUP AREA
Clearfield, Utah
Narrative Description: Indoor photograph shows 13 pieces of steel pipe with
attached flanges lying on the floor of an industrial storage space beneath large
structural steel beams supporting the building roof. Behind the pieces of steel
pipe are approximately 34 coils of rubber used to coat pipes and other
materials.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVERALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
AND FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. ALL INFORMATION IN THIS PROSPECTUS, UNLESS
OTHERWISE INDICATED, REFLECTS A STOCK SPLIT OF THE OUTSTANDING SHARES OF
INDUSTRIAL RUBBER'S COMMON STOCK INTO 2,934,000 SHARES OF COMMON STOCK EFFECTIVE
JANUARY 30, 1998. UNLESS OTHERWISE INDICATED, ALL INFORMATION HEREIN ASSUMES NO
EXERCISE OF (I) THE UNDERWRITER'S OVERALLOTMENT OPTION FOR 210,000 SHARES OF
COMMON STOCK, (II) THE UNDERWRITER'S WARRANT FOR 140,000 SHARES OF COMMON
STOCK AND (III) OUTSTANDING OPTIONS TO PURCHASE UP TO 113,600 SHARES OF COMMON
STOCK.
THE COMPANY
Industrial Rubber is in the business of designing, producing and supplying
protective materials, abrasion resistant products and equipment,
erosion/corrosion protective linings and proprietary rubber products. The
Company's first customers were the low grade iron ore (taconite) processing
plants in Minnesota. It has expanded its operations to include sales to mineral
processing plants throughout the U.S. and Canada, as well as the power, wood
processing and other heavy industries in these geographical regions.
The Company has three product lines. Its pipe lining and pipe products line
consists of rubber lined pipe and other pipe parts fabricated primarily for the
mineral processing industry. Its proprietary products are engineered replacement
parts primarily for mineral processing facilities. Its standard rubber products
are sold, along with related services, to the Company's customers in the various
industry segments served by the Company.
The Company's net sales in its first full year of operations in 1987 were
$1,989,000. The Company's net sales in 1997 were $14,421,000. The Company
estimates that in 1997 it provided over 50% of the North American market for
rubber lined tailings pipe for the mineral processing industry.
The Company seeks to leverage its strength in the pipe products field by
expanding its business. Its expansion plans include opening additional satellite
production locations strategically located to service customers, increasing its
sales to existing customers by offering an expanded line of products including
both steel and iron products as well as products integrating several material
types, and expanding its sales, when appropriate, internationally.
The Company seeks to provide both products and service for its customers by
providing products designed and modified to meet the particular needs of each
customer's applications. The Company believes that this emphasis on customer
service has resulted in repeat business for the Company.
The Company's growth to date has been financed with internally generated
funds. In order to continue its expansion, it will use the proceeds of this
Offering to acquire additional facilities and capabilities as well as to develop
for its customers a closed-loop recycling system so that worn out products are
recycled and remanufactured for the customer, addressing the concerns in the
mineral processing and other industries about future landfill/disposal costs.
The Company was incorporated as a Minnesota corporation on March 5, 1986,
as Industrial Rubber Applicators, Inc., and on January 30, 1998, changed its
name to Industrial Rubber Products, Inc. The Company's executive offices are
located at 3804 E. 13th Avenue, Hibbing, MN 55746, and its telephone number is
(218) 263-8831.
THE OFFERING
Common Stock Offered........... 1,400,000 shares
Common Stock to be outstanding
after this Offering........... 4,334,000 shares
Use of Proceeds................ Acquisition of production and processing
equipment or facilities, establishment of
satellite production and distribution
facilities, repayment of short-term bank loan,
working capital and general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq SmallCap
Market Symbol.................. INRB
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SUMMARY FINANCIAL DATA
The following table sets forth the summary financial data for the Company
for the periods indicated. This information should be read in conjunction with
the Financial Statements and related Notes appearing elsewhere herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The summary financial data as of and for the year ended December
31, 1995 have been derived from unaudited financial statements (not included in
this Prospectus), which, in the opinion of the Company, reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation. The summary financial data as of and for the years ended December
31, 1996 and 1997 have been derived from the Company's financial statements
which have been audited by McGladrey & Pullen, LLP, independent auditors, as
indicated in their report included elsewhere herein.
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YEAR ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997
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(UNAUDITED)
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STATEMENTS OF INCOME DATA:
Net sales ................................... $3,646,316 $6,309,775 $ 14,421,359
Gross profit ................................ 944,634 1,533,141 4,473,489
Operating expense ........................... 701,202 1,122,968 1,664,611
---------- ---------- ------------
Operating income ............................ 243,432 410,173 2,808,878
---------- ---------- ------------
Net income .................................. $ 188,490 $ 319,785 $ 2,701,767
========== ========== ============
PRO FORMA STATEMENTS OF INCOME DATA(1)
Income before income taxes .................. $ 2,701,767
Provision for income taxes .................. 1,038,000
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Net income .................................. $ 1,663,767
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Basic earnings per share .................... $ 0.54
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Weighted average shares outstanding ......... 3,087,600
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DECEMBER 31,
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ACTUAL PRO FORMA AS ADJUSTED
1997 1997(2) 1997(2)(3)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Current Assets ............... $3,308,711 $3,308,711 $ 8,643,711
Total Assets ................. 4,949,584 4,949,584 10,284,584
Current Liabilities .......... 2,534,680 3,334,680 2,534,680
Long-term Debt ............... 171,095 171,095 171,095
Stockholder's Equity ......... 2,243,809 1,443,809 7,578,809
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(1) The pro forma statements of income data reflect the effects on the
historical 1997 statement of income as if the Company had not been treated
as an S Corporation for income tax purposes. See "Dividend Policy and S
Corporation Status" and Note 7 of Notes to Financial Statements. The
weighted average number of shares outstanding have been adjusted to reflect
a stock split. Pro forma weighted average shares outstanding also assumes
the issuance of sufficient shares at $5.00 per share to provide net
proceeds, after estimated aggregate offering expenses and underwriting
discount, to repay $675,000 from the Offering proceeds of short-term bank
debt incurred to make an S Corporation distribution to the existing
shareholder. See Note 6 of Notes to Financial Statements.
(2) Reflects the amount of distributions payable after December 31, 1997 to the
Company's existing stockholder for the income tax liability (estimated to
approximate $800,000) resulting from the Company's earnings and status as an
S Corporation through December 31, 1997. See "Dividend Policy and S
Corporation Status," "Use of Proceeds," "Capitalization," and Note 7 of
Notes to Financial Statements.
(3) Adjusted to reflect the sale of shares of Common Stock offered by the
Company hereby at an assumed offering price of $5.00 per share and the
application of the estimated net proceeds therefrom. See "Use of
Proceeds."
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RISK FACTORS
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. THIS
PROSPECTUS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS WHICH REFLECT INDUSTRIAL
RUBBER'S PLANS, ESTIMATES AND BELIEFS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE DISCUSSED IN THE FOLLOWING
RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS. IN EVALUATING AN INVESTMENT IN
THE COMMON STOCK, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS AND OTHER INFORMATION CONTAINED IN THIS PROSPECTUS.
LIMITED PRODUCTION FACILITIES
All of Industrial Rubber's production is performed at its facilities in
Hibbing, Minnesota, and Clearfield, Utah. At the present time the estimated
operating capacity of those facilities is sufficient to permit approximately
$17,000,000 per year in sales. The Company's 1997 sales were $14,421,359. The
Company cannot significantly expand its sales without acquiring additional
equipment and facilities and hiring additional personnel. If facilities and
equipment are not available or if there is a shortage of adequately trained
personnel, Industrial Rubber's ability to maintain or grow its revenues may be
adversely affected. If the Company's facilities are significantly damaged by
fire or other casualty, production may be substantially interrupted and such
casualty loss and business interruption would have a material adverse effect on
the Company's operations and profitability. Industrial Rubber maintains business
interruption insurance but there can be no assurance that such coverage will be
sufficient to cover the Company's losses or that the Company will be able to
regain its market share or customer base after resuming operations.
MANAGEMENT OF EXPANSION AND GROWTH
Industrial Rubber is currently experiencing a period of growth that could
place a significant strain on its management and other resources. The Company's
ability to manage its growth will require it to continue to improve its
operational, financial and management systems, and to motivate and effectively
manage its employees. If the Company's management is unable to manage growth
effectively, the quality of the Company's products, its ability to identify,
hire and retain key personnel and its results of operations could be materially
and adversely affected.
Industrial Rubber anticipates using a portion of the proceeds from this
Offering to expand its production operations both geographically and by product
line. These expansions will require a significant expenditure of time, effort
and capital by the Company. These expansions will divert the Company's key
employees from other management and sales tasks and will likely result in
decreased sales and profitability while the expansion is taking place. The
Company's operations may also be adversely affected as the Company integrates
the new locations and product lines into its current manufacturing, distribution
and sales operations and systems. There can be no assurance that Industrial
Rubber will be able to successfully and profitably achieve such integration.
Although the Company believes that the addition of locations and products will
improve the Company's ability to supply its existing customers by providing more
rapid response to customer orders, increase the volume of orders from existing
customers by supplying more of their product needs and attract new customers,
there can be no assurance that the Company will be able to generate sufficient
additional revenue to offset the expenditures incurred in connection with the
expansion. Failure to successfully integrate the satellite production and
distribution locations and product lines or to offset these additional
expenditures could have a material adverse effect on the Company's results of
operations. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Strategy for
Continued Growth."
POSSIBLE ACQUISITIONS
Although Industrial Rubber is exploring potential acquisitions, no
acquisition targets have been identified, no acquisitions are currently being
negotiated and no portion of the proceeds of the Offering has been allocated to
specific acquisitions. The Company's expansion may include the acquisition of
existing businesses, which will subject it to all of the risks inherent in
acquiring existing businesses and attempting to integrate such businesses into
the Company's existing operations, such as unknown
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liabilities and other unforeseen expenses, difficulties, complications and
delays. The evaluation of potential acquisitions will divert management
resources from the Company's regular operations and will likely result in a
temporary reduction in sales and profitability while the acquisitions are being
evaluated and made. No assurance can be given that the Company will consummate
such future business opportunities, if any, or that such business opportunities,
if consummated, will ultimately be advantageous for the Company.
DEPENDENCE ON ADDITIONAL CAPITAL
Industrial Rubber's expansion plans will require substantial capital
investment. The Company intends to pay for its expansion using cash, capital
stock, notes and/or assumption of indebtedness. Most of the proceeds from this
Offering will be required by the Company for, among other purposes,
acquisitions, establishing new locations, integrating completed acquisitions,
acquiring equipment and funding inventory, work in process and accounts
receivable. If the cash generated internally and cash available from the
Offering are not sufficient to provide the capital required for such purposes
and future operations, the Company will require additional debt and/or equity
financing in order to provide for such capital. There can be no assurance,
however, that such financing will be available on terms satisfactory to the
Company, if at all. Failure by the Company to obtain sufficient additional
capital in the future could limit the Company's ability to implement its
business strategy. Future debt financings, if available, may result in increased
interest and amortization expense, increased leverage, decreased income
available to fund further acquisitions and expansion, and may limit the
Company's ability to withstand competitive pressures and render the Company more
vulnerable to economic downturns. Future equity financings may dilute the equity
interest of existing stockholders. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON LARGE CONTRACTS
A substantial portion of Industrial Rubber's revenues are from large
project contracts, typically contracts for rubber lined tailings pipe. In 1997
one customer accounted for $8,094,517 of net sales. The companies purchasing
such products and services from the Company pursuant to large contracts vary
from year to year. There is no assurance that the Company will be able to
continue to obtain large contracts in the future. The failure to obtain such
large contracts would result in a significant decrease in the Company's sales
and income. All such large contracts have been pursuant to purchase orders
rather than long-term purchase agreements. See "Business -- Products and
Technology."
DEPENDENCE ON KEY PERSONNEL
Industrial Rubber's success depends to a significant degree upon the
continued contributions of its management, operations, sales/marketing and
technical personnel, including Daniel O. Burkes, President, Chief Executive
Officer and Treasurer, Christopher M. Liesmaki, Vice President -- Operations,
and Richard M. Radovich, Vice President -- Engineering. The Company has an
employment agreement only with Mr. Burkes. The Company maintains a key person
life insurance policy of $1,000,000 on Mr. Burkes. The Company's employment
agreement with Mr. Burkes stipulates that upon termination of employment, Mr.
Burkes will be prohibited from participating in a competing venture for a period
of two years. However, a state court may determine to not enforce or to only
partially enforce this provision. It does not maintain key person life insurance
policies on other management personnel. The Company believes that its future
success will also depend in large part on its ability to attract and retain
highly skilled managerial, technical operations and sales/marketing personnel,
who are generally in great demand. Failure to attract and retain key personnel
could have a material adverse effect on the Company's results of operations. See
"Management."
PATENTS AND OTHER PROPRIETARY RIGHTS
Industrial Rubber has patented one of its products and is developing other
products that it believes may be patentable. However, the Company can give no
assurance that further patents will be issued; that present or future patents
will be enforceable, will exclude competitors or provide competitive advantage,
and will be valid if challenged; or that competitors will not be able to design
around or develop similar products. The Company also seeks to maintain the
confidentiality of its proprietary rubber formula and
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production processes which it believes are not patentable. However, the Company
can give no assurance that its confidentiality agreements will be enforced or
that competitors could not independently develop similar formulas or processes.
See "Business -- Proprietary Rights."
PRODUCT LIABILITY AND WARRANTY CLAIMS
Since Industrial Rubber's formation in 1986, the Company has never had a
significant claim brought against it for product liability. While the Company
has never incurred significant liability for such claims, any significant
increase in claims could have an adverse impact on the Company. The Company
believes that its product liability insurance is adequate and that it also has
certain rights to indemnification from third parties. There can, however, be no
assurance that claims exceeding such coverage will not be made, that the Company
will be able to continue to obtain insurance coverage or that the Company would
be successful in obtaining indemnification from such third parties. Although the
Company from time to time provides written limited warranties to its customers,
no significant warranty claims have been received. There can, however, be no
assurance that significant warranty claims will not be received in the future.
COMPETITION
The industry that Industrial Rubber is in is competitive. The Company faces
competition from national and regional manufacturers and distributors. The
national manufacturers and distributors provide proprietary design, large
distribution networks, large scale manufacturing to reduce costs and
sophisticated quality control programs. They may also have access to greater
financial resources than the Company. While the regional manufacturers and
distributors may lack these advantages, they do provide quick delivery and
personalized service to customers allowing them to effectively compete. See
"Business -- Competition."
GOVERNMENTAL AND ENVIRONMENTAL REGULATIONS
Industrial Rubber is subject to numerous federal, state and local laws and
regulations that govern the discharge and disposal of wastes, workplace safety
and other aspects of the Company's business. The Company's operations entail the
risk of noncompliance with environmental and other government regulations.
Environmental and other legislation and regulations have changed in recent years
and the Company cannot predict what, if any, impact future changes may have on
the Company's business. Further, environmental legislation has been enacted, and
may in the future be enacted, that creates liability for past actions that were
lawful at the time taken. As in the case with manufacturing companies in
general, if damage to persons or the environment has been caused, or is in the
future caused, by the Company's use of hazardous solvents or by hazardous
substances located at the Company's facilities, the Company may be fined or held
liable for the cost of remediating such damage. Imposition of such fines or the
incurrence of such liability may have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Governmental and Environmental Regulation."
BUSINESS CYCLES
The demand for Industrial Rubber's products within any market segment that
it serves is tied to the production levels of that market segment. For example,
decreases in the price of copper will result in decreased copper mining activity
and a decreased need for the Company's products. These business cycles could
result in significant yearly fluctuations in financial results. See "Business --
Markets."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Industrial Rubber may experience variability in its sales and net income on
a quarterly basis as a result of many factors, including: changes in world
commodity prices for processed minerals which affect its customers' usage of its
products; labor stoppages at its customers' facilities; changes in its raw
materials costs; and delays or accelerations of its customers' capital spending
programs. If revenues do not meet expectations in any given quarter and the
Company is unable to adjust spending in a timely manner, operating results may
be materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Sales and
Marketing."
7
<PAGE>
CONTROL BY MANAGEMENT
Upon completion of this Offering, the Company's President will own
approximately 67.7% of the issued and outstanding shares of Common Stock. As a
result of such ownership, he will have the ability to elect or remove all
members of the Board of Directors and thereby control the Company and will have
the power to approve actions requiring shareholder approval. Such a level of
ownership can delay, defer or prevent a change in control of the Company and can
adversely affect the voting and other rights of the other holders of Common
Stock. See "Principal Shareholders."
NO PRIOR PUBLIC MARKET
Prior to this Offering, there has been no public market for the Company's
Common Stock. There can be no assurance that an active trading market for the
Common Stock will develop or be sustained after this Offering.
DETERMINATION OF OFFERING PRICE
The initial public offering price for the Shares has been determined by
negotiation between the Company and the Underwriter. Such price bears no
relationship to the book value of the Company and may bear no relationship to
the market price of the Shares subsequent to this Offering. See "Underwriting."
POSSIBLE VOLATILITY OF STOCK PRICE
The stock market has from time to time experienced significant price and
volume fluctuations that may be related or unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. In addition,
the market price of the shares of Common Stock of the Company may be highly
volatile. Factors such as a small market float, fluctuations in the Company's
operating results, failure to meet analysts' expectations, announcements of
major contracts by the Company or its competitors, developments with respect to
the Company's major markets, changes in stock market analyst recommendations
regarding the Company, its competitors or the industry generally, and general
market conditions may have a significant effect on the market price of the
Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of Common Stock in the public market following this Offering could
adversely affect prevailing market prices. The existing shareholder has agreed
with the Underwriter not to sell or otherwise dispose of any shares or rights
to purchase shares of Common Stock beneficially held by him for 12 months from
the date of this Prospectus without the prior written consent of the
Underwriter. Upon expiration of this period, the 2,934,000 shares of Common
Stock held by the existing shareholder will be eligible for sale in the public
market subject to compliance with the volume limitations of Rule 144. Additional
shares of Common Stock, including shares issuable upon exercise of options, will
become eligible for sale in the public market from time to time in the future
and significant quantities of shares could become eligible if the Company makes
acquisitions of existing businesses with its stock. See "Description of
Securities," "Shares Eligible for Future Sale" and "Underwriting."
UNDESIGNATED STOCK -- POSSIBLE PREFERENCES
The Company's authorized capital consists of 25,000,000 shares of capital
stock of which 19,916,000 shares are undesignated shares. The Board of Directors
is authorized to designate and issue these undesignated shares in such classes
or series (including classes or series of preferred stock) as it deems
appropriate and to establish the rights and privileges of such shares, including
terms with respect to dividends, liquidation, redemption, sinking fund,
preemptive, conversion and voting rights and preferences. Accordingly, the Board
of Directors, without shareholder approval, may issue preferred stock with
terms (including terms with respect to dividends, liquidation, redemption,
sinking fund, preemptive, conversion and voting rights and preferences) that
could adversely affect the voting power and other rights of holders of the
Common Stock. No shares of preferred stock or any other class of common stock
are currently designated and there is no current plan to designate or issue any
such securities. The rights of holders of preferred stock and other classes of
common stock that may be issued may be superior to
8
<PAGE>
the rights granted to the holders of the Shares. Further, the ability of the
Board of Directors to designate and issue such undesignated shares could impede
or deter an unsolicited tender offer, takeover proposal or change of control
regarding the Company. See "Description of Securities."
DILUTION
Purchasers of Shares in this Offering will experience an immediate
substantial decline in net tangible book value per share of their Shares equal
to $3.07 (a 61.4% decline from the purchase price). See "Dilution."
NO DIVIDENDS
While the Company has historically operated as an S Corporation and has
distributed a portion of previously taxed earnings, it has not paid dividends on
its Common Stock. Other than S Corporation distributions to be paid as described
in this Prospectus, the Company does not anticipate paying dividends in the
foreseeable future. The Company intends to use retained earnings to fund its
future growth. See "Dividend Policy and S Corporation Status."
ANTI-TAKEOVER LAWS
Certain provisions of the Minnesota Business Corporation Act may have the
effect of delaying or preventing a change in control or merger of the Company,
which could operate to the detriment of the shareholders. See "Description of
Securities."
S CORPORATION DISTRIBUTIONS FROM OFFERING PROCEEDS
The Company has made distributions to its existing shareholder to enable
him to pay income taxes on the Company's earnings through December 31, 1997, due
to the Company's status as an S Corporation under Subchapter S of the Internal
Revenue Code of 1986, as amended, and comparable state tax laws. Approximately
$675,000 of the proceeds of this Offering will be used to repay a short-term
bank loan made to the Company on March 25, 1998, the proceeds of which were used
for an S Corporation distribution to the existing shareholder to enable him to
pay such income taxes. In addition, the Company expects to make a distribution
out of the proceeds of this Offering allocated to working capital to its
existing shareholder to enable him to pay income taxes on the Company's earnings
during the period January 1, 1998, through March 31, 1998, the date of the
termination of the Company's S Corporation status; no estimate is available as
to the amount of such distribution with respect to earnings for the period
ending March 31, 1998. Management believes that the S Corporation distributions
to the existing shareholder for purposes of paying income taxes on the Company's
earnings from January 1, 1998 through March 31, 1998, will be approximately
equal to the income taxes the Company would have paid itself had it not been an
S Corporation. See "Dividend Policy and S Corporation Status" and "Use of
Proceeds."
APPLICABILITY OF "PENNY STOCK RULES"
Federal regulations under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), regulate the trading of so-called "penny stocks" (the
"Penny Stock Rules"), which are generally defined as any security not listed on
a national securities exchange or Nasdaq, priced at less than $5.00 per share
and offered by an issuer with limited net tangible assets and revenues. In
addition, equity securities listed on Nasdaq which are priced at less than $5.00
per share are deemed penny stocks for the limited purpose of Section 15(b)(6) of
the Exchange Act, which makes it unlawful for any broker-dealer to participate
in a distribution of any penny stock without the consent of the Securities and
Exchange Commission if, in the exercise of reasonable care, the broker-dealer is
aware of or should have been aware of the participation of previously sanctioned
person. Therefore, if, during the time in which the Common Stock is quoted on
the Nasdaq SmallCap Market, the Common Stock is priced below $5.00 per share,
trading of the Common Stock will be subject to the provisions of Section
15(b)(6) of the Exchange Act. In such event, it may be more difficult for the
broker-dealer to sell the Common Stock and purchasers of the Shares offered
hereby may have difficulty in selling their Shares in the future in the
secondary market.
In the event that the Company's Common Stock is delisted from the Nasdaq
SmallCap Market and the Company fails other relevant criteria, resulting in the
Common Stock being considered penny stock,
9
<PAGE>
trading, if any, of the Common Stock would be subject to the full range of Penny
Stock Rules. Accordingly, delisting from the Nasdaq SmallCap Market and the
application of the comprehensive Penny Stock Rules may make it more difficult
for broker-dealers to sell the Company's Common Stock and purchasers of the
Shares offered hereby may have difficulty in selling their Shares in the future
in the secondary market.
USE OF PROCEEDS
The net proceeds to Industrial Rubber from the sale of the 1,400,000 Shares
of Common Stock offered to the public hereby at the Price to Public of $5.00 per
share are estimated to be $6,135,000 ($7,106,250 if the Underwriter's
overallotment option is exercised in full) after deducting the underwriting
discount and estimated offering expenses payable by the Company. The Company
currently intends to apply these proceeds approximately as follows:
<TABLE>
<S> <C>
Steel and iron casting, fabricating and machining capability ........ $1,500,000
Rubber recycling, mixing, molding and calendaring capability ........ 1,500,000
Satellite production and distribution facilities .................... 850,000
Product, process and marketing development .......................... 850,000
Repayment of short-term bank loan ................................... 675,000
Working capital and general corporate purposes ...................... 760,000
----------
Total .............................................................. $6,135,000
==========
</TABLE>
With approximately $1,500,000 of the proceeds of this Offering, Industrial
Rubber plans to purchase a facility or otherwise develop the capacity to sell
and distribute steel and iron products. Approximately $1,500,000 of the proceeds
are intended to be used to purchase a facility or otherwise develop the capacity
for recycling, mixing, molding and calendaring rubber. Approximately $850,000
will be used to acquire existing businesses or to purchase equipment and obtain
facilities for satellite production and distribution. Approximately $850,000
will be used to fund additional development of proprietary engineered products,
improved rubber formulas and production processes and marketing and sales
activities. Approximately $675,000 will be used to repay a bank loan to the
Company, the proceeds of which will be used for an S Corporation distribution to
the existing shareholder to enable him to pay income taxes resulting from the
Company's earnings through December 31, 1997. The remainder of the proceeds will
be used for working capital and general corporate purposes, including funding
increased inventory and accounts receivables. Any additional proceeds received
upon the exercise of the overallotment option or the Underwriter's Warrant
will be used for working capital and general corporate purposes.
Since Industrial Rubber has not entered into any acquisition or material
equipment purchase agreements, there can be no assurance that it will able to
carry out its expansion plans for the amounts budgeted.
Pending utilization of the net proceeds of this Offering, the Company plans
to invest such net proceeds in short-term money market investments, including
money market funds, certificates of deposit and interest-bearing bank accounts.
The Company believes that the proceeds of this Offering, together with cash
on hand, interest expected to be earned thereon, anticipated revenues and bank
borrowings will be sufficient to fund its operations and expansion plans for at
least 12 months.
10
<PAGE>
DIVIDEND POLICY AND S CORPORATION STATUS
For the foreseeable future, Industrial Rubber expects to follow a policy of
retaining earnings in order to finance the expansion and development of its
business. Therefore, it is unlikely that any dividends will be paid to holders
of the Shares in the foreseeable future.
Since 1989, Industrial Rubber has been treated for federal income tax
purposes as an S Corporation under Subchapter S of the Internal Revenue Code of
1986, as amended, and has been treated as an S Corporation under comparable
state tax laws. As a result, the Company's earnings from such dates through the
day preceding the date of termination of the Company's S Corporation status (the
"Termination Date") have been or will be, for federal and certain state income
tax purposes, taxed directly to the Company's shareholder at his individual
federal and state income tax rate, rather than to the Company. The Termination
Date will occur on or prior to the date of closing of this Offering. After the
Termination Date, the Company will no longer be treated as an S corporation and,
accordingly, will be subject to federal and state income taxes on its earnings.
Industrial Rubber has made and will make distributions to its existing
shareholder to enable him to pay income taxes on the Company's earnings through
December 31, 1997. The Company estimates that approximately $675,000 of the
proceeds of this Offering will be used to repay a short-term bank loan in that
amount to be incurred on March 25, 1998, in connection with a distribution to
the existing shareholder with respect to the Company's earnings for the year
ended December 31, 1997. A distribution of $125,000 was made in January 1998 out
of working capital. In addition, the Company expects to make a distribution out
of working capital to its existing shareholder to enable him to pay income taxes
on the Company's earnings during the period January 1, 1998 through the
Termination Date, which is estimated to be March 31, 1998; no estimate is
available as to the amount of such distribution with respect to earnings for the
period ending March 31, 1998. The amount of such distributions with respect to
earnings of the Company will total more than the amount the Company would have
been required to pay had it been taxed as a C corporation because of the
differences between tax rates for corporations and individuals. Management
believes that the S Corporation distributions to the existing shareholder for
purposes of paying income taxes on the Company's earnings from January 1, 1998
through March 31, 1998, will be approximately equal to the income taxes the
Company would have paid itself had it not been an S Corporation. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Certain Transactions" and Note 7 of Notes to Financial
Statements.
11
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock at December 31,
1997, was $2,243,809, or $.76 per share. "Net tangible book value" represents
the tangible assets less total liabilities of the Company, and "net tangible
book value per share" was determined by dividing the net tangible book value of
the Company by the number of shares of Common Stock outstanding on December 31,
1997, after giving effect to the stock split effective January 30, 1998. See
"Capitalization." "Net tangible book value dilution" represents the difference
between the Price to Public per Share and the net tangible book value per share
after this Offering. Without taking into account any changes in the Company's
net tangible book value per share after December 31,1997, other than to give
effect to the sale of the Shares offered hereby at the Price to Public of $5.00
per Share (net of underwriting commissions and estimated Offering expenses of
$865,000), the net tangible book value of the Company at December 31, 1997,
would have been $8,378,809, or $1.93 per Share. This represents an immediate
increase in net tangible book value to the existing shareholder of $1.17 per
Share and an immediate net tangible book value dilution to purchasers of the
Shares of $3.07 per share, as illustrated by the following table:
<TABLE>
<S> <C> <C>
Price to Public per Share ........................................... $ 5.00
Net tangible book value per share at December 31, 1997 ............. $ .76
Increase per share attributable to this Offering ................... 1.17
------
Net tangible book value per share after this Offering ............... 1.93
-------
Net tangible book value dilution per Share to new investors ......... $ 3.07
=======
</TABLE>
The following table summarizes, on a pro forma basis, the difference
between the number of shares of Common Stock purchased from the Company by its
existing shareholder and by new investors in this Offering, the total
consideration paid to the Company and the average price paid per share. The
table assumes that none of the 1,400,000 Shares offered hereby are purchased in
this Offering by the existing shareholder.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION(1) AVERAGE
----------------------- ------------------------- CONSIDERATION
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing Shareholder ......... 2,934,000 67.7% $ 146,750 2.0% $ 0.05
New Investors ................ 1,400,000 32.3% 7,000,000 98.0% $ 5.00
--------- ----- ---------- -----
Total ....................... 4,334,000 100.0% $7,146,750 100.0%
========= ===== ========== =====
</TABLE>
- ------------------
(1) Does not reflect deduction of the underwriting discount or any other
expenses incurred in connection with this Offering.
12
<PAGE>
CAPITALIZATION
The following table presents the actual capitalization of the Company at
December 31, 1997. The pro forma column represents the actual balances after
giving effect to the payment of approximately $800,000 in cash distributions
subsequent to year end to the existing shareholder of the Company, reflecting
the amount of distributions paid or payable to the Company's existing
stockholder for the income tax liability resulting from the Company's earnings
and status as an S Corporation through December 31, 1997. The as adjusted column
gives effect to (i) the sale of 1,400,000 shares of common stock by the Company
in this Offering at the initial public offering price of $5.00 per share; and
(ii) reflects the reclassification of undistributed earnings of approximately
$1,079,000 applicable to the Company's S Corporation status from retained
earnings to additional paid-in capital upon the termination of the S Corporation
election.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------------- ------------- ------------
<S> <C> <C> <C>
Long-Term Debt, less current maturities ........... $ 171,095 $ 171,095 $ 171,095
Stockholder's Equity:
Common stock, $.001 par value; authorized
25,000,000 shares, issued 2,934,000 shares (as
adjusted, 4,334,000 shares outstanding) ......... 2,934 2,934 4,334
Additional paid in capital ....................... 143,816 1,222,816 7,356,416
Retained earnings ................................ 2,097,059 218,059 218,059
---------- ---------- ----------
TOTAL STOCKHOLDER'S EQUITY ...................... 2,243,809 1,443,809 7,578,809
---------- ---------- ----------
TOTAL CAPITALIZATION ............................ $2,414,904 $1,614,904 $7,749,904
========== ========== ==========
</TABLE>
13
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth the summary financial data for the Company
for the periods indicated. This information should be read in conjunction with
the Financial Statements and related Notes appearing elsewhere herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The summary financial data as of and for the year ended December
31, 1995 have been derived from unaudited financial statements (not included in
this Prospectus), which, in the opinion of the Company, reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation. The summary financial data as of and for the years ended December
31, 1996 and 1997 have been derived from the Company's financial statements
which have been audited by McGladrey & Pullen, LLP, independent public
accountants, as indicated in their report included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997
------------ ------------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Net sales ................................... $3,646,316 $6,309,775 $ 14,421,359
Cost of sales ............................... 2,701,682 4,776,634 9,947,870
Gross profit ................................ 944,634 1,533,141 4,473,489
Operating expense ........................... 701,202 1,122,968 1,664,611
---------- ---------- ------------
Operating income ............................ 243,432 410,173 2,808,878
Nonoperating expense ........................ 54,942 90,388 107,111
---------- ---------- ------------
Net income .................................. $ 188,490 $ 319,785 $ 2,701,767
========== ========== ============
PRO FORMA STATEMENTS OF INCOME DATA(1):
Income before income taxes .................. $ 2,701,767
Provision for income taxes .................. 1,038,000
------------
Net income .................................. $ 1,663,767
Basic earnings per share .................... $ 0.54
============
Weighted average shares outstanding ......... 3,087,600
============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
1995 1996 1997 1997(2) 1997(2)(3)
------------ ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current Assets ...................... $ 765,512 $1,943,747 $3,308,711 $3,308,711 $ 8,643,711
Property and Equipment, net ......... 397,975 1,275,371 1,518,093 1,518,093 1,518,093
Other Noncurrent Assets ............. 216,408 120,131 122,780 122,780 122,780
Total Assets ........................ 1,379,895 3,339,249 4,949,584 4,949,584 10,284,584
Current Liabilities ................. 742,944 2,741,941 2,534,680 3,334,680 2,534,680
Long-term Debt ...................... 112,846 240,613 171,095 171,095 171,095
Stockholder's Equity ................ 524,105 356,695 2,243,809 1,443,809 7,578,809
</TABLE>
- -----------------
(1) The pro forma statements of income data reflect the effects on the
historical 1997 statement of income as if the Company had not been treated
as an S Corporation for income tax purposes. See "Dividend Policy and S
Corporation Status" and Note 7 of Notes to Financial Statements. The
weighted average number of shares outstanding have been adjusted to reflect
a stock split. Pro forma weighted average shares outstanding also assumes
the issuance of sufficient shares at $5.00 per share to provide net
proceeds, after estimated aggregate offering expenses and underwriting
discount, to repay $675,000 from the offering proceeds of short-term bank
debt incurred to make an S Corporation distribution to the existing
shareholder. See Note 6 of Notes to Financial Statements.
(2) Reflects the amount of distributions payable after December 31, 1997 to
the Company's existing shareholder for the income tax liability (estimated
to approximate $800,000) resulting from the Company's earnings and status as
an S Corporation through December 31, 1997. See "Dividend Policy and S
Corporation Status," "Use of Proceeds," "Capitalization," and Note 7 of
Notes to Financial Statements.
(3) Adjusted to reflect the sale of shares of Common Stock offered by the
Company hereby at an assumed offering price of $5.00 per share and the
application of the estimated net proceeds therefrom. See "Use of
Proceeds."
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus. This
Prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed below, as well as those discussed elsewhere in this Prospectus.
See "Risk Factors."
GENERAL
The Company was incorporated in March of 1986 to acquire and operate a
rubber lining facility then owned by Irathane Systems Incorporated, a wholly
owned subsidiary of Illinois Tool Works, Inc., located in Hibbing, Minnesota. At
the time the acquisition was closed in April 1986, the facility had been shut
down and it had no employees.
The Company began operations in April of 1986. The Company's business
originally consisted of applying and then vulcanizing rubber (for corrosion and
abrasion resistance purposes) to wearable parts that were used primarily in the
mining industry.
Initially, the Company was taxed as a C corporation under the Internal
Revenue Code. Effective January 1, 1989, the Company elected to be taxed as an S
corporation. The Company has continued to be taxed as an S corporation until
March 31, 1998, when the Company elected C corporation status.
Until 1996, the Company operated only from the Minnesota facility. After
obtaining a major purchase order to supply pipe lining for tailing pipe to be
used at Kennecott Utah Copper, the Company opened its second production facility
in Clearfield, Utah in the second half of 1996. That facility tripled the
Company's production capacity. The Kennecott project constituted 22% of net
sales in 1996 and 56% of net sales in 1997. Sales of products from the Utah
facility comprised 22% of net sales in 1996 and 70% of net sales in 1997. It is
likely that sales of products from the Utah facility will decrease in 1998
because the Kennecott project has been substantially completed. However, based
on its current backlog and management's past experience, the Company believes
that in 1998 it will be able to replace a significant portion of the sales that
the Kennecott project generated in 1997. There can, however, be no assurance
that new purchase orders will be received or that the Company can complete
sales at the same level of profitability realized in 1997.
As discussed elsewhere in this Prospectus, sales to certain major customers
constitute a significant portion of the Company's net sales. These major
customers (each of whom accounted for 10% or more of sales) constituted 50% of
net sales in 1996 and 56% of net sales in 1997. These sales were made pursuant
to purchase orders, rather than long-term contracts.
RESULTS OF OPERATIONS
The following table sets forth certain financial data expressed as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net Sales ........................................... 100% 100% 100%
Cost of Sales ....................................... 74% 76% 69%
--- --- ---
Gross Profit ....................................... 26% 24% 31%
Selling, General and Administrative Expense ......... 19% 18% 12%
Operating Income .................................... 7% 6% 19%
Nonoperating Expenses ............................... 2% 1% --%
--- --- ----
Net Income .......................................... 5% 5% 19%
=== === ===
</TABLE>
15
<PAGE>
NET SALES. The Company's net sales increased from $3,646,316 for 1995, to
$6,309,775 for 1996 and to $14,421,359 for 1997. Of the net sales in 1997,
$8,094,517 were related to Kennecott Utah Copper pipe lining project. The
Company's order backlog on January 15, 1998 was approximately $6,300,000.
COST OF SALES. Cost of sales as a percentage of sales was 69% in 1997
compared with 76% in 1996 and 74% in 1995. The decrease in 1997 was mainly due
to achieving a higher level of profitability on a major contract and the impact
of increased volume on fixed overhead costs. As a percentage of net sales, gross
profit decreased from 26% of net sales in 1995 to 24% in 1996, before increasing
to 31% of net sales in 1997. In dollar terms, gross profit increased from
$701,202 in 1995, to $1,533,141 in 1996, to $4,473,489 in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $701,202 (19% of net sales) in 1995, to
$1,122,968 (18% of net sales) in 1996, to $1,664,611 (12% of net sales) in 1997.
The increase in actual dollar amounts was due primarily to increased staffing
expenses, which were necessary to service increased sales and increased salaries
for key personnel, reflecting their efforts to increase sales and profitability
at the Company. The drop in selling, general and administrative expenses as a
percentage of net sales in 1997 reflected the fact that the Company was able to
achieve economies of scale thereby decreasing these expenses as a percentage of
sales.
NONOPERATING INCOME AND EXPENSE. The major nonoperating expense, interest
expense, increased from $72,227 in 1995, to $90,554 in 1996, to $110,731 in
1997. Nonoperating income was not a significant factor in the Company's
operating results in 1996 and 1997.
NET INCOME. Net income (before tax) in 1997 was $2,701,767 compared to
$319,785 in 1996 and $188,490 in 1995. Net income as a percentage of net sales,
increased from 5% in 1995 and 1996 to 19% in 1997. The increase was due
primarily to the successful completion of a major pipelining contract.
INCOME TAXES. As discussed elsewhere in this Prospectus, the Company was an
S Corporation until March 31, 1998, and as such was generally not responsible
for income taxes. Instead, the existing stockholder was taxed on the Company's
taxable income. If the Company had paid income taxes as a C Corporation, its
estimated income taxes in 1995 would have been $75,400, in 1996 income taxes
would have been $145,300, and in 1997 income taxes would have been $1,038,000.
FINANCIAL POSITION
Net working capital at December 31, 1996 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1996 1997
-------------- ------------
<S> <C> <C>
Current Assets:
Cash and equivalents .......................... $ 39,261 $ 132,344
Trade Receivables ............................. 1,220,933 2,282,637
Inventories ................................... 605,133 840,363
Other ......................................... 78,420 53,367
---------- ---------
1,943,747 3,308,711
---------- ---------
Current Liabilities:
Short-term debt (including current maturities
of long term) ................................ 1,844,634 1,353,861
Accounts payable and accrued expenses ......... 897,307 1,073,994
Other ......................................... -- 106,825
---------- ---------
2,741,941 2,534,680
---------- ---------
Net Working Capital (Deficit) ................. $ (798,194) $ 774,031
========== =========
</TABLE>
16
<PAGE>
The increase in trade receivables at December 31, 1997 was primarily due to
a single major contract which was in progress at year end. The percentage of
increase (87%) followed the growth in the Company's sales. Inventories increased
from 1996 to 1997, but the percentage of increase (39%) was significantly less
than the growth in sales. The change in the level of inventory is in part
dependent upon the Company's mix of sales with some types of sales requiring the
Company to carry more inventory than others.
Short-term debt and current maturities decreased from December 31, 1996, to
December 31, 1997 primarily reflecting the payment of principal (current
maturities) on the Utah equipment loan. The Company funded its major equipment
purchases for Utah on a three-year note which will be fully paid off in August
1999. During 1997, the Company also funded other capital expenditures and
working capital needs with short term borrowings. Accounts payable and accrued
expenses increased at December 31, 1997 versus year-end 1996 mainly due to
increased sales activity.
Long-term debt at December 31, 1997 consisted of $171,095 (primarily bank
debt at 9.5%). Long-term debt decreased $69,518 from December 31,1996.
The percentage of total debt to total assets decreased from 89% at December
31, 1996 to 55% at December 31, 1997. Stockholder's equity was $2,243,809 at
December 31, 1997 compared with $356,695 at December 31, 1996.
The Statement of Cash Flows for the years ended December 1996 and 1997 is
summarized below:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
Net Income ................................................. $ 319,785 $ 2,701,767
Depreciation ............................................... 248,238 374,551
Increase in Receivables and Inventories .................... (1,194,215) (1,399,934)
Increase in Accounts Payable and Accrued Expenses .......... 598,363 176,687
Additions to Plant and Equipment ........................... (1,125,634) (617,273)
S Corporation Distributions ................................ (487,195) (711,653)
Net proceeds (repayments) of debt .......................... 1,528,401 (560,291)
Other, net ................................................. 70,036 129,229
------------ ------------
Net increase (decrease) in cash and equivalents ............ $ (42,221) $ 93,083
============ ============
</TABLE>
Net cash provided by operating activities of $1,845,624 in 1997 was
primarily used for additions to plant and equipment, for S Corporation
distributions, and to repay bank debt for plant and equipment. In 1996 operating
activities used net cash of $17,926 with increases in trade receivables and
inventories using all cash generated by operations. In 1997 net cash used in
investing activities of $587,422 was primarily used for additions to plant and
equipment. In 1996, investing activities used $1,061,857 which was also
primarily used for additions to plant and equipment and funded by bank
borrowings.
In 1997 financing activities used $1,165,119 of net cash, $711,653 being
used for S Corporation distributions to the Company's shareholder for payment of
income taxes and net pay downs on bank borrowings of $560,291. In 1996 financing
activities provided $1,037,562 of net cash most of which came from an increase
in bank borrowings of $1,528,401. Most of the cash generated by financing was
used to fund equipment purchases for the Utah facility. S Corporation
distributions of $487,195, primarily to pay income taxes, were also made in
1996.
LIQUIDITY
As disclosed elsewhere in this Prospectus, the Company has major contracts
which account for a large percentage of its sales. A delay in or failure to pay
on those contracts by those customers could seriously impact the Company's
liquidity. In addition, the Company has made a distribution to its existing
shareholder of $125,000 since December 31, 1997 and expects to make an
additional distribution of approximately $675,000 in March 1998 to allow its
existing shareholder to pay income taxes with respect to the Company's earnings
through December 31, 1997. The Company also expects to make a distribution out
of working capital after the termination of its S Corporation election to enable
its existing shareholder to pay income taxes on its earnings from January 1,
1998 through termination of the
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S Corporation election; no estimate of the amount is available as that is
dependent on earnings from January 1, 1998 to the termination date. See "Use of
Proceeds."
The Company believes that the proceeds of this Offering, cash flow from
operations, interest expected to be earned on the proceeds of this Offering
until expended and bank borrowings will be sufficient to fund operations and
expansion plans for at least 12 months. The current bank loan agreement with
Norwest Bank Minnesota North, N.A. ("Norwest Bank") provides for a $1,500,000
line of credit based on a borrowing base calculation; the full $1,500,000 had
been borrowed as of March 25, 1998. The line of credit is due upon demand, and
Norwest Bank charges interest on the outstanding balance at its prime rate.
Management anticipates that the bank loan agreement will continue through 1998
or that the Company will enter into a similar agreement with another banking
institution. The Company obtained a waiver from Norwest Bank of certain
covenants that this Offering would otherwise have violated. See "Use of
Proceeds."
In order to meet its needs beyond 12 months, the Company may be required
to raise additional capital. There can be no assurance that sufficient capital
will be available if and when required on terms acceptable to the Company, if
at all. See "Risk Factors - Dependence on Additional Capital."
YEAR 2000
The Company does not expect that the Year 2000 problem will have any
significant impact on its internal operations. The Company believes that its
bookkeeping and computer design systems can be easily modified to correct any
computer program problems that occur at the turn of the century. However, the
Company cannot predict whether it will be affected by problems that its
suppliers and customers might have with their computerized billing, shipping and
payment systems.
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BUSINESS
GENERAL
Industrial Rubber designs, produces and supplies protective materials,
abrasion resistant products and equipment, erosion/corrosion protective linings
and proprietary rubber products to the mineral processing, power, wood
processing and other heavy industries.
Industrial Rubber has increased its sales from $3,646,316 in 1995 to
$14,421,359 in 1997, and its pro forma net income from $113,090 in 1995 to
$1,663,767 in 1997. This increase in sales and earnings has been the result of
the Company obtaining and successfully completing a number of large contracts.
During that three-year period, the Company has more than tripled its production
capacity by opening a production facility in Utah.
Industrial Rubber has three product lines. Its pipe and pipe lining
products line consists of rubber lined pipe and pipe parts fabricated primarily
for the mineral processing industry. Its proprietary products are engineered
replacement parts primarily for mineral processing facilities. Its standard
rubber products are sold, along with related services, to the Company's
customers in the various industry segments served by the Company.
Industrial Rubber operates two production and distribution centers. Its
Minnesota facility (located on the Mesaba Iron Range, the heart of the taconite
mining industry) is a 30,000 square foot manufacturing facility. Proprietary and
rubber lined pipe products produced at the Minnesota facility are used by
taconite pellet producing companies and are also shipped throughout North
America for use in copper, gold, molybdenum and other mineral processing
operations. The Minnesota facility also houses the Company's corporate
headquarters and sales and technical support staffs.
In 1996, due to customer demand, a second production facility in Utah,
equipped with over $1,000,000 in specially designed processing machinery, was
opened. The Utah plant is designed to supply Industrial Rubber's piping and pipe
products. It uses the Company's proprietary erosion/corrosion protective linings
and a network of suppliers to produce and supply rubber lined pipe and pipe
products for slurry transportation and mineral handling. Due to the large size
of these products, the location of this production facility, close to the
copper, gold and molybdenum producing plants in the western United States and
Canada, is advantageous for shipping and technical support.
The Company markets its products through a direct sales force and
independent sales representatives. The Company's major customers in 1997
included Kennecott Utah Copper (copper mining), Hibbing Taconite Company, whose
majority owner is Bethlehem Steel (taconite production), Royal Oak Mining Kemess
Mine (gold mining), and Shaw -- NAPTech (power generation).
Industrial Rubber's expected growth will come through increased penetration
of the North American hard rock mining market with its present rubber products,
the development and sales of new products, sales to new mineral processing
markets outside of North America and sales of present and new products to the
power generation, paper and pulp manufacturing and other heavy industries.
INDUSTRY
The markets for the Company's products are the hard rock mineral
processing, power and coal generation, paper and pulp production, and other
similar heavy industries. Its marketing to date has focused primarily on the
mining industry.
The North American mining industry is considered heavy industry. The hard
rock that hosts important minerals (iron, copper, gold, molybdenum), is
generally blasted from the earth and then crushed and ground (processed) to
allow the extraction (benefication) of these minerals. The equipment needed to
process and beneficate this rock is subject to constant abrasion, corrosion and
erosion. Industrial Rubber has developed, designed, tested and produced rubber
products that protect the mineral processing and benefication equipment,
extending their serviceable life, and saving its customers money through
decreased replacement costs and reduced downtime. The Company's rubber products
also provide further benefits to its customers through noise abatement and dust
and dirt reductions.
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Although Industrial Rubber's products protect the mineral processing and
benefication equipment, the products do become worn and must be replaced. Many
of the Company's products are used to replace its own and other manufacturers'
protective products that have become worn.
MARKETS
North American taconite (iron ore), copper, gold and molybdenum plants are
major present customers for Industrial Rubber products. Mineral processors use
equipment to crush, grind, classify (size), separate and transport the rock,
mineral rock and wastes. This equipment is in a constant cycle of repair and
replacement due to the severe abrasion, corrosion and erosion qualities of the
material it is handling.
Industrial Rubber's first market was the Minnesota taconite industry where
taconite rock with a typical iron ore content of 25% to 30% is excavated,
crushed, ground and separated to make 46 million tons of high grade taconite
(iron ore) pellets annually.(1)
The protective products, made from steel, iron, rubber, urethane, ceramics
and plastics are a large portion of a taconite plant's cost. For instance, to
protect the nine 36 foot diameter ore grinding mills at an 8,000,000 ton per
year operation, $5,500,000 is spent annually on abrasion resistant operating
materials.(2) The taconite industry in northern Minnesota operates approximately
160 ore grinding mills, ranging from 10 foot diameters to 36 foot diameters, and
spends over $30,000,000 per year in protecting these grinding mills.(3)
Peter Kakela, a taconite industry expert from Michigan State University,
projects a long-term stable demand for taconite pellets from the Mesaba Iron
Range of Minnesota. In the United States, nine mines, seven in northern
Minnesota and two in the Michigan Upper Peninsula, accounted for 99.2% of
taconite production. In Canada, four mines in Northeast Canada accounted for 99%
of its taconite production.(4) Minnesota taconite accounts for less than 10% of
worldwide production of iron ore. Globally, the growth in iron ore demand is
projected to continue over the next ten to 15 years.(5)
In 1991, Industrial Rubber began to sell its products to other mineral
processing markets to diversify its business and minimize the effects of demand
cycles. In 1997, approximtely 70% of the Company's sales were to mineral
processing facilities other than taconite. A large proportion of those sales
related to copper production.
The U.S. and Canada rank number two and number three, respectively, in
worldwide copper production and have slated many new mine openings and expansion
projects for copper production.(6) Arizona is the number one copper producing
state.(7)
Copper ore is typically a 1% to 1.5% grade. Gold ore is considerably lower.
The waste rock slurry pine systems needed to transport this rock to large
impoundments have grown, due to environmental and practical needs. A North
American copper producer recently invested $450,000,000 in a new 3,500 acre
copper rock waster (tailings) impoundment; of this total, $40,000,000 was spent
on highly abrasive resistant, lined pipe products.(8)
Although North America is a large market for the Company's products, the
world mining industry is also large, with Chile alone operating a significant
number of grinding mills with resulting mine
- ------------------
(1) "Expectations for Minnesota's Iron Ore Industry," pg. 17, Peter Kakela,
9/19/97.
(2) Interview with a Hibbing Taconite supervisor, Joe Marturano.
(3) Industrial Rubber's 1998 taconite customer survey.
(4) "Expectations for Minnesota's Iron Ore Industry," pg. 21, Peter Kakela,
9/19/97.
(5) "Taconite Industry's Future Safe," Duluth News Tribune 10/1/97.
(6) U.S. Geological Survey, Mineral Commodity Summaries, Daniel L. Edelstein,
February 1997.
(7) ID.
(8) Interview, Robert Dunne, Tailings Modernization Manager, Kennecott Utah
Copper, June 1997.
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production of 3,000,000 metric tons.(9) Recently, the Company has begun to
expand by selling its products outside of North America. In 1997, less than 1%
of the Company's sales were shipped offshore; in 1998, the Company estimates
that this proportion will grow to approximately 20% of sales. The international
market offers potential market growth for Industrial Rubber, with most of the
actual contracts coming from North American engineering firms or their
subcontractors. The Company's standard practice is to have non-North American
purchase orders guaranteed by letter of credit.
According to AME Mineral Economics of Australia, world demand for copper is
expected to grow over the next decade. China and other developing Asian
economies are expected to increase demand significantly.(10)
STRATEGY FOR CONTINUED GROWTH
The Company's goal is to be a leading designer, producer and supplier of
protective materials for equipment in mining and mineral processing, coal and
power generation, paper and pulp and related industries on a global basis. It
seeks to achieve this goal by several methods.
INCREASED PENETRATION OF EXISTING MARKETS. The Company intends to increase
its penetration of its historic markets, specifically mineral processors and, to
a lesser extent, coal and power generators, with its present protective
materials, concentrating on slurry pipe and pipe products and engineered and
proprietary grinding mill products.
The Company is employing a variety of approaches that include a customer
identification program and need analysis, an increase in the direct sales force
and development of a network of independent representatives to serve
geographical areas that are not easily accessible to the Company's direct sales
force. The Company will seek to develop strategic business alliances with end
use customers and the engineering firms who serve them. The Company will focus
on its present relationships with large volume repeat customers.
GEOGRAPHICAL EXPANSION IN NORTH AMERICA. Industrial Rubber is planning to
increase its sales in North America by placing satellite production and
distribution facilities where justified by the local market. While the Company
has identified several potential satellite locations, the locations that
presently appear most promising are Canada and the southwestern United States,
particularly Arizona.
At the beginning of 1995, there were a total of 284 mines (excluding sand
and gravel quarries) in operation in Canada. As Natural Resources Canada has
recently stated:
"Total value of Canadian mineral production soared in 1996.
The Canadian mineral industry remains an essential and
dependable cornerstone for national economic growth and
employment. As the world's greatest exporter of minerals and
metals, Canada enjoys benefits to its economy from this
industry."
According to an article in the CANADIAN MINING JOURNAL, August 1997, "capital
spending is on the uptake and about 50 new mines are expected to open in
1997-98, creating more than 6,000 jobs in the process. Moreover, spending on
exploration is on the rise . . ." A stated goal for the Canadian government is
to ensure that much of the mining and exploration capital expenditures are spent
within the Canadian borders. This growth projection and past experience in
competing in the Canadian market, particularly in dealing with exchange rate
issues, has demonstrated to Industrial Rubber the need for a production facility
in Canada.
Another likely location for a satellite facility is Arizona. According to
the U.S. Bureau of Mines, in 1996, for the eighth time in the past nine years,
Arizona led the U.S. in total non-fuel mineral production valued at $3.5
billion. Arizona continued as the top copper-producing state, accounting for 65%
of the total U.S. copper mine production and value. There are eight major
existing copper mines in Arizona. Arizona also produces gold, silver, molybdenum
and zinc.
INTERNATIONAL SALES EXPANSION OF PRODUCTS AND TECHNOLOGIES. The Company is
planning to target a portion of its marketing efforts to international mineral
processing and power generation customers. The
- ------------------
(9) U.S. Geological Survey, Mineral Commodity Summaries, Daniel L. Edelstein,
February 1997.
(10) "Strategic Studies," AME Mineral Economics, 3/6/98.
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Company will use its engineering customer database and international
representatives to market its products outside of North America. The Company's
direct sales force will support these efforts by attending and exhibiting at
international expositions -- such as the International Mining Expo in Santiago,
Chile, and the S.M.E. Mining Expo in Orlando, Florida.
VERTICAL EXPANSION OF PRODUCTS. The Company has identified other protective
material products, including steel and iron products, that are not presently
produced by Industrial Rubber, but are used by its customers. The Company's
growth strategy seeks to supply these products to its customers either through
the acquisition of appropriate production facilities or through developing
strategic relationships with the manufacturers of these products. This would
allow the Company to supply its customers with a full line of protective
products eliminating the disadvantage to the customers of acquiring components
from multiple suppliers. Customers should further benefit by having a single
source for the design and testing of protective product improvements.
INTEGRATION OF RAW MATERIALS SUPPLY. The Company currently purchases its
rubber from multiple suppliers that manufacture to the Company's specifications
and formulas. The Company plans to either purchase a raw material supplier or
purchase the equipment to process natural and synthetic rubber using the
Company's formulas and calendared forms. This integration is expected to reduce
production costs and expand potential markets by providing the capability to
develop new formulas internally. Management believes that the direct control of
raw material quality and research and development in the mixing and calendaring
process should enhance the product performance of the Company's products for its
customers. By strategically locating the raw material processing operation,
transportation costs can be reduced.
ENVIRONMENTAL SOLUTIONS FOR ITS CUSTOMERS. Recent studies in Minnesota and
Michigan have demonstrated that there is a concern regarding the environmental
considerations both for present disposal costs and future liabilities arising
from landfill disposal of steel, rubber, urethane and other worn out products.
At the present time, grinding mill parts, pump parts, classification screens,
pipe products and other benefication equipment protective parts made of rubber,
steel and urethane, are disposed of after usable life, normally through a
landfill method. The Company's planned closed-loop recycling program would allow
its customers to return these used equipment products to the Company. The
Company will remove the elastomeric compounds, and through cryogenic technology
and the Company's and others' proprietary material enhancement processes,
produce recycled raw materials to be used in manufacturing molded rubber
protective parts for repurchase.
Industrial Rubber plans to incorporate a closed-loop recycling program into
its marketing strategies for all products and locations. A further benefit of
the "closed-loop" recycling process and re-manufacturing raw materials should be
to reduce the Company's dependency on natural rubber.
PRODUCTS AND TECHNOLOGY
The Company has three product lines: pipe and pipe lining products,
proprietary and engineered products and standard rubber products.
PIPE AND PIPE LINING PRODUCTS. Industrial Rubber produces and supplies
rubber and steel slurry pipe and components for tailings pipeline systems. A
proprietary formulated rubber compound (I.R.P. X8220) is used which protects
these pipelines from abrasion and corrosion. This proprietary compound has
increased pipeline life expectancy by 50% in one North American taconite plant.
A taconite plant has advised Industrial Rubber that its operational evaluation
has demonstrated that unprotected steel tailing pipe has a service life of
20,000 hours, while similar pipe lined with Industrial Rubber's proprietary
compound X8220 has a service life of 40,000 hours. The Company's proprietary
compound X8220 has been used in 600,000 feet of slurry transportation pipe
products for 12 mineral processing plants. Since its development it has
demonstrated its ability to extend service life and protect expensive tailings
impoundment systems from corrosion and abrasive wear.
In 1996, the Company designed and developed new processes and equipment
that decreased the cost and improved the overall product quality of overland
slurry pipelines. Mechanical couplings, historically used in connecting lined
pipe for long distance overland slurry systems, are typically high cost items to
the customer. This is particularly true in high pressure, large diameter
pipelines. The Company
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believes that prior to 1996, industry standards and equipment limitations only
allowed for the production of 40' long pipe sections. Industrial Rubber has
designed its own production equipment, and presently supplies to its customers
60' pipe sections, eliminating one third of the required mechanical couplings,
and resulting in cost savings to the customers.
The Company used this technology in lining 120,000 linear feet of pipe for
the abrasive slurry transportation system of the Kennecott Utah Copper
Corporation at its $450,000,000 tailings impoundment modernization project in
Utah. Since 1996, three other major slurry transportation system products have
been ordered from Industrial Rubber:
1997 B & K Steel 8,200' 48" diameter pipe (completed)
1998 Royal Oak Kemess 47,000' 26" diameter pipe (completed)
1998 Newmont/Batu Haiju 21,000' 44" diameter pipe (ordered)
The Company believes that the development of 60' lined pipe has set the
standard for the industry. Industrial Rubber is continuing development efforts
to eliminate mechanical couplings in rubber lined pipe products for overland
slurry transportation systems.
In 1996, Industrial Rubber and its suppliers developed 1" thick calendared
rubber, the first in the industry to meet engineered specifications for an
abrasive slurry material. This rubber product doubled the expected service life
of industry standard 1/2" calendared rubber in slurry transport, and is
projected to result in cost savings for customers by reducing replacement cost.
Industrial Rubber's pipe product line includes large overland slurry system
pipe products and products as small as 2" in diameter. The Company can produce
rubber lined pipe from 2" to 72" in diameter, from 1" to 60' long, and with
calendared linings from 1/8" to 1" thick. It can provide all fittings, tees,
Y's, manifolds and other piping components typically used in mineral processing
and power generation facilities.
PROPRIETARY AND ENGINEERED PRODUCTS. Industrial Rubber's proprietary and
engineered products line includes engineered grinding mill parts. Examples of
such products are air bags, lifter bars and shell liners. The hard host rock
that contains minerals must be ground to small fragmented product size, using
large grinding mills. The wearable parts that protect these grinding mills have
a relatively short service life. They have been typically made of heavy iron
castings.
Industrial Rubber believes that its patented rubber grinding mill
discharger reduces weight, matches or increases service life and provides
improved fit when compared to other dischargers. A North American
mineral-processing plant has informed the Company that by using the Industrial
Rubber patented grinding mill dischargers, it has reduced grinding costs by
increasing production and decreasing energy costs per ton ground. The patented
grinding mill discharger is being used at two taconite, one molybdenum and three
copper mines, operating in 17 grinding mills. Grinding mill dischargers and
other grinding mill products are being designed for five additional mining
properties.
STANDARD RUBBER PRODUCTS. The Company's standard rubber products range in
weight from less than one pound to over 10,000 pounds, with costs ranging from
$20 to $20,000 for individual parts. Examples of such products are manifolds,
screens, pulleys and rolls. All products are made to customer engineered
specifications. The Company's Quality Assurance Program seeks to insure product
conformity while limiting defects and reducing associated value added costs. The
Company, responding to the needs of international markets, has begun
preparations to qualify under an ISO 9000 program.
RESEARCH AND DEVELOPMENT. The Company has not incurred significant research
and development costs, although it has incurred certain such costs on a
job-by-job basis which are expensed as incurred. Management anticipates that
research and development efforts will increase in the future.
RAW MATERIALS AND SUPPLIES. The Company obtains most of the rubber used to
treat or line its pipe products and to manufacture its standard rubber products
from Bedell-Kraus and Dyna-Mix. The Company obtains pipe from Piping Machine
Specialties, Naylor Pipe, Thrall Distributors and NAPTech, Inc. The Company
obtains pipe parts and other metal products from Furin & Shea and Vidmar Iron
Works. The Company anticipates that it will continue to obtain these materials
from these suppliers, but other sources are available for all such materials.
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SALES AND MARKETING
Industrial Rubber markets and sells its products to hard rock mineral
processing companies, power plants and other heavy industrial companies whose
process equipment is subject to abrasion and corrosion.
The Company presently has a sales force comprised of a sales and marketing
manager, four direct salespeople, a sales clerk, a marketing and public
relations clerk, two independent sales representative companies that employ five
direct salespeople and a marketing consultant. The Company plans to grow its
number of direct salespeople and is in the process of establishing independent
sales representation in certain national and international markets.
Industrial Rubber's marketing strategy is to maximize penetration of
domestic markets, including mineral processors and coal and power generating
facilities, with its present products. The Company intends to expand its product
lines and new products will be cross-sold to existing and new customers.
The marketing plan includes prospective customer identification, customer
needs analysis and increased and strategic placement of the sales force, to
facilitate geographic market and product expansion. The marketing plan will be
implemented in the U.S. and Canadian markets and, when appropriate,
internationally. The Company intends to develop business partnerships with
existing customers and the engineering firms that serve them.
Chile, Peru, Brazil, Argentina, Mexico and Australia are major mineral
processing countries, as are certain Southeast Asian countries. The Company will
direct its efforts to penetrate these markets by adding direct sales people,
adding independent representatives and forming strategic alliances with original
equipment manufacturers in these markets.
Industrial Rubber utilizes general and product specific brochures and sales
literature. Video is used as an additional marketing resource. Advertising and
articles in industry trade magazines, journals, newsletters and papers will be
increased. Tradeshow attendance and participation is expected to become a larger
part of the marketing effort. The Company's management is meeting with
international marketing consultants in preparation for international sales.
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From the grinding of the ore to the disposal of the waste rock (tailings)
in taconite, copper, gold and molybdenum processing plants, Industrial Rubber's
markets include products to protect the following equipment:
TRANSPORTATION CRUSHING GRINDING
- -------------- -------- --------
Thickeners Chutes Mill Liners
Feed Wells Dust Collection Systems Pulp Lifters
Shrouds Pulleys Trommel Screens
Pulleys Skirt Boards Bucket Wheels
Skirt Boards Repair Coatings Dust Collection Systems
Repair Coatings Process Piping Return Tubes
Process Piping Valves Pulleys
Valves Skirt Boards
Repair Coatings
Process Piping
Valves
SEPARATION SLURRY TRANSPORTATION CLASSIFICATION
- ---------- --------------------- --------------
Sumps Plumes Launders
Cyclones Pipe Dust Collection Systems
Tanks Elbows Pump Parts
Dust Collection Systems Sumps Screens
Launders Launders Repair Coatings
Clarifiers Clarifiers Process Piping
Pump Parts Pump Parts Valves
Thickeners Thickeners
Feed Wells Feed Wells
Shrouds Shrouds
Agitator Shafts Repair Coatings
Filter Tanks Process Piping
Pipe Elbows Valves
Coatings
Screens
Hydro Separators
Mag. Separators
Flot. Cell Separators
Process Piping
Valves
The Company has current market, customer and competition research underway,
evaluating the markets in which its current customers are found and other
potential markets. For example, materials transportation using slurry methods is
continuing to grow for mineral processing, power generation and tar (oil) sands
operations. Other markets include both hard and soft rock mining, processing and
benefication and other industries with abrasion and corrosive issues, such as:
* Coal
* Rock Aggregate
* Sand & Gravel
* Wood Processing
* Agriculture, Food & Grain
* Power Generation
* Railroad
* Industrial Controls & Environmental
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BACKLOG
The Company's order backlog on January 15, 1998, was approximately
$6,300,000. All the Company's sales are made through purchase orders. The
Company currently anticipates that it will have filled all current backlog
orders by the end of the first half of 1998. For factors that might affect the
Company's ability to fill its orders, see "Risk Factors."
COMPETITION
The protective material products business that serves the mineral
processing and power generation industries is competitive. These protective
material products are made of steel, iron, rubber, urethane, ceramics, plastics
and hybrids of these materials. The Company's competitors fabricate, cast, mold,
shape, machine, and form the material into finished products. Both large and
small companies throughout the world compete on price and by adding value to
their products through fit and function, using physical design, chemical or
physical make up or proprietary data (patents). The competition falls into two
categories.
The first category is the regional manufacturer/supplier that services the
mineral processing and power generation properties that are close to its
production facility. Standard rubber liners, urethane castors and metal
fabricators typically fall within this category. They use personalized service
and quick delivery as an advantage to their regional customers.
The second category is national manufacturers of products that are used by
a large number of mineral processing and power generating plants. Rubber
molders, cast iron and metal makers, ceramic manufacturers and original
equipment manufacturers typically fall into this category. They use proprietary
design, large distribution networks and high volume to reduce manufacturing
costs. Sophisticated quality programs, managed inventories and just-in-time
deliveries are advantages to their customers, and their size provides them with
access to greater financial and other resources.
The Company believes that regional manufacturer/supplier R. Wales & Sons
and national manufacturer/suppliers Rubber Engineering, Illinois Tool Works,
Linatex and Svedala represent the Company's main sources of competition and each
such competitor has greater resources than the Company.
The Company believes that it can successfully compete with companies in
both categories, through focused service to customers located near its Minnesota
and Utah facilities and through its ability to provide quality products in
increasingly large quantities to customers located in geographically distant
areas. The Company also believes that the satellite facilities that it may
establish will increase its ability to compete in geographically distant
markets.
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
Industrial Rubber is subject to a wide variety of governmental regulations,
with which it actively seeks to comply. As a manufacturing company, Industrial
Rubber is subject to safety regulation by the United States Department of Labor
and the Minnesota Department of Labor and Industry under the Occupational Safety
and Health Act ("OSHA"). Because its products are sold to the mining industry,
workplace safety at the Company is also subject to regulation by the Mine Safety
and Health Administration. The Company's operations are continually being
monitored and inspected. As new standards develop, the Company could be placed
in a situation of having to modify its production processes to comply with
changing regulations.
The Company uses hazardous solvents in its production processes and
disposes of waste products such as used solvents. These and other activities of
the Company are subject to various federal, state and local laws and regulations
governing the generation, handling, storage, transportation, treatment and
disposal of hazardous wastes. Under such laws, an owner or lessee of real estate
may be liable for, among other things, (i) the costs of removal or remediation
of certain hazardous or toxic substances located on, in or emanating from, such
property, as well as related costs of investigation and property damage and
substantial penalties for violations of such laws, and (ii) environmental
contamination at facilities where its waste is or has been disposed. Such laws
often impose such liability without regard to whether the owner or lessee knows
of, or was responsible for, the presence of such hazardous or toxic substances.
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While the Company's operations, to its best knowledge, are in full compliance
with all existing laws and regulations, environmental legislation and
regulations have changed rapidly in recent years and the Company cannot predict
what, if any, impact future changes in such legislation may have on the
Company's business. Further, environmental legislation has been enacted, and may
in the future be enacted, that creates liability for past actions that were
lawful at the time taken. As in the case with manufacturing companies in
general, if damage to persons or the environment has been caused, or is in the
future caused, by the Company's use of hazardous solvents or by hazardous
substances located at the Company's facilities, the Company may be fined or held
liable for the cost of remediating such damage. Imposition of such fines or the
incurrence of such liability may have a material adverse effect on the Company's
business, financial condition and results of operations. Further, changes in
environmental regulations in the future may require the Company to make
significant capital expenditures to change methods of disposal of hazardous
solvents or otherwise alter aspects of its operations.
The United States Environmental Production Agency ("EPA") in its October
1992 Preliminary Assessment of the Company's Minnesota facility reported that
the Company's predecessor had a 5,000 square foot unlined outdoor waste drum
storage area between 1967 and 1981. The EPA's assessment revealed no documented
releases from this area. During 1997, the Minnesota Pollution Control Agency
("MPCA") notified the Company that it will be required to complete an initial
investigation of possible soil contamination caused by the previous owner of the
Minnesota facility. The Company received a proposal from an environmental
consultant to perform the investigation requested by the MPCA and has accrued
the estimated $10,000 cost of the study. The environmental study has not been
completed to determine if a release of hazardous material has occurred; however,
management believes the cost of a cleanup, if any, will not be material because
visual inspection of the surface area reveals no evidence of contamination and
the area in which contamination could have occurred is small.
During February 1998, the Company received OSHA reports addressing a number
of deficiencies found by inspectors in the Company's production facilities, and
assessing fines against the Company totalling $7,950. Management believes that
neither the cost of correcting the alleged deficiencies nor the payment of any
fines will have a material effect on the operations of the Company. The Company
intends to participate with OSHA in a program to limit or correct future
deficiencies before fines are assessed.
PROPRIETARY RIGHTS
The Company currently holds one patent for a Discharge Millhead. The patent
on the Discharge Millhead will terminate on April 7, 2013. The Company is
developing additional potentially patentable products, including rubber
compounds, grinding mill parts, screens and cyclone products and pipe coupling
products and closed loop material handling services. Since many of the Company's
developments are extensions of existing knowledge, no assurance can be given
that patents for either the products or processes being developed will be
issued, that the scope of any patent protection will exclude competitors or
provide competitive advantages to the Company, that any of the Company's patents
will be held valid if subsequently challenged or that others will not claim
rights in or ownership to the patents and other proprietary rights held by the
Company. Further, there can be no assurance competitors have not developed or
will not develop similar products, duplicate the Company's products or, if
patents are issued to the Company, design around such patents. In addition,
whether or not patents are issued, others may hold or receive patents which
contain claims having a scope that covers products developed by the Company.
Industrial Rubber's proprietary rubber formula is not patentable. While the
Company obtains confidentiality agreements from its suppliers and its key
employees, competitors could independently develop the formula. Further,
litigation to protect either patents or trade secrets, enforce patents issued to
the Company, to protect trade secrets or know-how owned by the Company, and to
defend the Company against claimed infringement may be necessary.
EMPLOYEES
As of February 20, 1998, Industrial Rubber had 95 employees, all of whom
were full-time; 60 were in Minnesota and 35 were in Utah, of whom 76 were in
production, seven in sales, two in engineering and design, and ten in executive,
administrative and clerical positions. The Company believes that its relations
with its employees are excellent, demonstrated by a low turnover rate. The
Minnesota production employees are covered by a collective bargaining agreement
with the United Steel Workers
27
<PAGE>
of America, Local No. 6860-1, which terminates on April 1, 2000. There is no
union affiliation at the Utah facility. The Company believes that the
representation of the Minnesota production employees by the Union acts to remove
a potential barrier to the sale of certain of the Company's products to the
taconite mining plants by responding to union contract language that limits
out-sourcing of work.
FACILITIES
The Company owns a 30,000 square foot facility on four acres of land in the
Hibbing Industrial Park, Hibbing, Minnesota. Newly renovated corporate office
space occupies approximately 4,000 square feet of this facility, with the
remainder dedicated to manufacturing space. Portions of the eight acres of land
are used for receiving, storage and sandblasting activities.
The Company leases a 60,000 square foot facility and a nearby lot in
Clearfield, Utah. The current lease agreement runs through July 31, 1998, and
the Company has options to renew the lease through July 31, 2001. Approximately
58,000 square feet of the facility are used for manufacturing and approximately
2,000 square feet are used for office space. The nearby lot is used for
receiving and storage.
The facility located in Hibbing, Minnesota, was originally constructed in
1968, and the facility located in Clearfield, Utah, was constructed in the early
1940's. The Company believes that both facilities are in satisfactory condition.
LEGAL PROCEEDINGS
The Company has been involved from time to time in various legal
proceedings arising in the ordinary course of business. There are no pending or
threatened proceedings at this time.
28
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------- --- ---------------------------------------------
<S> <C> <C>
Daniel O. Burkes 45 President, Chief Executive Officer, Treasurer
and Director
Nancy J. Burkes 42 Vice President, Secretary, and Director
Christopher M. Liesmaki 40 Vice President -- Operations
Richard M. Radovich 54 Vice President -- Engineering
James A. Skalski 29 Controller
</TABLE>
All directors hold office until the next annual meeting of shareholders or
until their successors have been duly elected and qualified. Executive officers
of the Company are elected by and serve at the discretion of the Board of
Directors. Within 90 days of the completion of this Offering, it is anticipated
that Nancy J. Burkes will resign as a director and the Board of Directors will
be increased to five directors of which three will be outside directors. The
Board will establish an Audit Committee, which will review the results and scope
of the audit and other services provided by the Company's independent public
accountants.
DANIEL O. BURKES has been President, Chief Executive Officer and Treasurer
and a member of the Board of Directors of the Company since he founded it in
1986. He began working in 1975 in the rubber industry and from 1977 until 1986
he was the Sales and Marketing Director of Irathane Systems Incorporated, a
wholly owned subsidiary of Illinois Tool Works, Inc.
NANCY J. BURKES has been a Director, Vice President and Secretary of the
Company since its founding in 1986. Mrs. Burkes is married to Daniel O. Burkes,
and as indicated above will be resigning as a Director within 90 days after the
Offering.
CHRISTOPHER M. LIESMAKI has been with the Company since 1988 and currently
serves as the Company's Vice President -- Operations. He has previously held
the positions of Sales Engineer, Quality Assurance Coordinator, Sales and
Marketing Manager and General Manager. Prior to coming to the Company, Mr.
Liesmaki was a Materials Quality Engineer with Control Data Corporation for
eight years. Mr. Liesmaki is married to a sister of Nancy J. Burkes.
RICHARD M. RADOVICH has been with the Company since 1991 and serves as
Vice President -- Engineering. Mr. Radovich is also General Manager of Nelson
Roofing Company (see "Certain Transactions"). From 1985 to 1991 he was the
General Manager and a Product Engineering Estimator of Irathane Systems
Incorporated. Prior to 1985 he worked for 12 years as a Design Engineer with
Abe W. Mathews Engineering Company.
JAMES A. SKALSKI has been with the Company since 1997, and serves as the
Company's Controller. Mr. Skalski is a Certified Public Accountant. Before
joining the Company, Mr. Skalski taught accounting and computer courses at
Mesabi Range Technical College from 1995 to 1997, was controller of Viking
Supply from 1993 to 1994 and was an accounting employee at Irathane Systems
Incorporated in 1992.
SUMMARY COMPENSATION
The following table sets forth certain information regarding compensation
earned or awarded to the President and Chief Executive Officer and each
executive officer of the Company who received annual salary and bonus
compensation in excess of $100,000 for 1997 (the "Named Executive Officer").
29
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1)
- ------------------------------- ------ ----------- ----------
<S> <C> <C> <C>
Daniel O. Burkes, 1997 $255,216 --
President, Chief Executive
Officer and Treasurer
Christopher M. Liesmaki, 1997 $ 70,122 $78,000
Vice President -- Operations
Richard M. Radovich, 1997 $ 64,320 $50,000
Vice President -- Engineering
</TABLE>
- ------------------
(1) Bonus amounts are determined according to the discretion of the Company's
Board of Directors and are not determined according to any fixed formula.
EMPLOYMENT AGREEMENT
On January 30, 1998, the Company entered into a two-year Employment
Agreement with Daniel O. Burkes, President, Chief Executive Officer and
Treasurer of the Company, pursuant to which Mr. Burkes is entitled to an initial
annual base salary of $255,216 per year and a bonus determined by the Board of
Directors. Mr. Burkes is required by the agreement to maintain confidentiality
of all Company trade secrets and upon termination of employment will be
prohibited from participating in a competing venture for a period of two years.
The initial term of the agreement ends on January 30, 2000, unless sooner
terminated in accordance with the provisions of the agreement.
STOCK OPTIONS
On January 30, 1998, the Board of Directors and sole shareholder of the
Company adopted the Industrial Rubber Stock Option Plan (the "Plan") in order to
provide for the granting of stock purchase options to employees, directors and
officers of the Company. The Plan permits the granting of incentive stock
options meeting the requirements of Section 422 of the Internal Revenue Code of
1986, as amended, and also nonqualified stock options which do not meet the
requirements of Section 422. The Company has reserved 400,000 shares of its
Common Stock for issuance upon exercise of options granted under the Plan. On
January 30, 1998, the directors granted five-year incentive stock options to 15
employees of the Company, providing for the purchase of an aggregate 113,600
shares at $4.50 per share. One-fourth of the options become exercisable on
January 30, 1999, and an additional one-fourth on January 30 of each of the
subsequent three years. The group of employees receiving options included
Messrs. Liesmaki and Radovich, who received options to purchase 30,000 shares
and 25,000 shares, respectively.
The Plan also provides for the automatic grant of a non-qualified option to
purchase 10,000 shares of Common Stock, which vests over five years, to each
non-employee director at the time of his or her initial election to the Board of
Directors, and an automatic grant of a non-qualified option to purchase 2,500
shares of Common Stock at the end of each year during which such non-employee
serves as a director of the Company. The Plan authorizes the Board of Directors
to increase or decrease the 10,000 share and 2,500 share amounts. All such
options will be granted at an exercise price equal to the fair market value of
the Common Stock on the date of grant.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Restated Articles of Incorporation limit the liability of
directors in their capacity as directors to the Company or its shareholders to
the full extent permitted by Minnesota law. The Articles provide that a director
shall not be liable to the Company or its shareholders for monetary damages for
breach of fiduciary duty as a director, except (i) for any breach of the
director's duty of loyalty to the Company or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for dividends, stock repurchases and other distributions
made in violation of Minnesota law or for violations of the Minnesota securities
laws, or (iv) for any transaction from which the director derived an improper
personal benefit. These provisions do not affect
30
<PAGE>
the availability of equitable remedies, such as an action to enjoin or rescind a
transaction involving a breach of fiduciary duty, although, as a practical
matter, equitable relief may not be available. The above provisions also do not
limit liability of the directors for violations of, or relieve them from the
necessity of complying with, the federal securities law.
The Restated Bylaws of the Company also provide that the Company will
exercise, to the full extent permitted by law, its power of indemnification.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission (the "Commission")
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
CERTAIN TRANSACTIONS
Since August, 1992, the Company has provided certain services to Nelson
Roofing, Inc., a corporation owned by Daniel O. Burkes, the sole shareholder of
the Company. The services provided included accounting, human resource,
management and other miscellaneous services. Under this arrangement, Nelson
Roofing, Inc. paid the Company $120,000 in 1995, $73,000 in 1996 and $102,000 in
1997. Effective January 30, 1998, the arrangement with Nelson Roofing, Inc. was
formalized under a written agreement continuing the existing arrangement through
December 31, 1998, and requiring monthly itemized billing and payment.
Since January 1997, the Company has rented a home in Utah from Daniel O.
Burkes. The home is used as temporary housing for management and other Company
employees from the Hibbing facility who are on temporary assignment at the Utah
facility. During 1997, the Company paid a total of $61,100 in rent to Mr. Burkes
for use of the home. The Company intends to continue this arrangement on a
month-to-month basis, as needed.
During 1996 and 1997, the Company distributed $487,195 and $814,653,
respectively, to Daniel O. Burkes, its sole shareholder, in part to enable him
to pay income taxes on the Company's earnings due to the Company's status as an
S Corporation. Since January 1, 1998, a total of $800,000 has been distributed
to Mr. Burkes specifically to enable him to pay income taxes on the Company's
1997 earnings, $125,000 of which was distributed in January 1998 out of working
capital and $675,000 of which was distributed on March 25, from the proceeds of
a short-term bank loan on that date. See "Dividend Policy and S Corporation
Status" and "Use of Proceeds."
The Company believes that all prior transactions between the Company and
its officers, directors or other affiliates of the Company were on terms no less
favorable than could have been obtained from unaffiliated third parties on an
arm's-length basis. Although the Board lacked sufficient disinterested
independent directors to ratify these prior transactions at the time of their
initiation, the Company will be adding at least three independent outside
directors to its Board within 90 days of completion of this offering. All future
transactions, loans and any forgiveness of loans, with directors, officers or
stockholders holding more than 5% of the Company's outstanding Common Stock, or
affiliates of any such persons, will be made for bona fide business purposes and
will be on terms no less favorable than could be obtained from an unaffiliated
third party and will be approved by a majority of the independent outside
directors who do not have an interest in the transactions and who have access,
at the Company's expense, to the Company's independent legal counsel.
31
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of the date of the Prospectus certain
information regarding beneficial ownership of the Company's Common Stock by (i)
each person known by the Company to be the beneficial owner of more than 5% of
the outstanding Common Stock, (ii) each director of the Company, (iii) each
Named Executive Officer and (iv) all executive officers and directors of the
Company as a group. The following information assumes that the named individuals
will not be purchasing any Shares in this Offering.
<TABLE>
<CAPTION>
SHARES PERCENT BEFORE PERCENT AFTER
NAME AND ADDRESS(1) BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------------------ -------------------- ---------------- --------------
<S> <C> <C> <C>
Daniel O. Burkes ................... 2,934,000 100% 67.7%
Nancy J. Burkes .................... 2,934,000(2) 100% 67.7%
Christopher M. Liesmaki ............ 0(3) 0% 0%
Richard Radovich ................... 0(4) 0% 0%
All executive officers and directors
as a group (4 persons) ............ 2,934,000 100% 67.7%
</TABLE>
- ------------------
(1) The address of each named individual is 3804 E. 13th Avenue, Hibbing, MN
55746.
(2) Comprised of shares owned by Daniel O. Burkes, Mrs. Burkes' husband.
(3) Does not include 30,000 shares issuable to Mr. Liesmaki pursuant to a stock
option granted under the Company's Stock Option Plan, which option is not
currently exercisable.
(4) Does not include 25,000 shares issuable to Mr. Radovich pursuant to a stock
option granted under the Company's Stock Option Plan, which option is not
currently exercisable.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 25,000,000 shares
of capital stock, $.001 par value, of which 5,084,000 shares are Common Stock
and 19,916,000 shares are not designated as to terms and preferences.
COMMON STOCK
The Company has 2,934,000 shares of Common Stock issued and outstanding.
The holders of the Common Stock: (i) have equal ratable rights to dividends from
funds legally available therefor, when, as and if declared by the Board of
Directors of the Company; (ii) are entitled to share ratably in all the assets
of the Company available for distribution to holders of the Common Stock upon
liquidation, dissolution or winding up of the affairs of the Company; (iii) do
not have preemptive, subscription or conversion rights and there are no
redemption or sinking fund provisions applicable thereto; and (iv) are entitled
to one vote per share on all matters which shareholders may vote on at all
meetings of shareholders. All shares of the Common Stock now outstanding are
fully paid and nonassessable.
The holders of the Common Stock do not have cumulative voting rights, which
means that the holders of more than 50 percent of such outstanding shares voting
for the election of directors can elect all of the directors of the Company to
be elected, if they so choose. In such event, the holders of the remaining
shares will not be able to elect any of the Company's directors.
UNDESIGNATED STOCK
Under governing Minnesota law and the Company's Restated Articles of
Incorporation, no action by the Company's shareholders is necessary, and only
action of the Board of Directors is required, to authorize the issuance of any
of the undesignated stock. The Board of Directors is empowered to establish, and
to designate the name of each class or series of the undesignated shares and to
set the terms of such shares (including terms with respect to redemption,
sinking fund, dividend, liquidation, preemptive, conversion and voting rights
and preferences). Accordingly, the Board of Directors, without shareholder
approval, may issue undesignated stock with terms (including terms with respect
to redemption, sinking fund, dividend, liquidation, preemptive, conversion and
voting rights and preferences) that could adversely affect the voting power and
other rights of holders of the Common Stock.
32
<PAGE>
The existence of undesignated stock may have the effect of discouraging an
attempt, through acquisition of a substantial number of shares of Common Stock,
to acquire control of the Company with a view to effecting a merger, sale or
exchange of assets or a similar transaction. The anti-takeover effects of the
undesignated shares may deny shareholders the receipt of a premium on their
Common Stock and may also have a depressive effect on the market price of the
Common Stock.
MINNESOTA BUSINESS CORPORATION ACT
Section 302A.671 of the Minnesota Business Corporation Act provides that,
unless the acquisition of certain new percentages of voting control of the
Company (in excess of 20%, 33 or 50%) by an existing shareholder or other person
is approved by the holders of a majority of the outstanding voting stock other
than shares held by the acquirer (if already a shareholder) and officers and
directors who are also employees of the Company, the shares acquired above any
such new percentage level of voting control will not be entitled to voting
rights. In addition, if the requirements of this Section are not satisfied, the
Company may redeem the shares so acquired by the acquirer at their market value.
Section 302A.671 generally does not apply to a cash offer to purchase all shares
of voting stock of the issuing corporation if such offer has been approved by a
majority vote of disinterested directors of the issuing corporation.
Section 302A.673 of the Minnesota Business Corporation Act restricts
certain transactions between the Company and a shareholder who becomes the
beneficial holder of 10% or more of any class of the Company's outstanding
voting stock (an "interested shareholder") unless a majority of the
disinterested directors of the Company have approved, prior to the date on which
the shareholder acquired a 10% interest, either the business combination
transaction suggested by such a shareholder or the acquisition of shares that
made such a shareholder a statutory interested shareholder. If such prior
approval is not obtained, this section imposes a four-year prohibition from the
interested shareholder's share acquisition date on mergers, sales of substantial
assets, loans, substantial issuance of stock and various other transactions
involving the Company and the interested shareholder or its affiliates.
In the event of certain tender offers for stock of the Company, Section
302A.675 of the Minnesota Business Corporation Act precludes the tender offeror
from acquiring additional shares of stock (including acquisitions pursuant to
mergers, consolidations or statutory share exchanges) within two years following
the completion of such an offer unless the selling shareholders are given the
opportunity to sell the shares on terms that are substantially equivalent to
those contained in the earlier tender offer. The Section does not apply if a
committee of the Board consisting of all of its disinterested directors
(excluding present and former officers of the corporation) approves the
subsequent acquisition before the shares are acquired pursuant to the earlier
tender offer.
These statutory provisions could have the effect of delaying or preventing
a change in the control of the Company in a transaction or series of
transactions not approved by the Board of Directors.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to the Company's Common Stock
is Norwest Bank Minnesota, N.A.
33
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company has outstanding 2,934,000 shares of Common Stock. All of the
4,334,000 shares to be outstanding after the Offering will be freely tradeable
without restrictions or registration under the Securities Act, except as
follows. Of these shares, the 2,934,000 shares owned by the existing shareholder
are subject to a lockup agreement pursuant to which the existing shareholder
agreed not to offer, sell or otherwise dispose of any of his shares for a period
of 12 months after the effective date of this Offering, without the prior
written consent of the Underwriter. In addition, these shares are subject to
the restrictions of Rule 144 of the Securities Act with respect to the sale of
such shares.
In general, under Rule 144 a person (or persons whose sales are aggregated)
who beneficially owns shares acquired privately from the Company or an affiliate
of the Company at least one year previously and an affiliate of the Company who
beneficially owns shares acquired (whether or not such shares were acquired
privately) from the Company or an affiliate of the Company at least one year
previously, are entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
the Company's Common Stock or the average weekly trading volume in the Company's
Common Stock during the four calendar weeks preceding the filing of notice with
the Commission in connection with such sale. Sales under Rule 144 are also
subject to certain manner-of-sale provisions, notice requirements and the
availability of current public information about the Company. A person who has
not been an affiliate of the Company at any time during the three months
preceding a sale and who beneficially owns shares acquired from the Company or
an affiliate of the Company at least two years previously is entitled to sell
all such shares under Rule 144 without regard to any of the limitations of the
Rule.
The Company cannot predict the effect, if any, that sales of the securities
subject to the previously described lockup or Rule 144 restrictions or the
availability of such securities for sale could have on the market price, if any,
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Company's securities, including resale of the securities offered hereby, could
adversely affect prevailing market prices of the Company's securities and the
Company's ability to raise additional capital by occurring at a time when it
would be beneficial for the Company to sell securities.
34
<PAGE>
UNDERWRITING
The Company has entered into an Underwriting Agreement with R.J. Steichen &
Company (the "Underwriter") pursuant to which the Underwriter has agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company the 1,400,000 Shares of Common Stock offered hereby. The
Underwriting Agreement provides that the Underwriter will be obligated to
purchase all of the 1,400,000 Shares offered hereby, if any are purchased.
The Underwriter proposes to offer the shares to the public at the Price to
Public set forth on the cover page of this Prospectus and to dealers at such
price less a concession not in excess of $________ per share. The Underwriter
may allow, and such dealers may reallow, a concession not in excess of $________
per share to certain other brokers and dealers. After the initial public
offering, the Price to Public, concession and reallowance may be changed by the
Underwriter. Additionally, the Company has agreed to pay the Underwriter a
nonaccountable expense allowance equal to 2% of the aggregate public offering
price. The Company has paid the Underwriter $10,000 as an advance against
this nonaccountable expense allowance.
The Company has granted the Underwriter an option exercisable within 45
days after the effective date of the Registration Statement of which this
Prospectus is a part, to purchase up to an additional 210,000 shares of Common
Stock at the Price to Public, less the Underwriting Discount shown on the cover
page of this Prospectus. The Underwriter may exercise such option only for the
purpose of covering any overallotments in the sale of the Shares of Common Stock
offered hereby.
The Company has agreed to sell to the Underwriter, for nominal
consideration, a warrant to purchase up to 140,000 shares of Common Stock (the
"Underwriter's Warrant"). The Underwriter's Warrant may be exercised in whole or
in part commencing twelve months after the effective date of the Registration
Statement of which this Prospectus is a part and for a period of four years
thereafter, at an exercise price equal to 120% of the Price to Public. The
Underwriter's Warrant may not be transferred, sold, assigned or hypothecated for
a period of one year from the effective date of this Offering other than by will
or pursuant to operation of law, except to persons who are officers and
shareholders of the Underwriter. The Underwriter's Warrant contains
anti-dilution provisions providing for appropriate adjustments on the occurrence
of certain events, and contains customary demand and participatory registration
rights with respect to the underlying shares of Common Stock. Any profits
realized by the Underwriter upon the sale of such warrant or the securities
issuable upon exercise thereof may be deemed to constitute additional
underwriting compensation.
The Underwriter has informed the Company that it does not intend to confirm
sales to any account over which it exercises discretionary authority.
The Underwriting Agreement provides for reciprocal indemnification between
the Company, the Underwriter and its controlling persons against civil
liabilities in connection with the Offering, including liabilities under the
Securities Act of 1933, as amended. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted pursuant to the
foregoing provisions, the Company has been informed that, in the opinion of the
Commission, such indemnification is against public policy as expressed in such
Act and is therefore unenforceable.
The sole shareholder of the Company, who owns 2,934,000 shares of Common
Stock, has agreed that he will not, without the prior consent of the
Underwriter, publicly offer, sell or grant any option to sell any securities of
the Company in the open market or otherwise for a period of twelve months from
the effective date of this Offering.
In order to facilitate the offering of Common Stock, the Underwriter may
engage in transactions that stabilize, maintain or otherwise affect the price of
Common Stock. Specifically, the Underwriter may overallot Common Stock in
connection with the offering, creating a short position in the Common Stock for
its own account. In addition, to cover overallotments or to stabilize the price
of Common Stock, the Underwriter may bid for, and purchase, shares of Common
Stock in the open market. The Underwriter may also reclaim selling concessions
allowed to a dealer for distributing Common Stock in the Offering, if the
Underwriter repurchases previously distributed Common Stock in transactions to
cover its short position, in stabilization transactions or otherwise. Finally,
the Underwriter may bid for, and purchase,
35
<PAGE>
shares of the Common Stock in market making transactions and impose penalty
bids. These activities may stabilize or maintain the market price of Common
Stock above market levels that may otherwise prevail. The Underwriter is not
required to engage in these activities, and may end any of these activities at
any time.
Prior to this Offering there has been no public trading market for the
Common Stock. The initial public offering price of the Shares has been
determined by negotiations between the Company and the Underwriter and bears no
relation to the Company's current earnings, book value, net worth or financial
statement criteria of value. In determining such offering price, the Company and
the Underwriter considered a number of factors, including the requirements of
the Nasdaq Stock Market, Inc., price to earnings ratios of certain manufacturing
companies whose stock is publicly traded and the proportion of the Common Stock
to be sold to the public versus the proportion of the Common Stock to be
retained by the Company's principal shareholder.
The foregoing is a brief summary of the provisions of the Underwriting
Agreement and the Underwriter's Warrant and does not purport to be a complete
statement of their terms and conditions. A form of the Underwriting Agreement,
including a form of the Underwriter's Warrant, has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Johnson, Killen, Thibodeau & Seiler, P.A. and Lommen, Nelson, Cole &
Stageberg, P.A. Certain legal matters for the Underwriter will be passed upon
by Fredrikson & Byron, P.A.
EXPERTS
The audited financial statements of the Company included in this Prospectus
and elsewhere in the Registration Statement have been audited by McGladrey &
Pullen LLP independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in auditing and accounting.
AVAILABLE INFORMATION
Prior to this Offering, the Company has not been subject to the reporting
requirements of the Securities Exchange Act of 1934. The Company has filed with
the Washington, D.C. office of the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 ("Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the sale of the Shares. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
For further information with respect to the Company and the Shares, reference is
made to the Registration Statement, including the exhibits thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement. The Registration Statement may be
inspected by anyone without charge at the principal office of the Commission at
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, or at one of
the Commission's regional offices located at: Northwestern Atrium Center, 500
West Madison, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center,
13th Floor, New York, New York, 10048. Copies of all or any part of such
material may be obtained upon payment of the prescribed fees from the Public
Reference Section of the Commission at 450 Fifth Street, N.W, Washington, D.C.
20549. The Commission maintains a Website that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission (http://www.sec.gov).
The Company intends to distribute to its shareholders annual reports
containing audited financial statements and interim reports containing unaudited
financial statements.
36
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Independent auditor's report ................................................ F-2
Balance sheets as of December 31, 1996 and 1997 ............................. F-3
Statements of income for the years ended December 31, 1996 and 1997 ......... F-4
Statements of stockholder's equity for the years ended December 31, 1996
and 1997 ................................................................... F-5
Statements of cash flows for the years ended December 31, 1996 and 1997 ..... F-6
Notes to financial statements ............................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Industrial Rubber Products, Inc.
Hibbing, Minnesota
We have audited the accompanying balance sheets of Industrial Rubber
Products, Inc. (formerly Industrial Rubber Applicators, Inc.) as of December 31,
1996 and 1997, and the related statements of income, stockholder's equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Industrial Rubber Products,
Inc. as of December 31, 1996 and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
McGLADREY & PULLEN, LLP
Duluth, Minnesota
January 30, 1998
F-2
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1997
----------------------------
PRO FORMA
1996 ACTUAL (NOTE 6)
------------ ------------- ------------
<S> <C> <C> <C>
ASSETS (NOTE 4)
Current Assets
Cash .................................................... $ 39,261 $ 132,344 $ 132,344
Trade receivables ....................................... 1,220,933 2,282,637 2,282,637
Due to related parties (Note 9) ......................... 32,500 -- --
Inventories (Note 3) .................................... 605,133 840,363 840,363
Prepaid expenses ........................................ 45,920 53,367 53,367
---------- ---------- ----------
TOTAL CURRENT ASSETS ................................... 1,943,747 3,308,711 3,308,711
---------- ---------- ----------
Cash Value of Life Insurance ............................. 120,131 122,780 122,780
---------- ---------- ----------
Property and Equipment, at cost
Land .................................................... 10,000 10,000 10,000
Buildings ............................................... 223,282 518,741 518,741
Automotive equipment .................................... 233,931 339,481 339,481
Machinery and equipment ................................. 1,492,870 1,709,134 1,709,134
---------- ---------- ----------
1,960,083 2,577,356 2,577,356
Less accumulated depreciation ........................... 684,712 1,059,263 1,059,263
---------- ---------- ----------
1,275,371 1,518,093 1,518,093
---------- ---------- ----------
$3,339,249 $4,949,584 $4,949,584
========== ========== ==========
LIABILITIESAND STOCKHOLDER'S EQUITY
Current Liabilities
Bank note payable (Note 4) .............................. $ 890,000 $1,135,000 $1,935,000
Current maturities of long-term debt (Note 5) ........... 954,634 218,861 218,861
Due to related party (Note 9) ........................... -- 106,825 106,825
Accounts payable ........................................ 668,957 674,144 674,144
Accrued expenses ........................................ 228,350 399,850 399,850
---------- ---------- ----------
TOTAL CURRENT LIABILITIES .............................. 2,741,941 2,534,680 3,334,680
---------- ---------- ----------
Long-term Debt, less current maturities (Note 5) ......... 240,613 171,095 171,095
---------- ---------- ----------
Commitments and Contingencies (Notes 6, 7 and 11)
Stockholder's Equity (Note 6 )
Common stock, $.001 par value; authorized
25,000,000 shares; issued 2,934,000 shares ............. 38,604 2,934 2,934
Additional paid-in capital .............................. 108,146 143,816 1,222,816
Retained earnings ....................................... 209,945 2,097,059 218,059
---------- ---------- ----------
356,695 2,243,809 1,443,809
---------- ---------- ----------
$3,339,249 $4,949,584 $4,949,584
========== ========== ==========
</TABLE>
F-3
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
------------- --------------
<S> <C> <C>
Net Sales (Note 2) .................................... $6,309,775 $14,421,359
Cost of Sales ......................................... 4,776,634 9,947,870
---------- -----------
GROSS PROFIT ........................................ 1,533,141 4,473,489
Selling, general and administrative expenses .......... 1,122,968 1,664,611
---------- -----------
OPERATING INCOME .................................... 410,173 2,808,878
---------- -----------
Nonoperating Income (Expense)
Interest income ...................................... 166 3,620
Interest expense ..................................... (90,554) (110,731)
---------- -----------
(90,338) (107,111)
---------- -----------
NET INCOME .......................................... $ 319,785 $ 2,701,767
========== ===========
Pro Forma Information (Note 7)
Income before income taxes ........................... $ 2,701,767
Provision for income taxes ........................... 1,038,000
-----------
NET INCOME .......................................... $ 1,663,767
===========
Basic earnings per share ............................. $ 0.54
===========
Weighted average shares outstanding .................. 3,087,600
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------------- PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------------ ------------ ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ..... 36,880 $ 38,604 $108,146 $ 377,355 $ 524,105
Net income .................... -- -- -- 319,785 319,785
Dividends on common stock...... -- -- -- (487,195) (487,195)
------ --------- -------- ---------- ----------
Balance, December 31, 1996 ..... 36,880 38,604 108,146 209,945 356,695
Issuance of additional shares
and transfer to adjust
common stock to authorized
par value
as a result of stock split
(Note 6) ..................... 2,897,120 (35,670) 35,670 -- --
Net income .................... -- -- -- 2,701,767 2,701,767
Dividends on common stock...... -- -- -- (814,653) (814,653)
--------- --------- -------- ---------- ----------
Balance, December 31, 1997 ..... 2,934,000 $ 2,934 $143,816 $2,097,059 $2,243,809
========= ========= ======== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ....................................................... $ 319,785 $ 2,701,767
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation ................................................... 248,238 374,551
Changes in working capital components: .........................
Increase in receivables ....................................... (750,577) (1,164,704)
Increase in inventories ....................................... (443,638) (235,230)
(Increase) decrease in prepaid expenses ....................... 9,903 (7,447)
Increase in accounts payable and accrued expenses ............. 598,363 176,687
------------ ------------
Net cash provided by (used in) operating activities ......... (17,926) 1,845,624
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ............................... (1,125,634) (617,273)
Repayment of advance to stockholder .............................. 103,400 --
Receipts from (advances to) related party ........................ (32,500) 32,500
Increase in cash value of life insurance ......................... (7,123) (2,649)
------------ ------------
Net cash used in investing activities ....................... (1,061,857) (587,422)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds on short-term borrowings ............................ 465,000 245,000
Proceeds from long-term borrowings ............................... 1,250,000 20,000
Principal payments on long-term borrowings ....................... (186,599) (825,291)
Dividends paid on common stock ................................... (487,195) (711,653)
Advances from related party ...................................... -- 106,825
Other ............................................................ (3,644) --
------------ ------------
Net cash provided by (used in) financing activities ......... 1,037,562 (1,165,119)
------------ ------------
Net increase (decrease) in cash ............................. (42,221) 93,083
Cash:
Beginning ........................................................ 81,482 39,261
------------ ------------
Ending ........................................................... $ 39,261 $ 132,344
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest ....................................... $ 102,210 $ 111,430
============ ============
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company's operations consist primarily of vulcanizing rubber and
applying urethane (for corrosion and abrasion resistant purposes) to pipes,
pumps, launders, etc. that are used in the mining industry in Northern Minnesota
and Utah. The Company extends credit to its customers, all on an unsecured
basis, on terms that it establishes for individual customers. The Company's Utah
operations commenced in August 1996. Approximately 22 percent and 70 percent of
net sales resulted from the Utah operations for the years ended December 31,
1996 and 1997, respectively.
During 1998 the Company changed its name to Industrial Rubber Products,
Inc., from Industrial Rubber Applicators, Inc.
A summary of the Company's significant accounting policies follows:
CASH
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any losses
in such accounts.
TRADE RECEIVABLES
The Company charges bad debts to expense in the year they are deemed
uncollectible. It is the opinion of management that, based on prior bad debt
experience and the status of current receivables, an allowance for doubtful
accounts is not necessary.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed as
follows:
YEARS METHOD
------- --------------
Buildings ........................ 19-39 Straight-line
Automotive equipment ............. 3-5 Accelerated
Machinery and equipment .......... 5-7 Accelerated
INCOME TAXES
The Company, with the consent of its stockholder, has elected to be taxed
under sections of the federal and state income tax laws, which provide that, in
lieu of corporation income taxes, the stockholder separately accounts for the
Company's items of income, deductions, losses and credits. Therefore, these
statements do not include any provision for federal and state income taxes. The
State of Utah requires the Company to deposit on behalf of the stockholder
income taxes for which the stockholder receives a credit on his personal income
tax return. Total state income taxes paid or payable on behalf of the
stockholder amounted to $8,000 and $103,000 for the years ended December 31,
1996 and 1997, respectively. (See Note 7.)
The Company pays dividends annually to enable the stockholder to pay his
individual income taxes on the Company's taxable income.
ADVERTISING COSTS
The Company follows the policy of charging the costs of advertising to
expense as incurred. For the years ended December 31, 1996 and 1997, advertising
expense totaled $16,699 and $22,450, respectively.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of product. Returns and
allowances are recorded in the period the need for such is identified.
F-7
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of current assets and liabilities approximates fair
value because of the short maturity of those instruments. The carrying amount of
long-term debt approximates fair value since interest rates fluctuate with the
prime rate.
EARNINGS PER SHARE
Earnings per share are computed based upon the weighted average number of
shares outstanding during the period, and assume the issuance of sufficient
shares at $5.00 per share to provide net proceeds, after estimated aggregate
offering expenses and underwriting discount, to repay short-term bank debt of
$675,000 incurred to make an S Corporation distribution to the existing
shareholder. (See Note 6.) The Company will be required to present dilutive
earnings per share in the future as a result of the option plan discussed in
Note 6.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers and the major countries in which
the entity holds assets and reports revenue.
NOTE 2. MAJOR CUSTOMERS
Net sales for the years ended December 31, 1996 and 1997 include sales to
several major customers, each of which accounted for 10 percent or more of net
sales:
AMOUNT OF NET SALES
YEAR ENDED DECEMBER 31,
------------------------------
CUSTOMER 1996 1997
- -------- ------------- --------------
Customer A ......... $1,417,656 $8,094,517
Customer B ......... 1,043,089 *
Customer C ......... 680,228 *
---------- ----------
- ------------------
*The net sales to these customers was under 10 percent of net sales for the year
ended December 31, 1997.
Trade receivable balance due from Customer A as of December 31, 1997
amounted to approximately $420,000.
The Company has a trade receivable from a customer amounting to
approximately $1,168,000 as of December 31, 1997, of which $594,000 is due from
sales to the customer and $574,000 is due for the purchase of steel pipe.
F-8
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3. INVENTORIES
Inventories consist of the following as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Raw materials ........................................... $542,410 $538,330
Work in process ......................................... 48,443 255,937
-------- --------
590,853 794,267
Raw materials purchased on behalf of customers .......... 14,280 46,096
-------- --------
$605,133 $840,363
======== ========
</TABLE>
The Company incurs costs on behalf of its customers for the purchase of
pipes, pumps, launders, etc. and is reimbursed for these costs by the customers.
The Company does not receive a commission or recognize gross profit upon sale of
these components, and therefore, net sales and cost of sales in the statements
of income do not include amounts for sales and purchases of components.
NOTE 4. NOTE PAYABLE
The Company has a $1,500,000 bank line of credit for working capital
financing which is due on demand. Advances under the line of credit are subject
to a borrowing base of eligible trade receivables and inventories, as defined in
the agreement. The line of credit is collateralized by trade receivables,
inventories, equipment, assignment of a life insurance policy, and is personally
guaranteed by the stockholder. Interest is payable monthly at the bank's prime
rate (9.5% at December 31, 1997).
Among other things, the agreement requires the Company to:
a. Maintain a ratio of total liabilities to tangible net worth of less than
3 to 1.
b. Maintain a current ratio of at least 1.2 to 1.
c. Maintain a ratio of traditional cash flow to current maturities of
long-term debt of at least 1.5 to 1.
d. Refrain from declaring or paying dividends in excess of 50% of after tax
net income.
The Company has received a waiver from the bank of certain of the above
requirements in conjunction with the proposed initial public offering discussed
in Note 6.
F-9
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5. LONG-TERM DEBT
A summary of long-term debt as of December 31, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
Note payable bank, due in monthly installments of $20,090 including
interest at the bank's prime rate (9.5% at December 31, 1997) to
August l999, at which time the remaining balance is due. The note is
subject to the same collateral and covenants as described in Note 4. $ 946,350 $370,594
Note payable bank, due in monthly installments of $2,580 including
interest at the bank's prime rate to August 2001. The note was
repaid in full during 1997. ........................................ 248,897 --
Other note payable due in November 2002 ............................. -- 19,362
--------- --------
1,195,247 389,956
Less current maturities ............................................. 954,634 218,861
--------- --------
$ 240,613 $171,095
========= ========
</TABLE>
Aggregate maturities required on long-term debt as of December 31, 1997 are
as follows:
DECEMBER 31, AMOUNT
------------ ----------
1998 ................... $218,861
1999 ................... 159,414
2000 ................... 4,016
2001 ................... 4,139
2002 ................... 3,526
--------
$389,956
========
NOTE 6. STOCKHOLDER'S EQUITY
In January 1998, the Company amended its Articles of Incorporation to
increase the number of authorized shares of stock to 25,000,000 and declared a
stock split so that 2,934,000 shares of common stock are outstanding. The stock
split has been retroactively reflected in the accompanying financial statements.
During 1997 the Company commenced activity to accomplish an initial public
offering (IPO) of its common stock. The Company intends to sell approximately
1,400,000 shares of common stock (excluding the underwriters' over allotment
option to purchase an additional 210,000 shares of common stock) at a proposed
offering price of approximately $5.00 per share. Under the terms of the
agreement the Company has agreed to sell to the Underwriter a warrant to
purchase a number of shares equal to 10% of the shares sold by the Company in
the offering. The warrant may not be exercised during the first year after the
effective date of the offering and is exercisable during a period of four years
thereafter at a price equal to 120% of the public offering price.
On January 30, 1998, the Company adopted the 1998 Stock Option Plan to
provide for the granting of stock options to employees, directors and officers
of the Company. The number of shares issued pursuant to the options granted
shall not exceed 400,000 shares, of which 113,600 were granted to employees
concurrent with the adoption of the plan. Options are exercisable at the fair
market value at the date of grant and expire five years after grant. As
permitted under generally accepted accounting principles, management anticipates
that grants under the plan will be accounted for following the provisions of APB
Opinion No. 25 and its related interpretations.
F-10
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6. STOCKHOLDER'S EQUITY (CONTINUED)
The Company intends to make distributions totaling approximately $800,000
subsequent to year end, of which $125,000 was paid in January 1998, to enable
the shareholder to pay income taxes on the related 1997 income of the Company.
The accompanying pro forma balance sheet reflects an anticipated distribution of
$800,000, which is assumed to be funded with additional short-term bank debt.
The Company estimates that approximately $675,000 of the proceeds from the IPO
will be used to repay the short-term bank debt. In addition, the pro forma
balance sheet reflects the reclassification of undistributed earnings of
approximately $1,079,000 applicable to the Company's S Corporation status from
retained earnings to additional paid-in capital upon the termination of the S
Corporation election. Additional distributions to the shareholder may be
necessary in an amount sufficient to discharge the shareholder's actual tax
liability on the 1998 income of the Company through the termination of the S
Corporation election. (See Note 7.)
NOTE 7. INCOME TAXES
The Company has been taxed as an corporation since January 1989. As an S
corporation, the Company generally is not responsible for income taxes; instead,
the stockholder is taxed on the Company's taxable income.
As described in Note 6, the Company has a pending public offering for the
sale of common stock. Upon closing of the offering, the Company's status as an S
corporation will be terminated and, accordingly, the Company will be subject to
federal and state income taxes from the date of termination of the S election.
In addition, the Company may be required to recognize deferred taxes for
cumulative temporary difference between financial reporting and income tax
reporting. Such deferred tax will be based on the cumulative temporary
difference at the date of the termination of the S corporation election. If the
termination of the S corporation status occurred at December 31, 1997, a
deferred tax asset of approximately $14,700 would result.
Pro forma income taxes represent the estimated income taxes that would have
been reported had the Company filed federal and state income tax returns under
the asset and liability method of accounting.
The following summarizes the pro forma provision for income taxes:
YEAR ENDED DECEMBER 31, 1996 1997
- ----------------------- ----------- ----------
Federal:
Current ................. $122,300 $ 873,300
Deferred ................ (3,900) (2,150)
-------- ----------
118,400 871,150
State:
Current ................. 28,100 167,400
Deferred ................ (1,200) (550)
-------- ----------
26,900 166,850
-------- ----------
Total .................. $145,300 $1,038,000
======== ==========
F-11
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7. INCOME TAXES (CONTINUED)
The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate to pretax income due to the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1997
----------------------- ----------- ------------
<S> <C> <C>
Computed "expected" tax expense ........................... $111,900 $ 945,600
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit .......... 17,800 110,100
Other nondeductible expenses ............................ 18,800 9,300
Benefit of income taxed at lower rates .................. (3,200) (27,000)
-------- ----------
Total .................................................. $145,300 $1,038,000
======== ==========
</TABLE>
Temporary differences that give rise to deferred tax assets relate to
capitalized inventory costs and accrued liabilities not currently deductible and
amounted to $14,700 as of December 31, 1997.
NOTE 8. RETIREMENT PLAN
The Company has a Salary Savings Plan and Trust (401(k)) which covers
substantially all employees of the Company. The plan provides for contributions
in such amounts as the Board of Directors may annually determine. Company
contributions for 1996 and 1997 were $27,838 and $49,165, respectively.
NOTE 9. RELATED COMPANY TRANSACTIONS
The Company has a receivable of $32,500 as of December 31, 1996 from Nelson
Roofing, Inc., a company owned by the stockholder of the Company. The Company
has a payable of $106,825 to Nelson Roofing, Inc. as of December 31, 1997. The
Company provides management and administrative services for Nelson Roofing, Inc.
and receives a management fee for such services. Management fees received from
Nelson Roofing, Inc. amounted to approximately $73,000 in 1996 and $102,000 in
1997. On January 30, 1998, the Company entered into a formal agreement with
Nelson Roofing, Inc. to provide management and administrative services through
December 31, 1998. Management fees are based upon actual employee cost plus
overhead. The Company paid $9,243 in 1997 to Nelson Roofing, Inc. for
construction services.
During 1997 the Company rented a house in Utah owned by the stockholder on
a month to month basis. Total rent paid to the stockholder amounted to $61,100
in 1997.
The Company rented warehouse space from a company owned by the stockholder
which amounted to $12,600 in 1996 and $6,700 in 1997.
On January 30, 1998, the Company entered into a two-year employment
agreement with its president. Under the agreement, the president will receive a
base salary of $255,216 and a bonus as determined by the Board of Directors. The
agreement contains certain noncompetition provisions.
NOTE 10. OPERATING LEASES
The Company leases its Utah production facility under the terms of an
operating lease expiring July 30, 1998. Lease payments amount to $13,000 per
month at December 31, 1997. The Company has renewal options for another
six-month period and three successive one-year periods. The lease provides that
the Company pay all utilities, and property taxes and insurance over certain
amounts. The Company also leases equipment on a short-term basis.
Total rent expense, including rent paid to related parties, amounted to
approximately $106,000 in 1996 and $282,000 in 1997.
F-12
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 11. ENVIRONMENTAL CLEANUP OBLIGATION
During 1997, the Minnesota Pollution Control Agency ("MPCA") notified the
Company that it will be required to complete an initial investigation of
possible soil contamination caused by the previous owner at its Hibbing,
Minnesota site. The Company received a proposal from an environmental consultant
to perform the investigation requested by the MPCA and has accrued the estimated
$10,000 cost of the study. The environmental study has not been completed to
determine if a release of hazardous material has occurred; however, management
believes the cost of a clean up, if any, will not be material because visual
inspection of the surface area reveals no evidence of contamination and the area
in which any contamination could have occurred is small.
F-13
<PAGE>
[PHOTO]
Caption: PRODUCTION AREA
Hibbing, Minnesota
Narrative Description: Photograph shows two workers on an industrial shop floor
surrounded by several pieces of steel pipe ranging in diameter from 18 inches to
three feet and by pieces of rubber used to coat pipes and other products
produced by the Company. One of the workers is working on a flat surface
approximately 50 feet in length and six feet in width on which a coil of rubber
has been stretched out.
[PHOTO]
Caption: COMPLETED RUBBER LINED PIPE
Narrative Description: Photograph shows the flanged ends of three pieces of
rubber lined pipe approximately three feet in diameter. The pipe rests on steel
beams above the floor of the facility, above other partially obscured lengths of
pipe lying beneath.
[PHOTO]
Caption: 10 FT. X 64 FT.
AUTOCLAVE
Narrative Description: Indoor photograph shows a worker standing inside an
approximately ten-foot diameter steel pipe. The entrance to the chamber has
teeth to facilitate closure and sealing.
[PHOTO]
Caption: PRE-VULCANIZED PIPE
Narrative Description: Photograph shows worker between two pieces of
rubber-coated pipe of approximately five feet in diameter. The pipe pieces have
flanges attached and are placed on the floor of the production facility.
[PHOTO]
Caption: PATENTED RUBBER LINED
DISCHARGE MILLHEAD
Narrative Description: Outdoor photograph shows worker examining an
approximately 25 foot diameter black rubber-coated millhead in six pieces.
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THESE SECURITIES IN ANY STATE
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
STATE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------------------------
TABLE OF CONTENTS
PAGE
---
Prospectus Summary ............................... 3
Summary Financial Data ........................... 4
Risk Factors ..................................... 5
Use of Proceeds .................................. 10
Dividend Policy and S Corporation Status ......... 11
Dilution ......................................... 12
Capitalization ................................... 13
Selected Financial Data .......................... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ..................................... 15
Business ......................................... 19
Management ....................................... 29
Certain Transactions ............................. 31
Principal Shareholders ........................... 32
Description of Securities ........................ 32
Shares Eligible for Future Sale .................. 34
Underwriting ..................................... 35
Legal Matters .................................... 36
Experts .......................................... 36
Available Information ............................ 37
Index to Financial Statements .................... F-1
---------------------------------
Until ____________ , 1998 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock offered hereby, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
1,400,000 SHARES
INDUSTRIAL RUBBER
PRODUCTS, INC.
COMMON STOCK
--------------------
PROSPECTUS
--------------------
[LOGO] R J STEICHEN & CO
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VI of the Bylaws of the Company provides that the Company will
indemnify any person against expenses, including attorneys' fees, judgments,
fines, and amounts paid in settlement if the person was or is a party, or is
threatened to be made a party, to any threatened, pending, or completed action,
suit, or proceeding by reason of the fact that the person was a director,
officer, or agent of the Company, as fully as may be permitted from time to time
by the statutes and decision of law of the State of Minnesota or by any other
provision of law. Under the provisions of the Minnesota Business Corporation Act
(the "MBCA"), present and former officers and directors are indemnified against
such liabilities and expenses if the person (i) acted in good faith; (ii)
received no improper personal benefits; (iii) had, in the case of a criminal
proceeding, no reasonable cause to believe the conduct was unlawful; and (iv)
reasonably believed the conduct was in the best interest of the corporation, or,
in certain circumstances, reasonably believed that the conduct was not opposed
to the best interest of the corporation. The MBCA also provides that a
corporation may purchase and maintain insurance on behalf of any indemnified
party against any liability asserted against such person, whether or not the
corporation would have been required to indemnify the person against liability
under provisions of the MBCA. Article VI of the Bylaws contains certain other
provisions regarding indemnification.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
NASD Fee ............................................... $ 1,305
*NASDAQ SmallCap Market Fee ............................. 9,500
Registration Fee ....................................... 2,375
*Printing Expenses ...................................... 20,000
*Legal Fees and Expenses ................................ 95,000
*Accounting Fees and Expenses ........................... 35,000
*Blue Sky Fees and Expenses ............................. 15,000
*Transfer Agent Fees and Expenses ....................... 7,500
*Underwriter's Nonaccountable Expense Allowance ......... 140,000
*Miscellaneous .......................................... 14,320
--------
Total ................................................. $340,000
========
- ------------------
*Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ --------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Restated Articles of Incorporation of the Registrant*
3.2 Restated Bylaws of the Registrant*
4.1 Specimen Stock Certificate*
5.1 Opinion and Consent of Johnson, Killen, Thibodeau & Seiler, P.A.
10.1 Employment Agreement between the Company and Daniel O. Burkes*
10.2 Management Contract between the Company and Nelson Roofing, Inc.*
10.3 Real Estate Lease between the Company and Freeport Center Associates, as amended*
10.4 Labor Agreement between the Company and United Steelworkers of America*
10.5 Stock Option Plan, including specimen Stock Option Agreement
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -------------------------------------------------------------------------------
<S> <C>
10.6 Restated Term Loan and Credit Agreement with Norwest Bank Minnesota North,
National Association*
10.7 Waiver Letter from Norwest Bank dated February 13, 1998*
23.1 Consent of Johnson, Killen, Thibodeau & Seiler, P.A. (included in Exhibit 5.1)
23.2 Consent of Lommen, Nelson, Cole & Stageberg, P.A.*
23.3 Consent of McGladrey & Pullen, LLP
27.1 Financial Data Schedule*
</TABLE>
- -------------
* Previously filed.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel, the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the questions whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(4) To provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and
registered in such names as required by the underwriter to permit
prompt delivery to each purchaser.
II-2
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Hibbing
and State of Minnesota on April 15, 1998.
INDUSTRIAL RUBBER PRODUCTS, INC.
By: /s/ DANIEL O. BURKES
------------------------------------
DANIEL O. BURKES
Daniel O. Burkes
President/Principal Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------------------- -----------------
<S> <C> <C>
/S/ DANIEL O. BURKES President, Treasurer and Director April 15, 1998
- ------------------------------ (Principal Executive Officer)
Daniel O. Burkes (Principal Financial Officer)
/S/ NANCY J. BURKES Vice President, Secretary and Director April 15, 1998
- ------------------------------
Nancy J. Burkes
</TABLE>
II-3
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
INDUSTRIAL RUBBER PRODUCTS, INC.
EXHIBIT INDEX TO FORM SB-2
EXHIBIT
NO. EXHIBITS
- -------- ---------------------------------------------------------------------
1.1 Form of Underwriting Agreement
3.1 Restated Articles of Incorporation of the Registrant*
3.2 Restated Bylaws of the Registrant*
4.1 Specimen Stock Certificate*
5.1 Opinion and Consent of Johnson, Killen, Thibodeau & Seiler, P.A.
10.1 Employment Agreement between the Company and Daniel O. Burkes*
10.2 Management Contract between the Company and Nelson Roofing, Inc.*
10.3 Real Estate Lease between the Company and Freeport Center Associates,
as amended*
10.4 Labor Agreement between the Company and United Steelworkers of
America*
10.5 Stock Option Plan, including specimen Stock Option Agreement
10.6 Restated Term Loan and Credit Agreement with Norwest Bank Minnesota
North, National Association*
10.7 Waiver Letter from Norwest Bank dated February 13, 1998*
23.1 Consent of Johnson, Killen, Thibodeau & Seiler, P.A. (included in
Exhibit 5.1)
23.2 Consent of Lommen, Nelson, Cole & Stageberg, P.A.*
23.3 Consent of McGladrey & Pullen, LLP
27.1 Financial Data Schedule*
- -------------
* Previously filed.
1,400,000 SHARES COMMON STOCK
INDUSTRIAL RUBBER PRODUCTS, INC.
UNDERWRITING AGREEMENT
______________________, 1998
R. J. Steichen & Company
One Financial Plaza, Suite 100
Minneapolis, MN 55402-2543
Dear Ladies and Gentlemen:
Industrial Rubber Products, Inc., a Minnesota corporation (the
"Company"), hereby confirms its agreement to issue and sell R. J. Steichen &
Company (the "Underwriter") an aggregate of 1,400,000 shares of authorized but
unissued common stock, par value $.001 per share, of the Company (the "Common
Stock"). Such 1,400,000 shares of Common Stock are collectively referred to in
this Agreement as the "Firm Shares." The Company also hereby confirms its
agreement to issue and sell to the Underwriter an aggregate of up to 210,000
additional shares of Common Stock upon the request of the Underwriter solely for
the purpose of covering overallotments. Such additional shares are referred to
in this Agreement as the "Option Shares." The Firm Shares and the Option Shares
are collectively referred to herein as the "Shares." Further, the Company hereby
confirms its agreement to issue to the Underwriter warrants for the purchase of
a total of 140,000 shares as described in Section 5 hereof (the "Underwriter's
Warrants"), assuming purchase by the Underwriter of the Firm Shares. The shares
issuable upon exercise of the Underwriter's Warrants are referred to as the
"Warrant Shares."
The Company hereby confirms the arrangements with respect to the
purchase by the Underwriter of the Firm Shares plus the Option Shares purchased
if the overallotment option is exercised in whole or in part.
1. Representations and Warranties of the Company. The Company
represents and warrants to and agrees with the Underwriter as follows:
(a) A registration statement on Form SB-2 with respect to the
Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "1933 Act")
and the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "SEC") thereunder and has
<PAGE>
been filed with the SEC under the 1933 Act. The Company has filed such
amendments to the registration statement and such amended preliminary
prospectuses as may have been required to be filed to the date hereof.
If the Company has elected not to rely upon Rule 430A, the Company has
prepared and will promptly file an amendment to the registration
statement and an amended prospectus (provided the Underwriter has
consented to such filing). If the Company has elected to rely upon Rule
430A, it will prepare and timely file a prospectus pursuant to Rule
424(b) that discloses the information previously omitted from the
prospectus in reliance upon Rule 430A. Copies of such registration
statement and each pre-effective amendment thereto, and each related
preliminary prospectus have been delivered by the Company to the
Underwriter. Such registration statement, as amended or supplemented,
including all prospectuses included as a part thereof, financial
schedules, exhibits, the information (if any) deemed to be part thereof
pursuant to Rules 430A and 434 under the 1933 Act and any registration
statement filed pursuant to Rule 462 under the 1933 Act, is herein
referred to as the "Registration Statement." The term "Prospectus" as
used herein shall mean the final prospectus, as amended or
supplemented, included as a part of the Registration Statement on file
with the SEC when it becomes effective; provided, however, that if a
prospectus is filed by the Company pursuant to Rules 424(b) and 430A or
a term sheet is filed by the Company pursuant to Rule 434 under the
1933 Act, the term "Prospectus" as used herein shall mean the
prospectus so filed pursuant to Rules 424(b) and 430A) and the term
sheet so filed pursuant to Rule 434. The term "Preliminary Prospectus"
as used herein means any prospectus, as amended or supplemented, used
prior to the Effective Date (as defined in Section 4(a) hereof) and
included as a part of the Registration Statement, including any
prospectus filed with the SEC pursuant to Rule 424(a).
(b) Neither the SEC nor any state securities division has
issued any order preventing or suspending the use of any Preliminary
Prospectus, or issued a stop order with respect to the offering of the
Shares or requiring the recirculation of a Preliminary Prospectus and,
to the best knowledge of the Company, no proceeding for any such
purpose has been initiated or threatened. Each part of the Registration
Statement, when such part became or becomes effective, each Preliminary
Prospectus, on the date of filing with the SEC, and the Prospectus and
any amendment or supplement thereto, on the date of filing thereof with
the SEC and on any Closing Date (as defined in Section 3 hereof), as
the case may be, conformed or will conform in all material respects
with the requirements of the 1933 Act and the Rules and Regulations and
the securities laws ("Blue Sky Laws") of the states where the Shares
are to be sold (the "States") and contained or will contain all
statements that are required to be stated therein in accordance with
the 1933 Act, the Rules and Regulations and the Blue Sky Laws of the
States. When the Registration Statement became or becomes effective and
when any post-effective amendments thereto shall become effective, the
Registration Statement did not and will not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
Neither any Preliminary Prospectus, on the date of filing thereof with
the SEC, nor the Prospectus or any amendment or supplement thereto, on
the date of filing thereof with the SEC and on the First and Second
Closing Dates, contained or will contain any untrue statement of a
material fact or omit to state a material fact necessary
<PAGE>
in order to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, however, that
none of the representations and warranties in this Subsection 1(b)
shall apply to statements in, or omissions from, the Registration
Statement, Preliminary Prospectus or the Prospectus, or any amendment
thereof or supplement thereto, which are based upon and conform to
written information furnished to the Company by the Underwriter
specifically for use in the preparation of the Registration Statement,
Preliminary Prospectus or the Prospectus, or any amendment or
supplement thereto. There is no contract or other document of the
Company of a character required by the 1933 Act or the Rules and
Regulations to be described in the Registration Statement or
Prospectus, or to be filed as an exhibit to the Registration Statement,
that has not been described or filed as required. The descriptions of
all such contracts and documents or references thereto are correct and
include the information required under the 1933 Act and the Rules and
Regulations.
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Minnesota, with full corporate power and authority, to own, lease
and operate its properties and conduct its business as described in the
Registration Statement and Prospectus. The Company is duly qualified to
do business as a foreign corporation in good standing in each
jurisdiction in which the ownership or lease of its properties, or the
conduct of its business, requires such qualification and in which the
failure to be qualified or in good standing would have a material
adverse effect on the business of the Company. The Company has all
necessary and material authorizations, approvals and orders of and from
all governmental regulatory officials and bodies to own its properties
and to conduct its business as described in the Registration Statement
and Prospectus, and is conducting its business in substantial
compliance with all applicable material laws, rules and regulations of
the jurisdictions in which it is conducting business. The Company holds
all licenses, certificates, permits, authorizations, approvals and
orders of and from all state, federal and other governmental regulatory
officials and bodies necessary to own its properties and to conduct its
business as described in the Registration Statement and Prospectus, or
has obtained waivers from any such applicable requirements from the
appropriate state, federal or other regulatory authorities. All such
licenses, permits, approvals, certificates, consents, orders and other
authorizations are in full force and effect, and the Company has not
received notice of any proceeding or action relating to the revocation
or modification of any such license, permit, approval, certificate,
consent, order or other authorization which, individually or in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, might materially and adversely affect the conduct of the
business or the condition, financial or otherwise, or the earnings,
affairs or business prospects of the Company.
(d) The Company has no subsidiaries and is not affiliated with
any other Company or business entity, except as disclosed in the
Prospectus.
(e) The Company is not in violation of its Restated Articles
of Incorporation, as amended, or Restated Bylaws or in default in the
performance or observance of any obligation, agreement, covenant or
condition contained in any bond, debenture, note or
<PAGE>
other evidence of indebtedness or in any contract, indenture, mortgage,
loan agreement, joint venture or other agreement or instrument to which
the Company is a party or by which the Company or its properties are
bound, and there does not exist any state of facts which constitutes an
event of default on the part of the Company or which, with notice or
lapse of time or both, would constitute such an event of default. The
Company is not, to the best of its knowledge after due inquiry, in
violation of any law, order, rule, regulation, writ, injunction or
decree of any government, governmental instrumentality or court,
domestic or foreign, which violation is material to the business of the
Company.
(f) The Company has full requisite power and authority to
enter into this Agreement. This Agreement has been duly authorized,
executed and delivered by the Company and will be a valid and binding
agreement on the part of the Company, enforceable in accordance with
its terms, if and when this Agreement shall have become effective in
accordance with Section 8, except as enforceability may be limited by
the application of bankruptcy, insolvency, moratorium or similar laws
affecting the rights of creditors generally and by judicial limitations
on the right of specific performance and except as the enforceability
of the indemnification or contribution provisions hereof may be
affected by applicable federal or state securities laws. The
performance of this Agreement and the consummation of the transactions
herein contemplated will not result in a breach or violation of any of
the terms and provisions of, or constitute a default under or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company pursuant to, (i) any indenture,
mortgage, deed of trust, loan agreement, bond, debenture, note,
agreement or other evidence of indebtedness, lease, contract or other
agreement or instrument to which the Company is a party or by which the
property or assets of the Company is bound, (ii) the Company's Restated
Articles of Incorporation, as amended, or Restated Bylaws or (iii) any
statute or any order, rule or regulation of any court, governmental
agency or body having jurisdiction over the Company. No consent,
approval, authorization or order of any court, governmental agency or
body is required for the consummation by the Company of the
transactions on its part herein contemplated, except such as may be
required under the 1933 Act, the Rules and Regulations, the Blue Sky
Laws, the rules and regulations of the National Association of
Securities Dealers, Inc. ("NASD") and the rules and regulations of
Nasdaq.
(g) Except as is otherwise expressly stated in the
Registration Statement or Prospectus, there are no actions, suits or
proceedings pending before any court or governmental agency, authority
or body to which the Company is a party or of which the business or
property of the Company is the subject which might result in any
material adverse change in the condition (financial or otherwise),
business or prospects of the Company, materially and adversely affect
its properties or assets or prevent consummation of the transactions
contemplated by this Agreement; and, to the best of the Company's
knowledge, no such actions, suits or proceedings are threatened except
as is otherwise expressly stated in the Registration Statement or
Prospectus. The Company is not aware of any facts which would form the
basis for the assertion of any material claim or liability which are
not disclosed in the Registration Statement or the Prospectus or
adequately reserved for in the financial statements which are a part
thereof, except for such claims or
<PAGE>
liabilities which are not currently expected to have a material adverse
effect on the condition (financial or otherwise) or the earnings,
affairs or business prospects of the Company. All pending legal or
governmental proceedings to which the Company is a party or to which
any of its property is subject which are not described in the
Registration Statement and the Prospectus, including ordinary routine
litigation incidental to the business, are, considered in the
aggregate, not material to the Company.
(h) The authorized, issued and outstanding capital stock of
the Company is as set forth under the caption "Capitalization" in the
Prospectus. The outstanding shares of capital stock of the Company are
duly authorized, validly issued, fully paid and nonassessable. The
Shares conform in substance to all statements relating thereto
contained in the Registration Statement and Prospectus. The Shares to
be sold by the Company hereunder have been duly authorized and, when
issued and delivered pursuant to this Agreement, will be validly
issued, fully paid and nonassessable and will conform to the
description thereof contained in the Prospectus. No preemptive rights
or similar rights of any security holders of the Company exist with
respect to the issuance and sale of the Shares by the Company or
exercise of the Underwriter's Warrants. Except as disclosed in the
Prospectus, the Company has received waivers from each security holder
that has the right to require the Company to register under the 1933
Act any securities of any nature owned or held by such person either in
connection with the transactions contemplated by this Agreement or
after a demand for registration by such holder. Upon payment for and
delivery of the Shares pursuant to this Agreement, the Underwriter will
acquire the Shares, free and clear of all liens, encumbrances or
claims. The certificates evidencing the Shares will comply as to form
with all applicable provisions of the laws of the State of Minnesota.
Except as set forth in any part of the Registration Statement, the
Company does not have outstanding any options to purchase, or any
rights or warrants to subscribe for, or any securities or obligations
convertible into, or any contracts or commitments to issue or sell, any
Common Stock or other securities of the Company, or any such warrants,
convertible securities or obligations.
(i) The Underwriter's Warrants and the Warrant Shares have
been duly authorized. The Underwriter's Warrants, when issued and
delivered to the Representa-tive, will constitute valid and binding
obligations of the Company in accordance with their terms, except as
enforceability may be limited by the application of bankruptcy,
insolvency, moratorium or similar laws affecting the rights of
creditors generally and by judicial limitations on the right of
specific performance. The Warrant Shares when issued in accordance with
the terms of this Agreement and pursuant to the Underwriter's Warrants,
will be validly issued, fully paid and nonassessable and subject to no
preemptive rights or similar rights on the part of any person or
entity. A sufficient number of shares of Common Stock of the Company
have been reserved for issuance by the Company upon exercise of the
Underwriter's Warrants.
(j) McGladrey & Pullen, LLP, whose reports appear in the
Registration Statement and Prospectus, are independent accountants
within the meaning of the 1933 Act and the Rules and Regulations. The
financial statements of the Company, together with the
<PAGE>
related notes, forming part of the Registration Statement and
Prospectus (the "Financial Statements"), fairly present the financial
position and the results of operations of the Company at the respective
dates and for the respective periods to which they apply. The Financial
Statements are accurate, complete and correct and have been prepared in
accordance with the 1933 Act, the Rules and Regulations and generally
accepted accounting principles ("GAAP"), consistently applied
throughout the periods involved, except as may be otherwise stated
therein. The summaries of the Financial Statements and the other
financial, statistical and related notes set forth in the Registration
Statement and the Prospectus are (i) accurate and correct and fairly
present the information purported to be shown thereby as of the dates
and for the periods indicated on a basis consistent with the audited
financial statements of the Company and (ii) in compliance in all
material respects with the requirements of the 1933 Act and the Rules
and Regulations.
(k) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus and at any
Closing Date, except as is otherwise disclosed in the Registration
Statement or Prospectus, there has not been:
(i) any change in the capital stock or long-term debt
(including any capitalized lease obligation), or increase in
the short-term debt of the Company;
(ii) any issuance of options, warrants, convertible
securities or other rights to purchase the capital stock of
the Company;
(iii) any adverse change, or any development
involving a material adverse change, in or affecting the
business, business prospects, properties, assets, patents or
patent applications (including those of the Company and those
relating to devices or technologies licensed to the Company),
management, financial position, stockholders' equity, results
of operations or general condition of the Company;
(iv) any material transaction entered into by the
Company;
(v) any material obligation, direct or contingent,
incurred by the Company, except obligations incurred in the
ordinary course of business that, in the aggregate, are not
material; or
(vi) any dividend or distribution of any kind
declared, paid or made on the Company's capital stock.
(l) Except as is otherwise disclosed in the Registration
Statement or Prospectus, the Company has good and marketable title to
all of the property, real and personal, described in the Registration
Statement or Prospectus as being owned by the Company, free and clear
of all liens, encumbrances, equities, charges or claims, except as do
not materially interfere with the uses made and to be made by the
Company of such property or as disclosed in the Financial Statements.
Except as is otherwise disclosed in the Registration Statement or
Prospectus, the Company has valid and binding leases to the real and
personal
<PAGE>
property described in the Registration Statement or Prospectus as being
under lease to the Company, except as to those leases which are not
material to the Company or the lack of enforceability of which would
not materially interfere with the use made and to be made by the
Company of such leased property.
(m) There has been no unlawful storage, treatment or disposal
of waste by the Company at any of the facilities owned or leased
thereby, except for such violations which would not have a material
adverse effect on the condition, (financial or otherwise) or the
shareholders' equity, results of operation, business, properties or
prospects of the Company. There has been no material spill, discharge,
leak, emission, ejection, escape, dumping or release of any kind onto
the properties owned or leased by the Company, or into the environment
surrounding those properties, of any toxic or hazardous substances, as
defined under any federal, state or local regulations, laws or
statutes, except for those releases either permissible under such
regulations, laws or statutes or otherwise allowable under applicable
permits or which would not have a material adverse effect on the
condition (financial or otherwise) or the shareholders' equity, results
of operation, business, properties or prospects of the Company.
(n) The Company has filed all necessary federal and state
income and franchise tax returns and paid all taxes shown as due
thereon. The Company is not in default in the payment of any taxes and
has no knowledge of any tax deficiency which might be asserted against
it which would materially and adversely affect the Company's business
or properties.
(o) No labor disturbance by the employees of the Company
exists or, to the best of the Company's knowledge, is imminent which
could reasonably be expected to have a material adverse effect on the
conduct of the business, operations, financial condition or income of
the Company.
<PAGE>
(p) Except as disclosed in the Prospectus:
(i) The Company owns or possesses the unrestricted
rights to use all patents, copyrights, trademarks, trade
secrets and proprietary rights or information necessary for
the development, manufacture, operation and sale of all
products and services sold or proposed to be sold by the
Company and for the conduct of its present or intended
business as described in the Prospectus. There are no pending
legal, governmental or administrative proceedings relating to
patents, copyrights, trademarks or proprietary rights or
information to which the Company is a party or to which any
property of the Company is subject and no such proceedings
are, to the best of the Company's knowledge, threatened or
contemplated against the Company by any governmental agency or
authority or others. The Company has not received any notice
of conflict with asserted rights of others. The Company is not
using any confidential information or trade secrets of any
third party without such party's consent.
(ii) The Company does not infringe upon the right or
claimed rights of any person under or with respect to any of
the intangible rights listed in the preceding subsection. The
Company is not obligated or under any liability whatsoever to
make any payments 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.
(q) The Company intends to apply the proceeds from the sale of
the Shares by it to the purposes and substantially in the manner set
forth in the Prospectus.
(r) The Company has no defined benefit pension plan or other
pension benefit plan, which is intended to comply with the provisions
of the Employee Retirement Income Security Act of 1974 as amended from
time to time, except as disclosed in the Registration Statement.
(s) To the best of the Company's knowledge, no person is
entitled, directly or indirectly, to compensation from the Company or
the Underwriter for services as a finder in connection with the
transactions contemplated by this Agreement.
(t) The conditions for use of a Registration Statement on Form
SB-2 for the distribution of the Shares have been satisfied with
respect to the Company.
(u) The Company has not taken and will not take, directly or
indirectly, any action (and does not know of any action by its
directors, officers, stockholders, or others) which has constituted or
is designed to, or which might reasonably be expected to, cause or
result in stabilization or manipulation, as defined in the Securities
Exchange Act of 1934, as
<PAGE>
amended (the "1934 Act") or otherwise, of the price of any security of
the Company to facilitate the sale or resale of the Shares.
(v) The Company has not sold any securities in violation of
Section 5 of the 1933 Act.
(w) The Company maintains insurance, which is in full force
and effect, of the types and in the amounts adequate for its business
and in line with the insurance maintained by similar companies and
businesses.
(x) The Company hereby represents that, as of the date hereof,
it has complied with all provisions of Section 517.075, Florida
Statutes and Rule 3E-900-001 of the Rules of the Florida Department of
Banking and Finance, Division of Securities, copies of which are
attached hereto.
(y) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorizations and (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with GAAP.
(z) All material transactions between the Company and its
stockholders who beneficially own more than 5% of any class of the
Company's voting securities have been accurately disclosed in the
Prospectus, and the terms of each such transaction are fair to the
Company and no less favorable to the Company than the terms that could
have been obtained from unrelated parties.
(aa) The Company has obtained a written agreement, enforceable
by the Underwriter from the sole existing stockholder of the Company,
that for one year following the Effective Date, such person will not,
without the Underwriter's prior written consent, sell, transfer or
otherwise dispose of, or agree to sell, transfer or otherwise dispose
of, other than by gift to donees who agree to be bound by the same
restriction or by will or the laws of descent, any of his or her Common
Stock, or any options, warrants or rights to purchase Common Stock or
any shares of Common Stock received upon exercise of any options,
warrants or rights to purchase Common Stock, all of which are
beneficially held by such persons during such 12 month period.
(bb) The Common Stock of the Company has been approved by
Nasdaq for trading on its Small Cap Market following effectiveness of
the Registration Statement.
(cc) The Company has not distributed and will not distribute
any prospectus or other offering material in connection with the
offering and sale of the Shares other than Preliminary Prospectus or
the Prospectus or other materials permitted by the Act to be
distributed by the Company.
<PAGE>
(dd) To the Company's knowledge, none of the Company's
officers, directors or security holders has any affiliations with the
NASD, except as set forth in the Registration Statement or as otherwise
disclosed in writing to the Underwriter.
(ee) The Company is not, and upon completion of the sale of
the Shares contemplated hereby will not be required to, register as an
"investment company" under the Investment Company Act of 1940, as
amended.
(ff) Any certificate signed by any officer of the Company and
delivered to the Underwriter or counsel to the Underwriter shall be
deemed to be a representation and warranty of the Company to the
Underwriter as to the matters covered thereby.
2. Purchase, Sale, Delivery and Payment.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions
herein set forth, the Company agrees to issue and sell to the
Underwriter, and the Underwriter agrees to purchase from the Company,
at $5.00 per Share (net of underwriting discounts and commissions of
$.3750 per Share) the Firm Shares. The Underwriter will purchase all of
the Firm Shares if any are purchased.
(b) On the basis of the representations and warranties herein
contained, but subject to the terms and conditions herein set forth,
the Company hereby grants an option to the Underwriter to purchase the
Option Shares at the same purchase price as the Firm Shares for use
solely in covering any overallotments made by the Underwriter in the
sale and distribution of the Firm Shares. The option granted hereunder
may be exercised at any time (but not more than once) within 45 days
after the Effective Date (as defined in Section 4(a) hereof) upon
notice (confirmed in writing) by the Underwriter to the Company setting
forth the aggregate number of Option Shares as to which the Underwriter
is exercising the option and the date on which certificates for such
Option Shares are to be delivered. The option granted hereby may be
canceled by the Underwriter as to the Option Shares for which the
option is unexercised at any time prior to the expiration of the 45-day
period upon notice to the Company.
(c) The Company will deliver the Firm Shares to the
Underwriter at the offices of Fredrikson & Byron, P.A., unless some
other place is agreed upon, at 10:00 A.M., Minneapolis time, against
payment of the purchase price at the same place, on the third full
business day after trading of the Shares has commenced (but not more
than ten full business days after the date the Registration Statement
is declared effective), or such earlier time as may be agreed upon
between the Underwriter and the Company. Such time and place is herein
referred to as the "First Closing Date."
(d) The Company will deliver the Option Shares being purchased
by the Underwriter to the Underwriter at the offices of Fredrikson &
Byron, P.A. set forth in Section 2(c) above, unless some other place is
agreed upon, at 10:00 a.m., Minneapolis
<PAGE>
time, against payment of the purchase price at the same place, on the
date determined by the Underwriter and of which the Company has
received notice as provided in Section 2(b), which shall not be earlier
than one nor later than three full business days after the exercise of
the option as set forth in Section 2(b), or at such other time not
later than ten full business days thereafter as may be agreed upon by
the Underwriter and the Company, such time and date being herein
referred to as the "Second Closing Date." The First and Second Closing
Dates are collectively referred to herein as the "Closing Date."
(e) Certificates for the Shares to be delivered will be
registered in such names and issued in such denominations as the
Underwriter shall request of the Company at least two full business
days prior to the First Closing Date or the Second Closing Date, as the
case may be. The certificates will be made available to the Underwriter
in definitive form for the purpose of inspection and packaging at least
24 hours prior to each respective Closing Date.
(f) Payment for the Shares shall be made, against delivery to
the Underwriter or its designated agent, of certificates for the Shares
by wire transfer to a designated account of the Company.
(g) The Underwriter will make a public offering of the Shares
directly to the public (which may include selected dealers who are
members in good standing with the NASD or foreign dealers not eligible
for membership in the NASD but who have agreed to abide by the
interpretation of the NASD's Board of Governor's with respect to
free-riding and withholding) as soon as the Underwriter deems
practicable after the Registration Statement becomes effective at the
Price to Public set forth in Section 2(a) above, subject to the terms
and conditions of this Agreement and in accordance with the Prospectus.
Such concessions from the public offering price may be allowed selected
dealers of the NASD as the Underwriter determines, and the Underwriter
will furnish the Company with such information about the distribution
arrangements as may be necessary for inclusion in the Registration
Statement. It is understood that the public offering price and
concessions may vary after the initial public offering. The Underwriter
shall offer and sell the Shares only in jurisdictions in which the
offering of Shares has been duly registered or qualified, or is exempt
from registration or qualification, and shall take reasonable measures
to effect compliance with applicable state and local securities laws.
(h) On the First Closing Date, the Company shall issue and
deliver to the Underwriter the Underwriter's Warrants.
3. Further Agreements of the Company. The Company hereby covenants and
agrees with the Underwriter as follows:
(a) If the Registration Statement has not become effective
prior to the date hereof, the Company will use its best efforts to
cause the Registration Statement and any subsequent amendments thereto
to become effective as promptly as possible. The Company will notify
the Underwriter promptly, after the Company shall receive notice
<PAGE>
thereof, of the time when the Registration Statement, or any subsequent
amendment thereto, has become effective or any supplement to the
Prospectus has been filed. Following the execution and delivery of this
Agreement, the Company will prepare, and timely file or transmit for
filing with the SEC in accordance with Rules 430A, 424(b) and 434, as
applicable, copies of the Prospectus, or, if necessary, a
post-effective amendment to the Registration Statement (including the
Prospectus), in which event, the Company will take all necessary action
to have such post-effective amendment declared effective as soon as
possible. The Company will notify the Underwriter promptly upon the
Company's obtaining knowledge of the issuance by the SEC of any stop
order suspending the effectiveness of the Registration Statement or of
the initiation or threat of any proceedings for that purpose and will
use its best efforts to prevent the issuance of any stop order and, if
a stop order is issued, to obtain as soon as possible the withdrawal or
lifting thereof. The Company will promptly prepare and file at its own
expense with the SEC any amendments of, or supplements to, the
Registration Statement or the Prospectus which may be necessary in
connection with the distribution of the Shares by the Underwriter.
During the period when a Prospectus relating to the Shares is required
to be delivered under the 1933 Act, the Company will promptly file any
amendments of, or supplements to, the Registration Statement or the
Prospectus which may be necessary to correct any untrue statement of a
material fact or any omission to state any material fact necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading. The Company will notify the Underwriter
promptly of the receipt of any comments from the SEC regarding the
Registration Statement or Prospectus or request by the SEC for any
amendment thereof or supplement thereto or for any additional
information. The Company will not file any amendment of, or supplement
to, the Registration Statement or Prospectus, whether prior to or after
the Effective Date, which shall not previously have been submitted to
the Underwriter and its counsel a reasonable time prior to the proposed
filing or to which the Underwriter shall have reasonably objected.
(b) The Company has used and will continue to use its best
efforts to register or qualify the Shares for sale under the securities
laws of such jurisdictions as the Underwriter may designate and the
Company will file such consents to service of process or other
documents necessary or appropriate in order to effect such registration
or qualification. In each jurisdiction in which the Shares shall have
been registered or qualified as above provided, the Company will
continue such registrations or qualifications in effect for so long as
may be required for purposes of the distribution of the Shares;
provided, however, that in no event shall the Company be obligated to
qualify to do business as a foreign corporation in any jurisdiction in
which it is not now so qualified or to take any action which would
subject it to the service of process in suits, other than those arising
out of the offering or sale of the Shares, in any jurisdiction where it
is not now so subject. In each jurisdiction where any of the Shares
shall have been so qualified, the Company will file such statements and
reports as are or may be reasonably required by the laws of such
jurisdiction to continue such qualification in effect. The Company will
notify the Underwriter immediately of, and confirm in writing, the
suspension of qualification of the Shares or the threat of such action
in any jurisdiction. The Company will use its best efforts to qualify
or register its Common Stock for sale in nonissuer transactions under
(or obtain
<PAGE>
exemptions from the application of) the securities laws of such states
designated by the Underwriter (and thereby permit market-making
transactions and secondary trading in its Common Stock in such states),
and will comply with such securities laws and will continue such
qualifications, registrations and exemptions in effect for a period of
five years after the date hereof.
(c) The Company will furnish to the Underwriter, as soon as
available, copies of the Registration Statement (one of which will be
signed and which shall include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such
documents, including any prospectus prepared to permit compliance with
Section 10(a)(3) of the 1933 Act, all in such quantities as the
Underwriter may from time to time reasonably request prior to the
printing of each such document. The Company specifically authorizes the
Underwriter and all dealers to whom any of the Shares may be sold by
the Underwriter to use and distribute copies of such Preliminary
Prospectuses and Prospectuses in connection with the sale of the Shares
as and to the extent permitted by the federal and applicable state and
local securities laws.
(d) For as long as the Company has more than 100 beneficial
owners, but in no event more than five years after the Effective Date,
the Company will mail as soon as practicable to the holders of its
Common Stock substantially the following documents, which documents
shall be in compliance with this Section if they are in the form
prescribed by the 1934 Act:
(i) within forty-five days after the end of the first three
quarters of each fiscal year, copies of the quarterly
unaudited statement of profit and loss and quarterly unaudited
balance sheets of the Company and any material subsidiaries;
and
(ii) within ninety days after the close of each fiscal year,
appropriate financial statements as of the close of such
fiscal year for the Company and any material subsidiary which
shall be certified to by a nationally recognized firm of
independent certified public accountants in such form as to
disclose the Company's financial condition and the results of
its operations for such fiscal year.
(e) For as long as the Company has more than 100 beneficial
owners, but in no event more than five years after the Effective Date,
the Company will furnish to the Underwriter (i) concurrently with
furnishing such reports to its stockholders, the reports described in
Section 3(d) hereof; (ii) as soon as they are available, copies of all
other reports (financial or otherwise) mailed to security holders; and
(iii) as soon as they are available, copies of all reports and
financial statements furnished to, or filed with, the SEC, the NASD,
any securities exchange or any state securities commission by the
Company. During such period, the foregoing financial statements shall
be on a consolidated basis to the extent that the accounts of the
Company and any subsidiary or subsidiaries are consolidated and shall
be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
<PAGE>
(f) The Company will not, without the prior written consent of
the Underwriter, which consent shall not be unreasonably withheld, sell
or otherwise dispose of any capital stock or securities convertible or
exercisable into capital stock of the Company (other than options
granted under the Company's Stock Option Plan as described in the
Registration Statement and securities issuable upon exercise thereof)
during the twelve month period following the Effective Date. Prior to
the Closing Date, the Company will not repurchase or otherwise acquire
any of its capital stock or declare or pay any dividend or make any
distribution on any class of its capital stock.
(g) Subject to the proviso set forth below, the Company shall
be responsible for and pay all costs and expenses incident to the
performance of its obligations under this Agreement including, without
limiting the generality of the foregoing, (i) all costs and expenses in
connection with the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits),
Preliminary Prospectuses and the Prospectus and any amendments thereof
or supplements to any of the foregoing; (ii) the issuance and delivery
of the Shares, including taxes, if any; (iii) the cost of all
certificates representing the Shares; (iv) the fees and expenses of the
Transfer Agent for the Shares; (v) the fees and disbursements of
counsel for the Company; (vi) all fees and other charges of the
independent public accountants of the Company; (vii) the cost of
furnishing and delivering to the Underwriter and dealers participating
in the offering copies of the Registration Statement (including
appropriate exhibits), Preliminary Prospectuses, the Prospectus and any
amendments of, or supplements to, any of the foregoing; (viii) the NASD
filing and quotation fees; (ix) the fees and disbursements, including
filing fees and all accountable fees and expenses of counsel for the
Underwriter incurred in registering or qualifying the Shares for sale
under the laws of such jurisdictions upon which the Underwriter and the
Company may agree; and (x) a nonaccountable expense allowance to the
Underwriter equal to 2% of the gross proceeds from the offering and
sale of the Shares (the "Offering"). The Underwriter hereby acknowledge
receipt of a $10,000 advance against the Underwriter's non-accountable
expense allowance referred to in the preceding sentence. In the event
this Agreement is terminated pursuant to Section 8 below, the Company
shall remain obligated to pay the Underwriter its accountable expenses,
including but not limited to travel expenses and expenses of its legal
counsel, not to exceed $30,000. Further, if upon termination of this
Agreement pursuant to Section 8 below, the Underwriter's actual
accountable out-of-pocket expenses do not exceed the $10,000 advance
against the Underwriter's accountable expense allowance, the portion of
the advance not used will be reimbursed to the Company by the
Underwriter.
(h) The Company will not take, and will use its best efforts
to cause each of its officers and directors not to take, directly or
indirectly, any action designed to or which might reasonably be
expected to cause or result in the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
of the Shares.
(i) The Company will use its best efforts to maintain the
listing of its Common Stock on the Nasdaq Small Cap Market.
<PAGE>
(j) For a period of at least three years after the Effective
Date, the Company will file with the SEC all reports and other
documents as may be required by the 1933 Act, the Rules and Regulations
and the 1934 Act.
(k) The Company will apply the proceeds from the sale of the
Shares substantially in the manner set forth in the Prospectus.
(l) Prior to or as of the First Closing Date, the Company
shall have performed each condition to the Underwriter's obligations
required to be performed by it pursuant to Section 4 hereof.
(m) Other than as permitted by the 1933 Act and the Rules and
Regulations, the Company will not distribute any prospectus or other
offering material in connection with the Offering.
(n) The Company will apply the net proceeds from the sale of
the Shares substantially in the manner set forth in the Prospectus.
(o) During the period ending 120 days from the Effective Date,
the Company agrees that it will issue press releases, make public
statements and respond to inquiries of the press and securities
analysts only after conferring with its counsel and with the
Underwriter.
(p) On First Closing Date, the Company shall grant to the
Underwriter the Underwriter's Warrants, in substantially the form
attached as Appendix A hereto.
(q) Prior to or as of either Closing Date, the Company shall
have performed each condition to closing required to be performed by
the Company pursuant to Section 4 hereof.
4. Conditions of the Underwriter's Obligations. The obligation of the
Underwriter to purchase and pay for the Shares as provided herein shall be
subject to the accuracy of the representations and warranties of the Company, in
the case of the Firm Shares as of the date hereof and the First Closing Date (as
if made on and as of the First Closing Date) and in the case of the Option
Shares, as of the date hereof and the Second Closing Date (as if made on and as
of the Second Closing Date), to the performance by the Company of its
obligations hereunder, and to the satisfaction of the following additional
conditions on or before the First Closing Date in the case of the Firm Shares
and on or before the Second Closing Date in the case of the Option Shares:
(a) The Registration Statement shall have become effective not
later than 5:00 P.M. Minneapolis time, on the first full business day
following the date of this Agreement, or such later date as shall be
consented to in writing by the Underwriter (the "Effective Date"). If
the Company has elected to rely upon Rule 430A, the information
concerning the price of the Shares and price-related information
previously omitted from the effective Registration Statement pursuant
to Rule 430A shall have been transmitted to the SEC for
<PAGE>
filing pursuant to Rule 424(b) within the prescribed time period, and
prior to the Closing Date the Company shall have provided evidence
satisfactory to the Underwriter of such timely filing (or a
post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the 1933 Act
and the Rules and Regulations). No stop order suspending the
effectiveness thereof shall have been issued and no proceeding for that
purpose shall have been initiated or, to the knowledge of the Company
or the Underwriter, threatened by the SEC or any state securities
commission or similar regulatory body. Any request of the SEC for
additional information (to be included in the Registration Statement or
the Prospectus or otherwise) shall have been complied with to the
satisfaction of the Underwriter and its legal counsel. The NASD, upon
review of the terms of the Offering, shall not have objected to the
terms of the Underwriter's participation in the Offering.
(b) The Underwriter shall not have advised the Company that
the Registration Statement or Prospectus, or any amendment thereof or
supplement thereto, contains any untrue statement of a fact which is
material or omits to state a fact which is material and is required to
be stated therein or is necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that this Section 4(b) shall not apply
to statements in, or omissions from, the Registration Statement or
Prospectus, or any amendment thereof or supplement thereto, which are
based upon and conform to written information furnished to the Company
by the Underwriter specifically for use in the preparation of the
Registration Statement or the Prospectus, or any such amendment or
supplement.
(c) Subsequent to the date as of which information is given
the Registration Statement and Prospectus, there shall not have
occurred any change, or any development involving a prospective change,
which materially and adversely affects the business or properties of
the Company and which, in the reasonable opinion of the Underwriter,
materially and adversely affects the market for the Shares.
(d) The Underwriter shall have received the opinion of
Johnson, Killen, Thibodeau & Seiler, P.A. and the opinion of Lommen,
Nelson, Cole & Stageberg, P.A., counsel for the Company, dated as of
such respective Closing Date, addressed to the Underwriter and
satisfactory in form and substance to the Underwriter and its counsel,
to the effect that:
(i) The Company has been duly incorporated and is
validly existing in good standing under the laws of the State
of Minnesota with the requisite corporate power to own, lease
and operate its properties and conduct its business as
described in the Prospectus; and is duly qualified to do
business as a foreign corporation in good standing in all
jurisdictions where the ownership or leasing of its properties
or the conduct of its business requires such qualification and
in which the failure to be so qualified or in good standing
would have a material adverse effect on its business. The
activities of the Company are permitted under the 1933 Act,
the Rules and Regulations and other applicable laws.
<PAGE>
(ii) The number of authorized, issued and outstanding
shares of capital stock of the Company are as set forth under
the caption "Capitalization" in the Prospectus. The
outstanding shares of capital stock of the Company have been
duly authorized and validly issued, and are fully paid and
nonassessable. Upon delivery of and payment for the Shares
hereunder, the Underwriter will acquire the Shares free and
clear of all liens, encumbrances or claims. To such counsel's
knowledge, no preemptive rights, contractual or otherwise, of
securities holders of the Company exist with respect to the
issuance or sale of the Shares by the Company pursuant to this
Agreement or the issuance of the Warrant Shares upon exercise
of the Underwriter's Warrants. To such counsel's knowledge, no
rights to require registration of shares of Common Stock or
other securities of the Company exist which may be exercised
in connection with the filing of the Registration Statement.
The Shares, Underwriter's Warrants and Warrant Shares conform
as to matters of law in all material respects to the
description of such securities made in the Prospectus and such
description accurately sets forth the material legal
provisions thereof required to be set forth in the Prospectus.
(iii) The Shares have been duly authorized and, upon
delivery to the Underwriter against payment therefor, will be
validly issued, fully paid and nonassessable.
(iv) The certificates evidencing the Shares comply as
to form with the applicable provisions of the laws of the
State of Minnesota.
(v) The Underwriter's Warrants have been duly
authorized, executed and delivered by the Company and are the
valid and binding obligations of the Company, enforceable in
accordance with their terms, except as enforceability may be
limited by the application of bankruptcy, insolvency,
moratorium, or other laws of general application affecting the
rights of creditors generally and by judicial limitations on
the right of specific performance and other equitable
remedies. The Warrant Shares when issued in accordance with
the terms of this Agreement and pursuant to the Underwriter's
Warrants will be validly issued, fully paid and nonassessable.
A sufficient number of shares of Common Stock has been
reserved for issuance upon exercise of the Underwriter's
Warrants.
(vi) The Registration Statement has become and is
effective under the 1933 Act, the Prospectus has been filed as
required by Rule 424(b), if necessary and, to the knowledge of
such counsel, no stop orders suspending the effectiveness of
the Registration Statement have been issued and no proceedings
for that purpose have been instituted or are pending or
contemplated under the 1933 Act.
(vii) To such counsel's knowledge, there are no
material legal or governmental proceedings of a character
required by the 1933 Act and the Rules and Regulations to be
described or referred to in the Registration Statement or
<PAGE>
Prospectus that are not described or referred to therein. All
pending legal or governmental proceedings, if any, to which
the Company is a party or to which any of its property is
subject which are not described in the Registration Statement
and the Prospectus, including ordinary routine litigation
incidental to the business, are, considered in the aggregate,
not material to the Company.
(viii) No authorization, approval or consent of any
governmental authority or agency is necessary in connection
with the issuance and sale of the Shares as contemplated under
this Agreement, except such as may be required and obtained
under the 1933 Act or under state or other securities laws in
connection with the purchase and distribution of the Shares by
the Underwriter.
(ix) The conditions for use of a registration
statement on Form SB-2 for the distribution of shares have
been satisfied with respect to the Company.
(x) This Agreement has been duly authorized, executed
and delivered by, and is a valid and binding agreement of the
Company, enforceable in accordance with its terms, except as
enforceability may be limited by the application of
bankruptcy, insolvency, moratorium or similar laws affecting
the rights of creditors generally and judicial limitations on
the right of specific performance and except as the
enforceability of indemnification or contribution provisions
hereof may be limited by federal or state securities laws.
(xi) Such counsel does not know of any contracts,
agreements, documents or instruments required to be filed as
exhibits to the Registration Statement or described in the
Registration Statement or the Prospectus which are not so
filed or described as required, and does not know of any
amendment to the Registration Statement required to be filed
that has not been filed; and insofar as any statements in the
Registration Statement or the Prospectus constitute summaries
of any contract, agreement, document or instrument to which
the Company is a party, such statements are accurate summaries
and fairly present the information called for with respect to
such matters.
(xii) To such counsel's knowledge, there are no
defects in title or leasehold interests, or any liens,
encumbrances, equities, charges or claims, not disclosed in
the Registration Statement or Prospectus which would
materially affect the present occupancy or use of any of the
real or personal property owned or leased by the Company.
(xiii) To such counsel's knowledge, except as
described in the Prospectus, there are no United States
patents of third parties which are infringed by the
manufacture, use or sale of the products or processes
currently made, used or sold by the Company.
<PAGE>
(xiv) To such counsel's knowledge there are no legal,
governmental or administrative proceedings pending or
threatened against the Company that relate to patents,
trademarks or other intellectual property, except for pending
or proposed United States and foreign patent applications.
(xv) To such counsel's knowledge, except as described
in the Prospectus, after due inquiry, the Company has not
received any notice of conflict with the asserted rights of
others in respect of any trademarks, service marks, trade
names, trademark registrations, service mark registrations,
copyrights, licenses, inventions, trade secrets, patents,
patent applications, know-how, or similar rights, nor of any
threatened actions with respect thereto, which, if determined
adversely to the Company, would individually or in the
aggregate have a material adverse effect on the general
affairs, financial position, net worth or results of
operations of the Company.
(xvi) To such counsel's knowledge, after due inquiry,
the Company owns, possesses or is licensed under all such
material trademarks, trademark applications, trademark
registrations, service marks, service mark registrations,
copyrights, patents, patent applications and licenses as are
described in the Prospectus and which are necessary for the
Company's present or planned future business as described in
the Prospectus.
(xvi) The performance of this Agreement and the
consummation of the transactions described herein will not
result in a violation or default under, the Company's Restated
Articles of Incorporation, as amended, Restated Bylaws or
other governing documents. To such counsel's knowledge, (a)
the Company is not in violation of, or in default under, its
Restated Articles of Incorporation, as amended, Restated
Bylaws or other governing documents; and (b) the execution,
delivery and performance of this Agreement and the
consummation of the transactions described herein will not
result in a material violation of, or a material default
under, the terms or provisions of (A) any bond, debenture,
note, or other evidence of indebtedness or any contract,
license, indenture, mortgage, loan agreement, joint venture or
partnership agreement, lease, agreement or instrument to which
the Company is a party or by which the Company or any of its
properties is bound, or (B) any law, order, rule, regulation,
writ, injunction, or decree known to such counsel of any
government, governmental agency or court having jurisdiction
over the Company or any of its properties.
(xvii) To such counsel's knowledge, sales of
unregistered securities by the Company prior to the Effective
Date were exempt from registration requirements of the Act and
are not required to be integrated under Rule 502(a) of the
Regulation D of the Act with the public offering contemplated
hereby.
<PAGE>
(xviii) The Company is not, and immediately upon
completion of the sale of the Shares contemplated hereby will
not be required to register as an "investment company" under
the Investment Company Act of 1940, as amended.
(xix) To such counsel's knowledge, the Company has
not consummated any form of business combination which is
required to be described or referenced in the Registration
Statement that is not so described or referenced.
In expressing the foregoing opinion, as to matters of fact relevant to
conclusions of law, counsel may rely, to the extent that they deem proper, upon
certificates of public officials and of the officers of the Company, provided
that copies of such officers' certificates are attached to the opinion.
In addition to the matters set forth above, such opinion shall also
include a statement to the effect that, although such counsel cannot guarantee
the accuracy, completeness or fairness of any of the statements contained in the
Registration Statement, Prospectus, or any amendment thereof or supplement
thereto in connection with such counsel's representation, investigation and due
inquiry of the Company in the preparation of the Registration Statement,
Prospectus and any amendment thereof or supplement thereto, nothing has come to
the attention of such counsel which causes them to believe that the Registration
Statement, Prospectus, or any amendment thereof or supplement thereto (other
than the financial statements and supporting financial and statistical data
included or incorporated therein, as to which such counsel need express no
opinion) contains an 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, in light of the circumstances in which they were made, not misleading;
provided, however, that such opinion of counsel does not require any statement
concerning statements in, or omissions from, the Registration Statement,
Prospectus, or any amendment thereof or supplement thereto, which are based upon
and conform to written information furnished to the Company by the Underwriter
specifically for use in the preparation of the Registration Statement,
Prospectus, or any such amendment or supplement.
(e) The Underwriter shall have received from Fredrikson &
Byron, P.A., its counsel, such opinion or opinions as the Underwriter
may reasonably require, dated as of each Closing Date and satisfactory
in form and substance to the Underwriter, with respect to the
sufficiency of corporate proceedings and other legal matters relating
to this Agreement and the transactions contemplated hereby, and the
Company shall have furnished to said counsel such documents as they may
have requested for the purpose of enabling them to pass upon such
matters. In connection with such opinion, as to matters of fact
relevant to conclusions of law, such counsel may rely, to the extent
that they deem proper, upon representations or certificates of public
officials and of responsible officers of the Company.
(f) The Underwriter and the Company shall have received
letters, dated the date hereof and as of each Closing Date, from
McGladery & Pullen, LLP independent public accountants, containing
statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and
<PAGE>
certain financial and statistical information contained in the
Registration Statement and the Prospectus, all in form and substance
satisfactory to the Underwriter and its counsel.
(g) The Underwriter shall have received from the Company a
certificate, dated as of such Closing Date, of the principal executive
officer and the principal financial or accounting officer of the
Company to the effect that:
(i) The representations and warranties of the Company
in this Agreement are true and correct as if made on and as of
such Closing Date. The Company has complied with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied at, or prior to, such date.
(ii) No stop order suspending the effectiveness of
the Registration Statement has been issued and no proceeding
for that purpose has been instituted or is pending or to the
best knowledge of such officers contemplated under the 1933
Act.
(iii) Neither the Registration Statement nor the
Prospectus nor any amendment thereof or supplement thereto
included any untrue statement of a material fact or omitted to
state any 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, and,
since the effective date of the Registration Statement, there
has occurred no event required to be set forth in an amended
or supplemented prospectus which has not been so set forth;
provided, however, that such certificate does not require any
representation concerning statements in, or omissions from,
the Registration Statement or Prospectus, or any amendment
thereof or supplement thereto, which are based upon and
conform to written information furnished to the Company by the
Underwriter specifically for use in the preparation of the
Registration Statement or the Prospectus, or any such
amendment or supplement.
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, and except as contemplated or referred to in the
Prospectus, no event has occurred that should have been set
forth in an amendment or supplement to Registration Statement
or the Prospectus which has not been so set forth and the
Company has not incurred any direct or contingent liabilities
or obligations material to the Company, or entered into any
material transactions, except liabilities, obligations or
transactions in the ordinary course of business, and there has
not been any change in the capital stock or long-term debt of
the Company, (including any capitalized lease obligations),
any material increase in the short-term debt of the Company,
any material adverse change in the financial position, net
worth or results of operations of the Company or declaration
or payment of any dividend.
<PAGE>
(v) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, the Company has not sustained any material loss
of, or damage to, its properties, whether or not insured.
(vi) Except as is otherwise expressly stated in the
Registration Statement and Prospectus, there are no material
actions, suits or proceedings pending before any court or
governmental agency, authority or body, or, to the best of
their knowledge, threatened, to which the Company is a party
or of which the business or property of the Company is the
subject.
(h) The Underwriter shall have received, dated as of each
Closing Date, from the Secretary of the Company a certificate of
incumbency certifying the names, titles and signatures of the officers
authorized to carry out the resolutions of the Board of Directors of
the Company authorizing and approving the execution, delivery and
performance of this Agreement, a copy of such resolutions to be
attached to such certificate, certifying that such resolutions and the
Restated Articles of Incorporation, as amended of the Company and the
Restated Bylaws of the Company have been validly adopted and have not
been amended or modified.
(i) The Underwriter shall have received an original written
agreement from the sole existing stockholders of the Company, that for
twelve months following the Effective Date, such person will not,
without the Underwriter's prior written consent, sell, transfer or
otherwise dispose of, or agree to sell, transfer or otherwise dispose
of, other than by gift to donees who agree to be bound by the same
restriction or by will or the laws of descent, any of his or her Common
Stock, or any options, warrants or rights to purchase Common Stock or
any shares of Common Stock received upon exercise of any options,
warrants or rights to purchase Common Stock, all of which are
beneficially held by such persons during the twelve month period.
(j) The Company shall not have failed to have performed any of
its agreements herein contained and required to be performed by it at
or prior to the First Closing Date or the Second Closing Date, as the
case may be.
(k) The Shares shall have been registered or qualified for
sale or exempt from such registration or qualification under the
securities laws of such jurisdictions as designated by the Underwriter
such qualifications or exemptions shall continue in effect to and
including the First Closing Date or the Second Closing Date, as the
case may be.
(l) The Company shall have furnished to the Underwriter, dated
as of the date of each Closing Date, such further certificates and
documents as the Underwriter or its counsel shall have reasonably
required.
(m) All such opinions, certificates, letters and documents
will be in compliance with the provisions hereof only if they are
reasonably satisfactory to the Underwriter and its legal counsel. All
statements contained in any certificate, letter, or other document
<PAGE>
delivered pursuant hereto by, or on behalf of, the Company shall be
deemed to constitute representations and warranties of the Company.
(n) The Underwriter may waive in writing the performance of
any one or more of the conditions specified in this Section 4 or extend
the time for their performance.
(o) If any of the conditions specified in this Section 4 shall
not have been fulfilled when and as required by this Agreement to be
fulfilled, this Agreement and all obligations of the Underwriter
hereunder may be canceled at, or at any time prior to, each Closing
Date by the Underwriter. Any such cancellation shall be without
liability of the Underwriter to the Company and shall not relieve the
Company of its obligations under Section 3(g) hereof. Notice of such
cancellation shall be given to the Company at the address specified in
Section 11 hereof in writing, or by telegraph or telephone confirmed in
writing.
5. Underwriter's Warrants. On the First Closing Date, the Company shall
sell to the Underwriter for $50 the Underwriter's Warrants, which warrants shall
first become exercisable one year after the Effective Date and shall remain
exercisable for a period of four years thereafter. The Underwriter's Warrants
shall be subject to certain transfer restrictions and shall be in substantially
the form filed as an exhibit to the Registration Statement and attached as
Appendix A hereto.
6. Indemnification.
(a) The Company hereby agrees to indemnify and hold harmless
the Underwriter and each person, if any, who controls the Underwriter
within the meaning of Section 15 of the 1933 Act against any losses,
claims, damages or liabilities, joint or several, to which such
Underwriter or each such controlling person may become subject, under
the 1933 Act, the 1934 Act, the common law or otherwise, insofar as
such losses, claims, damages or liabilities (or judicial or
governmental actions or proceedings in respect thereof) arise out of,
or are based upon, (i) any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or any
amendment thereof, or the omission or alleged omission to state in the
Registration Statement or any amendment thereof a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; (ii) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus if used prior to
the Effective Date of the Registration Statement or in the Prospectus
(as amended or as supplemented, if the Company shall have filed with
the SEC any amendment thereof or supplement thereto), or the omission
or alleged omission to state therein a 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;
or (iii) any untrue statement or alleged untrue statement of a material
fact contained in any application or other statement executed by the
Company or based upon written information furnished by the Company
filed in any jurisdiction in order to qualify the Shares under, or
exempt the Shares or the sale thereof from qualification under, the
securities laws of such jurisdiction, or the omission or alleged
omission to state in such
<PAGE>
application or statement a material fact required to be stated therein
or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and the
Company will reimburse the Underwriter and each such controlling person
for any legal or other expenses reasonably incurred by such Underwriter
or controlling person (subject to the limitation set forth in Section
6(c) hereof) in connection with investigating or defending against any
such loss, claim, damage, liability or action; provided, however, that
the Company will not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of, or is based upon,
an untrue statement, or alleged untrue statement, omission or alleged
omission, made in reliance upon and in conformity with written
information furnished to the Company by, or on behalf of, the
Underwriter specifically for use in the preparation of the Registration
Statement or any such post effective amendment thereof, any such
Preliminary Prospectus or the Prospectus or any such amendment thereof
or supplement thereto, or in any application or other statement
executed by the Company or the Underwriter filed in any jurisdiction in
order to qualify the Shares under, or exempt the Shares or the sale
thereof from qualification under, the securities laws of such
jurisdiction; and provided further that the foregoing indemnity
agreement is subject to the condition that, insofar as it relates to
any untrue statement, alleged untrue statement, omission or alleged
omission made in any Preliminary Prospectus but eliminated or remedied
in the Prospectus, such indemnity agreement shall not inure to the
benefit of the Underwriter if the person asserting any loss, claim,
damage or liability purchased the Shares from such Underwriter which
are the subject thereof (or to the benefit of any person who controls
such Underwriter), if a copy of the Prospectus was not sent or given to
such person with, or prior to, the written confirmation of the sale of
such Shares to such person. This indemnity agreement is in addition to
any liability which the Company may otherwise have.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each of the Company's directors, each of the Company's
officers who has signed the Registration Statement and each person who
controls the Company within the meaning of Section 15 of the 1933 Act
against any losses, claims, damages or liabilities to which the Company
or any such director, officer, or controlling person may become
subject, under the 1933 Act, the 1934 Act, the common law, or
otherwise, insofar as such losses, claims, damages, or liabilities (or
judicial or governmental actions or proceedings in respect thereof)
arise out of, or are based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, or the omission or alleged omission
to state in the Registration Statement or any amendment thereof, a
material fact required to be stated therein or necessary to make the
statements therein not misleading; (ii) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary
Prospectus if used prior to the Effective Date of the Registration
Statement or in the Prospectus (as amended or as supplemented, if the
Company shall have filed with the SEC any amendment thereof or
supplement thereto), or the omission or alleged omission to state
therein a 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; or (iii) any untrue
statement or alleged untrue statement of a material fact contained in
any application or other statement executed by the
<PAGE>
Company or by the Underwriter and filed in any jurisdiction in order to
qualify the Shares under, or exempt the Shares or the sale thereof from
qualification under, the securities laws of such jurisdiction, or the
omission or alleged omission to state in such application or statement
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; in each case to the extent, but only the extent,
that such untrue statement, alleged untrue statement, omission or
alleged omission, was made in reliance upon and in conformity with
written information furnished to the Company by, or on behalf of, the
Underwriter specifically for use in the preparation of the Registration
Statement or any such post effective amendment thereof, any such
Preliminary Prospectus or the Prospectus or any such amendment thereof
or supplement thereto, or in any application or other statement
executed by the Company or by the Underwriter and filed in any
jurisdiction; and the Underwriter will reimburse any legal or other
expenses reasonably incurred by the Company or any such director,
officer or controlling person in connection with investigating or
defending against any such loss, claim, damage, liability or action.
This indemnity agreement is in addition to any liability which the
Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against any
indemnifying party under this Section 6, notify in writing the
indemnifying party of the commencement thereof. The omission so to
notify the indemnifying party will not relieve the indemnifying party
from any liability under this Section 6 as to the particular item for
which indemnification is then being sought, unless such omission so to
notify prejudices the indemnifying party's ability to defend such
action. In case any such action is brought against any indemnified
party and the indemnified party notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel who shall be reasonably satisfactory to such
indemnified party; and 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 under
this Section 6 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof other
than reasonable costs of investigation; provided, however, that if, in
the reasonable judgment of the indemnified party, it is advisable for
such parties and controlling persons to be represented by separate
counsel, any indemnified party shall have the right to employ separate
counsel to represent it and all other parties and their controlling
persons who may be subject to liability arising out of any claim in
respect of which indemnity may be sought by the Underwriter against the
Company or by the Company against the Underwriter hereunder, in which
event the fees and expenses of such separate counsel shall be borne by
the indemnifying party and paid as incurred. Any such indemnifying
party shall not be liable to any such indemnified party on account of
any settlement of any claim or action effected without the prior
written consent of such indemnifying party.
7. Contribution.
<PAGE>
(a) If the indemnification provided for in Section 6 is
unavailable under applicable law to any indemnified party in respect of
any losses, claims, damages or liabilities referred to therein, then
each indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Underwriter from the
offering of the Shares or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company and the
Underwriter in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. The Company and the
Underwriter agree that contribution determined by per capita allocation
would not be equitable. The respective relative benefits received by
the Company on the one hand, and the Underwriter, on the other hand,
shall be deemed to be in the same proportion (A) in the case of the
Company, as the total price paid to the Company for the Shares by the
Underwriter (net of underwriting discount received but before deducting
expenses) bears to the aggregate public offering price of the Shares
and (B) in the case of the Underwriter, as the aggregate underwriting
discount received by them bears to the aggregate public offering price
of the Shares, in each case as reflected in the Prospectus. The
relative fault of the Company and the Underwriter shall be determined
by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company
or by the Underwriter and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages and liabilities referred to above
shall be deemed to include any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or
defending any action or claim. Notwithstanding the provisions of this
Section 7, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares
underwritten by it were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by
reason of any untrue or alleged untrue statement or omission or alleged
omission in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of
the 1933 Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. For purposes of this
Section 7, each person who controls the Underwriter within the meaning
of the 1933 Act or the 1934 Act shall have the same rights to
contribution as the Underwriter, each person who controls the Company
within the meaning of the 1933 Act or the 1934 Act shall have the same
rights to contribution as the Company and each officer of the Company
who shall have signed the Registration Statement and each director of
the Company shall have the same rights to contribution as the Company.
<PAGE>
(b) Promptly after receipt by a party to this Agreement of
notice of the commencement of any action, suit or proceeding, such
person will, if a claim for contribution in respect thereof is to be
made against another party (the "Contributing Party"), notify the
Contributing Party of the commencement thereof, but the omission so to
notify the Contributing Party will not relieve the Contributing Party
from any liability which it may have to any party other than under this
Section 7, unless such omission so to notify prejudices the
Contributing Party's ability to defend such action. Any notice given
pursuant to Section 6 hereof shall be deemed to be like notice under
this Section 7. In case any such action, suit or proceeding is brought
against any party, and such person notifies a Contributing Party of the
commencement thereof, the Contributing Party will be entitled to
participate therein with the notifying party and any other Contributing
Party similarly notified.
8. Effective Date of This Agreement and Termination.
(a) This Agreement shall become effective at 8:00 a.m.,
Minneapolis time, on the day on which the Underwriter releases the
initial public offering of the Firm Shares for sale to the public. The
Underwriter shall notify the Company immediately after any action has
been taken which causes this Agreement to become effective. Until this
Agreement is effective, it may be terminated by the Company or the
Underwriter by giving notice as hereinafter provided, except that the
provisions of Sections 3(g), 6, 7 and 8 shall at all times be
effective. For purposes of this Agreement, the release of the initial
public offering of the Firm Shares for sale to the public shall be
deemed to have been made when the Underwriter releases, by telegram or
otherwise, firm offers of the Firm Shares to securities dealers or
release for publication a newspaper advertisement relating to the Firm
Shares, whichever occurs first. This Agreement, shall nevertheless,
become effective at such time earlier than the time specified above as
the Underwriter may determine, by notice to the Company.
(b) Until the First Closing Date, this Agreement may be
terminated by the Underwriter, at its option, by giving notice to the
Company, if (i) the Company shall have sustained a loss by fire, flood,
accident or other calamity which is material with respect to the
business of the Company; the Company shall have become a party to
material litigation, not disclosed in the Registration Statement or the
Prospectus; or the business or financial condition of the Company shall
have become the subject of any material litigation, not disclosed in
the Registration Statement or the Prospectus; or there shall have been,
since the respective dates as of which information is given in the
Registration Statement or the Prospectus, any material adverse change
in the general affairs, business, key personnel, capitalization,
financial position or net worth of the Company, whether or not arising
in the ordinary course of business, which loss or change, in the
reasonable judgment of the Underwriter, shall render it inadvisable to
proceed with the delivery of the Shares, whether or not such loss shall
have been insured; (ii) trading in securities generally on the New York
Stock Exchange, American Stock Exchange, Nasdaq National Market, Nasdaq
Small Cap Market or the over-the-counter market shall have been
suspended or minimum prices shall have been established on such
exchange by the SEC or by such exchanges or markets; (iii) a general
banking moratorium shall have been declared by federal, New York or
Minnesota
<PAGE>
authorities; (iv) there shall have been such a material adverse change
in general economic, monetary, political or financial conditions, or
the effect of international conditions on the financial markets in the
United States shall be such that, in the judgment of the Underwriter,
makes it inadvisable to proceed with the delivery of the Shares; (v)
the enactment, publication, decree or other promulgation of any federal
or state statute, regulation, rule or order of either of any court or
other governmental authority which, in the judgment of the Underwriter,
materially and adversely affects or will materially and adversely
affect the business or operations of the Company; (vi) there shall be a
material outbreak of hostilities or material escalation and
deterioration in the political and military situation between the
United States and any foreign power, or a formal declaration of war by
the United States of America shall have occurred; or (vii) the Company
shall have failed to comply with any of the provisions of this
Agreement on its part to be performed on or prior to such date or if
any of the conditions, agreements, representations or warranties of the
Company shall not have been fulfilled within the respective times
provided for in this Agreement. Any such termination shall be without
liability of any party to any other party, except as provided in
Sections 6 and 7 hereof; provided, however, that the Company shall
remain obligated to pay costs and expenses to the extent provided in
Section 3(g) hereof.
(c) If the Underwriter elects to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this
Section 8, it shall notify the Company promptly by telegram or
telephone, confirmed by letter sent to the address specified in Section
11 hereof. If the Company shall elect to prevent this Agreement from
becoming effective, it shall notify the Underwriter promptly by
telegram or telephone, confirmed by letter sent to the address
specified in Section 11 hereof.
10. Survival of Indemnities, Contribution Agreements, Warranties and
Representations. The respective indemnity and contribution agreements of the
Company and the Underwriter contained in Sections 6 and 7, respectively, the
representations and warranties of the Company set forth in Section 1 hereof and
the covenants of the Company set forth in Section 3 hereof shall remain
operative and in full force and effect, regardless of any investigation made by,
or on behalf of, the Underwriter, the Company, any of its officers and
directors, or any controlling person referred to in Sections 6 and 7, and shall
survive the delivery of and payment for the Shares. The aforesaid indemnity and
contribution agreements shall also survive any termination or cancellation of
this Agreement. Any successor of any party or of any such controlling person, or
any legal representative of such controlling person, as the case may be, shall
be entitled to the benefit of the respective indemnity and contribution
agreements.
11. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and, if sent to the
Underwriter, shall be mailed, delivered or telegraphed and confirmed, to R.J.
Steichen & Company, One Financial Plaza, Suite 100, Minneapolis, Minnesota
55402-2543, Attention: Patrick M. Sidders, with a copy to Melodie R. Rose, Esq.,
Fredrikson & Byron, P.A., 1100 International Centre, 900 Second Avenue South,
Minneapolis, Minnesota 55402; or, if sent to the Company, shall be mailed,
delivered or telegraphed and confirmed, to Industrial Rubber Products, Inc.,
3804 E. 13th Avenue, Hibbing,
<PAGE>
Minnesota 55746, Attention: Daniel O. Burkes, with a copy to John N. Nys,
Johnson, Killen, Thibodeau & Seiler, P.A., 811 Norwest Center, Duluth, Minnesota
55802.
12. Information Furnished by the Underwriter. The statements relating
to the stabilization activities of the Underwriter and the statements under the
caption "Underwriting" in any Preliminary Prospectus and in the Prospectus
constitute the written information furnished by, or on behalf of, the
Underwriter specifically for use with reference to the Underwriter referred to
in Section 1(b) and Section 6 hereof.
13. Parties. This Agreement shall inure to the benefit of and be
binding upon the Underwriter and the Company, their respective successors and
assigns, and the officers, directors and controlling persons referred to in
Sections 6 and 7. Nothing expressed in this Agreement is intended or shall be
construed to give any person or corporation, other than the parties hereto,
their respective successors and assigns, and the controlling persons, officers
and directors referred to in Sections 6 and 7 any legal or equitable right,
remedy, or claim under, or in respect of, this Agreement or any provision herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of the parties
hereto and their respective executors, administrators, successors, assigns and
such controlling persons, officers and directors, and for the benefit of no
other person or corporation. No purchaser of any Shares from the Underwriter
shall be construed a successor or assign merely by reason of such purchase.
14. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Minnesota, without regard to the
conflict of law provisions thereof.
<PAGE>
If the foregoing is in accordance with the Underwriter's understanding
of this agreement, kindly sign and return to the Company the enclosed
counterpart of this Agreement, whereupon it will become a binding agreement
between the Company and the Underwriter in accordance with its terms.
Very truly yours,
INDUSTRIAL RUBBER PRODUCTS, INC.
By
------------------------------------
Its
-----------------------------------
ACCEPTANCE
The foregoing Underwriting Agreement is hereby confirmed and accepted by the
undersigned as of the date first above written.
R. J. STEICHEN & COMPANY
By
------------------------------------
Its
-----------------------------------
<PAGE>
APPENDIX A
WARRANT
TO PURCHASE 140,000 SHARES OF COMMON STOCK
OF
INDUSTRIAL RUBBER PRODUCTS, INC.
___________________, 1998
(issuance date)
THIS CERTIFIES THAT, for good and valuable consideration, R. J.
Steichen & Company (the "Underwriter"), or its registered assigns, is entitled
to subscribe for and purchase from, Industrial Rubber Products, Inc., a
Minnesota corporation (the "Company"), at any time after the one-year
anniversary of the issuance date of this Warrant, to and including the five-year
anniversary of the issuance date of this Warrant, 140,000 fully paid and
nonassessable shares of the Common Stock of the Company at the price of $6.00
per share (the "Warrant Exercise Price"), subject to the antidilution provisions
of this Warrant. Reference is made to this Warrant in the Underwriting Agreement
dated ______________, 1998, by and between the Company and the Underwriter. The
shares which may be acquired upon exercise of this Warrant are referred to
herein as the "Warrant Shares." As used herein, the term "Holder" means the
Underwriter, any party who acquires all or a part of this Warrant as a
registered transferee of the Underwriter, or any record holder or holders of the
Warrant Shares issued upon exercise, whether in whole or in part, of the
Warrant. As used herein, the term "Common Stock" means and includes the
Company's presently authorized common stock, $.001 par value, and shall also
include any capital stock of any class of the Company hereafter authorized which
shall not be limited to a fixed sum or percentage in respect of the rights of
the Holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution, or winding up of the
Company.
This Warrant is subject to the following provisions, terms and
conditions:
1. Exercise; Transferability.
(a) The rights represented by this Warrant may be exercised by the
Holder hereof, in whole or in part (but not as to a fractional share of Common
Stock), by written notice of exercise (in the form attached hereto) delivered to
the Company at the principal office of the Company prior to the expiration of
this Warrant and accompanied or preceded by the surrender of this Warrant along
with a check in payment of the Warrant Exercise Price for such shares.
(b) Until exercisable, this Warrant may not be sold, assigned,
hypothecated, or otherwise transferred, other than by will or pursuant to the
operation of law, except to a person who is an officer and shareholder of the
Underwriter. Further, this Warrant may not be sold, transferred, assigned,
hypothecated or divided into two or more Warrants of smaller denominations, nor
may
<PAGE>
any Warrant shares issued pursuant to exercise of this Warrant be transferred,
except as provided in Section 7 hereof.
2. Exchange and Replacement. Subject to Sections l and 7 hereof, this
Warrant is exchangeable upon the surrender hereof by the Holder to the Company
at its office for new Warrants of like tenor and date representing in the
aggregate the right to purchase the number of Warrant Shares purchasable
hereunder, each of such new Warrants to represent the right to purchase such
number of Warrant Shares (not to exceed the aggregate total number purchasable
hereunder) as shall be designated by the Holder at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction, or mutilation of this Warrant, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
will make and deliver a new Warrant of like tenor, in lieu of this Warrant;
provided, however, that if the Underwriter shall be such Holder, an agreement of
indemnity by such Holder shall be sufficient for all purposes of this Section 2.
This Warrant shall be promptly canceled by the Company upon the surrender hereof
in connection with any exchange or replacement. The Company shall pay all
expenses, taxes (other than stock transfer taxes), and other charges payable in
connection with the preparation, execution, and delivery of Warrants pursuant to
this Section 2.
3. Issuance of the Warrant Shares.
(a) The Company agrees that the shares of Common Stock purchased hereby
shall be and are deemed to be issued to the Holder as of the close of business
on the date on which this Warrant shall have been surrendered and the payment
made for such Warrant Shares as aforesaid. Subject to the provisions of the
subsection (b) below, certificates for the Warrant Shares so purchased shall be
delivered to the Holder within a reasonable time, not exceeding fifteen (15)
days after the rights represented by this Warrant shall have been so exercised,
and, unless this Warrant has expired, a new Warrant representing the right to
purchase the number of Warrant Shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be delivered to the Holder
within such time.
(b) Notwithstanding the foregoing, however, the Company shall not be
required to deliver any certificate for Warrant Shares upon exercise of this
Warrant except in accordance with exemptions from the applicable securities
registration requirements or registrations under applicable securities laws.
Nothing herein, however, shall obligate the Company to effect registrations
under federal or state securities laws, except as provided in Section 9 hereof.
If registrations are not in effect and if exemptions are not available when the
Holder seeks to exercise the Warrant, the Warrant exercise period will be
extended, if need be, to prevent the Warrant from expiring, until such time as
either registrations become effective or exemptions are available, and the
Warrant shall then remain exercisable for a period of at least 30 calendar days
from the date the Company delivers to the Holder written notice of the
availability of such registrations or exemptions. The Holder agrees to execute
such documents and make such representations, warranties, and agreements as may
be required solely to comply with the exemptions relied upon by the Company, or
the registrations made, for the issuance of the Warrant Shares.
<PAGE>
4. Covenants of the Company. The Company covenants and agrees that all
Warrant Shares will, upon issuance, be duly authorized and issued, fully paid,
nonassessable, and free from all taxes, liens, and charges with respect to the
issue thereof. The Company further covenants and agrees that during the period
within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized and reserved for the purpose of issue
upon exercise of the subscription rights evidenced by this Warrant a sufficient
number of shares of Common Stock to provide for the exercise of the rights
represented by this Warrant.
5. Antidilution Adjustments. The provisions of this Warrant are subject
to adjustment as provided in this Section 5.
(a) The Warrant Exercise Price shall be adjusted from time to time such
that in case the Company shall hereafter:
(i) pay any dividends on any class of stock of the Company
payable in Common Stock or securities convertible into Common Stock;
(ii) subdivide its then outstanding shares of Common Stock
into a greater number of shares; or
(iii) combine outstanding shares of Common Stock, by
reclassification or otherwise;
then, in any such event, the Warrant Exercise Price in effect immediately prior
to such event shall (until adjusted again pursuant hereto) be adjusted
immediately after such event to a price (calculated to the nearest full cent)
determined by dividing (a) the number of shares of Common Stock outstanding
immediately prior to such event, multiplied by the then existing Warrant
Exercise Price, by (b) the total number of shares of Common Stock outstanding
immediately after such event (including the maximum number of shares of Common
Stock issuable in respect of any securities convertible into Common Stock), and
the resulting quotient shall be the adjusted Warrant Exercise Price per share.
An adjustment made pursuant to this Subsection shall become effective
immediately after the record date in the case of a dividend or distribution and
shall become effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of an adjustment
made pursuant to this Subsection, the Holder of any Warrant thereafter
surrendered for exercise shall become entitled to receive shares of two or more
classes of capital stock or shares of Common Stock and other capital stock of
the Company, the Board of Directors (whose determination shall be conclusive)
shall determine the allocation of the adjusted Warrant Exercise Price between or
among shares of such classes of capital stock or shares of Common Stock and
other capital stock. All calculations under this Subsection shall be made to the
nearest cent or to the nearest 1/100 of a share, as the case may be. In the
event that at any time as a result of an adjustment made pursuant to this
Subsection, the Holder of any Warrant thereafter surrendered for exercise shall
become entitled to receive any shares of the Company other than shares of Common
Stock, thereafter the Warrant Exercise Price of such other shares so receivable
upon exercise of any Warrant shall be subject to adjustment from time to time in
a manner and on
<PAGE>
terms as nearly equivalent as practicable to the provisions with respect to
Common Stock contained in this Section 5.
(b) Upon each adjustment of the Warrant Exercise Price pursuant to
Section 5(a) above, the Holder of each Warrant shall thereafter (until another
such adjustment) be entitled to purchase at the adjusted Warrant Exercise Price
the number of shares, calculated to the nearest full share, obtained by
multiplying the number of shares specified in such Warrant (as adjusted as a
result of all adjustments in the Warrant Exercise Price in effect prior to such
adjustment) by the Warrant Exercise Price in effect prior to such adjustment and
dividing the product so obtained by the adjusted Warrant Exercise Price.
(c) In case of any consolidation or merger to which the Company is a
party, or in case of any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety, or in
the case of any statutory exchange of securities with another corporation
(including any exchange effected in connection with a merger of a third
corporation into the Company), there shall be no adjustment under Subsection (a)
of this Section above but the Holder of each Warrant then outstanding shall have
the right thereafter to convert such Warrant into the kind and amount of shares
of stock and other securities and property which he would have owned or have
been entitled to receive immediately after such consolidation, merger, statutory
exchange, sale, or conveyance had such Warrant been converted immediately prior
to the effective date of such consolidation, merger, statutory exchange, sale,
or conveyance and in any such case, if necessary, appropriate adjustment shall
be made in the application of the provisions set forth in this Section with
respect to the rights and interests thereafter of any Holders of the Warrant, to
the end that the provisions set forth in this Section shall thereafter
correspondingly be made applicable, as nearly as may reasonably be, in relation
to any shares of stock and other securities and property thereafter deliverable
on the exercise of the Warrant. The provisions of this Subsection shall
similarly apply to successive consolidations, mergers, statutory exchanges,
sales or conveyances.
(d) Upon any adjustment of the Warrant Exercise Price, then and in each
such case, the Company shall give written notice thereof, by first-class mail,
postage prepaid, addressed to the Holder as shown on the books of the Company,
which notice shall state the Warrant Exercise Price resulting from such
adjustment and the increase or decrease, if any, in the number of shares of
Common Stock or other securities purchasable at such price upon the exercise of
this Warrant, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based.
6. No Voting Rights. This Warrant shall not entitle the Holder to any
voting rights or other rights as a shareholder of the Company.
7. Notice of Transfer of Warrant or Resale of the Warrant Shares.
(a) Subject to the sale, assignment, hypothecation, or other transfer
restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof,
agrees to give written notice to the Company before transferring this Warrant or
transferring any Warrant Shares of such Holder's intention to do so, describing
briefly the manner of any proposed transfer. Promptly upon receiving such
written
<PAGE>
notice, the Company shall present copies thereof to the Company's counsel and to
counsel to the original purchaser of this Warrant. If in the opinion of each
such counsel the proposed transfer may be effected without registration or
qualification (under any federal or state securities laws), the Company, as
promptly as practicable, shall notify the Holder of such opinion, whereupon the
Holder shall be entitled to transfer this Warrant or to dispose of Warrant
Shares received upon the previous exercise of this Warrant, all in accordance
with the terms of the notice delivered by the Holder to the Company; provided
that an appropriate legend may be endorsed on this Warrant or the certificates
for such Warrant Shares respecting restrictions upon transfer thereof necessary
or advisable in the opinion of counsel to the Company and satisfactory to the
Company to prevent further transfers which would be in violation of Section 5 of
the Securities Act of 1933, as amended (the "1933 Act") and applicable state
securities laws; and provided further that the prospective transferee or
purchaser shall execute such documents and make such representations,
warranties, and agreements as may be required solely to comply with the
exemptions relied upon by the Company for the transfer or disposition of the
Warrant or Warrant Shares.
(b) If in the opinion of either of the counsel referred to in this
Section 7, the proposed transfer or disposition of this Warrant or such Warrant
Shares described in the written notice given pursuant to this Section 7 may not
be effected without registration or qualification of this Warrant or such
Warrant Shares the Company shall promptly give written notice thereof to the
Holder, and the Holder will limit its activities in respect to such as, in the
opinion of both such counsel, are permitted by law.
8. Fractional Shares. Fractional shares shall not be issued upon the
exercise of this Warrant, but in any case where the Holder would, except for the
provisions of this Section 8, be entitled under the terms hereof to receive a
fractional share, the Company shall, upon the exercise of this Warrant for the
largest number of whole shares then called for, pay a sum in cash equal to the
sum of (a) the excess, if any, of the Market Price of such fractional share over
the proportional part of the Warrant Exercise Price represented by such
fractional share, plus (b) the proportional part of the Warrant Exercise Price
represented by such fractional share. For purposes of this Section, the term
"Market Price" with respect to shares of Common Stock of any class or series
means the closing sale price reported by Nasdaq National Market or any national
securities exchange or, if none, the average of the last reported closing bid
and asked prices on any national securities exchange or quoted in Nasdaq
SmallCap, or if not listed on a national securities exchange or quoted in Nasdaq
SmallCap Market, the average of the last reported closing bid and asked prices
as reported by Metro Data Company, Inc. from quotations by market makers in such
Common Stock on the Minneapolis-St. Paul local over-the-counter market.
9. Registration Rights.
(a) If at any time after the one-year anniversary of the issuance date
of this Warrant and prior to the end of the two-year period following complete
exercise of this Warrant or the close of business on the seven-year anniversary
of the issuance of this Warrant, whichever occurs earlier, the Company proposes
to register under the 1933 Act (except by a Form S-4 or Form S-8 Registration
Statement or any successor forms thereto) or qualify for a public distribution
under Section 3(b) of the 1933 Act, any of its securities, it will give written
notice to all Holders of this
<PAGE>
Warrant, any Warrants issued pursuant to Section 2 and/or Section 3(a) hereof,
and any Warrant Shares of its intention to do so and, on the written request of
any such Holder given within thirty (30) days after the receipt of any such
notice (which request shall specify the interest in this Warrant or the Warrant
Shares intended to be sold or disposed of by such Holder and describe the nature
of any proposed sale or other disposition thereof), the Company will use its
best efforts to cause all such Warrant Shares, the Holders of which shall have
requested the registration or qualification thereof, to be included in such
registration statement proposed to be filed by the Company; provided, however,
that if a greater number of Warrant Shares is offered for participation in the
proposed offering than in the reasonable opinion of the managing underwriter of
the proposed offering can be accommodated without adversely affecting the
proposed offering, then the amount of Warrant Shares proposed to be offered by
such Holders for registration, as well as the number of securities of any other
selling shareholders participating in the registration, shall be proportionately
reduced to a number deemed satisfactory by the managing underwriter.
(b) Further, on a one-time basis during the four-year period commencing
on the one-year anniversary of the issuance date of this Warrant, upon request
by the Holder or Holders of a majority in interest of this Warrant, of any
Warrants issued pursuant to Section 2 and/or Section 3(a) hereof, and of any
Warrant Shares, the Company will promptly take all necessary steps to register
or qualify, on Form S-3 (or successor form) under the 1933 Act and the
securities laws of such states as the Holders may reasonably request, such
number of Warrant Shares issued and to be issued upon conversion of the Warrants
requested by such Holders in their request to the Company. The Company shall
keep effective and maintain any registration, qualification, notification, or
approval specified in this Paragraph (b), and from time to time shall amend or
supplement the prospectus used in connection therewith to the extent necessary
in order to comply with applicable law, for such period, as may be reasonably
necessary for such Holders or Holders of such Warrant Shares to dispose of such
Warrant Shares.
(c) With respect to each inclusion of securities in a registration
statement pursuant to this Section 9, 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 is required to bear such fees and disbursements), all internal
expenses, the premiums and other costs of policies of insurance against
liability arising out of the public offering, and legal fees and disbursements
and other expenses of complying with state securities laws of any jurisdictions
in which the securities to be offered are to be registered or qualified. Fees
and disbursements of special counsel and accountants for the selling Holders,
underwriting discounts and commissions, and transfer taxes for selling Holders
and any other expenses relating to the sale of securities by the selling Holders
not expressly included above shall be borne by the selling Holders.
(d) The Company hereby indemnifies each of the Holders of this Warrant
and of any Warrant Shares, and the officers and directors, if any, who control
such Holders, within the meaning of Section 15 of the 1933 Act, against all
losses, claims, damages, and liabilities caused by (1) any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement or Prospectus (and as amended or supplemented if the Company shall
have furnished any
<PAGE>
amendments thereof or supplements thereto), any Preliminary Prospectus or any
state securities law filings; (2) any 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 under which they were made,
not misleading, except insofar as such losses, claims, damages, or liabilities
are caused by any untrue statement or omission or alleged untrue statement or
omission contained in information furnished in writing to the Company by such
Holder expressly for use therein; and each such Holder by its acceptance hereof
severally agrees that it will indemnify and hold harmless the Company, each of
its directors, each of its officers who signs such Registration Statement, and
each person, if any, who controls the Company, within the meaning of Section 15
of the 1933 Act, with respect to losses, claims, damages, or liabilities which
are caused by any untrue statement or alleged untrue statement, omission or
alleged omission contained in information furnished in writing to the Company by
such Holder expressly for use therein.
10. Miscellaneous. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
holder of this Warrant and the Company. This Warrant shall be construed and
enforced in accordance with and governed by the laws of the State of Minnesota
without regard to its choice of law provisions.
IN WITNESS WHEREOF, Industrial Rubber Products, Inc. has caused this
Warrant to be signed by its duly authorized officer as of the date first above
written.
INDUSTRIAL RUBBER PRODUCTS, INC.
By
------------------------------------
Its
-----------------------------------
<PAGE>
TO: INDUSTRIAL RUBBER PRODUCTS, INC.
NOTICE OF EXERCISE OF WARRANT To Be Executed by the Registered Holder in
Order to Exercise the Warrant
The undersigned hereby irrevocably elects to exercise the attached Warrant to
purchase for cash, _________________ of the shares issuable upon the exercise of
such Warrant, and requests that certificates for such shares (together with a
new Warrant to purchase the number of shares, if any, with respect to which this
Warrant is not exercised) shall be issued in the name of
-------------------------------
(Print Name)
Please insert social security
or other identifying number
of registered Holder of
certificate (______________) Address:
-------------------------------
-------------------------------
Date:
------------------ -------------------------------
Signature*
*The signature on the Notice of Exercise of Warrant must correspond to the name
as written upon the face of the Warrant in every particular without alteration
or enlargement or any change whatsoever. When signing on behalf of a
corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
<PAGE>
ASSIGNMENT FORM
To be signed only upon authorized transfer of Warrants.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers unto __________________________ the right to purchase the securities
of Industrial Rubber Products, Inc., Incorporated to which the within Warrant
relates and appoints _____________, attorney, to transfer said right on the
books of Industrial Rubber Products, Inc., Incorporated with full power of
substitution in the premises.
Dated:
------------------- -----------------------------------
(Signature)
Address:
-----------------------------------
-----------------------------------
Social Security or Tax I.D. Number
of Assignee:
-----------------------------------
EXHIBIT 5.1
[LAW FIRM STATIONERY]
Industrial Rubber Products, Inc.
3804 East 15th Avenue
Hibbing, MN 55746
Gentlemen:
We have examined (a) the Registration Statement on Form SB-2 (No.
333-46643), including the Prospectus constituting a part thereof, filed by you
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended, relating to the sale by you of 1,400,000 shares of your Common Stock,
par value $.001 per share (the "Common Stock"), in the manner set forth in said
Registration Statement and Prospectus, (b) your Restated Articles of
Incorporation and your Restated Bylaws as certified by your Secretary, both as
amended to date, and (c) your corporate proceedings relative to your
organization and to the issuance of the Common Stock.
In addition to the foregoing, we have reviewed such other proceedings,
documents and records and have ascertained or verified such additional facts as
we deem necessary or appropriate for the purposes of this opinion.
Based upon the foregoing, we are of the opinion that:
1. Industrial Rubber Products, Inc., has been legally incorporated and
is validly existing under the laws of the State of Minnesota.
2. The Common Stock has been duly authorized and will be, when sold by
you as contemplated in said Registration Statement, legally issued, fully paid
and nonassessable.
We hereby consent to the use of this opinion as an exhibit to said
Registration Statement and to the references to our firm under the caption
"Legal Matters" in the Prospectus.
Yours very truly,
JOHNSON, KILLEN, THIBODEAU & SEILER, P.A.
/s/ John Nys
John Nys
STOCK OPTION PLAN
OF
INDUSTRIAL RUBBER PRODUCTS, INC.
1. PURPOSE. The purpose of this Stock Option Plan (the "Plan") is to
encourage personnel of Industrial Rubber Products, Inc. (the "Company") to
acquire a proprietary interest in the Company, thereby creating an additional
incentive to such personnel to promote the Company's best interests and to
continue in its employ, and further to provide an additional inducement for the
acquisition of the services of persons capable of contributing to the future
success of the Company. Options granted under this Plan may be either "incentive
stock options" within the provisions of Section 422 of the Internal Revenue Code
of 1986 and any amendments thereto, or options which do not qualify as incentive
stock options.
2. ADMINISTRATION.
A. This Plan shall be administered by the Stock Option
Committee (the "Committee") of the Board of Directors of the Company
(the "Board"). The Committee shall be comprised of the entire Board or,
if the Board so determines, of two or more "non-employee directors" as
defined in Rule 16b-3 of the General Rules and Regulations under the
Securities Exchange Act of 1934.
B. The Committee shall have full authority and discretion to
determine, consistent with the provisions of this Plan, the employees
and others to be granted options, the times at which options shall be
granted, the option price of the shares subject to each option (subject
to Section 6), the number of shares subject to each option (subject to
Section 3), the period during which each option becomes exercisable
(subject to Section 7), and the terms to be set forth in each option
agreement. The Committee shall also have full authority and discretion
to adopt and revise such rules and procedures as it shall deem
necessary for the administration of this Plan.
C. The Committee's interpretation and construction of any
provisions of this Plan or any option granted hereunder shall be final,
conclusive and binding on the Company, the optionee and all other
persons.
3. ELIGIBILITY.
A. The Committee shall from time to time determine the
individuals who shall be granted options under this Plan. Incentive
stock options may only be granted under this Plan to any full or
part-time employee (which term includes, but is not limited to,
officers and directors who are also employees) of the Company or of its
present and future subsidiary corporations. Options which do not
qualify as incentive stock options may be granted under this Plan to
other persons designated by the Committee, including, but not limited
to, members of the Board of Directors, consultants or independent
<PAGE>
contractors providing services to the Company or its present and future
subsidiary corporations. The term "subsidiary corporation" shall, for
purposes of this Plan, be defined in the same manner as such term is
defined in Section 425(f) of the Internal Revenue Code.
B. An individual who has been granted an option may be granted
an additional option or options under this Plan if the Committee shall
so determine, with the restriction that no individual employee may
receive incentive stock options (under this Plan and all incentive
stock option plans of the Company and its subsidiary corporations)
which are exercisable for the first time during any calendar year for
shares having an aggregate Fair Market Value (determined as of the time
the option is granted) in excess of $100,000.
C. The granting of an option under this Plan shall not affect
any outstanding stock option previously granted to an optionee under
this Plan or any other plan of the Company.
D. (i) Each non-employee director of the Company shall
automatically be granted a non-qualified option under this Plan
providing for the purchase of 10,000 shares of the Company's Common
Stock at 100% of the Fair Market Value of such Common Stock on the date
of his/her first election to the Board (whether such election shall be
by the shareholders or otherwise), or on the date that an employee
director of the Company becomes a non-employee director of the Company.
(ii) Each non-employee director of the Company,
serving as of the end of each calendar year, shall automatically be
granted a non-qualified option under this Plan providing for the
purchase of 2,500 shares of the Company's Common Stock at 100% of the
Fair Market Value of such Common Stock on the date of grant for his/her
services to the Company during such year. The number of shares covered
by such option shall be reduced proportionately for a non-employee
director who served as a director of the Company for less than the full
year.
(iii) The Board may from time to time amend Section
3.D.(i) and/or Section 3.D.(ii) to increase or decrease the number of
shares of Common Stock that may be purchased pursuant to the options to
be automatically granted pursuant to such Sections.
4. SHARES OF STOCK SUBJECT TO THIS PLAN. The number of shares which may
be issued pursuant to the options granted by the Committee under this Plan shall
not exceed four hundred thousand (400,000) shares of the common voting stock of
the Company (the "Common Stock"), subject to adjustment as provided in this
Plan. Such shares may be authorized by the Company and held in treasury. Any
shares subject to an option which expires for any reason or is terminated
unexercised as to such shares may again be subject to an option under this Plan.
<PAGE>
5. ISSUANCE AND TERMS OF OPTION AGREEMENTS. Each option granted under
this Plan shall be evidenced by a written Option Agreement, which shall be
subject to the provisions of this Plan and to such other terms and conditions as
the Committee may deem appropriate.
6. OPTION PRICE.
A. Each Option Agreement shall state the number of shares to
which it pertains and shall state the option price. The option price
for each share of Common Stock covered by an incentive stock option
granted under this Plan shall not be less than 100% of the Fair Market
Value of the Common Stock on the date the option is granted; provided
that if the employee, at the time the option is granted, owns more than
10% of the total combined voting power of all classes of stock of the
Company, the option price shall not be less than 110% of the Fair
Market Value of the Common Stock on the date the option is granted. The
option price for options granted under this Plan which do not qualify
as incentive stock options may be equal to, greater than or less than
the Fair Market Value of the Common Stock on the date the option is
granted; provided, however, that the option price for any options
granted to an employee or director of the Company shall not be less
than 85 percent of Fair Market Value of the Common Stock on the date of
the grant. "Fair Market Value," as used in this Plan, shall mean the
value of the Common Stock on a pertinent date as determined by the
Committee, using such valuation methods as it, in its sole discretion,
shall deem appropriate.
B. Upon the exercise of the option, the option price shall be
payable (i) in United States dollars, in cash or by check, or (ii) if
the Committee, in its sole discretion, shall so authorize, in shares of
the Common Stock of the Company then owned by the optionee, which
shares shall be valued at their Fair Market Value on the date of
delivery. The Committee, in its sole discretion, may permit the
optionee to authorize a third party to sell shares of the Common Stock
(or a sufficient portion of the shares) acquired upon the exercise of
the option and remit to the Company a sufficient portion of the sale
proceeds to pay the entire option price and any tax withholding
resulting from such exercise.
C. The proceeds of the sale of the Common Stock subject to
option shall be added to the general funds of the Company and used for
its corporate purposes.
7. TERMS AND EXERCISE OF OPTIONS. Each option granted under this Plan
shall be exercisable during the periods and for the number of shares as shall be
provided in the Option Agreement evidencing the option granted by the Committee
and the terms thereof. In no event, however, shall any option be exercisable by
its terms after the expiration of ten years from the date of grant, nor shall
any incentive stock option granted to a person then owning more than 10% of the
total combined voting power of all classes of stock of the Company be
exercisable by its terms after the expiration of five years from the date of
grant.
<PAGE>
8. WITHHOLDING TAXES.
A. The Company shall have the right to require the payment
(through withholding from the optionee's salary or otherwise) of any
federal, state or local taxes required by law to be withheld with
respect to the issuance of shares upon the exercise of an option or
with respect to any disposition of such shares by the optionee.
B. In order to assist an optionee in paying federal and state
income taxes required to be withheld upon the exercise of a
non-qualified option granted hereunder, the Committee in its discretion
and subject to such additional terms and conditions as it may adopt,
may permit the optionee to elect to satisfy such income tax withholding
obligation by having the Company withhold a portion of the shares of
Common Stock otherwise to be delivered upon exercise of such option
with a Fair Market Value equal to the taxes required to be withheld.
9. REQUIREMENT OF LAW. The granting of options and the issuance of
shares of Common Stock upon the exercise of an option shall be subject to all
applicable laws, rules and regulations, and shares shall not be issued except
upon approval of proper government agencies or stock exchanges as may be
required. The exercise of any option will be contingent upon receipt from the
optionee of a representation in writing that at the time of such exercise it is
the optionee's intention to acquire the shares being purchased for investment
and not for resale or other distribution thereof to the public.
10. NON-TRANSFERABILITY. Except as otherwise provided by the Committee,
awards under the Plan are not transferable other than as designated by the
optionee by will or by the laws of descent and distribution, and then only as
provided in the Option Agreement.
11. EARLY TERMINATION OF INCENTIVE STOCK OPTIONS. Unless otherwise
stated in the Option Agreement, if an optionee shall cease to be employed by the
Company, or a subsidiary of the Company, for whatever reason and at whatever
time, all options held by the optionee shall be cancelled as of the date of such
termination of employment.
12. EARLY TERMINATION OF NON-QUALIFIED OPTIONS. Unless otherwise stated
in the Option Agreement, a non-qualified option granted under this Plan will
continue for its full term without early termination.
13. ADJUSTMENTS; REORGANIZATION; LIQUIDATION.
A. In the event of any change in the outstanding shares of
Common Stock by reason of any stock dividend or split,
recapitalization, reclassification, merger, consolidation, combination
or exchange of shares, or other similar corporate change, then if the
Board shall determine, in its sole discretion, that such change
necessarily or equitably requires an adjustment in the number of shares
subject to each outstanding
<PAGE>
option and the option prices or in the maximum number of shares subject
to this Plan, such adjustments shall be made by the Board and shall be
conclusive and binding for all purposes of this Plan. No adjustment
shall be made in connection with the issuance by the Company of any
warrants, rights or options to acquire additional shares of Common
Stock or of securities convertible into Common Stock.
B. If the Company shall become a party to any corporate
merger, consolidation, major acquisition of property for stock, sale of
all or substantially all of its common stock, reorganization or
liquidation, the Board shall have power to make any arrangement it
deems advisable with respect to outstanding options, which shall be
binding for all purposes of this Plan, including, but not limited to,
the substitution of new options for any options then outstanding, the
assumption of any such options and the termination of any such options.
C. Neither this Plan nor the grant of any option pursuant to
this Plan shall affect in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations or changes of its
capital or business structure or to merge or to dissolve, liquidate or
sell or transfer all or any part of its business or assets, or issue
additional shares of Common Stock or options.
14. CLAIM TO STOCK OPTION, OWNERSHIP OR EMPLOYMENT RIGHTS. No employee
or other person shall have any claim or right to be granted options under this
Plan. Prior to issuance of the stock, no optionee, his/her personal
representative, heirs or legatees shall be entitled to voting rights, dividends
or other rights of shareholders except as otherwise provided in this Plan.
Neither this Plan nor any action taken hereunder shall be construed as giving
any employee any right to be retained in the employ of the Company.
15. EXPENSE OF PLAN. The expenses of administering this Plan shall be
borne by the Company.
16. RELIANCE ON REPORTS. Each member of the Board shall be fully
justified in relying or acting in good faith upon any report made by the
independent public accountants of the Company and upon any other information
furnished in connection with this Plan by any person or persons other than
himself. In no event shall any person who is or shall have been a member of the
Board be liable for any determination made or other action taken, or any
omission to act, in reliance upon any such report or information, or for any
action taken, including the furnishing of information, or failure to act, if in
good faith.
17. INDEMNIFICATION. Each person who is or shall have been a member of
the Board shall be indemnified and held harmless by the Company against and from
any loss, cost, liability or expense that may be imposed upon or reasonably
incurred by such person in connection with or resulting from any claim, action,
suit or proceeding to which he may be a party or in which he may be involved by
reason of any action taken or failure to act under this Plan and against and
from any and all amounts paid by such person in settlement thereof, with the
Company's
<PAGE>
approval, or paid by such person in satisfaction of a judgment in any such
action, suit or proceeding against him, provided he shall give the Company an
opportunity, at its own expense, to handle and defend the same before he
undertakes to handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification to
which such person may be entitled under the Company's articles of incorporation
or bylaws, as a matter of law, or otherwise, or any power that the Company may
have to indemnify him or hold him harmless.
18. AMENDMENT AND TERMINATION. No options may be granted under this
Plan after February 2, 2008, or earlier termination of this Plan as hereinafter
provided. The Board may terminate this Plan or modify or amend this Plan in such
respect as it shall deem advisable, provided, however, that the Board may not,
without further approval within 12 months by the Company's shareholders, (a)
increase the maximum aggregate number of shares of Common Stock as to which
options may be granted under this Plan except as provided in Section 13, (b)
change the class of employees or others eligible to receive options, (c) change
the provisions of this Plan regarding the option price, (d) extend the period
during which options may be granted, or (e) extend the maximum period of ten
years after the date of grant during which options may be exercised. No
termination or amendment of this Plan may, without the consent of an individual
to whom an option shall theretofore have been granted, adversely affect the
rights of such individual under such option. Further, this Plan may not, without
the approval of the Company's shareholders, be amended in any manner that will
cause incentive stock options issued under it to fail to meet the requirements
of incentive stock options as defined in Section 422 of the Internal Revenue
Code of 1986 or any amendments thereto.
19. GENDER. Any masculine terminology used in this Plan shall also
include the feminine gender.
20. EFFECTIVE DATE. The effective date of this Plan is the date of its
adoption by the Board; provided, however, that it and any and all options
granted hereunder shall be and become null and void if the shareholders of the
Company shall fail to approve this Plan within 12 months from the date of its
adoption.
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement on Form SB-2 (No.
333-46643) of our report, dated January 30, 1998, relating to the financial
statements of Industrial Rubber Products, Inc. We also consent to the reference
to our Firm under the captions "Experts" and "Selected Financial Data" in the
Prospectus.
McGLADREY & PULLEN, LLP
Duluth, Minnesota
April 15, 1998
