<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 6, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 000-22221
FIELDWORKS, INCORPORATED
(Exact name of registrant as specified in its charter)
Minnesota 41-1731723
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
9961 Valley View Road
Eden Prairie, Minnesota 55344
(Address of principal executive offices)
(Zip Code)
(612) 947-0856
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X]
The number of shares of the registrant's Common Stock, $.001 par value,
outstanding as of May 14, 1997 was 8,684,054.
- --------------------------------------------------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
FIELDWORKS, INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
April 6, 1997 January 5, 1997
------------- ---------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................ $11,586,900 $ 2,132,089
Accounts receivable, net of allowance
for doubtful accounts of $280,000 and
$201,400................................ 3,070,977 2,008,693
Inventories.............................. 5,979,680 4,417,322
Note receivable from related party....... -- 92,175
Prepaid expenses and other............... 299,748 418,189
----------- -----------
Total current assets................. 20,937,305 9,068,468
----------- -----------
PROPERTY AND EQUIPMENT:
Computers and equipment.................. 1,191,634 1,125,379
Furniture and fixtures................... 128,723 125,374
Leasehold improvements................... 110,547 98,585
Less: Accumulated depreciation........... (658,936) (553,178)
----------- -----------
Property and equipment, net.......... 771,968 796,160
DEPOSITS AND OTHER ASSETS, net............ 27,463 41,491
----------- -----------
$21,736,736 $ 9,906,119
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable............................ $ 4,959,644 $ 4,675,838
Notes payable to related parties......... -- 1,350,000
Accounts payable......................... 2,283,572 1,111,526
Accrued compensation and benefits........ 398,922 264,035
Accrued warranty and other............... 968,079 567,201
Current maturities of capitalized
lease obligations....................... 50,783 57,411
----------- -----------
Total current liabilities............ 8,661,000 8,026,011
CAPITALIZED LEASE OBLIGATIONS, less
current maturities....................... 68,449 66,722
----------- -----------
Total liabilities.................... 8,729,449 8,092,733
----------- -----------
SHAREHOLDERS' EQUITY:
Series A convertible preferred stock,
$.001 par value, 300,000 shares
authorized, issued and outstanding at
January 5, 1997......................... -- 300
Common stock, $.001 par value,
30,000,000 and 14,700,000 shares
authorized; 8,684,054 and 5,880,736
issued and outstanding.................. 8,684 5,881
Common stock warrants.................... 150,640 231,985
Additional paid-in capital............... 19,849,260 7,878,591
Accumulated deficit...................... (7,001,297) (6,303,371)
----------- -----------
Total shareholders' equity........... 13,007,287 1,813,386
----------- -----------
$21,736,736 $ 9,906,119
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
FIELDWORKS, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
------------------------------
April 6, 1997 March 31, 1996
------------- --------------
<S> <C> <C>
NET SALES..................................... $5,117,168 $2,830,315
COST OF SALES................................. 3,234,523 1,735,277
---------- ----------
Gross profit............................. 1,882,645 1,095,038
---------- ----------
OPERATING EXPENSES:
Sales and marketing......................... 988,279 590,748
General and administrative.................. 774,260 465,026
Research and development.................... 397,681 430,712
---------- ----------
Total operating expenses................. 2,160,220 1,486,486
---------- ----------
Operating loss........................... (277,575) (391,448)
INTEREST EXPENSE AND OTHER, net............... (420,351) (63,904)
---------- ----------
NET LOSS FROM CONTINUING OPERATIONS........... (697,926) (455,352)
LOSS FROM DISCONTINUED OPERATION (NOTE 1)..... -- (69,609)
---------- ----------
NET LOSS...................................... $ (697,926) $ (524,961)
========== ==========
EARNINGS (LOSS) PER SHARE:
Net loss per common share from
continuing operations...................... $ (.10) $ (.07)
Loss per common share from
discontinued operation..................... -- (.01)
---------- ----------
Net loss per common share................... $ (.10) $ (.08)
========== ==========
Weighted average common shares
outstanding................................ 7,040,430 6,581,170
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FIELDWORKS, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
April 6, 1997 March 31, 1996
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................... $ (697,926) $(524,961)
Adjustments to reconcile net loss to net
cash used for operating activities-
Depreciation and amortization............ 399,363 61,438
Change in operating items:
Accounts receivable................... (1,062,284) (59,177)
Inventories........................... (1,562,358) (224,793)
Prepaid expenses and other............ 122,670 (121,263)
Net assets of discontinued
operation............................ -- 46,116
Accounts payable...................... 1,172,046 493,021
Accrued expenses...................... 535,765 32,626
----------- ---------
Net cash used for operating
activities........................... (1,092,724) (296,993)
----------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment.......... (74,412) (92,756)
Collection of loan to related party......... 92,175 --
----------- ---------
Net cash provided by (used for)
investing activities.................... 17,763 (92,756)
----------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock...... 11,891,827 106,000
Net line of credit borrowings............... -- 340,000
Payment of notes payable to related
parties.................................... (1,350,000) --
Payment of capitalized lease
obligations................................ (12,055) (9,539)
----------- ---------
Net cash provided by financing
activities.............................. 10,529,772 436,461
----------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS......... 9,454,811 46,712
CASH AND CASH EQUIVALENTS, beginning of
period....................................... 2,132,089 112,602
----------- ---------
CASH AND CASH EQUIVALENTS, end of period...... $11,586,900 $ 159,314
=========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FIELDWORKS, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation:
The accompanying unaudited consolidated financial statements of FieldWorks,
Incorporated (FieldWorks or the Company), should be read in conjunction with the
consolidated financial statements and notes thereto filed with the Securities
and Exchange Commission in the Company's Registration Statement on Form S-1,
File No. 333-18335, for the fiscal year ended January 5, 1997. In the opinion
of management, the accompanying consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) considered
necessary to present fairly the financial results for the interim periods
presented. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the entire fiscal year.
Merger With Paragon Technology, Incorporated and Subsequent Distribution
In August 1995, FieldWorks completed a merger with Paragon Technology,
Incorporated (Paragon), a Pennsylvania company engaged in software research and
development. The merger was accounted for as a pooling of interests. On
November 11, 1996, the Company's board of directors approved the distribution of
all of the issued and outstanding common stock of Paragon as a dividend to
Company shareholders of record as of November 15, 1996. All shares of Paragon
stock were distributed prior to January 5, 1997. Paragon's results of
operations for the three month period ended March 31, 1996 have been presented
as a discontinued operation in the accompanying statement of operations.
2. Inventories:
Inventories are stated at the lower of cost or market value, as determined
by the first-in, first-out cost method, and consisted of the following:
<TABLE>
<CAPTION>
April 6, 1997 January 5, 1997
------------- ---------------
<S> <C> <C>
Raw materials............................... $4,327,153 $2,772,219
Work in process............................. 947,645 1,066,189
Finished goods.............................. 704,882 578,914
---------- ----------
Total..................................... $5,979,680 $4,417,322
========== ==========
</TABLE>
3. Initial Public Offering:
In March 1997, the Company completed an initial public offering (IPO) of
2,125,000 shares of common stock with proceeds of approximately $11.9 million,
net of related offering costs. The proceeds of the offering will be used to
repay bridge financing arrangements, to fund capital expenditures and for
working capital purposes. In connection with the offering, the Company issued
warrants to the underwriter to purchase 212,500 shares of common stock at an
exercise price of $7.80 per share. At the completion of the IPO, the Company's
articles of incorporation were amended to authorize 30 million shares of common
stock, $.001 par value, and five million shares of undesignated preferred stock,
$.001 par value.
<PAGE>
4. Supplemental Cash Flow Information:
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------
April 6, 1997 March 31, 1996
------------- --------------
<S> <C> <C>
Supplemental cash flow disclosure:
Cash paid for interest.................... $88,353 $66,379
======= =======
Noncash investing activities:
Property and equipment acquired under
capital leases........................... $ 7,154 $ --
======= =======
</TABLE>
5. Recently Issued Accounting Pronouncement:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128).
This standard establishes new guidelines for computing and presenting earnings
(loss) per share (EPS). Management believes that the adoption of SFAS No. 128
will not have a material impact on the Company's calculation of EPS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. When used in
this Form 10-Q and in future filings by the Company with the Securities and
Exchange Commission, in the Company's press releases and in oral statements made
with the approval of an authorized executive officer, the words or phrases
"believes," "anticipates," "expects," "intends," "will likely result,"
"estimates," "projects" or similar expressions are intended to identify such
forward-looking statements, but are not the exclusive means of identifying such
statements. These forward-looking statements involve risks and uncertainties
that may cause the Company's actual results to differ materially from the
results discussed in the forward-looking statements. In light of this, the
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
undertakes no obligation to revise any forward-looking statements in order to
reflect events or circumstances after the date of such statements. Readers are
urged carefully to review and consider the various disclosures made by the
Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission, all of which attempt to advise interested
parties of the risks and factors that may affect the Company's business.
Factors that might cause such differences include, but are not limited to, the
following: the level of market acceptance of the Company's products, the growth
of the rugged computing market, the impact of competition, the success of the
Company's on going research and development efforts, the future availability of
financing when and if needed and the impact of general economic and business
conditions on the Company's sales. The Company's forward-looking statements are
qualified in their entirety by the cautions and risk factors set forth under the
"Cautionary Statement" filed as Exhibit 99.1 to this Form 10-Q.
<PAGE>
Results of Operations
The following table sets forth certain financial data expressed as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
April 6, March 31,
---------- ---------
1997 1996
---------- ---------
<S> <C> <C>
Net sales...................................... 100% 100%
Cost of sales.................................. 63 61
---- ----
Gross profit................................. 37 39
Operating expenses:
Sales and marketing.......................... 19 21
General and administrative................... 15 17
Research and development..................... 8 15
---- ----
Total operating expenses.................. 42 53
Operating loss................................. (5) (14)
Interest expense and other, net................ (9) (2)
---- ----
Net loss from continuing operations............ (14) (16)
Loss from discontinued operation............... -- (3)
---- ----
Net loss....................................... (14)% (19)%
==== ====
</TABLE>
Comparison of the Three Month Periods Ended April 6, 1997 and March 31, 1996
Net Sales. The Company's net sales increased 81% from $2.8 million in the
first quarter of fiscal 1996 to $5.1 million for the comparable period in 1997.
Of the increase in net sales, $2.7 million was due to an increase in the number
of units sold, offset by a $0.4 million aggregate decrease due to reductions in
the average selling prices of the 7000 Series products. International sales
decreased from 29% of net sales for the first quarter of 1996 to 23% of net
sales for the comparable period in 1997 as a result of the Company's focus on
building its domestic sales force and the impact of continuing efforts to
achieve compliance with European EMI standards for the 5000 Series. The Company
believes that international sales as a percentage of total net sales will
continue at levels similar to those in 1996, with little impact on the Company's
results of operations or liquidity.
Gross Profit. Gross profit increased 72% from $1.1 million in the first
quarter of 1996 to $1.9 million in the comparable period in 1997. As a
percentage of net sales, gross profit decreased from 39% to 37%. The
introduction in the second half of 1996 of the 5000 Series, which carries lower
pricing and profit margins, and the introduction of a new lower base price 7000
Series model in the fourth quarter of 1996, were the significant causes for the
reduced margins as a percent of net sales. With unit volume increases and
improvements in manufacturing efficiencies, the Company believes it can maintain
gross margins in the mid to high 30% range for the remainder of 1997.
Sales and Marketing. Sales and marketing expenses increased from $0.6
million or 21% of net sales for the first quarter of 1996 to $1.0 million or 19%
of net sales for the comparable period in 1997. The increase was due primarily
to increased staffing as the Company continued to expand its inside sales force,
manufacturers representative commissions, and advertising and promotion expenses
to build general product recognition. The Company expects that its sales and
marketing expenses will continue to increase as it seeks additional expansion of
its sales channels.
General and Administrative. General and administrative expenses increased
from $0.5 million or 16% of net sales for the first quarter of 1996 to $0.8
million or 15% of net sales for the first quarter of
<PAGE>
1997. The increase was due primarily to increased staffing, allowances for bad
debt expenses, facilities expenses, information systems support and expansion
costs, and professional services. Additional compensation related expenses were
incurred as the Company continued to add to its general and administrative
infrastructure. The Company also incurred greater facility costs for additional
rented space as compared to the first quarter of 1996. The Company expects to
continue to increase its general and administrative expenses in the foreseeable
future.
Research and Development. Research and development expenses are incurred
in the development and testing of new products and customized computing
platforms for special applications and are expensed as incurred. Research and
development expenses remained constant at $0.4 million, which represented a
decrease from 15% to 8% of net sales from the first quarter of 1996 to the first
quarter of 1997. An increase in salaries and related expenses in the first
quarter of 1997 was offset by a reduction in product development material costs
as compared to the first quarter of 1996. During the first quarter of 1996 a
significant investment in material costs was made relating to the introduction
of the 5000 Series. The Company expects research and development expenses to
increase for the foreseeable future as it continues to develop new products and
enhance its existing product lines.
Interest Expense and Other, Net. Interest expense increased from
approximately $64,000 for the first quarter of 1996 to $420,000 for the
comparable period in 1997, primarily due to higher levels of indebtedness and
the related amortization of certain financing costs. The Company expects to
report net interest income in future quarters due to the repayment of debt in
March and April of 1997 using initial public offering proceeds and the
subsequent investment of the remaining proceeds. Forms of indebtedness
outstanding during the first quarter of 1997 included loans from affiliated
parties and other bridge notes, which were required to fund working capital
requirements prior to the completion of the initial public offering.
Liquidity and Capital Resources
Since inception, the Company has principally financed its operations and
capital expenditures through the private sale of equity and debt securities,
loans and bank lines of credit. As of January 5, 1997, the Company had
outstanding loans of $6.4 million, including $1.3 million with affiliated
parties. As of April 6, 1997, the Company had outstanding loans of $5.0
million. No bank lines were open as of January 5, 1997 or April 6, 1997. In the
first quarter of 1997, the Company completed an initial public offering of
common stock and received net proceeds of $11.9 million from the sale of
2,125,000 shares. From the proceeds, the Company repaid $1.4 million of loans
during the first quarter of 1997, including the entire amount with affiliated
parties, and has subsequently repaid the remaining $5.0 million of loans in the
second quarter of 1997. Cash provided by financing activities, including those
listed above, totaled $10.5 million for the first quarter of 1997 and $0.4
million for the comparable period in 1996.
Cash used for operating activities totaled $1.1 million for the first
quarter of 1997 and $0.3 million for the comparable period in 1996.
Inventories, which include primarily raw materials, work in process and
demonstration units, increased from $4.4 million at January 5, 1997 to $6.0
million at April 6, 1997. The increase was primarily due to a build up of raw
materials necessary to fill the Company's backlog of orders and maintain current
increased production levels. Accounts receivable increased 53% from $2.0
million at January 5, 1997 to $3.1 million at April 6, 1997, due to increased
sales. Accounts payable increased from $1.1 million at January 5, 1997 to $2.3
million at April 6, 1997, primarily due to the increased purchases of
inventories, as well as costs related to the initial public offering. Accrued
warranty and other increased from $0.6 million at January 5, 1997, to $1.0
million at April 6, 1997 due to warranties related to increased sales, as well
as accruals for expenses related to the initial public offering and interest on
outstanding notes.
As of April 6, 1997 the Company had cash and cash equivalents of $11.6
million.
<PAGE>
The Company believes that cash on hand, interest expected to be earned
thereon, and anticipated revenues will be sufficient to fund its operations at
least through the next twelve months. Cash requirements for periods beyond the
next twelve months depend on the Company's profitability, its ability to manage
working capital requirements and its rate of growth, among other factors.
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
On June 25, 1996, a shareholder of the Company commenced an action in
Minnesota state district court against the Company and certain directors of the
Company. The essence of the shareholder's allegations was that the Company
issued shares of Common Stock without the authorization of all shareholders in
violation of certain agreements and that certain of the Company's directors
treated the plaintiff unfairly. The shareholder requested unspecified equitable
relief. On October 8, 1996, the district court judge granted the Company's
motion for summary judgment dismissing the lawsuit, and on October 29, 1996,
judgment was entered in favor of the Company. By notice dated January 15, 1997,
the shareholder filed an appeal with the Minnesota Court of Appeals, Rejsa vs.
Beeman et al. Briefs have been submitted in the matter and oral arguments are
set for June 17, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A Special Meeting of Shareholders was held on January 20, 1997.
(b) The shareholders voted on four matters: to amend and restate the
Company's Amended and Restated Articles of Incorporation, to amend and
restate the Company's Amended and Restated Bylaws, to adopt the
Company's 1996 Nonemployee Director Stock Option Plan and to amend the
Company's 1994 Long-Term Incentive and Stock Option Plan (the Plan)
increasing the number of shares subject to the Plan from 1,100,000 to
1,500,000. The shareholders voted in favor of all matters by the
following votes:
<TABLE>
<CAPTION>
Votes Votes Votes
----- ----- -----
For Against Abstained
--- ------- ---------
<S> <C> <C> <C>
Amend and restate the Amended and
Restated Articles of Incorporation..... 3,830,702 386,000 1,000
Amend and restate the Amended and
Restated Bylaws........................ 3,769,368 -- --
Adopt the 1996 Nonemployee Director
Stock Option Plan...................... 3,692,368 524,334 1,000
Amend the 1994 Long-Term Incentive
and Stock Option Plan.................. 3,724,368 491,334 1,000
</TABLE>
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 1.1 Underwriting Agreement, dated March 19, 1997, between the
Company and R.J. Steichen & Company (filed herewith)
Exhibit 3.1 Second Amended and Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement filed on Form S-1, File No.
333-18335)
Exhibit 3.2 Second Amended and Restated Bylaws of the Company
(incorporated by reference to Exhibit 3.4 to the Company's
Registration Statement filed on Form S-1, File No. 333-18335)
Exhibit 10.1 Warrant dated March 25, 1997, issued to R.J. Steichen &
Company (filed herewith)
Exhibit 11.1 Statement Re Computation of Per Share Earnings
Exhibit 27.1 Financial Data Schedule
Exhibit 99.1 Cautionary Statement
(b) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIELDWORKS, INCORPORATED
Date: May 20, 1997 /s/ Steven A. Manske
-----------------------------------------
Steven A. Manske, Vice President of
Finance (as authorized officer and
principal financial officer)
<PAGE>
EXHIBIT 1.1
2,125,000 SHARES COMMON STOCK
FIELDWORKS, INCORPORATED
UNDERWRITING AGREEMENT
----------------------
March 19, 1997
R. J. Steichen & Company
As Representative of the Several Underwriters
One Financial Plaza, Suite 100
120 South 6th Street
Minneapolis, MN 55402
Dear Ladies and Gentlemen:
FieldWorks, Incorporated, a Minnesota corporation (the "Company"), hereby
confirms its agreement to issue and sell to the underwriters named in Schedule I
hereto (the "Underwriters"), for which R. J. Steichen & Company is acting as the
representative (in such capacity, the "Representative"), an aggregate of
2,125,000 shares of authorized but unissued common stock, par value $.001 per
share, of the Company (the "Common Stock"). Such 2,125,000 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 Underwriters
an aggregate of up to 318,750 additional shares of Common Stock upon the request
of the Representative 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
Representative warrants for the purchase of a total of 212,500 shares as
described in Section 5 hereof (the "Representative's Warrants"), assuming
purchase by the Underwriters of the Firm Shares. The shares issuable upon
exercise of the Representative's Warrants are referred to as the "Warrant
Shares."
The Company hereby confirms the arrangements with respect to the purchase,
severally and not jointly, by each of the Underwriters the number of the Firm
Shares set forth opposite their respective names in Schedule I, plus their pro
rata portion of the Option Shares purchased if the overallotment option is
exercised in whole or in part. The Company has been advised and hereby
acknowledges that R. J. Steichen has been duly authorized to act as the
representative of the Underwriters. As used in this Agreement, the term
"Underwriter" refers to any individual member of the underwriting syndicate and
includes any party substituted for an Underwriter under Section 9 hereof.
1. Representations and Warranties of the Company. The Company represents
and warrants to and agrees with each of the several Underwriters as follows:
1
<PAGE>
(a) A registration statement on Form S-1 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 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 Representative 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 Representative. 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, without
the Representative's knowledge on the date hereof, 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
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<PAGE>
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 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 Underwriters 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 in all
material respects 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 material 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 Registration
Statement.
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<PAGE>
(e) The Company is not in violation of its Articles of Incorporation
or Bylaws or in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any bond, debenture, note or
other evidence of indebtedness or in any indenture, mortgage, loan
agreement or joint venture, 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 in violation or default in the performance or
observance of any other contract, agreement or instrument to which the
Company is a party or by which the Company or its properties are bound
which violation or default would have a material adverse effect on the
business or condition (financial or otherwise) of the Company, 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, 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 power and authority to enter into this
Agreement. This Agreement has been duly authorized, executed and delivered
by the Company and, assuming the due authorization, execution and delivery
of this Agreement by the Representative on behalf of the Underwriters, 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 Articles of Incorporation or 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
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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 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 in the Prospectus. The outstanding Common Stock of
the Company is 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 Representative'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 Underwriters
will acquire the Shares, free and clear of all liens, encumbrances or
claims created by actions of the Company. 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 Representative's Warrants and the Warrant Shares have been
duly authorized. The Representative's Warrants, when issued and delivered
to the Representative, 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
Representative'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
5
<PAGE>
sufficient number of shares of Common Stock of the Company have been
reserved for issuance by the Company upon exercise of the Representative's
Warrants.
(j) Arthur Andersen 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 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 material 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
6
<PAGE>
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 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) 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.
(n) 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.
(o) 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 has no reason to believe that it is infringing
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.
(p) 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.
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<PAGE>
(q) The Company has no defined benefit pension plan or other pension
benefit plan, except for its 401(K) Plan which has no benefit obligations
and has not been funded, 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.
(r) To the best of the Company's knowledge, no person is entitled,
directly or indirectly, to compensation from the Company or the
Underwriters for services as a finder in connection with the transactions
contemplated by this Agreement.
(s) The conditions for use of a Registration Statement on Form S-1 for
the distribution of the Shares have been satisfied with respect to the
Company.
(t) 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
amended (the "1934 Act") or otherwise, of the price of any security of the
Company to facilitate the sale or resale of the Shares.
(u) The Company has not sold any securities in violation of Section
5(a) of the 1933 Act.
(v) The Company maintains insurance, which is in full force and
effect, of the types and in the amounts that it reasonably deems, following
consultation with its insurance broker, to be adequate for its business and
in line with the insurance maintained by similar companies and businesses.
(w) 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.
(x) 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.
(y) 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.
(z) The Company has obtained a written agreement from each of the
officers and directors of the Company and each stockholder of the Company
who is an affiliate (as defined in Rule 144 under the 1933 Act) of the
Company that for 180 days following the Effective Date, such person will
not, without the Representative's prior written
8
<PAGE>
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 180-day period.
(aa) The Company has obtained a written agreement from certain
stockholders of the Company who are not affiliates (as defined in Rule 144
under the 1933 Act) of the Company and who hold an aggregate of 2,836,690
shares of stock of the Company that for 90 days following the Effective
Date, such persons will not, without the Representative'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 90-day period.
(bb) The Common Stock of the Company has been approved by Nasdaq for
trading on its National Market following effectiveness of the Registration
Statement.
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 each of the Underwriters, and the
Underwriters agree, severally and not jointly, to purchase from the
Company, at $6.045 per Share (net of underwriting discounts and
commissions of $.455 per Share) the respective amount of Firm Shares set
forth opposite such Underwriter's name in Schedule I hereto. The
Underwriters will collectively 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 Underwriters to purchase an
aggregate of the Option Shares at the same purchase price as the Firm
Shares for use solely in covering any overallotments made by the
Underwriters 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 30 days after the Effective Date (as defined in Section 4(a) hereof)
upon notice (confirmed in writing) by the Representative to the Company
setting forth the aggregate number of Option Shares as to which the
Underwriters are exercising the option and the date on which certificates
for such Option Shares are to be delivered. Option Shares shall be
purchased severally for the account of each Underwriter in proportion to
the number of Firm Shares set forth opposite the name of such Underwriter
in Schedule I hereto. The option granted hereby may be canceled by the
Representative as to the Option Shares for which the option is unexercised
at any time prior to the expiration of the 30-day period upon notice to the
Company.
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<PAGE>
(c) The Company will deliver the Firm Shares to the Representative 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 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 Representative 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
Underwriters to the Representative 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 time, against payment of the purchase
price at the same place, on the date determined by the Representative 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 Representative 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 Underwriters 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 Underwriters 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
Representative or its designated agent, of certificates for the Shares by
wire transfer to a designated account of the Company.
(g) The Underwriters 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 Underwriters deem 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
Underwriters determine, and the Underwriters 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 Underwriters 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.
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<PAGE>
(h) On the First Closing Date, the Company shall issue and deliver to
the Representative the Representative's Warrants.
(i) It is understood that the Representative, individually and not as
a Representative, may (but shall not be obligated to) make payment on
behalf of any Underwriter or Underwriters for the Shares to be purchased by
such Underwriter or Underwriters. No such payment by the Representative
shall relieve such Underwriter or Underwriters from any of its or their
other obligations hereunder.
3. Further Agreements of the Company. The Company hereby covenants and
agrees with each of the Underwriters 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
Representative promptly, after the Company shall receive notice 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 Representative 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
Underwriters. 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 Representative 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 Representative and its counsel a
reasonable time prior to the proposed filing or to which the Representative
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 Representative may designate and the Company will file
such consents to service of
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<PAGE>
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 Representative
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 exemptions from the application
of) the securities laws of such states designated by the Representative
(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 Representative, as soon as
available, copies of the Registration Statement (one of 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 Representative may from time to time reasonably
request prior to the printing of each such document. The Company
specifically authorizes the Underwriters and all dealers to whom any of the
Shares may be sold by the Underwriters 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.
12
<PAGE>
(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 Representative (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.
(f) The Company will not, without the prior written consent of the
Representative, 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 pursuant to
currently outstanding options, warrants and convertible securities) during
the 180-day 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 Underwriters 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
Company incurred in registering or qualifying the Shares for sale under the
laws of such jurisdictions upon which the Representative and the Company
may agree; and (x) a nonaccountable expense allowance to the Representative
equal to 2% of the gross proceeds of the Offering. The Representative
hereby acknowledge receipt of a $10,000 advance against the
Representative'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
Representative its actual accountable out-of-pocket expenses, not to exceed
$20,000, without the prior written approval of the Company. Further, if
upon termination of this Agreement pursuant to Section 8 below, the
Representative's actual accountable out-of-pocket expenses do not exceed
the $10,000 advance against the Representative's accountable expense
allowance,
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the portion of the advance not used will be reimbursed to the Company by
the Representative.
(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 National Market.
(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 closing 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) On First Closing Date, the Company shall grant to the
Representative the Representative's Warrants, in substantially the form
attached as Appendix A hereto.
4. Conditions of the Underwriters' Obligations. The respective
obligations of the several Underwriters 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 Representative (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 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 Representative of such timely filing (or a
post-effective amendment
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<PAGE>
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 Representative, 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 Underwriters and their legal counsel. The NASD,
upon review of the terms of the Offering, shall not have objected to the
terms of the Underwriters' participation in the Offering.
(b) The Representative 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 any of the Underwriters
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 Representative, materially and adversely
affects the market for the Shares.
(d) The Representative shall have received the opinion of Dorsey &
Whitney LLP, counsel for the Company, dated as of such respective Closing
Date and satisfactory in form and substance to the Representative 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 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.
(ii) The number of authorized shares of capital stock of the
Company are as set forth in the Prospectus and the outstanding capital
stock have been duly authorized and validly issued, and are fully paid
and nonassessable. Upon delivery of and payment for the Shares
hereunder, the Underwriters will acquire the Shares free and clear of
all liens, encumbrances or claims created by actions of the Company.
To such counsel's knowledge, no preemptive rights, contractual or
otherwise, of securities holders of the Company exist with respect to
the
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<PAGE>
issuance or sale of the Shares by the Company pursuant to this
Agreement or the issuance of the Warrant Shares upon exercise of the
Representative'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, Representative's Warrants
and Warrant Shares conform as to matters of law in all material
respects to the description of these 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 Underwriters 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 Representative'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, and except as the enforceability of
indemnification or contribution provisions hereof may be limited by
federal or state securities laws. The Warrant Shares when issued in
accordance with the terms of this Agreement and pursuant to the
Representative'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 Representative'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 such counsel's knowledge, 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 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
16
<PAGE>
under the 1933 Act or under state or other securities laws in
connection with the purchase and distribution of the Shares by the
Underwriters.
(ix) The Registration Statement, when it became effective, the
Prospectus and any amendments thereof or supplements 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) on the date of filing or the date thereof,
complied as to form in all material respects with the requirements of
the 1933 Act and the Rules and Regulations.
(x) This Agreement has been duly authorized, executed and
delivered by, and, assuming the due authorization, execution and
delivery of this Agreement by the Representative on behalf of the
Underwriters, 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) To such counsel's knowledge, the execution, delivery and
performance of this Agreement and the consummation of the transactions
described herein will not result in a violation of, or a default
under, the terms or provisions of (A) any material bond, debenture,
note, contract, lease, license, indenture, mortgage, deed of trust,
loan agreement, joint venture or other agreement or instrument to
which the Company is a party or by which the Company or any of its
properties are bound, or (B) any material 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.
(xii) 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.
(xiii) 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.
(xiv) 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
17
<PAGE>
adverse effect on the general affairs, financial position, net worth
or results of operations of the Company.
(xv) 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.
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 or
otherwise delivered at Closing.
In addition to the matters set forth above, such counsel shall also provide
a letter 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), as of the date of such letter, 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 letter 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 any of the Underwriters specifically for use in the preparation
of the Registration Statement, Prospectus, or any such amendment or supplement.
(e) The Representative shall have received from Fredrikson & Byron,
P.A., its counsel, such opinion or opinions as the Representative may
reasonably require, dated as of each Closing Date and satisfactory in form
and substance to the Representative, 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 Representative and the Company shall have received letters,
dated the date hereof and as of each Closing Date, from Arthur Andersen,
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
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<PAGE>
certain financial and statistical information contained in the Registration
Statement and the Prospectus, all in form and substance satisfactory to the
Representative.
(g) The Representative shall have received from the Company a
certificate, dated as of each 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 any of the Underwriters
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 and other than pursuant
to the exercise or conversion of options, warrants or convertible
securities reflected in the Registration Statement or the Prospectus),
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.
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<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 Representative shall have received, dated as of each Closing
Date, from the Secretary of the Company (i) a certificate of incumbency
certifying the names, titles and signatures of the officers authorized to
execute this Agreement; (ii) 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; and (iii) a certificate certifying that such resolutions
and the Articles of Incorporation of the Company and the Bylaws of the
Company have been validly adopted and have not been amended or modified.
(i) The Representative shall have received a written agreement from
each of the officers and directors of the Company and each stockholder of
the Company who is an affiliate (as defined in Rule 144 under the 1933 Act)
of the Company that for 180 days following the Effective Date, such person
will not, without the Representative'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 180-day period.
(j) The Representative shall have received a written agreement from
certain stockholders of the Company who are not affiliates (as defined in
Rule 144 under the 1933 Act) of the Company and who hold an aggregate of
2,836,690 shares of stock of the Company that for 90 days following the
Effective Date, such persons will not, without the Representative'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 90-day period.
(k) 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.
The Representative 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.
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<PAGE>
(l) 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 Representative 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.
(m) The Company shall have furnished to the Representative, dated as
of the date of each Closing Date, such further certificates and documents
as the Representative shall have reasonably required.
(n) All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably
satisfactory to the Representative and its legal counsel. All statements
contained in any certificate, letter, or other document delivered pursuant
hereto by, or on behalf of, the Company shall be deemed to constitute
representations and warranties of the Company.
(o) The Representative 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.
(p) 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 Underwriters hereunder may be
canceled at, or at any time prior to, each Closing Date by the
Representative. Any such cancellation shall be without liability of the
Underwriters 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. Representative's Warrants. On the First Closing Date, the Company
shall sell the Representative's Warrants to the Representative for $50, which
Representative's Warrants shall first become exercisable one year after the
Effective Date and shall remain exercisable for a period of four years
thereafter. The Representative's Warrants shall have an initial exercise price
per share equal to 120% of the price per share set forth in Section 2(a), 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 each
Underwriter and each person, if any, who controls any 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
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<PAGE>
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 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 each 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, any 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 any 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 any 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) Each Underwriter severally, but not jointly, 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
22
<PAGE>
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 Company or by any
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, any 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 any Underwriter and filed in
any jurisdiction; and each 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 Underwriters 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
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<PAGE>
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 Underwriters against the Company or by the
Company against the Underwriters 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.
------------
(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 Underwriters 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 Underwriters 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 Underwriters
agree that contribution determined by per capita allocation (even if the
Underwriters were considered a single person) would not be equitable. The
respective relative benefits received by the Company on the one hand, and
the Underwriters, 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 Underwriters (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 Underwriters, 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 Underwriters 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 Underwriters 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. The Underwriters' obligation to contribute pursuant to this
section are several and not joint. 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
24
<PAGE>
misrepresentation. For purposes of this Section 7, each person who
controls an Underwriter within the meaning of the 1933 Act or the 1934 Act
shall have the same rights to contribution as such 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.
(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 Underwriters release the initial public
offering of the Firm Shares for sale to the public. The Representative
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 Representative by
giving notice as hereinafter provided, except that the provisions of
Sections 3(g), 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
Underwriters release, 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.
(b) Until the First Closing Date, this Agreement may be terminated by
the Representative, 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 Representative, shall render it inadvisable
to proceed with the delivery of the Shares, whether or not such loss shall
have been
25
<PAGE>
insured; (ii) trading in securities generally on the New York Stock
Exchange, American Stock Exchange, Nasdaq National Market, Nasdaq SmallCap
Market(TM) 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 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 Representative, 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 Representative, 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 Representative 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 Representative promptly by telegram or telephone,
confirmed by letter sent to the address specified in Section 11 hereof.
9. Default of Underwriter. If any Underwriter or Underwriters default in
their obligation to purchase the Firm Shares hereunder and the aggregate amount
of Firm Shares which such defaulting Underwriter or Underwriters agreed but
failed to purchase does not exceed 10% of the total amount of Firm Shares, the
other Underwriters shall be obligated, severally, in proportion to their
respective commitments hereunder, to purchase the Firm Shares which such
defaulting Underwriter or Underwriters agreed but failed to purchase. If any
Underwriter or Underwriters so defaults and the aggregate amount of Firm Shares
with respect to which such default or defaults occur is more than 10% of the
total number of Firm Shares and arrangements satisfactory to the Representative
and the Company for purchase of such Firm Shares by other persons (who may
include one or more of the nondefaulting Underwriters, including the
Representative) are not made within 48 hours after such default (during which
time the Representative shall use its best efforts to procure such
arrangements), this Agreement will terminate without liability on the part of
any nondefaulting Underwriter or the Company except for the provisions of
Sections 6 and 7 hereof. In any such case, either the Representative or the
Company shall have the right to postpone the Closing Date, but in no event for
more than seven days, in order that any required changes, not including a
reduction in the number of Firm Shares, to the Registration Statement and the
Prospectus of any other documents or arrangements
26
<PAGE>
may be effected. As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this Section 9. Nothing herein
shall relieve a defaulting Underwriter from liability for its default.
10. Survival of Indemnities, Contribution Agreements, Warranties and
Representations. The respective indemnity and contribution agreements of the
Company and the Underwriters 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 Underwriters, 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
Representative or any of the Underwriters, shall be mailed, delivered or
telegraphed and confirmed, to R.J. Steichen & Company, One Financial Plaza,
Suite 100, 120 South 6th Street, Minneapolis, Minnesota 55402, Attention:
Patrick M. Sidders, with a copy to Timothy M. Heaney, 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 FieldWorks, Incorporated, 9961 Valley View Road, Eden Prairie,
Minnesota 55344, Attention: Gary J. Beeman, with a copy to Kenneth L. Cutler,
Esq., Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, MN 55402.
12. Information Furnished by the Underwriter. The statements relating to
the stabilization activities of the Underwriters and the statements under the
caption "Underwriting" in any Preliminary Prospectus and in the Prospectus
constitute written information furnished by, or on behalf of, the Underwriters
specifically for use with reference to the Underwriters referred to in Section
1(b), Section 4(d), Section 4(g) and Section 6 hereof.
13. Parties. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters 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 Underwriters
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 laws provisions thereof.
27
<PAGE>
If the foregoing is in accordance with the Representative'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 each of the several Underwriters in accordance with its
terms.
Very truly yours,
FIELDWORKS, INCORPORATED
By /s/ G. Beeman
----------------------------
Its President & CEO
----------------------------
ACCEPTANCE
The foregoing Underwriting Agreement is hereby confirmed and accepted by the
undersigned for itself and as Representative of the several Underwriters
referred to in the foregoing Agreement as of the date first above written.
R. J. STEICHEN & COMPANY
By /s/ Patrick M. Sidders
----------------------
Its Senior V.P.
----------------------
644202
28
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Name of Underwriter Number of Firm Shares
- ------------------- ---------------------
<S> <C>
1. R. J. Steichen & Company............................. 1,785,000
2. Josephtal, Lyon & Ross, Inc.......................... 100,000
3. Needham & Company.................................... 100,000
4. John G. Kinnard & Co................................. 40,000
5. Smith, Moore & Company............................... 40,000
6. Commonwealth & Associates............................ 40,000
7. Summit Investment Corp............................... 20,000
---------
TOTAL.......................................... 2,125,000
=========
</TABLE>
29
<PAGE>
EXHIBIT 10.1
WARRANT
-------
To Purchase 212,500 Shares of Common Stock
of
FIELDWORKS, INCORPORATED
THIS CERTIFIES THAT, for good and valuable consideration, R. J. Steichen &
Company (the "Representative"), or its registered assigns, is entitled to
subscribe for and purchase from FieldWorks, Incorporated, a Minnesota
corporation (the "Company"), at any time after March 19, 1998, to and including
March 20, 2002, Two Hundred Twelve Thousand Five Hundred (212,500) fully paid
and nonassessable shares of the Common Stock of the Company at the price of
$7.80 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 March 19, 1997, by and between the Company and the
Representative. 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 Representative, any party who acquires all or a part of this
Warrant as a registered transferee of the Representative, 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 of the Representative.
Further, this Warrant may not be sold, transferred, assigned, hypothecated or
divided into two or more Warrants of smaller denominations, nor may 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
1
<PAGE>
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 Representative 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. If
registrations are not in effect and if exemptions are not available such as
would permit the Company to issue Warrant Shares to the Holder 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 such as would permit
the Company to issue Warrant Shares to the Holder, 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.
4. Covenants of the Company. The Company covenants and agrees that all
Warrant Shares will, upon issuance following payment therefor, 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.
2
<PAGE>
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
referred to in Section 5(a)(i) above), 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 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.
3
<PAGE>
(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 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
4
<PAGE>
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 Market(SM), or if not listed on a national securities exchange or
quoted in Nasdaq SmallCap Market(SM), 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 March 19, 1998 and prior to the end of the two-
year period following complete exercise of this Warrant or the close of business
on March 20, 2004, 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 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
date 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.
5
<PAGE>
(b) Further, on a one-time basis during the four-year period commencing
March 20, 1998, 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, until
March 25, 1999 or such later period, not to exceed six (6) months from the
effective date of such registration or qualification specified in this Paragraph
(b), 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 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.
6
<PAGE>
10. Additional Right to Convert Warrant.
(a) The Holder of this Warrant shall have the right to require the Company
to convert this Warrant (the "Conversion Right") at any time after it is
exercisable, but prior to its expiration into shares of Company Common Stock as
provided for in this Section 10. Upon exercise of the Conversion Right, the
Company shall deliver to the Holder (without payment by the Holder of any
Warrant Exercise Price) that number of shares of Company Common Stock equal to
the quotient obtained by dividing (x) the value of the Warrant at the time the
Conversion Right is exercised (determined by subtracting the aggregate Warrant
Exercise Price for the Warrant Shares in effect immediately prior to the
exercise of the Conversion Right from the aggregate Fair Market Value for the
Warrant Shares immediately prior to the exercise of the Conversion Right) by (y)
the Fair Market Value of one share of Company Common Stock immediately prior to
the exercise of the Conversion Right.
(b) The Conversion Right may be exercised by the Holder, at any time or
from time to time after it is exercisable, prior to its expiration, on any
business day by delivering a written notice in the form attached hereto (the
"Conversion Notice") to the Company at the offices of the Company exercising the
Conversion Right and specifying (i) the total number of shares of Common Stock
the Holder will purchase pursuant to such conversion and (ii) a place and date
not less than three nor more than 20 business days from the date of the
Conversion Notice for the closing of such purchase.
(c) At any closing under Section 10(b) hereof, (i) the Holder will
surrender the Warrant and (ii) the Company will deliver to the Holder a
certificate or certificates for the number of shares of Company Common Stock
issuable upon such conversion, together with cash, in lieu of any fraction of a
share, and (iii) the Company will deliver to the Holder a new Warrant
representing the number of shares, if any, with respect to which the Warrant
shall not have been exercised.
(d) Fair Market Value of a share of Common Stock as of a particular date
(the "Determination Date") shall mean:
(i) If the Company's Common Stock is traded on an exchange or is
quoted on the Nasdaq National Market, then the closing or last sale price,
respectively, reported for the business day immediately preceding the
Determination Date,
(ii) If the Company's Common Stock is not traded on an exchange or on
the Nasdaq National Market but is traded on the Nasdaq SmallCap Market(SM)
or other over-the-counter market, then the closing bid and asked prices
reported for the business day immediately preceding the Determination Date,
and
(iii) If the Company's Common Stock is not traded on an exchange or
on the Nasdaq National Market, Nasdaq SmallCap Market(SM) or other over-
the-counter market, then the price established in good faith by the Board
of Directors.
7
<PAGE>
IN WITNESS WHEREOF, FieldWorks, Incorporated has caused this Warrant to be
signed by its duly authorized officer and this Warrant to be dated March 25,
1997.
FieldWorks, Incorporated
By /s/ G. Beeman
____________________________
Its Chief Executive Officer
___________________________
631994
8
<PAGE>
To: FieldWorks, Incorporated
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.
9
<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 FieldWorks, Incorporated to which the within Warrant relates and
appoints _____________, attorney, to transfer said right on the books of
FieldWorks, Incorporated with full power of substitution in the premises.
Dated:________________ _____________________________
(Signature)
Address:
______________________________
______________________________
Social Security or Tax I.D. Number
of Assignee:
_______________________________
10
<PAGE>
CASHLESS EXERCISE FORM
(To be executed upon exercise of Warrant
pursuant to Section 10)
To: FieldWorks, Incorporated
The undersigned hereby irrevocably elects a cashless exercise of the right
of purchase represented by the within Warrant Certificate for, and to purchase
thereunder, ______________ shares of Common Stock, as provided for in Section 10
therein.
Please issue a certificate or certificates for such Common Stock in the
name of, and pay any cash for any fractional share to:
Name___________________________________
(Please print name)
Address________________________________
_____________________________________
Social Security No.____________________
Signature______________________________
NOTE: The above signature should correspond exactly with the name on the
first page of this Warrant Certificate or with the name of the assignee
appearing in the assignment form below.
And if said number of shares shall not be all the shares purchasable under
the within Warrant Certificate, a new Warrant Certificate is to be issued in the
name of the above signed for the balance remaining of the shares purchasable
thereunder.
11
<PAGE>
Exhibit 11.1
FIELDWORKS, INCORPORATED AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
For the Three Months Ended
------------------------------
April 6, 1997 March 31, 1996
------------- --------------
<S> <C> <C>
PRIMARY AND FULLY DILUTED.
Net loss............................... $ (697,926) $ (524,961)
========== ==========
Weighted average common shares
outstanding........................... 6,411,270 5,844,233
Effect of conversion of preferred
shares (1)............................ 469,146 576,923
Effect of cheap shares issued (2)...... 160,014 160,014
---------- ----------
7,040,430 6,581,170
========== ==========
NET LOSS PER COMMON SHARE............... $ (.10) $ (.08)
========== ==========
</TABLE>
(1) Gives effect to preferred shares which converted to common shares
concurrent with the company's initial public offering.
(2) Warrants issued and options granted from March 1, 1996 to February 28, 1997
are included in the calculation for all periods presented, using the
treasury stock method, in accordance with Staff Accounting Bulletin Topic
4(D).
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-04-1998
<PERIOD-START> JAN-06-1997
<PERIOD-END> APR-06-1997
<CASH> 11,586,900
<SECURITIES> 0
<RECEIVABLES> 3,070,977
<ALLOWANCES> 0
<INVENTORY> 5,979,680
<CURRENT-ASSETS> 20,937,305
<PP&E> 1,430,904
<DEPRECIATION> 658,936
<TOTAL-ASSETS> 21,736,736
<CURRENT-LIABILITIES> 8,661,000
<BONDS> 0
0
0
<COMMON> 8,684
<OTHER-SE> 12,998,603
<TOTAL-LIABILITY-AND-EQUITY> 21,736,736
<SALES> 5,117,168
<TOTAL-REVENUES> 5,117,168
<CGS> 3,234,523
<TOTAL-COSTS> 3,234,523
<OTHER-EXPENSES> 397,681
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 420,351
<INCOME-PRETAX> (697,926)
<INCOME-TAX> 0
<INCOME-CONTINUING> (697,926)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (697,926)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> 0
</TABLE>
<PAGE>
Exhibit 99.1
CAUTIONARY STATEMENT
FieldWorks, Incorporated ("FieldWorks" or the "Company"), or persons acting
on behalf of the Company, or outside reviewers retained by the Company making
statements on behalf of the Company, or underwriters, from time to time, may
make, in writing or orally, "forward-looking statements" as defined under the
Private Securities Litigation Reform Act of 1995 (the "Act") and incorporated in
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. This Cautionary Statement is for
the purpose of qualifying for the "safe harbor" provisions of the Act and is
intended to be a readily available written document that contains factors which
could cause results to differ materially from those projected in such
forward-looking statements. These factors are in addition to any other
cautionary statements, written or oral, which may be made or referred to in
connection with any such forward-looking statement.
The following matters, among others, may have a material adverse effect on
the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company. Reference to this Cautionary
Statement in the context of a forward-looking statement shall be deemed to be a
statement that any one or more of the following factors may cause actual results
to differ materially from those which might be projected, forecast, estimated or
budgeted by the Company in such forward-looking statement or statements:
1
<PAGE>
Uncertainty of Market Acceptance
The market for rugged computing platforms is a relatively new, limited
sector of the portable computer market. The Company's success will depend upon
increasing the market acceptance of its two current series of products, which
are both heavier and more expensive than most consumer portable personal
computers. There can be no assurance that the Company's products will gain
widespread acceptance or that the Company will generate sufficient sales to
allow the Company to attain profitable operations. In addition, the failure of
the rugged computing platform market to expand would have a material adverse
effect on the Company's business, financial condition and results of
operations.
Competition
The Company believes that it currently occupies a niche in the portable
computer market with its rugged computing platforms. The Company currently
faces direct competition in this market niche from companies producing
portable computers intended for field use such as Amrel Technology, Inc.,
Badger Computers (a unit of Group Financial Partners, Inc.), Dolch Computer
Systems, Getac Corporation, Husky Computers Inc., Itronix Corporation, Kontron
Elektronik Corporation (a subsidiary of Kontron Elektronik GmbH) and Panasonic
Personal Computer Company. To the extent FieldWorks and its direct competitors
expand and develop this market niche, other manufacturers may turn their
attention to this niche and begin to produce products directly competitive
with those offered by the Company. The Company's computing platforms also face
indirect competition from a variety of different companies and products,
including consumer portable personal computers, customized portable personal
computers and single-purpose diagnostic and data collection instruments.
Both the portable computer industry and the diagnostic and data collection
instrument industry are intensely competitive. Many of the companies that
produce or may produce devices that compete, directly or indirectly, with the
Company's products have substantially greater financial, technological and
marketing resources than the Company. Among other effects, increased competition
may require the Company to reduce the prices it charges for its products. There
can be no assurance that the Company will be able to compete effectively against
current or future competitors, or that such competitors will not succeed in
adapting more rapidly and effectively to changes in technology or in the market
or in developing or marketing products that will be more widely accepted.
2
<PAGE>
RISK OF TECHNOLOGICAL OBSOLESCENCE
Both the computer industry and the diagnostic and data collection instrument
industry are characterized by rapid technological change, including changes in
customer requirements, frequent new product introductions and enhancements,
and evolving industry standards. The Company's success will depend in part on
its ability to keep pace with technological developments and emerging industry
standards and to respond to customer requirements by enhancing its current
products and developing and introducing new products. Failure to anticipate or
respond rapidly to advances in technology and to adapt the Company's products
appropriately could have a material adverse effect on the success of the
Company's products and thus on the Company's business, financial condition and
results of operations. Similarly, failure to institute and maintain effective
policies intended to prevent the building of an inventory of parts that have
become obsolete will require the Company to write off portions of such
inventory as was done in 1995 and 1996. Any significant future write-offs
could have an adverse effect on the Company's financial condition.
Technological advances may also increase the level of competition in the
rugged computing platform market.
RISKS ASSOCIATED WITH MANAGING GROWTH
If the Company is to grow successfully, it must increase its manufacturing
output and capacity significantly. The anticipated growth of the Company's
operations will place significant strain not only on the manufacturing
resources of the Company, but also on the Company's management, sales and
marketing, operating and financial systems and resources. If such growth
occurs, the Company may encounter difficulties, including problems involving
lower than projected production rates, disrupted quality control and
assurance, decreased product reliability, increased manufacturing costs,
difficulties in maintaining internal accounting controls, malfunctioning of
existing and new equipment, insufficient or untimely component supplies and
shortages of personnel. There can be no assurance that the Company will be
able successfully to plan for or manage increased production and marketing of
its products. The failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
anticipates that, at projected sales growth levels, it will be required to
move into expanded production and administrative facilities. The Company has
located a new space and anticipates moving in the fourth quarter of 1997. In the
process of moving its operations, the Company may encounter difficulties that
could impair the Company's operations, including, among others, delays in
occupying the new facilities, cost overruns, malfunctioning of new or moved
equipment, production inefficiencies due to facility design or lack of
familiarity with the new facilities, disrupted quality control and assurance as
a result of the move and resulting decreased product reliability. Any such
difficulties could have an adverse effect on the Company's business, financial
condition and results of operations.
RISKS ASSOCIATED WITH DEVELOPING SALES CHANNELS
The Company is engaged in building its sales organization and refining its
sales strategies. Failure to develop this sales organization sufficiently or
to implement appropriate sales strategies in a timely manner could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company distributes a substantial portion of its products through
independent sales representatives and distributors. The Company also sells its
products to OEMs, value added resellers ("VARs") and systems integrators. The
success of the Company is dependent in large part upon the performance of
these resellers, many of whom may also carry competitive products, and on its
ability to attract new resellers. The Company operates pursuant to written
agreements, most of which may be terminated by the reseller on 30 days'
written notice with or without cause. The loss of any of the Company's major
resellers or a failure to make acceptable arrangements with resellers in new
markets could have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON THIRD-PARTY MANUFACTURERS
Although the Company performs some mechanical subassembly and all final
assembly of its products, the Company relies on sub-contract manufacturers to
produce a number of subassemblies. Utilization of sub-contract
3
<PAGE>
manufacturers results in dependence on the timely delivery of high quality
products from these manufacturers and may leave the Company with less
flexibility and control over the manufacturing process than if it conducted
all of these operations internally. There can be no assurance that the timely
delivery of quality subassemblies will not be interrupted. Any interruption in
the timely supply of quality subassemblies would have a material adverse
effect on the Company's ability to deliver its products until acceptable
arrangements could be made with a qualified alternative subassembly
manufacturer. There can be no assurance that the Company would be able to
reach an arrangement with such a manufacturer at acceptable prices and
adequate quality levels on a timely basis. If the Company were unable to do
so, such an interruption would have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON AVAILABILITY OF COMPONENTS
The Company's rugged computing platforms employ a number of components not
generally used in off the shelf personal computers, such as special hard disk
drives, CD-ROM drives, floppy disk drives, displays and power supplies. There
can be no assurance that such components will continue to be produced.
Further, a number of components contained in the Company's products are single
sourced. While the Company believes that there are other companies that could
provide these components, changing suppliers can create uncertainty and be
costly and time-consuming. In the event that the Company could not obtain
adequate or timely quantities of necessary components from its current
suppliers, there can be no assurance that the Company would be able to
identify or access alternative sources of such components within a reasonable
period of time, on acceptable terms, or at all. Some of the Company's current
vendors use tools that have been designed for and are the property of the
Company; if the Company were required to change suppliers for these
components, it would need either to move the necessary tools or to obtain new
tools, either of which could entail significant cost and delay. Moreover, the
Company's buying power may be limited by its small size, and the Company may
receive less favorable allocations and other terms such as price, timing or
other factors than larger companies buying from the same suppliers. The
unavailability of adequate quantities, the inability to develop alternative
sources, a reduction or interruption in supply or a significant increase in
the price of components could have a material adverse effect on the Company's
ability to manufacture and market its products.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's operating results may vary significantly from quarter to
quarter due to such factors as changes in customer buying patterns, the timing
of the announcement and introduction of new products by the Company or its
competitors, the tactics of the Company's competitors, technological
developments affecting the rugged computing platform market, and the overall
strength of the economy. The Company has experienced some seasonality in
orders for its products, with relatively fewer orders received in the first
quarter of the year, a decline in European orders in the summer, and a rise in
orders in the last quarter. In addition, the Company has experienced long
sales cycles in connection with sales to many of its customers, especially
those that are government agencies or large corporations, and also believes
that such customers may place orders that are disproportionate in size
compared to the Company's other orders. Furthermore, a decision by a customer
to return a large order, or a decision by a customer to return a smaller order
that had been customized such that it could not easily be resold, could have
an adverse impact on the Company's results in any quarter, as occurred in 1995
and 1996. All of these factors, along with the uncertainties associated with
the introduction of any new product or product enhancement, in gauging
ultimate customer demand, and in predicting general trends in the market for
the Company's products, may limit management's ability to plan for production
and to forecast quarterly results of operations accurately. The Company's
operating results for any particular quarter are not necessarily indicative of
results that the Company may achieve for any subsequent quarter or full year.
DEPENDENCE ON INTELLECTUAL PROPERTY
The Company's success will depend in part on its ability to protect its
proprietary rights and to operate without infringing on the proprietary rights
of third parties. As of May 14, 1997 no patents have been issued to the Company.
The Company has filed two U.S. patent applications covering various aspects of
its 7000 Series Field WorkStation laptop computing platforms and its 5000 Series
Field WorkStation notebook computing platforms and the technology incorporated
in such platforms and a Patent Cooperation Treaty ("PCT") application covering
various aspects of the 5000 Series, and the Company may apply for additional
patents in the future. There can be no assurance that any of the Company's
current or future patent
4
<PAGE>
applications will result in issued patents, that the scope of the claims in
any patents issued to the Company will prevent competitors from introducing
competitive products or that any patents issued to the Company would be
enforceable if challenged. In addition, even if patents for which the Company
has applied or applies in the future are ultimately issued, other parties may
hold or receive patents that contain claims covering other technology included
in the Company's current or future products that could hinder or prevent the
sale of the Company's products or require the Company to obtain licenses to
such technology, which might not be available on acceptable terms or at all.
In addition to patents, the Company intends to rely upon unpatented trade
secrets and know-how and on the expertise of its employees. Although the
Company believes that it has in the past taken, and intends in the future to
take, appropriate steps to protect its unpatented proprietary rights,
including requiring that its employees and third parties granted access to the
Company's proprietary technology enter into confidentiality agreements with
the Company, there can be no assurance that these measures will be sufficient
to protect the Company's rights against third parties. Likewise, there can be
no assurance that others will not independently develop or otherwise acquire
unpatented technologies or products similar or superior to those of the
Company.
The Company claims trademark rights in four marks used in connection with
its products in the United States and filed for registration of such
trademarks in June 1996. The U.S. Patent and Trademark Office (the "PTO") has
not determined the registrability of the trademarks. United States trademark
rights are acquired by use rather than by registration, and there can be no
assurance that others do not have conflicting or superior rights to the
Company's trademarks. The Company is aware that there are third parties that
have claimed or may claim superior rights, in certain territories in the
United States, to the use of certain of the marks in which the Company claims
rights; there can thus be no assurance that no third party will contest the
Company's right to use or register its trademarks. In addition, the PTO can
deny registration to trademarks that it determines are "merely descriptive" or
"generic." There can thus be no assurance that any of the trademarks covered
by the Company's applications for registration will be found registrable, that
registrations will issue, or that the Company can support the cost of defense
of its trademarks.
The Company licenses from third parties certain software that it includes in
its products. If any such licenses were terminated, the Company could be
required to license similar software from other third parties; there can be no
assurance that the Company could do so in a timely fashion, on acceptable
terms, or at all.
The high technology area frequently features disputes over intellectual
property. The Company may in the future be required to defend its intellectual
property rights against infringement, duplication, discovery and
misappropriation by third parties or to defend itself against third-party
claims of infringement. Likewise, disputes may arise in the future with
respect to ownership of technology developed by employees who were previously
employed by other companies. Any such litigation or disputes could result in
substantial costs to, and a diversion of effort by, the Company. An adverse
determination could subject the Company to significant liabilities to third
parties, require the Company to seek licenses from or pay royalties to third
parties or require the Company to develop appropriate alternative technology.
There can be no assurance that any such licenses would be available on
acceptable terms or at all, or that the Company could develop alternate
technology at an acceptable price or at all. Any of these events could have a
material adverse effect on the Company's business, financial condition and
results of operations.
NEED TO ATTRACT AND RETAIN KEY PERSONNEL
The success of the Company is dependent on its ability to attract and retain
personnel needed for its business. The Company's personnel needs include
highly trained personnel for such areas as management, sales and engineering,
including Gary J. Beeman and Robert C. Szymborski, the Company's co-founders
and currently the Chief Executive Officer, and Executive Vice President and
Chief Technical Officer, respectively, of the Company. Qualified individuals in
such areas are in high demand and are often subject to competing employment
opportunities. In addition, as the Company increases its production and sales
levels, it will need to attract and retain additional qualified skilled and
unskilled workers for its manufacturing and related operations. In recent years
there has been great demand for qualified skilled and unskilled employees in the
5
<PAGE>
Minneapolis area, where the Company's manufacturing operations are located.
There can be no assurance that the Company will be successful in attracting
and retaining the personnel needed for its business. Any failure to do so
would adversely affect the Company's business, financial condition and results
of operations.
RISKS ASSOCIATED WITH INTERNATIONAL SALES
In the year ended January 5, 1997, international sales of the Company's
products represented approximately 24% of the Company's net sales.
International sales are subject to inherent risks, including longer payment
cycles, greater difficulty or delay in accounts receivable collection, U.S.
and foreign import and export restrictions and tariffs, the burdens of
complying with a variety of foreign laws, potentially adverse tax
consequences, potentially inadequate protection of intellectual property
rights, restrictions on repatriation of earnings, and exposure to increased
political and economic instability. In addition, the Company's net receipts
from international sales are typically lower than net receipts from domestic
sales as the result of the Company bearing some of the cost of foreign import
tariffs and the time required to collect foreign sales receivables is
generally longer than that required for domestic receivables. The loss of a
key foreign distributor or the inability to maintain a foreign distribution
network could have an adverse effect on the Company's business, financial
condition and results of operations.
All of the Company's export sales are currently denominated in United States
dollars. An increase in the value of the United States dollar relative to
foreign currencies could make the Company's products more expensive and,
therefore, potentially less competitive in foreign markets. In the future, if
the Company's export sales were to be denominated in local currencies, foreign
currency translations may contribute to significant fluctuations in the
Company's financial condition and results of operations. If for any reason
currency exchange or price controls or other restrictions on foreign
currencies were imposed, the Company's business, financial condition and
results of operations could be materially adversely affected.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
In order to meet its needs beyond the end of 1997, 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. Any additional equity financings may be dilutive to existing shareholders,
and any debt financing may involve restrictive covenants. Failure to secure
additional financing if and when needed could adversely affect the Company and
its operations, including requiring the Company to delay, scale back, or
eliminate market expansion activities and research and development on existing
or new products, or forcing the Company to cease operations entirely.
The foregoing review of factors pursuant to the Act should not be construed as
exhaustive.
6
