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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
for the fiscal year ended January 3, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 000-22221
FIELDWORKS, INCORPORATED
Minnesota
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(State or other jurisdiction of incorporation or organization)
7631 Anagram Drive, Eden Prairie, Minnesota
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(Address of principal executive offices)
41-1731723
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(I.R.S. Employer Identification No.)
55344
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(Zip Code)
(612) 974-7000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
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None
Name of each exchange on which registered
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None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 16,
1999 as reported on the Nasdaq National Market, was approximately $15,290,257.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. The determination of affiliate status
for purposes of this paragraph is not necessarily a conclusive determination for
other purposes.
The number of shares of the registrant's Common Stock, $.001 par value,
outstanding as of March 16, 1999 was 8,832,926.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1999 Annual Meeting of
Shareholders to be held May 18, 1999 are incorporated by reference in Part III.
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PART I
ITEM 1. Business
The Company FieldWorks, Incorporated ("FieldWorks" or "the Company") was
incorporated in Minnesota on October 2, 1992 and began as a company dedicated to
the development and sale of rugged mobile computing platforms. While the Company
continues to manufacture and sell these products, it has concluded that its
strongest opportunity for growth and differentiation is as a company that
focuses on designing and providing complete customer-specific rugged mobile
computing solutions. The Company's solutions address business needs in service
bay diagnostics, test and measurement, and logistics management for the
trucking, public services and government/military industries worldwide. Complete
solutions can include hardware, software, peripherals, service and support--
thus, FieldWorks is a systems integration company as well as a manufacturer. The
Company also offers customers a high level of end-user industry expertise in
service and support. FieldWorks' professional services capabilities include
consultation and/or management of solution conceptualization, design,
development, implementation and support.
All platforms are designed to be rugged and reliable, meeting military
standards for shock, vibration and moisture. They are suited for use in
demanding field environments, offering features such as daylight-readable color
displays and a pointing device that is impervious to dirt and can be used with a
glove. The Company's platforms also offer a high level of expandability.
Expansion paths include desktop-like ISA and PCI expansion slots, PC card slots,
serial ports, universal serial bus and custom modules. As a result, all
platforms are flexible "electronic toolboxes" that integrate the end-user's
application-specific tools and technologies into one custom, rugged mobile
solution. Lastly, because of their modular system architecture, the Company's
platforms are easily upgraded to incorporate new central processing units,
display technologies and peripheral technologies, such as wireless
communication. Such upgradeability contributes to a long solution life span and
reduces the total cost of ownership for the customer.
Rugged Mobile Computing Solutions Market. Due to technological advances
over the past several years, organizations have become increasingly dependent on
mobile computing and communications devices, such as portable computers, pagers
and cellular telephones, to enhance workforce productivity. Organizations are
increasingly seeking to computerize field personnel. Such computerization can
provide sophisticated field diagnostic and analytic capabilities, enhance field
access to data and on-line information, eliminate paperwork and improve
communication.
Industries such as trucking, public services, and the government and
military have recognized the need for computerization and automation in the
field. However, the effectiveness of field force computerization and automation
efforts has often been limited by the nature of the products that have been
available. Computers are now being used in the field to perform a wide range of
tasks, but both off-the-shelf, consumer portable computers and custom-designed
portable computers generally have significant shortcomings that limit their use
by field personnel. In part as a result of these limitations, some companies
still prefer to employ only single-purpose diagnostic and data collection
machines in the field, foregoing the benefits of full computerization.
The field force automation markets for the Company's products consist of
those businesses and other entities that are seeking effective mobile computing
platforms for field personnel and functions. Users of the Company's field
computing platforms and their demands vary widely, and include: (i)
transportation, which needs diagnostic service tools in a single PC-based tool
with integrated software modules and hardware peripherals, (ii) utilities and
telecommunications test crews, which require electronic toolboxes that can
perform data acquisition, diagnostic, communications and analysis tasks to
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expedite installation, repair and troubleshooting, (iii) public services, which
use computers as mobile data terminals that link into central dispatch, and (iv)
the military, which needs mobile units capable of withstanding battlefield
conditions chiefly for communication and field data acquisition purposes.
FieldWorks has chosen to focus on service bay, test and measurement, and
logistics management solutions for trucking, public services (which includes
utility and telecommunications companies), and government/military industries.
Strategy. The Company's vision is to be the worldwide leader in customer-
specific computing solutions for demanding field environments. The Company's
strategy consists of the following key components:
Penetrate Key Vertical Markets. The Company is targeting key vertical
markets including trucking, public services and government/military. The Company
develops specialized product features and functions to address the special needs
of a particular vertical market and provides consultation services to support
the requirements of its customers. The Company's strategy is to be a key
provider of information tools and services to facilitate standardization in
service bay, test and measurement and logistics management.
Enhance Professional Services Offerings. The Company intends to position
itself as a professional service and system integration company whose uniqueness
is its market application expertise and customer support regarding the use of
the technology it provides. In 1998, the Company established a professional
services organization focused on this initiative.
Reduce Operating Expenses and Production Costs. The Company is evaluating
the outsourcing of work where value is not recognized and rewarded by its
customers. The Company is focused on reducing operating expenses and product
costs and improving inventory management to enhance its competitive position and
achieve profitability.
FieldWorks Products and Professional Services. The Company is focused on
delivering products and professional services that address the varied and
specialized requirements of field force personnel. The Company's platforms are
designed to be rugged, expandable, upgradeable and customizable.
Product Series The Company's product series consist of the following:
7000 Series Field WorkStation Laptop Computing Platform. The 7000 Series
offers significant expansion capacity and is targeted at the high end of the
rugged field computing platform market. The structure of this laptop computing
platform is based on a high-strength cast magnesium alloy external housing.
Internal components that are sensitive to shock and vibration are contained
within this housing and isolated with special tuned shock absorbing polymers,
while a shock absorbing bushing system suspends all drives and the CPU. The 7000
Series incorporates the Company's backplane/card cage design, which provides up
to six ISA/PCI expansion card slots within the housing, permitting the
integration of instrumentation, data acquisition and communications
capabilities. Also contained within the housing are PCMCIA expansion capability,
integrated AC/DC power, battery capability, desktop ISA/PCI slots, optional
integrated CD-ROM, optional dual removable hard drive system and optional Motion
Picture Experts Group ("MPEG-II") video compression decoding boards.
5000 Series Field WorkStation Notebook Computing Platform. The 5000 Series
is designed as a smaller, more lightweight toolbox with less expandability. The
structure of this notebook computing platform is based on an internal frame cast
from a high-strength magnesium alloy. The skeleton and rubber coating protect
internal sub-systems from shock and vibration. Virtually all of the electronics
of the 5000 Series are contained in a "technology module" that has been
designed for easy removal, making it possible for customers to service the units
themselves and simplifying upgrades. In addition to two optional ISA or PCI
expansion slots, all 5000 Series platforms have four universal bays in two
sizes. The two larger bays can house batteries, CD-ROM drives, an internal AC
adapter, hard drives or floppy drives. The two smaller bays can house removable
drives and/or PCMCIA slots.
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2000 Series Embedded Vehicle System (EVS). A new product line with
production scheduled to begin the second quarter of 1999, FieldWorks' mobile
embedded server is a three-piece onboard vehicle PC that includes a server
component, a high-bright display and a back-lit keyboard. FieldWorks--and OEMs
and systems integrators--can customize the system by adding wireless technology,
Global Positioning System (GPS) technology, data radios and other devices
through two embedded PC card slots and three open serial ports. Via cabling,
system developers can also connect floppy and CD-ROM devices to the server,
which can then be mounted in a remote location up to 16 feet away. EVS is
ideally suited for fixed in-vehicle computing and communication applications
including logistics management. Application examples include computer-aided
dispatch and Geographic Information Systems/Global Positioning System mapping.
Professional Services. The Company believes that to gain a competitive
advantage in the rugged mobile computing market, in light of the relatively low
level of products it delivers, it must differentiate itself by providing value-
added services along with the products it sells. The Company maintains a
professional services and support program for the benefit of its customers,
including consulting relating to business needs assessment, product application,
technical support, project management, product implementation and
troubleshooting on post-installation questions. The Company provides a one-year
warranty program under which the Company agrees to diagnose, repair and test any
product, and also offers limited warranty programs for extended periods. The
Company can also provide replacement unit pools for large volume customers to
minimize downtime. Software integration, including loading and testing of
multiple software applications, can be provided to manage potential
communications conflicts. The Company can also provide on-site product training
and consultation services tailored to customer requirements.
In conceiving a solution, FieldWorks applies a business needs-analysis
process and evaluates the customer's current and potential needs to ensure a
three- to five-year solution life span. FieldWorks can develop custom software
and/or integrate third-party software. Implementation services include customer
training, project management and support services, including dedicated telephone
support, and software update and platform upgrade programs. Support services are
aimed at maintaining customer productivity.
Manufacturing. The Company's manufacturing process consists primarily of
the mechanical subassembly, final assembly and testing of components and
subassemblies purchased from third party suppliers and subcontractors. These
functions, along with the final packaging of its products, are performed at the
Company's worldwide headquarters in Eden Prairie, Minnesota. The Company
assembles products in accordance with customers' specifications. This enables
the Company to provide computing platforms and services that satisfy each
customer's specific field requirements.
The Company works with a number of subcontractors to assemble mechanical
components, to manufacture printed circuit boards, and to produce certain
components, all to the Company's design specifications. Many of these components
are made using tools that have been designed for, and belong to, the Company,
but that are located on the manufacturer's premises. The Company has
relationships with subcontractors who provide subassemblies on a turn-key basis.
The Company also purchases components directly from one or more third party
suppliers before forwarding them to subcontractors for assembly.
The Company employs extensive quality control systems and has a quality
assurance department. The Company received ISO 9001 quality assurance
certification in March 1996 and was re-certified in January 1999.
Sales and Marketing/Customers. The Company's sales and marketing efforts
are based on the recognition that each of the Company's target vertical markets
purchases from different channels. The Company's direct sales force focuses its
efforts on building and maintaining relationships with large-volume key accounts
and with dominant manufacturers or sales channel entities. The Company also
utilizes a network of independent sales representatives for domestic sales.
Other segments of the market are addressed by sales to value-added resellers and
systems integrators that typically sell systems
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that have been configured for specific end-user applications through the
addition of hardware, software or services. Representatives, resellers and
integrators generally target large- to mid-size accounts, with the exception of
military integrators, or prime contractors, which target large military
accounts. FieldWorks' telesales force addresses the mass market of small
accounts. Additionally, the Company sells platforms to the U.S. government via
the General Services Administration (GSA) schedule.
FieldWorks' sales strategy is to partner with key-account customers to
design and develop customer-specific solutions that FieldWorks can later package
and standardize for sale to large, mid and mass accounts. Professional services
are tailored to each unique customer's requirements.
For international sales, the Company maintains a network of international
distributors, which are managed by the Company's director of international
sales. To date, the Company's international sales have been principally in
Europe.
For the years ended January 3, 1999 and January 4, 1998, sales to one
customer, Navistar International, represented 10% and 13%, respectively, of net
sales.
Backlog. The Company believes that backlog is not a meaningful indicator of
its future business prospects due to the potentially long customer sales cycle
and significant variations in the size and delivery schedules of orders received
by the Company. As a result, the Company does not believe that backlog at any
particular date is necessarily indicative of future results.
Competition. The Company believes that it currently occupies a niche in the
field force automation market because it is unique in providing rugged mobile
computing solutions and services as well as platforms. The Company's platforms
face direct competition from companies producing portable computers intended for
field use such as Dolch Computer Systems; Getac Corp.; XL Computing Corp. (a
subsidiary of Cycomm International, Inc.); Itronix Corp.; Kontron Elektronik
Corp. (a subsidiary of Kontron Elektronik GmbH); Paravant Computer Systems,
Inc.; Motorola, Inc.; Melard Technologies, Inc.; WPI Husky Computers Inc.;
Intermec Technologies Corp. and Panasonic Personal Computer Company. The Company
believes its primary competitive factors relate to product pricing,
functionality, product dimensions and technology enhancements. To the extent the
Company and its direct competitors expand and develop this market niche, other
manufacturers may turn their attention to this niche and begin to develop
products and services 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.
Research and Development. The Company designs many of the aspects and
components of its computing platforms. The Company believes that its efforts in
this area have provided it with technological advantages and the Company intends
to continue to focus research and development efforts on improving its core
technologies. In addition, the Company is continuing to focus its efforts on
expanded products and services that address broader customer preferences by
providing a greater range of expandability, features and price. The Company's
research and development efforts also involve developing customized solutions
for its customers who have unique, specialized requirements. Research and
development expenses were $1.9 million in 1996 and 1997, and $3.2 million in
1998.
Intellectual Property. In April 1996 the Company filed a provisional patent
application related to certain aspects of the design of its 5000 Series Field
WorkStation notebook computing platforms, including the technology module and
features that enhance its upgradeability and ruggedness. In March 1997, the
Company filed a non-provisional United States patent application, and filed an
international patent application under the international Patent Cooperation
Treaty ("PCT"), both of which claimed priority to the provisional patent
application. Based on the PCT application, a European Patent
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Application, which is a regional application that covers 17 European countries,
was filed in October 1998. In July 1996, the Company filed a non-provisional
United States patent application related to the backplane design employed in its
7000 Series Field WorkStation laptop computing platforms.
The Company uses the following marks in connection with its products:
FieldWorks, FieldWorks with Design, Field MousePad, Field WorkStation, and
Technology Module. Registrations have been issued in the U.S. Patent and
Trademark Office with respect to FieldWorks with Design, Field MousePad, Field
WorkStation and Technology Module. FieldWorks with Design is registered on the
Principal Register. The remaining registrations are registered on the
Supplemental Register. Supplemental Registrations do not confer the same rights
as Principal Registrations. Specifically, Supplemental Registrations do not
serve as prima facie evidence of the validity of the registered mark, the
registration of the mark, the registrant's ownership of the mark, or the
registrant's exclusive right to use the mark. In addition, the filing date of
the application does not confer any right of priority and does not constitute
notice of the registrant's claim of ownership of the mark. The Company is aware
that there are third parties that have claimed and 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.
Employees. As of January 3, 1999, the Company employed 140 full-time
employees, of whom 53 were engaged primarily in manufacturing, 33 were engaged
primarily in sales and marketing, 33 were engaged primarily in engineering and
research and development, and 21 were engaged primarily in administration. The
Company also employs part-time, temporary employees, and contract employees, as
necessary. No employees are represented by any labor union or other collective
bargaining unit. The Company believes that its relations with its employees are
good.
ITEM 2. Properties
The Company's main operations are conducted in Eden Prairie, Minnesota, at
a leased site of approximately 53,000 square feet. The lease term expires in
November 2004. The Company's main operations had previously been conducted at
another leased site of approximately 24,000 square feet in Eden Prairie,
Minnesota. This space, the lease for which expires in June 1999, has been
subleased for the remaining period.
ITEM 3. Legal Proceedings
The Company is involved in legal actions in the ordinary course of its
business. Although the Company cannot predict the outcome of any such legal
actions, management believes that there is no pending legal proceeding against
or involving the Company for which the outcome is likely to have a material
adverse effect upon the Company's financial position, results of operations or
cash flows.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
Company's fourth quarter ended January 3, 1999.
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PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters
Market Information. The following financial data is filed as part of this
report:
Footnote #10 in the Notes to Consolidated Financial Statements, Page 35.
Shareholders As of March 16, 1999, there were 168 holders of record of the
Company's Common Stock.
Dividends. The Company has not paid any cash dividends since inception and
does not anticipate paying cash dividends in the foreseeable future. Any such
payment would require prior approval under the Company's current line of credit
agreement.
Use of Proceeds. The Company's registration statement on Form S-1, file
number 333-18335, was declared effective on March 19, 1997. The Company
registered an aggregate of 2,443,750 shares of common stock, $.001 par value
(including 316,250 shares covered by a registration statement filed pursuant to
Rule 462(m) on March 20, 1997, file number 333-23637) with R.J. Steichen &
Company as the managing underwriter. The offering commenced on March 20, 1997,
and on March 25, 1997, the Company closed on aggregate proceeds of $13,812,500
from the sale of 2,125,000 of these shares. The remainder of the shares
registered were subject to an underwriters' over-allotment option that
subsequently expired unexercised.
The following expenses were incurred in connection with the issuance and
distribution of the securities:
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Underwriters' discount and commission $ 967,000
Expenses paid to underwriters 276,000
Other expenses 809,000
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Total expenses $ 2,052,000
Net offering proceeds $11,760,000
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The net offering proceeds have been used as follows as of January 3, 1999:
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Construction of plant, building and facilities $ 348,000
Purchase of machinery and equipment 1,322,000
Repayment of indebtedness 6,597,000
Working capital 2,485,000
Temporary investment in money market accounts 1,008,000
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$11,760,000
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All such amounts were paid direct to third parties.
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ITEM 6. Selected Financial Data
Selected Consolidated Statements of Operations Data:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Years Ended December 31,
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January 3, January 4, January 5,
(in thousands, except per share amounts) 1999 1998 1997 1995 1994
<S> <C> <C> <C> <C> <C>
Net sales $ 20,002 $ 23,815 $ 13,111 $ 8,242 $ 2,742
Cost of sales 14,200 14,620 7,930 4,777 1,954
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Gross profit 5,802 9,195 5,181 3,465 788
Operating expenses:
Sales and marketing 5,482 5,043 3,616 1,726 928
General and administrative 2,915 3,034 2,232 1,169 762
Research and development 3,214 1,884 1,896 948 765
Product upgrade and restructuring costs 1,473 -- -- -- --
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Total operating expenses 13,084 9,961 7,744 3,843 2,455
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Operating loss (7,282) (766) (2,563) (378) (1,667)
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Interest expense and other, net 158 (258) (356) (69) (21)
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Net loss from continuing operations (7,124) (1,024) (2,919) (447) (1,688)
Loss from discontinued operation(1) -- -- (377) (180) --
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Net loss $ (7,124) $ (1,024) $ (3,296) $ (627) $ (1,688)
==========================================================================================================
Basic and diluted loss per common share:
Net loss per common share from
continuing operations $ (.81) $ (.12) $ (.45) $ (.07) $ (.31)
Loss per common share from
discontinued operation(1) -- -- (.06) (.03) --
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Net loss per common share $ (.81) $ (.12) $ (.51) $ (.10) $ (.31)
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Weighted average common shares outstanding 8,799 8,242 6,442 6,131 5,430
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Selected Consolidated Balance Sheet Data:
January 3, January 4, January 5, December 31, December 31,
(in thousands, except per share amounts) 1999 1998 1997 1995 1994
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Cash and cash equivalents $ 1,690 $ 3,219 $ 2,132 $ 113 $ 126
Working capital 4,077 11,517 1,042 1,685 1,317
Total assets 10,956 16,120 9,906 4,559 3,603
Long-term debt and capital lease obligations,
less current portion 97 23 67 62 11
Total debt 110 70 6,150 1,254 809
Accumulated deficit (14,452) (7,327) (6,303) (2,805) (2,173)
Total shareholders' equity 5,793 12,799 1,813 2,132 1,636
</TABLE>
(1) In November 1996, the Company's Board of Directors approved the distribution
of all of the issued and outstanding shares of the common stock of the Company's
wholly-owned subsidiary, Paragon, as a dividend to shareholders of record of the
Company as of November 15, 1996. Paragon's results of operations for the years
ended December 31, 1995 and January 5, 1997, as well as the estimated loss from
disposition, have been presented as a discontinued operation in the above
Statements of Operations Data.
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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement Regarding Forward-Looking Statements. This report
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 report, the words or phrases
"believes," "anticipates," "expects," "intends," "estimates," or similar
expressions are intended to identify 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.
Factors that might cause such differences include, but are not limited to, the
following: risks associated with the development of new products, market
acceptance of new products and services, technological obsolescence, dependence
on third-party manufacturers and suppliers, risks associated with the Company's
dependence on proprietary technology and the long customer sales cycle. 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 to carefully review the various disclosures made by the Company in this
report, including in particular Exhibit 99.1 to this report, and in other
reports filed with the Securities and Exchange Commission that advise interested
parties of the risks and factors that may affect the Company's business.
Operating Results. The following table sets forth certain financial data
expressed as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
For the Years Ended January 3, 1999 January 4, 1998 January 5, 1997
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of sales 71 61 60
---- --- ----
Gross profit 29 39 40
Operating expenses:
Sales and marketing 27 21 28
General and administrative 15 13 17
Research and development 16 8 14
Product upgrade and restructuring costs 8 -- --
---- --- ----
Total operating expenses 66 42 59
---- --- ----
Operating loss (37) (3) (19)
Interest income (expense) and other, net 1 (1) (3)
---- --- ----
Net loss from continuing operations (36) (4) (22)
Loss from discontinued operation -- -- (3)
---- --- ----
Net loss (36)% (4)% (25)%
---- --- ----
</TABLE>
Market Trends. The worldwide market for portable computers continues to
expand. The availability of high-powered portable computer technology coupled
with application specific technologies and the proliferation of wireless
communications contributes to the increased demand. The Company expects
increased requirements to improve the efficiency in field based work forces and
link field workers into corporate information systems.
The Company targets those markets which require portable computing
platforms that can perform multiple functions including diagnostics, data
acquisition and electronic testing and monitoring. Specifically, the Company is
targeting Trucking, Public Services, including Utilities and Public Safety, and
Government/Military. Each of these vertical markets continues to experience
growth in field service computer application requirements.
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Comparison of Years Ended January 3, 1999
and January 4, 1998
Net Sales. Net sales for 1998 were $20.0 million, a decrease of $3.8
million or 16% from 1997 net sales of $23.8 million. The decrease in sales was
due primarily to several factors relating to the 5000 Series product. During
mid- 1998 the 5000 Series II product was released which provided technology
upgrades, lower pricing and improved performance and reliability over the 5000
Series I. Sales of the 5000 Series products represented 38% and 46% of net sales
or $7.6 million and $10.9 million in 1998 and 1997, respectively. Sales of the
7000 Series product were comparable in 1998 and 1997.
International sales slightly decreased to $5.6 million, or 28% of net sales
for 1998, from $6.0 million, or 25% of net sales in 1997. The majority of
international sales are in Europe, including $4.0 million in 1998 and $3.4
million in 1997. The Company anticipates that international sales as a
percentage of net sales will remain in the mid to upper 20% range with little
impact on the Company's results of operations and liquidity.
The Company expects sales growth in 1999 due to increased penetration of
key vertical markets, introduction of the 2000 Series platform, and
establishment of the professional services organization. The Company is
targeting sales in trucking, public services and military/government and has
reorganized its sales and marketing efforts to focus on these markets. The 2000
Series line of mobile embedded servers is anticipated to be in production in the
second quarter of 1999 and has been designed to enhance sales to customers
requiring in-vehicle applications. Additionally, management believes that
providing professional services, including consultation, business needs
assessment, training and software integration with the Company's products, will
increase future sales opportunities.
Delays in the introduction of the 2000 Series platform and/or market
acceptance of the product could reduce the Company's projected 1999 sales. In
addition, the Company expects revenue growth to fluctuate due to potentially
long customer sales cycles.
Gross Profit. Gross profit decreased $3.4 million from $9.2 million in 1997
to $5.8 million in 1998. Gross profit margins, as a percentage of net sales,
decreased from 39% to 29%. This decrease was the result of the impact of fixed
manufacturing overhead costs allocated over reduced production volume in 1998.
Additionally, gross profit was negatively impacted by a $1.0 million write down
of inventory in the second quarter of 1998. These charges were due to
discontinuation of the 5000 Series I product and other product changes in
response to technological and market developments. The Company continues to take
steps to strengthen its materials management to reduce the risk of future large
write-downs of inventory. With these actions and anticipated unit volume
increases offset by potential pricing reductions on larger customer orders, the
Company believes gross profit margins should be in the mid 30% range in the near
future.
Gross profit for all periods presented reflects the Company's
reclassification of certain warranty-related costs from cost of sales to sales
and marketing expense. The impact was to decrease cost of sales and increase
gross profit by $458,000, or 2% of net sales in 1998 and by $774,500, or 3% of
net sales for 1997.
Sales and Marketing. Sales and marketing expenses include salaries,
incentive compensation, commissions, travel, trade shows, and general
advertising and promotion. These expenses also include the costs related to
maintaining the Company's standard one-year warranty program. Sales and
marketing expenses were $5.5 million in 1998, an increase of $0.5 million as
compared to $5.0 million in 1997. As a percentage of net sales, sales and
marketing expenses increased from 21% in 1997 to 27% in 1998. The increase in
expenses was primarily due to expansion of the sales force including the
addition of the professional services group. The Company intends to continue
expanding its sales force as well as investing in advertising and promotion
costs within its target markets. The Company anticipates sales and marketing
expenses to slightly decrease as a percentage of net sales.
9
<PAGE>
General and Administrative. General and administrative expenses include the
Company's executive, finance, information services and human resources cost
centers. These expenses decreased slightly from $3.0 million or 13% of net sales
in 1997 to $2.9 million or 15% of net sales in 1998. The Company anticipates
holding the growth of general and administrative expenses to a level less than
the growth of sales in the near future.
Research and Development. Research and development expenses are incurred in
the design, development and testing of new platforms, and in the enhancement and
testing of existing products. All research and development costs are expensed as
incurred. These expenses increased from $1.9 million or 8% of net sales in 1997
to $3.2 million or 16% of net sales in 1998. This increase was primarily
attributable to the introduction of the 5000 Series II and development of the
2000 Series product. The Company anticipates these expenses to increase in the
near future to support expanded product and solutions offerings. Additional
expenses are also anticipated to support customer-specific professional services
including software integration and engineering support.
Product Upgrade and Restructuring Costs. Product upgrade and restructuring
costs were $1.5 million or 8% of net sales in 1998. There were no such costs
during 1997. These costs related to the discontinuation of the 5000 Series I
platform, as well as other internal reorganization efforts. During 1998, the
Company introduced the 5000 Series II platform, which has expanded features and
increased performance. The Company also established reserves in 1998 to address
any customer or upgrade issues with respect to the 5000 Series I. In addition,
the Company incurred expenses relating to restructuring and severance costs.
Interest Expense and Other, Net. Net interest income of $158,000 was
recorded in 1998 as compared to net interest expense of $258,000 in 1997.
Proceeds from the initial public offering were used to repay debt in the first
and second quarters of 1997. The Company anticipates to record net interest
expense in 1999 as it utilizes its line of credit for working capital purposes
to fund its operations.
Comparison of Years Ended January 4, 1998
and January 5, 1997
Net Sales. The Company's net sales increased 82% from $13.1 million in 1996
to $23.8 million in 1997. The increase was primarily attributable to a 97%
increase in the number of units sold, offset by both a decrease in the average
selling price of the 7000 Series and an increase in sales of the 5000 Series,
which carries lower pricing. International sales increased to $6.0 million or
25% of net sales in 1997 as compared to $3.2 million or 24% of net sales in
1996.
Gross Profit. Gross profit increased 77% from $5.2 million in 1996 to $9.2
million in 1997. As a percentage of net sales, gross profit margins decreased
slightly from 40% to 39%. The addition of the 5000 Series product at lower
margins offset the increase in volume.
Sales and Marketing. Sales and marketing expenses increased from $3.6
million in 1996 to $5.0 million in 1997. As a percentage of net sales, sales and
marketing expenses decreased from 28% in 1996 to 21% in 1997. The increased
expenses were primarily due expansion in the Company's direct sales force and
sales commissions.
General and Administrative. General and administrative expenses increased
from $2.2 million or 17% of net sales in 1996 to $3.0 million or 13% of net
sales in 1997. The increase was attributable to additional compensation expense
due to an expanded executive management team and the move of primary operations
to a new facility.
10
<PAGE>
Research and Development. Research and development expenses remained
consistent at $1.9 million in 1997 and 1996. These expenses decreased as a
percentage of net sales from 14% in 1996 to 8% in 1997. The increase in salaries
and related expenses was offset by a reduction in product development costs in
1997.
Interest Expense and Other, Net. Interest expense, net of interest income,
decreased from $356,000 in 1996 to $258,000 in 1997. Proceeds from the initial
public offering were used to repay debt in March and April of 1997, with
interest income earned on remaining proceeds for the rest of the year.
Liquidity and Capital Resources
In March 1997, the Company completed its initial public offering of common
stock and received net proceeds of $11.8 million from the sale of 2,125,000
shares. From the proceeds, the Company repaid $6.4 million of loans in 1997.
There were no additional loans or credit facilities until November 1998, at
which time the Company entered into a two-year $3.0 million line of credit
agreement. Borrowings bear interest at the greater of 3% over prime or 9%.
Borrowings, as of January 3, 1999, were $682,000. The borrowing base is 75% of
eligible receivables plus the lesser of $600,000 or 30% of eligible inventory as
defined in the agreement. The availability based on the borrowing base
calculation was $1.7 million as of January 3, 1999. For the fourth quarter of
1998, the net loss limitation contained in the agreement was $500,000. The
Company has received a written covenant waiver for the fourth quarter reported
loss of $712,000. For 1999, the agreement contains an equivalent covenant
requiring cumulative year-to-date profit on a quarterly basis. Failure to comply
with this covenant could result in default and accelerated repayment
requirements.
The Company's cash balance as of January 3, 1999 was $1.7 million as
compared to the January 4, 1998 balance of $3.2 million. Cash used for operating
activities totaled $1.2 million in 1998 and $3.7 million in 1997. The Company's
accounts receivable decreased from $6.4 million at January 4, 1998 to $3.9
million at January 3, 1999. The decrease in accounts receivable was due to
increased effort on reducing collection periods and timing of shipments at year-
end. Net inventories decreased from $5.0 million at January 4, 1998 to $3.4
million at January 3, 1999. This decrease was due to an enhanced focus on
inventory controls. Deferred revenue increased from $0.6 million at January 4,
1998 to $0.8 million at January 3, 1999. This increase was attributable to the
sales of extended warranties. Accrued liabilities decreased from $0.5 million at
January 4, 1998 to $0.3 million at January 3, 1999, due to timing of payments at
year end.
The Company purchased $1.1 million of property, plant and equipment in 1998
as compared to $0.9 million in 1997. The 1998 expenditures related primarily to
tooling expenditures for the 5000 Series II and 2000 Series products and
leasehold improvements on the new facility. The Company anticipates purchases of
property, plant and equipment to slightly decrease compared to prior years as
leasehold improvement activity has been completed.
The Company currently anticipates meeting its cash flow needs in 1999 with
existing cash on hand and cash expected to be generated from operations,
supplemented with line of credit borrowings and other potential financing
sources. The Company may also seek additional equity or debt financing to fund
expansion of product and service offerings. The timing and amount of any
additional capital requirements cannot be precisely determined at this time and
will depend on a number of factors including the demand for the Company's
products, profitability, cash management operations, growth and many other
factors. There can be no assurances that additional financing will be available
at all or that it, if available, will be obtainable on terms favorable to the
Company and would not be dilutive.
11
<PAGE>
Year 2000 Compliance
The year 2000 issue is the result of computer programs using only the last
two digits to identify the year. These programs may not be able to interpret
dates beyond the year 1999, which could cause computer system failure or other
errors disrupting operations. The Company is aware of the potential computing
difficulties that the issue presents for the Company's operations in the year
2000 and as a result, has established an internal team, reporting to upper
management, to address the issue. This team's focus includes the functioning of
the Company's products, internal computer systems and non-computer operations,
production processes, key vendors, vital business partners and critical
customers.
The Company's major internal information systems software was upgraded
during the first quarter of 1998 to ensure year 2000 compliance and provide
enhanced systems capabilities. The total cost of the implementation was
$110,000. The Company plans to perform other minor upgrades to its software and
hardware by mid-1999. Approximately 60% of the expected costs associated with
internal systems software alterations have been incurred to date. The Company's
internal production processes and non-information systems software are in the
process of being assessed. The cost of making them year 2000 compliant is
anticipated to be minimal.
Management believes its current products are year 2000 compliant and is
offering updated configuration software for products shipped in prior periods.
Notification to customers of the availability of updated software has occurred
and re-notification of key customers will occur in the second quarter of 1999.
Associated costs are expected to be under $100,000. Approximately 75% of the
expected costs associated with ensuring the Company's products are year 2000
compliant have been incurred to date.
The source of funds for upgrades to internal software, production processes
and previously sold products is existing cash. There are currently no other
projects within the Company that are affected by the outlay of significant
resources to ensure year 2000 compliance.
The Company's operations with respect to the year 2000 may also be affected
by other entities with which the Company transacts business. The Company has
requested documentation from its vendors regarding compliance, and will evaluate
alternative courses of action for vendors who are not or will not be year 2000
compliant. To date, varying confirmations have been received from the Company's
vendors. The Company has identified its critical vendors and is in the process
of verifying which are currently year 2000 compliant. Contingency plans will be
developed for all critical vendors which are not year 2000 compliant by the end
of the second quarter of 1999.
The year 2000 issue creates risk for the Company from unforeseen problems
in its own computer systems and from the Company's vendors. Although the Company
does not believe that the year 2000 issue will have a material impact on its
business, financial position, results of operations or liquidity, it is
uncertain as to what extent any failure of the Company's systems or its vendors'
systems may have on its operations.
The Company identified all critical, external entities by the end of the
first quarter of 1999. Notification of these entities, determination of their
year 2000 status and development of alternative plans, if necessary are to be
completed by the end of the second quarter of 1999.
Although the Company intends to fully address the year 2000 issue, without
further assessment or resources assigned, the Company can give no assurance that
the year 2000 issue will not cause significant business disruption, including
delays in parts availability resulting in potential shipping delays and/or lost
revenues.
12
<PAGE>
ITEM 7A. Quantitative and Qualitative Disclosures
About Market Risk
The Company is exposed to market risk related to changes in interest rates
on borrowings under the Company's line of credit agreement. The line of credit
bears interest based on the Prime Lending Rate. At January 3, 1999, the Company
had $682,000 outstanding. Based on analysis, likely interest rate shifts would
have an immaterial impact on the Company.
The Company has no derivative financial instruments or derivative commodity
instruments in its cash and cash equivalents. The Company invests its cash and
cash equivalents in money market instruments. The Company had $1.7 million in
cash and cash equivalents at January 3, 1999. Based on analysis, likely shifts
in money market rates would have an immaterial impact on the Company.
All of the Company's transactions are conducted and accounts are
denominated in United States dollars and as such, the Company does not currently
have exposure to foreign currency risk.
ITEM 8. Financial Statements and Supplementary Data
Page
Consolidated Balance Sheets as of January 3, 1999 and January 4,
1998 24
Consolidated Statements of Operations for the years ended January
3, 1999, January 4, 1998 and January 5, 1997 25
Consolidated Statements of Shareholders' Equity for the years
ended January 3, 1999, January 4, 1998 and January 5, 1997 26
Consolidated Statements of Cash Flows for the years ended January
3, 1999, January 4, 1998 and January 5, 1997 27
Notes to Consolidated Financial Statements 28
Report of Independent Public Accountants 35
ITEM 9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure
None.
13
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information required by this item is set forth in the Proxy Statement under the
heading Election of Directors and is incorporated herein by reference.
ITEM 11. Executive Compensation
Information required by this item is set forth in the Proxy Statement under the
heading Executive Compensation and is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is set forth in the Proxy Statement under the
heading Security Ownership of Certain Beneficial Owners and Management and is
incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
Information required by this item is set forth in the Proxy Statement under the
heading Certain Transactions and is incorporated herein by reference.
14
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Annual Report:
1. Financial Statement Schedule: The following financial statement
schedule of FieldWorks, Incorporated for the fiscal years ended January 3,
1999, January 4, 1998, and January 5, 1997, is filed as part of this Report
and should be read in conjunction with the Consolidated Financial
Statements of FieldWorks, Incorporated.
o Schedule II - Valuation and Qualifying Accounts
o Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be
set forth therein is included in the Consolidated Financial
Statements or Notes thereto.
2. Exhibits: The Exhibits listed on the accompanying Index to Exhibits
are filed as part of, or incorporated by reference into, this Report.
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company
during the fiscal quarter ended January 3, 1999.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ David C. Malmberg
- --------------------------------------------------------------------------------
David C. Malmberg
Chairman of the Board,
Chief Executive Officer
Dated: April 5, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ David C. Malmberg Chairman of the Board, Chief Executive Officer April 5, 1999
- ---------------------------------------------------------------------------------------------
David C. Malmberg
/s/ Karen L. Engebretson Chief Financial Officer, Vice President of Finance April 5, 1999
- ---------------------------------------------------------------------------------------------
Karen L. Engebretson (principal financial and accounting officer)
/s/ Gary J. Beeman Vice Chairman of the Board April 5, 1999
- ---------------------------------------------------------------------------------------------
Gary J. Beeman
/s/ James A. Bernards Director April 5, 1999
- ---------------------------------------------------------------------------------------------
James A. Bernards
/s/ Robert W. Heller Director April 5, 1999
- ---------------------------------------------------------------------------------------------
Robert W. Heller
/s/ Robert C. Szymborski Director April 5, 1999
- ---------------------------------------------------------------------------------------------
Robert C. Szymborski
/s/ Richard J. York Director April 5, 1999
- ---------------------------------------------------------------------------------------------
Richard J. York
</TABLE>
16
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 3, 1999 January 4, 1998
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,690,469 $ 3,218,759
Accounts receivable, net of allowance for
doubtful accounts of $269,800 and $384,600 3,930,366 6,402,023
Inventories 3,400,744 5,009,137
Prepaid expenses and other 121,780 186,298
- ------------------------------------------------------------------------------------------------
Total current assets 9,143,359 14,816,217
- ------------------------------------------------------------------------------------------------
Property and Equipment:
Computers and equipment 1,620,455 1,628,949
Furniture and fixtures 1,109,895 378,821
Leasehold improvements 458,216 184,446
Less: Accumulated depreciation (1,393,342) (913,918)
- ------------------------------------------------------------------------------------------------
Property and equipment, net 1,795,224 1,278,298
Deposits and Other Assets, net 17,385 25,555
- ------------------------------------------------------------------------------------------------
$ 10,955,968 $ 16,120,070
================================================================================================
Liabilities and Shareholders' Equity
Current Liabilities:
Line of credit $ 681,981 $ --
Accounts payable 1,804,186 1,489,982
Accrued warranty and product upgrade 1,102,798 332,053
Accrued compensation and benefits 376,932 410,758
Other accrued liabilities 321,532 455,462
Deferred revenue 765,184 563,095
Current maturities of capitalized lease obligations 13,548 47,409
- ------------------------------------------------------------------------------------------------
Total current liabilities 5,066,161 3,298,759
Capitalized Lease Obligations, less current maturities 96,868 22,693
- ------------------------------------------------------------------------------------------------
Total liabilities 5,163,029 3,321,452
- ------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 9)
Shareholders' Equity:
Common stock, $.001 par value, 30,000,000 shares
authorized; 8,823,926 and 8,725,426 issued and outstanding 8,824 8,725
Common stock warrants 150,640 150,640
Additional paid-in capital 20,085,011 19,966,602
Accumulated deficit (14,451,536) (7,327,349)
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 5,792,939 12,798,618
- ------------------------------------------------------------------------------------------------
$ 10,955,968 $ 16,120,070
================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Years Ended
- -------------------------------------------------------------------------------------------------------------------------
January 3, 1999 January 4, 1998 January 5, 1997
<S> <C> <C> <C>
Net Sales $ 20,001,787 $ 23,815,045 $ 13,111,077
Cost of Sales 14,199,526 14,620,121 7,929,622
- -------------------------------------------------------------------------------------------------------------------------
Gross profit 5,802,261 9,194,924 5,181,455
- -------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Sales and marketing 5,482,216 5,042,543 3,616,003
General and administrative 2,914,871 3,034,670 2,232,040
Research and development 3,214,164 1,884,128 1,896,448
Product upgrade and restructuring costs 1,472,530 -- --
- -------------------------------------------------------------------------------------------------------------------------
Total operating expenses 13,083,781 9,961,341 7,744,491
- -------------------------------------------------------------------------------------------------------------------------
Operating loss (7,281,520) (766,417) (2,563,036)
Interest Expense and Other, net 157,333 (257,561) (356,328)
- -------------------------------------------------------------------------------------------------------------------------
Net Loss from Continuing Operations (7,124,187) (1,023,978) (2,919,364)
Loss from Discontinued Operation (Note 1) -- -- (376,682)
- -------------------------------------------------------------------------------------------------------------------------
Net Loss $ (7,124,187) $ (1,023,978) $ (3,296,046)
=========================================================================================================================
Basic and Diluted Loss Per Share:
Net loss per common share from continuing operations $ (.81) $ (.12) $ (.45)
Loss per common share from discontinued operation -- -- (.06)
- -------------------------------------------------------------------------------------------------------------------------
Net loss per common share $ (.81) $ (.12) $ (.51)
=========================================================================================================================
Weighted average common shares outstanding 8,799,031 8,242,434 6,442,193
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Series A
Convertible Common Additional Total Share-
Preferred Stock Common Stock Stock Paid-in Accumulated holders'
Shares Amount Shares Amount Warrants Capital Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 -- $ -- 5,840,068 $5,840 $115,185 $ 4,816,262 $(2,805,143) $ 2,132,144
Issuance of preferred stock 300,000 300 -- -- -- 2,999,700 -- 3,000,000
Exercise of stock options -- -- 40,668 41 -- 62,629 -- 62,670
Issuance of common
stock warrants -- -- -- -- 116,800 -- -- 116,800
Spin-off of Paragon (Note 1) -- -- -- -- -- -- (202,182) (202,182)
Net loss -- -- -- -- -- -- (3,296,046) (3,296,046)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, January 5, 1997 300,000 300 5,880,736 5,881 231,985 7,878,591 (6,303,371) 1,813,386
Issuance of common stock,
net of offering costs
of $2,042,200 -- -- 2,125,000 2,125 -- 11,768,207 -- 11,770,332
Conversion of preferred
stock (300,000) (300) 576,923 577 -- (277) -- --
Exercise of stock options -- -- 61,422 61 -- 157,472 -- 157,533
Exercise of common
stock warrants -- -- 81,345 81 (81,345) 162,609 -- 81,345
Net loss -- -- -- -- -- -- (1,023,978) (1,023,978)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, January 4, 1998 -- -- 8,725,426 8,725 150,640 19,966,602 (7,327,349) 12,798,618
Exercise of stock options -- -- 98,500 99 -- 118,409 -- 118,508
Net loss -- -- -- -- -- -- (7,124,187) (7,124,187)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, January 3, 1999 -- $ -- 8,823,926 $8,824 $150,640 $20,085,011 $(14,451,536) $ 5,792,939
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended
January 3, 1999 January 4, 1998 January 5, 1997
<S> <C> <C> <C>
Operating Activities:
Net loss $(7,124,187) $(1,023,978) $(3,296,046)
Adjustments to reconcile net loss to net cash
used for operating activities-
Depreciation and amortization 692,332 747,717 373,662
Accrued product upgrade and restructuring costs 846,876 -- --
Change in operating items:
Accounts receivable 2,471,657 (4,393,330) (120,765)
Inventories 1,608,393 (591,815) (2,596,021)
Prepaid expenses and other 70,104 236,117 (348,991)
Net assets of discontinued operation -- -- (163,931)
Accounts payable 314,204 378,456 211,599
Accrued expenses 160,291 1,477,288 571,541
Deferred revenue (202,089) (547,156) (13,333)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used for operating activities (1,162,419) (3,716,701) (5,382,285)
- --------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Purchase of property and equipment (1,118,974) (886,829) (556,120)
Loan to related party -- 92,175 (92,175)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (1,118,974) (794,654) (648,295)
- --------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from issuance of common stock 118,508 12,009,210 162,670
Proceeds from issuance of preferred stock -- -- 3,000,000
Net line of credit borrowings (repayments) 681,981 -- (1,160,000)
Net proceeds from notes payable -- -- 4,735,952
Proceeds from notes payable to related parties -- -- 2,890,000
Payment of notes payable -- (5,000,000) --
Payment of notes payable to related parties -- (1,350,000) (1,540,000)
Payment of capitalized lease obligations (47,386) (61,185) (38,555)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 753,103 5,598,025 8,050,067
- --------------------------------------------------------------------------------------------------------------------------
Change In Cash and Cash Equivalents (1,528,290) 1,086,670 2,019,487
Cash and Cash Equivalents, beginning of year 3,218,759 2,132,089 112,602
- --------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of year $ 1,690,469 $ 3,218,759 $ 2,132,089
==========================================================================================================================
Supplemental Cash Flow Disclosure:
Cash paid for interest $ 12,191 $ 266,858 $ 214,601
==========================================================================================================================
Noncash Investing and Financing Activities:
Property and equipment acquired under capital leases $ 87,700 $ 7,154 $ 68,558
==========================================================================================================================
Issuance of warrants $ -- $ -- $ 116,800
==========================================================================================================================
Net assets acquired/disposed of relating to
Paragon (Note 1) $ -- $ -- $ 202,182
==========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
Notes to Consolidated Financial Statements
1. Nature of Business
Operating Activities. FieldWorks designs, manufactures and provides
professional services for rugged, portable computer platforms for use in
demanding field environments. The Company's portable computing platforms have
been designed to meet military standards for ruggedness and to function despite
exposure to extreme temperature, mechanical shock, vibration and moisture. The
Company's products have been designed with a modular system configuration that
allows a user to easily upgrade the central processing unit, processor or any of
the other technological components without purchasing a new computer. The
Company's computing platforms are expandable through multiple expansion slots to
provide a flexible electronic "toolbox" that can integrate a user's
application-specific, multi-media and communications needs into one portable,
rugged device.
FieldWorks provides solutions to specific customers by providing business
needs analysis, unique product designs, oversight of product implementation and
support and maintenance services. FieldWorks provides professional services to
evaluate the customer's current and potential needs to ensure the platform
chosen is best suited for field requirements. FieldWorks aids in customizing
hardware, software and design solutions to tailor its computer platforms, and
provides training, specialized support and product upgrades to enhance customer
productivity.
The Company's future operations are dependent upon the attainment of
certain objectives, including further penetration of vertical markets, enhancing
professional services and system integration offerings and reducing operating
expenses and production costs. Additionally, the attainment of these objectives
is subject to the availability of sufficient cash and/or financing. Financing
needs will be contingent upon demand for the Company's products, profitability,
cash management operations and other factors.
Merger With Paragon Technology, Incorporated and Subsequent Distribution.
In August 1995, FieldWorks completed a merger agreement with Paragon Technology,
Incorporated (Paragon), a Pennsylvania company engaged in software research and
development. The merger was effected through a share-for-share exchange of
25,300 shares of FieldWorks' common stock for all of the outstanding shares of
Paragon common stock and 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. At January 5, 1997,
the Company had a note receivable from Paragon of $92,175. This note was repaid
in full on February 5, 1997.
Paragon's results of operations for 1996 have been presented as a
discontinued operation in the accompanying consolidated statements of
operations. Revenues applicable to Paragon were approximately $183,000 for the
period from January 1, 1996 to November 15, 1996.
21
<PAGE>
2. Summary of Significant Accounting Policies
Fiscal Year. Beginning in fiscal 1996, the Company changed to a 52/53-week
fiscal year. Fiscal years subsequent to 1996 end on the Sunday closest to
December 31st. All references herein to "1998", "1997" and "1996" represent the
52-week fiscal year ended January 3, 1999, the 52-week fiscal year ended January
4, 1998, and the 53-week fiscal year ended January 5, 1997, respectively. The
Company believes that this change does not affect comparability of the financial
statements.
Principles of Consolidation. The consolidated financial statements of the
Company include the accounts of the Company and its wholly owned subsidiary. All
intercompany accounts and transactions have been eliminated in consolidation.
Earnings (Loss) Per Common Share. The Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128)
effective in the quarter and year ended January 4, 1998. SFAS No. 128
established accounting standards for computing and presenting earnings (loss)
per share (EPS). Basic EPS is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. No
dilution for potentially dilutive securities is included. Diluted EPS is
calculated using the treasury stock method and reflects the dilutive effect of
outstanding options, warrants and other securities.
In the Company's calculations, the impact of common stock equivalents has
been excluded from the computation of weighted average common shares
outstanding, except as follows, as the effect would be antidilutive.
A reconciliation of EPS calculations under SFAS No. 128 is as follows:
1998 1997 1996
- -----------------------------------------------------------------------------
Net loss $(7,124,187) $(1,023,978) $(3,296,046)
=============================================================================
Weighted average common
shares outstanding 8,799,031 8,125,147 5,865,270
Effect of conversion of
preferred stock -- 117,287 576,923
- -----------------------------------------------------------------------------
Common and common equivalent
shares outstanding 8,799,031 8,242,434 6,442,193
=============================================================================
Basic and diluted loss per share $ (.81) $ (.12) $ (.51)
=============================================================================
Cash and Cash Equivalents. Cash and cash equivalents consist of amounts
held in the Company's checking accounts and money market funds with original
maturities of 90 days or less. The carrying value of these instruments
approximates fair value.
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:
January 3, 1999 January 4, 1998
- --------------------------------------------------------------------------------
Raw materials $2,478,662 $3,268,558
Work in process 173,791 859,172
Finished goods 748,291 881,407
- --------------------------------------------------------------------------------
Total $3,400,744 $5,009,137
================================================================================
Property and Equipment. Property and equipment are recorded at cost. Repair
and maintenance costs which do not significantly extend the lives of the
respective assets are expensed as incurred. Depreciation is computed using the
straight-line method over the related assets' useful lives, ranging from two to
seven years.
22
<PAGE>
Warranties. The Company provides a one-year warranty on its products from
the date of sale. Warranty costs, including parts and labor, are estimated based
on historical experience. These estimated costs are accrued in the period in
which the related revenue is recognized. Actual warranty costs may differ from
such estimates.
Revenue Recognition. The Company recognizes product revenue, net of
estimated returns, at the time of product shipment. Services revenue is
recognized as earned. Revenues related to separately priced extended warranties
sold to customers are recorded as deferred revenue and recognized over the
periods covered by the extended warranties.
Significant Customers and Export Sales. For the years ended January 3, 1999
and January 4, 1998, sales to one customer, Navistar International, represented
10% and 13%, respectively, of net sales. For the year ended January 5, 1997,
there were no customers representing over 10% of net sales.
Export sales by major location were as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Europe $3,988,000 $3,396,000 $2,087,000
Americas 709,000 1,875,000 342,000
Middle East/Africa 565,000 183,000 299,000
Asia 119,000 416,000 158,000
Australia 120,000 93,000 154,000
Russia 123,000 -- 152,000
- --------------------------------------------------------------------------------
$5,624,000 $5,963,000 $3,192,000
================================================================================
Research and Development. Research and development costs are charged to
expense as incurred.
Concentrations of Credit Risk. The Company's exposure to concentrations of
credit risk relates primarily to trade receivables. This exposure is limited due
to the large number of customers and their vast dispersion across several
vertical markets and geographies. The Company controls potential credit risk by
performing credit evaluations for all customers and requires letters of credit,
bank guarantees and advance payments, if deemed necessary. Bad debt write-offs
through 1998 have not been material.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the financial statements. Estimates also affect the reported amounts of
revenues and expenses during the periods presented. Estimates are used for such
items as allowances for doubtful accounts, inventory reserves, useful lives of
property and equipment and warranty costs. Ultimate results could differ from
those estimates.
3. Product Upgrade and Restructuring Costs
During the second quarter of 1998, the Company discontinued the 5000 Series
I product line and introduced the Series II model, which offers expanded
features and increased performance. In addition, the Company incurred costs
related to internal restructuring and reorganization efforts, including employee
severance and associated costs. The components of the product upgrade and
restructuring charge were as follows:
Warranty and product upgrade costs $1,025,000
Employee severance and associated costs 447,530
- --------------------------------------------------------------------------------
Total $1,472,530
================================================================================
In addition, the Company recorded a $1.0 million inventory charge in the
second quarter of 1998 relating to discontinuation of the 5000 Series I product
line and other technological and market developments.
23
<PAGE>
4. Income Taxes
The Company accounts for income taxes under the liability method, which
requires recognition of deferred income tax assets and liabilities for the
expected future income tax consequences under enacted tax laws of temporary
differences between the financial reporting and tax bases of assets and
liabilities.
A reconciliation of the Company's statutory tax rate to the effective rate
is as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Federal statutory rate 34% 34% 34%
State taxes, net of federal tax benefit 4 4 6
Valuation allowance (38) (38) (40)
- --------------------------------------------------------------------------------
--% --% --%
================================================================================
As of January 3, 1999, the Company had approximately $10,200,000 of net
operating loss carryforwards for federal income tax purposes that are available
to offset future taxable income through the year 2013. Certain restrictions
caused by the change in ownership resulting from sales of stock will limit
annual utilization of the net operating loss carryforwards.
The components of the Company's deferred tax asset are as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Net operating loss carryforwards $ 4,112,000 $ 1,666,000 $ 1,760,000
Deductible differences 1,439,000 1,074,000 448,000
Valuation allowance (5,551,000) (2,740,000) (2,208,000)
- --------------------------------------------------------------------------------
$ -- $ -- $ --
================================================================================
5. Line of Credit and Notes Payable
Line of Credit. In November 1998, the Company entered into a two-year
$3,000,000 line-of-credit agreement. Borrowings bear interest at the greater of
3% over prime or 9%. The borrowing base is 75% of eligible receivables plus the
lesser of $600,000 or 30% of eligible inventory as defined in the agreement. The
availability based on the borrowing base calculation was $1.7 million as of
January 3, 1999. Personal validity guarantees were provided on accounts
receivable by two executive officers of the Company. The agreement contains
certain financial covenants, including profit/loss covenants for 1998 and 1999.
The net loss limitation for the fourth quarter of 1998 was $500,000. The Company
was out of compliance with the fourth quarter 1998 net loss limitation covenant,
and has received a written waiver of default. For 1999, the agreement contains a
covenant requiring cumulative year-to-date profit calculated on a quarterly
basis. Outstanding borrowings under this line of credit were $682,000 at January
3, 1999 as a result of minimum borrowing levels specified in the agreement. The
borrowings on the line-of-credit were invested in a money market account to
recoup a portion of the minimum interest charges.
The following information relates to this credit facility for 1998, since
the inception of the agreement:
Maximum amount outstanding during the period $682,000
Average borrowings during the period $341,000
Weighted average interest rate during the period 10.75%
Interest rate at end of year 10.75%
Notes Payable. During December 1996, the Company raised approximately
$4,684,000 through a private debt offering, net of $316,000 in offering costs.
In connection with the notes, the Company issued five-year warrants for the
purchase of 250,000 shares of common stock at an exercise price of $5.20. These
notes were repaid in April 1997.
24
<PAGE>
In May through September 1996, the Company entered into certain unsecured
short-term financing agreements with related and other parties, for a total of
$2,890,000. Outstanding borrowings under these agreements were $1,350,000 at
January 5, 1997 and were repaid in March 1997.
6. Shareholders' Equity
In March 1997, the Company completed an initial public offering (IPO) of
2,125,000 shares of common stock with proceeds of approximately $11.8 million,
net of related offering costs. The Company used $6.4 million of the proceeds to
repay bridge financing arrangements (see Note 5) and the remaining proceeds were
used to fund capital expenditures and for working capital. In connection with
the IPO, the Company granted warrants for the purchase of 212,500 shares to the
underwriter. These warrants have an exercise price of $7.80 and expire in March
2002. 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.
In July 1996, the Company sold 300,000 shares of Series A, $.001 par value
convertible preferred stock (Preferred Stock) at $10 per share. The Preferred
Stock was automatically converted into common stock upon consummation of the
initial public offering at a rate of $5.20. The holder of the Preferred Stock
was also granted warrants to purchase 46,154 shares of the Company's common
stock at an exercise price of $5.20 per share. The warrants are exercisable
through July 2001.
7. Warrants
Warrants to purchase 692,054 and 913,399 shares of the Company's common
stock were outstanding at January 3, 1999 and January 4, 1998, respectively. The
warrants are exercisable at prices ranging from $3 to $7.80 and are exercisable
at various times through March 2002. In March 1997, warrants for the purchase of
81,345 shares at $1 per share were exercised.
8. Stock Option and 401(k) Plans
Stock Option Plan. In June 1994, the Company adopted the 1994 Long-Term
Incentive and Stock Option Plan (the Plan). Under the Plan, options are granted
at an exercise price equal to the fair market value of the common stock at the
date of grant. Incentive stock options are granted to employees, and vest over
varying periods not to exceed ten years.
As of January 3, 1999, the Plan is authorized to issue up to 2,000,000
shares of common stock for such options. At January 3, 1999 and January 4, 1998,
192,977 and 124,476 shares were available for future grants.
In December 1996, the Company's board of directors approved the
Non-Employee Directors' Stock Option Plan (the Directors' Plan), which was
approved at a shareholder meeting held on January 20, 1997. Under the Directors'
Plan, each nonemployee director will receive 25,000 nonqualified options upon
election and 10,000 options at each reelection date. The Directors' Plan
authorizes the issuance of up to 300,000 shares of common stock for these
options. At January 3, 1999, 190,000 shares were available for future grants.
On August 7, 1998, the Board of Directors approved the repricing of all
outstanding incentive stock options for non-director employees with an exercise
price greater than $3.00. The new exercise price of such options is $2.3125,
representing the fair market value of the Company's common stock on that date. A
total of 301,400 options with exercise prices of $3.38 to $6.88 were cancelled
and reissued under the terms described above.
25
<PAGE>
Shares subject to option are summarized as follows:
<TABLE>
<CAPTION>
Incentive Weighted average Non-qualified Weighted average
stock options exercise price stock options exercise price
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 343,000 $ 1.77 100,000 $1.40
Options granted 320,900 5.25 57,500 5.00
Options canceled (2,332) 3.57 -- --
Options exercised (5,668) 1.35 (35,000) 1.57
- --------------------------------------------------------------------------------------------------------
Balance, January 5, 1997 655,900 3.47 122,500 3.04
Options granted 449,800 5.33 181,000 6.07
Options canceled (50,678) 5.40 -- --
Options exercised (31,422) 3.36 (30,000) 1.00
- --------------------------------------------------------------------------------------------------------
Balance, January 4, 1998 1,023,600 $ 4.19 273,500 $5.27
Options granted 1,170,900 2.54 106,750 3.63
Options canceled (762,050) 5.05 (25,000) 5.13
Options exercised (63,500) 1.05 (35,000) 1.57
- --------------------------------------------------------------------------------------------------------
Balance, January 3, 1999 1,368,950 $ 2.75 320,250 $5.14
========================================================================================================
Options exercisable at:
January 5, 1997 471,103 $ 2.92 81,217 $2.13
========================================================================================================
January 4, 1998 536,683 $ 3.22 162,678 $4.82
========================================================================================================
January 3, 1999 534,000 $ 2.54 241,500 $5.01
========================================================================================================
Additional information regarding options outstanding at January 3, 1999 is
as follows:
Weighted average
Number of Exercise Weighted average remaining
Type of option options price range exercise price contractual life
- --------------------------------------------------------------------------------------------------------
Incentive 135,500 $1.00 $ 1.00 0.3 years
Incentive 1,113,700 $1.01-$3.00 2.48 6.0 years
Incentive 119,750 $3.01-$5.00 4.71 3.1 years
- --------------------------------------------------------------------------------------------------------
1,368,950
========================================================================================================
Nonqualified 56,750 $2.63-$3.00 $ 2.73 7.5 years
Nonqualified 92,500 $3.01-$5.00 4.58 8.1 years
Nonqualified 171,000 $5.01-$6.50 6.24 7.8 years
- --------------------------------------------------------------------------------------------------------
320,250
========================================================================================================
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
its stock option plans. Accordingly, no compensation cost has been recognized in
the accompanying consolidated statements of operations. Had compensation cost
been recognized based on the fair values of options at the grant dates
consistent with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and net loss per common share would have
been increased to the following pro forma amounts:
1998 1997 1996
- --------------------------------------------------------------------------------
Net loss
As reported $(7,124,187) $(1,023,978) $(3,296,046)
Pro forma (7,606,187) (2,083,978) (4,156,046)
Net loss per common share
As reported $(.81) $(.12) $(.51)
Pro forma (.86) (.25) (.65)
26
<PAGE>
The weighted average fair values of options granted were as follows:
Incentive Nonqualified
stock options stock options
1998 grants $2.33 $3.24
1997 grants 3.47 4.43
1996 grants 3.87 4.46
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996:
1998 1997 1996
- --------------------------------------------------------------------------------
Risk-free interest rate 4.80% 6.35% 6.59%
Expected life of incentive options 5 years 5 years 5 years
Expected life of nonqualified options 7 years 7 years 10 years
Expected volatility 114% 72% 90%
Expected dividend yield -- -- --
401(k) Profit-Sharing Plan. Effective January 1, 1996, the Company adopted
a 401(k) profit-sharing plan (the 401(k) Plan) covering substantially all
employees. Eligible employees may elect to defer up to 15% of their eligible
compensation. In 1998, the Company accrued matching contributions of 50% on the
first 4% of each plan participant's eligible contributions. Through January 3,
1999, the Company's matching contributions totaled approximately $68,000.
9. Commitments and Contingencies
Leases. The Company leases its current headquarters office facilities under
an operating lease which expires September 30, 2004. The Company leased its
previous office facilities under an operating lease which expires June 30, 1999.
This facility has been subleased for the remaining period under lease. Total
additional rentals to be received in future years are approximately $107,000.
The Company also leases equipment under capital leases which expire at various
dates through December 2002. Property and equipment under capital leases at
January 3, 1999 totaled $105,800.
The following is a schedule of future minimum lease payments as of January
3, 1999:
Capital leases Operating leases
- --------------------------------------------------------------------------------
1999 $ 15,418 $608,000
2000 44,774 505,000
2001 37,024 462,500
2002 30,853 482,500
2003 -- 482,500
Thereafter -- 442,000
- --------------------------------------------------------------------------------
Total minimum capital lease payments 128,069
Less--
Amount representing interest (17,653)
Current maturities (13,548)
- --------------------------------------------------------------------------------
Noncurrent portion of minimum capital
lease payments $ 96,868
================================================================================
Legal Proceedings. The Company is involved in legal actions in the ordinary
course of its business. Although the outcome of any such legal actions cannot be
predicted, management believes that there is no pending legal proceeding against
or involving the Company for which the outcome is likely to have a material
adverse effect upon the Company's financial position, results of operations or
cash flows.
27
<PAGE>
10. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
(in thousands) 1998 1997 1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 5,386 $5,117 $ 3,834 $ 5,513 $ 4,412 $ 6,012 $ 6,370 $7,173
Gross profit 2,172 2,059 72 2,188 1,443 2,365 2,115 2,583
Net income (loss) $ (756) $ (698) $(4,194) $ (305) $(1,462) $ (53) $ (712) $ 32
====================================================================================================================
Basic and diluted loss
per common share $(.09) $(.10) $(.48) $(.04) $(.17) $(.01) $(.08) $ --
====================================================================================================================
Price range of common
stock(1):
High 5 9/16 6 1/4 4 5 5/8 3 5/8 6 1/2 4 1/4 7 3/4
Low 3 3/8 4 3/4 2 1/4 3 11/32 1 9/16 4 1/16 2 9/16 5
</TABLE>
(1) FieldWorks, Incorporated common stock is traded on the Nasdaq National
Market System under the symbol "FWRX".
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To FieldWorks, Incorporated:
We have audited the accompanying consolidated balance sheets of FieldWorks,
Incorporated (a Minnesota corporation) and Subsidiary as of January 3, 1999 and
January 4, 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended January 3, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FieldWorks, Incorporated and
Subsidiary as of January 3, 1999 and January 4, 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
January 3, 1999 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 8, 1999
28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To FieldWorks, Incorporated:
Our audits of the financial statements for FieldWorks, Incorporated for each of
the three years in the period ended January 3, 1999 were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
information on this page is presented for purposes of additional analysis and is
not a required part of the basic financial statements. This information has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, in fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
February 8, 1999
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Additions Deductions-
Fiscal Beginning Charged to Write-Offs Balance at
Year of Year Expense of Accounts End of Year
- ---- ------- ------- ----------- -----------
<C> <S> <C> <C> <C> <C>
1998 Allowance for Doubtful Accounts 384,600 1,600 116,400 269,800
Accrued Severance and
Restructuring Costs 0 447,500 431,400 16,100
1997 Allowance for Doubtful Accounts 201,400 236,500 53,300 384,600
1996 Allowance for Doubtful Accounts 110,600 91,500 700 201,400
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Exhibit
No Description
- --------------------------------------------------------------------------------
3.1 Second Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to the exhibit 3.1 filed with the Company's
Registration Statement filed on Form S-1, File No. 333-18335)
3.2 Second Amended and Restated Bylaws of the Company (incorporated by
reference to the exhibit 3.4 filed with the Company's Registration
Statement filed on Form S-1, File No. 333-18335)
4.1 Form of Certificate for Common Stock (incorporated by reference to the
exhibit 4.1 filed with the Company's Registration Statement filed on Form
S-1, File No. 333-18335)
10.1 Form of Warrant to purchase Shares of Common Stock, including
registration rights provisions (incorporated by reference to the exhibit
10.1 filed with the Company's Registration Statement filed on Form S-1,
File No. 333-18335)
10.2 Warrant, dated as of June 19, 1996, between the Company and Brightstone
Capital, Ltd. (incorporated by reference to the exhibit 10.3 filed with
the Company's Registration Statement filed on Form S-1, File No.
333-18335)
10.3 Form of Warrant (July 1996) (incorporated by reference to the exhibit
10.6 filed with the Company's Registration Statement filed on Form S-1,
File No. 333-18335)
10.4 Warrant, dated as of July 29, 1996, issued to Network General Corporation
(incorporated by reference to the exhibit 10.8 filed with the Company's
Registration Statement filed on Form S-1, File No. 333-18335)
10.5 Form of Warrant (September 1996) (incorporated by reference to the
exhibit 10.12 filed with the Company's Registration Statement filed on
Form S-1, File No. 333-18335)
10.6 Amendment to Warrant, dated October 15, 1996, between the Company and
Brightstone Capital, Ltd. (incorporated by reference to the exhibit 10.13
filed with the Company's Registration Statement filed on Form S-1, File
No. 333-18335)
10.7 Agreement to Extend Promissory Notes and Amendment to Warrants, dated as
of October 15, 1996, between the Company and Brightstone Fund VI,
Brightstone Fund VII and Brightstone Capital, Ltd. (incorporated by
reference to the exhibit 10.14 filed with the Company's Registration
Statement filed on Form S-1, File No. 333-18335)
10.8 Agreement to Extend Promissory Note and Amendment to Warrant, dated as of
October 15, 1996, between the Company and Stephen L. Becher (incorporated
by reference to the exhibit 10.15 filed with the Company's Registration
Statement filed on Form S-1, File No. 333-18335)
10.9 Amendment to Warrant, dated as of October 15, 1996, between the Company
and Brightbridge Fund I L.P. (incorporated by reference to the exhibit
10.16 filed with the Company's Registration Statement filed on Form S-1,
File No. 333-18335)
10.10 Form of Warrant (December 1996) (incorporated by reference to the exhibit
10.19 filed with the Company's Registration Statement filed on Form S-1,
File No. 333-18335)
10.11 Office/Warehouse Lease, dated May 10, 1994, by and between The
Northwestern Mutual Life Insurance Company and the Company (incorporated
by reference to the exhibit 10.20 filed with the Company's Registration
Statement filed on Form S-1, File No. 333-18335)
10.12 Amendment to Lease, dated May 22, 1996, between the Company and The
Northwestern Mutual Life Insurance Company (incorporated by reference to
the exhibit 10.21 filed with the Company's Registration Statement filed
on Form S-1, File No. 333-18335)
10.13 Lease Agreement dated April 7, 1995, by and between Ronald C. Devine and
the Company (incorporated by reference to the exhibit 10.22 filed with
the Company's Registration Statement filed on Form S-1, File No.
333-18335)
10.14 1994 Long Term Incentive and Stock Option Plan, as amended, including
forms of option agreements (incorporated by reference to the exhibit
10.24 filed with the Company's Registration Statement filed on Form S-1,
File No. 333-18335)
<PAGE>
Exhibit
No Description
- --------------------------------------------------------------------------------
10.15 Directors' Stock Option Plan (incorporated by reference to the exhibit
10.25 filed with the Company's Registration Statement filed on Form S-1,
File No. 333-18335)
10.16 Form of Mutual Confidentiality Agreement for use with third parties
(incorporated by reference to the exhibit 10.26 filed with the Company's
Registration Statement filed on Form S-1, File No. 333-18335)
10.17 Form of Employee Disclosure and Assignment Agreement (incorporated by
reference to the exhibit 10.27 filed with the Company's Registration
Statement filed on Form S-1, File No. 333-18335)
10.18 Form of OEM Agreement (incorporated by reference to the exhibit 10.28
filed with the Company's Registration Statement filed on Form S-1, File
No. 333-18335)
10.19 Form of Sales Representative Agreement (incorporated by reference to the
exhibit 10.29 filed with the Company's Registration Statement filed on
Form S-1, File No. 333-18335)
10.20 Form of System Integrator Agreement (incorporated by reference to the
exhibit 10.30 filed with the Company's Registration Statement filed on
Form S-1, File No. 333-18335)
10.21 Form of Extended Limited Warranty Agreement (incorporated by reference to
the exhibit 10.31 filed with the Company's Registration Statement filed
on Form S-1, File No. 333-18335)
10.22 Lease Agreement, dated November 11, 1996, by and between OMNI
Offices/Woodlawn Hills and the Company (incorporated by reference to the
exhibit 10.32 filed with the Company's Registration Statement filed on
Form S-1, File No. 333-18335)
10.23 Option Agreement, dated as of January 21, 1997, by and between the
Company and David C. Malmberg (incorporated by reference to the exhibit
10.33 filed with the Company's Registration Statement filed on Form S-1,
File No. 333-18335)
10.24 Warrant dated March 25, 1997, issued to R.J. Steichen & Company
(incorporated by reference to the exhibit 10.1 filed with the Company's
Report on Form 10-Q for the fiscal quarter ended April 6, 1997)
10.25 Employment Agreement with Ronald E. Lewis dated September 18, 1997
(incorporated by reference to the exhibit 10.1 filed with the Company's
Report on Form 10-Q for the fiscal quarter ended October 5, 1997)
10.26 Lease Agreement, dated May 16, 1997, by and between CSM Properties, Inc.
and the Company (incorporated by reference to the exhibit 10.35 filed
with the Company's Report on Form 10-K for the fiscal year ended January
4, 1998)
10.27 Addendum to Lease, dated as of December 30, 1997, between the Company and
CSM Properties, Inc. (incorporated by reference to the exhibit 10.36
filed with the Company's Report on Form 10-K for the fiscal year ended
January 4, 1998)
10.28 Sublease Agreement, dated November 6, 1997, by and between Golf Galaxy
and the Company (incorporated by reference to the exhibit 10.37 filed
with the Company's Report on Form 10-K for the fiscal year ended January
4, 1998)
10.29 Sublease Agreement, dated December 5, 1997, by and between LSC, Inc. and
the Company (incorporated by reference to the exhibit 10.38 filed with
the Company's Report on Form 10-K for the fiscal year ended January 4,
1998)
10.30 Sublease Agreement, dated January 6, 1998, by and between Apartment
Search and the Company (incorporated by reference to the exhibit 10.39
filed with the Company's Report on Form 10-K for the fiscal year ended
January 4, 1998)
10.31 General Credit and Security Agreement, dated November 19, 1998, by and
between Spectrum Commercial Services and the Company (filed herewith)
10.32 Promissory Note, dated November 19, 1998, by and between Spectrum
Commercial Services and the Company (filed herewith)
21.1 Subsidiaries of the Company (incorporated by reference to the exhibit
21.1 filed with the Company's Registration Statement filed on Form S-1,
File No. 333-18335)
23.1 Consent of Arthur Andersen LLP (filed herewith)
27.1 Financial Data Schedule for the year ended January 3, 1999 (filed
herewith)
99.1 Cautionary Statement (filed herewith)
<PAGE>
GENERAL CREDIT AND SECURITY AGREEMENT
THIS AGREEMENT, dated as of November 19, 1998, between SPECTRUM
Commercial Services, a division of Lyon Financial Services, Inc., a Minnesota
corporation, having its mailing address and principal place of business at 7900
International Drive, Suite 890, Bloomington, Minnesota 55425-1581 (herein called
"Lender"), and FieldWorks, Incorporated, a Minnesota corporation, having the
mailing address and principal place of business at 7631 Anagram Drive, Eden
Prairie, Minnesota 55344 (herein called "Borrower").
1. Agreement. This Agreement states the terms and conditions under which
Borrower may obtain certain loans and/or other credit extensions from Lender.
2. Certain Definitions. For purposes of this Agreement, the following
terms shall have the following meanings:
"Advance(s)" shall have the meaning provided in Paragraph 4(a).
"Affiliate" shall include, with respect to any party, any Person
which directly or indirectly controls, is controlled by, or is under
common control with such party and, in addition, in the case of
Borrower, each officer, director or shareholder of Borrower, and each
joint venturer and partner of Borrower.
"Borrower" shall have the meaning provided in the preamble
hereto.
"Borrowing Base" shall mean the sum of (i) Seventy Five percent
(75%) of the net amount of Eligible Receivables or such greater or
lesser percentage as Lender, in its sole discretion, shall deem
appropriate, plus (ii) the lesser of (x) Six Hundred Thousand and
No/100ths Dollars ($600,000.00) or (y) Thirty percent (30%) of the net
amount of Eligible Inventory, or such greater or lesser dollars and/or
percentage as Lender, in its sole discretion, shall deem appropriate.
"Business Day" shall mean any day on which major commercial
banks in Minneapolis, Minnesota are open for the transaction of business
of the kind contemplated by this Agreement.
"Chattel Paper" shall have the meaning ascribed to such term in
Article 9 of the Commercial Code.
"Closing Date" shall mean the day specified by Borrower on which
all of the conditions precedent specified in Paragraph 21 shall have
been satisfied.
"Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
"Commercial Code" shall mean the Uniform Commercial Code as
enacted in the State of Minnesota, as amended from time to time.
"Consolidated" shall, when used with reference to any financial
information pertaining to (or when used as a part of any defined term or
statement pertaining to the financial condition of) any Person, mean the
accounts of such Person and its subsidiaries, determined on a
consolidated basis, all determined as to principles of consolidation
and, except as otherwise specifically required by the definition of such
term or by such statement as to such accounts, in accordance with GAAP.
"Contingent Obligations" shall mean, with respect to any Person,
all of such Person's liabilities and obligations which are contingent
upon and will not mature unless and until the occurrence of some event
or circumstance and which are not included within the definition of
Liabilities of such Person.
"Customer(s)" shall have the meaning provided in Paragraph 7(a).
"Default" shall mean any event which, with the giving of notice
or passage of time, or both, would constitute an Event of Default.
"Eligible Inventory" shall mean the dollar value of only that
Inventory in which only Lender holds a senior security interest and as
to which Lender, in its sole discretion, shall elect from time to time
to constitute Eligible Inventory. Without limiting the discretion of
Lender to consider any Inventory not to be Eligible Inventory, and by
way of example of types of Inventory that Lender will consider not to be
Eligible Inventory, Lender, notwithstanding any earlier classification
of eligibility, may consider any Inventory not to be Eligible Inventory
if: (i) such Inventory does not constitute finished goods or such
Inventory does not constitute raw materials that are to be used or
consumed in the normal course in the processing of such raw materials
into finished goods which, upon completion, will constitute Eligible
Inventory; (ii) such Inventory does not meet all standards imposed by
any governmental agency having regulatory authority over such goods
and/or their use, manufacture or sale; (iii) such Inventory has not been
physically received by Borrower at Borrower's principal offices in Eden
Prairie, Minnesota; (iv) such Inventory is not currently usable or
currently salable in the normal course of Borrower's operations; (v)
such Inventory is on consignment to or from any other Person or is
subject to any bailment; (vi) such Inventory is subject to any lien,
Security Interest or other encumbrance whatsoever, except for the
security interest of Lender under this Agreement; (vii) such Inventory
has been sold to any other person; or (viii) such Inventory is located
in a place other than Borrower's warehouse/principal place of business
in Eden Prairie, Minnesota, or (ix) such inventory is specialty, custom,
or limited purpose software and hardware. The value of Eligible
Inventory shall be the lower of the cost or market value
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of the Eligible Inventory computed on a first-in, first-out basis in
accordance with generally accepted accounting principles on the basis of
the most recent inventory certificates delivered to Lender pursuant to
Paragraph 17(a)(v).
"Eligible Receivables" shall mean the dollar value of only such
Receivables of Borrower arising from the sale and actual shipment of
Inventory or the full and complete rendition of services in the ordinary
course of business which has been fully performed by Borrower and in
which only Lender holds a senior security interest and as to which
Lender, in its sole discretion, shall from time to time determine to be
Eligible Receivables. Without limiting the discretion of Lender to
consider any Receivable not to be an Eligible Receivable, and by way of
example only of types of Receivables that Lender will consider not to be
Eligible Receivables, Lender, notwithstanding any earlier classification
of eligibility may consider any Receivable not to be an Eligible
Receivable if: (i) any warranty is breached as to the Receivable; (ii)
the Receivable is not paid by the account debtor within the earlier of
120 days from the date of the invoice relating to such Receivable or 60
days from the due date of the invoice relating to such Receivable; (iii)
the account debtor disputes liability or makes any claim with respect to
the Receivable, provided that such Receivable shall only be ineligible
up to the amount of such dispute or claim; (iv) a petition in bankruptcy
or other application for relief under any insolvency law is filed with
respect to the account debtor owing the Receivable; (v) the account
debtor on the Receivable makes an assignment for the benefit of
creditors, becomes insolvent, fails, suspends, or goes out of business;
(vi) the Receivable arises from a sale to an account debtor outside the
United States, unless the sale is backed by an acceptable letter of
credit; (vii) the Receivable is owed by an account debtor who owes
Receivables of which more than 10% are more than 90 days past the date
of the invoices relating to such Receivables; (viii) the account debtor
is an Affiliate or employee of Borrower; (ix) the account debtor is also
a supplier or creditor of Borrower; (x) the account debtor is the United
States of America, or any department or any agency of any thereof,
unless Borrower has complied with the Assignment of Claims Act to
Lender's satisfaction; or (xi) the Receivable is either a consignment
Receivable or a bonded Receivable or a retainage.
"Equipment" shall have the meaning provided in Paragraph 3.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as the same may from time to time be amended, and the rules and
regulations promulgated thereunder by any governmental agency or
authority, as from time to time in effect.
"ERISA Affiliate" shall mean, with respect to any Person, any
trade or business (whether or not incorporated) which is a member of a
group of which such Person is a member and which is under common control
within the meaning of Section 414 of the Code, as amended from time to
time, and the regulations promulgated and rulings issued thereunder.
"ERISA Event" shall mean: (a) a Reportable Event described in
Section 4043 of ERISA and the regulations issued thereunder (other than
a Reportable Event not subject to the provision for 30-day notice to the
PBGC under such regulations); (b) the withdrawal of Borrower or any
ERISA Affiliate from a Plan during a plan year in which it was a
"substantial employer" as defined in Section 4001(a)(2) of ERISA; (c)
the filing of a notice of intent to terminate a Plan or the treatment of
a Plan amendment as a termination under Section 4041 of ERISA; (d) the
institution of proceedings to terminate a Plan by the PBGC under Section
4042 of ERISA; or (e) any other event or condition that might reasonably
be expected to constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Plan.
"Event of Default" shall have the meaning provided in Paragraph
20.
"GAAP" shall mean generally accepted accounting principles
consistently applied and maintained throughout the period indicated and
consistent with the audited financial statements delivered to Lender
pursuant to Paragraph 16(h). Whenever any accounting term is used herein
which is not otherwise defined, it shall be interpreted in accordance
with GAAP.
"General Intangibles" shall have the meaning provided in
Paragraph 3.
"Guarantor" NONE.
"Independent Public Accountants" shall mean Arthur Andersen, LLP
or any other firm of independent public accountants which is acceptable
to Lender.
"Inventory" shall have the meaning provided in Paragraph 3.
"Liabilities" of any Person shall mean those items which, in
accordance with GAAP, appear as liabilities on a balance sheet.
"Facility Fee" shall have the meaning provided in Paragraph 17.
"Loan Administration Fee" shall have the meaning provided in
Paragraph 17.
"Loan Document(s)" shall mean individually or collectively, as
the case may be, this Agreement, the Note, the Validity Guarantees, and
any and all other documents executed, delivered or referred to herein or
therein, as originally executed and as amended, modified or supplemented
from time to time.
"Material Adverse Occurrence" shall mean any occurrence of
whatsoever nature (including, without limitation, any adverse
determination in any litigation, arbitration or governmental
investigation or proceeding) which Lender shall determine, in its sole
discretion, could materially adversely affect the present or prospective
financial condition or operations of Borrower or a Guarantor or impair
the ability of Borrower or a Guarantor to perform its obligations under
this Agreement or any other Loan Document.
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"Maturity Date" shall mean November 18, 2000, provided, however,
that Borrower shall have the option to extend the Maturity Date for
subsequent twelve month periods, unless Lender (in its sole and absolute
discretion) notifies Borrower at least sixty days prior to the then
current Maturity Date that the extension shall not be available and in
that event, no extension shall occur. In any event, the extension option
shall not be available if, as of the then current Maturity Date (i) an
Event of Default has occurred and is continuing (whether or not Lender
has notified Borrower of such default), or (ii) this Agreement has
previously terminated as provided in Paragraph 23, or (iii) Lender has,
in its sole and absolute discretion, demanded payment of amounts owed
hereunder. Should Borrower have the option to extend the Maturity Date
and choose to do so, than Borrower shall notify Lender of its request
for an extension at least 60 days before the then current Maturity Date
and, prior to the then current Maturity Date, shall have executed a new
or amended promissory note reflecting the extended Maturity Date and
which contains substantially the same terms as the Note then in effect.
"Maximum Principal Amount" shall mean, at any date, Three
Million and No/100ths Dollars ($3,000,000.00).
"Monthly Payment Date" shall mean the first day of each month.
"Multi-employer Plan" shall mean a "multiemployer plan" as
defined in Section 4001(a)(3) of ERISA to which Borrower is making or
accruing an obligation to make contributions, or has within any of the
preceding three plan years made or accrued an obligation to make
contributions.
"Net Profit" or "Net Loss" for any period shall mean net income
or loss for such period, determined in accordance with GAAP excluding,
however, (i) extraordinary gains (including but not limited to the
conversion of debt to equity, the forgiveness of debt and the like), and
(ii) gains (whether or not extraordinary) from sales or other
dispositions of assets other than the sale of Inventory in the ordinary
course of Borrower's business.
"Note" shall mean Borrower's revolving or promissory note of
even date payable to the order of Lender to evidence the Advances,
including any replacements, substitutions or amendments thereof.
"Obligations" shall have the meaning provided in Paragraph 3.
"Participant" shall mean each Person who purchases a
participation interest from Lender in the obligations.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or
any successor board, authority, agency, officer or official of the
United States administering the principal functions assigned on the date
hereof to the Pension Benefit Guaranty Corporation under ERISA.
"Person" shall mean any natural person, corporation, firm,
partnership, association, government, governmental agency or any other
entity, whether acting in an individual, fiduciary or other capacity.
"Plan" shall mean each employee benefit plan or other class of
benefits covered by Title IV of ERISA, in either case whether now in
existence or hereafter instituted, of Borrower or any of its
Subsidiaries.
"Prime Rate" shall mean the publicly announced base rate (or
other publicly announced reference rate) charged by Norwest Bank
Minnesota, National Association; Borrower acknowledges that the Prime
Rate may not be the lowest rate made available by Lender to its
customers and that Lender may lend to its customers at rates that are
at, above or below the Prime Rate.
"Receivables" shall have the meaning provided in Paragraph 3(a).
"Reportable Event" shall have the meaning given to that term in
Title IV of ERISA.
"Security Interest" shall mean any lien, pledge, mortgage,
encumbrance, charge or security interest of any kind whatsoever
(including, without limitation, the lien or retained security title of a
conditional vendor) whether arising under a security instrument or as a
matter of law, judicial process or otherwise or the agreement by
Borrower to grant any lien, security interest or pledge, mortgage or
encumber any asset.
"Subordinated Debt" shall mean indebtedness of Borrower for
borrowed money which is subordinated to the Obligations on terms
satisfactory to Lender in its sole discretion.
"Subsidiary" of any Person shall mean any other corporation of
which more than 50% of the outstanding shares of capital stock having
ordinary voting power for the election of directors is owned directly or
indirectly by such Person, by such Person and one or more Subsidiaries,
or by one or more other Subsidiaries.
"Termination Date" shall mean the earliest of (i) the Maturity
Date or (ii) the date upon which Lender's obligation to make Advances is
terminated pursuant to Paragraph 20, or (iii) the date upon which the
obligations are declared to be due and payable (or automatically become
due and payable) upon the occurrence of an Event of Default as provided
in Paragraph 20 or otherwise, or (iv) the date upon which this Agreement
terminates as provided in Paragraph 23, or (v) upon demand by Lender in
its sole and absolute discretion.
"Withdrawal Liability" shall have the meaning given to that term
in Title IV of ERISA.
"Working Capital" at any date shall mean Current Assets at such
date minus Current Liabilities at such date.
3. Security. As security for all present and future sums loaned or
advanced by Lender to Borrower and for
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all other obligations now or hereafter chargeable to Borrower's loan account
hereunder, and all other obligations and liabilities of any and every kind of
Borrower to Lender, due or to become due, direct or indirect, absolute or
contingent, joint or several, howsoever created, arising or evidenced, now
existing or hereafter at any time created, arising or incurred (herein called
"Obligations'), Borrower hereby grants to Lender a security interest in and to
the following property:
(a) All Receivables of Borrower now owned or hereafter acquired
or arising, together with all customer lists, original books and
records, ledger and account cards, computer tapes, discs, printouts and
records, whether now in existence or hereafter created. "Receivables"
means all rights of Borrower to the payment of money, whether or not
earned and howsoever evidenced or arising, including (without
limitation) all present and future "Accounts", accounts receivable,
"Chattel Paper", "Instruments", and rights to payment which are "General
Intangibles" (as those terms are used in the Commercial Code), all
security therefor and all of Borrower's rights as an unpaid seller of
goods (including rescission, replevin, reclamation and stopping in
transit) and all of Borrower's rights to any goods represented by any of
the foregoing including returned or repossessed goods;
(b) All Inventory of Borrower, whether now owned or hereafter
acquired and wherever located. "Inventory" includes all Goods (as
defined in Article 9 of the Commercial Code) intended for sale or lease
or to be furnished under contracts of service, all raw materials and
work in process therefor, all finished goods thereof, all materials and
supplies of every nature used or usable or consumed or consumable in
connection with the manufacture, packing, shipping, advertising,
selling, leasing or furnishing of such Goods, and all accessories
thereto and all documents of title therefor evidencing the same;
(c) All Equipment of Borrower, whether now owned or hereafter
acquired and wherever located. "Equipment" includes all of Borrower's
Goods other than Inventory, all replacements and substitutions therefor
and all accessions thereto, and specifically includes, without
limitation, all present and future machinery, equipment, vehicles,
manufacturing equipment, shop equipment, office and record keeping
equipment, furniture, fixtures, parts, tools and all other Goods (except
Inventory) used or acquired for use by Borrower for any business or
enterprise;
(d) All General Intangibles and Deposit Accounts (as defined in
Article 9 of the Commercial Code) of Borrower, whether now owned or
hereafter acquired, including (without limitation) all present and
future domestic and foreign patents, patent applications, trademarks,
trademark applications, copyrights, trade names, trade secrets, patent
and trademark licenses (whether Borrower is licensor or licensee), shop
drawings, engineering drawings, blueprints, specifications, parts lists,
manuals, operating instructions, customer and supplier lists, licenses,
permits, franchises, the right to use Borrower's corporate name and the
goodwill of Borrower's business; and
(e) All Investment Property (as defined in the Commercial Code)
including but not limited to stock and other securities evidencing
ownership of any other organization, company or entity as well as all
amendments, extensions, renewals and replacements of the above, together
with all certificates, other instruments, options, rights, interest, and
other distributions issued as an addition to, in substitution or in
exchange for, or on account of, the same, all whether now existing or
hereafter arising and whether now owned or hereafter acquired; and
(f) All products and proceeds of any and all of the foregoing
and all products and proceeds of any other Collateral (as hereinafter
defined) including the proceeds of any insurance covering any of the
Collateral, as well as all Deposit Accounts (as defined in the
Commercial Code), money, cash, and the like.
All such Receivables, Inventory, Equipment, General Intangibles, Investment
Property, Deposit Accounts, products and proceeds, together with all other
assets and properties of Borrower in or on which Lender is now or hereafter
granted a security interest, mortgage, lien or encumbrance pursuant to this
Agreement or otherwise, are hereinafter sometimes referred to as "Collateral".
4. Advances.
(a) At the request of Borrower, Lender agrees, subject to the
terms and conditions hereinafter set forth, to make loans (each such
loan being herein sometimes called individually an "Advance" and
collectively the "Advances") to Borrower from time to time on any
Business Day during the period from the date hereof and ending on the
Termination Date; provided, however, that Lender shall not be required
to make any ------------------ Advance if, after giving effect to such
Advance, the aggregate unpaid principal amount of Advances outstanding
would exceed the lesser of the Borrowing Base or the Maximum Principal
Amount. The amount of each such Advance shall be charged to Borrower's
loan account. Borrower acknowledges that Lender may, but shall not be
obligated to, make an Advance at any time in an amount equal to any
overdraft in any account of Borrower maintained with Lender or any
Participant even if the aggregate unpaid principal amount of Advances
exceeds or would exceed the Borrowing Base or the Maximum Principal
Amount.
(b) In order to obtain an Advance, Borrower shall give written
or telephonic notice to Lender, by not later than 11:00 a.m.
(Minneapolis time) on the day before the requested Advance is to be
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made. Lender, shall make such Advance by transferring the amount thereof
in immediately available funds for credit to Borrower's account (other
than a payroll account), as specified in such notice. At the request of
Lender, Borrower shall confirm in writing any telephonic notice.
(c) The obligation of Lender to make Advances shall terminate on
the Termination Date.
(d) If at any time the sum of the aggregate outstanding
principal balance of the Advances exceeds the lesser of (i) the Maximum
Principal Amount or (ii) the Borrowing Base, then Borrower agrees to
make, on demand, a principal repayment on the Advances in an amount
equal to such excess together with accrued interest on the amount repaid
to the date of repayment. Borrower agrees that, on the Termination Date
(or earlier upon demand), it will repay the entire outstanding principal
balance of the Advances together with accrued interest thereon and all
accrued fees without presentment or demand for payment, notice of
dishonor, protest or notice of protest, all of which are hereby waived.
(e) The Advances shall be evidenced by the Note made by Borrower
payable to the order of Lender in a principal amount equal to the
Maximum Principal Amount; subject, however, to the provisions of the
Note to the effect that the principal amount payable thereunder at any
time shall not exceed the then unpaid principal amount of all Advances
made by Lender. Borrower hereby irrevocably authorizes Lender to make or
cause to be made, at or about the time of each Advance made by Lender,
an appropriate notation on the records of Lender, reflecting the
principal amount of such Advance, and Lender shall make or cause to be
made, on or about the time of receipt of payment of any principal of the
Note, an appropriate notation on its records reflecting such payment.
The aggregate amount of all Advances set forth on the records of Lender
shall be rebuttable presumptive evidence of the principal amount owing
and unpaid on the Note.
4A. Demand Facility. All interest, principal, Advances, and any other
amounts owing hereunder are due ON DEMAND and Lender specifically reserves the
absolute right to demand payment of all such amounts at any time, with or
without advance notice, for any reason or no reason whatsoever. Lender's right
to make such demand is not exclusive and Lender may coincidentally or separately
from such demand make further demand for payment pursuant to Paragraph 20 or
otherwise hereunder and, further, amounts may become due hereunder (pursuant to
Paragraph 20 or otherwise) without a demand by Lender, as provided in this
agreement.
5. Interest. Borrower agrees to pay interest on the outstanding
principal amount of the Note, at the close of each day at a fluctuating rate per
annum (computed on the basis of actual number of days elapsed and a year of 360
days) which is at all times equal to Three Percent (3%) in excess of the Prime
Rate; each change in such fluctuating rate caused by a change in the Prime Rate
to occur simultaneously with the change in the Prime Rate (the "Initial Rate");
provided, however, that (i) in no event shall the Initial Rate or the Adjusted
Rate in effect hereunder at any time be less than 9% per annum; and (ii)
interest payable hereunder with respect to each calendar month shall not be less
than $5,950.00 regardless of the amount of loans, Advances or other credit
extensions that actually may have been outstanding during the month. Interest
accrued through the last day of each month will be due and payable to Lender on
the next Monthly Payment Date. Interest shall also be payable on the Maturity
Date or on any earlier Termination Date. Interest accrued after the Maturity
Date or earlier Termination Date shall be payable on Demand. Interest may be
charged to Borrower's loan account as an Advance at Lender's option, whether or
not Borrower then has the right to obtain an Advance pursuant to the terms of
this Agreement.
In the event Borrower earns "Net Profit" for the 12 months ending October 31,
1999 of at least One Million Dollars ($1,000,000) and evidences such profit by
delivering to Lender a financial statement prepared according to GAAP that
reflects the required Net Profit, and provided no Event of Default exists, then
upon Borrower's written request, the Initial Rate shall be reduced to Two and
One Half percent (2 1/2%) in excess of the Prime Rate (the "Adjusted Rate")
commencing with the next scheduled Monthly Payment Date following Lender's
receipt of Borrower's written request.
Notwithstanding the foregoing, after an Event of Default occurs and during its
continuance, the Note shall bear interest until paid at 3% per annum in excess
of the rate otherwise then in effect, which rate shall continue to vary based on
further changes in the Prime Rate; provided, however, that after an Event of
Default, (i) in no event shall the interest rate in effect under the Note at any
time be less than 14% per annum; and (ii) interest payable under the Note with
respect to each calendar month shall not be less than $8,660 regardless of the
amount of loans, Advances or other credit extensions that actually may have been
outstanding during the month.. The undersigned shall also pay a late fee equal
to 10% of any payment under the Note that is more than 10 days past due.
6. Set-Off; etc. Upon the occurrence and during the existence of a
Default or an Event of Default, Lender is hereby authorized at any time and from
time to time, without notice to Borrower (any such notice being expressly waived
by Borrower), to set off and apply any and all deposits (general or special,
time or demand, provisional or final) at any time held and other indebtedness at
any time owing by Lender or any Participant to or for the credit or the account
of Borrower, including specifically any amounts held in any account maintained
at Lender or any Participant, against any and all amounts which may be owed to
Lender or any Participant by Borrower whether in connection with this Agreement
or otherwise and irrespective of whether Borrower shall have made any requests
under this Agreement.
7. Reports and Collections.
(a) Borrower agrees to furnish to Lender, at least weekly,
schedules describing
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Receivables created or acquired by Borrower (including confirmatory
written assignments thereof), including copies of all invoices to
account debtors and other obligors (all herein referred to as
"Customers") and original shipping or delivery receipts for all goods
sold, but if Borrower fails to do so the rights of Lender as a secured
party will not be impaired. At any time that an Event of Default exists,
Lender may notify Customers at any time that Receivables have been
assigned to Lender and collect them directly in Lender's own name but
unless and until Lender does so or gives Borrower other instructions,
Borrower shall make collection for Lender at Borrower's sole cost and
expense. Borrower shall advise Lender promptly of any goods which are
returned by Customers or otherwise recovered involving an amount in
excess of $5,000.00. Borrower shall also advise Lender promptly of all
disputes and claims by Customers involving an amount in excess of
$5,000.00 and settle or adjust them at no expense to Lender. At any time
after the occurrence and during the continuance of an Event of Default,
Lender may at all times settle or adjust such disputes and claims
directly with the Customers for amounts and upon terms which Lender
considers advisable. If Lender so directs at any time while an Event of
Default exists, no discount, credit or allowance shall be granted by
Borrower to any Customer and no return of goods shall be accepted by
Borrower without Lender's written consent.
(b) Borrower agrees to furnish to Lender Inventory
certifications in accordance with Paragraph 17(a)(v) and a physical
listing of all Inventory, wherever located, at least once every twelve
months or, in either case, as more frequently requested by Lender.
(c) All full and partial payments and any other cash collections
from whatever source whatsoever, whether or not arising from the sale,
collection or other disposition of Collateral (whether or not in the
ordinary course of business), including but not limited to the
collection of accounts receivable in the ordinary course of business and
the ordinary sales of inventory or services for cash, shall immediately
be delivered by Borrower to Lender in their original form (except for
endorsement where necessary) and uncashed (in the case of checks or
other documents). Upon Lender's request, Borrower shall direct all
customers and other remitters of payments to mail payments to Lender's
post office box or other lockbox. Until such payments are so delivered
to Lender (or Lender's lockbox), such payments shall be held in trust by
Borrower for and as Lender's property and shall not be commingled with
any funds of Borrower. The net amount received by Lender as proceeds
arising from the sale or other disposition of Collateral will be
credited by Lender to Borrower's loan account (subject to final
collection thereof) promptly upon receipt.
8. Warranty as to Collateral. Borrower warrants that:
(a) all Receivables listed in or reported on Borrower's
schedules will, when Borrower delivers the schedules to Lender, be bona
fide existing obligations created by the sale and actual delivery of
goods or the rendition of services to Customers in the ordinary course
of business, not subject to return, evaluation or other condition, and
which Borrower then owns free of any Security Interest except for the
Security Interest in favor of Lender created by this Agreement or
Security Interests permitted under Paragraph 18(d), and which are then
unconditionally owing to Borrower without defense, offset or
counterclaim; and that all shipping or delivery receipts, invoice copies
and other documents furnished to Lender in connection therewith will be
genuine; and
(b) all Inventory and Equipment is and shall be owned by
Borrower, free of any Security Interest except for the Security Interest
of Lender created by this Agreement or Security Interests permitted by
Paragraph 18(d).
Lender's rights to and security interest in the Collateral will not be impaired
by the ineligibility of any such Collateral for Advances and will continue to be
effective until all obligations chargeable to Borrower's loan account have been
fully satisfied.
9. Power of Attorney. Borrower authorizes and appoints Lender, or any of
Lender's officers, employees or agents whom Lender may from time to time
designate, as Borrower's attorney with power to: (a) to endorse Borrower's name
on any checks, notes, acceptances, drafts or other forms of payment or security
that may come into Lender's possession; (b) to sign Borrower's name on any
invoice or bill of lading relating to any Receivables, on drafts against
Customers, on schedules and confirmatory assignments of Receivables, on notices
of assignment, financing statements and amendments under the Commercial Code and
other public records, on verifications of accounts and on notices to Customers;
(c) to notify the post office authorities to change the address for delivery of
Borrower's mail to an address designated by Lender; (d) to receive, open and
dispose of all mail addressed to Borrower; (e) to send requests for verification
of accounts to Customers; (f) to obtain information from any bank, creditor,
customer or other Person regarding Borrower's relationship, account, history
etc.; (g) to sign lien waivers and other releases or satisfactions of claims or
rights by Borrower in exchange for payment or other consideration which Lender
in its sole discretion believes is appropriate under the circumstances; (h) to
directly verify and/or confirm the existence, authenticity, accuracy or terms of
any Receivable (both in Lender's own name or in Borrower's name) without
previously notifying Borrower of its intention to do so and Borrower grants its
consent to Lender for Lender's employees and agents to represent themselves as
employees or agents of Borrower for these purposes; and (i) to do all things
necessary to carry out this Agreement; provided however, that the powers
specified in clauses (c) and (d) above may be exercised only after the
occurrence of an Event of Default. Borrower ratifies and approves all acts of
the attorney other than
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those arising from the willful misconduct of Lender or such attorney. Neither
Lender nor the attorney will be liable for any acts of commission or omission
nor for any error in judgment or mistake of fact or law. This power, being
coupled with an interest, is irrevocable so long as any Receivable in which
Lender has a security interest or any Obligation remains unpaid. Borrower waives
presentment and protest of all instruments and notice thereof, notice of default
and dishonor and all other notices to which Borrower may otherwise be entitled.
10. Location of Collateral. Borrower warrants that its chief executive
office is at the address stated in the opening paragraph of this Agreement and
that its books and records concerning Receivables are located there. Borrower's
Inventory, Equipment and other goods are at the location or locations as
designated on Schedule A annexed hereto. Borrower shall immediately notify
Lender if any additional locations for Collateral are subsequently established.
Borrower shall not change the location of its chief executive office, the place
where it keeps its books and records, or the location of any Collateral (except
for sales of Inventory in the ordinary course of business) until Borrower has
obtained the written consent of Lender and all necessary filings have been made
and other actions taken to continue the perfection of Lender's Security Interest
in such new location. Lender's Security Interest attaches to all the Collateral
wherever located, and the failure of Borrower to inform Lender of the location
of any item or items of Collateral shall not impair Lender's Security Interest
therein.
11. Ownership and Protection of Collateral. Borrower warrants,
represents and covenants to Lender that the Collateral is now and, so long as
Borrower is obligated to Lender, will be owned by Borrower free and clear of all
Security Interests except for the Security Interest in favor of Lender created
by this Agreement and except the Security Interests, if any, permitted by
Paragraph 18(d), and that said Collateral, including the Receivables and
proceeds resulting from the collection, sale or other disposition thereof, will
remain free and clear of any and all Security Interests except for the Security
Interest in favor of Lender created by this Agreement and except the Security
Interests, if any, permitted under Paragraph 18(d). Borrower will not sell,
lease or otherwise dispose of the Collateral, or attempt to do so (except for
sales of Inventory in the ordinary course of business and sales of obsolete and
worn equipment not in excess of $25,000 in the aggregate in any calendar year)
without the prior written consent of Lender and unless the proceeds of any such
sale are paid to Lender for application on Borrower's Obligations. While a
Default or an Event of Default exists, Lender will at all times have the right
to take physical possession of any Inventory and Equipment constituting
Collateral and to maintain such possession on Borrower's premises or to remove
the same or any part thereof to such other places as Lender may wish. If Lender
exercises Lender's right to take possession of such Collateral, Borrower shall
on Lender's demand, assemble the same and make it available to Lender at a place
reasonably convenient to Lender. Borrower shall at all times keep the Equipment
constituting Collateral in good condition and repair (reasonable wear and tear
excepted). All expenses of protecting, storing, warehousing, insuring, handling
and shipping of the Collateral, all costs of keeping the Collateral free of any
Security Interests prohibited by this Agreement and of removing the same if they
should arise, and any and all excise, property, sales and use taxes imposed by
any state, federal or local authority on any of the Collateral or in respect of
the sale thereof, shall be borne and paid by Borrower and if Borrower fails to
promptly pay any thereof when due, Lender may, at its option, but shall not be
required to, pay the same and charge Borrower's loan account therefor. Borrower
agrees to renew all insurance required by this Paragraph 11 or Paragraph 13 at
least 10 days prior to its expiration. Borrower agrees that, with respect to any
Inventory maintained in a public warehouse, (i) Borrower will ensure that any
warehouse receipts issued are not in a negotiable form, (ii) Borrower will, upon
request from Lender, deliver all warehouse receipts to Lender, and (iii)
Borrower will cause the public warehouseman to execute an agreement similar to
those delivered pursuant to Paragraph 21 and in form and substance satisfactory
to Lender.
12. Perfection of Security Interest. Borrower agrees to execute such
financing statements together with any and all other instruments or documents
and take such other action, including delivery, as may be required to create,
evidence, perfect and maintain Lender's Security Interest in the Collateral and
Borrower shall not in any manner do any act or omit to do any act which would in
any manner impair or invalidate Lender's Security Interest in the Collateral or
the perfection thereof.
13. Insurance. Borrower shall maintain insurance coverage on any
Collateral other than Receivables with such companies, against such hazards, and
in such amounts as may from time to time be acceptable to Lender and shall
deliver such policies or copies thereof to Lender with satisfactory lender's
loss payable endorsements naming Lender. Each policy of insurance shall contain
a clause requiring the insurer to give not less than 30 days prior written
notice to Lender in the event of any anticipated cancellation of the policy for
any reason and a clause that the interest of Lender shall not be impaired or
invalidated by any act or neglect of Borrower nor by the occupation of the
premises wherein such Collateral is located for purposes more hazardous than are
permitted by said policy. Borrower will maintain, with financially sound and
reputable insurers, insurance with respect to its properties and business
against such casualties and contingencies of such types (which may include,
without limitation, public and product liability, larceny, embezzlement, or
other criminal misappropriation insurance) and in such amounts as may from time
to time be required by Lender.
14. Borrower's Account. Lender may charge to Borrower's loan account at
any time the amounts of all Obligations (and interest, if any, thereon) owing by
Borrower to Lender, including (without limitation) loans, Advances, debts,
liabilities, obligations acquired by purchase, assignment or participation and
all other obligations, whenever arising, whether absolute or contingent and
whether due or to become due; also the amount of all costs and expenses and all
reasonable attorneys' fees and legal expenses incurred in connection with
efforts made to enforce payment of such obligations, or to obtain payment of any
Receivables, or the foreclosure of any Collateral or in the prosecution or
defense of any actions or proceedings relating in any way to this Agreement
(including but not limited to bankruptcy or
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insolvency proceedings) whether or not suit is commenced, including reasonable
attorneys' fees and legal expenses incurred in connection with any appeal of a
lower court's order or judgment; and also the amounts of all unpaid taxes and
the like, owing by Borrower to any governmental authority or required to be
deposited by Borrower, which Lender pays or deposits for Borrower's account. All
of Borrower's borrowings hereunder and (unless otherwise specified) all other
obligations which are chargeable to Borrower's loan account shall be payable ON
DEMAND; recourse to security will not be required at any time. All sums at any
time standing to Borrower's credit on Lender's books and all of Borrower's
property at any time in Lender's possession or upon or in which Lender has a
Security Interest, may be held by Lender as security for all obligations which
are chargeable to Borrower's loan account. Subject to the foregoing, Lender, at
Borrower's request, will remit to Borrower any net balance standing to
Borrower's credit on Lender's books. Lender will account to Borrower monthly, in
writing, and each monthly accounting will be fully binding on Borrower, unless,
within thirty days thereafter, Borrower gives Lender specific written notice of
exceptions. All debit balances in Borrower's loan account will bear interest as
provided in Paragraph 5 of this Agreement. If Lender so requests at any time,
Borrower will immediately execute and deliver to Lender a promissory note in
negotiable form payable on demand to Lender's order in a principal amount equal
to the amount of the debit balance in Borrower's loan account, with interest as
provided in Paragraph 5 of this Agreement. In any event, Borrower covenants to
pay all Advances, debts, accounts and interest when due.
15. Participations. If any Person shall acquire a participation in
Advances made to Borrower hereunder, Borrower hereby grants to Lender as well as
any such Person holding a participation, and Lender and such Person shall have
and are hereby given a continuing Security Interest in any money, securities and
other property of Borrower in the custody or possession of such Participant,
including the right of set-off as fully as if such Participant had lent directly
to Borrower the amount of such participation. Borrower hereby grants to Lender
its continuing authority and consent to release any and all financial and other
information related to Borrower's financial condition, performance, its
business, operations or any other matter whatsoever to any of Borrower's
creditors (both secured and unsecured), to any Participant, or to any other
Person for their consideration of a possible participation in Advances by that
Person.
16. General Representations and Warranties. To induce Lender to make
Advances hereunder, Borrower makes the following representations and warranties,
all of which shall survive the initial Advance:
(a) Borrower is a corporation duly organized, existing, and in
good standing under the laws of the State of Minnesota, has corporate
power to own its property and to carry on its business as now conducted,
and is duly qualified to do business in all states in which the nature
of its business requires such qualification. During the past five years,
Borrower has done business solely under the names listed on Schedule B
attached hereto. Borrower does not own any capital stock of any
corporation, except as set forth on Schedule C attached hereto.
(b) The execution and delivery of this Agreement and the other
Loan Documents and the performance by Borrower of its obligations
hereunder and thereunder do not and will not conflict with any provision
of law, or of the charter or bylaws of Borrower, or of any agreement
binding upon Borrower.
(c) The execution and delivery of this Agreement and the other
Loan Documents have been duly authorized by all necessary corporate
action by directors and shareholders of Borrower; and this Agreement and
the other Loan Documents have in fact been duly executed and delivered
by Borrower and constitute its lawful and binding obligations, legally
enforceable against it in accordance with their respective terms.
(d) Except as disclosed to Lender on Schedule D attached hereto,
there is no action, suit or proceeding at law or equity, or before or by
any federal, state, local or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, pending
or, to the knowledge of Borrower, threatened against Borrower or any
Guarantor or the property of Borrower or any Guarantor which, if
determined adversely, would be a Material Adverse Occurrence, and
neither Borrower nor any Guarantor is in default with respect to any
final judgment, writ, injunction, decree, rule or regulation of any
court or federal, state, local or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or
foreign, where the effect of such default would be a Material Adverse
Occurrence.
(e) The authorization, execution and delivery of this Agreement,
and the payment of the loans and interest hereon, is not, and will not
be, subject to the jurisdiction, approval or consent of any federal,
state or local regulatory body or administrative agency.
(f) All of the assets of Borrower are free and clear of Security
Interests except those listed on Schedule E attached hereto.
(g) Borrower has filed all federal, state and local tax returns
which, to the knowledge of Borrower, are required to be filed, and
Borrower has paid all taxes shown on such returns and all assessments
which are due. Borrower has made all required withholding deposits.
Federal income tax returns of Borrower have been examined and approved
or adjusted by the applicable taxing authorities or closed by applicable
statutes for all fiscal years prior to and including the fiscal year
ended on January 4, 1998. Borrower does not have knowledge of any
objections to or claims for additional taxes by federal, state or
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local taxing authorities for subsequent years which would be a Material
Adverse Occurrence.
(h) Borrower has furnished to Lender the financial statements
listed on Schedule G attached hereto. These statements were prepared in
accordance with GAAP and present fairly the financial condition of
Borrower and its Consolidated Subsidiaries. There has been no material
adverse change in the condition of Borrower and its Consolidated
Subsidiaries, financial or otherwise, since the date of the most recent
of such financial statements.
(i) The value of the assets and properties of Borrower at a fair
valuation and at their then present fair salable value is and, after
giving effect to any pending Advance and the application of the amount
advanced, will be materially greater than its total liabilities,
including Contingent Obligations, and Borrower has (and has no reason to
believe that it will not have) capital sufficient to pay its
liabilities, including Contingent Obligations, as they become due.
(j) Borrower is in compliance with all requirements of law
relating to pollution control and environmental regulations in the
respective jurisdictions where Borrower is presently doing business or
conducting operations.
(k) All amounts obtained pursuant to Advances will be used for
Borrower's working capital purposes.
(l) Except for the trademarks, patents, copyrights and franchise
rights listed on Schedule F attached hereto, Borrower is not the owner
of any patent, trademark, copyright or franchise rights.
(m) (i) Each Plan is in compliance in all material respects with
all applicable provisions of ERISA and the Code; (ii) the aggregate
present value of all accrued vested benefits under all Plans (calculated
on the basis of the actuarial assumptions specified in the most recent
actuarial valuation for such Plans) did not exceed as of the date of the
most recent actuarial valuation for such Plans the fair market value of
the assets of such Plans allocable to such benefits; (iii) Borrower is
not aware of any information since the date of such valuations which
would materially affect the information contained therein; (iv) no Plan
which is subject to Part 3 of Subtitle B of Title I of ERISA or Section
412 of the Code has incurred an accumulated funding deficiency, as that
term is defined in Section 302 of ERISA or Section 412 of the Code
(whether or not waived); (v) no liability to the PBGC (other than
required premiums which have become due and payable, all of which have
been paid) has been incurred with respect to any Plan, and there has not
been any Reportable Event which presents a material risk of termination
of any Plan by the PBGC; and (vi) Borrower has not engaged in a
transaction which would subject it to tax, penalty or liability for
prohibited transactions imposed by ERISA or the Code. Borrower does not
contribute to any Multiemployer Plan.
(n) No part of any Advance shall be used at any time by Borrower
to purchase or carry margin stock (within the meaning of Regulation U
promulgated by the Board of Governors of the Federal Reserve System) or
to extend credit to others for the purpose of purchasing or carrying any
margin stock. Borrower is not engaged principally, or as one of its
important activities, in the business of extending credit for the
purposes of purchasing or carrying any such margin stock. No part of the
proceeds of any Advance will be used by Borrower for any purpose which
violates, or which is inconsistent with, any regulations promulgated by
the Board of Governors of the Federal Reserve System.
(o) Borrower is not an "investment company", or an "affiliated
person" of, or a "promoter" or "principal underwriter" for, an
"investment company", as such terms are defined in the Investment
Company Act of 1940, as amended. The making of the Advances, the
application of the proceeds and repayment thereof by Borrower and the
performance of the transactions contemplated by this Agreement will not
violate any provision of said Act, or any rule, regulation or order
issued by the Securities and Exchange Commission thereunder.
(p) The number of shares and classes of the capital stock of
Borrower and the ownership thereof are accurately set forth on Schedule
H attached hereto. Borrower has not: (i) issued any unregistered
securities in violation of the registration requirements of Section 5 of
the Securities Act of 1933, as amended, or any other law; or (ii)
violated any rule, regulation or requirement under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, in
either case where the effect of such violation would be a Material
Adverse Occurrence. No proceeds of the Advances will be used to acquire
any security in any transaction which is subject to Section 13(d) or
14(d) of the Securities Exchange Act of 1934, as amended.
(q) Except for Contingent Obligations shown on Schedule I
attached hereto, Borrower does not have any Contingent Obligations.
(r) All factual information heretofore or herewith furnished by
or on behalf of Borrower to Lender for purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all other
such factual information hereafter furnished by or on behalf of Borrower
to Lender will be, true and accurate in every material respect on the
date as of which such information is dated or certified and no such
information contains any material misstatement of fact or omits to state
a material fact or
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<PAGE>
any fact necessary to make the statements contained therein not
misleading.
(s) Each representation and warranty shall be deemed to be
restated and reaffirmed to Lender on and as of the date of each Advance
under this Agreement except that any reference to the financial
statements referred to in Paragraph 16(h) shall be deemed to refer to
the financial statements then most recently delivered to Lender pursuant
to Paragraphs 17(a)(i) and (ii).
17. Affirmative Covenants. Borrower agrees that it will:
(a) Furnish to Lender in form satisfactory to Lender:
(i) Within 90 days after the end of each fiscal year of
Borrower, a complete audited financial report prepared and
certified without qualification or explanatory language by
Independent Public Accountants on a Consolidated and
consolidating basis for Borrower and any Consolidated
Subsidiaries of Borrower; together with a copy of the management
letter or memorandum, if any, delivered by such independent
certified public accountant to Borrower and Borrower's response
thereto. If Borrower shall fail to supply the report within such
time limit, Lender shall have the right (but not the duty) to
employ certified public accountants acceptable to Lender to
prepare such report at Borrower's expense;
(ii) Within 30 days after the end of each month, a
balance sheet with operating figures as to that month, certified
as correct by the chief financial officer or treasurer of
Borrower but subject to adjustments as to inventories or other
items to which an officer of Borrower directs attention in
writing, together with a reconciliation of any variances between
the information provided on such balance sheet and the
information for that day previously delivered to Lender pursuant
to Paragraph 17(a)(v);
(iii) With the financial statements described in
Paragraph 17(a)(i) and (ii), a compliance certificate in the
form attached as Exhibit A certified as true and accurate by the
chief financial officer or treasurer of Borrower;
(iv) Within 10 days after the end of each month, an
aging of accounts receivable together with a reconciliation in a
form satisfactory to Lender and an aging of accounts payable in
form acceptable to Lender, both certified as true and accurate
by an officer of Borrower;
(v) Within 10 days after the end of each month, an
inventory certification report for all Inventory at all
locations and in form acceptable to Lender and certified as true
and accurate by an officer of Borrower; and
(vi) From time to time, at Lender's request, any and all
other material, reports, information, tax returns and/or figures
reasonably required by Lender.
(b) Permit Lender and its representatives access to, and the
right to make copies of, the books, records, and properties of Borrower
at all reasonable times; and permit Lender and its representatives to
discuss Borrower's financial matters with officers of Borrower and with
its Independent Public Accountant (and, by this provision, Borrower
authorizes its Independent Public Accountant to participate in such
discussions).
(c) Pay when due all taxes, assessments, and other liabilities
against it or its properties except those which are being contested in
good faith and for which an adequate reserve has been established;
Borrower shall make all withholding payments when due.
(d) Promptly notify Lender in writing of any substantial change
in present management or present business, of its intention to enter
into a new business or industry, or of its intention to wind down,
liquidate or close substantially all of its business;
(e) Pay when due all amounts necessary to fund in accordance
with its terms any Plan;
(f) Comply in all material respects with all laws, acts, rules,
regulations and orders of any legislative, administrative or judicial
body or official applicable to Borrower's business operation or
Collateral or any part thereof; provided, however, that Borrower may
contest any such law, act, rule, regulation or order in good faith by
appropriate proceedings so long as (i) Borrower first notifies Lender of
such contest, and (ii) such contest does not, in Lender's sole
discretion, adversely affect Lender's right or priority in the
Collateral or impair Borrower's ability to pay the Obligations when due;
(g) Permit Lender and its representatives, at any time, to
examine and inspect any Collateral, and to examine, inspect and copy the
Debtor's records pertaining to the Collateral and the Debtor's financial
condition, business and property.
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<PAGE>
(h) Loan Administration Fee. Pay Lender for the period
commencing on the date of this Agreement and continuing through the date
of full payment of all Obligations, a reasonable administration fee
(herein called the "Loan Administration Fee"), which shall be equal to
the sum of $7,500 per calendar quarter (or any partial quarter),
commencing as of the date hereof and pro-rated for the balance of the
current calendar quarter, plus all out-of-pocket expenses incurred by
Lender in conducting examinations. The Loan Administration Fee shall be
non-refundable, shall be deemed earned when paid, and shall be payable
to Lender as of the date hereof (for the balance of the current calendar
quarter), and thereafter on January 1, 1999 and on the first day of each
subsequent 3 month period/quarter. The existence or payment of the Loan
Administration Fee, Facility Fee or any other fee or charge, shall in no
way alter or diminish the obligation to pay interest, Lender's costs of
collection and attorneys' fees, or any other fees or charges imposed
under this agreement or any other agreement between Lender and Borrower
or any Guarantor;
(i) Facility Fee. Pay Lender, for the period commencing on the
date of this Agreement and continuing through the Termination Date, a
non-refundable annual facility fee (the "Facility Fee") of Thirty
Thousand Dollars per year (less the $15,000 survey fee which has already
been paid and which is credited against the first year's Facility Fee).
Each payment of the Facility Fee shall be nonrefundable and shall be
deemed to have been earned in full when charged to Borrower.
Notwithstanding the above subparagraph, in the event Borrower
earns Net Profit for the 12 months ending October 31, 1999 of at least
One Dollar ($1.00) and evidences such profit by delivering to Lender a
financial statement prepared according to GAAP that reflects the
required Net Profit, and provided no Event of Default exists, then upon
Borrower's written request, the Facility Fee for the second year of this
Agreement shall be reduced to Fifteen Thousand Dollars .
Notwithstanding the above subparagraph, in the event Borrower
earns Net Profit for the 12 months ending October 31, 1999 of at least
One Million Dollars ($1,000,000.00) and evidences such profit by
delivering to Lender a financial statement prepared according to GAAP
that reflects the required Net Profit, and provided no Event of Default
exists, then upon Borrower's written request, the Facility Fee for the
second year of this Agreement shall be eliminated.
(j) Promptly notify Lender in writing of (x) any litigation
which (i) involves an amount in dispute in excess of $10,000.00 (ii)
relates to the matters which are the subject of this Agreement, or (iii)
if determined adversely to Borrower would be a Material Adverse
Occurrence; and (y) any adverse development in any litigation described
in clause (x).
(k) Promptly notify Lender of any Default or Event of Default.
(l) As of the calendar quarter ending December 31, 1998,
Borrower shall achieve Net Loss of $500,000 or less before income tax;
(m) As of the calendar quarter ending 3/31/99, and as of the end
of each subsequent calendar quarter, Borrower shall achieve a Net Profit
of at least $1.00 on a year-to-date basis and before income tax
18. Negative Covenants. Borrower agrees that, absent Lender's written
consent (which it may or may grant, in its sole discretion), it will not:
(a) Expend or contract to expend an aggregate in excess of
$750,000 for fixed assets in any fiscal year, whether by way of
purchase, lease or otherwise, and whether payable currently or in the
future.
(b) Purchase or redeem any shares of Borrower's capital stock;
or declare or pay any dividends (other than dividends payable in capital
stock); or make any distribution to stockholders of any assets of
Borrower; (provided, however, that so long as no Default or Event of
Default exists or would result from such distributions, Borrower may
make Acceptable Distributions to be used by Borrower's shareholders
solely to make required income tax payments.
(c) Incur or permit to exist any indebtedness, secured or
unsecured, for money borrowed, except: (i) borrowings under this
Agreement; (ii) borrowings, if any, which are existing on the date of
this Agreement and which are disclosed on Schedule J attached hereto; or
(iii) indebtedness, not exceeding $150,000.00 at any one time in the
aggregate outstanding, which was incurred to acquire fixed assets, but
only to the extent that such fixed asset acquisition is permitted by
Paragraph 18(a).
(d) Create or permit to exist any Security Interest on any
assets now owned or hereafter acquired except: (i) those created in
Lender's favor and held by Lender; (ii) liens of current taxes not
delinquent or taxes which are being contested in good faith for which an
adequate reserve has been established; (iii) purchase money security
interests securing indebtedness permitted by Paragraph 18(c)(iii);
provided, however, that such Security Interest extends only to the fixed
assets acquired with the proceeds of such indebtedness; and (iv)
Security Interests disclosed on Schedule E attached hereto, securing
only debt outstanding on the date of this Agreement and disclosed on
Schedule J.
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<PAGE>
(e) Effect any recapitalization; or be a party to any merger or
consolidation; or, except in the normal course of business, sell,
transfer, convey or lease all or any substantial part of its property;
or sell or assign (except to Lender), with or without recourse, any
Receivables or General Intangibles.
(f) Enter into a new business or purchase or otherwise acquire
any business enterprise or any substantial assets of any person or
entity; or make any loans to any person or entity; or purchase any
shares of stock of, or similar interest in, or make any capital
contribution to or investment in, any entity.
(g) Permit more than $150,000.00 to be owing at any one time to
Borrower by all of Borrower's employees, officers, directors, or
shareholders, or members of their families, as a result of any
borrowings, purchases, travel advances or other transactions or events;
(h) Become a guarantor or surety or pledge its credit or its
assets on any undertaking of another, except for the Contingent
Obligations shown on Schedule I attached hereto;
(i) In any fiscal year pay excessive or unreasonable salaries,
bonuses, fees, commissions, fringe benefits or other forms of
compensation (such salaries, bonuses, fees, commissions, fringe benefits
or other forms of compensation being "Compensation") to any of its
officers or directors or any Guarantor; or increase the Compensation of
any officers or Guarantor by more than ten percent (10%) or pay any such
increases in Compensation of officers or Guarantors other than from
profits earned in the year of such payment; provided however, that in
the next fiscal year after the date hereof Compensation to David
Malmberg may not exceed $175,000 and to Robert Heller, $150,000, with an
increase of no more than 10% in subsequent fiscal years.
(j) Permit any default to occur under the terms of any Loan
Document, note, loan agreement, lease, mortgage, contract for deed,
security agreement, or other contractual obligation binding upon
Borrower;
(k) Make any substantial change in present ownership, management
or present business, enter into a new business or industry, or take
actions to wind down, liquidate or close substantially all of its
business;
(l) Enter into any agreement providing for the leasing by
Borrower of property which has been or is to be sold or transferred by
Borrower to the lessor thereof, or which is substantially similar in
purpose to the property so sold or transferred;
(m) Change its terms of trade with respect to the due date of
any Receivable;
(n) Change its fiscal year;
(o) (i) Permit or suffer any Plan maintained for employees of
Borrower or any commonly controlled entity to engage in any transaction
which results in a liability of Borrower under Section 409 or 502(i) of
ERISA or Section 4975 of the Code; (ii) permit or suffer any such Plan
to incur any "accumulated funding deficiency" (within the meaning of
Section 302 of ERISA and Section 412 of the Code), whether or not
waived; (iii) terminate, or suffer to be terminated, any Plan covered by
Title IV of ERISA maintained by Borrower or any commonly controlled
entity or permit or suffer to exist a condition under which PBGC may
terminate any such Plan; or (iv) permit to exist the occurrence of any
Reportable Event (as defined in Title IV of ERISA) which represents
termination by the PBGC of any Plan;
(p) Enter into any transaction with any Affiliate of Borrower
upon terms and conditions less favorable to Borrower than the terms and
conditions which would apply in a similar transaction with an unrelated
third party;
(q) Enter into any agreement containing any provision which
would be violated or breached by Borrower under any Loan Document or by
the performance by Borrower of its obligations under any Loan Document;
(r) Amend or modify the provisions of any Subordinated Debt; or
(s) Maintain any Inventory at a warehouse which issues
negotiable warehouse receipts with respect to such inventory.
19. Availability of Collateral. Lender may from time to time, for its
convenience, segregate or apportion the Collateral for purposes of determining
the amounts and maximum amounts of Advances which may be made hereunder.
Nevertheless, Lender's security interest in all such Collateral, and any other
collateral rights, interests and properties which may now or hereafter be
available to Lender, shall secure and may be applied to the payment of any and
all loans, Advances and other Obligations secured by Lender's security interest,
in any order or manner of application and without regard to the method by which
Lender determines to make Advances hereunder.
20. Default and Remedies. It shall be an Event of Default under this
Agreement if:
(a) Borrower fails to make any payment required under this
Agreement or any present or future supplements hereto or under any other
agreement between Borrower and Lender when due, or if payable upon
demand, upon demand; or
(b) Borrower fails to perform or observe any covenant, condition
or agreement
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contained in this Agreement or in any other Loan Document; or
(c) Any warranty, representation or statement made or furnished
to Lender by or on behalf of Borrower or any Guarantor proves to have
been false, incorrect or misleading in a material respect when made; or
(d) A proceeding seeking an order for relief under the
Bankruptcy Code is commenced by or against Borrower or any Guarantor,
provided however, that if such a proceeding is commenced against
Borrower or any Guarantor on an involuntary basis, then only if such
action is not dismissed within 60 days of first being filed; or
(e) Borrower or any Guarantor becomes insolvent or generally
fails to pay, or admit in writing its or his inability to pay, its or
his debts as they become due; or
(f) Borrower or any Guarantor applies for, consents to, or
acquiesces in, the appointment of a trustee, receiver or other custodian
for it or him or for any of its or his property, or makes a general
assignment for the benefit of creditors; or, in the absence of such
application, consent or acquiescence, a trustee, receiver or other
custodian is appointed for Borrower or for Guarantor or for a
substantial part of Borrower's or any Guarantor's property; or
(g) Any other reorganization, debt arrangement, or other case or
proceeding under any bankruptcy or insolvency law, or any dissolution or
liquidation proceeding is commenced in respect of Borrower or any
Guarantor, provided however, that if such a proceeding is commenced
against any Guarantor on an involuntary basis, then only if such action
is not dismissed within 60 days of first being filed; or
(h) Borrower or any Guarantor takes any action to authorize, or
in furtherance of, any of the events described in the foregoing clauses
(d) through (g); or
(i) All or a substantial part of the assets of Borrower or any
Guarantor are sold, leased, or otherwise disposed of (whether in one
transaction or in a series of transactions) to one or more Persons;
(j) Any judgments, writs or warrants of attachment, executions
or similar process (not covered by insurance) in the aggregate amount
that exceeds $10,000.00 is issued or levied against Borrower, any
Guarantor or any of its or his assets and is not released, vacated or
fully bonded prior to any sale and in any event within five days after
its issue or levy; or
(k) The issuance or levy of any garnishment, summons, writ of
attachment, writ, warrant, attachment, tax lien or tax levy, execution
or other process against any property of Borrower or any Guarantor; or
(l) The attachment of any tax lien to any property of Borrower
or any Guarantor which is other than for taxes or assessments not yet
due and payable; or
(m) Any Guarantor dies or attempts to revoke his or its
guaranty; or
(n) A Material Adverse Occurrence takes place.
Upon the occurrence of any Event of Default described in Paragraphs 20(d), (e),
(f), (g) or (h), all Obligations shall be and become immediately due and payable
without any declaration, notice, presentment, protest, demand or dishonor of any
kind (all of which are hereby waived by Borrower) and Borrower's ability to
obtain any additional credit extensions or Advances under this Agreement shall
be immediately and automatically terminated. Upon the occurrence of any other
Event of Default, Lender, without notice to Borrower, may terminate Borrower's
ability to obtain any additional credit extensions or Advances under this
Agreement and may declare all or any portion of the Obligations to be due and
payable, without notice, presentment, protest or demand or dishonor of any kind
(all of which are hereby waived), whereupon the full unpaid amount of the
obligations which shall be so declared due and payable shall be and become
immediately due and payable. Upon the occurrence of an Event of Default, Lender
shall have all the rights and remedies of a secured party under the Commercial
Code and may require Borrower to assemble the Collateral and make it available
to Lender at a place designated by Lender, and Lender shall have the right to
take immediate possession of the Collateral and may enter any of the premises of
Borrower or wherever the Collateral is located with or without process of law
and to keep and store the same on said premises until sold (and if said premises
be the property of Borrower, Borrower agrees not to charge Lender or a purchaser
from Lender for storage thereof for a period of at least 90 days). Upon the
occurrence of an Event of Default, Lender, without further demand, at any time
or times, may sell and deliver any or all of the Collateral at public or private
sale, for cash, upon credit or otherwise, at such prices and upon such terms as
Lender deems advisable, at its sole discretion. Any requirement under the
Commercial Code or other applicable law of reasonable notice will be met if such
notice is mailed to Borrower at its address set forth in the opening paragraph
of this Agreement at least ten days before the date of sale. Lender may be the
purchaser at any such sale, if it is public. The proceeds of sale will be
applied first to all expenses of retaking, holding, preparing for sale, selling
and the like, including attorneys' fees and legal expenses (whether or not suit
is commenced) including, without limitation, reasonable attorneys' fees and
legal expenses incurred in connection with any appeal of a lower court's order
or judgment, and second to the payment (in whatever order Lender elects) of all
other obligations chargeable to Borrower's loan account hereunder. Subject to
the provisions of the Commercial Code, Lender will return any excess to Borrower
and Borrower shall remain liable to Lender for any deficiency. Borrower agrees
to give Lender
-13-
<PAGE>
immediate notice of the existence of any Default or Event of Default.
21. Conditions Precedent to Initial Advance. The obligation of Lender to
make the initial Advance is subject to the condition precedent that Lender shall
have received on or before the date of the initial Advance copies of all of the
following, unless waived by Lender:
(a) A favorable opinion of counsel to Borrower and the
Guarantors in form and substance satisfactory to Lender;
(b) UCC-1 Financing Statements in a form acceptable to Lender
appropriately completed and duly executed by Borrower;
(c) Acceptable recent UCC, tax lien, judgment, and bankruptcy
searches from the filing offices in all states required by Lender;
(d) The Validity Guaranties, in form and substance satisfactory
to Lender in its sole and absolute discretion, appropriately completed
and duly executed by Karen Engebretson and David Malmberg;
(e) Subordination Agreements relating to all notes payable under
which Borrower is obligated;
(f) A certified copy of all documents evidencing any necessary
consent or governmental approvals (if any) with respect to the Loan
Documents or any other documents provided for in this Agreement;
(g) A certificate by the Secretary or any Assistant Secretary of
Borrower certifying as to: (i) attached resolutions of Borrower's Board
of Directors authorizing or ratifying the execution, delivery and
performance of the Loan Documents to which Borrower is a party and any
other documents provided for by this Agreement, (ii) the names of the
officers of Borrower authorized to sign the Loan Documents together with
a sample of the true signature of such officers, and (iii) attached
bylaws of Borrower;
(h) Certificates of Good Standing for Borrower issued by its
state of incorporation and by those states requested by Lender;
(i) A copy of the articles of incorporation of each Guarantor
that is a corporation certified by the Secretary of State;
(j) Evidence of insurance for all insurance required by the Loan
Documents;
(k) An officer certificate, in form and substance satisfactory
to Lender, executed by the President of Borrower;
(l) The Note, in form and substance satisfactory to Lender in
its sole and absolute discretion, appropriately completed and duly
executed by the Borrower;
(m) Appropriate collateral account agreements executed by
Borrower and the other parties thereto;
(n) Such landlord lien waivers and mortgagee consents as Lender,
in its sole discretion, may require, in form and substance satisfactory
to Lender in its sole discretion, appropriately completed and duly
executed;
(o) Such other approvals, opinions or documents as Lender may
require.
22. Conditions Precedent to All Advances. The obligation of Lender to
make any Advance (including the initial Advance) shall be subject to the
satisfaction of each of the following conditions, unless waived in writing by
Lender:
(a) The representations and warranties of Borrower set forth in
this Agreement are true and correct on the date of the Advance (and
after giving effect to the Advance then being made);
(b) No Default, no Event of Default and no Material Adverse
Occurrence shall then have occurred and be continuing on the date of the
Advance or result from the making of the Advance; and
(c) No litigation, arbitration or governmental investigation or
proceeding shall be pending or, to the knowledge of Borrower or any
Guarantor, threatened against Borrower or any Guarantor or affecting its
business or operations or its ability to perform its obligations
hereunder which, if adversely determined to Borrower or any Guarantor,
would constitute a Material Adverse Occurrence.
23. Termination. Subject to automatic termination of Borrower's ability
to obtain additional Advances or credit extensions under this Agreement upon the
occurrence of any Event of Default specified in Paragraphs 20(d), (e), (f), (g)
or (h) and to Lender's right to terminate Borrower's ability to obtain
additional credit extensions and Advances under this Agreement upon the
occurrence of any other Event of Default or upon demand, this Agreement shall
have a term ending on the Termination Date provided, however, that Borrower may
terminate this Agreement at any earlier time upon sixty days prior written
notice; provided further, however, that if Borrower terminates this Agreement at
any time prior to December 1, 1999, then Borrower shall pay to Lender a
prepayment charge equal to the product arrived at by multiplying $5,950.00 times
the number of calendar months (whole and fractional) from the Termination Date
to and including the then current Maturity Date (the "Prepayment Charge"), and
if Borrower terminates this Agreement on or after December 1, 1999 and before
June 1, 2000, then Borrower shall pay to Lender Seventy Five percent (75%) of
the Prepayment Charge, and if Borrower terminates
-14-
<PAGE>
this Agreement on or after June 1, 2000 and before the then current Maturity
Date, then Borrower shall pay to Lender a prepayment charge equal to Fifty
percent (50%) of the Prepayment Charge, provided further, that if all amounts
owing hereunder are paid completely from funds borrowed from Riverside Bank (and
not from any other source of funds), then no Prepayment Charge shall be due. On
the Termination Date, all obligations arising under this Agreement shall become
immediately due and payable without further notice or demand. Lender's rights
with respect to outstanding Obligations owing on or prior to the Termination
Date will not be affected by termination and all of said rights including
(without limitation) Lender's Security Interest in the Collateral existing on
such Termination Date or acquired by Borrower thereafter, and the requirements
of this Agreement that Borrower furnish schedules and confirmatory assignments
of Receivables and Inventory and turn over to Lender all full and partial
payments thereof shall continue to be operative until all such Obligations have
been duly satisfied.
24. Grant of License to Use Patents and Trademarks Collateral. For the
purpose of enabling Lender to exercise rights and remedies under this Agreement,
Borrower hereby grants to Lender an irrevocable, non-exclusive license
(exercisable without payment of royalty or other compensation to Borrower) to
use, license or sublicense any patent or trademark now owned or hereafter
acquired by Borrower and wherever the same may be located, and including in such
license reasonable access to all media in which any of the licensed items may be
recorded or stored and to all computer and automatic machinery software and
programs used for the compilation or printout thereof.
25. Miscellaneous.
(a) The performance or observance of any affirmative or negative
covenant or other provision of this Agreement and any supplement hereto
may be waived by Lender in a writing signed by Lender but not otherwise.
No delay on the part of Lender in the exercise of any remedy, power or
right shall operate as a waiver thereof, nor shall any single or partial
exercise of any remedy, power or right preclude other or further
exercise thereof or the exercise of any other remedy, power or right.
Each of the rights and remedies of Lender under this Agreement will be
cumulative and not exclusive of any other right or remedy which Lender
may have hereunder or as allowed by law.
(b) Any notice, demand or consent authorized by this Agreement
to be given to Borrower shall be deemed to be given when transmitted by
telex or telecopier (provided a confirmation copy thereof is sent by
U.S. mail, first class, within 24 hours of transmission) or personally
delivered, or three days after being deposited in the U.S. mail, postage
prepaid, or one day after delivery to Federal Express or other overnight
courier service, in each case addressed to Borrower at its address shown
in the opening paragraph of this Agreement, or at such other address as
Borrower may, by written notice received by Lender, designate as
Borrower's address for purposes of notice hereunder. Any notice or
request authorized by this Agreement to be given to Lender shall be
deemed to be given when personally delivered, or three business days
after being deposited in the U.S. mail, certified, return receipt
requested, postage prepaid, or one business day after delivery to and
receipt by Federal Express or other overnight courier, in each case
addressed to Lender at its address shown in the opening paragraph of
this Agreement, or at such other address as Lender may, by written
notice received by Borrower, designate as Lender's address for purposes
of notice hereunder; provided, however, that any notice to Lender given
pursuant to Paragraph 4(b) shall not be deemed given until received.
(c) This Agreement, including exhibits and schedules and other
agreements referred to herein, is the entire agreement between the
parties, supersedes and rescinds all prior agreements relating to the
subject matter herein, cannot be changed, terminated or amended orally,
and shall be deemed effective as of the date it is accepted by Lender.
(d) Borrower agrees to pay and will reimburse Lender on demand
for all expenses incurred by Lender arising out of the origination of,
or during the duration of, this transaction including without limitation
filing and recording fees and attorneys' fees and legal expenses,
including costs of in-house counsel (whether or not suit is commenced),
whether incurred in the negotiation and preparation of this Agreement,
in the operation of cash management, delivery/courier or other services
including Lender's then current charges for the operation of a lockbox
and wire transfer or advance fees, in the protection and perfection of
Lender's security interest in the Collateral, in the enforcement of any
of the provisions of this Agreement or of Lender's rights and remedies
hereunder and against the Collateral, in the defense of any claim or
claims made or threatened against Lender arising out of this
transaction, or otherwise including, without limitation, in each
instance, all reasonable attorneys' fees and legal expenses incurred in
connection with any appeal of a lower court's order or judgment. Lender
may also impose other miscellaneous charges for additional products or
services provided to Borrower based on the cost agreed to by Borrower
from time to time. Lender is authorized to deduct any such expenses from
any amount due Borrower and/or to add such expenses to Borrower's loan
account hereunder.
Borrower acknowledges that Lender has certain responsibilities
in connection with the making of Advances and the administration of this
Agreement. Consequently, Borrower hereby indemnifies, exonerates and
holds Lender, and its officers, directors, employees and agents (the
"Indemnified Parties") free and harmless from and against any and all
actions, causes of action, suits, losses, liabilities and damages, and
expenses in connection therewith
-15-
<PAGE>
including, without limitation, reasonable attorneys' fees and
disbursements (the 'Indemnified Liabilities"), incurred by the
Indemnified Parties or any of them as a result of, or arising out of, or
relating to:
(i) any transaction financed or to be financed in whole
or in part directly or indirectly with proceeds of any Advance,
or
(ii) the execution, delivery, performance or enforcement
of this Agreement or any document executed pursuant hereto by
any of the Indemnified Parties, except for any such Indemnified
Liabilities arising on account of any Indemnified Party's gross
negligence or willful misconduct.
If and to the extent that the foregoing undertaking may be unenforceable
for any reason, Borrower hereby agrees to make the maximum contribution
to the payment and satisfaction of each of the Indemnified Liabilities
which is permissible under applicable law. The provisions of this
Paragraph shall survive termination of this Agreement.
With regard to Borrower's obligation to indemnify Lender, Lender will
notify Borrower of any event requiring indemnification within ten
business days (or as soon thereafter as reasonably possible) following
Lender's receipt of notice of commencement of any action or proceeding,
or after it learns that a claim against it is likely, and which gives
rise to a claim for indemnification. Borrower will be entitled (but not
obligated) to assume the defense or settlement of any such action or
proceeding or to participate in any negotiations to settle or otherwise
resolve any claim using counsel of its choice; provided that such
counsel is reasonably satisfactory to Lender. If Borrower elects to
assume the defense or settlement of any such action or proceeding,
Lender (and its counsel) may continue to participate at its own expense
in such action or proceeding.
(e) This Agreement is made under and shall be governed by and
interpreted in accordance with the internal laws of the state of
Minnesota, except to the extent that the perfection of the Security
Interest hereunder, or the enforcement of any remedies hereunder with
respect to any particular Collateral, shall be governed by the laws of a
jurisdiction other than the State of Minnesota. Captions herein are for
convenience only and shall not be deemed part of this Agreement.
(f) This Agreement shall be binding upon Borrower and Lender and
their respective successors, assigns, heirs, and personal
representatives and shall inure to the benefit of Borrower, Lender and
the successors and assigns of Lender, except that Borrower may not
assign or transfer its rights hereunder without the prior written
consent of Lender, and any assignment or transfer in violation of this
provision shall be null and void. In connection with the actual or
prospective sale by Lender of any interest or participation in the
obligations, Borrower authorizes Lender to furnish any information in
its possession, however acquired, concerning Borrower or any of its
Affiliates to any person or entity.
(g) Borrower hereby irrevocably consents and submits to the
personal jurisdiction of any Minnesota state court or federal court over
any action or proceeding arising out of or relating to the Agreement,
and Borrower hereby irrevocably agrees that all claims in respect of
such action or proceeding shall be venued (at the sole option of Lender)
in either the District Court of Dakota or Hennepin County, Minnesota, or
the United States District Court, District of Minnesota. Borrower hereby
irrevocably waives, to the fullest extent it may effectively do so, the
defense of an inconvenient forum to the maintenance of such action or
proceeding. Borrower irrevocably consents to the service of copies of
the summons and complaint and any other process which may be served in
any such action or proceeding by the mailing by United States certified
mail, return receipt requested, of copies of such process to Borrower's
address stated in the preamble hereto. Borrower agrees that judgment
final by appeal, or expiration of time to appeal without an appeal being
taken, in any such action or proceeding shall be conclusive and may be
enforced in any other jurisdictions by suit on the judgment or in any
other manner provided by law. Nothing in this Paragraph shall affect the
right of Lender to serve legal process in any other manner permitted by
law or affect the right of Lender to bring any action or proceeding
against Borrower or its property in the courts of any other
jurisdiction. Borrower agrees that, if it brings any action or
proceeding arising out of or relating to this Agreement, it shall bring
such action or proceeding in the District Court of Hennepin County,
Minnesota.
(h) The provisions of this Agreement are severable, and in any
action or proceeding involving any State corporate law, or any State or
Federal bankruptcy, insolvency, reorganization or other law affecting
the rights of creditors generally, if the obligations of the Borrower
hereunder would otherwise be held or determined to be void, invalid, or
unenforceable on account of the grant of a security interest hereunder
to secure Borrower's contingent obligations, then, notwithstanding any
other provision of this Agreement to the contrary, the amount of such
liability shall, without any further action by Borrower, Lender or any
other person, be automatically limited and reduced to the highest amount
which is valid and enforceable as determined in such action or
proceeding.
(i) A photocopy or other reproduction hereof may be filed as a
financing statement.
-16-
<PAGE>
(j) Lender agrees to exercise due care to maintain the
confidentiality of all information relating to Borrower which has been
provided to Lender, and neither Lender nor any of its affiliates shall
use any such information for any purpose in any manner other than
pursuant to the terms contemplated by the Loan Documents, except to the
extent such information (i) was or becomes generally available to the
public, other than as a result of a disclosure by Lender, or (ii) was or
becomes available on a non-confidential basis from a source other than
Borrower, provided that such source is not bound by a confidentiality
agreement with Borrower which is known to Lender; provided further,
however, that Lender may disclose such information (a) at the request of
or pursuant to any requirement of any governmental authority to which
Lender is subject or in connection with the examination of Lender by any
such authority, (b) pursuant to a subpoena or other court process, (c)
when required to do so in accordance with the provisions of any
applicable law, (d) to Lender's independent auditors, lenders or other
professional advisors, and (e) to any person or entity and in any
proceeding necessary in Lender's reasonable judgement to protect
Lender's interest in connection with any claim or dispute involving
Lender. Borrower authorizes Lender to disclose to any prospective
transferee or loan participant such financial and other information in
Lender's possession concerning Borrower which has been delivered to
Lender in connection with the Loan Documents; provided that, unless
otherwise agreed y Borrower, the transferee has agreed in writing to
keep such information confidential to the same extent required of Lender
under this paragraph.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
LENDER: SPECTRUM COMMERCIAL SERVICES
By Steven I. Lowenthal
----------------------------------
Its Senior Vice President
----------------------------------
BORROWER: FIELDWORKS, INC.
By /s/ David C. Malmberg
----------------------------------
Its Chief Executive Officer
----------------------------------
Fed. Tax ID #: 41-1731723
-----------------
-17-
<PAGE>
List of Exhibits
----------------
Exhibit A Compliance Certificate
List of Schedules
-----------------
Schedule A Locations of Inventory and Equipment
(Paragraph 10)
Schedule B Names Under Which Borrower Has Done Business (Paragraph 16(a))
Schedule C Capital Stock of Corporations Owned by Borrower (Paragraph 16(a))
Schedule D Litigation (Paragraph 16(d))
Schedule E Security Interests (Paragraphs 16(f) and 18(d))
Schedule F Patents, Trademarks, Copyrights and Franchise Rights
(Paragraph 16(l))
Schedule G Financial Statements (Paragraph 16(h))
Schedule H Stock and Stock Ownership of Borrower (Paragraph 16(p))
Schedule I Contingent Obligations (Paragraph 16(q))
Schedule J Permitted Existing Indebtedness (Paragraphs 18(c) and (d))
-18-
<PAGE>
Exhibit A
- ---------
FIELDWORKS, INCORPORATED
COMPLIANCE CERTIFICATE
----------------------
Enclosed are the month end financial statements, including: Balance Sheet,
Income Statement, Detailed Accounts Receivable Aging, and Accounts Payable
Aging. The financial data was reviewed by myself and I certify all of the data
to be true and accurate and there has not been (except as otherwise indicated
below or attached hereto) any material change since the computation date(s)
specified therein .
- --------------------------------------------------------------------------------
For end of Quarter Statements:
Quarterly Profit Covenant: Quarter to date Net Income $
Quarterly Profit Covenant: Year to date Net Income $
Does this comply with the agreed upon covenant? _______ Yes _______ No
- --------------------------------------------------------------------------------
FIELDWORKS INCORPORATED
By: /s/ Karen L. Engebretson Date Signed: November 19, 1998
---------------------------------- ----------------------
Its: Chief Financial Officer/ VP Finance
-------------------------------------
-19-
<PAGE>
Schedule A
- ----------
OFFSITE VENDORS/MANUFACTURERS:
- ------------------------------
Balcon, 15532 Nowthen Blvd., Ramsey, MN
Battery Network, 955 Borra Place, Escondido, CA
Benchmark Electronics, 4065 Theurer Blvd, Winona, MN
Cirris Systems Corp., 1991 Parkway Blvd., Salt Lake City, UT
Control Products, 1724 Lake Drive W., Chanhassen, MN
Del-Mar Die Casting, 12901 South Western Ave., Gardena, CA
Dynapro Thin Film, 7025 West Marcia Road, Milwaukee, WI
Engel Diversified, 1060 Quacker Ave. No., Jordan, MN
Flexor Products, 200 Fil-Mor Drive, Morton, MN
J&E Manufacturing, 7925 215th Street W., Lakeville, MN
Juno Tool & Plastic, 106 Donovan Dr., Alexandria, MN
Lunt Manufacturing, 601-605 Lunt Ave., Schaumburg, IL
Metro Molded, 11610 Jay St., Coon Rapids, MN
Modern Plastics, 12535 316th Ave., Princeton, MN
Orion International, 1225 Chestnut Ave., Minneapolis, MN
Profile Plastics, 18672 Lake Dr. East, Chanhassen, MN
Rubber Development, 701 Technology Place, Waverly, IA
Swanson Tool & Die, 11755 Justen Circle, Maple Grove, MN
TorqMaster, 200 Harvard Ave., Stanford, CT
Ultra-X, 1765 Scott Blvd., Suite 101, Santa Clara, CA
Vanguard Products, 87 Newton road, Danbury, CT
Xetel Corp., 2105 Gracy Farms Lane, Austin, TX
Schedule B
- ----------
FieldWorks, Incorporated
Schedule C
- ----------
None.
Schedule D
- ----------
Mike Rejsa v FieldWorks
- -----------------------
Judgement was entered in favor of the Company including award for attorney fees
in the Rejsa v. FieldWorks case (Court file # MC 98-6881). However, there is the
possibility for appeal.
Schedule E
- ----------
Premier Funding Group, Inc. 3 Pro-E Workstations, Pro-E Modules & Server
286 South Main Street, Suite 300
Alpharetta, Georgia 30201
Schedule F
- ----------
TRADEMARK:
FieldWorks, Inc. Registered 9/16/97
Technology Module Registered 12/2/97
Field Workstation Registered 12/16/97
Field Mousepad Registered 12/23/97
Schedule G
- ----------
The third quarter financials statements are incorporated by reference to the
Company's Report on Form 10-Q filed with the SEC for the fiscal quarter ended
October 4, 1998.
Schedule H
- ----------
Series A, convertible preferred stock, $.001 par value, 5,000,000 shares
authorized, 0 issued and outstanding.
Common stock, $.001 par value, 30,000,000 share authorized, 8,820,926 issued and
outstanding.
Schedule I
- ----------
None.
Schedule J
- ----------
3 Pro-E Workstations, Pro-E Modules & Server leased through Premier Funding
Group as per Schedule E. $99,800
-20-
<PAGE>
EXHIBIT 10.32
PROMISORY NOTE
--------------
$3,000,000.00 November 19, 1998
Bloomington, Minnesota
FOR VALUE RECEIVED, the undersigned, FIELDWORKS, INCORPORATED ("Borrower")
promises to pay to the order of SPECTRUM COMMERCIAL SERVICES, a division of Lyon
Financial Services, Inc., (the "Lender") at its office in Bloomington,
Minnesota, or at such other place as any present or future holder of this Note
may designate from time to time, the principal sum of (i) Three Million and
00/100 Dollars ($3,000,000.00), or (ii) the aggregate unpaid principal amount of
all advances and/or extensions of credit made by the Lender to the undersigned
pursuant to this Note as shown in the records of any present or future holder of
this Note, whichever is less, plus interest thereon from the date of each
advance in whole or in part included in such amount until this Note is fully
paid. Interest shall be computed on the basis of the actual number of days
elapsed and a 360-day year, at an annual rate equal to Three percent (3.0%) per
annum in excess of the Prime Rate of Norwest Bank Minnesota, NA (the "Initial
Rate"), and that shall change when and as said Prime Rate shall change;
provided, however, that (i) in no event shall the interest rate in effect
hereunder at any time be less than 9% per annum; and (ii) interest payable
hereunder with respect to each calendar month shall not be less than $5,950.00
regardless of the amount of loans, advances or other credit extensions that
actually may have been outstanding during the month. Interest is due and payable
on the first day of each calendar month and at maturity (the Initial Rate, the
Adjusted Rate as well as other rates of interest referred to herein shall be
referred to collectively herein as the "Rate of Interest"). The term "Prime
Rate" means the rate established by Norwest Bank in its sole discretion from
time to time as its Prime or Base Rate, and the undersigned acknowledges that
Norwest Bank and/or Lender may lend to its customers at rates that are at, above
or below the Prime Rate. Notwithstanding the foregoing, while an Event of
Default occurs and continues to exist, this Note shall bear interest until fully
paid at five percent (5%) per annum in excess of the rate otherwise then in
effect, which rate shall continue to vary based on further changes in the Prime
Rate; provided, however, that after an Event of Default, (i) in no event shall
the interest rate in effect hereunder at any time be less than 14% per annum;
and (ii) interest payable hereunder with respect to each calendar month shall
not be less than $8,660.00 regardless of the amount of loans, advances or other
credit extensions that actually may have been outstanding during the month. The
undersigned also shall pay the holder of this Note a late fee equal to 10% of
any payment under this Note that is more than 10 days past due.
In the event the undersigned earns "Net Profit" (as defined in the Credit
Agreement) for the 12 months ending October 31, 1999 of at least One Million
Dollars ($1,000,000) and evidences such profit by delivering to Lender a
financial statement prepared according to GAAP that
<PAGE>
reflects the required Net Profit, and provided no Event of Default exists or has
occurred, then upon the written request of the undersigned, the Initial Rate
shall be reduced to Two and One Half percent (2 1/2%) in excess of the Prime
Rate (the "Adjusted Rate") commencing with the next scheduled Monthly Payment
Date (as defined in the Credit Agreement) following Lender's receipt of
Borrower's written request.
All interest, principal, and any other amounts owing hereunder are due on
November 18, 2000 or earlier UPON DEMAND by Lender or any holder hereof, and
Lender specifically reserves the absolute right to demand payment of all such
amounts at any time, with or without advance notice, for any reason or no reason
whatsoever. Lender's right to make such demand is not exclusive and Lender may
coincidentally or separately from such demand make further demand for payment
pursuant to the terms hereof (including but not limited to upon the occurrence
of an Event of Default), and further, amounts may become due hereunder without a
demand by Lender.
All or any part of the unpaid balance of this Note may be prepaid upon sixty
days prior written notice, provided, however, that if this Note is fully
pre-paid prior to November 1, 2000, then there shall be a prepayment charge as
provided in the Credit Agreement.. At the option of the then holder of this
Note, any payment under this Note may be applied first to the payment of other
charges, fees and expenses under this Note and any other agreement or writing in
connection with this Note, second to the payment of interest accrued through the
date of payment, and third to the payment of principal. Amounts may be advanced
and readvanced under this Note at the Lender's sole and absolute discretion,
provided the principal balance outstanding shall not exceed the amount first
above written. Neither the Lender nor any other person has any obligation to
make any advance or readvance under this Note.
The occurrence of any of the following events shall constitute an Event of
Default under this Note: (i) any default in the payment of this Note; or (ii)
any other default under the terms of any now existing or hereafter arising debt,
obligation or liability of any maker, endorser, guarantor or surety of this Note
or any other person providing security for this Note or for any guaranty of this
Note, including, but not limited to, that certain General Credit and Security
Agreement dated November 2, 1998 ("Credit Agreement") and Validity Guarantees of
David C. Malmberg and Karen L. Engebretson dated November 2, 1998; or (iii) the
insolvency (other than the insolvency of the undersigned), death dissolution,
liquidation, merger or consolidation of any such maker, endorser, guarantor,
surety or other person; or (iv) any appointment of a receiver, trustee or
similar officer of any property of any such maker, endorser, guarantor, surety
or other person; or (v) any assignment for the benefit of creditors of any such
maker, endorser, guarantor, surety or other person; or (vi) any commencement of
any proceeding under any bankruptcy, insolvency, dissolution, liquidation or
similar law by or against any such maker, endorser, guarantor, surety or other
person, provided however, that if such a proceeding is commenced against the
maker hereof or any Guarantor on an involuntary basis, then only if such action
is not dismissed within 60 days of first being filed; or (vii) the sale, lease
or other disposition (whether in one transaction
<PAGE>
or in a series of transactions) to one or more persons of all or a substantial
part of the assets of any such maker, endorser, guarantor, surety or other
person; or (viii) any such maker, endorser, guarantor, surety or other person
dies or takes any action to revoke or terminate any agreement, liability or
security in favor of the Lender; or (ix) the entry of any judgment or other
order for the payment of money in the amount of $10,000.00 or more against any
such maker, endorser, guarantor, surety or other person which judgment or order
is not discharged or stayed in a manner acceptable to the then holder of this
Note within 10 days after such entry; or (x) the issuance or levy of any writ,
warrant, attachment, garnishment, execution or other process against any
property of any such maker, endorser, guarantor, surety or other person; or (xi)
the issuance or attachment of any tax lien or tax levy against any property of
any such maker, endorser, guarantor, surety or other person which is other than
for taxes or assessments not yet due and payable; or (xii) any statement,
representation or warranty made by any such maker, endorser, guarantor, surety
or other person (or any representative of any such maker, endorser, guarantor,
surety or other person) to any present or future holder of this Note at any time
shall be false, incorrect or misleading in any material respect when made; or
(xiii) there is a material adverse change in the condition (financial or
otherwise), business or property of any such maker, endorser, guarantor, surety
or other person. Upon the occurrence of any Event of Default described in
subparagraphs (iii), (iv), (v) or (vi) above, all amounts outstanding under this
Note (including unpaid principal, interest and other charges due or accruing
hereunder) shall be and become immediately due and payable without any
declaration, notice, presentment, protest, demand or dishonor of any kind (all
of which are hereby waived by Borrower) and Borrower's ability to obtain any
additional credit extensions or advances under this Note shall be immediately
and automatically terminated. Upon the occurrence of an Event of Default and at
any time thereafter while an Event of Default is continuing, the then holder of
this Note may, at its option, declare this Note to be immediately due and
payable and thereupon this Note shall become due and payable for the entire
unpaid principal balance of this Note plus accrued interest and other charges on
this Note without any presentment, demand, protest or other notice of any kind.
The undersigned: (i) waives demand, presentment, protest, notice of protest,
notice of dishonor and notice of nonpayment of this Note; (ii) agrees to
promptly provide all present and future holders of this Note from time to time
with financial statements of the undersigned and such other information
respecting the financial condition, business and property of the undersigned as
any such holder of this Note may reasonably request, in form and substance
acceptable to such holder of this Note; (iii) agrees that when or at any time
after this Note becomes due the then holder of this note may offset or charge
the full amount owing on this note against any account then maintained by the
undersigned with such holder of this Note without notice; (iv) agrees to pay on
demand all fees, costs and expenses of all present and future holders of this
Note in connection with this Note and any security and guaranties for this Note,
including but not limited to audit fees and expenses and reasonable attorneys'
fees and legal expenses, plus interest on such amounts at the rate set forth in
this Note; and (v) consents to the personal jurisdiction of the state and
federal courts located in the State of Minnesota in connection with any
controversy related in any way to this Note or any security of guaranty for this
Note, waives any argument that venue in such forums is not convenient, and
agrees that any litigation initiated by the undersigned against the Lender or
any other present or future holder of this Note relating in any
<PAGE>
way to this Note or any security or guaranty for this Note shall be venued (at
the sole option of Lender or the holder hereof) in either the District Court of
Dakota or Hennepin County, Minnesota, or the United States District Court,
District of Minnesota. Interest on any amount under this Note shall continue to
accrue, at the option of any present or future holder of this Note, until such
holder receives final payment of such amount in collected funds in form and
substance acceptable to such holder. The maker agrees that, if it brings any
action or proceeding arising out of or relating to this Agreement, it shall
bring such action or proceeding in the District Court of Hennepin County,
Minnesota.
In the event a court of competent jurisdiction determines that any of the
figures called the Rate of Interest violates any usury laws or any other law,
then, such Rate of Interest or other provision shall be accordingly and
retroactively adjusted or modified to comply with the highest rate allowed under
applicable law. Further, if any provision or application of any provision of
this Note other than the Rate of Interest (including but not limited to any
provision relating to the calculation of interest) is held unlawful or
unenforceable in any respect (including but not limited to any usury or similar
law), such illegality or unenforceability shall not affect other provisions or
applications which can be given effect, and this Note shall be construed as if
the unlawful or unenforceable provision or application had never been contained
herein or prescribed hereby. The undersigned waives notice of acceptance hereof.
No waiver of any right or remedy under this Note shall be valid unless in
writing executed by the holder of this Note, and any such waiver shall be
effective only in the specific instance and for the specific purpose given. All
rights and remedies of all present and future holders of this Note shall be
cumulative and may be exercised singly, concurrently or successively. The
undersigned, if more than one, shall be jointly and severally liable under this
Note, and the term "undersigned," wherever used in this Note, shall mean the
undersigned or any one or more of them. This Note shall bind the undersigned and
the successors and assigns of the undersigned. This Note shall be governed by
and construed in accordance with the laws of the State of Minnesota.
THE UNDERSIGNED REPRESENTS, CERTIFIES, WARRANTS AND AGREES THAT THE UNDERSIGNED
HAS READ ALL OF THIS NOTE AND UNDERSTANDS ALL OF THE PROVISIONS OF THIS NOTE.
THE UNDERSIGNED ALSO AGREES THAT COMPLIANCE BY ANY PRESENT OR FUTURE HOLDER OF
THIS NOTE WITH THE EXPRESS PROVISIONS OF THIS NOTE SHALL CONSTITUTE GOOD FAITH
AND SHALL BE CONSIDERED REASONABLE FOR ALL PURPOSES.
FIELDWORKS, INCORPORATED
By /s/ David C. Malmberg
--------------------------
David C. Malmberg
CEO
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report incorporated by reference in this Form 10-K into the Company's previously
filed Registration Statement File No. 333-26297.
/s/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
April 2, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JAN-03-1999 JAN-04-1998
<PERIOD-START> JAN-05-1998 JAN-06-1997
<PERIOD-END> JAN-03-1999 JAN-04-1998
<CASH> 1,690,469 3,218,759
<SECURITIES> 0 0
<RECEIVABLES> 3,930,366 6,402,023
<ALLOWANCES> 0 0
<INVENTORY> 3,400,744 5,009,137
<CURRENT-ASSETS> 9,143,359 14,816,217
<PP&E> 3,188,566 2,192,216
<DEPRECIATION> 1,393,342 913,918
<TOTAL-ASSETS> 10,955,968 16,120,070
<CURRENT-LIABILITIES> 5,066,161 3,298,759
<BONDS> 0 0
0 0
0 0
<COMMON> 8,824 8,725
<OTHER-SE> 5,784,115 12,789,893
<TOTAL-LIABILITY-AND-EQUITY> 10,955,968 16,120,070
<SALES> 20,001,787 23,815,045
<TOTAL-REVENUES> 20,001,787 23,815,045
<CGS> 14,199,526 14,620,121
<TOTAL-COSTS> 14,199,526 14,620,121
<OTHER-EXPENSES> 3,214,164 1,884,128
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (157,333) 257,561
<INCOME-PRETAX> (7,124,187) (1,023,978)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,124,187) (1,023,978)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,124,187) (1,023,978)
<EPS-PRIMARY> (.81) (.12)
<EPS-DILUTED> (.81) (.12)
</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:
Uncertainty of Market Acceptance
The field force automation market for rugged computing platforms is a
relatively new, limited sector of the portable computer market. The Company's
success will depend upon expanding its professional services offering,
penetrating the key vertical markets of transportation/trucking, public service
and government/military, and increasing the market acceptance of its products,
which are both heavier and more expensive than most consumer portable personal
computers. There can be no assurance that the Company's current or new 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 Dolch Computer Systems; Getac Corp.; XL
Computing Corp. (a subsidiary of Cycomm International, Inc.); Itronix Corp.;
Kontron Elektronik Corp. (a subsidiary of Kontron Elektronik GmbH); Paravant
Computer Systems, Inc.; Motorola, Inc.; Melard Technologies, Inc.; WPI Husky
Computers Inc.; Intermec Technologies Corp. 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 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.
-1-
<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 1998, 1997 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 professional
services offerings and improve the efficiency of its manufacturing operations.
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 Company is evaluating outsourcing of work where
value is not recognized by customers and which reduces operating expenses and
production costs. The failure of the Company to manage growth could have a
material 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 original equipment manufacturers (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 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.
-2-
<PAGE>
Dependence on Third-Party Manufacturers
Although the Company performs some mechanical subassembly and all final
assembly of its products, the Company relies on subcontract manufacturers to
produce a number of subassemblies. Utilization of subcontract 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 could 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 could 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 long customer sales cycles, changes in customer
buying patterns, the timing of the 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 fluctuations in the
orders for its products due to 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.
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.
-3-
<PAGE>
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 January 3, 1999 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 Work Station notebook computing platforms and the technology
incorporated in such platforms and a regional foreign patent application that
includes 17 European countries 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 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 for 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 trademarks and filed for registration in June
1996. 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 U.S. Patent and Trademark Office 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 an the
Company's business, financial condition and results of operations.
-4-
<PAGE>
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. Qualified
individuals in such areas are in high demand and are often subject to competing
employment opportunities. In addition, as the Company increases its product
offering, 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 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 3, 1999, international sales of the Company's
products represented approximately 28% 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 accordance with the terms of the line of credit facility established in
the fourth quarter of 1998, if certain covenants are not met by the Company in
fiscal year 1999, the Lender has the right to request immediate payment of the
outstanding line of credit. Failure to meet any covenant requirements could
adversely affect the Company's business, financial condition and results of its
operations.
In order to meet its needs during and beyond the end of 1999, 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 financing 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.
Year 2000
In order to ensure no interruption of operations after 1999, the Company
needs to ensure it is Year 2000 compliant. The scope of compliance includes the
Company's products, internal computer systems and non-computer operations,
production processes, key vendors, vital business partners and critical
customers. Failure to adequately evaluate or assess any Year 2000 issues and/or
develop contingency plans could adversely affect the Company and its operations,
including ability to deliver products to customers.
The foregoing review of factors pursuant to the Act should not be construed
as exhaustive.
-5-
