<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
[X] Filed by the Registrant
[_] Filed by a Party other than the Registrant
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to ss. 240.14a-12
FieldWorks, Incorporated
- ---------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
-----------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing is calculated and state how it was determined):
-----------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
-----------------------
5) Total fee paid:
--------------------------------------------------------
[_] Fee paid previously by written preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
--------------------------------------------
2) Form Schedule or Registration Statement No.:
-----------------------
3) Filing Party:
------------------------------------------------------
4) Date Filed:
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<PAGE>
FieldWorks, Incorporated
7631 Anagram Drive
Eden Prairie, MN 55344
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
Thursday, January 27, 2000
3:00 p.m.
----------------
TO THE SHAREHOLDERS OF FIELDWORKS, INCORPORATED:
Notice is hereby given that a Special Meeting of Shareholders of
FieldWorks, Incorporated (the "Company") will be held on Thursday, January 27,
2000, at the Minneapolis Marriott Southwest, 5801 Opus Parkway, Minnetonka,
Minnesota at 3:00 p.m., Minneapolis, Minnesota time, for the following
purpose:
1. To approve the transactions contemplated by that certain Securities
Purchase Agreement dated November 20, 1999, between the Company and
Industrial-Works Holding Corp., a wholly owned subsidiary of Glenmount
International, L.P., including the issuance and sale to Industrial-
Works of 4,250,000 shares of Series B Preferred Stock of the Company
and a warrant to purchase 500,000 shares of common stock, $.001 par
value, of the Company (the "Common Stock").
2. To approve that certain Voting Agreement dated November 20, 1999 by and
among the Company, Industrial-Works, and certain officers and directors
of the Company and their affiliates (the "Voting Agreement"), and the
voting rights of the shares subject to the Voting Agreement.
Only holders of record of the Company's Common Stock at the close of
business on December 15, 1999, will be entitled to receive notice of and to
vote at the meeting or any adjournment thereof.
You are cordially invited to attend the meeting. Whether or not you plan to
be personally present at the meeting, please complete, date and sign the
enclosed proxy card and return it promptly in the enclosed envelope. If you
later desire to revoke your proxy, you may do so at any time before it is
exercised.
BY ORDER OF THE BOARD OF DIRECTORS
David G. Mell
President and Chief Executive
Officer
Eden Prairie, MN
December 29, 1999
IMPORTANT--PLEASE MAIL YOUR PROXY CARD PROMPTLY
In order that there may be a proper representationat the
meeting, you are urged, whether you own oneshare or many, to
complete, sign and mail your proxy.
<PAGE>
FieldWorks, Incorporated
7631 Anagram Drive
Eden Prairie, Minnesota 55344
----------------
PROXY STATEMENT
for
Special Meeting of Shareholders
to be held January 27, 2000
----------------
INTRODUCTION
This Proxy Statement is being furnished to the shareholders of FieldWorks,
Incorporated (the "Company"), in connection with the solicitation by the Board
of Directors of the Company of proxies to be voted at the Special Meeting of
Shareholders (the "Special Meeting") to be held on Thursday, January 27, 2000
at 3:00 p.m., and at any adjournment thereof, to approve the transactions
contemplated by that certain Securities Purchase Agreement (the "Purchase
Agreement") dated as of November 20, 1999, between the Company and Industrial-
Works Holding Corp. ("Industrial-Works"), including the issuance and sale to
Industrial-Works of 4,250,000 shares of Series B Convertible Participating
Preferred Stock of the Company (the "Series B Preferred Stock" and such shares
of Series B Preferred Stock, the "Series B Shares"), each share of which is
convertible into one share of the Company's Common Stock, par value $.001 per
share, (the "Common Stock"); the issuance of a warrant to purchase 500,000
shares of Common Stock; and the issuance of Common Stock upon exercise of the
warrant and the conversion of the Series B Shares (collectively, the "Common
Shares") (the "Transaction"). Following the Transaction, Industrial-Works will
own or have the right to acquire approximately 35% of the outstanding Common
Stock of the Company, assuming conversion of the Series B Shares and Warrant
into shares of Common Stock. In addition, the shareholders will be asked to
approve that certain Voting Agreement dated as of November 20, 1999 by and
among the Company, Industrial-Works and certain officers and directors of the
Company and their affiliates (the "Voting Agreement") entered into pursuant to
the terms of the Purchase Agreement, together with the voting rights of the
shares subject to the Voting Agreement. This Proxy Statement and the
accompanying proxy were first mailed to shareholders on or about December 29,
1999.
The cost of soliciting Proxies, including preparing, assembling and mailing
the Proxies and soliciting material will be borne by the Company. Directors,
officers and regular employees of the Company may, without compensation other
than their regular compensation, solicit Proxies personally or by letter or
telephone. Industrial-Works and its affiliates may, without additional
compensation, also solicit Proxies.
Any shareholder giving a Proxy may revoke it at any time prior to its use
at the Special Meeting by giving written notice of such revocation to the
Secretary or other officer of the Company or by filing a new written Proxy
with an officer of the Company. Personal attendance at the Special Meeting is
not, by itself, sufficient to revoke a Proxy unless written notice of the
revocation or a subsequent Proxy is delivered to an officer before the revoked
or superseded Proxy is used at the Special Meeting.
The presence at the Special Meeting in person or by proxy of the holders of
a majority of the outstanding shares of the Company's Common Stock entitled to
vote shall constitute a quorum for the transaction of business. Proxies not
revoked will be voted in accordance with the instructions specified by
shareholders by means of the ballot provided on the Proxy for that purpose.
Proxies which are signed but which lack any such specific instructions with
respect to the proposals will, subject to the following, be voted in favor of
the proposals set forth in the Notice of Special Meeting. If a shareholder
abstains from voting as to either proposal, then the shares held by such
shareholder shall be deemed present at the Special Meeting for purposes of
determining a quorum and for purposes of calculating the vote with respect to
the proposal, but shall not be deemed to have been voted in favor of the
proposal. Abstentions as to a proposal, therefore, will have the same effect
as votes against the
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<PAGE>
proposal. If a broker returns a "non-vote" proxy, indicating a lack of voting
instruction by the beneficial holder of the shares and a lack of discretionary
authority on the part of the broker to vote on the proposals, then the shares
covered by such non-vote proxy shall be deemed present at the Special Meeting
for purposes of determining a quorum, but shall not be deemed to be present at
the Special Meeting for purposes of calculating the vote required for approval
of the proposal.
OUTSTANDING SHARES AND VOTING RIGHTS
The Board of Directors of the Company has fixed December 15, 1999, as the
record date (the "Record Date") for determining shareholders entitled to vote
at the Special Meeting. Persons who were not shareholders on the Record Date
will not be allowed to vote at the Special Meeting. At the close of business
on the Record Date, 8,894,426 shares of the Company's Common Stock and no
shares of preferred stock were issued and outstanding. Each share of Common
Stock is entitled to one vote on each matter to be voted upon at the Special
Meeting. Holders of the Common Stock are not entitled to cumulative voting
rights. Generally, the affirmative vote of a majority of the shares of Common
Stock present and entitled to vote is required for the approval of the matter
to be acted upon. However, if the shares present and entitled to vote on the
matter would not constitute a quorum for the transaction of business at the
meeting, then the matter must be approved by a majority of the voting power of
the minimum number of shares that would constitute such a quorum. Under the
Company's Bylaws, a majority of the shares entitled to vote constitutes a
quorum for the transaction of business at the meeting.
----------------
PROPOSAL ONE:
TO APPROVE THE TRANSACTIONS
CONTEMPLATED BY THE PURCHASE AGREEMENT,
INCLUDING THE ISSUANCE OF
THE SERIES B SHARES, THE WARRANT AND THE COMMON SHARES
TO INDUSTRIAL-WORKS HOLDING CORP.
----------------
SUMMARY OF THE TRANSACTION
On November 20, 1999, the Company entered into the Purchase Agreement with
Industrial-Works, pursuant to which Industrial-Works will, for an aggregate
purchase price of $4,250,000, acquire 4,250,000 newly-issued shares of the
Company's Series B Preferred Stock (each share of which is initially
convertible into one share of Common Stock) and a warrant to purchase an
additional 500,000 newly-issued shares of the Company's Common Stock, in each
case, at a price of $1.00 per share. The Purchase Agreement provides that,
upon closing, three of the seven members of the Company's Board of Directors
will resign and the Company's Board of Directors will appoint three members
designated by Industrial-Works. Moreover, if the Company fails to meet certain
financial goals, the number of members of the Board of Directors may be
increased by two and Industrial-Works shall have the right to nominate the two
additional members of the Board of Directors. Industrial-Works intends to pay
for the transactions contemplated by the Purchase Agreement with the proceeds
of a capital contribution by its sole shareholder. The consummation of the
transactions contemplated by the Purchase Agreement is contingent upon
receiving Company shareholder approval.
In connection with entering into the Purchase Agreement, the Company and
certain of its shareholders have entered into certain ancillary agreements
with Industrial-Works and Glemount, LLC ("Glenmount"), an affiliate of
Industrial-Works. First, the Company and Glenmount have entered into a
management services agreement (the "Services Agreement") whereby
representatives of Glenmount will perform advisory and consulting services for
the Company for a period of one year, commencing on the date of the Services
Agreement. The primary services consist of providing active and continuing
support to the Company's management in identifying, developing and executing
all major strategic, acquisition, operational and financial opportunities for
the Company.
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<PAGE>
Second, the Company, Industrial-Works and certain of the shareholders of
the Company holding approximately 21% of the outstanding Common Stock of the
Company have entered into a voting agreement (the "Voting Agreement") pursuant
to which such shareholders have agreed to vote all of their shares in favor of
approval of the Purchase Agreement and all transactions contemplated thereby,
and for a period of three years following the Closing, in favor of the
election to the Board of Directors of the nominees designated by Industrial-
Works. See "Proposal Two: Approval of the Voting Agreement and the Voting
Rights of the Shares Subject to the Voting Agreement." These shareholders have
also agreed under the Voting Agreement to restrictions on the sale, transfer,
exercise or conversion of their shares, options and warrants on or prior to
March 20, 2000.
Following the closing, Industrial-Works will own or have the right to
acquire up to approximately 27% of the Company's outstanding Common Stock on a
fully diluted basis (assuming exercise of the warrant and the conversion of
the Series B Preferred Stock).
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" APPROVAL
OF THE TRANSACTIONS CONTEMPLATED BY THE PURCHASE AGREEMENT, INCLUDING THE
ISSUANCE AND SALE TO INDUSTRIAL-WORKS OF THE SERIES B SHARES, THE WARRANT AND
THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANT AND THE
CONVERSION OF THE SERIES B SHARES.
THE TRANSACTION
Securities Purchase Agreement
Set forth below is a summary of all of the material terms of the Purchase
Agreement. This description is only a summary and does not purport to be
complete and is qualified in its entirety by, and made subject to, the
Purchase Agreement, a copy of which is attached as Appendix A to this Proxy
Statement and incorporated herein by reference.
General
The Company and Industrial-Works entered into the Purchase Agreement on
November 20, 1999. Pursuant to the Purchase Agreement, the Company has agreed
to issue and sell to Industrial-Works and Industrial-Works has agreed to
purchase from the Company for an aggregate purchase price of $4,250,000 (the
"Purchase Price") (i) 4,250,000 shares of Series B Preferred Stock (the
"Series B Shares") and (ii) a warrant (the "Warrant") to purchase an
additional 500,000 shares of Common Stock at an exercise price of $1.00 per
share, exercisable on the seventh anniversary of the date of the closing of
the transactions contemplated by the Purchase Agreement (the "Closing"),
subject to acceleration of exercisability if the Company's Common Stock price
attains certain thresholds.
The Closing will take place as promptly as practicable after satisfaction
or waiver of the conditions to closing set forth in the Purchase Agreement and
described below. At the Closing, (i) Industrial-Works will pay to the Company
the Purchase Price; (ii) the Company will issue to Industrial-Works the Series
B Shares and (iii) the Company will issue to Industrial-Works the Warrant.
Covenants
Under the Purchase Agreement, the parties have agreed to certain matters as
described below.
Board of Directors. The Company and Industrial-Works have agreed that
concurrent with the Closing, a meeting of the Board of Directors of the
Company will be held, and at that meeting the number of directors constituting
the Board will be fixed at seven, three current directors will resign from the
Board of Directors, and three persons designated by Industrial-Works will be
added to the Board. See "Board of Directors After the Financing." So long as
the Warrant or any Series B Shares remain outstanding, the holders of the
Series B Shares
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<PAGE>
have the right to designate three directors of the Company, and, if operating
losses exceed agreed-upon levels or future operating profits do not reach
certain agreed-upon levels, have the right to expand the Company's Board of
Directors from seven to nine and to designate two additional directors. If
Industrial-Works elects to expand the Board of Directors to nine in such
circumstances, then within six months following the appointment of such two
additional directors, Industrial-Works must either convert the Series B Shares
into shares of Common Stock or relinquish its right to appoint the additional
two directors. See "Description of Capital Stock--Rights and Preferences of
the Series B Convertible Participating Preferred Stock."
No Solicitation; Restrictive Agreements Prohibited. Under the Purchase
Agreement, the Company may not seek, initiate or encourage any agreement,
transaction or discussions with respect to an acquisition of the Company or
its assets or business, or a combination with the Company, or a financing
transaction proposal as an alternative to the transactions contemplated by the
Purchase Agreement (a "Competing Proposal"). In addition, the Company may not
become a party to any agreement which, by its terms, restricts the Company's
performance of its obligations with respect to the transactions contemplated
by the Purchase Agreement.
Conduct of the Company's Business Pending the Closing. The Company has
agreed that, prior to the Closing, without the prior written consent of
Industrial-Works, it will not take any of the actions set forth in the
description of "other voting rights" of the Series B Preferred Stock in the
section "Description of Capital Stock--Rights and Preferences of Series B
Convertible Participating Preferred Stock" below.
Fees and Expenses. The Company is required to pay all reasonable out-of-
pocket due diligence expenses and outside legal and consulting fees and
expenses of Industrial-Works incurred in connection with the Transaction,
provided the payment for such expenses shall be limited to $50,000, except as
otherwise provided in the Purchase Agreement.
Other Covenants. The Company and Industrial-Works have also agreed to
certain matters regarding the following: (i) convening of the Special Meeting
and execution and delivery of the Voting Agreement; (ii) SEC filings; (iii)
financial statements and reports; (iv) reserve for conversion and warrant
shares; (v) maintaining the Company's corporate existence; (vi) properties,
business and insurance; (vii) access to information; (viii) compliance with
laws; (ix) keeping of records and books of account; and (x) publication
matters.
Conditions to Closing
Under the Purchase Agreement, the obligation of Industrial-Works to
purchase and pay for the Series B Shares is subject to the fulfillment of the
following conditions any and all of which may be waived, in whole or in part,
to the extent permitted by applicable law: (i) the Company shall have obtained
approval of the transactions contemplated by the Purchase Agreement from its
shareholders; (ii) the Company shall have executed and delivered the Warrant;
(iii) the Company shall have executed and delivered the Services Agreement and
shall not be in default on any monthly payment to Industrial-Works pursuant to
such agreement; (iv) the Company shall have executed and delivered, and each
of its current officers and directors and their respective affiliates (owning
an aggregate of not less than 1,700,000 shares of Common Stock) shall have
executed and delivered, the Voting Agreement within five business days of the
execution of the Purchase Agreement; (v) the Company shall have taken all
necessary actions and obtained all needed resignations so that, immediately
following the Closing, the Company's Board of Directors consists of those
persons named in the section "Board of Directors After the Financing" below;
(vi) Industrial-Works shall have received an opinion of counsel for the
Company; (vii) the representations and warranties of the Company contained in
the Purchase Agreement shall have been true, complete and correct on the date
of the Purchase Agreement; (viii) the Company shall have performed and
complied with all agreements contained in the Purchase Agreement required to
be performed prior to or at the Closing Date; (ix) all corporate and other
proceedings to be taken by the Company in connection with the Transaction and
all documents incident thereto shall be reasonably satisfactory in form and
substance to Industrial-Works; (x) Industrial-Works shall have received copies
of the Company's Articles of Incorporation certified by the Minnesota
Secretary of State and a certificate of the Minnesota Secretary of State
certifying as to
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<PAGE>
the due incorporation and good standing of the Company and the payment of all
applicable taxes by the Company; (xi) the Board of Directors shall have
adopted the Series B Certificate and such Certificate shall have been filed
with the Minnesota Secretary of State and have become effective; (xii) all
third-party consents and approvals shall have been obtained and all
preemptive, first refusal or other rights shall have been irrevocably waived
in writing; (xiii) no Material Adverse Change (as defined in Section 6.17 of
the Purchase Agreement) shall have occurred since October 3, 1999; (xiv) the
Company shall have paid the fees and expenses due to Industrial-Works under
the Purchase Agreement; and (xv) the Company shall have maintained in effect
directors' and officers' liability insurance coverage, ensuring an aggregate
of at least $5,000,000 in such liability insurance coverage.
Termination
The Purchase Agreement may be terminated (i) at any time by mutual written
consent of the Company and Industrial-Works, (ii) by Industrial-Works by
written notice to the Company if all conditions to Closing have not been
satisfied prior to February 11, 2000; (iii) by the Company following a
Competing Proposal which is made in a manner which becomes public; or (iv) by
either the Company or Industrial-Works following a material breach by the
other party to the Purchase Agreement, provided that if such breach is
curable, the Purchase Agreement may only be terminated if, after ten business
days notice, the party in breach has not cured such breach or commenced
diligent efforts to cure such breach. If the Purchase Agreement is terminated
by Industrial-Works pursuant to (ii) above, the limitation on expenses payable
by the Company to Industrial-Works would be increased from $50,000 to $85,000.
Termination of the Purchase Agreement will not relieve any party of
liability for breaches of the Purchase Agreement which occurred prior to
termination.
In the event that the Company receives a Competing Proposal in a manner
which is or becomes public and the Purchase Agreement is terminated following
such proposal, then the Company is required, simultaneously with termination
of the Purchase Agreement, to pay Industrial-Works a fee (the "Breakup Fee")
in the amount of $500,000 or, if greater, 2.5% of the value of the Company as
established by the transaction contemplated in the Competing Proposal. If, in
the absence of a Competing Proposal, the shareholders of the Company do not
approve the Transaction, the Company is required to pay Glenmount, LLC the
$100,000 required under the terms of the Services Agreement and is required to
issue to Industrial-Works a warrant for 250,000 shares of the Company's Common
Stock at a purchase price of $1.00 per share (the "Break-up Warrant"). The
Break-up Warrant, if issued, will be exercisable immediately and will expire
if not exercised within five years.
Additional Matters
Except as otherwise provided in the Purchase Agreement, the parties will
pay their own fees and expenses, including their own counsel fees, incurred in
connection with the Purchase Agreement and any transaction contemplated
thereby.
The Warrant
The Company has also agreed under the Purchase Agreement to issue the
Warrant at the Closing. Upon issuance, the Warrant will entitle Industrial-
Works to purchase an additional 500,000 shares of Common Stock of the Company
at a purchase price of $1.00 per share. The Warrant will be exercisable on the
seventh anniversary of the date of the Closing, except that the vesting of the
Warrant will accelerate with respect to a portion of the shares covered
thereby in the event that the closing price of the Company's Common Stock
averages a certain price for five consecutive trading days, as follows:
<TABLE>
<CAPTION>
5-day Average Cumulative Number of
Closing Price Shares Exercisable
------------- --------------------
<S> <C>
$2.50............................................... 166,700
$3.75............................................... 333,400
$5.00............................................... 500,000
</TABLE>
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<PAGE>
The Warrant provides for proportionate adjustment to the number of shares
subject to the Warrant and the Warrant exercise price in the event of stock
splits and combinations, stock dividends and distributions, reclassification
of stock, a reorganization of the Company, or certain sales of shares below
the Warrant's exercise price.
At the option of the holder of the Warrant, all or any portion of the
Warrant exercise price may be paid by surrendering a portion of the shares
issuable upon exercise of the Warrant. The value of the shares so surrendered
shall be the closing price of the Company's Common Stock on the date of the
holder's notice of exercise.
The foregoing is a brief summary of each of the material terms of the
Warrant. This summary does not purport to be complete and is qualified in its
entirety by, and made subject to, the form of Warrant, a copy of which is
attached as Appendix B to this Proxy Statement and incorporated herein by
reference.
The Voting Agreement
The Company, Industrial-Works and each of the officers and directors of the
Company, together with certain of their affiliates (collectively, the
"Shareholders"), have entered into a voting agreement dated as of November 20,
1999 (the "Voting Agreement") pursuant to which the Shareholders have agreed
that (i) they will not transfer, sell, assign or otherwise dispose of, in
whole or in part, any of their shares in the Company prior to March 20, 2000,
(ii) they will not transfer, sell, assign, or otherwise dispose of, or
convert, exercise or attempt to exercise or convert, in whole or in part, any
options convertible into, or warrants to purchase, shares of the Company's
Common Stock held by them on or prior to March 20, 2000, and (iii) they will
vote or cause to be voted each of their shares at every annual or special
meeting of the shareholders of the Company (a) in favor of approval of the
Purchase Agreement and all transactions contemplated thereby, and (b) for a
period of three years following the Closing, in favor of the election to the
Board of Directors of the nominees designated by Industrial-Works.
A copy of the Voting Agreement is attached as Appendix C to this Proxy
Statement and incorporated herein by reference. The Voting Agreement will also
be submitted to the Company's shareholders for a vote. See "Proposal Two:
Approval of the Voting Agreement and the Voting Rights of the Shares Subject
to the Voting Agreement."
The Services Agreement
The Purchase Agreement provides that the parties will enter into a
management services agreement in the form attached as an exhibit thereto (the
"Services Agreement"). This agreement was entered into on November 20, 1999.
Under the Services Agreement, Glenmount, LLC, an affiliate of Industrial-Works
and Glenmount International, L.P., will perform advisory and consulting
services for the Company for a period of one year, commencing on the date of
the Services Agreement. The primary services consist of providing active and
continuing support to the Company's management in identifying, developing and
executing all major strategic, acquisition, operational and financial
opportunities for the Company.
During the first three months of this agreement, Robert Forbes, one of the
director-designees of Industrial-Works, will provide these services. Following
the initial three months of this agreement, Glenmount, in consultation with
the Company's Board of Directors, shall determine who will provide these
services. Glenmount may also provide other services, as Glenmount and the
Company may subsequently agree upon pursuant to the terms of the Services
Agreement. In the case of investment banking services, Glenmount is entitled
to customary fees on terms reasonably approved by the Company's Board of
Directors. In consideration for Glenmount's obligations under the Services
Agreement, the Company is required to pay Glenmount a fee equal to (a) $10,000
on the date of the Services Agreement, (b) $10,000 within 30 days after the
date of such agreement, (c) $10,000 within 60 days after the date of such
agreement, and (d) $200,000 simultaneously with the Closing, together with
reasonable reimbursement of expenses. The Services Agreement may be renewed by
the parties.
The foregoing is a brief summary of each of the material terms of the
Services Agreement. This summary does not purport to be complete and is
qualified in its entirety by, and made subject to, the Services Agreement, a
copy of which is attached as Appendix D to this Proxy Statement and
incorporated herein by reference.
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Board of Directors after the Financing
Upon the closing of the financing, Robert W. Heller, Robert C. Szymborski
and Richard J. York will resign from the Company's existing Board of
Directors. The holders of the Series B Shares will have the right to nominate
three members to the Board of Directors, who initially shall be Richard J.
Boyle, Robert D. D. Forbes and Michael E. Johnson. The remaining members of
the Board of Directors will be Gary J. Beeman, James A. Bernards, David C.
Malmberg and David G. Mell, and Mr. Malmberg shall remain Chairman of the
Board. The consent of the directors nominated by the Series B Shares would be
required to increase the number of directors.
If the Company's operating losses exceed certain agreed-upon levels or
future operating profits fail to reach certain agreed-upon levels, Industrial-
Works could have the right to expand the Company's Board of Directors from
seven to nine and to appoint five of the nine Board members. If Industrial-
Works elects to expand the Board of Directors to nine in such circumstances,
then within six months following the appointment of five of the nine members
of the Board of Directors, Industrial-Works must either convert the Series B
Shares into shares of Common Stock or relinquish its right to appoint the
additional two Board members.
The following information is furnished with respect to each of the
prospective members of the Board of Directors following the Closing:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gary J. Beeman.......... 45 Continuing Director
James A. Bernards....... 52 Continuing Director
Richard J. Boyle........ 65 Industrial-Works nominee
Robert D.D. Forbes...... 50 Industrial-Works nominee
Michael E. Johnson...... 39 Industrial-Works nominee
David C. Malmberg....... 56 Chairman, Continuing Director
David G. Mell........... 52 President & Chief Executive Officer, Continuing Director
</TABLE>
Gary J. Beeman was a co-founder of the Company and has served as its Vice
Chairman of the Board of Directors since March 1998 and as its Treasurer and a
member of the Board of Directors of the Company since the Company's inception
in October 1992. He also served as the Company's Chairman of the Board of
Directors until January 1997, as its President until April 1997 and as its
Chief Executive Officer until March 1998.
James A. Bernards has served as a director of the Company since January
1999. He is President of Brightstone Capital, Ltd., a venture fund and
President of Facilitation, Inc., a business consulting services company. Mr.
Bernards was a co-founder and President of the accounting firm Stirtz,
Bernards, & Co. from 1981 to 1993. He serves on the boards of directors of FSI
International, Inc. and Health Fitness Inc. and several privately held
companies.
Richard J. Boyle has been a director of Glenmount Investment, LLC, the
general partner of Glenmount International, L.P., since February 1998. He has
been a director and Chairman and Chief Executive Officer of Spinnaker
Industries Inc., a manufacturer and marketer of adhesive-backed materials,
since June 1994. Mr. Boyle also has served as a Managing Director of Boyle
Fleming & Co., Inc., an investment and management firm, since 1993. From 1990
to 1992, Mr. Boyle was President and Chief Executive Officer of LTV Aerospace
and Defense Company, a manufacturer of aircraft, missiles, and specialty
vehicles. He was Corporate Vice President, Marketing and Business Development
of Honeywell Inc., a provider of products and systems for the industrial,
building, space, and marine markets from 1987 to 1990. Mr. Boyle is a director
of several privately held companies.
Robert D. D. Forbes has been a director of Glenmount Investment, LLC, the
general partner of Glenmount International, L.P., since February 1998. He was
a founder of Glenmount International, L.P., and has been Managing Director of
Glenmount, LLC, the manager of Glenmount International, L.P., since January
1998. From 1995 to 1997, Mr. Forbes was Senior Vice President of BCE Capital
Inc., a growth capital affiliate of Northern
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Telecom ("Nortel"). From 1989 to 1995, he was Vice President, Corporate
Development of Derlan Industries Limited, an industrial technology company.
From 1983 to 1989, Mr. Forbes served as an officer and director of Royal Bank
Venture Capital Limited, and became President of Royal Bank Capital
Corporation, the growth capital subsidiary of the Royal Bank of Canada. From
1980-1983, he was Vice President, Technology Development for TDC Technology
Development Corporation.
Michael E. Johnson has been a director of Glenmount Investment, LLC, the
general partner of Glenmount International, L.P., since February 1998. He is a
founder of Glenmount International, L.P., and has been Managing Director of
Glenmount, LLC, the manager of Glenmount International, L.P., since January
1998. Mr. Johnson was the founder of Bainbridge Group, a law corporation, and
served as its President and Chief Executive Officer from 1994 to 1998. From
1990 to 1994, he was counsel with Jones, Day, Reavis & Pogue, an international
law firm. From 1986 to 1990, Mr. Johnson was counsel with Shearman & Sterling,
an international law firm.
David C. Malmberg has served as Chairman of the Board of Directors since
January 1997 and as a director of the Company since October 1996. From July
1998 until July 1999, he also served as Chief Executive Officer of the
Company. Since 1994, Mr. Malmberg has been President of David C. Malmberg,
Inc., a management consulting and private investment management firm. From
1972 to 1994 he served in various positions, including Vice Chairman,
President and Chief Operating Officer, at National Computer Systems, Inc., a
provider of information systems and services to the educational, commercial
and financial markets. Mr. Malmberg is the Chairman of the Board of National
City Bancorporation, Chairman of the Board of Three Five Systems, Inc. and
serves on the board of directors of PPT/Vision, Inc.
David G. Mell has served as a director of the Company since September 1999.
Mr. Mell joined the Company as President and Chief Operating Officer in May
1999 and was named Chief Executive Officer of the Company in July 1999. From
1996 to 1998, he was Vice President of Business Processes for Imation, a data
storage and information management company spun off from 3M in 1996. From 1992
to 1996, Mr. Mell was Vice President and General Manager of the Data Storage
Division of 3M, serving the computer industry.
Use of Proceeds
The Company entered into the Transaction because it believes that Glenmount
provided it with the opportunity to accelerate its strategic initiatives. The
Company will use the net proceeds from the $4,250,000 investment for market
expansion and new product development as well as for working capital and
general corporate purposes.
The amount and timing of the expenditures and the actual uses of the net
proceeds for the purposes identified above will depend on numerous factors,
including the timing and status of the Company's growth.
Pending utilization of the proceeds to be received in the Transaction, the
Company plans to invest such proceeds in short-term or mid-term, investment
grade securities or other short-term or mid-term debt instruments.
Effect of the Transaction on Existing Shareholders
Following the Transaction, the existing holders of the Company's Common
Stock will continue to own the shares of the Company Common Stock owned by
them prior to the Transaction. However, following the closing, Industrial-
Works will own 4,250,000 shares of the Company's Series B Preferred Stock,
representing approximately 25% of the outstanding shares of Common Stock on an
as-converted basis and assuming the exercise or conversion of all options and
warrants outstanding on the date hereof, and will have the right to acquire an
additional 500,000 shares of Common Stock pursuant to the Warrant, which
together will give Industrial-Works the right to own approximately 35% of the
shares of Common Stock assuming the full exercise of the Warrant (and assuming
no exercise or conversion of other outstanding options and warrants), and
8
<PAGE>
approximately 27% assuming the exercise of the Warrant and the exercise or
conversion of all options and warrants outstanding on the date hereof. As a
result, following the closing, Industrial-Works will have the right to
influence the business and operations of the Company to a significant extent,
and will have the ability to greatly influence any vote of the shareholders,
including votes concerning the election of directors and changes in control.
In addition, if Industrial-Works acquires the right to increase the size of
the Board of Directors by two additional directors, together with the right to
appoint those two additional directors, the directors designated by
Industrial-Works will have the ability to control the outcome of most votes by
the Board of Directors, regardless of the votes of the other directors not
designated by Industrial-Works. For example, with respect to any transaction,
including without limitation an acquisition or other business combination
transaction, between the Company and a third party, the directors designated
by Industrial-Works would be able to prevent the consummation of such a
transaction. With respect to a transaction between the Company and Industrial-
Works or any of its affiliates, however, including without limitation the
acquisition of the remaining interest in the Company by Industrial-Works, the
directors designated by Industrial-Works would not be able to vote on such
transaction. Therefore, Industrial-Works may be in a position to control the
timing and the terms upon which any acquisition or other business combination
involving the Company and a third party may occur, subject to the fiduciary
duties it and its director designees might have as a shareholder and
directors, respectively, to the remaining shareholders, and subject to having
the number of directors return to seven if the Series B Shares are not
converted into shares of Common Stock.
Background of the Transaction
As part of its ongoing business of developing investment opportunities for
Glenmount International, Glenmount, LLC contacted the Company by letter. In
June 1999, Mr. Malmberg responded to such an inquiry on behalf of the Company.
After initial discussions between Mr. Forbes of Glenmount and Mr. Malmberg, a
confidentiality agreement was signed on July 12, 1999. After the Company
discussed its financing needs and its opportunities, Glenmount conducted an
initial business review and made a preliminary proposal to the Company.
On October 5, 1999, the Company appointed a special committee of outside,
independent directors to conduct the negotiations with Glenmount and recommend
a course of action to the entire Board. This committee consisted of James A.
Bernards and Richard J. York.
Glenmount's preliminary proposal was the basis for discussions that led to
the signing of a letter of intent on September 22, 1999. After further
discussions and additional review by Glenmount, an amendment to the letter of
intent was signed on October 29, 1999.
The committee and the management of the Company kept the entire Board of
Directors advised of their progress in discussions with Glenmount, including
reports at meetings held on September 20, 1999 and October 30, 1999. The
committee members and the other Board members had the opportunity to review
drafts of the agreement and reports on the status of negotiations. After terms
were finalized, they were approved by the Board of Directors at a meeting held
on November 19, 1999 and the Purchase Agreement was executed as of
November 20, 1999.
Reasons for the Transaction
In reaching its determination that the Transaction is in the best interests
of the Company and its shareholders, the Board of Directors considered a
number of factors. The following is a list of the primary factors considered
by the Board:
. The proceeds from the sale of the Series B Shares will provide the
Company with needed capital for (a) funding the expansion of its
business and (b) funding expanded research and development relating to
new products;
9
<PAGE>
. The anticipated positive effects upon the Company's balance sheet and
results of operations from the use of the net proceeds of the financing
to accelerate the Company's ability to develop and market its products;
. The ability for the Company to gain strategic expertise from Glenmount
through its partnership of experienced entrepreneurs and Glenmount's
industrial links to national and international sources of technical,
marketing and production expertise;
. Glenmount's agreement to provide certain valuable advisory and
consulting services under the Services Agreement and to provide active
and continuing support to the Company's management in identifying,
developing and executing major strategic, acquisition, operational and
financial opportunities for the Company;
. The ability of the existing shareholders of the Company to benefit from
the Company's future growth which may be enhanced by the relationships
with Glenmount and its affiliates;
. The Company's financial condition;
. The absence of any serious offers from any other third parties regarding
alternative financing opportunities, a possible acquisition of the
Company's assets, or a possible merger with the Company; and
. The limitations on the ability of Glenmount and its affiliates to take
action adverse to minority shareholders under Minnesota corporate law
governing a director's duties to act in good faith, in a manner the
director reasonably believes to be in the best interest of the
corporation and with the care an ordinarily prudent person in a like
position would exercise under similar circumstances.
Reason for Shareholder Vote
Minnesota law does not require shareholder approval of the Transaction;
however, the Company's Common Stock is quoted on The Nasdaq National Market.
Pursuant to the rules of the National Association of Securities Dealers, to
maintain its eligibility to have its Common Stock quoted on The Nasdaq
National Market, the Company must obtain shareholder approval for the issuance
of Common Stock or securities convertible or exercisable for Common Stock if
the voting power of the shares to be issued or issuable upon conversion or
exercise of such securities equals or exceeds 20% of the voting power
outstanding before the securities are first issued. Since the Series B Shares
to be issued to Industrial-Works would exceed the foregoing requirement, the
Company is seeking the approval of its shareholders as required by such rules.
Recent Development
On November 24, 1999, Nasdaq notified the Company that it was no longer in
compliance with the net tangible asset requirement of $4,000,000 for continued
listing of shares of the Company's Common Stock on the Nasdaq National Market.
As a result of the Company's failure to meet the requirements for continued
listing, Nasdaq is reviewing the Company's eligibility for continued listing
on the Nasdaq National Market. The Company has requested that Nasdaq defer
action on the continued listing of the Company's Common Stock until after the
special meeting of shareholders. If the Transaction is consummated, the
Company expects that the net proceeds from the issuance of the Series B Shares
will result in the Company having sufficient cash resources to meet the net
tangible assets listing requirements. The continued listing of the Company's
Common Stock on the Nasdaq National Market, however, will be based in part on
the Company's ability to demonstrate that it can sustain compliance with the
continued listing requirements.
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<PAGE>
----------------
PROPOSAL TWO:
APPROVAL OF THE VOTING AGREEMENT AND
THE VOTING RIGHTS OF THE
SHARES SUBJECT TO THE VOTING AGREEMENT
----------------
Section 302A.671 of the Minnesota Business Corporation Act applies, with
certain exceptions, to any acquisition of the Company's voting stock from a
person other than the Company, and other than in connection with certain
mergers and exchanges to which the Company is a party, that results in the
beneficial ownership by such person of 20 percent or more of the voting stock
then outstanding. See "Description of Capital Stock--Certain Provisions of the
Articles of Incorporation and Bylaws and State Law Provisions with Potential
Antitakeover Effects." Under Section 302A.671, the execution of the Voting
Agreement could be considered a control share acquisition requiring specific
shareholder approval in order for the shares to retain their voting rights.
For a discussion of the terms of the Voting Agreement, see "The Transaction--
The Voting Agreement" set forth under Proposal One above.
Section 302A.671 is not applicable to the Series B Shares, the Warrant or
the shares acquired upon conversion of the Series B Shares or exercise of the
Warrant because it does not apply to shares which are acquired directly from
the Company. Under Section 302A.671, however, the execution of the Voting
Agreement could be considered a control share acquisition by Industrial-Works
of more than 20 percent of the Company's outstanding voting stock, in that the
execution of such agreement would result in Industrial-Works being deemed to
beneficially own the shares, options and warrants subject to the Voting
Agreement (the "Voting Agreement Shares"). Industrial-Works has submitted to
the Company the information statement required by Section 302A.671, which
information statement is attached hereto as Appendix E.
As the execution of the Voting Agreement is a transaction contemplated by
the Purchase Agreement, and the Board of Directors has recommended that its
shareholders approve the transactions contemplated under the Purchase
Agreement, the Company's Board of Directors believes it is appropriate and in
the best interests of the Company and its shareholders that the Company's
shareholders approve the Voting Agreement. In addition, the Company believes
it is in the best interests of all its shareholders to specifically approve
the voting rights of the Voting Agreement Shares so that those Voting
Agreement Shares in excess of 20% of the Company's outstanding voting stock do
not temporarily lose their voting rights under Section 302A.671.
Votes Required to Approve Proposal
The approval of Proposal Two at the special meeting will require the
affirmative vote of the Company's shareholders as follows:
. The affirmative vote of the holders of a majority of voting power of all
shares entitled to vote, including the Voting Agreement Shares; and
. The affirmative vote of the holders of a majority of voting power of all
shares entitled to vote, excluding the Voting Agreement Shares.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" APPROVAL
OF THE VOTING AGREEMENT AND THE VOTING RIGHTS OF THE SHARES SUBJECT TO THE
VOTING AGREEMENT.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of December 4, 1999, by:
(i) each director of the Company, (ii) each named executive officer of the
Company, (iii) all directors and executive officers of the Company as a group
and (iv) each person or entity known by the Company to own beneficially more
than five percent of the Company's Common Stock. Unless otherwise indicated,
the business address of the individuals listed below is 7631 Anagram Drive,
Eden Prairie, MN 55344.
<TABLE>
<CAPTION>
Prior to the Transaction After the Transaction
------------------------ ------------------------
Shares Percent of Shares Percent of
Beneficially Outstanding Beneficially Outstanding
Name Owned (1) Shares (1) Owned (1) Shares (1)
- ---- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Robert C. Szymborski (2)..... 845,416 9.4% 845,416 6.2%
Brightstone Entities (3)..... 623,334 7.0% 623,334 4.6%
Network General Corporation
(4)......................... 623,077 7.0% 623,077 4.6%
Gary J. Beeman (5)........... 458,152 5.1% 458,152 3.3%
David C. Malmberg (6)........ 278,900 3.0% 278,900 2.0%
Robert W. Heller (7)......... 80,000 * 80,000 *
David G. Mell (8)............ 76,500 * 76,500 *
James A. Bernards (9)........ 64,175 * 64,175 *
Richard J. York (10)......... 31,250 * 31,250 *
Industrial-Works Holding
Corp........................ 0 0 4,250,000 32%
All directors and current
executive
officers as a group (7
persons).................... 1,860,893 19.6% 1,860,893 13.1%
</TABLE>
- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with rules of the SEC,
and generally includes voting power and/or investment power with respect
to securities. Shares of Common Stock subject to options or warrants
currently exercisable or exercisable within 60 days of December 4, 1999
are deemed outstanding for computing the percentage of the person holding
such options or warrants but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote, the
Company believes that the persons named in this table, based on
information provided by such persons, have sole voting and investment
power with respect to the shares of Common Stock indicated.
(2) Includes 50,000 shares of Common Stock issuable pursuant to currently
exercisable options and 12,500 shares of Common Stock issuable upon
exercise of warrants.
(3) Includes 160,000 shares of Common Stock held of record by Brightstone IV
Partners ("Brightstone IV"); 200,000 shares of Common Stock held of record
by Brightstone Fund V Partnership ("Brightstone V"); 100,000 shares of
Common Stock held of record by Brightstone Fund VI L.P. ("Brightstone
VI"); 83,334 shares of Common Stock held of record by Brightside Fund
Limited Partnership ("Brightside"); 50,000 shares of Common Stock held of
record by Brightstone Fund VII L.P. ("Brightstone VII," and, together with
Brightstone IV, Brightstone V, Brightstone VI, and Brightside, the
"Brightstone Entities"); 15,000 shares of Common Stock issuable upon the
exercise of warrants issued to Brightstone IV; and 15,000 shares of Common
Stock issuable upon exercise of warrants issued to Brightstone V.
Brightstone IV, Brightstone V, Brightstone VI, Brightstone VII and
Brightside are all limited partnerships of which Brightstone Capital Ltd.,
LLC ("Brightstone Capital") is the general partner; Brightstone Capital is
a limited liability company of which Mr. Bernards is President. The
address of the Brightstone Entities is 7200 Metro Boulevard, Edina,
Minnesota 55439. Mr. Bernards disclaims beneficial ownership of these
funds.
(4) Includes 46,154 shares of Common Stock issuable upon exercise of warrants.
(5) Includes 50,000 shares of Common Stock issuable pursuant to currently
exercisable options.
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<PAGE>
(6) Includes 245,000 shares of Common Stock issuable pursuant to currently
exercisable options and 10,000 shares of Common Stock issuable upon
exercise of warrants.
(7) Includes 55,000 shares of Common Stock issuable pursuant to currently
exercisable options.
(8) Includes 50,000 shares of Common Stock issuable pursuant to currently
exercisable options and 12,500 shares of Common Stock issuable upon
exercise of warrants.
(9) Includes 39,175 shares of Common Stock issuable pursuant to currently
exercisable options. See also Note 3.
(10) Includes 26,750 shares of Common Stock issuable pursuant to currently
exercisable options.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
The Company currently is authorized to issue 30,000,000 shares of Common
Stock (the "Common Stock") and 5,000,000 shares of undesignated preferred
stock. Upon the closing of the Transaction, 750,000 shares of the preferred
stock will be undesignated and 4,250,000 shares will designated Series B
Convertible Participating Preferred Stock.
The following summary of certain provisions of the Company's capital stock
describes all material provisions of, but does not purport to be complete and
is subject to, and qualified in its entirety by, the Second Amended and
Restated Articles of Incorporation and the Second Amended and Restated Bylaws
of the Company and by the provisions of applicable law.
Common Stock
As of December 4, 1999, there were 8,894,426 shares of Common Stock
outstanding held of record by 164 stockholders.
The issued and outstanding shares of Common Stock are, and the shares of
Common Stock issuable upon conversion of the Series B Preferred Stock and the
exercise of the Warrant will be, validly issued, fully paid and nonassessable.
Subject to the prior rights of the holders of any preferred stock, the holders
of outstanding shares of Common Stock are entitled to receive dividends out of
assets legally available therefor at such times and in such amounts as the
Board of Directors may from time to time determine. The shares of Common Stock
are neither redeemable nor convertible and the holders thereof have no
preemptive or subscription rights to purchase any securities of the Company.
Upon liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive pro rata the assets of the Company which
are legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of any holders of any preferred
stock then outstanding, including the right to participate in distributions.
Each outstanding share of Common Stock is entitled to one vote on all matters
submitted to a vote of stockholders.
Warrants
As of December 4, 1999, there were outstanding warrants to purchase an
aggregate of 2,233,054 shares of Common Stock at a weighted average exercise
price of $2.29 per share. These warrants are exercisable at prices ranging
from $1.00 to $7.80 at various times through September 2004.
Preferred Stock
The Board of Directors of the Company is authorized to issue 5,000,000
shares of undesignated preferred stock. The Board of Directors has the
authority to issue the preferred stock in one or more series and to fix the
price, rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of
shares constituting a series or the designation of such series. The Company's
shareholders are being asked to vote on the Transaction for the reasons
described under "Reason for Shareholder Vote."
Rights and Preferences of the Series B Convertible Participating Preferred
Stock
As of December 29, 1999, no shares of Series B Preferred Stock were issued
or outstanding. At the Closing, the Company will issue 4,250,000 shares of
Series B Preferred Stock to Industrial-Works for an aggregate purchase price
of $4,250,000, pursuant to the terms set forth in the form of Certificate of
Designation for Series B Convertible Participating Preferred Stock approved by
the Board of Directors and attached as Exhibit A to the
14
<PAGE>
Appendix F to this Proxy Statement. The holders of Series B Preferred Stock
will be entitled to significant rights, preferences and privileges as follows:
Dividends. The holders of Series B Preferred Stock will be entitled to
dividends only if the Board of Directors declares such dividends.
Liquidation Preference. In the event of any liquidation of the Company, the
holders of the Series B Preferred Stock will be entitled to receive out of the
surplus funds and the proceeds of the Company's assets $1.00 per share of
Series B Preferred Stock plus any accrued and unpaid dividends thereon (the
"Preferred Amount"). The right of the holders of Series B Preferred Stock to
receive the Preferred Amount upon the liquidation of the Company shall take
preference and occur prior to the distribution of any of the Company's surplus
funds, assets or proceeds therefrom to the holders of any other class of
shares of the Company (including the Common Stock) ranking junior to the
Series B Preferred Stock. After the distribution of the Preferred Amount,
subsequent distributions may be made to holders of classes of preferred stock
ranking junior to the Series B Preferred Stock and to the holders of the
Common Stock until the holders of the Common Stock have received an amount per
share equal to the Preferred Amount. Thereafter, any remaining surplus funds,
assets or proceeds therefrom shall be distributed equally to the holders of
the Series B Preferred Stock and the Common Stock, counting the Series B
Preferred Stock on an as-converted basis.
Redemption. Neither the holders of the Series B Preferred Stock nor the
Company shall have any rights of redemption of the Series B Preferred Stock.
Special Voting Rights for Directors. As long as the Series B Preferred
Stock remains outstanding, the holders of the Series B Preferred Stock shall
have the right to act as a class to elect three (3) members of the Company's
Board of Directors, to terminate any of such members of the Board of Directors
and to fill any vacancies among directors so elected or terminated. Upon the
occurrence of any of the following events, the holders of the Series B
Preferred Stock shall have the authority to act as a class to elect by
majority vote two (2) additional members of the Board of Directors (the
"Additional Directors"), thus increasing the size of the Board of Directors
from seven (7) to nine (9) (each such event listed below, a "Triggering
Event"):
(a) the Company incurs operating losses in excess of $1,000,000 for the
fourth quarter of 1999;
(b) the Company incurs operating losses in excess of $100,000 for the first
quarter of 2000;
(c) the Company incurs an operating loss in any amount for the second
quarter of 2000;
(d) the Company achieves operating income of less than $200,000 in the
third quarter of 2000;
(e) the Company achieves operating income of less than $400,000 in the
fourth quarter of 2000;
(f) the Company achieves operating income of less than $600,000 in the
first quarter of 2001;
(g) the Company achieves operating income of less than $800,000 in the
second quarter of 2001; or
(h) the Company achieves operating income of less than $1,000,000 in the
third quarter of 2001.
If the holders of the Series B Preferred Stock have not exercised their
conversion rights (as described below) within six (6) months after the
election of the Additional Directors, the right of the holders of the Series B
Preferred Stock to name Additional Directors shall lapse and the number of
members of the Board of Directors shall revert to seven (7).
Other Voting Rights. The holders of the Series B Preferred Stock will vote
on all matters presented to the Company's shareholders on an as-converted to
Common Stock basis. In addition, the Company shall not take any of the
following actions without the prior affirmative written consent of the holders
of at least two-thirds (2/3) of the Series B Preferred Stock:
(a) alter or amend, whether by merger or otherwise, any of the rights,
preferences or privileges of the Series B Preferred Stock;
15
<PAGE>
(b) amend, alter, repeal or modify the Company's Articles of Incorporation
or Bylaws, any certificate of designation or preferences relating to any
series of preferred stock or any other class of capital stock, or the terms or
provisions of any option or convertible security;
(c) create, authorize, issue or change the authorized number of any
securities or shares of any such class or series of securities which: (i) rank
senior to or on parity with the Series B Preferred Stock created in the
Transaction; (ii) have the right to cast more than one vote per share, and/or
have the right, voting as a class or series, to elect one or more members of
the Board of Directors; or (iii) are in any way convertible into or
exchangeable for shares of any of the foregoing;
(d) initiate or cause or allow to be initiated, whether in a single
transaction or series of related transactions, any of the following events:
(i) the commencement by the Company of a voluntary bankruptcy case or of any
undertaking or third-party proceeding relating to any reorganization,
arrangement, adjustment of debt, relief of debtors, custodial appointment,
dissolution, insolvency or liquidation or similar action involving the
Company; (ii) the commencement of an involuntary bankruptcy case against the
Company, unless such petition is opposed by the Company within fifteen (15)
days or is dismissed within sixty (60) days after commencement thereof; or
(iii) the occurrence of either the consummation of a tender for or purchase of
more than fifty percent (50%) of the Company's Common Stock by a third party
other than the holder of a majority of the Series B Preferred Stock, or any
other transaction that would cause the shareholders of the Company immediately
prior to the consummation of such transaction to possess less than fifty
percent (50%) of the voting securities of the surviving or continuing entity
after the transaction, unless such transaction has been approved by the vote
of all members of the Board of Directors that have been appointed or nominated
by the holders of the Series B Preferred Stock;
(e) enter into any merger or consolidation with any other person that
results in the holders of the Company's capital stock immediately prior to
such transaction owning less than fifty percent (50%) of the voting power of
the successor entity's capital stock after such transaction;
(f) discontinue or dispose of more than ten percent (10%) of the assets of
the business of the Company, taken as a whole;
(g) initiate or cause or allow to exist any recapitalization of the Company
or reclassification of any of the Company's authorized capital stock into any
other class or series of capital stock;
(h) redeem any shares of the Company's capital stock;
(i) acquire in any manner an ownership interest in any business entity's
equity or assets where the aggregate consideration payable in connection with
such acquisition (including, without limitation, cash consideration, the fair
market value of any securities and the net present value of any deferred
consideration) is at least $1,000,000;
(j) make any capital expenditures in excess of $500,000 individually or
$1,000,000 for any fiscal year;
(k) increase the number of directors to a number greater than seven (7),
except upon the occurrence of a Triggering Event;
(l) make any material change in the nature of its business as conducted on
the date the Series B Preferred Stock is issued, or fail to conduct its
business in the ordinary course in a manner consistent with past practice;
(m) sell, transfer, convey, lease or dispose of, outside the ordinary
course of business, any material assets or properties of the Company in any
transaction or transactions that calls for payments in excess of $500,000;
(n) establish or purchase any subsidiary;
(o) enter into any agreements, transactions or leases not in the ordinary
course of the Company's business that call for payments in excess of $250,000;
(p) incur new or additional indebtedness in excess of $500,000, unless such
indebtedness extends, renews, refinances or amends certain existing credit
agreements;
16
<PAGE>
(q) increase the compensation of any member of management by greater than
ten percent (10%) in any single fiscal year (including without limitation by
issuance of warrants, options or other contingent compensation) or hire any
employee whose total annual compensation will exceed $125,000, unless such
transaction has been approved by the vote of all members of the Board of
Directors that have been appointed or nominated by the holders of the Series B
Preferred Stock; or
(r) enter into any transaction, except for transactions on customary and
reasonable terms, with: (i) any of the Company's affiliates, employees or
shareholders holding more than five percent (5%) of the outstanding capital
stock of any class or series of capital stock of the Company; (ii) any member
of the immediate family of any person set forth in clause (i); or (iii) any
corporation, partnership, trust or other entity in which any person set forth
in clauses (i), (ii), or (iii), or member of the family of any such person, is
a director, officer, trustee, partner or holder of more than five percent (5%)
of the outstanding capital stock thereof.
Conversion. At any time, each holder of a share of Series B Preferred Stock
may convert such share of Series B Preferred Stock into Common Stock. The
conversion rate will initially be one share of Series B Preferred Stock to
Common Stock. This conversion rate may be proportionately adjusted in the
event of stock splits and combinations, stock dividends and distributions,
reclassification of stock, a reorganization of the Company, or certain sales
of shares below the conversion price then in effect
Preemptive Rights. The Company will first offer to the holders of the
Series B Preferred Stock the right to purchase shares in any offering of
additional securities of the Company in a manner which allows the holders of
the Series B Preferred Stock to maintain such holders' aggregate percentage
ownership of the Company's Common Stock on a fully diluted, as-converted
basis.
Certain Provisions of the Articles of Incorporation and Bylaws and State Law
Provisions with Potential Antitakeover Effects
The existence of authorized but unissued preferred stock, described above,
and certain provisions of Minnesota law, described below, could have an anti-
takeover effect. These provisions are intended to provide management with
flexibility, to enhance the likelihood of continuity and stability in the
composition of our Board of Directors and its policies, and to discourage an
unsolicited takeover of the Company if the Board of Directors determines that
such a takeover is not in the best interests of the Company and its
shareholders. However, these provisions could have the effect of discouraging
attempts to acquire the Company, which could deprive the Company's
shareholders of opportunities to sell their shares of Common Stock at prices
higher than prevailing market prices.
Section 302A.671 of the Minnesota Business Corporation Act applies, with
exceptions, to any acquisition of the Company's voting stock from a person
other than the Company, and other than in connection with certain mergers and
exchanges to which the Company is a party, that results in the beneficial
ownership by such person of 20 percent or more of the voting stock then
outstanding. Section 302A.671 requires approval of any such acquisitions by a
majority vote of the Company's shareholders before its consummation. In
general, shares acquired in the absence of such approval are denied voting
rights and are redeemable at their then fair market value by the Company
within 30 days after the acquiring person has failed to give a timely
information statement to the Company or after the date on which the
shareholders voted not to grant voting rights to the acquiring person's
shares.
Section 302A.671 is not applicable to the Series B Shares, the Warrant or
the shares acquired upon conversion of the Series B Shares or exercise of the
Warrant because it does not apply to shares which are acquired directly from
the corporation. The Company is seeking shareholder approval of the Voting
Agreement, however, because under Section 302A.671, the execution of the
Voting Agreement could be considered a control share acquisition by
Industrial-Works of more than 20 percent of the Company's outstanding voting
stock, in that the execution of such agreement would result in Industrial-
Works being deemed to beneficially own the shares subject to the Voting
Agreement. See "Proposal Two: Approval of Voting Agreement and the Voting
Rights of the Shares Subject to the Voting Agreement." Following consummation
of the Transaction, Industrial-
17
<PAGE>
Works will own or have the right to acquire approximately 35% of the Company's
outstanding shares upon conversion of the Series B Shares and exercise of the
Warrant. Due to the calculation of "beneficial ownership" under Section
302A.671, the Voting Agreement could be deemed to confer "ownership" of an
additional 28%, thus bringing total "ownership" for purposes of Section
302A.671 to more than 50%. However, voting power would be less unless (i) all
warrants and options covered by the Voting Agreement are exercised, (ii) no
other warrants or options are exercised and (iii) no shares issued to parties
signing the Voting Agreement are sold to others. Therefore, no restrictions
under Section 302A.671 will apply to Industrial-Works following the Closing
unless its beneficial ownership falls below 50% and then Industrial-Works
subsequently intends to acquire, other than from the Company, beneficial
ownership of shares resulting in voting power greater than 50%.
Section 302A.673 of the Minnesota Business Corporation Act generally
prohibits any business combination by and between the Company (or any
subsidiary thereof) and any shareholder that purchases 10 percent or more of
the Company's voting shares within four years following the interested
shareholder's share acquisition date. The business combination may be
permitted if it is approved by a committee of all of the disinterested members
of the Company's Board of Directors before the interested shareholder's
acquisition date.
On November 19, 1999, a special committee of all of the disinterested
directors of the Company's Board of Directors (the "Special Committee")
authorized the Transaction, including authorizing the Company to enter into
the Voting Agreement. Therefore, Section 302A.673 is not applicable to
Industrial-Works with respect to the Transaction, and will not be applicable
with respect to any future transaction between the Company and Industrial-
Works.
Registration Rights
The holders of the Series B Preferred Stock and the Warrant and their
permitted transferees (the "Holders") will be entitled to certain rights with
respect to the registration of such shares of Common Stock obtained by the
Holders upon the conversion of the Series B Preferred Stock and the exercise
of the Warrant (such shares of Common Stock, the "Registrable Securities").
Under the terms of an agreement between the Company and the Holders, the
holders of Registrable Securities exercisable or convertible into at least
1,500,000 shares of Common Stock may require, on two occasions after the first
anniversary of the closing of the Transaction, that the Company use its best
efforts to register the Registrable Securities for public resale. In addition,
if the Company proposes to register any of its securities under the Securities
Act, either for its own account or for the account of other security holders
exercising registration rights, the Holders are entitled to notice of such
registration and are entitled to include shares of such Common Stock therein.
The holders of Registrable Securities exercisable or convertible into at least
1,500,000 shares of Common Stock may also require the Company to register all
or a portion of their Registrable Securities on Form S-3 under the Securities
Act when use of such form becomes available to the Company. All such
registration rights are subject to certain conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares to be included in such registration.
In addition to the registration rights granted to the holders of Series B
Shares and the Warrant, of the outstanding warrants to purchase an aggregate
of 2,233,054 shares of Common Stock, holders of warrants to purchase an
aggregate of 2,186,900 shares of Common Stock have piggyback registration
rights. Of these warrants to purchase an aggregate of 2,186,900 shares of
Common Stock, holders of warrants to purchase an aggregate of 1,862,500 shares
of Common Stock also have demand registration rights. Finally, holders of
warrants to purchase an aggregate of 212,500 shares of Common Stock also have
standard Form S-3 registration rights.
If the holders of warrants, by exercising their demand registration rights,
cause a large number of securities to be registered and sold in the public
market, such sales could have an adverse effect on the market price for the
Company's Common Stock. If the Company were to initiate a registration and
include shares held by such holders pursuant to the exercise of their
piggyback registration rights, such sales might have an adverse effect on the
Company's ability to raise capital.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below should be read in conjunction with the
consolidated financial statements and related notes on pages F-3 through F-18.
The statements of operations and balance sheet data as of and for the years
ended January 3, 1999, January 4, 1998, January 5, 1997, and December 31, 1995
and 1994 are derived from, and are qualified by reference to the audited
consolidated financial statements included elsewhere in this Proxy or as
previously filed with the Securities and Exchange Commission and should be
read in conjunction with those consolidated financial statements and notes
thereto. The selected consolidated financial data as of and for the nine
months ended October 3, 1999 and October 4, 1998 have been derived from
unaudited consolidated financial statements of the Company which, in the
opinion of management, include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial information
set forth therein. The results for the nine months ended October 3, 1999 are
not necessarily indicative of the results expected for the entire year.
Selected Consolidated Statements of Operations Data:
<TABLE>
<CAPTION>
Years Ended
Nine Months Ended December 31,
--------------------- ---------------
Year Ended Year Ended Year Ended
October 3, October 4, January 3, January 4, January 5,
1999 1998 1999 1998 1997 1995 1994
---------- ---------- ---------- ---------- ---------- ------ -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $18,313 $13,632 $20,002 $23,815 $13,111 $8,242 $ 2,742
Cost of sales........... 13,095 9,945 14,200 14,620 7,930 4,777 1,954
------- ------- ------- ------- ------- ------ -------
Gross profit........... 5,218 3,687 5,802 9,195 5,181 3,465 788
Operating expenses:
Sales and marketing.... 4,034 4,154 5,482 5,043 3,616 1,726 928
General and
administrative........ 2,258 2,230 2,915 3,034 2,232 1,169 762
Research and
development........... 2,486 2,380 3,214 1,884 1,896 948
Product upgrade and
restructuring costs... 400 1,472 1,473 -- -- -- --
------- ------- ------- ------- ------- ------ -------
Total operating
expenses............. 9,178 10,236 13,084 9,961 7,744 3,843 2,455
------- ------- ------- ------- ------- ------ -------
Operating loss.......... (3,960) (6,549) (7,282) (766) (2,563) (378) (1,667)
Interest expense and
other, net............. (54) 137 158 (258) (356) (69) (21)
------- ------- ------- ------- ------- ------ -------
Net loss from continuing
operations............. (4,014) (6,412) (7,124) (1,024) (2,919) (447) (1,688)
Loss from discontinued
operation(1)........... -- -- -- -- (377) (180) --
======= ======= ======= ======= ======= ====== =======
Net loss................ $(4,014) $(6,412) $(7,124) $(1,024) $(3,296) $ (627) $(1,688)
======= ======= ======= ======= ======= ====== =======
Basic and diluted loss
per common share:
Net loss per common
share from continuing
operations............. $ (.45) $ (.73) $ (.81) $ (.12) $ (.45) $ (.07) $ (.31)
Loss per common share
from discontinued
operation(1)........... -- -- -- -- (.06) (.03) --
======= ======= ======= ======= ======= ====== =======
Net loss per common
share.................. $ (.45) $ (.73) $ (.81) $ (.12) $ (.51) $ (.10) $ (.31)
======= ======= ======= ======= ======= ====== =======
Weighted average common
shares outstanding..... 8,868 8,792 8,799 8,242 6,442 6,131 5,430
======= ======= ======= ======= ======= ====== =======
</TABLE>
19
<PAGE>
Selected Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
October 3, January 3, January 4, January 5, December 31, December 31,
1999 1999 1998 1997 1995 1994
---------- ---------- ---------- ---------- ------------ ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 1,175 $ 1,690 $ 3,219 $ 2,132 $ 113 $ 126
Working capital......... 2,971 4,077 11,517 1,042 1,685 1,317
Total assets............ 11,451 10,956 16,120 9,906 4,559 3,603
Long-term debt and
capital lease
obligations, less
current portion........ 2,167 97 23 67 62 11
Total debt.............. 2,207 110 70 6,150 1,254 809
Accumulated deficit..... (18,465) (14,452) (7,327) (6,303) (2,805) (2,173)
Total shareholders'
equity................. 2,741 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Cautionary Statement Regarding Forward Looking Statements
Statements other than historical information contained herein constitute
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 herein and in future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases and in
oral statements made with the approval of an authorized executive officer, the
words or phrases "believes," "anticipates," "expects," "intends," "estimates,"
"should," "may" or similar expressions are intended to identify such forward-
looking statements, but are not the exclusive means of identifying such
statements. These forward-looking statements involve risks and uncertainties
that may cause the Company's actual results to differ materially from the
results discussed in the forward-looking statements. 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, 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 and consider the various disclosures made by the Company
herein and in the Company's reports filed with the Securities and Exchange
Commission that attempt to advise interested parties of the risks and factors
that may affect the Company's business. The Company's forward-looking
statements are qualified in their entirety by the cautions and risk factors
set forth under the "Cautionary Statement" filed as Exhibit 99.1 to its Form
10-K for the year ended January 3, 1999.
20
<PAGE>
Results of Operations
Nine Months Ended October 3, 1999 and October 4, 1998
The following table sets forth certain financial data expressed as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
--------------------- ---------------------
October 3, October 4, October 3, October 4,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales..................... 100% 100% 100% 100%
Cost of sales................. 74 67 72 73
Gross profit.................. 26 33 28 27
Operating expenses:
Sales and marketing........... 33 29 22 30
General and administrative.... 15 15 12 16
Research and development...... 17 19 14 18
Restructuring and product
upgrade costs................ 8 4 2 11
--- --- --- ---
Total operating expenses...... 73 67 50 75
--- --- --- --- ---
Operating loss................ (47) (34) (22) (48)
Interest income (expense) and
other, net................... (1) 1 * 1
--- --- --- ---
Net loss...................... (48)% (33)% (22)% (47)%
=== === === ===
</TABLE>
- --------
*Less than .5%.
Net Sales. The Company's net sales increased 8% from $4.4 million in the
third quarter of fiscal 1998 to $4.8 million for the third quarter of fiscal
1999 and increased 34% from $13.6 million in the first nine months of 1998 to
$18.3 million for the comparable period in 1999. The year-to-date increase was
partially due to significant customer contracts in the first six months of
1999 for the 5000 Series Workstation, offset by a decrease in sales of the
7000 Series Workstation due to customer anticipation of the 8000 Series
Workstation, a technologically enhanced and updated product. Unit volumes of
the 5000 Series Workstation decreased 16% from the third quarter of 1998 to
the third quarter of 1999; however, the volumes increased 84% from the first
nine months of 1998 to the comparable period in 1999 due to significant
customer sales in the trucking industry. Unit volumes of the 7000 Series
Workstation decreased 29% from the third quarter of 1998 to the third quarter
of 1999 and 19% from the first nine months of 1998 to the first nine months of
1999. Sales of the 5000 Series Workstations represented 35% and 52% of net
sales for the nine months ended October 4, 1998 and October 3, 1999,
respectively. Sales of the FW2000 Series Embedded Vehicle Server were $0.8
million for the nine months ended October 3, 1999. Revenue of $0.7 million for
the FW2000 Series during the third quarter of 1999 was less than anticipated
due to initial production delays and supplier constraints. Production of the
FW2000 began in mid-1999; therefore, there were no comparable sales in 1998.
Professional Services revenue, including product upgrades, technical support
and non-standard product sales accounted for $1.0 million, or 20% of net
sales, for the third quarter of 1999 and $2.7 million, or 15% of net sales,
for the first nine months of 1999. Professional services revenue was not
significant in 1998.
The Company has focused its marketing efforts on the transportation, public
services and government/military markets with emphasis on service bay, mobile
communications and test measurement/data acquisition applications. Two
customers, John Deere Information Systems and Ryder Transportation Services,
represented over 10% of the Company's net sales or $0.8 million and $0.7
million, respectively for the third quarter of 1999 and one customer, Navistar
International, represented revenues of $0.5 million in the third quarter of
1998.
International sales decreased from $3.5 million, or 26% of net sales, for
the first nine months of 1998 to $2.7 million, or 15% of net sales, for the
comparable period in 1999. The decrease in international sales for the
21
<PAGE>
first nine months of 1999 as compared to the same period in 1998 was due to
the level of significant contracts with domestic customers and order
acceleration by international customers in late 1998. Additionally,
international customers are waiting for the enhanced 8000 Series Workstation
which is currently in the pre-production testing phase. The majority of
international sales, approximately 69%, are in Europe.
Gross Profit. Gross profit decreased from $1.4 million, or 33% of net
sales, for the third quarter of 1998 to $1.2 million, or 26% of net sales, for
the third quarter of 1999. Gross profit increased from $3.7 million, or 27% of
net sales, for the first nine months of 1998 to $5.2 million, or 28% of net
sales, for the first nine months of 1999. Gross margin for the first nine
months in 1998 was negatively impacted by an inventory writedown of $1.0
million in the second quarter. This writedown related to excess and obsolete
inventory due to product changes in response to technological developments and
market needs. In 1999, sales under high volume contracts, which include volume
discounts, comprised a significant portion of sales for the first nine months.
Additionally, gross margin was negatively impacted by disposition of
previously identified obsolete inventory during the first nine months of 1999.
Recovery on this inventory has been less than anticipated resulting in
additional write-off of $264,000. Gross margin was also negatively impacted by
start-up costs associated with the introduction of the FW2000 Series. The
Company's gross profit margin will fluctuate as a result of a number of
factors, including mix of products sold, inventory obsolescence, the
proportion of international sales, utilization of manufacturing capacity,
large customer contracts (with the associated volume discounts) and
outsourcing expenses.
The Company has identified contract manufacturers for outsourcing of
certain manufacturing activities and expects complete implementation in the
first quarter of 2000. The Company will initially outsource the final assembly
process with the intent of improving design for manufacturability. Final
integration work will remain at the Company, as appropriate.
Sales and Marketing. Sales and marketing expenses include salaries, sales
commissions, travel, technical support and professional services personnel,
advertising, promotions and trade shows. In addition, these expenses include
the labor and material costs related to maintaining the Company's standard
one-year warranty on its products. Sales and marketing expenses increased from
$1.3 million, or 29% of net sales, for the third quarter of 1998 to $1.6
million, or 33% of net sales, for the comparable period in 1999. This increase
is a result of establishing the Professional Services organization and the
writedown of demonstration equipment in 1999. In the first nine months of
1998, sales and marketing expenses were $4.2 million and 30% of net sales as
compared to $4.0 million and 22% of net sales in the first nine months of
1999. The decrease in the nine-month period was due to a reduction in
promotion and advertising expenses as vertical market strategies were
developed, as well as other cost control initiatives. In addition, warranty
expense decreased due to enhanced performance and specific component level
repair.
General and Administrative. General and administrative expenses include the
Company's executive, finance and administration, human resources, and
information services departments. These expenses increased from $0.6 million
for the quarter ended October 4, 1998, to $0.7 million for the quarter ended
October 3, 1999. As a percentage of net sales, general and administrative
expenses remained constant at 15% for the quarters ended October 4, 1998 and
October 3, 1999. General and administrative expenses increased slightly from
$2.2 million for the first nine months of 1998 as compared to $2.3 million for
the first nine months and 1999 and represented 16% and 12% of net sales,
respectively. The increase is partially due to organizational changes
resulting from outsourcing activities.
Research and Development. Research and development expenses are incurred in
the design, development and testing of new or enhanced products, services and
customized computing platforms. These costs are expensed as incurred. Research
and development expenses remained constant at $0.8 million for the third
quarters of 1998 and 1999. As a percentage of net sales, research and
development costs were 19% and 17% for the third quarter of 1998 and 1999,
respectively. Research and development expenses increased slightly from $2.4
million for the first nine months of 1998 to $2.5 million for the comparable
period in 1999. As a percentage of net sales, research and development
expenses decreased from 18% for the first nine months of 1998 to 14%
22
<PAGE>
for the first nine months of 1999. The $0.1 million increase was primarily due
to the development of new products, including the FieldWorks 2000 Series
Mobile Embedded Vehicle System and engineering support of customer-specific
applications.
Restructuring and Product Upgrade Costs. Restructuring and product upgrade
costs were $0.2 million, or 4% of net sales, for the third quarter of 1998 as
compared to $0.4 million, or 8% of net sales for the third quarter of 1999.
Restructuring and product upgrade costs decreased from $1.5 million, or 11% of
net sales, for the first nine months of 1998 to $0.4 million, or 2% of net
sales, for the first nine months of 1999. In 1999, the costs were due to
severance charges from reorganizational efforts related to outsourcing the
manufacturing and design of products. In 1998, these costs related to the
discontinuation of the 5000 Series I Workstation, as well as other internal
reorganization efforts.
Interest Income (Expense) and Other, Net. Net interest income was
approximately $34,000 for the third quarter of 1998 compared to net interest
expense of $36,000 for the comparable period in 1999. Net interest income for
the first nine months of 1998 was $137,000 compared to net interest expense of
$54,000 for the comparable period in 1999. The increase in interest expense is
due to borrowings on the Company's line of credit. The Company will continue
recording interest expense from both its line of credit and interest payments
on its subordinated notes issued in September 1999. Additionally, financing
costs of $882,000 related to warrants issued in September 1999 will be
amortized over the next two years.
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.
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.
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.
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.
23
<PAGE>
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.
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.
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.
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
On November 20, 1999, the Company signed a Securities Purchase Agreement
with Industrial-Works Holding Corp. ("Industrial-Works"), a wholly owned
subsidiary of Glenmount International, L.P., regarding the issuance of shares
of convertible preferred stock. The number of shares to be issued will be
4,250,000 at $1.00 per share, with the Company receiving $4.25 million from
such issuance.
24
<PAGE>
The Company will issue Industrial-Works a warrant to purchase 500,000
shares of Common Stock, with an exercise price of $1.00. The warrant will be
exercisable based on the Company's stock price performance and will expire
from three years to seven years after the transaction closing date.
The Company has entered into a one-year compensatory management services
agreement with Glenmount, LLC ("Glenmount"), an affiliate of Industrial-Works,
for Glenmount to provide active and continuing support to the Company's
management. The focus of Glenmount will be to work collaboratively with the
Company to accelerate current initiatives and to identify, develop and execute
major strategic, acquisition, operational and financial opportunities.
In September 1999, the Company completed a private placement of $3.0
million in subordinated notes. The notes bear interest at 11% per annum and
mature in September 2001. Noteholders also received warrants to purchase 1.5
million shares of common stock exercisable at $1.00 per share. The warrants
are exercisable for five years, and recorded at their estimated fair value at
the date of issuance.
In November 1998, the Company entered into a two-year, $3.0 million line of
credit agreement. Borrowings bear interest at the greater of 4% over prime or
9%. The interest rate changed from 3% over prime to 4% over prime in the third
quarter of 1999 due to default on the Company's profitability covenant. At
October 3, 1999, the interest rate was 12.25%. The line of credit balance was
$1.0 million as of October 3, 1999, as compared to $0.7 million at January 3,
1999. The borrowing base consists of 75% of eligible receivables plus the
lesser of $600,000 or 30% of eligible inventory as defined in the agreement.
Availability based on the borrowing base calculation, including accounts
receivable and inventory, was $2.5 million as of October 3, 1999 and was $1.7
million, including only accounts receivable, as of January 3, 1999. The
agreement contains a covenant requiring cumulative year-to-date profit on a
quarterly basis. The Company was out of compliance with the covenant as of
October 3, 1999, and has received a written waiver of default. Failure to
comply with this covenant in the future could result in default, interest rate
increases and immediate repayment requirements.
Cash used for operating activities totaled $3.4 million for the first nine
months of 1999. The Company's accounts receivable decreased $0.1 million from
$3.9 million at January 3, 1999 to $3.8 million at October 3, 1999 due to
timing of payments received. Inventories increased $0.7 million to $4.1
million at October 3, 1999 due to purchases for anticipated sales and backlog
on the FW2000 Series product.
The Company purchased $0.5 million of property, plant and equipment during
the first nine months of 1999. The expenditures related primarily to
manufacturing tooling for vendors of the Company's FW2000 Series Mobile
Embedded Vehicle System. The Company anticipates maintaining this level of
expenditures in the foreseeable future, as new product line developments are
completed and existing platforms are enhanced.
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 that the proceeds from the issuance of preferred
stock and from its issuance of subordinated notes, together with its line of
credit and anticipated cash flows, should be sufficient to fund its
25
<PAGE>
cash flow needs through the year 2000. However, if the Purchase Agreement
between the Company and Industrial-Works is not approved or the transactions
thereunder executed, the Company will pursue alternative financing options.
Cash requirements for future periods depend on demand for the Company's
products, cash management operations, growth rate, and acquisition strategies,
among other factors. There can be no assurance that additional financing will
be available, or if it is available, that it would be on terms favorable to
the Company and would not be dilutive to existing shareholders.
Year 2000
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. Approximately 95% 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 have been
assessed and the Company believes these items are year 2000 compliant.
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. Associated costs are expected to be under $100,000. Approximately
95% of the expected costs associated with ensuring that 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 operating cash flows. 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 the readiness of 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. The Company has identified its critical
vendors and is in the process of verifying which are currently year 2000
compliant. Contingency plans for all critical vendors have not yet been
completed.
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 what effect any failure of the Company's systems or its vendors'
systems might have on its operations.
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.
Quantitative And Qualitative Disclosures About Market Risk
The Company does not utilize derivative or other financial instruments for
hedging or speculative purposes, and accordingly, is not exposed to these
types of market risk.
26
<PAGE>
The Company is subject to interest rate risk related to its outstanding
line of credit and note borrowings and any existing money market or other
investment amounts. The Company's line of credit bears interest at a rate
based on the prime lending rate, and any money market investments also earn
interest based on market rates. The Company's long-term notes bear interest at
a fixed rate. Based on current interest rate conditions, the Company does not
believe that it is exposed to significant associated market risk.
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.
27
<PAGE>
OTHER MATTERS
Shareholder Proposals
Any proposal by a shareholder to be presented at the annual meeting of
shareholders to be held in 2000 which the shareholder intends to request be
included in the Company's proxy statement must have been received at the
Company's principal executive offices, 7631 Anagram Drive, Eden Prairie, MN
55344 before December 13, 1999. Any other proposals to be presented at the
annual meeting of shareholders to be held in 2000 must be received in writing
at the Company's principal executive offices, 7631 Anagram Drive, Eden
Prairie, MN 55344 not later than the close of business on the tenth day
following the day on which the notice of the meeting was mailed to
shareholders. Any such notice must contain the specific information required
by the Company's Bylaws, a copy of which will be provided to any shareholder
upon written request.
Additional Matters
The Board of Directors of the Company does not presently know of any
matters to be presented for consideration at the Special Meeting other than
matters described in the Notice of Special Meeting mailed together with this
Proxy Statement, but if other matters are presented, it is the intention of
the persons named in the accompanying proxy to vote on such matters in
accordance with their best judgment.
Independent Public Accountants
Arthur Andersen LLP has served as the Company's independent public
accountants since 1993 and has been selected to serve as the Company's
independent public accountants for the fiscal year ending January 2, 2000.
Representatives of Arthur Andersen LLP will be present at the Special Meeting,
will have an opportunity to make a statement if they desire to do so and will
be available to respond to appropriate questions from shareholders.
Available Information
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, and, in accordance therewith, files reports and other
information with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements and other information filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the following Regional Offices of the Commission: Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material also can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also
maintains a Web site address, http://www.sec.gov. The Company Common Stock is
listed and traded on The Nasdaq Stock Market; reports, proxy statements and
other information concerning the Company may be inspected at the offices of
Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
BY ORDER OF THE BOARD OF DIRECTORS,
David G. Mell
President and Chief Executive
Officer
Eden Prairie, Minnesota
December 29, 1999
28
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ANNUAL FINANCIAL STATEMENTS--
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of January 3, 1999 and January 4, 1998... F-3
Consolidated Statements of Operations for the years ended January 3,
1999, January 4, 1998 and January 5, 1997.............................. F-4
Consolidated Statements of Shareholders' Equity for the years ended
January 3, 1999, January 4, 1998 and January 5, 1997................... F-5
Consolidated Statements of Cash Flows for the years ended January 3,
1999, January 4, 1998 and January 5, 1997.............................. F-6
Notes to Consolidated Financial Statements.............................. F-7
INTERIM FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets as of October 3, 1999 and January 3, 1999... F-15
Consolidated Statements of Operations for the three and nine months
ended October 3, 1999 and October 4, 1998.............................. F-16
Consolidated Statements of Cash Flows for the nine months ended October
3, 1999 and October 4, 1998............................................ F-17
Notes to Consolidated Financial Statements.............................. F-18
</TABLE>
F-1
<PAGE>
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
F-2
<PAGE>
FIELDWORKS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 3, January 4,
1999 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.
F-3
<PAGE>
FIELDWORKS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
-------------------------------------
January 3, January 4, January 5,
1999 1998 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.
F-4
<PAGE>
FIELDWORKS, INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A
Convertible
Preferred Stock Common Stock Common Additional Total
---------------- ---------------- Stock Paid-in Accumulated Shareholders'
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.
F-5
<PAGE>
FIELDWORKS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
-------------------------------------
January 3, January 4, January 5,
1999 1998 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.
F-6
<PAGE>
FIELDWORKS, INCORPORATED
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.
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.
F-7
<PAGE>
FIELDWORKS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
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)
=========== =========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
January 3, January 4,
1999 1998
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
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.
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.
F-8
<PAGE>
FIELDWORKS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
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:
<TABLE>
<S> <C>
Warranty and product upgrade costs............................ $1,025,000
Employee severance and associated costs....................... 447,530
----------
Total......................................................... $1,472,530
==========
</TABLE>
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.
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.
F-9
<PAGE>
FIELDWORKS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the Company's statutory tax rate to the effective rate
is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate.................................. 34% 34% 34%
State taxes, net of federal tax benefit................. 4 4 6
Valuation allowance..................................... (38) (38) (40)
--- --- ---
--% --% --%
=== === ===
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
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)
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
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:
<TABLE>
<S> <C>
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%
</TABLE>
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.
F-10
<PAGE>
FIELDWORKS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
F-11
<PAGE>
FIELDWORKS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
--------- ----- ------- -----
</TABLE>
Additional information regarding options outstanding at January 3, 1999 is
as follows:
<TABLE>
<CAPTION>
Weighted average
Number of Exercise Weighted average remaining
Type of option options price range exercise price contractual life
- -------------- --------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
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>
F-12
<PAGE>
FIELDWORKS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
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)
</TABLE>
The weighted average fair values of options granted were as follows:
<TABLE>
<CAPTION>
Incentive Nonqualified
stock stock
options options
--------- ------------
<S> <C> <C>
1998 grants........................................ $2.33 $3.24
1997 grants........................................ 3.47 4.43
1996 grants........................................ 3.87 4.46
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
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....................... -- -- --
</TABLE>
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.
F-13
<PAGE>
FIELDWORKS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a schedule of future minimum lease payments as of January
3, 1999:
<TABLE>
<CAPTION>
Capital Operating
leases leases
------- ---------
<S> <C> <C>
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
=======
</TABLE>
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.
10. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
--------------- ------------------ ---------------- ---------------
1998 1997 1998 1997 1998 1997 1998 1997
------- ------ -------- -------- ------- ------- ------- ------
(in thousands)
<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".
F-14
<PAGE>
FIELDWORKS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 3, January 3,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................... $ 1,175,253 $ 1,690,469
Accounts receivable, net of allowance for doubtful
accounts of $250,100 and $269,800, respectively.. 3,756,684 3,930,366
Inventories....................................... 4,091,459 3,400,744
Prepaid expenses and other........................ 489,922 121,780
------------ ------------
Total current assets........................... 9,513,318 9,143,359
------------ ------------
Property and equipment:
Computers and equipment........................... 2,163,600 1,620,455
Furniture and fixtures............................ 1,093,099 1,109,895
Leasehold improvements............................ 435,813 458,216
Less: Accumulated depreciation.................... (1,888,993) (1,393,342)
------------ ------------
Property and equipment, net.................... 1,803,519 1,795,224
Other long term assets, net........................ 133,879 17,385
------------ ------------
$ 11,450,716 $ 10,955,968
============ ============
Liabilities And Shareholders' Equity
Current liabilities:
Line of credit.................................... $ 1,009,631 $ 681,981
Accounts payable.................................. 2,974,894 1,804,186
Accrued warranty and product upgrade.............. 825,689 1,102,798
Accrued compensation and benefits................. 518,969 376,932
Other accrued liabilities......................... 322,857 321,532
Deferred revenue.................................. 850,164 765,184
Current maturities of capitalized lease
obligations...................................... 40,226 13,548
------------ ------------
Total current liabilities...................... 6,542,430 5,066,161
Notes payable:
Notes payable..................................... 3,000,000 --
Less: Discount on notes payable.................. 882,000 --
------------ ------------
Notes payable, net............................. 2,118,000 --
Capitalized lease obligations, less current
maturities........................................ 49,070 96,868
------------ ------------
Total liabilities.............................. 8,709,500 5,163,029
------------ ------------
Shareholders' equity:
Common stock, $.001 par value, 30,000,000 shares
authorized; 8,894,426 and 8,823,926 issued and
outstanding, respectively........................ 8,894 8,824
Common stock warrants............................. 1,010,922 150,640
Additional paid-in capital........................ 20,186,658 20,085,011
Accumulated deficit............................... (18,465,258) (14,451,536)
------------ ------------
Total shareholders' equity..................... 2,741,216 5,792,939
------------ ------------
$ 11,450,716 $ 10,955,968
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE>
FIELDWORKS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
------------------------ ------------------------
October 3, October 4, October 3, October 4,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.................. $ 4,784,431 $ 4,412,312 $18,312,977 $13,632,083
Cost of sales.............. 3,538,376 2,969,855 13,095,256 9,945,144
----------- ----------- ----------- -----------
Gross profit........... 1,246,055 1,442,457 5,217,721 3,686,939
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing...... 1,561,435 1,290,331 4,033,387 4,154,229
General and
administrative.......... 704,016 647,101 2,258,160 2,229,629
Research and
development............. 818,526 813,435 2,485,641 2,379,811
Restructuring and product
upgrade costs........... 399,978 187,720 399,978 1,472,530
----------- ----------- ----------- -----------
Total operating
expenses.............. 3,483,955 2,938,587 9,177,166 10,236,199
----------- ----------- ----------- -----------
Operating loss......... (2,237,900) (1,496,130) (3,959,445) (6,549,260)
Interest income (expense)
and other, net............ (35,821) 33,927 (54,277) 136,863
----------- ----------- ----------- -----------
Net loss................... $(2,273,721) $(1,462,203) $(4,013,722) $(6,412,397)
=========== =========== =========== ===========
Basic and diluted earnings
(loss) per share:
Net loss per common
share................... $ (.26) $ (.17) $ (.45) $ (.73)
=========== =========== =========== ===========
Weighted average common
shares outstanding...... 8,894,426 8,809,497 8,867,821 8,791,513
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE>
FIELDWORKS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended
------------------------
October 3, October 4,
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net loss............................................ $(4,013,722) $(6,412,397)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization...................... 495,734 517,516
Accrued product upgrade and restructuring costs.... 399,978 1,010,001
Non-cash consulting expense........................ 9,500 --
Change in operating items:
Accounts receivable............................... 173,682 3,513,723
Inventories....................................... (690,715) 1,063,111
Prepaid expenses and other........................ (484,719) 50,265
Accounts payable.................................. 1,170,708 (182,012)
Accrued expenses.................................. (533,725) (313,269)
Deferred revenue.................................. 84,980 200,739
----------- -----------
Net cash used for operating activities........... (3,388,299) (552,323)
----------- -----------
Investing activities:
Net purchases of property and equipment............. (503,946) (1,044,948)
----------- -----------
Net cash used for investing activities........... (503,946) (1,044,948)
----------- -----------
Financing activities:
Proceeds from issuance of notes..................... 3,000,000 --
Proceeds from issuance of common stock.............. 70,499 115,508
Net line of credit borrowings (repayments).......... 327,650 --
Payment of capitalized lease obligations............ (21,120) (39,556)
----------- -----------
Net cash provided by financing activities........ 3,377,029 75,952
----------- -----------
Change in cash and cash equivalents.................. (515,216) (1,521,319)
Cash and cash equivalents, beginning of period....... 1,690,469 3,218,759
----------- -----------
Cash and cash equivalents, end of period............. $ 1,175,253 $ 1,697,440
=========== ===========
Supplemental cash flow disclosure:
Cash paid for interest.............................. $ 85,162 $ 5,962
=========== ===========
Non cash financing activities:
Issuance of warrants................................ $ 882,000 $ --
=========== ===========
Expiration of warrants.............................. $ 31,218 $ --
=========== ===========
Non-cash consulting expense......................... $ 9,500 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE>
FIELDWORKS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
The accompanying unaudited consolidated financial statements of FieldWorks,
Incorporated (FieldWorks or the Company), should be read in conjunction with
the consolidated financial statements and notes thereto filed with the
Securities and Exchange Commission in the Company's Annual Report on Form 10-
K, for the fiscal year ended January 3, 1999. In the opinion of management,
the accompanying consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) considered necessary to
present fairly the financial results for the interim periods presented. The
results of operations for the interim periods are not necessarily indicative
of the results to be expected for the entire fiscal year.
2. Inventories:
Inventories are stated at the lower of cost or market value, as determined
by the first-in, first-out cost method, and consisted of the following:
<TABLE>
<CAPTION>
October 3, January 3,
1999 1999
---------- ----------
<S> <C> <C>
Raw materials....................................... $2,873,011 $2,478,662
Work in process..................................... 499,253 173,791
Finished goods...................................... 719,195 748,291
---------- ----------
Total............................................... $4,091,459 $3,400,744
========== ==========
</TABLE>
3. Earnings (Loss) Per Share:
The Company presents earnings (loss) per share (EPS) data in accordance
with the requirements of the Statement of Financial Accounting Standards No.
128. Under SFAS No. 128, 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 as the effect
would be antidilutive. As a result, basic and diluted EPS are equal for all
periods presented in the accompanying Consolidated Statements of Operations.
4. Restructuring and Product Upgrade Costs:
In 1999, the Company incurred restructuring costs due to severance charges
from reorganizational efforts related to outsourcing certain aspects of the
manufacturing and design of products. In 1998, these costs related to the
discontinuation of the 5000 Series I Workstation, as well as other internal
reorganization efforts.
5.Issuance of Notes:
In September 1999, the Company completed a private placement of $3.0
million in subordinated notes. The notes bear interest at 11% per annum and
mature in September 2001. Noteholders also received warrants to purchase 1.5
million shares of common stock exercisable at $1.00 per share. The warrants
are exercisable for five years, and were recorded at their estimated fair
value at the date of issuance.
F-18
<PAGE>
APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES PURCHASE AGREEMENT
between
FIELDWORKS, INCORPORATED,
a Minnesota corporation
and
INDUSTRIAL-WORKS HOLDING CORP.,
a Delaware corporation
Dated as of November 20, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I AUTHORIZATION, ISSUANCE AND SALE OF SECURITIES................... 1
SECTION 1.01 Authorization............................................... 1
SECTION 1.02 The Series B Shares......................................... 1
SECTION 1.03 The Warrant................................................. 1
SECTION 1.04 The Conversion Shares and Warrant Shares.................... 1
SECTION 1.05 Purchase and Sale........................................... 1
SECTION 1.06 Closing..................................................... 2
SECTION 1.07 Use of Proceeds............................................. 2
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY................... 2
SECTION 2.01 Organization, Qualifications and Corporate Power............ 2
SECTION 2.02 Authorization of Agreements, Etc............................ 2
SECTION 2.03 Validity.................................................... 3
SECTION 2.04 Authorized Capital Stock.................................... 3
SECTION 2.05 Third-Party Approvals....................................... 4
SECTION 2.06 SEC Filings................................................. 4
SECTION 2.07 Litigation.................................................. 4
SECTION 2.08 Material Agreements and Liabilities; Financial Statements... 4
SECTION 2.09 Inventory................................................... 5
SECTION 2.10 Absence of Certain Changes.................................. 5
SECTION 2.11 Proprietary Information of Third Parties.................... 6
SECTION 2.12 Patents, Trademarks, Etc.................................... 6
SECTION 2.13 Compliance with Laws........................................ 7
SECTION 2.14 Certain Other Agreements.................................... 7
SECTION 2.15 Offering of the Series B Shares............................. 7
SECTION 2.16 Brokers..................................................... 8
SECTION 2.17 Officers.................................................... 8
SECTION 2.18 Employees................................................... 8
SECTION 2.19 Year 2000................................................... 8
SECTION 2.20 Taxes....................................................... 8
SECTION 2.21 ERISA....................................................... 9
SECTION 2.22 Environmental Matters....................................... 9
SECTION 2.23 Affiliate Transactions...................................... 10
SECTION 2.24 Insurance................................................... 10
SECTION 2.25 Tangible Assets............................................. 11
SECTION 2.26 Customer Relations.......................................... 11
SECTION 2.27 Books and Records........................................... 11
SECTION 2.28 Warranties.................................................. 11
SECTION 2.29 Outsourcing................................................. 11
SECTION 2.30 Disclosure.................................................. 11
ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS
OF THE PURCHASERS......................................................... 12
SECTION 3.01 Representations............................................. 12
ARTICLE IV CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS................. 12
SECTION 4.01 Conditions to Obligations of the Purchasers................. 12
</TABLE>
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<TABLE>
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ARTICLE V COVENANTS OF THE COMPANY....................................... 14
SECTION 5.01 Stockholder Meeting; Voting Agreement and Transfer
Restrictions.......................................................... 14
SECTION 5.02 SEC Filings............................................... 14
SECTION 5.03 Financial Statements, Reports, Etc........................ 15
SECTION 5.04 Reserve for Conversion Shares............................. 15
SECTION 5.05 Reserve for Warrant Shares................................ 16
SECTION 5.06 Corporate Existence....................................... 16
SECTION 5.07 Properties, Business, Insurance........................... 16
SECTION 5.08 Inspection, Consultation and Advice....................... 16
SECTION 5.09 No Solicitation; Restrictive Agreements Prohibited........ 17
SECTION 5.10 Fees and Expenses of Directors............................ 17
SECTION 5.11 Board of Directors........................................ 17
SECTION 5.12 Compliance with Laws...................................... 17
SECTION 5.13 Keeping of Records and Books of Account................... 17
SECTION 5.14 Protective Provisions..................................... 17
SECTION 5.15 Publication Matters....................................... 19
ARTICLE VI MISCELLANEOUS................................................. 19
SECTION 6.01 Expenses.................................................. 19
SECTION 6.02 Breakup Fee............................................... 19
SECTION 6.03 Termination............................................... 20
SECTION 6.04 Survival of Agreements.................................... 20
SECTION 6.05 Brokerage................................................. 20
SECTION 6.06 Parties in Interest....................................... 20
SECTION 6.07 Notices................................................... 21
SECTION 6.08 Governing Law; Jury Trial Waiver.......................... 21
SECTION 6.09 Injunctive Relief......................................... 22
SECTION 6.10 Assignment................................................ 22
SECTION 6.11 Limitation of Liability................................... 22
SECTION 6.12 Entire Agreement.......................................... 22
SECTION 6.13 Counterparts.............................................. 22
SECTION 6.14 Amendments................................................ 22
SECTION 6.15 Severability.............................................. 22
SECTION 6.16 Titles and Subtitles...................................... 22
SECTION 6.17 Certain Defined Terms..................................... 22
INDEX TO EXHIBITS
EXHIBIT A Form of Certificate of Designation for Series B Convertible
Participating
Preferred Stock.................................................. A-1
EXHIBIT B Form of Warrant to Purchase Common Stock..................... B-1
EXHIBIT C Form of Management Services Agreement........................ C-1
EXHIBIT D Form of Voting and Transfer Restriction Agreement............ D-1
EXHIBIT E Form of Opinion of Counsel to Company........................ E-1
EXHIBIT F Form of Breakup Warrant...................................... F-1
</TABLE>
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SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") dated as of November
20, 1999 by and among Fieldworks, Incorporated, a Minnesota corporation (the
"Company"), and Industrial-Works Holding Corp., a Delaware corporation
("Purchaser"). Section 6.17 lists certain defined terms used in this Agreement.
WHEREAS, on the terms and subject to the conditions set forth herein, the
Company wishes to issue and sell to Purchaser newly issued shares ("Series B
Shares") of the authorized but unissued Series B Convertible Participating
Preferred Stock of the Company (the "Series B Preferred Stock"), and a warrant
to purchase 500,000 shares of the Common Stock, $.001 par value per share
("Common Stock") of the Company (the "Warrant");
WHEREAS, the Purchaser wishes to purchase the Series B Shares and the
Warrant on the terms and subject to the conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained in this Agreement, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties agree as
follows:
ARTICLE I
AUTHORIZATION, ISSUANCE AND SALE OF SECURITIES
SECTION 1.01 Authorization. The Company has authorized and reserved for
issuance 4,250,000 shares of Series B Preferred Stock, upon the terms and
conditions described herein, and has authorized and reserved 4,250,000 shares
of the Company's Common Stock for issuance upon conversion of the Series B
Shares. The Company has authorized and reserved 500,000 shares of the Company's
Common Stock for issuance upon exercise of the Warrant, and will reserve
250,000 shares of the Company's Common Stock for issuance upon the exercise of
the Breakup Warrant, if the Breakup Warrant is issued.
SECTION 1.02 The Series B Shares. The Series B Shares shall be issued
pursuant to, and shall be vested with the rights and preferences, and subject
to the limitations set forth in the Certificate of Designation of the Series B
Convertible Participating Preferred Stock (the "Series B Certificate") attached
hereto as Exhibit A.
SECTION 1.03 The Warrant. The Warrant and the Warrant Shares shall be issued
pursuant to, and shall be vested with the rights and subject to the limits of
the Warrant to Purchase Shares of Common Stock attached hereto as Exhibit B.
SECTION 1.04 The Conversion Shares and Warrant Shares. The shares of the
Company's Common Stock issued or issuable upon conversion of the Series B
Shares (the "Conversion Shares") and the shares of the Company's Common Stock
issued or issuable upon exercise of the Warrant, or the Breakup Warrant (the
"Warrant Shares") will be entitled to the registration rights provisions
attached as Exhibit A to the Warrant.
SECTION 1.05 Purchase and Sale. Subject to the terms and conditions of this
Agreement, the Company agrees to issue and sell to Purchaser and Purchaser
agrees to purchase from the Company, 4,250,000 shares of Series B Preferred
Stock for a purchase price of one dollar ($1.00) per share.
Subject to the terms and conditions of this Agreement, the Company agrees to
issue and sell to Purchaser and Purchaser agrees to purchase from the Company a
warrant to purchase 500,000 shares of the Company's Common Stock in
consideration for Purchaser's investment in the Series B Shares. If any rule,
law or regulation requires an allocation of a portion of the Purchase Price to
the Warrants, $100 shall be so allocated.
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SECTION 1.06 Closing. Subject to the terms and conditions of this Agreement,
the closing shall take place at the offices of Paul, Hastings, Janofsky &
Walker LLP, 17th Floor, 695 Town Center Drive, Costa Mesa, California 92626 on
January 19, 2000 or at such other place, time and date as Company and Purchaser
may direct (the "Closing Date"). At the Closing, Company will deliver to
Purchaser the Warrant and the Series B Shares, registered in Purchaser's name,
and Purchaser shall transfer the Purchase Price to the account of the Company
by wire transfer of immediately available funds.
SECTION 1.07 Use of Proceeds. The Company shall use such proceeds for
acquisitions and for general working capital.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Purchaser that, except as set
forth in the Disclosure Schedules attached hereto (which Disclosure Schedules
make explicit reference to the particular representation or warranty as to
which exception is taken, which in each case shall constitute the sole
representation and warranty as to which such exception shall apply):
SECTION 2.01 Organization, Qualifications and Corporate Power.
(a) The Company is a corporation duly incorporated, validly existing and in
good standing under the laws of its state of incorporation and is duly licensed
or qualified to transact business as a foreign corporation and is in good
standing in each jurisdiction in which the nature of the business transacted by
it or the character of the properties owned or leased by it requires such
licensing or qualification, except for such jurisdictions, if any, in which the
failure to be so qualified or in good standing would not, individually or in
the aggregate, have a Material Adverse Effect. The Company has the corporate
power and authority to own and hold its properties and to carry on its business
as now conducted and as proposed to be conducted, as described in the Company's
Annual Report on Form 10-K for the year ended January 3, 1999 (the "Annual
Report"), and the Company has the corporate power and authority to execute,
deliver and perform its obligations under this Agreement, the Warrant, the
Breakup Warrant, and all other documents to be delivered in connection with any
of them (the "Transaction Documents"), and to issue, sell and deliver the
Series B Shares and to issue and deliver the Warrant Shares, or the Conversion
Shares.
(b) The Company does not (i) own of record or beneficially, directly or
indirectly, (A) any shares of capital stock or securities convertible into
capital stock of any other corporation or (B) any participating or limited
liability company interest in any partnership, joint venture, limited liability
company or other non-corporate business enterprise or (ii) control, directly or
indirectly, any other entity.
(c) The Articles of Incorporation of the Company (the "Articles of
Incorporation") and the Bylaws of the Company (the "Bylaws") are in full force
and effect as of the date hereof in the forms attached to, or incorporated by
reference in, the Annual Report.
SECTION 2.02 Authorization of Agreements.
(a) The execution and delivery by the Company of this Agreement, the
Warrant, the Breakup Warrant, and all other Transaction Documents, the
performance by the Company of its obligations hereunder and thereunder, the
issuance, sale and delivery of the Series B Shares, the Warrant, and the
Breakup Warrant, if issued, and the issuance and delivery of the Conversion
Shares and the Warrant Shares have been duly authorized by all requisite
corporate action and do not violate any provision of law, any order of any
court or other agency of government, the Articles of Incorporation or the
Bylaws, or any provision of any indenture, agreement or other instrument to
which the Company, or any of its properties or assets is bound, or conflict
with, result in a breach of or constitute (with due notice or lapse of time or
both) a default under any such
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indenture, agreement or other instrument, or result in the creation or
imposition of any lien, charge, restriction, claim or encumbrance of any nature
whatsoever upon any of the properties or assets of the Company.
(b) The Series B Certificate, the Warrant, and the Breakup Warrant have been
duly approved by the Board of Directors of the Company. The Series B Shares
have been duly authorized and, when issued in accordance with this Agreement
and the Series B Certificate, will be validly issued, fully paid and
nonassessable shares of Series B Preferred Stock, with no personal liability
attaching to the ownership thereof, and will be free and clear of all liens,
charges, restrictions, claims and encumbrances imposed by or through the
Company except as set forth in this Agreement and the Series B Certificate. The
Conversion Shares and the Warrant Shares have been duly reserved for issuance
upon conversion of the Series B Shares and the exercise of the Warrant or the
Breakup Warrant, respectively, and, when so issued, will be duly authorized,
validly issued, fully paid and nonassessable shares of Common Stock not subject
to, or issued in violation of, any purchase option, right of first refusal,
pre-emptive right, subscription right or any similar right under any provision
of the Minnesota Business Corporation Act (the "MBCA"), the Articles of
Incorporation or Bylaws, or any contract to which the Company is a party or is
otherwise bound, with no personal liability attaching to the ownership thereof
and will be free and clear of all liens, charges, restrictions, claims and
encumbrances imposed by or through the Company except as set forth in this
Agreement, the Series B Certificate, the Warrant, or the Breakup Warrant.
Neither the issuance, sale or delivery of the Series B Shares, the Warrant or
the Breakup Warrant nor the issuance or delivery of the Conversion Shares or
the Warrant Shares is subject to, or in violation of, any purchase option,
right of first refusal, pre-emptive right, subscription right or any similar
right under any provision of the MBCA, the Articles of Incorporation or Bylaws,
or any contract to which the Company is a party or is otherwise bound, or of
any other right in favor of any Person that has not been effectively waived.
SECTION 2.03 Validity. This Agreement has been duly executed and delivered
by the Company and constitutes a legal, valid and binding obligation of the
Company, enforceable in accordance with its terms, and each other Transaction
Document when executed and delivered in accordance with this Agreement will
constitute a legal, valid and binding obligation of the Company, enforceable in
accordance with its terms (subject in each case, as to the enforcement of
remedies, to applicable bankruptcy, reorganization, insolvency, moratorium and
similar laws affecting the rights of creditors generally, and as to the remedy
of specific performance and other forms of injunctive relief, subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought).
SECTION 2.04 Authorized Capital Stock. The authorized capital stock of the
Company consists of (i) 30,000,000 shares of Common Stock and (ii) 5,000,000
shares of preferred stock, of which 4,250,000 shares have been designated
Series B Preferred Stock. 8,894,426 shares of Common Stock are validly issued
and outstanding, fully paid and nonassessable with no personal liability
attaching to the ownership thereof, 3,893,604 shares of Common Stock are
reserved for issuance upon exercise of outstanding options and warrants, and
another 793,777 shares have been reserved for issuance under the 1994 Long-Term
Incentive and Stock Option Plan and the 1996 Directors' Stock Option Plan, and
no Series B Shares shall have been issued. The shareholders of record, and
holders by name or by category of subscriptions, warrants, options, convertible
debt or equity securities, and other rights (contingent or other) to purchase
or otherwise acquire equity securities of the Company, and the number of shares
of Common Stock and the number of such subscriptions, warrants, options,
convertible securities, and other such rights held by each, are as set forth on
Schedule 2.04. Schedule 2.04 also identifies, to the extent known to the
Company, all the beneficial owners of such securities, to the extent the record
holders are not the beneficial owners of such securities. The designations,
powers, preferences, rights, qualifications, limitations and restrictions in
respect of each class and series of authorized capital stock of the Company are
as set forth in the Articles of Incorporation, and all such designations,
powers, preferences, rights, qualifications, limitations and restrictions are
valid, binding and enforceable and in accordance with all applicable laws.
Except as contemplated by this Agreement or set forth in the attached Schedule
2.04, (i) no Person owns of record or is known to the Company to own
beneficially any share of Common Stock, (ii) no subscription, warrant, option,
convertible security, or other right (contingent or other) to
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purchase or otherwise acquire equity securities of the Company is authorized or
outstanding, (iii) there is no commitment by the Company to issue shares,
subscriptions, warrants, options, convertible equity or debt securities, or
other such rights or to distribute to holders of any of its equity or debt
securities any evidence of indebtedness or asset and (iv) there are no options,
warrants, rights, convertible or exchangeable securities, "phantom" stock
rights, stock appreciation rights, stock-based performance units, commitments,
contracts, arrangements or undertakings of any kind to which the Company is a
party or by which it is bound (x) obligating the Company to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of capital
stock or other equity interests in, or any security convertible into, or
exercisable for or exchangeable for, any capital stock of or other equity
interest in, the Company, (y) obligating the Company to issue, grant, extend or
enter into any such option, warrant, call, right, security, commitment,
contract, arrangement or undertaking, or (z) that give any person the right to
receive any economic benefit or right similar to or derived from the economic
benefits and rights occurring to holders of Common Stock. Except as provided
for in the Articles of Incorporation or as set forth in the attached Schedule
2.04, the Company has no obligation (contingent or other) to purchase, redeem
or otherwise acquire any of its securities or any interest therein or to pay
any dividend or make any other distribution in respect thereof. Except as set
forth on Schedule 2.04 and in the Series B Certificate, or as expressly
contemplated by the terms of this Agreement, there are no voting trusts or
agreements, shareholders' agreements, pledge agreements, buy-sell agreements,
rights of first refusal, preemptive rights or proxies relating to any
securities of the Company whether or not the Company is a party thereto. All of
the outstanding securities of the Company were issued in compliance with all
applicable federal and state securities laws.
SECTION 2.05 Third-Party Approvals. No registration or filing with, or
consent or approval of or other action by any third party, is or will be
necessary for the valid execution, delivery and performance by the Company of
the Transaction Documents, the issuance, sale and delivery of the Warrant or of
the Series B Shares on the Closing Date, or, if issued, the Breakup Warrant,
or, upon exercise or conversion thereof, the issuance and delivery of the
Warrant Shares and the Conversion Shares, other than (i) filings pursuant to
state securities laws (all of which filings have been made by the Company,
other than those which are required to be made after the Closing and which will
be duly made on a timely basis) in connection with the sale of the Series B
Shares, the Warrant and the Breakup Warrant, if issued, and (ii) with respect
to the registration rights granted in the Warrant or the Breakup Warrant, the
registration of the shares covered thereby with the United States Securities
and Exchange Commission (the "SEC") and filings pursuant to state securities
laws.
SECTION 2.06 SEC Filings. The Company has filed, on a timely basis, all
filings required to be made by it with the SEC.
SECTION 2.07 Litigation. Except as set forth on Schedule 2.07, as of the
date hereof there is no action, suit, claim, proceeding or investigation
pending or, to the best of the Company's knowledge, threatened against or
affecting the Company. The Company is not subject to any order, writ,
injunction or decree entered in any lawsuit or proceeding. The Company has no
knowledge of any facts or circumstances that might give rise to any of the
foregoing.
SECTION 2.08 Material Agreements and Liabilities; Financial Statements.
(a) Schedule 2.08(a) contains a complete list of the Company's Material
Agreements, obligations and Liabilities (whether absolute, accrued or
contingent). "Material Agreements" shall mean all agreements to which the
Company is a party or by which the Company is bound that are material to the
conduct and operations of its business and properties, including without
limitation any agreements (i) which are not terminable upon less than thirty
(30) days' notice, (ii) which provide for payments to or by the Company in
excess of $100,000 annually (except for purchase orders and customer orders
entered in the ordinary course of business), (iii) which obligate the Company
to share, license or develop any product or technology (except those which
would not have a Material Adverse Effect), (iv) which involve transactions or
proposed transactions between the Company, on the one hand, and any Affiliate
of the Company, on the other hand, (v) which are debt financing agreements
(excluding equipment leases which in the aggregate do not obligate the
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Company for payments in excess of $50,000), (vi) pursuant to which the Company
has issued or proposes to issue any Capital Stock or Convertible Securities or
(vii) pursuant to which the Company has granted registration rights pertaining
to any securities to any Person. "Liability" or "Liabilities" means, with
respect to any Person, any liability or obligation of such Person of any kind,
character or description, whether known or unknown, absolute or contingent,
accrued or unaccrued, liquidated or unliquidated, secured or unsecured, joint
or several, due or to become due, vested or unvested, executory, determined,
determinable or otherwise and whether or not the same is required to be accrued
on the financial statements of such Person. The Company has in all material
respects performed, and is now performing in all material respects, its
obligations under, and is not in default (or by the lapse of time and/or the
giving of notice would otherwise be in default) in respect of, any of the
Material Agreements. To the Company's knowledge, none of the other parties to
the Material Agreements are in default thereunder. Each of the Material
Agreements is in full force and effect and is a valid and enforceable
obligation against the Company and, to the Company's knowledge, the other party
or parties thereto, in accordance with its terms.
(b) The audited balance sheet of the Company as of January 3, 1999, the
unaudited balance sheet of the Company for the nine-month period ended October
3, 1999, the audited statement of income and cash flow of the Company for the
fiscal year ended January 3, 1999 and unaudited statement of income and cash
flow of the Company for the nine-month period ended October 3, 1999
(collectively, the "Financial Statements") are set forth on Schedule 2.08(b) or
in the Annual Report. The Financial Statements have been prepared in accordance
with GAAP applied on a consistent basis throughout the periods indicated and
with each other (except that the unaudited Financial Statements may not contain
all footnotes required by GAAP) and fairly present the financial condition of
the Company and the results of operations as of such dates and for such periods
indicated. Except as reflected in the Financial Statements, the Company is not
a guarantor or indemnitor of any Indebtedness or Liability of any other Person.
The Company maintains a standard system of accounting established and
administered in accordance with GAAP. The general ledger, accounts receivable,
accounts payable, bank reconciliations and payroll records of the Company have
been maintained in all material respects in the ordinary course and contain a
materially correct and complete record of the matters typically contained in
records of such nature.
(c) The Company has not received any management letters or other letters
from the Company's independent auditing firm(s) relating to the results of
operations, financial statements or internal controls of the Company insofar as
the same may pertain to the business or assets of the Company which it has not
disclosed to Purchaser.
SECTION 2.09 Inventory.
To the Company's knowledge, and subject to the inventory reserves described
in Schedule 2.09, each item of inventory of the Company, whether reflected on
the Company's balance sheet or subsequently acquired, is (a) free of any
material defect or deficiency, (b) in good, usable and currently marketable
condition in the ordinary course of the business of the Company (subject, in
the case of raw materials and work-in-process, to the completion of the
production process) and (c) properly reflected in the books and records of the
Company at the lesser of cost and fair market value, all as determined in
accordance with GAAP. All inventory reflected on the Company's balance sheets
conforms to the Company's published specifications and to any additional
requirements of the intended purchaser, in the case of items identified to a
particular order. Except as set forth in Schedule 2.09, since January 3, 1999,
there have not been any write-downs of the value of, or establishment of any
reserves against, any inventory of the Company.
SECTION 2.10 Absence of Certain Changes.
(a) Except as disclosed in the Company's filings pursuant to the Securities
Exchange Act of 1934 (the "Exchange Act"; the "Exchange Act Filings") or as set
forth in the Financial Statements, since January 3, 1999, there has not been
any change to the financial condition of the Company that would have a Material
Adverse Effect on the Company or on the business or prospects of the Company,
and, except as specifically
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reflected in the Financial Statements or in the Exchange Act filings, the
Company has not (i) declared or paid any dividends, or authorized or made any
distribution upon or with respect to any class or series of its capital stock;
(ii) made capital expenditures or commitments therefor exceeding (excluding
purchases of tooling in an aggregate amount not exceeding $800,000) $50,000
individually or $250,000 in the aggregate; (iii) made any loans or advances to
any Person exceeding $15,000 individually or $30,000 in the aggregate or
guaranteed the obligations of any Person; (iv) sold, exchanged or otherwise
disposed of any of its assets or rights exceeding $50,000 individually or
$100,000 in the aggregate; (v) incurred any material change in the assets,
liabilities, financial condition, operating results or business of the Company
from that reflected in the Financial Statements; (vi) suffered any damage,
destruction or loss, whether or not covered by insurance, that had or would
have a Material Adverse Effect on the Company; (vii) waived a right or a debt
owed to it exceeding $15,000 individually or $30,000 in the aggregate; (viii)
agreed to or made any material change or amendment to any Material Agreement;
(ix) permitted or allowed any of its assets to be subjected to any material
encumbrance; (x) written up or down the value of any inventory, notes or
accounts receivable or other assets in any material respect; (xi) licensed,
sold, transferred, pledged, modified, disclosed, disposed of or permitted to
lapse any right to the use of any Intellectual Property; (xii) made any change
in any method of accounting or accounting practice or any change in
depreciation or amortization policies or rates previously adopted; (xiii) paid,
lent or advanced any amount to, sold, transferred or leased any assets to or
entered into any Material Agreement or material arrangement with any of its
Affiliates or entered into any agreement or arrangement whatsoever with any of
its Affiliates, except for directors' fees, travel expense advances and
employment compensation to officers; or (xiv) incurred or suffered any other
event or condition of any character that could reasonably be expected to have a
Material Adverse Effect on the Company.
(b) Schedule 2.10(b) sets forth a list of the ten (10) most highly
compensated employees and officers of the Company for the fiscal year ended
January 3, 1999, and a list of the ten (10) most highly compensated employees
and officers of the Company for the current fiscal year (on an annualized
basis), in each case based on total compensation paid to each such employee or
officer, and in each case setting forth such annual (or annualized) total
compensation for such employee or officer.
SECTION 2.11 Proprietary Information of Third Parties. No third party has
claimed or, to the Company's knowledge, has reason to claim that any Person
employed by or affiliated with the Company has (a) violated or may be violating
any of the terms or conditions of his or her employment, non-competition or
non-disclosure agreement with such third party, (b) disclosed or may be
disclosing or utilized or may be utilizing any trade secret or proprietary
information or documentation of such third party or (c) interfered or may be
interfering in the employment relationship between such third party and any of
its present or former employees. No third party has requested information from
the Company which suggests that such a claim might be contemplated. To the
Company's knowledge, no Person employed by or affiliated with the Company has
employed or proposes to employ any trade secret or any information or
documentation proprietary to any former employer, except as licensed or
otherwise authorized or permitted to do so, and no Person employed by or
affiliated with the Company has violated any confidential relationship which
such Person may have had with any third party, in connection with the
development, manufacture or sale of any product or proposed product or the
development or sale of any service or proposed service of the Company, and the
Company has no reason to believe there will be any such employment or
violation. None of the execution or delivery of this Agreement, or the carrying
on of the business of the Company, or the conduct or proposed conduct of the
business of the Company will conflict with or result in a breach of the terms,
conditions or provisions of or constitute a default under any contract,
covenant or instrument under which any such Person is obligated.
SECTION 2.12 Patents, Trademarks, Copyrights, Etc. The Annual Report sets
forth a list and brief description of all domestic and foreign patents, patent
rights, patent applications, trademarks, trademark applications, service marks,
service mark applications, trade names, domain names and copyrights, and all
applications for such which are in the process of being prepared, owned by or
registered in the name of the Company, or of which the Company is a licensor or
licensee, or in which the Company has any right, and in each case a brief
description of the nature of such right. The Company owns or possesses adequate
licenses or other rights to use all patents, patent applications, trademarks,
trademark applications, service marks, service
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mark applications, trade names, domain names, copyrights, manufacturing
processes, formulae, trade secrets, customer lists and know how (collectively,
"Intellectual Property") used in or necessary to the conduct of its business as
conducted and as proposed to be conducted, and no claim is pending or, to the
best of the Company's knowledge, threatened on the ground that the operations
of the Company infringe upon or conflict with the asserted rights of any other
Person under any Intellectual Property, and to the best of the Company's
knowledge, there is no basis for any such claim (whether or not pending or
threatened). No claim is pending or, to the best of the Company's knowledge,
threatened on the ground that any such Intellectual Property owned or licensed
by the Company, or which the Company otherwise has the right to use, is invalid
or unenforceable by the Company and there is no basis for any such claim
(whether or not pending or threatened). To the best of the Company's knowledge,
all technical information developed by and belonging to the Company which has
not been patented has been kept confidential, except for instances of non-
compliance which would not have a Material Adverse Effect.
SECTION 2.13 Compliance with Laws.
(a) The Company is in compliance with all Applicable Laws, except for
instances of non-compliance which would not have a Material Adverse Effect. The
Company has not received any notice of, nor does the Company have any knowledge
of, any material violation (or of any investigation, inspection, audit or other
proceeding by any governmental entity involving allegations of any material
violation) of any Applicable Law involving or related to the Company which has
not been dismissed or otherwise disposed of. The Company has not received
notice and does not otherwise have any knowledge that the Company is charged
with, threatened with or under investigation with respect to, any violation of
any Applicable Law, and has no knowledge of any proposed change in any
Applicable Law that would have a material adverse effect on the Company. The
Company has not received any opinion or memorandum or legal advice from legal
counsel to the effect that it is exposed, from a legal standpoint, to any
liability that may be material to its business, prospects, financial condition,
operations, property or affairs. There is no existing law, rule, regulation or
order, and the Company is not aware of any proposed law, rule, regulation or
order, whether federal, state, county or local, that would prohibit the Company
from, or otherwise materially adversely affect the Company in, conducting its
business in any jurisdiction in which it proposes to conduct business.
(b) The Company has, and, to the Company's knowledge after due inquiry, all
professional employees or agents of the Company have, all licenses, franchises,
permits, accreditations, authorizations, and other approvals from all
Governmental Entities ("Approvals") necessary for or used in the conduct of, or
relating to the operation of, the business of the Company and the occupancy and
operation, for its present uses, of the real and personal property which the
Company owns or leases. The Company is not in material violation of any such
Approval or any terms or conditions thereof. All such Approvals are in full
force and effect, have been issued to and fully paid for by the holder thereof
and no notice or warning from any Governmental Entity with respect to the
suspension, revocation or termination of any Approval has been, to the
knowledge of the Company, threatened by any Governmental Entity or issued or
given to the Company. No such Approvals will in any way be affected, terminate
or lapse by reason of the consummation of all or any portion of the
transactions contemplated by this Agreement.
SECTION 2.14 Certain Other Agreements. Except as contemplated or otherwise
set forth or disclosed by this Agreement, the Company has no legal obligation,
absolute or contingent, to any other Person to sell any Capital Stock, material
assets or the business of the Company or to effect any merger, consolidation,
liquidation, dissolution, recapitalization or other reorganization of the
Company or to enter into any agreement with respect thereto.
SECTION 2.15 Offering of the Series B Shares Warrant. Neither the Company
nor any Person authorized or employed by the Company as agent, broker, dealer
or otherwise in connection with the offering or sale of the Series B Shares,
the Warrant or any security of the Company similar to the Series B Shares or
the Warrant has offered the Series B Shares or the Warrant or any such similar
security for sale to, or solicited any offer to buy the Series B Shares, the
Warrant or any such similar security from, or otherwise approached or
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negotiated with respect thereto with, any Person or Persons, and neither the
Company nor any Person acting on its behalf has taken or will take any other
action (including, without limitation, any offer, issuance or sale of any
security of the Company under circumstances which might require the integration
of such security with the Series B Shares or the Warrant under the Securities
Act of 1933 (the "Securities Act") or the rules and regulations of the
Commission thereunder), in either case so as to subject the offering, issuance
or sale of the Series B Shares or the Warrant to the registration provisions of
the Securities Act.
SECTION 2.16 Brokers. The Company has no contract, arrangement or
understanding with any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement.
SECTION 2.17 Officers. Schedule 2.17 sets forth the names of the officers of
the Company, together with the title or job classification of each such Person
and the total compensation anticipated to be paid to each such Person by the
Company in calendar year 1999. Except as set forth on Schedule 2.17, no
employee of the Company has an employment agreement or understanding, whether
oral or written, with the Company.
SECTION 2.18 Employees. Except as disclosed to Purchaser on Schedule 2.18,
each of the officers of the Company, each key employee and each other employee
now employed by the Company who has access to confidential information of the
Company has executed an appropriate nondisclosure agreement in customary form,
and such agreements are in full force and effect. No officer or key employee of
the Company has advised the Company (orally or in writing) that he or she
intends to terminate employment with the Company. The Company has never had any
employees represented by collective bargaining agreements. The Company is
currently in compliance with all Applicable Laws relating to the employment of
labor, including provisions relating to employment practices, terms and
conditions of employment, wages, hours, equal opportunity, collective
bargaining and the payment of Social Security and other taxes, and with ERISA.
There is no unfair labor practice charge or complaint against the Company
pending before the National Labor Relations Board or any other governmental
agency arising out of the activities of the Company of which the Company has
received notice or of which the Company has knowledge, and the Company has no
knowledge of any facts or information which would give rise thereto. There is
no labor strike or labor disturbance pending or, to the knowledge of the
Company, threatened against the Company. No collective bargaining
representation petition is pending or, to the knowledge of the Company,
threatened against the Company.
SECTION 2.19 Year 2000. The disclosure under the heading "Year 2000" in the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October 3,
1999 (the "99Q3 Quarterly Report") is complete and accurate in all material
respects. The Company has no reasons to believe that it will incur expenses
after the date hereof in an amount in excess of $100,000 in the aggregate as a
result of problems commonly referred to as "Year 2000" software problems with
respect to the products, internal computer systems, non-computer operations or
productions processes of the Company or its vendors, business partners or
customers.
SECTION 2.20 Taxes. The Company has filed, or caused to be filed, on a
timely basis all tax returns (including payroll, unemployment and other taxes
related to its employees and independent contractors) required to be filed with
any federal or state governmental body and all material tax returns required to
be filed with any local or municipal governmental body, all such tax returns
are true, correct and complete in all material respects and the Company, has
paid or caused to be paid all taxes, levies, assessments, tariffs, duties or
other fees and any interest and penalties thereon ("Taxes") imposed, assessed
or collected by any governmental body that may have become due and payable
pursuant to those tax returns or otherwise. No such federal, state, local or
municipal tax returns have ever been audited by the Internal Revenue Service,
state or other authorities (except for an audit of state sales and use tax
returns). No deficiency assessment with respect to or proposed adjustment of
any of the Company's Federal, state, municipal or local tax returns has
occurred or, to the Company's knowledge, is threatened (except for a deficiency
assessment following the most recent audit of sales and use tax returns, which
the Company has fully satisfied). There has been no tax lien imposed by any
governmental body outstanding against the business or the Company's assets or
properties, except liens for current taxes not yet due. The reserve for Taxes
on the balance sheet in the Financial Statements is fully adequate to cover all
liabilities for Taxes with respect to periods ending on or before the Closing
Date. The transactions contemplated by this Agreement will not, assuming
compliance by parties to all Transaction
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Documents with the terms thereof, cause or result in a limitation on the
Company's net operating losses pursuant to Section 382 of the Code.
SECTION 2.21 ERISA. "Employee Benefit Plans" means (i) all of the Company's
employee benefit plans (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) and (ii) all other employee
benefit arrangements or payroll practice, including employment agreements,
stock option plans, severance agreements, board of directors' and executive
compensation arrangements, incentive programs or arrangements, sick leave,
severance pay policies, salary continuation for disability, consulting
arrangements, workers' compensation, retirement, deferred compensation, bonus,
stock purchase, hospitalization, medical insurance, life insurance, tuition
reimbursement or scholarship programs, plans providing benefits or payments in
the event of a change of control, change in ownership, or sale of a substantial
portion of the Company's assets, maintained by the Company (including ERISA
Affiliates as defined below) or to which the Company or an ERISA Affiliate has
contributed or is or was obligated to make payments, in each case with respect
to any current or former employee or director of the Company or an ERISA
Affiliate. The Company has no employee pension benefit plans (as defined in
Section 3(2) of ERISA) ("Employee Pension Plans"). The Company, including its
ERISA Affiliates, does not and has never maintained or participated in, been
obligated to make contributions to, and does not have and has had no liability
with respect to, any Employee Benefit Plan which is: (i) subject to Title IV of
ERISA or the minimum funding requirements of Section 412 of the Code or Section
302 of ERISA, (ii) a "multi-employer plan" (as defined in Section 3(37) of
ERISA), (iii) a "multiple employer plan" (as defined in Section 4063 or 4064 of
ERISA), or (iv) a funded vacation pay plan. The Company and its ERISA
Affiliates have, with respect to each Employee Benefit Plan, complied in all
material aspects with all applicable laws, and the lawful terms of such plans.
No employee of the Company nor any fiduciary with respect to the Employee
Benefit Plans has issued or distributed any written communication to any
present or former employee of the Company regarding the effect the transactions
contemplated by this Agreement may have on any Employee Benefit Plan or other
employee-related practice, policy, or arrangement. There shall be no payment,
accrual of additional benefits, acceleration of payments, vesting or term
extension of any benefit under any Employee Benefit Plan or any agreement or
arrangement solely by reason of entering into or in connection with the
transactions contemplated by this Agreement. No Employee Benefit Plan has
participated in, engaged in or been a party to any non-exempt prohibited
transaction as described under the Code or ERISA, and neither the Company nor
any of its ERISA Affiliates has had asserted against them any claim for taxes
under Chapter 43 of Subtitle D of the Code and Section 5000 of the Code, or for
penalties under ERISA Section 502(c), (i) or (l), with respect to any Employee
Benefit Plan nor, to the knowledge of the Company, is there a basis for any
such claim. No officer, director or employee of the Company has committed a
material breach of any responsibility or obligation imposed upon fiduciaries by
Title I of ERISA with respect to any Employee Benefit Plan. Other than routine
claims for benefits, there is no claim pending or, to the knowledge of the
Company, threatened, involving any Employee Benefit Plan by any Person against
such plan, the Company or any of its ERISA Affiliates. There is no pending or,
to the knowledge of the Company, threatened, proceeding involving any Employee
Benefit Plan before any governmental agency. In accordance with applicable law
and the terms of such plan, each Employee Benefit Plan can be amended or
terminated at any time, without consent from any other party. With respect to
the Employee Benefit Plans, individually and in the aggregate, no event has
occurred, and to the knowledge of the Company, there exists no condition or set
of circumstances in connection with which the Company could be subject to any
liability that is reasonably likely to have a Material Adverse Effect. For
purposes of this Agreement, an "ERISA Affiliate" is any entity, whether or not
incorporated, deemed to be under common control or affiliated with the Company
under Section 414.
SECTION 2.22 Environmental Matters.
(a) To the best knowledge of the Company, the Company: (i) is, and within
the period of all applicable statutes of limitation has been, in compliance
with all applicable Environmental Laws; (ii) holds all Environmental Permits
(each of which is in full force and effect) required for any of its current
operations or for any property owned, leased or otherwise operated by it; and
(iii) is, and within the period of all applicable
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statutes of limitation has been, in compliance with all of its Environmental
Permits. The Company reasonably believes that each of its Environmental Permits
currently in effect will be renewed effective prior to the expiration of such
Environmental Permit.
(b) The Company has not received any notice of alleged, actual or potential
responsibility for, or any inquiry or investigation regarding, any
Environmental Condition. The Company has not received any notice of any other
claim, demand or action by any individual or entity alleging any actual or
threatened injury or damage to any person, property, natural resource or the
environment arising from or relating to any Release or threatened Release of
any Hazardous Materials at, on, under, in, to or from any Facility or any
former Facilities, or in connection with any operations or activities of the
Company.
(c) The Company has not entered into or agreed to and is not subject to any
consent decree, order or settlement or other agreement in any judicial,
administrative, arbitral or other similar forum relating to compliance with or
Liability under any Environmental Law.
(d) To the best knowledge of the Company, Hazardous Materials have not been
transported, disposed of, emitted, discharged or otherwise Released or
threatened to be Released to or at any real property presently or formerly
owned or leased by the Company, which Hazardous Materials are reasonably
expected to (i) give rise to a material Liability of the Company under any
applicable Environmental Law, (ii) interfere with the Company's continued
operations or (iii) materially impair the fair salable value of any real
property owned or leased by the Company.
(e) The Company has not assumed or retained, by contract or, to the
knowledge of the Company, by operation of law in connection with the sale or
transfer of any assets or business, Liabilities arising from or associated with
or otherwise in connection with such assets or business of any kind, fixed or
contingent, known or not known, under any applicable Environmental Law. The
Company is not required to make any material capital or other expenditures to
comply with any Environmental Law nor to the knowledge of the Company is there
any reasonable basis on which any Governmental Entity could take any action
that would require any such capital expenditures.
(f) No environmental audits or assessments which have been conducted in
respect of any Facility or any former Facility within the past five (5) years,
by the Company, or any attorney, environmental consultant or engineer or other
Person engaged by the Company for such purpose.
SECTION 2.23 Affiliate Transactions. Except for regular salary payments,
warrants, rights, options and fringe benefits under an individual's
compensation package with the Company, none of the officers, directors,
employees or other Affiliates of the Company, nor any member of the family of
such a person, is a party to any agreement, understanding, Indebtedness or
proposed transaction with the Company or, to the Company's knowledge, is
directly interested in any Material Agreement with the Company. The Company has
not guaranteed or assumed any obligations of its officers, directors, employees
or other Affiliates or members of any of their families. To the Company's
knowledge, other than as contemplated by this Agreement, none of the officers,
directors, or other Affiliates of the Company nor any member of their families
has any direct or indirect ownership interest in any Person (other than a less
than 5% ownership interest in a publicly traded company) with which the Company
has a business relationship or with any Person that competes with the Company.
To the Company's knowledge without any duty of inquiry, no employees nor any
member of their families has any direct or indirect ownership interest in any
Person with which the Company has a business relationship or that competes with
the Company.
SECTION 2.24 Insurance. To the best knowledge of the Company, each insurance
policy held by or for the benefit of the Company is in full force and effect.
The Company carries, and will continue to carry, insurance with reputable
insurers with respect to such of its properties and businesses, in such amounts
and against such risks as is adequate for its business and as is customarily
maintained by other entities of similar size engaged in similar businesses.
None of such insurance was obtained through the use of materially false or
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misleading information or the failure to provide the insurer with all material
information requested in order to evaluate the liabilities and risks insured.
The Company has not received any notice of cancellation or non-renewal of any
insurance policies or binders.
SECTION 2.25 Tangible Assets.
(a) The Company has good and valid title to or valid and subsisting
leasehold interests in all fixtures and equipment having original cost or fair
market value in excess of $25,000, including all such fixtures and equipment
reflected in the Company's most recent balance sheet included in the Financial
Statements and all such fixtures and equipment purchased or otherwise acquired
by the Company since the date of such balance sheet. None of such fixtures and
equipment is subject to any encumbrance except for encumbrances incurred in the
ordinary course of business or which, individually or in the aggregate, are not
substantial in amount and do not materially detract from the value of the
property or assets of the Company or interfere with the present use of such
property or assets.
(b) The buildings and fixtures and equipment owned by the Company are in
good operating condition and repair (except for ordinary wear and tear), with
no material defects, are sufficient for the operation of the business of the
Company as presently conducted and are in conformity, in all material respects,
with all Applicable Laws relating thereto currently in effect.
SECTION 2.26 Customer Relations. "Material Customer" means any Person from
whom the Company has recognized revenue in excess of $100,000 since January 1,
1997 or to whom the Company has any obligation to complete work or honor any
contractual warranty or has any obligation or Liabilities. Except as set forth
in Schedule 2.26, since January 1, 1997, no Material Customer has canceled or
terminated any purchase order, purchase contract or Material Agreement or
notified the Company in writing or orally of its intent to cancel or terminate
purchase order, purchase contract or any Material Agreement or materially alter
the amount of business that it transacts with the Company. Ryder has not
terminated, deferred or delayed (i) any programs that are likely to affect the
Company's projected product sales for any quarterly period from the date of
this Agreement through December 31, 2000 or (ii) any joint development project
now in progress or previously proposed.
SECTION 2.27 Books and Records. The Company has made and kept (and given
Purchaser access to) books and records and accounts, which, in reasonable
detail, accurately and fairly reflect the activities of the Company. The minute
books of the Company previously made available to Purchaser accurately and
adequately reflect all material action previously taken by the shareholders,
the Board of Directors and committees of the Board of Directors of the Company.
SECTION 2.28 Warranties. The Company's warranty terms are as described on
Schedule 2.28 to this Agreement. The reserve for warranty claims on the
Company's most recent quarterly balance sheet dated October 3, 1999, reflects
the Company's historical and anticipated warranty expense accurately and in
accordance with GAAP.
SECTION 2.29 Outsourcing. Company anticipates that its present vendors will
be able to ship the products known as the FW8000, FW5000 and FW2000 in
commercial quantities sufficient to meet projected demand no later than
February 28, 2000, at a cost to the Company which does not exceed the costs
previously disclosed to Purchaser.
SECTION 2.30 Disclosure. Neither this Agreement, nor any Schedule or Exhibit
to this Agreement, contains an untrue statement of a material fact or omits a
material fact necessary to make the statements contained herein or therein not
misleading. None of the statements, documents, certificates or other items
prepared or supplied by the Company with respect to the transactions
contemplated hereby contains an untrue statement of a material fact or omits a
material fact necessary to make the statements contained therein not
misleading. There is no fact which the Company has not disclosed to Purchaser
in writing and of which the
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Company is aware which materially and adversely affects or could be reasonably
expected to materially and adversely affect the business, prospects, financial
condition, operations, property or affairs of the Company. The financial
projections and other estimates provided to Purchaser were prepared by the
Company based on assumptions of fact and opinion as to future events which the
Company, at the date of the issuance of such projections and estimates,
believed to be reasonable. As of the date hereof, no facts have come to the
attention of the Company which would, in its opinion, require the Company to
revise or amplify the assumptions underlying such projections and other
estimates or the conclusions derived therefrom.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASERS
SECTION 3.01 Representations. Purchaser represents and warrants to the
Company that:
(a) it is wholly owned by Glenmount International, L.P., which is a
partnership which was not organized for the specific purpose of acquiring the
Series B Shares or the Warrant;
(b) it has sufficient knowledge and experience in investing to be able to
evaluate the risks and merits of its investment in the Company, and it is able
financially to bear the risks thereof;
(c) it has had an opportunity to discuss the Company's business, management
and financial affairs with the Company's management;
(d) the Series B Shares, the Warrant, the Breakup Warrant (if issued), and
the Conversion Shares and Warrant Shares are being acquired for Purchaser's own
account for the purpose of investment and not with a view to or for sale in
connection with any distribution thereof;
(e) Purchaser is a corporation, duly formed, validly existing and in good
standing under the laws of its state of formation and has the power and
authority to execute, deliver and perform this Agreement;
(f) the execution and delivery by Purchaser of this Agreement, and the
performance by the Purchaser of its obligations hereunder, have been duly
authorized by all requisite corporate action; and
(g) Purchaser has duly executed and delivered this Agreement and it
constitutes its legal, valid and binding obligation, enforceable in accordance
with its terms (subject, as to the enforcement of remedies, to applicable
bankruptcy, reorganization, insolvency, moratorium and similar laws affecting
the rights of creditors generally and as the remedy of specific performance and
other forms of injunctive relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding therefor may be
brought).
ARTICLE IV
CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS
SECTION 4.01 Conditions to Obligations of the Purchaser. The obligation of
Purchaser to purchase and pay for the Series B Shares to be purchased by it on
the Closing Date hereunder is, at its option, subject to the satisfaction, on
or before the Closing Date of the following conditions:
(a) Shareholder Approval. The Company shall have obtained approval of this
Agreement and the transactions contemplated hereby, including any actions
necessary to increase the number of directors, from its Shareholders.
(b) Warrant. The Company shall have executed and delivered the Warrant,
substantially in the form of Exhibit B hereto.
(c) Management Services Agreement. The Company shall have executed and
delivered, at the same time this Agreement is delivered, a Management Services
Agreement with Purchaser in the form of Exhibit C hereto (the "Management
Services Agreement") and Company shall not be in default on any monthly payment
to Purchaser pursuant to such Management Services Agreement.
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(d) Voting Agreement and Transfer Restrictions. The Company shall have
executed and delivered, and each of its current officers and directors and
their respective Affiliates and all other parties listed on Schedule 4.01(d)
(owning an aggregate of not less than 1,700,000 shares of Common Stock) shall
have executed and delivered within five (5) business days of the execution of
this Agreement, an agreement in substantially the form attached hereto as
Exhibit D, pursuant to which each such officer, director or Affiliate agrees on
behalf of himself, herself or itself, (i) to vote his or her or its outstanding
shares in support of the transactions contemplated by this Agreement, (ii) to
vote his or her or its outstanding shares in favor of Purchaser's nominees to
the Board of Directors for a period of three (3) years following the Closing,
(iii) to refrain from transferring any shares of the Company prior to March 20,
2000, and (iv) to refrain from exercising or transferring any existing options
or warrants prior to March 20, 2000.
(e) Board of Directors. The Company shall have taken all necessary actions
and obtained all needed resignations so that, immediately following the
Closing, the Company's Board of Directors consists of David Malmberg, David
Mell, Gary Beeman, Robert D. D. Forbes, Michael E. Johnson, Richard J. Boyle
and one other person selected by the Company and reasonably acceptable to
Purchaser (to be agreed upon in within ten (10) business days following the
execution of this Agreement). If any such person becomes unavailable prior to
the Closing, Purchaser and Company shall agree upon a replacement (except that
Company may not object to Purchaser's nominee to replace Michael Johnson,
Robert D.D. Forbes or Richard J. Boyle).
(f) Opinion of the Company's Counsel. Purchaser shall have received from
Dorsey & Whitney, counsel for the Company, an opinion dated the Closing Date,
in the form attached as Exhibit E hereto.
(g) Representations and Warranties to be True and Correct on Date Hereof.
The representations and warranties of the Company contained in Article II shall
have been true, complete and correct on the date of this Agreement and the
Chief Executive Officer and Chief Financial Officer of the Company shall have
certified to such effect the Purchaser in writing.
(h) Performance. The Company shall have performed and complied with all
agreements contained herein required to be performed or complied with by it
prior to or at the Closing Date and the Chief Executive Officer and Chief
Financial Officer of the Company shall have certified to the Purchaser in
writing to such effect and to the further effect that all of the conditions set
forth in this Article IV have been satisfied.
(i) All Proceedings to be Satisfactory. All corporate and other proceedings
to be taken by the Company in connection with the transactions contemplated
hereby and all documents incident thereto shall be reasonably satisfactory in
form and substance to the Purchaser, and Purchaser shall have received all such
counterpart originals or certified or other copies of such documents as it
reasonably may request.
(j) Supporting Documents. Purchaser shall have received a copy of:
(i) (A) the Articles of Incorporation, certified as of a recent date by
the Secretary of State of the State of Minnesota, and (B) a certificate of
the Secretary of State of the State of Minnesota dated as of a recent date
as to the due incorporation and good standing of the Company, the payment
of all applicable taxes by the Company and listing all documents of the
Company on file with said Secretary; and
(ii) such additional supporting documents and other information with
respect to the operations and affairs of the Company as Purchaser
reasonably may request.
(k) Terms of Series B Shares. The Board of Directors of the Company shall
have adopted the Series B Certificate in substantially the form attached as
Exhibit A hereto and such Certificate shall have been filed with the Minnesota
Secretary of State and have become effective.
(l) Third-Party Approvals. All Persons having any right to consent to or
approve the issuance of the Series B Shares, the Warrant, the Conversion
Shares, or the Warrant Shares shall have delivered such consents
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or approvals in writing. All Persons having any preemptive, first refusal or
other rights with respect to the issuance of the Series B Shares, the
Conversion Shares, or the Warrant Shares shall have irrevocably waived the same
in writing.
(m) No Material Adverse Change. No Material Adverse Change, as defined in
Section 6.17, in the reasonable judgment of the Purchaser, shall have occurred
in the Company's business, financial condition, prospects or results of
operations since October 3, 1999.
(n) Expenses. The Company shall have paid fees and expenses due pursuant to
Section 6.01 hereof incurred prior to the Closing (subject to the limitation
set forth in such Section 6.01).
(o) Directors and Officers Liability Insurance. The Company shall have
maintained in effect directors' and officers' liability insurance coverage, on
customary terms and conditions (including coverage for liabilities arising
before the date of taking office to the extent arising from such person's
status as a prospective member of the Board of Directors), ensuring an
aggregate of at least $5,000,000 in such liability insurance coverage.
All such documents shall be reasonably satisfactory in form and substance to
the Purchaser.
ARTICLE V
COVENANTS OF THE COMPANY
The Company covenants and agrees with the Purchasers that:
SECTION 5.01 Stockholder Meeting; Voting Agreement and Transfer
Restrictions.
(a) The Company agrees to promptly submit this Agreement and the
transactions contemplated hereby to the Company's stockholders for approval in
compliance with the MBCA and the policies of the NASDAQ Stock Market and to use
best efforts to obtain such approval on or before January 31, 2000.
(b) The Company will execute and deliver and shall use its best efforts to
cause each of its current officers and directors and their respective
Affiliates listed on Schedule 4.01(d) (owning an aggregate of not less than
1,700,000 shares of Common Stock) to execute and deliver, within five (5)
business days of the execution of this Agreement, an agreement in substantially
the form attached hereto as Exhibit D, pursuant to which each such officer and
director agrees on behalf of himself, herself or itself and each of his, her or
its Affiliates, (i) to vote his, her or its outstanding shares in support of
the transactions contemplated in this Agreement, (ii) to vote his, her or its
outstanding shares in favor of Purchaser's nominees to the Board of Directors
for a period of three (3) years following the Closing of the transactions
contemplated by this Agreement, (iii) to refrain from transferring any shares
of the Company prior to March 20, 2000, and (iv) to refrain from exercising or
transferring any existing options or warrants prior to March 20, 2000. Company
will not issue or redeem any Capital Stock or security convertible into Capital
Stock prior to March 20, 2000, except as contemplated by this Agreement.
SECTION 5.02 SEC Filings. The Company shall at all times file all reports
required to be filed by it under the Securities Act or the Exchange Act, and
shall take such further action as Purchaser may reasonably request, all to the
extent required from time to time, to allow Purchaser to sell the Conversion
Shares and the Warrant Shares without registration under the Securities Act
within the limitation of the exemptions provided by (a) Rule 144 under the
Securities Act, as such rule may be amended from time to time, or (b) any
similar rule or regulation hereafter adopted by the SEC. Upon the request of
Purchaser, the Company shall deliver to Purchaser (i) a certificate from the
President, Chief Executive Officer or Chief Financial Officer stating that the
Company has complied with all such requirements; (ii) copies of the Company's
most recent quarterly or annual report; and (iii) all such other reports and/or
documents as Purchaser may reasonably request to avail itself of Rule 144, 144A
or any other SEC regulation allowing it to sell the Conversion Shares or the
Warrant Shares without registration.
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SECTION 5.03 Financial Statements, Reports, Etc. Until the Closing, and
thereafter, so long as the Warrant or any Series B Shares are outstanding,
Purchaser shall be entitled to receive the following information:
(a) within ninety (90) days after the end of each fiscal year of the
Company, a balance sheet of the Company, as of the end of such fiscal year and
the related consolidated statements of income, shareholders' equity and cash
flows for the fiscal year then ended, prepared in accordance with GAAP and
certified by a "Big Five" firm of independent public accountants of recognized
national standing selected by the Board of Directors of the Company (the
"Annual Audited Financial Statements");
(b) within twenty-one (21) days after the end of each accounting month of
the Company within each fiscal year, a balance sheet of the Company and the
related statements of income, shareholders' equity and cash flows, unaudited
but prepared in accordance with GAAP and certified by the Chief Financial
Officer of the Company, or, if there is no Chief Financial Officer, the Chief
Executive Officer, such consolidated balance sheet to be as of the end of such
month and such consolidated statements of income, shareholders' equity and cash
flows to be for such month and for the period from the beginning of the fiscal
year to the end of such month, in each case with comparative statements for the
prior fiscal year and with respect to the then-applicable budget;
(c) at the time of delivery of each financial statement pursuant to Section
5.03(b), a certificate executed by the Chief Financial Officer of the Company
or, if there is no Chief Financial Officer, the Chief Executive Officer,
stating that such officer has reviewed this Agreement, the terms of the
Warrant, and the terms of the Series B Preferred Stock contained in the
Articles of Incorporation and has no knowledge of any default by the Company in
the performance or observance of any of the provisions of this Agreement, the
terms of the Warrant, or the terms of the Series B Preferred Stock contained in
the Articles of Incorporation or, if such officer has such knowledge,
specifying such default and the nature thereof;
(d) within thirty (30) days after the end of each quarter, a quarterly
management narrative report explaining all significant variances from forecasts
and all significant current developments in staffing, marketing, sales and
operations;
(e) no later than thirty (30) days prior to the start of each fiscal year,
consolidated capital and operating expense budgets, cash flow projections and
income and loss projections for the Company in respect of such fiscal year, all
itemized in reasonable detail and prepared on a monthly basis, and, promptly
after preparation, any revisions to any of the foregoing;
(f) promptly following receipt by the Company, each audit response letter,
accountant's management letter and other written report submitted to the
Company by its independent public accountants in connection with an annual or
interim audit of the books of the Company;
(g) promptly after the commencement thereof, notice of all actions, suits,
claims, proceedings, investigations and inquiries of the type described in
Section 2.07 involving the Company that could materially adversely affect the
Company;
(h) promptly upon sending, making available or filing the same, all press
releases, reports and financial statements that the Company sends or makes
available to its shareholders or files with the SEC; and
(i) promptly, from time to time, such other material information regarding
the business, prospects, financial condition, operations, property or affairs
of the Company as Purchaser reasonably may request.
SECTION 5.04 Reserve for Conversion Shares. The Company shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock, for the purpose of effecting the conversion of the Series B Shares and
otherwise complying with the terms of this Agreement, such number of its duly
authorized shares of Common Stock as shall be sufficient to effect the
conversion of the Series B
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Shares from time to time outstanding, or otherwise to comply with the terms of
this Agreement. If at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of the Series B
Shares or otherwise to comply with the terms of this Agreement, the Company
will immediately take such corporate action as may be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes. The Company will obtain all
authorizations, consents, approvals or other actions by or make any filing with
any court or administrative body that may be required under applicable state
securities laws in connection with the issuance of shares of Common Stock upon
conversion of the Series B Shares, which conversion may be made by Purchaser at
any time.
SECTION 5.05 Reserve for Warrant Shares. The Company shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock, for the purpose of effecting the exercise of the Warrant and the Breakup
Warrant and otherwise complying with the terms of this Agreement, such number
of its duly authorized shares of Common Stock as shall be sufficient to effect
the exercise of the Warrant and the Breakup Warrant, or otherwise to comply
with the terms of this Agreement. If at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the exercise
of the Warrant or the Breakup Warrant or otherwise to comply with the terms of
this Agreement, the Company will immediately take such corporate action as may
be necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purposes. The Company
will obtain all authorizations, consents, approvals or other actions by or make
any filing with any court or administrative body that may be required under
applicable state securities laws in connection with the issuance of shares of
Common Stock upon exercise of the Warrant, which exercise may be made by
Purchaser at any time.
SECTION 5.06 Corporate Existence. The Company shall maintain its respective
corporate existence, rights and franchises in full force and effect.
SECTION 5.07 Properties, Business, Insurance.
(a) The Company shall maintain as to its properties and businesses, with
financially sound and reputable insurers, insurance against such casualties and
contingencies and of such types and in such amounts as is customary for
companies similarly situated, which insurance shall be at all times adequate
and sufficient for the business of the Company, as reasonably determined by the
Board of Directors. Without limiting the foregoing, the Company shall at all
times maintain general liability insurance in an amount not less than
$7,000,000. The Company shall not cause or permit any assignment or change in
beneficiary and shall not borrow against any such policy. If requested by
Purchaser, the Company will add one designee of Purchaser as a notice party for
each such policy and shall request that the issuer of each policy provide such
designee with ten (10) days' notice before such policy is terminated (for
failure to pay premiums or otherwise) or assigned or before any change is made
in the beneficiary thereof.
(b) Without limiting its obligations pursuant to Section 5.07(a), the
Company shall maintain so long as the Warrant or any shares of the Series B
Shares remain outstanding, directors' and officers' liability insurance the
Warrant or coverage, on customary terms and conditions (including coverage for
liabilities arising before the date of taking office to the extent arising from
such person's status as a prospective member of the Board of Directors),
providing an aggregate of at least $5,000,000 in such liability insurance
coverage. The Company shall at all times maintain provisions in its Bylaws and
Articles of Incorporation indemnifying all directors against liability and
absolving all directors from liability to the maximum extent permitted under
the laws of the State of Minnesota.
SECTION 5.08 Inspection, Consultation and Advice. The Company shall permit
Purchaser and such Persons as Purchaser may designate, to visit and inspect, at
Purchaser's expense, any of the properties of the Company, examine its books
and take copies and extracts therefrom, discuss the affairs, finances and
accounts of the Company with their officers, employees and public accountants
(and the Company hereby authorizes said accountants to discuss with such
Purchaser and such designees such affairs, finances and accounts), and consult
with and advise the management of the Company as to its affairs, finances and
accounts, all at reasonable times
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and upon reasonable notice. In addition, and without limiting the foregoing,
Company shall permit Purchaser to conduct such environmental investigations of
Company facilities as Purchaser deems appropriate, including "Phase II" review.
SECTION 5.09 No Solicitation; Restrictive Agreements Prohibited.
(a) The Company shall not seek, initiate or encourage any agreement,
transaction or discussions which would be a Competing Proposal as defined in
Section 6.02.
(b) The Company shall not become a party to any agreement which, by its
terms, restricts the Company's performance of its obligations under the
Transaction Documents.
SECTION 5.10 Fees and Expenses of Directors. The Company shall promptly
reimburse in full each director of the Company who is not an employee of the
Company for all of his or her reasonable out-of-pocket expenses, including, but
not limited to, travel expenses, incurred in attending each meeting of the
Board of Directors of the Company or any committee thereof and any other
meetings attended at the request of the Company and pay any fees paid to
directors therefor.
SECTION 5.11 Board of Directors.
(a) Other than as provided in paragraphs (b) and (c) below, the number of
directors of the Company shall be fixed at seven (7).
(b) So long as the Warrant or any Series B Shares remain outstanding, the
holders of the Series B Shares shall have the right to designate three (3)
directors of the Company, and shall have the right pursuant to paragraph (c)
below to designate two (2) additional directors of the Company (each such
director, a "Series B Director"). The holders of the Series B Shares, voting
together as a class, shall have the exclusive right to (i) terminate any Series
B Director during his or her term of office, with or without cause; and (ii) to
fill any vacancy among the Series B Directors.
(c) The holders of the Warrant and the Series B Shares shall have the right
to compel the Company to take all necessary action to increase the number of
directors from seven (7) to nine (9), and the right to appoint two (2)
additional directors to fill the vacancies created by such increase, upon the
occurrence of any one or more of the circumstances described in Section 5(c) of
the Series B Certificate attached as Exhibit A to this Agreement.
(d) If, within six months following the election of additional directors by
the holders of the Series B Shares pursuant to clause (c) above, the Series B
Shares shall not have been converted to Company Common Stock, the right of the
Series B Shares to elect an additional two directors shall expire, but the
right to elect three directors shall remain in effect.
SECTION 5.12 Compliance with Laws. The Company shall conduct its business in
compliance with all Applicable Laws.
SECTION 5.13 Keeping of Records and Books of Account. The Company shall keep
adequate records and books of account, in which complete entries will be made
in accordance with GAAP consistently applied, reflecting all financial
transactions of the Company, and in which, for each fiscal year, all proper
reserves for depreciation, depletion, obsolescence, amortization, taxes, bad
debts and other purposes in connection with its business shall be made.
SECTION 5.14 Protective Provisions. The Company shall not take any of the
following actions without the prior affirmative written consent of Purchaser
or, following the Closing, of the holders of the Warrant and holders of at
least two-thirds (2/3) of the Series B Shares:
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(a) alter, change or amend (by merger or otherwise) any of the rights,
preferences or privileges of the Series B Preferred Stock;
(b) alter, change or amend any of the terms of the Warrant;
(c) other than as provided in Section 5.11(c) hereof, amend, restate, alter,
modify or repeal (by merger or otherwise) its Articles of Incorporation or
Bylaws, including, without limitation, amending, restating, modifying or
repealing (by merger or otherwise) (i) any certificate of designation or
preferences (as in effect from time to time) relating to any series of
Preferred Stock or (ii) any of the rights, preferences and privileges of any
other class of Capital Stock or the terms or provisions of any option or
Convertible Security;
(d) (i) create, authorize or issue Senior Securities, Parity Securities,
Supervoting Securities or shares of any such class or series; (ii) create,
authorize or issue any securities (including Convertible Securities)
convertible into, or exercisable, redeemable or exchangeable for, shares of
Senior Securities, Parity Securities or Supervoting Securities; (iii) increase
or decrease the authorized number of shares of Series B Preferred Stock; or
(iv) increase or decrease the authorized number of shares of any class or
series of Senior Securities, Parity Securities, Supervoting Securities or
shares of any such class or series;
(e) (i) initiate or suffer to exist any Liquidation Event with respect to
the Company, (ii) enter into any merger or consolidation with any other Person
that results in the holders of the Company's Capital Stock immediately prior to
such transaction owning less than fifty percent (50%) of the voting power of
the successor entity's Capital Stock after such transaction or (iii) otherwise
discontinue or dispose of more than ten percent (10%) of the assets of the
business of the Company, taken as a whole;
(f) initiate or suffer to exist any recapitalization of the Company, or
reclassify any authorized Capital Stock of the Company into any other class or
series of Capital Stock of the Company;
(g) redeem any shares of Capital Stock;
(h) acquire, in one or a series of transactions, any equity ownership
interest, by way of merger or otherwise, in any Person, or any asset or assets
of any Person, where the aggregate consideration payable in connection with
such acquisition (including, without limitation, cash consideration, the fair
market value of any securities and the net present value of any deferred
consideration) is at least $1,000,000, or (ii) make any capital expenditures in
excess of $500,000 individually or $1,000,000 for any fiscal year;
(i) change the number of directors of the Company to a number other than
seven (7) or the manner in which the directors are selected, except as set
forth in Section 5.11(c) hereof;
(j) make any material change in the nature of its business as conducted on
the Closing Date, or fail to conduct its business in the ordinary course
consistent with past practice;
(k) sell, transfer, convey, lease or dispose of, outside the ordinary course
of business, any material assets or properties of the Company, whether now or
hereafter acquired, in any transaction or transactions that call for payments
in excess of $500,000;
(l) establish or purchase any Subsidiary;
(m) enter into any agreements, transactions or leases not in the ordinary
course of the Company's business as conducted on the Closing Date that call for
payments in excess of $250,000;
(n) incur any new or additional Indebtedness which exceeds $500,000 provided
that this clause (n) shall not prohibit the extension, renewal, amendment or
refinancing (including refinancings with other lenders) of the Company's
existing credit facility with Spectrum Commercial Services, a Division of Lyon
Financial Services, Inc. on terms no more restrictive than those contained in
the General Credit and Security Agreement dated November 19, 1998, as amended
on August 20, 1999 (except interest rate "spreads" may increase by no more
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than 50 basis points over prime and principal amounts advanced against accounts
receivable or inventory (but no other amounts of principal) may increase or
decrease provided that advance rates are no greater than those currently in
effect).
(o) other than as set forth in an annual compensation plan approved by the
Series B Directors, increase management compensation with respect to any Person
in an amount greater than ten percent (10%) in any single fiscal year
(including without limitation by issuance of warrants, options or other
contingent compensation); or hire any new employee whose annual compensation
exceeds $125,000; or
(p) except for transactions on customary and reasonable terms, enter into
any transaction with (i) any Affiliate of the Company, (ii) any employee of the
Company, (iii) any holder of more than five percent (5%) of the outstanding
capital stock of any class or series of Capital Stock of the Company, (iv) any
member of the immediate family of any Person set forth in clauses (i), (ii) and
(iii) above, or (v) any corporation, partnership, trust or other entity in
which any Person set forth in clauses (i), (ii), (iii) or (iv) above, or member
of the family of any such Person, is a director, officer, trustee, partner or
holder of more than five percent (5%) of the outstanding capital stock thereof.
For purposes of this Agreement, the members of the "immediate family" of any
Person shall consist of the spouse, parents, children, siblings, mothers- and
fathers-in-law, sons-and daughters-in-law, and brothers- and sisters-in-law of
such Person.
SECTION 5.15 Publication Matters. The Company shall not use the name or logo
of Purchaser or any of its Affiliates in connection with any press releases or
advertisements without the prior written consent of Purchaser and the prior
written approval by Purchaser of the form and content of any such press release
or advertisement. The Company consents to the publication by Purchaser or any
of its Affiliates of a tombstone or similar advertising material relating to
the transactions contemplated by this Agreement, which may include the
Company's name, business description and size of investment. In addition, the
Company agrees that Purchaser and its Affiliates may use the Company's name and
logo on websites among a list of representative investments and may provide the
Company's name and appropriate individual contacts to companies for the purpose
of securing supplier discounts or other similar benefits for the Company.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01 Expenses. The Company shall pay all reasonable out-of-pocket
due diligence expenses and outside legal and consulting fees and expenses of
Purchaser incurred in connection with investigating, negotiating or documenting
the transactions contemplated hereby (whether such fees and expenses are
incurred prior to or after the Closing Date), provided that the payment for
such expenses shall be limited to $50,000 except as otherwise provided in
Section 6.03.
SECTION 6.02 Breakup Fee. (a) If any person (other than Purchaser or any of
its Affiliates) shall have made, proposed, communicated or disclosed a proposal
for an acquisition of the Company or its assets or business, or a combination
with the Company, or a financing transaction proposal as an alternative to the
transactions contemplated by this Agreement (a "Competing Proposal") in a
manner which is or becomes public and this Agreement is terminated following
such proposal, then the Company shall, simultaneously with termination of this
Agreement, pay to Purchaser a fee (the "Breakup Fee") in the amount of $500,000
or, if greater, 2.5% of the value of the Company established by a proposed
transaction, if, following the announcement or proposal of a transaction, this
Agreement is terminated. If (in the absence of a Competing Proposal) the
stockholders do not approve the transactions contemplated by this Agreement,
the Company shall pay to Purchaser the $100,000 required pursuant to the terms
of the Management Services Agreement (the "Consulting Fee") and shall issue to
Purchaser a warrant (the "Breakup Warrant") for 250,000 shares at the purchase
price of $1.00 per share, which will be exercisable immediately and will expire
if not exercised within five years, and will otherwise have the terms and
conditions set forth on Exhibit F. The Consulting Fee shall be paid by wire
transfer of immediately available funds.
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(b) The Company agrees that the agreement contained in Section 6.02(a) above
is an integral part of the transactions contemplated by this Agreement and that
the Consulting Fee constitutes liquidated damages and not a penalty. If Company
fails to promptly pay to Purchaser any amount due under such Section 6.02(a),
Company shall pay the costs and expenses (including reasonable legal fees and
expenses) in connection with any action, including the filing of any lawsuit or
other legal action, taken to collect payment thereof, together with interest on
the amount of any unpaid amount at the annual rate of four percent (4%) above
the publicly announced prime rate of Citibank, N.A. (or, if lower, the maximum
rate permitted by law) from the date such amount was required to be paid to the
date of payment.
(c) The Company agrees to reserve 250,000 shares of its Common Stock for
issuance in connection with the exercise of the Breakup Warrant, if the Breakup
Warrant is issued. The obligation to reserve shares in connection with the
Breakup Warrant shall survive termination of this Agreement pursuant to Section
6.03, below, and shall remain binding upon the Company.
(d) Except as provided otherwise in paragraphs (a) and (b) above and in
Section 6.01, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such expenses, except that Company shall pay all costs and expenses (i) in
connection with obtaining shareholder approval for this Agreement and the
transactions contemplated hereby, including printing and mailing the proxy
statement and (ii) of obtaining any consents of any third party.
SECTION 6.03 Termination. This Agreement may be terminated:
(a) at any time by mutual agreement of the parties;
(b) by Purchaser by written notice to the Company if all conditions to
closing have not been satisfied prior to February 11, 2000;
(c) by the Company following a proposal of the type described in Section
6.02(a), by written notice to Purchaser; or
(d) by either party following a material breach by the other party to this
Agreement, provided that if such breach is curable, this Agreement may only be
terminated if, after ten (10) business days' notice, the party in breach has
not either cured such breach or commenced diligent efforts to cure such breach.
Termination of this Agreement shall not waive any party of liability for
breaches of this Agreement which occurred prior to termination. If this
Agreement is terminated by Purchaser pursuant to subsection (b) of this Section
6.03, the limitation on expenses payable pursuant to Section 6.01 shall be
$85,000.
SECTION 6.04 Survival of Agreements. All covenants, agreements,
representations and warranties made in the Transaction Documents or any
certificate or instrument delivered to Purchaser pursuant to or in connection
with the Transaction Documents shall survive the execution and delivery of the
Transaction Documents, the issuance, sale and delivery of the Series B Shares,
the issuance and delivery of the Warrants, and the issuance and delivery of the
Conversion Shares and the Warrant Shares, and all statements contained in any
certificate or other instrument delivered by the Company hereunder or
thereunder or in connection herewith or therewith shall be deemed to constitute
representations and warranties made by the Company.
SECTION 6.05 Brokerage. Each party hereto will indemnify and hold harmless
the others against and in respect of any claim for brokerage or other
commissions relative to this Agreement or to the transactions contemplated
hereby, based in any way on agreements, arrangements or understandings made or
claimed to have been made by such party with any third party.
SECTION 6.06 Parties in Interest. All representations, covenants and
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of the respective successors and
assigns of the parties hereto whether so expressed or not. Without limiting the
generality of the
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foregoing, all representations, covenants and agreements benefiting Purchaser
shall inure to the benefit of any and all subsequent holders from time to time
of Series B Shares, the Warrants, Conversion Shares or the Warrant Shares.
SECTION 6.07 Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be delivered in Person,
mailed by certified or registered mail, return receipt requested, delivered by
overnight courier, or sent by telecopier or telex, addressed as follows:
(a) if to the Company,
Fieldworks, Incorporated
7631 Anagram Drive
Eden Prairie, Minnesota
Attention: Karen Engebretson
Facsimile: (612) 947-7030
with a copy to:
Dorsey & Whitney LLP
Pillsbury Center
220 South Sixth Street
Minneapolis, MN 55402
Attention: Kenneth Cutler
Facsimile: (612) 340-8738
(b) if to Purchaser:
Industrial Works Holding Corp.
c/o Glenmount International, L.P.
19200 Von Karman Avenue, Suite 400
Irvine, California 92612
Attention: Michael E. Johnson
Facsimile: (949) 477-8044
with a copy to:
Paul, Hastings, Janofsky & Walker LLP
695 Town Center Drive, 17th Floor
Costa Mesa, California 92626-1924
Attention: Peter J. Tennyson
Facsimile: (714) 979-1921
or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others.
SECTION 6.08 Governing Law; Jury Trial Waiver. This Agreement shall be
construed, interpreted and the rights of the parties determined in accordance
with the laws of the State of California without regard to the conflict of law
principles thereof; except with respect to matters of law concerning the
internal corporate affairs of any corporate entity which is a party to or the
subject of this Agreement and as to those matters, the law of the jurisdiction
under which the respective entity derives its powers shall govern. The parties
irrevocably elect as the sole judicial forum for the adjudication of any
matters arising under or in connection with this Agreement, the Transaction
Documents and the transactions contemplated hereby and thereby, and consent to
the jurisdiction of, the courts located in Orange County, California, and waive
any and all objections to such jurisdiction or venue that they may have. The
parties hereby waive any right to have trial by jury in any action,
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suit or proceeding brought to enforce or defend any rights or remedies arising
under or in connection with this Agreement, whether grounded in tort, contract
or otherwise.
SECTION 6.09 Injunctive Relief. The parties hereto acknowledge and agree
that irreparable damage would occur in the event any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of the provisions of this
Agreement and shall be entitled to enforce specifically the provisions of this
Agreement in any court of the United States or any state thereof having
jurisdiction, in addition to any other remedy to which the parties may be
entitled under this Agreement or at law or in equity.
SECTION 6.10 Assignment.
(a) Neither this Agreement nor any of the rights or obligations hereunder
may be assigned by the Company without the prior written consent of Purchaser.
(b) Purchaser may, without the consent of the Company, sell, transfer, or
otherwise convey the Warrant, any Breakup Warrant or any of the Series B Shares
purchased by Purchaser hereunder or the Conversion Shares or Warrant Shares,
and the rights and obligations of Purchaser hereunder, to any of its Affiliates
or to an Accredited Investor, provided, however, that such Person (except for a
transferee of the Breakup Warrant) shall not have any rights under this
Agreement unless it executes a counterpart of this Agreement in connection with
such transfer.
(c) Subject to the foregoing, this Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns, and no other person shall have any right, benefit or obligation
hereunder.
SECTION 6.11 Limitation of Liability. In no event shall (a) any Affiliate of
Purchaser, or (b) any direct or indirect member, shareholder, officer,
director, limited partner, employee or any other representative of Purchaser or
any Affiliate of Purchaser, be personally liable for any obligation of
Purchaser under this Agreement.
SECTION 6.12 Entire Agreement. This Agreement, including the Schedules and
Exhibits hereto, constitutes the sole and entire agreement of the parties with
respect to the subject matter hereof. All Schedules and Exhibits hereto are
hereby incorporated herein by reference.
SECTION 6.13 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 6.14 Amendments. This Agreement may not be amended or modified
without the written consent of the Company and Purchaser.
SECTION 6.15 Severability. If any provision of this Agreement shall be
declared void or unenforceable by any judicial or administrative authority, the
validity of any other provision and of the entire Agreement shall not be
affected thereby.
SECTION 6.16 Titles and Subtitles. The titles and subtitles used in this
Agreement are for convenience only and are not to be considered in construing
or interpreting any term or provision of this Agreement.
SECTION 6.17 Certain Defined Terms. As used in this Agreement, the following
terms shall have the following meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
"Affiliate" means, with respect to a specified Person, (a) any other person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person, (b) any other Person
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that owns, directly or indirectly, five percent (5%) or more of such specified
person's Capital Stock, (c) any employee or director of such specified Person,
(d) any member of the family of any Person specified in clauses (a), (b), and
(c), or (e) any corporation, limited liability company, partnership, trust or
other entity in which any Person set forth in clauses (a), (b), (c) or (d)
above, or member of the family of any such Person, is a director, officer,
trustee, partner or holder of more than five percent (5%) of the outstanding
Capital Stock thereof. For the purposes of this definition, "control," when
used with respect to any specified person, means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. All
limited partners in Glenmount International, L.P. shall be considered
Purchaser's Affiliates.
"Agreement" has the meaning set forth in the preamble hereto.
"Applicable Law" means any statute, law, rule or regulation or any judgment,
order, writ, injunction, decree or financial assessment (subject, in the case
of financial assessments, to the exhaustion of appeals) of any Governmental
Entity to which a specified Person or its properties or assets, or its
officers, directors, employees, consultants or agents (in their capacities as
such) is subject, including, without limitation, all such statutes, laws,
rules, regulations, judgments, orders, writs, injunctions, decrees and
financial assessments relating to, without limitation, energy regulation,
public utility regulation, securities regulation, consumer protection, equal
opportunity, health care industry regulation, public health and safety, motor
vehicle safety or standards, third party reimbursement, environmental
protection, fire, zoning, building and occupational safety and health matters
and laws respecting employment practices, employee documentation, terms and
conditions of employment and wages and hours.
"Approvals" has the meaning set forth in Section 2.13(b) hereof.
"Breakup Warrant" means a Warrant in the form of Exhibit F.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Change of Control" shall be deemed to have occurred upon (i) the
consummation of a tender for or purchase of more than fifty percent (50%) of
the Company's Common Stock by a third party, in a single transaction or series
of related transactions, (ii) a merger, consolidation or sale of all or
substantially all of the assets of the Company such that the shareholders of
the Company immediately prior to the consummation of such transaction own less
than fifty percent (50%) of the voting securities of the surviving entity
immediately after the transaction or transactions, in a single transaction or
series of related transactions, or (iii) the sale or transfer of more than
twenty-five percent (25%) of the shares of Capital Stock of the Company, in a
single transaction or series of related transactions.
"Closing" has the meaning set forth in Section 1.06 hereof.
"Closing Date" has the meaning set forth in Section 1.06 hereof.
"Code" means the Internal Revenue Code.
"Common Stock" has the meaning set forth in the preamble hereto.
"Company" has the meaning set forth in the preamble hereto.
"Consulting Fee" has the meaning set forth on Section 6.02 hereof.
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"Conversion Shares" has the meaning set forth in Section 1.04 hereof.
"Convertible Security" means any stock or security that is directly or
indirectly convertible into or exchangeable for or exercisable for Capital
Stock, including without limitation, the Series B Shares, the Warrant and any
other option, warrant or exchangeable debt security.
"Employee Benefit Plans" has the meaning set forth in Section 2.21 hereof.
"Employee Pension Plans" has the meaning set forth in Section 2.21 hereof.
"Environmental Condition" means the Release or threatened Release of any
Hazardous Material (whether or not upon a Facility or any former Facility or
other property and whether or not such Release constituted at the time thereof
a violation of any Environmental Law) as a result of which the Company has or
would reasonably be expected to become liable to any Person or by reason of
which any Facility, any former Facility or any of the assets of the Company may
suffer or be subjected to any encumbrances.
"Environmental Laws" means any and all foreign, federal, state, local or
municipal laws, rules, orders, regulations, statutes, ordinances, codes,
legally binding decrees or other requirements of any Governmental Entity
(including, without limitation, common law) regulating, relating to or imposing
liability or standards of conduct concerning protection of the environment or
of human health relating to exposure of any kind of Hazardous Materials, as
have been, are now or may at any time hereafter be in effect.
"Environmental Permits" means any and all permits, licenses, registrations,
notifications, exemptions and any other authorizations required under any
Environmental Law.
"ERISA" has the meaning set forth in Section 2.21 hereof.
"ERISA Affiliate" has the meaning set forth in Section 2.21 hereof.
"Facility" or "Facilities" means one or more of the offices and buildings
and all other real property and related facilities which are owned, leased or
operated by the Company.
"Financial Statements" has the meaning set forth in Section 2.08(b) hereof.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board, as in effect from time to time.
"Governmental Entity" means any court or tribunal in any jurisdiction
(domestic or foreign) or any federal, state or local public, governmental or
regulatory body, agency, department, commission, board, bureau or other
authority or instrumentality (domestic or foreign).
"Hazardous Materials" means any hazardous substance, gasoline or petroleum
(including crude oil or any fraction thereof) or petroleum products,
polychlorinated biphenyls, ureaformaldehyde insulation, asbestos or asbestos-
containing materials, pollutants, contaminants, radioactivity and any other
materials or substances of any kind, whether solid, liquid or gas, and whether
or not any such substance is defined as hazardous under any Environmental Law,
that is regulated pursuant to any Environmental Law or that could give rise to
liability under any Environmental Law.
"Indebtedness" means, as to any Person, (a) all indebtedness of such Person
for borrowed money or for the deferred purchase price of property or services
(including, without limitation, reimbursement and all other obligations with
respect to surety bonds, letters of credit and bankers' acceptances, whether or
not matured, but not including obligations to trade creditors incurred in the
ordinary course of business), (b) all obligations evidences by notes, bonds,
debentures or similar instruments, (c) all indebtedness created or arising
under any
A-24
<PAGE>
conditional sale or other title retention agreements with respect to property
acquired by such Person (even though the rights and remedies of the seller or
lender under such agreement in the event of default are limited to repossession
or sale of such property), (d) all obligations of such Person that are required
to be classified and accounted for as capital lease obligations under GAAP, (e)
all indebtedness of any other Person guaranteed, directly or indirectly, by
such Person, and (f) all Indebtedness referred to in clauses (a), (b), (c),
(d), and (e) above secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any Lien upon or
in property (including, without limitation, accounts and contract rights) owned
by such Person, even though such Person has not assumed or become liable for
the payment of such Indebtedness.
"Intellectual Property" has the meaning set forth in Section 2.12 hereof.
"Knowledge" or "known" means, with respect to any Person, the actual
knowledge of such Person, after reasonable inquiry; provided, that a Person
shall be deemed to have actual knowledge of the contents of all books and
records with respect to which such Person has reasonable access; provided,
further, and without limiting the generality of the foregoing, with respect to
any Person that is a corporation actual knowledge shall be deemed to include
the actual knowledge of all principal employees of any such Person (including
without limitation each director, the Chief Executive Officer, President, Chief
Financial Officer and all Vice Presidents of such Person).
"Liability" has the meaning set forth in Section 2.08 hereof.
"Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment,
conditional sale agreement, deposit arrangement, security interest,
encumbrance, lien (statutory or other), preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever in
respect of any property of a Person, whether granted voluntarily or imposed by
law, and includes the interest of a lessor under a capital lease or under any
financing lease having substantially the same economic effect as any of the
foregoing and the filing of any financing statement or similar notice naming
the owner of such property as debtor, under the Uniform Commercial Code or
other comparable law of any jurisdiction.
"Liquidation Event" means, with respect to any Person, any of the following
events: (i) the commencement by such Person of a voluntary case under the
bankruptcy laws of the United States, as now or hereafter in effect, or the
commencement of an involuntary case against such Person with respect to which
the petition shall not be controverted within fifteen (15) days, or be
dismissed within sixty (60) days, after commencement thereof; (ii) the
appointment of a custodian for, or the taking charge by a custodian of, all or
substantially all of the property of such Person; (iii) the commencement by
such Person of any proceeding under any reorganization, arrangement, adjustment
of debt, relief of debtors, dissolution, insolvency or liquidation or similar
law of any jurisdiction whether now or hereafter in effect relating to such
Person; (iv) the commencement against such Person of any proceeding set forth
in the preceding clause (iii), which is not controverted within ten (10) days
thereof and dismissed within sixty (60) days after the commencement thereof;
(v) the adjudication of such Person insolvent or bankrupt, or the adoption by
such Person of a plan of liquidation, (vi) the occurrence of any Change of
Control with respect to such Person or (vii) the filing of a certificate of
dissolution in respect of the Company with the Secretary of State of the State
of Minnesota; in any of cases (i) through (vi) above, in a single transaction
or series of related transactions.
"Material Adverse Change" shall mean, with respect to the Company (a) the
failure of the company to generate revenues of at least $5,000,000 in the
fourth fiscal quarter of 1999; (b) Company Operating Losses in excess of
$1,250,000 in the fourth fiscal quarter of 1999; (c) a material breach by the
Company of any contract with Ryder; (d) any acceleration of the indebtedness
under Company's existing subordinated notes; (e) the filing of any bankruptcy
proceeding with the consent of the Company or the filing against the Company of
an involuntary bankruptcy or insolvency petition; (f) any litigation against
the Company or formal, written threat of litigation against the Company
involving an amount in excess of $1,000,000; (g) any litigation filed against
the Company seeking to enjoin, or obtain damages for, the infringement of the
intellectual property or patent
A-25
<PAGE>
rights to any third party, or (h) binding, accepted and credit- approved orders
for fewer than 50 units of the Series 5000 on normal terms and conditions
(including delivery within 60 days and price not less than expected price
previously disclosed to Purchaser) are received by the Company in connection
with the Ryder RCRC Program prior to December 31, 1999.
"Material Adverse Effect" means, with respect to the Company, any effect or
change, as the case may be, that individually or in the aggregate is material
and adverse to the business, financial condition, results of operations or
prospects of the Company.
"Material Agreements" has the meaning set forth in Section 2.08 hereof.
"Parity Securities" means any class or series of capital stock which ranks
on a parity with the Series B Preferred Stock as to dividend distributions or
distributions upon the liquidation, winding up and dissolution of the Company.
"Operating Losses" shall mean, for any period, the amount of operating
losses for such period, if any, determined in accordance with generally
accepted accounting principles applied in a manner consistent with the
application of such principles in periods prior to 1999, provided that the
impact of any expenses directly attributable to the Management Services
Agreement or revenues or expenses directly attributable to (a) any reversal of
prior inventory, warranty or other reserves, (b) any sale of assets (other than
inventory in the ordinary course), and (c) any business acquired by the Company
after the date hereof through merger, acquisition of securities, acquisition of
assets or otherwise, in each case, shall be excluded from the determination of
operating losses pursuant to this sentence.
"Person" shall mean an individual, corporation, trust, partnership, joint
venture, unincorporated organization, government agency or any agency or
political subdivision thereof, or other entity.
"Purchaser" has the meaning set forth in the preamble hereto, but in the
event Purchaser distributes Series B Shares, it shall mean any holder of Series
B Shares.
"Release" means and includes any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping or
disposing into the environment or the workplace of any Hazardous Materials, and
otherwise as defined in any Environmental Law.
"SEC" has the meaning set forth in Section 2.05 hereof.
"Senior Securities" means any class or series of capital stock which ranks
senior to the Series B Preferred Stock as to dividend distributions or
distributions upon the liquidation, winding up and dissolution of the Company.
"Series B Preferred Stock" has the meaning set forth in the Recitals hereto.
"Series B Shares" has the meaning set forth in the Recitals hereto.
"Supervoting Securities" means any class or series of the Company's Capital
Stock the holders of which have the right to cast more than one vote per share
and/or have the right to elect one or more members of the Board of Directors,
voting as a class or series.
"Taxes" has the meaning set forth in Section 2.20 hereof.
"Transaction Documents" has the meaning set forth in Section 2.01(a) hereof.
"Warrant" has the meaning set forth in the Recitals hereto.
"Warrant Shares" has the meaning set forth in Section 1.04 hereof.
* * * * *
(Signatures on following page)
A-26
<PAGE>
[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the Company and Purchaser have executed this Securities
Purchase Agreement as of the day and year first above written.
COMPANY: FIELDWORKS, INC., a Minnesota
corporation
By: _________/s/ David G. Mell__________
Name: David G. Mell
Title: President & CEO
PURCHASER: INDUSTRIAL-WORKS HOLDING CORP., a
Delaware corporation
By: ______ /s/ Michael E. Johnson_______
Name: Michael E. Johnson Title:
President
A-27
<PAGE>
APPENDIX B
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
OR EXEMPTION FROM REGISTRATION UNDER THE FOREGOING LAWS. ACCORDINGLY, THIS
WARRANT MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF WITHOUT (i) AN
OPINION OF COUNSEL SATISFACTORY TO FIELDWORKS, INCORPORATED THAT SUCH SALE,
TRANSFER OR OTHER DISPOSITION MAY LAWFULLY BE MADE WITHOUT REGISTRATION UNDER
THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS OR (ii) SUCH
REGISTRATION.
FIELDWORKS, INCORPORATED
WARRANT
TO PURCHASE
SHARES OF COMMON STOCK
For value received, in consideration of the execution and delivery of the
Securities Purchase Agreement between the issuer of this Warrant and
Industrial-Works Holding Corp., a Delaware corporation ("Purchaser") dated
November , 1999 ("Securities Purchase Agreement"), Purchaser and its
successors or assigns ("Holder"), is entitled to purchase from FieldWorks,
Incorporated, a Minnesota corporation (the "Company"), up to 500,000 fully paid
and nonassessable shares of the Company's common stock, $.001 par value per
share or such greater or lesser number of such shares as may be determined by
application of the anti-dilution provisions of this Warrant, at the price of
One Dollar $1.00 per share (the "Warrant Exercise Price").
This Warrant may be exercised, with respect to all 500,000 shares, upon the
seventh (7th) anniversary of the date of this Warrant (the "Seventh Anniversary
Date"), provided, however, that the exercise of this Warrant may be
accelerated, with respect to a portion of the shares, under the following
circumstances:
(a) This Warrant may be exercised with respect to 167,000 shares (as
adjusted pursuant to Section 4(b) of this Warrant) after the closing price
of the Company's common stock averages $2.50 for five (5) consecutive
trading days, and will remain exercisable with respect to such shares for a
period of three (3) years following such acceleration, but shall no longer
be exercisable with respect to such shares if not exercised within such
three-year period, or, if sooner, prior to the Seventh Anniversary Date.
(b) This Warrant may be exercised with respect to an additional 167,000
shares (as adjusted pursuant to Section 4(b) of this Warrant) after the
closing price of the Company's common stock averages $3.75 for five (5)
consecutive trading days, and will remain exercisable with respect to such
shares for a period of three (3) years following such acceleration, but
shall no longer be exercisable with respect to such shares if not exercised
within such three-year period or, if sooner, prior to the Seventh
Anniversary Date.
(c) This Warrant may be exercised with respect to the remaining 166,000
shares (as adjusted pursuant to Section 4(b) of this Warrant) after the
closing price of the Company's common stock averages $5.00 for five (5)
consecutive trading days, and will remain exercisable with respect to such
shares for a period of three (3) years following such acceleration, but
shall no longer be exercisable with respect to such shares if not exercised
within such three-year period or, if sooner, prior to the Seventh
Anniversary Date.
B-1
<PAGE>
This Warrant is subject to the following terms and conditions:
1. Exercise. The rights represented by this Warrant may be exercised by the
Holder, in whole or in part, by written election, in the form set forth below,
by the surrender of this Warrant (properly endorsed if required) at the
principal office of the Company, and by payment to it by cash, certified check
or bank draft of the Warrant Exercise Price for the shares to be purchased. The
shares so purchased shall be deemed to be issued as of the close of business on
the date on which this Warrant has been exercised by payment to the Company of
the Warrant Exercise Price. Certificates for the shares of stock so purchased,
bearing the restrictive legend set forth at the end of this Warrant, shall be
delivered to Holder within fifteen (15) days after the rights represented by
this Warrant shall have been so exercised, and, unless this Warrant has
expired, a new warrant representing the number of shares, if any, with respect
to which this Warrant remains exercisable shall also be delivered to Holder
hereof within such time. No fractional shares shall be issued upon any exercise
of this Warrant.
2. "Cashless" Exercise. At Holder's option, all or any portion of the
Warrant Exercise Price may be paid by surrendering a portion of the shares
issuable upon exercise of this Warrant. The value of the shares so surrendered
shall be the closing price of the Company's common stock on the date of
Holder's notice of exercise.
3. Shares. All shares that may be issued upon the exercise of the rights
represented by this Warrant shall, upon issuance, be duly authorized and
issued, fully paid and nonassessable shares. During the period within which the
rights represented by this Warrant may be exercised, the Company shall at all
times have authorized and reserved for the purpose of issue or transfer upon
exercise of the subscription rights evidenced by this Warrant a sufficient
number of shares of its common stock to provide for the exercise of the rights
represented by this Warrant.
4. Adjustment. The Warrant Exercise Price shall be subject to adjustment
from time to time as hereinafter provided in this Section 4:
(a) If the Company at any time divides the outstanding shares of its
common stock into a greater number of shares (whether pursuant to a stock
split, stock dividend or otherwise), and conversely, if the outstanding
shares of its common stock are combined into a smaller number of shares,
the Warrant Exercise Price in effect immediately prior to such division or
combination shall be proportionately adjusted to reflect the reduction or
increase in the value of each such common share.
(b) If any stock dividend, capital reorganization or reclassification of
the capital stock of the Company, or consolidation or merger of the Company
with another corporation, or the sale of all or substantially all of its
assets to another corporation shall be effected in such a way that holders
of the Company's common stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for such common stock,
then, as a condition of such stock dividend, reorganization,
reclassification, consolidation, merger or sale, Holder shall have the
right to purchase and receive upon the basis and upon the terms and
conditions specified in this Warrant and in lieu of the shares of the
common stock of the Company immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby, such shares
of stock, other securities or assets as would have been issued or delivered
to the Holder if Holder had exercised this Warrant and had received such
shares of common stock immediately prior to such stock dividend,
reorganization, reclassification, consolidation, merger or sale. The
Company shall not effect any such consolidation, merger or sale unless
prior to the consummation thereof the successor corporation (if other than
the Company) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume by written instrument executed and
mailed to Holder at the last address of Holder appearing on the books of
the Company the obligation to deliver to Holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions,
Holder may be entitled to purchase.
B-2
<PAGE>
(c) If and whenever the Company shall (1) issue or sell any shares of
its common stock for a per-share consideration less than the Warrant
Exercise Price in effect immediately prior to the time of such issuance or
sale, (2) issue or sell any warrants, options or other rights to acquire
shares of its common stock at a purchase price less than the Warrant
Exercise Price in effect immediately prior to the time of such issuance or
sale, or (3) issue or sell any other securities that are convertible into
shares of its common stock for a purchase or exchange price less than the
Warrant Exercise Price in effect immediately prior to the time of such
issuance or sale (except for the issuance or sale of shares of the
Company's common stock pursuant to stock option plans, stock purchase plans
or other employee stock incentive programs adopted by the Company's Board
of Directors, or pursuant to business acquisition or lease financing
transactions), then, upon such issuance or sale, the Warrant Exercise Price
shall be reduced to the price (calculated to the nearest cent) determined
by dividing (A) an amount equal to the sum of (1) the number of shares of
the Company's common stock outstanding immediately prior to such issue or
sale multiplied by the then existing Warrant Exercise Price and (2) the
consideration, if any, received by the Company upon such issue or sale plus
the consideration to be received by the Company upon the exercise of such
stock purchase rights by (B) an amount equal to the sum of (1) the number
of shares of its common stock outstanding immediately prior to such issue
or sale and (2) the number of its shares of common stock thus issued or
sold or issuable or saleable upon the exercise of such purchase rights or
the conversion of such convertible securities; provided, however, that in
the event that any such purchase right expires or is terminated prior to
the exercise of this Warrant, the Warrant Exercise Price shall be
recalculated by deleting such purchase right and provided further that if
an adjustment is made to the Warrant Exercise Price as a result of the
issuance or sale of any such purchase rights or convertible securities, no
further adjustment shall be made to the Warrant Exercise Price at the time
such purchase rights are exercised or convertible securities are converted.
(d) Upon any adjustment of the Warrant Exercise Price, Holder shall
thereafter be entitled to purchase, at the Warrant Exercise Price resulting
from such adjustment, the number of shares obtained by multiplying the
Warrant Exercise Price in effect immediately prior to such adjustment by
the number of shares purchasable pursuant hereto immediately prior to such
adjustment and dividing the product thereof by the Warrant Exercise Price
resulting from such adjustment.
(e) Upon any adjustment of the warrant exercise price, the Company shall
give written notice thereof to Holder, stating the Warrant Exercise Price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares purchasable at such price upon the exercise of this
Warrant, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based.
5. No Rights as Shareholder. This Warrant shall not entitle Holder to any
voting rights or other rights as a shareholder of the Company.
6. Registration Rights. Holder shall be entitled to certain demand
registration rights and also entitled to participate in any registered offering
of shares of the Company's common stock. Holder's participation in any such
offering shall be in accordance with the procedures, and subject to the
limitations, set forth on Exhibit A to this Warrant.
7. Transfer. This Warrant and all rights hereunder are transferable, in
whole or in part, at the principal office of the Company by the holder hereof
in person or by duly authorized attorney, upon surrender of this Warrant
properly endorsed to any person or entity who represents in writing that such
person or entity is acquiring the Warrant for investment and without any view
to the sale or other distribution thereof. Each holder of this Warrant, by
taking or holding the same, consents and agrees that the bearer of this
Warrant, when endorsed, may be treated by the Company and all other persons
dealing with this Warrant as the absolute owner hereof for any purpose and as
the person entitled to exercise the rights represented by this Warrant, or to
the
B-3
<PAGE>
transfer hereof on the books of the Company, any notice to the contrary
notwithstanding; but until such transfer on such books, the Company may treat
the registered owner hereof as the owner for all purposes.
8. Notices. All demands and notices to be given hereunder shall be delivered
or sent by first class mail, postage prepaid; in the case of the Company,
addressed to its corporate headquarters, Attention: Chief Financial Officer,
7631 Anagram Drive, Eden Prairie, MN 55344, until a new address shall have been
substituted by like notice; and in the case of Holder, addressed to Holder at
the address written below, until a new address shall have been substituted by
like notice.
[The remainder of this page intentionally is left blank, signature page
follows]
B-4
<PAGE>
[SIGNATURE PAGE TO WARRANT]
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed and
delivered by a duly authorized officer.
Dated: , 2000
FIELDWORKS, INCORPORATED
By___________________________________
Chief Financial Officer
Name and Address of Holder:
Industrial-Works Holding Corp.
19200 Von Karman Avenue, Suite 400
Irvine, California 92612
B-5
<PAGE>
RESTRICTION ON TRANSFER
The shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended, or the securities laws of any state and
may not be sold, transferred or otherwise disposed of except pursuant to an
effective registration statement or exemption from registration under the
foregoing laws. Accordingly, the shares represented by this certificate may not
be sold, transferred or otherwise disposed of without (i) an opinion of counsel
satisfactory to FieldWorks, Incorporated that such sale, transfer or other
disposition may lawfully be made without registration under the Securities Act
of 1933 and applicable state securities laws or (ii) such registration.
B-6
<PAGE>
WARRANT EXERCISE
(To be signed only upon exercise of this Warrant)
The undersigned, the Holder of the foregoing Warrant, hereby irrevocably
elects to exercise the purchase right represented by such warrant for, and to
purchase thereunder, shares of common stock of FieldWorks,
Incorporated, to which such warrant relates and herewith makes payment of
[$ ] therefor in cash, certified check or bank draft and requests that
the certificates for such shares be issued in the name of, and be delivered to
, whose address is set forth below the signature of the
undersigned.
Dated:
_____________________________________
Signature
If shares are to be issued other than to Holder:
Social Security or other Tax
Identification No.
_________________________________ _____________________________________
_________________________________
_________________________________
_________________________________
Please print present name and
address
B-7
<PAGE>
WARRANT ASSIGNMENT
(To be signed only upon transfer of this Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
the right represented by the foregoing warrant to purchase
the shares of common stock of FieldWorks, Incorporated, and appoints
attorney to transfer such right on the books of FieldWorks,
Incorporated, with full power of substitution in the premises.
Dated:
_____________________________________
Signature
_________________________________ Social Security or other Tax
Identification No.
_________________________________ _____________________________________
_________________________________
Please print present name and
address
B-8
<PAGE>
EXHIBIT A
TO
WARRANT
ISSUED BY
FIELDWORKS, INCORPORATED
Registration Rights
1. Definitions. As used in this Exhibit A, the following terms shall have
the following respective meanings:
"Company" means FieldWorks, Incorporated, a Minnesota corporation.
"Common Stock Equivalents" shall mean, with respect to any Eligible Holder
as of any applicable date of determination, a sum equal to (i) the number of
shares of Common Stock owned by such Eligible Holder as of such date of
determination plus (ii) with respect to any shares of Series B Preferred Stock
owned by such Eligible Holder, the number of shares of Common Stock issued or
issuable upon conversion of such Series B Preferred Stock issued or issuable
upon conversion as of the date of determination, and (iii) with respect to the
Warrant owned by such Eligible Holder, the number of shares of Common Stock
issued or issuable upon exercise of such Warrant as of the date of
determination (in each case, whether or not such Series B Preferred Stock or
Warrant is so converted or exercised).
"Eligible Holders" means each of Industrial-Works Holding Corp. and any
Person to whom it transfers any Registrable Securities, or any of their
respective Permitted Transferees.
"Holder" means (i) any person owning of record Registrable Securities that
have not been sold to the public or (ii) any transferee of record of such
Registrable Securities in accordance with Section 7 of the Warrant or Section
6.10 of the Securities Purchase Agreement.
"Register," "registered," and "registration" refer to a registration
effected by preparing and filing a registration statement in compliance with
the Securities Act, and the declaration or ordering of effectiveness of such
registration statement or document.
"Registrable Securities" means (i) Common Stock of the Company issued or
issuable upon exercise of the Warrants or on conversion of shares of Series B
Preferred Stock, and (ii) any Common Stock of the Company issued as (or
issuable upon the conversion or exercise of any Warrant, right or other
security which is issued as) a dividend or other distribution with respect to,
or in exchange for or in replacement of, such above-described securities.
Notwithstanding the foregoing, Registrable Securities shall not include any
securities sold by a person to the public either pursuant to a registration
statement or Rule 144, or sold in a private transaction in which the
transferor's rights under this Exhibit A is are not assigned.
"Registrable Securities then outstanding" shall be the number of shares
determined by calculating the total number of shares of the Company's Common
Stock that are Registrable Securities and either (i) are then issued and
outstanding or (ii) are issuable pursuant to then exercisable or convertible
securities.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"SEC" or "Commission" means the United States Securities and Exchange
Commission.
"Securities Purchase Agreement" shall mean the Agreement dated November 20,
1999 pursuant to which the Series B Preferred Stock was sold to Industrial-
Works Holding Corp.
"Series B Preferred Stock" shall mean the Series B Convertible Participating
Preferred Stock of the Company.
B-9
<PAGE>
"Warrant" shall mean the Warrant to purchase common stock issued by the
Company in connection with the closing of the transactions contemplated by the
Securities Purchase Agreement.
2. Demand Registrations
(a) Timing Of Demand Registrations; Required Threshold.
At any time after the first anniversary of this Agreement, any Eligible
Holder owning at least one million five hundred thousand (1,500,000) Common
Stock Equivalents (as such number may be equitably adjusted from time to
time to reflect any stock split, stock dividend, recapitalization,
reclassification, consolidation or the like) may request (such Person, the
"Initiating Holder") that the Company file a Registration Statement under
the Securities Act on an appropriate form with respect to at least fifty
percent (50%) of the Registrable Securities owned by such Initiating Holder
(which form shall be available for the sale of the Registrable Securities
in accordance with the intended method or methods of distribution thereof
and shall include all financial statements required by the SEC to be filed
herewith) covering the shares of Registrable Securities that are the
subject of such request and the Company shall file such a Registration
Statement.
(b) Number of Demand Registrations.
The Company shall be obligated to prepare, file and cause to become
effective pursuant to this Section 2 no more than two (2) Registration
Statements in the aggregate pursuant to Section 2(a) above for the Eligible
Holders; provided, however, that a Registration Statement shall not be
counted as one of the two (2) Demand Registrations hereunder unless it
becomes effective and is maintained effective in accordance with the
requirements specified in Section 6(a); provided, further, that if there is
an underwriter's cutback pursuant to Section 2(e) with respect to the
second request for registration initiated by an Eligible Holder, such
requested registration shall not be deemed to be a requested registration
for purposes of the limitation to two (2) Demand Registrations pursuant to
this Section 2(b).
(c) Deferral by Company.
Notwithstanding anything in this Section 2 to the contrary, the Company
shall not be obligated to prepare, file and cause to become effective
pursuant to this Section 2 a Registration Statement if within five (5) days
of receipt of a request for a Demand Registration the Company furnishes to
the Initiating Holder a certificate signed by the Chief Executive Officer
of the Company that, in the good faith judgment of the Board of Directors,
it would be detrimental in any material respect to the Company and its
shareholders for the Company to comply with the Demand Registration, and it
is therefore essential to defer the filing of the Registration Statement
relating thereto. Any such deferral shall be for a period of not more than
six (6) months after the Company's receipt of the Initiating Holder's
written request for registration pursuant to this Section 2; provided,
however, that the Company may not exercise this right more than once with
respect to a Demand Registration and that any requested registration
deferred, and not ultimately effected, by the Company pursuant to the
provisions of this Section 2(c) shall thereafter not be deemed to be a
requested registration for purposes of the limitation to two (2) Demand
Registrations pursuant to Section 2(a) above.
(d) Participation.
The Company shall promptly give written notice to all other Eligible
Holders upon receipt of a request for a Demand Registration pursuant to
Section 2(a) above. Such other Eligible Holders may, by written notice to
the Company and the Initiating Holder, within thirty (30) business days of
the Company's notice, elect to join in a request for a Demand Registration
pursuant to Section 2(a) above, with respect to any number of shares of
Registrable Securities owned by such Eligible Holder. The Registrable
Securities of the other Eligible Holders being offered in such Demand
Registration shall be treated pari passu with
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the Registrable Securities being offered by the Initiating Holder for all
purposes including "underwriter's cutbacks" under subsection (e) of this
Section and any such request by an Eligible Holder shall not be treated as
either a request by such Eligible Holder for a Piggyback Registration under
Section 3 or as a request by such Eligible Holder for a Demand Registration
under this Section 2. The Company shall include in such Demand Registration
such shares of Registrable Securities for which it has received written
requests to register such shares within thirty (30) days after such written
notice has been given, provided that all the Registrable Securities for
which the Initiating Holder and the other Eligible Holders have requested
registration shall be covered by such registration statement before any
other securities are included.
In addition, the Company shall promptly give written notice to all
eligible Holders upon receipt of a request for a demand registration by any
Person (such Person, the "Initiating Person") pursuant to any other
registration rights agreement with the Company (whether such other
registration rights agreement is entered into before or after the date
hereof). Each Eligible Holder may, by written notice to the Company, within
thirty (30) business days of the Company's notice, elect to request a
Demand Registration pursuant to Section 2(a) above, with respect to any
shares of Registrable Securities owned by such Eligible Holder. The
Registrable Securities of the Eligible Holders being offered in such Demand
Registration shall be treated pari passu with the registrable securities
being offered by the Initiating Person for all purposes including
"underwriter's cutbacks" and any such request by an Eligible Holder shall
not be treated as either a request by such Eligible Holder for a Piggyback
Registration under Section 3 or as a request by such Eligible Holder for a
Demand Registration under this Section 2. Further, the selection of the
managing underwriter and the underwriters for the demand registration
requested by the Initiating Person shall be subject to the approval of a
majority in interest of the Eligible Holders participating in any
underwritten offering. The Company shall include in such demand
registration such shares of Registrable Securities for which it has
received written requests to register such shares within thirty (30) days
after such written notice has been given, provided that all the Registrable
Securities for which the Initiating Person and the Eligible Holders have
requested registration shall be covered by such registration statement
before any other securities are included.
(e) Underwriter's Cutback.
If the public offering of Registrable Securities is to be underwritten
and, in the good faith judgment of the managing underwriter, the inclusion
of all the Registrable Securities requested to be registered hereunder
would interfere with the successful marketing of such shares of Registrable
Securities, the number of shares of Registrable Securities to be included
shall be reduced and the number of shares to be included in the
underwriting or registration shall be allocated first among the Eligible
Holders pro rata upon the basis of the number of shares of Registrable
Securities sought to be offered by the Eligible Holders pursuant to such
Demand Registration and any remainder shall be allocated among the Company
and the other persons entitled to incidental registrations pro rata upon
the basis of the number of shares of Registrable Securities sought to be
registered thereby. If a person who has requested inclusion in such Demand
Registration does not agree to the terms of any such underwriting, such
person shall be excluded therefrom by written notice from the Company, the
underwriter or the Initiating Holder, and the securities owned by such
person(s) shall be withdrawn from registration (the "Withdrawn
Securities").
If there are any Withdrawn Securities as a result of an Underwriter's
Cutback, then the Company shall offer to those persons who have retained
rights to include securities in the Demand Registration the right to
include additional securities in the registration in an aggregate amount
equal to the number of Withdrawn Securities that would have been included
in the Demand Registration after giving effect to the Underwriter's Cutback
had such securities not been withdrawn, with such shares to be allocated
among such persons in accordance with the allocation of rights set forth in
this paragraph (e).
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(f) Managing Underwriter.
The managing underwriter or underwriters of any Underwritten Offering
covered by a Demand Registration shall be selected by a majority in
interest of the Eligible Holders participating in such Underwritten
Offering and shall be reasonably acceptable to the Company. The right of
any other Holders joining in a request for registration as provided in
Section 2(d) above to registration pursuant to this Section 2 shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting on
the same terms as those of the Initiating Holder (unless otherwise mutually
agreed by a majority in interest of the Eligible Holders participating in
such registration and such Holder with respect to such participation and
inclusion).
3. Piggyback Registrations
(a) Participation.
Each time the Company decides to file a Registration Statement under the
Securities Act (other than registrations on Forms S-4 or S-8 or any
successor form thereto, and other than a Demand Registration or a demand
registration by an Initiating Person) covering the offer and sale by it or
any of its security holders of any of its securities for money, the Company
shall give written notice thereof to all Eligible Holders. The Company
shall include in such Registration Statement such shares of Registrable
Securities for which it has received a written request from any Eligible
Holder to register such shares within twenty (20) days after such written
notice has been given. If the Registration Statement is to cover an
Underwritten Offering, such Registrable Securities shall be included in the
underwriting on the same terms and conditions as the securities otherwise
being sold through the underwriters.
(b) Underwriter's Cutback.
Subject to the requirements of Section 12 hereof, if in the good faith
judgment of the managing underwriter of such offering the inclusion of all
of the shares of Registrable Securities and any other Common Stock
requested to be registered would interfere with the successful marketing of
such shares, then the number of shares of Registrable Securities and other
Common Stock to be included in the offering shall be reduced, with the
participation in such offering to be in the following order of priority:
(1) first, the shares of Common Stock which the Company proposes to sell
for its own account, (2) second, the shares of Registrable Securities of
all Eligible Holders requested to be included, and (3) third, any other
shares of Common Stock requested to be included. Any necessary allocation
among the Holders of shares within each of the foregoing groups shall be
pro rata among such Holders requesting such registration based upon the
number of shares of Common Stock and Registrable Securities owned by such
Holders.
(c) Company Control.
The Company may decline to file a Registration Statement after giving
notice to Eligible Holders pursuant to Section 3(a) above, or withdraw a
Registration Statement after filing and after such notice, but prior to the
effectiveness thereof; provided that the Company shall promptly notify each
Eligible Holder in writing of any such action and provided further that the
Company shall bear all expenses incurred by each Eligible Holder or
otherwise in connection with such withdrawn Registration Statement.
4. Registration on Form S-3
(a) Right to Request Registrations on Form S-3.
After the Company has qualified for the use of Form S-3, in addition to
the rights contained in the foregoing provisions of this Agreement, the
Eligible Holders shall have the right to request registrations on Form S-3
or any comparable or successor form. Each such request shall be in writing
and shall state the
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anticipated number of shares of Registrable Securities to be disposed of
and the anticipated gross proceeds of such shares, and the intended methods
of disposition of such shares by such Eligible Holder or Eligible Holders,
including whether such resales are to be made on a delayed or continuous
basis pursuant to Rule 415. The Company shall not be obligated to effect
any registration pursuant to this Section 4 if (i) the Eligible Holders
propose to sell Registrable Securities representing less than fifteen
percent (15% ) of the shares of the Registrable Securities then held by all
Eligible Holders or (ii) the circumstances described in Section 2(c) shall
apply (but subject to the limitations set forth therein).
(b) Application of Certain Provisions.
If the registration is for an Underwritten Offering, the provisions of
Sections 2(d) and 2(f) hereof shall also apply to such registration, except
the Company may not include any shares for its own account.
5. Hold-back Agreements
(a) By Holders of Registrable Securities.
Upon the written request of the managing underwriter of any Underwritten
Offering of the Company's securities, a Holder of Registrable Securities
shall not sell or otherwise dispose of any Registrable Securities (other
than those included in such registration) without the prior written consent
of such managing underwriter for a period (not to exceed thirty (30) days
before the effective date and one hundred twenty (120) days thereafter)
that such managing underwriter reasonably determines is necessary in order
to effect the Underwritten Offering; provided that each of the officers and
directors of the Company, and each Holder of more than one percent (1%) of
the Common Stock of the Company, shall have entered into substantially
similar holdback agreements with such managing underwriter covering at
least the same period.
(b) By the Company and Others.
The Company agrees:
(1) not to effect any public or private sale or distribution of any
of its equity securities during the 30-day period prior to, and during
the 120-day period after, the effective date of each Underwritten
Offering made pursuant to a Demand Registration or a Piggyback
Registration, if so requested in writing by the managing underwriter
(except as part of such Underwritten Offering, pursuant to
registrations on Forms S-4 or S-8 or any successor forms thereto), and
(2) not to issue any Equity Securities other than for sale in a
registered public offering unless each of the Persons to which such
securities are issued has entered a written agreement binding on its
transferees not to effect any public sale or distribution of such
securities during such 130-day period, including without limitation a
sale pursuant to Rule 144 under the Securities Act (except as part of
such Underwritten Registration, if and to the extent permitted
hereunder).
6. Registration Procedures
If and whenever the Company is required to register Registrable Securities
pursuant to this Agreement, the Company will use all commercially reasonable
efforts to effect such registration to permit the sale of such Registrable
Securities in accordance with the intended plan of distribution thereof and
will as expeditiously as practicable:
(a) prepare and file with the SEC as soon as practicable a Registration
Statement with respect to such Registrable Securities and use all
commercially reasonable efforts to cause such Registration Statement to
become effective and remain continuously effective until the date that is
the earlier to occur of (i) the date six months from the date such
Registration Statement was declared effective, and (ii) the
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date the last of the Registrable Securities covered by such Registration
Statement have been sold, provided that before filing a Registration
Statement or Prospectus or any amendments or supplements thereto, the
Company shall furnish to Holders of Registrable Securities covered by such
Registration Statement and the underwriters, if any, draft copies of all
such documents proposed to be filed, which documents will be subject to the
review of each Eligible Holder and such underwriters, and the Company shall
not file any Registration Statement or amendment thereto or any Prospectus
or any supplement thereto to which the Eligible Holders or the
underwriters, if any, shall reasonably object;
(b) prepare and file with the SEC such amendments and post-effective
amendments to the Registration Statement, and such supplements to the
Prospectus, as may be requested by any underwriter of Registrable
Securities or as may be required by the rules, regulations or instructions
applicable to the registration form used by the Company or by the
Securities Act or rules and regulations thereunder to keep the Registration
Statement effective until all Registrable Securities covered by such
Registration Statement are sold in accordance with the intended plan of
distribution set forth in such Registration Statement or supplement to the
Prospectus;
(c) promptly notify the selling Holders of Registrable Securities and
the managing underwriter, if any, and (if requested by any such Person)
confirm such advice in writing,
(1) when the Prospectus or any supplement or post-effective
amendment has been filed, and, with respect to the Registration
Statement or any post-effective amendment, when the same has become
effective,
(2) of any request by the SEC for amendments or supplements to the
Registration Statement or the Prospectus or for additional information,
(3) of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose,
(4) if at any time the representations and warranties of the Company
contemplated by clause (1) of paragraph (o) below cease to be accurate
in all material respects,
(5) of the receipt by the Company of any notification with respect
to the suspension of the qualification of the Registrable Securities
for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose, and
(6) of the existence of any fact which results in the Registration
Statement, the Prospectus or any document incorporated therein by
reference containing a misstatement;
(d) make all commercially reasonable efforts to obtain the withdrawal of
any order suspending the effectiveness of the Registration Statement at the
earliest practicable time;
(e) unless the Company objects in writing on reasonable grounds, if
requested by the managing underwriter or any Eligible Holder holding more
than twenty-five percent (25%) of the Registrable Securities then
outstanding, as promptly as practicable incorporate in a supplement or
post-effective amendment such information as the managing underwriter and
such Eligible Holder agree should be included therein relating to the sale
of the Registrable Securities, including, without limitation, information
with respect to the number of shares of Registrable Securities being sold
to underwriters, the purchase price being paid therefor by such
underwriters and with respect to any other terms of the Underwritten
Offering of the Registrable Securities to be sold in such offering; and
make all required filings of such supplement or post-effective amendment as
soon as notified of the matters to be incorporated in such supplement or
post-effective amendment;
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<PAGE>
(f) only with respect to Demand Registrations, promptly prior to the
filing of any document which is to be incorporated by reference into the
Registration Statement or the Prospectus (after initial filing of the
Registration Statement) provide copies of such document to counsel to each
of the Eligible Holders and to the managing underwriter, if any, and make
the Company's representatives available for discussion of such document and
make such changes in such document prior to the filing thereof as counsel
for each Eligible Holder or underwriters may reasonably request;
(g) furnish to each selling Holder of Registrable Securities and the
managing underwriter, without charge, at least one signed copy of the
Registration Statement and any post-effective amendments thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference);
(h) deliver to each Eligible Holder and the underwriters, if any,
without charge, as many copies of each Prospectus (and each preliminary
prospectus) as such Persons may reasonably request (the Company hereby
consenting to the use of each such Prospectus (or preliminary prospectus)
by each of the selling Holders of Registrable Securities and the
underwriters, if any, in connection with the offering and sale of the
Registrable Securities covered by such Prospectus (or preliminary
prospectus));
(i) prior to any public offering of Registrable Securities, use all
commercially reasonable efforts to register or qualify or cooperate with
the selling Holders of Registrable Securities, the underwriters, if any,
and their respective counsel in connection with the registration or
qualification of such Registrable Securities for offer and sale under the
securities or blue sky laws of such jurisdictions as such underwriters may
designate in writing and do anything else necessary or advisable to enable
from a legal perspective the disposition in such jurisdictions of the
Registrable Securities covered by the Registration Statement; provided that
the Company shall not be required to qualify generally to do business in
any jurisdiction where it is not then so qualified or to take any action
which would subject it to general service of process in any such
jurisdiction where it is not then so subject;
(j) cooperate with the selling Holders of Registrable Securities and the
managing underwriter, if any, to facilitate the timely preparation and
delivery of certificates not bearing any restrictive legends representing
the Registrable Securities to be sold and cause such Registrable Securities
to be in such denominations and registered in such names as the managing
underwriter may request at least three business days prior to any sale of
Registrable Securities to the underwriters;
(k) use all commercially reasonable efforts to cause the Registrable
Securities covered by the Registration Statement to be registered with or
approved by such other governmental agencies or authorities as may be
necessary to enable the seller or sellers thereof or the underwriters, if
any, to consummate the disposition of such Registrable Securities;
(l) if the Registration Statement or the Prospectus contains a
misstatement, prepare a supplement or post-effective amendment to the
Registration Statement or the related Prospectus or any document
incorporated therein by reference or file any other required document so
that, as thereafter delivered to the purchasers of the Registrable
Securities, the Prospectus will not contain a misstatement;
(m) use all commercially reasonable efforts to cause all Registrable
Securities covered by the Registration Statement to be listed on any
national securities exchange on which the Company's securities are listed
or authorized for quotation on Nasdaq, if requested by any Eligible Holder
or the managing underwriter, if any; provided, however, that the payment of
any required listing or other fee shall always be deemed to be
"commercially reasonable" for purposes of this Section 6(m);
(n) provide a CUSIP number for all Registrable Securities not later than
the effective date of the Registration Statement;
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(o) enter into such agreements (including an underwriting agreement) and
do anything else reasonably necessary or advisable in order to expedite or
facilitate the disposition of such Registrable Securities, and in such
connection, whether or not the registration is an Underwritten
Registration:
(1) make such representations and warranties to the Holders of such
Registrable Securities and the underwriters, if any, in form, substance
and scope as are customarily made by issuers to holders and
underwriters, respectively, in similar Underwritten Offerings;
(2) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the managing underwriter, if any, and each
Eligible Holder) addressed to each selling Holder and the underwriter,
if any, covering the matters customarily covered in opinions delivered
to holders and underwriters, respectively, in similar Underwritten
Offerings and such other matters as may be reasonably requested by any
Eligible Holder or such underwriters;
(3) obtain "cold comfort" letters and updates thereof from the
Company's independent certified public accountants addressed to the
selling Holders of Registrable Securities and the underwriters, if any,
such letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters to holders and
underwriters, respectively, in connection with similar Underwritten
Offerings;
(4) if an underwriting agreement is entered into, cause the same to
include customary indemnification and contribution provisions and
procedures with respect to such underwriters; and
(5) deliver such documents and certificates as may be reasonably
requested by any Eligible Holder and the managing underwriter, if any,
to evidence compliance with clause (1) above and with any customary
conditions contained in the underwriting agreement or other agreement
entered into by the Company.
The above shall be done at each closing under such underwriting or similar
agreement or as and to the extent otherwise reasonably requested by any
Eligible Holder;
(p) make available for inspection by representatives of any Eligible
Holder, any underwriter participating in any disposition pursuant to such
Registration Statement, and any attorney or accountant retained by the
sellers or any such underwriter, all financial and other records and
pertinent corporate documents and properties of the Company, and cause the
Company's officers, directors and employees to supply all information
reasonably requested by any such seller or underwriter in connection with
the Registration; provided that any records, information or documents that
are designated by the Company in writing as confidential shall be kept
confidential by such Persons unless disclosure of such records, information
or documents is required by court or administrative order; and
(q) otherwise use all commercially reasonable efforts to comply with all
applicable rules and regulations of the SEC relating to such Registration,
and make generally available to its security holders earnings statements
satisfying the provisions of Section 12(a) of the Securities Act, no later
than forty-five (45) days after the end of any 12-month period (or ninety
(90) days, if such period is a fiscal year) commencing at the end of any
fiscal quarter in which Registrable Securities are sold to underwriters in
an Underwritten Offering, or, if not sold to underwriters in such an
offering, beginning with the first month of the Company's first fiscal
quarter commencing after the effective date of the Registration Statement,
which statements shall cover said 12-month period.
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7. Registration Expenses
(a) Demand Registrations and S-3 Registrations.
The Company shall bear all Expenses incurred in connection with any
Demand Registrations, S-3 Registrations or any Registrations which do not
become or are not maintained effective in accordance with the requirements
specified in Section 6(a), including expenses and fees of one counsel for
all Holders. Notwithstanding the foregoing, the Underwriters' Commissions
related or attributable to Registrable Securities sold or incurred in
connection with a Demand Registration or S-3 Registration that becomes
effective shall be shared by the Holders of the Registrable Securities
whose Registrable Securities are included in such Registration, pro rata,
in accordance with the aggregate amount of Registrable Securities sold by
such Holders.
(b) Piggyback Registrations.
The Company shall bear all Registration Expenses incurred in connection
with any Piggyback Registrations, including expenses and fees of one
counsel for all Holders, except that each Holder of the Registrable
Securities whose Registrable Securities are included in such Registration
shall pay its pro rata share of the Underwriters' Commissions related or
attributable to Registrable Securities sold or incurred in such
Registration, in accordance with the amount of Registrable Securities sold
by all such Holders.
(c) Company Expenses.
The Company also will, in any event, pay its internal expenses
(including, without limitation, all salaries and expenses of its officers
and employees performing legal or accounting duties), the expense of any
annual audit, the fees and expenses incurred in connection with any listing
of the securities to be registered on a securities exchange, and the fees
and expenses of any Person, including special experts, retained by the
Company.
8. Termination of Registration Rights. A Holder's registration rights under
this Exhibit A shall terminate and be of no further force and effect if all the
Registrable Securities held by and issuable to such Holder may be sold under
Rule 144 during any ninety (90) day period.
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<PAGE>
APPENDIX C
VOTING AND TRANSFER RESTRICTION AGREEMENT
This VOTING AGREEMENT (this "Agreement") is entered into as of this 20th day
of November, 1999, by and among Fieldworks, Incorporated, a Minnesota
corporation ("Company"), and those persons listed on Exhibit "A" hereto
(collectively, the "Shareholders"), and, for the purpose of enforcing its
rights under this Agreement pursuant to the Minnesota Business Corporation Act,
Industrial-Works Holding Corp., a Delaware corporation ("Purchaser").
WITNESSETH:
WHEREAS, the Company has entered into that certain Securities Purchase
Agreement dated as of November 20, 1999 (the "Purchase Agreement"), pursuant to
which the Company will issue to Purchaser 4,250,000 shares of the Company's
Series B Participating Preferred Stock ("Series B Stock"), which is convertible
into an equal number of shares of the Company's common stock (the "Company
Common Stock"), and warrants to purchase 500,000 shares of Company Common
Stock, in exchange for the consideration set forth in the Purchase Agreement;
WHEREAS, the Company and the Shareholders are entering into this Agreement
in order to fulfill the obligations of the Company pursuant to Section 5.01 of
the Purchase Agreement;
WHEREAS, the Shareholders believe that the terms of this Agreement, and the
transactions contemplated by the Purchase Agreement, are in the best interests
of both the Company and the Shareholders, and the Company and the Shareholders
will benefit substantially from the performance of the transactions and
obligations thereunder:
NOW, THEREFORE, as an inducement to Purchaser to enter into and to perform
its obligations under the Purchase Agreement, and in consideration of the
benefits to be realized by both the Company and the Shareholders from such
performance, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in accordance with Section
302A.455 of the Minnesota Business Corporation Act, the parties hereto agree as
follows:
1. Voting. Each Shareholder agrees that:
a. He, she or it shall vote or cause to be voted (or give a written
consent with respect to) all of his, her, or its shares of Company Common
Stock in favor of the Purchase Agreement and all transactions contemplated
thereby.
b. For a period of three (3) years following the closing of the
transactions contemplated by the Purchase Agreement, at any special or
annual meeting of Company stockholders at which directors of the Company
are to be elected, or in connection with a solicitation of consents through
which directors of the Company are to be elected, he, she or it shall vote
or cause to be voted (or give a written consent with respect to) all of
his, her, or its shares of Company Common Stock (i) in favor of the
election to the board of directors of the nominees favored by Purchaser,
and (ii) against any nominees opposed by Purchaser, with respect to the
three (3) or five (5) directors, whichever is the number of directors
Purchaser may elect pursuant to its rights as a holder of Series B Stock.
2. Restrictions on Transfer of Company Common Stock. Each Shareholder
agrees that he, she, or it will not transfer, sell, assign, or otherwise
dispose of, in whole or in part, the shares of Company Common Stock held by
him, her, or it on or prior to March 20, 2000.
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3. Restrictions on Transfer or Exercise of Options and Warrants. Each
Shareholder agrees that he, she, or it will not transfer, sell, assign, or
otherwise dispose of, or convert, exercise or attempt to exercise or convert,
in whole or in part, any options convertible into, or warrants to purchase,
shares of Company Common Stock held by him, her, or it on or prior to March 20,
2000.
4. Termination. This Agreement and the obligations contained herein shall
continue in effect for the period commencing on the date hereof and ending at
the earliest of (i) [January 31, 2003], (ii) the date, if any, upon which the
Purchase Agreement is terminated pursuant to the provisions of Section 6.03(a)
or (b) thereof, or (iii) the date, if any, upon which the Purchaser and all
parties hereto mutually agree to terminate the obligations and rights of the
parties hereunder.
5. Miscellaneous.
a. Additional Representations. Each Shareholder represents and warrants
that (i) he, she or it has the requisite power and authority to enter into
and perform this Agreement; and (ii) the performance of this Agreement by
such Shareholder will not require him, her or it to obtain the consent,
waiver or approval of any person and will not, to the best of his, her or
its knowledge, violate, result in a breach of or constitute a default under
any statute, regulation, agreement, judgment, consent, decree or
restriction by which he, she or it is bound.
b. Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants
and restrictions of this Agreement shall remain in full force and effect
and shall in no way be affected, impaired or invalidated.
c. Amendments and Modification. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of
a written agreement executed by the parties hereto. Notwithstanding the
foregoing, this Agreement may not be amended without the written consent of
Purchaser.
d. Equitable Relief. Each Shareholder agrees that if he, she, or it
fails to perform his, her or its obligations under this Agreement for any
reason, then Purchaser shall be entitled to specific performance and
injunctive or other equitable relief, and each Shareholder hereby further
agrees to waive any requirement for the securing or posting of any bond in
connection with the obtaining of any injunctive or other equitable relief.
This provision is without prejudice to any other rights that Purchaser may
have against such Shareholder for any failure to perform his, her or its
obligations under this Agreement.
e. Governing Law. This Agreement and the legal relations between the
parties hereto arising from this Agreement shall be governed by and
construed in accordance with the laws of the State of Minnesota, without
reference to or application of any conflicts of law principles.
f. Entire Agreement. This Agreement contains the entire agreement and
understanding of the parties hereto in respect of the subject matter
hereof, and supersedes all prior negotiations and understandings between
the parties with respect to such subject matters.
g. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same agreement.
h. Binding Effect. During the term of this Agreement, the rights and
obligations of the parties hereto shall inure to the benefit of and be
binding upon the parties and all transferees, assigns, and successors of
the Shareholders with respect to shares of Company Common Stock.
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<PAGE>
i. Capacity. The shareholders are executing this Agreement in their
capacity as shareholders, and not in their capacity as directors or
officers, and, without limiting their obligations as shareholders, nothing
herein shall limit their actions or require any actions in any director or
officer capacity.
[Signature Page Follows]
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered as
of the day and year first written above.
FIELDWORKS, INCORPORATED
By: /s/ David G. Mell________________
Its: President & Chief Executive
Officer_____________________________
SHAREHOLDERS
By: /s/ Gary J. Beeman_______________
Gary J. Beeman
By: /s/ James A. Bernards____________
James A. Bernards
By: /s/ Karen L. Engebretson_________
Karen L. Engebretson
By: /s/ Robert W. Heller_____________
Robert W. Heller
By: /s/ David C. Malmberg____________
David C. Malmberg
By: /s/ David G. Mell________________
David G. Mell
By: /s/ Robert C. Szymborski_________
Robert C. Szymborski
By: /s/ Richard J. York______________
Richard J. York
By: /s/ George E. Kline______________
George E. Kline for Brightstone
Entities
INDUSTRIAL-WORKS HOLDING CORP.
By: /s/ Michael E. Johnson___________
Its: President_______________________
C-4
<PAGE>
EXHIBIT A
TO
VOTING AGREEMENT
Gary J. Beeman
James A. Bernards
Karen L. Engebretson
Robert W. Heller
David C. Malmberg
David G. Mell
Robert C. Szymborski
Richard J. York
Brightstone Entities
C-5
<PAGE>
APPENDIX D
[LETTERHEAD OF FIELDWORKS, INCORPORATED]
Glenmount, LLC
Suite 400
19200 Von Karman Avenue
Irvine, California 92612-8512
Re: Management Services Agreement
Gentlemen:
Fieldworks, Incorporated ("Fieldworks") hereby engages you to perform
advisory and consulting services to Fieldworks for a period of one-year
commencing upon the date of this Agreement.
1. Scope of Primary Services. The primary services to be provided by you
consist of active and continuing support to FieldWorks' management in
identifying, developing and executing all major strategic, acquisition,
operational and financial opportunities for FieldWorks.
a. During the initial three months of this Agreement, you will arrange
for Robert Forbes to provide these primary services for at least 16
days per month, unless you and we agree to a different schedule.
During this initial three-month period, you agree that these
services will be provided on-site at our facilities, off-site for
meetings with existing or prospective vendors or customers, or at
another mutually agreed location.
b. Following the initial three months of this Agreement, you shall
determine, in consultation with our board of directors, which of
your personnel shall be assigned to provide these primary services.
Further, we agree that, following the initial three month period of
this Agreement, such services are not expected to consume more than
five man-days per month and such services may be provided from such
locations as you determine.
2. Compensation for Primary Services. For the primary services described
above, we will pay you (a) $10,000 on the date hereof, (b) $10,000
within 30 days after the date hereof, (c) $10,000 within 60 days after
the date hereof, and (d) $200,000 simultaneously with the closing of the
transactions contemplated by the Securities Purchase Agreement of even
date herewith, between Industrial-Works Holding Corp., a Delaware
corporation (the "Securities Purchase Agreement").
3. Reimbursement of Expenses. We agree to reimburse or pay directly your
reasonable expenses, including travel, hotel or boarding charges, meals
and other items customarily reimbursed to outside advisors or
consultants. Such expenses, if not paid directly by Fieldworks at your
request, shall be paid to you within five business days of submission of
an itemized invoice evidencing your payment of such expenses.
4. Additional Services and Compensation. In addition to the primary
services and related compensation described above, we agree that you
will be entitled to additional compensation if, for example, at our
request (a) any of your employees or representatives (in addition to
Robert Forbes) provide substantial services to us during the initial
three-month period of this Agreement, or (b) Robert Forbes or any other
employees or representatives provide more than five man-days of services
per month following the initial three-month period of this Agreement. If
such additional services do not arise in connection with any such
transaction, you shall be entitled to such additional compensation as
shall be negotiated at the time such services are rendered.
D-1
<PAGE>
5. Investment Banking Services. Further, if you perform additional services
to initiate a merger, acquisition, disposition, joint venture, financing
or other similar transaction or expend substantial time on any such
transaction initiated by others, you shall be entitled to receive
additional fees of the type customarily received by investment bankers
on terms satisfactory to the Board of Directors in its reasonable
discretion.
6. Term. The term of this Agreement shall be for a period of one year
commencing on the date hereof. Prior to the expiration of this
Agreement, FieldWorks and you shall negotiate the terms and conditions
upon which this Agreement may be renewed, subject to approval by the
members of our board of directors not nominated by the holders of Series
B Preferred Stock. If the Securities Purchase Agreement is terminated,
then this Agreement shall immediately terminate. Notwithstanding any
termination, (x) we will immediately pay you the amounts identified in
clauses (a), (b) and (c) of paragraph 2 above (to the extent such
amounts have not previously been paid), (y) the indemnity provisions of
paragraph 6 below shall survive plus (z) you shall be paid$100,000 if
the Securities Purchase Agreement is terminated upon a failure of the
Company's shareholders to approve the transactions it contemplates,.
7. Insurance and Indemnity. We agree during the term of this Agreement to
carry directors' and officers' insurance in an amount not less than $5
million to include you and your designated persons as additional
insureds, to the extent our insurance company will permit us to treat
your assigned persons as consultants. In addition, we hereby agree to
the indemnity provisions set forth on Exhibit A to this Agreement.
Please countersign this Agreement in the place indicated below to confirm
your acceptance of an agreement to the terms stated in this letter.
Very truly yours,
FIELDWORKS INCORPORATED
By /s/ David G. Mell_______________
President and Chief Executive
Officer
CONFIRMED AND ACCEPTED
By Glenmount, LLC
By /s/ Michael E. Johnson_____
Managing Director
D-2
<PAGE>
ADDENDUM A
In connection with the engagement described in the foregoing letter
agreement to which this Addendum A is attached, Fieldworks, Incorporated
("Company") agrees to indemnify and hold harmless Glenmount, LLC ("Glenmount")
and each of its officers, directors, representatives, agents, employees and
controlling persons (within the meaning of the Securities Act of 1933, as
amended) against any losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) related to or arising out of this engagement,
and will reimburse Glenmount and each other person indemnified hereunder for
all legal and other expenses as incurred in connection with investigating or
defending any such loss, claim, damage, liability, action or proceeding whether
or not in connection with pending or threatened litigation in which Glenmount
or any of other person indemnified hereunder is a party; provided, however,
that the Company will not be liable in any such case (except cases arising out
of the use of information provided by any Company) for losses, claims, damages,
liabilities or expenses arising from the gross negligence or willful misconduct
of Glenmount or the party claiming a right to indemnification.
In case any proceeding shall be instituted involving any person in respect
of whom indemnity may be sought, such person (the "Indemnified Party") shall
promptly notify the Company, and the Company, upon the request of the
Indemnified Party, shall retain counsel reasonably satisfactory to the
Indemnified Party to represent the Indemnified Party and any others the Company
may designate in such proceeding and shall pay as incurred the fees and
expenses of such counsel related to such proceedings. In any such proceeding,
any Indemnified Party shall have the right to retain its own counsel at its own
expense, except that the Company shall pay as incurred the fees and expenses of
counsel retained by the Indemnified Party in the event that (i) the Company and
the Indemnified Party shall have mutually agreed to the retention of such
counsel or, (ii) the named parties to any such proceeding (including any
impleaded parties) include the Company and the Indemnified Party and
representation of such parties by the same counsel would be inappropriate, in
the reasonable opinion of the Indemnified Party, due to actual or potential
differing interests between them.
The Company shall not be liable for any settlement of any proceeding
effected without its written consent. In addition, the Company will not,
without the prior written consent of Glenmount, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action, suit
or proceeding in respect of which indemnification may be sought hereunder
(whether or not Glenmount or any Indemnified Party is an actual or potential
party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of Glenmount and each
other Indemnified Party hereunder from all liability arising out of such claim,
action, suit or proceeding.
D-3
<PAGE>
APPENDIX E
[Industrial-Works Holding Corp. Letterhead]
December 9, 1999
Ms. Karen Engebretson
Fieldworks, Incorporated
7631 Anagram Drive
Eden Prairie, Minnesota 55344
Re: Schedule 13-D for Industrial-Works Holding Corp. and Affiliates
Dear Ms. Engebretson:
On December 7, 1999, Industrial-Works Holding Corp. ("IWH") and its
affiliates filed a statement on Schedule 13-D (the "Statement") with the
Securities Exchange Commission ("SEC") with respect to IWH's proposed
transactions with Fieldworks, Incorporated ("Fieldworks"), as required pursuant
to Regulation (S)240.13d-1(a) of the Securities Exchange Act. SEC Regulation
(S)240.13d-7 requires that Fieldworks, as the issuing company, must receive
from IWH a copy of all statements filed under SEC Regulation (S)240.13d-1 with
respect to its stock. In that regard, enclosed is an executed copy of the
above-referenced Statement filed by IWH.
To the extent Minnesota Revised Statute (S)302A.671 ("Section 671") is
applicable to the matters reported on the Statement, the Statement and this
letter should be treated as the statement submitting the information called for
by Section 671.
If the Voting Agreement entered into among Fieldworks, IWH, and certain
shareholders of Fieldworks (the "Voting Agreement") in contemplation of the
acquisition (the "Share Acquisition") of Series B Preferred Stock (the
"Preferred Stock") and a warrant for 500,000 shares of common stock (the
"Common Shares") of Fieldworks (the "Warrant") by IWH is deemed to be a
"control share acquisition," IWH would, because of the Voting Agreement, have
beneficial ownership of approximately 28% of Fieldwork's Common Shares prior to
the closing of the Share Acquisition, thus putting IWH over the 20% threshold
in subdivision (d)(2) of Section 671. This percentage includes all presently
unexercised warrants and options of the parties to the Voting Agreement, since
IWH may be deemed to control those shares upon exercise of such options and
warrants. We note that the acquisition of the Preferred Stock and the Warrant,
and any Common Shares received upon conversion of the Preferred Stock or
exercise of the Warrant, is not a "control share acquisition" as defined in
Section 671 because it is an acquisition directly from Fieldworks.
Following the closing of the Share Acquisition, the beneficial ownership of
IWH attributable to the Voting Agreement, if any, will be diluted due to the
issuance of the Preferred Stock and the Warrant and will be approximately 19%.
In addition, IWH will own beneficially approximately 32.7% of Fieldwork's
Common Shares due to the acquisition of the Preferred Stock and the Warrant
(this is different than the percentage in the Statement because Section 671
calculates beneficial ownership in a different manner), which, when aggregated
with the 19% attributable to the Voting Agreement, will cause IWH to exceed the
50% threshold in subdivision (d)(2) of Section 671.
E-1
<PAGE>
As you know, except for the ownership reported on the Statement, none of the
persons filing the Statement (the "Filing Persons") owns, or has owned prior to
this filing, any shares of Fieldworks. In addition, as described in the
disclaimer shown in Item 6 of the Statement, the Filing Persons have no plans
or purposes to take any of the actions under subdivision (e)(1)-(7) of Section
671.
Please contact Veronica Nitschke at (714) 668-6224 if you have any
questions.
Very truly yours,
/s/ Michael E. Johnson
________________
Michael E. Johnson
President
Enclosure
cc: Peter J. Tennyson, Esq.
E-2
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
FIELDWORKS, INCORPORATED
(Name of Issuer)
COMMON STOCK
(Title of Class of Securities)
31659 P 10 3
(CUSIP Number)
Michael E. Johnson
Robert D.D. Forbes
Glenmount International, L.P.
19200 Von Karman Avenue, Suite 400
Irvine, California 92612-8512
(949) 475-0055
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications)
DECEMBER 1, 1999
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to
report the acquisition which is the subject of this Schedule 13D, and is
filing this schedule because of Rule 13d-1(b)(3) or (4), check the following
box [_].
Note: Six copies of this statement, including all exhibits, should be filed
with the Commission. See Rule 13d-1(a) for other parties to whom copies are to
be sent.
* The remainder of this cover page shall be filled out for a reporting
person's initial filing on this form with respect to the subject class of
securities, and for any subsequent amendment containing information which
would alter disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be
deemed to be "filed" for the purpose of Section 18 of the Securities Exchange
Act of 1934 ("Act") or otherwise subject to the liabilities of that section of
the Act but shall be subject to all other provisions of the Act (however, see
the Notes).
SEC 1746 (12-91)
E-3
<PAGE>
SCHEDULE 13D
CUSIP No. 31659 P 10 3 Page 2 of 12 Pages
1Name of Reporting Person S.S. OR I.R.S. IDENTIFICATION
NO. OF ABOVE PERSON
- --------------------------------------------------------------------------------
Industrial-Works Holding Corp.
2CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
(a) [_]
(b) [X]
- --------------------------------------------------------------------------------
3SEC USE ONLY
- --------------------------------------------------------------------------------
4SOURCE OF FUNDS AF
- --------------------------------------------------------------------------------
5CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) OR 2(e) [_]
- --------------------------------------------------------------------------------
6CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- --------------------------------------------------------------------------------
NUMBER 7 SOLE VOTING POWER
OF 4,250,000 Shares
SHARES
ENEFICIALLYB
OWNED BY
EACH
REPORTING
PERSON
WITH
-------------------------------------------------------------------
8 SHARED VOTING POWER
NONE
-------------------------------------------------------------------
9 SOLE DISPOSITIVE POWER
4,250,000 Shares
-------------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
NONE
- --------------------------------------------------------------------------------
11AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
PERSON
4,250,000 Shares
- --------------------------------------------------------------------------------
12CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (7) EXCLUDES CERTAIN SHARES [X]
- --------------------------------------------------------------------------------
13PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (7)
Approximately 32% (Based on 8,894,426 Shares reported
as outstanding as of November 9, 1999)
- --------------------------------------------------------------------------------
14TYPE OF REPORTING PERSON
CO
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
E-4
<PAGE>
SCHEDULE 13D
CUSIP No. 31659 P 10 3 Page 3 of 12 Pages
1Name of Reporting Person S.S. OR I.R.S. IDENTIFICATION
NO. OF ABOVE PERSON
- --------------------------------------------------------------------------------
Glenmount International, L.P.
2CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
(a) [_]
(b) [X]
- --------------------------------------------------------------------------------
3SEC USE ONLY
- --------------------------------------------------------------------------------
4SOURCE OF FUNDS OO
- --------------------------------------------------------------------------------
5CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) OR 2(e) [_]
- --------------------------------------------------------------------------------
6CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- --------------------------------------------------------------------------------
NUMBER 7 SOLE VOTING POWER
OF 4,250,000 Shares
SHARES
ENEFICIALLYB
OWNED BY
EACH
REPORTING
PERSON
WITH
-------------------------------------------------------------------
8 SHARED VOTING POWER
NONE
-------------------------------------------------------------------
9 SOLE DISPOSITIVE POWER
4,250,000 Shares
-------------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
NONE
- --------------------------------------------------------------------------------
11AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
PERSON
4,250,000 Shares
- --------------------------------------------------------------------------------
12CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (7) EXCLUDES CERTAIN SHARES [X]
- --------------------------------------------------------------------------------
13PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (7)
Approximately 32% (Based on 8,894,426 Shares reported
as outstanding as of November 9, 1999)
- --------------------------------------------------------------------------------
14TYPE OF REPORTING PERSON
PN
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
E-5
<PAGE>
SCHEDULE 13D
CUSIP No. 31659 P 10 3 Page 4 of 12 Pages
1Name of Reporting Person S.S. OR I.R.S. IDENTIFICATION
NO. OF ABOVE PERSON
- --------------------------------------------------------------------------------
Glenmount, LLC
2CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
(a) [_]
(b) [X]
- --------------------------------------------------------------------------------
3SEC USE ONLY
- --------------------------------------------------------------------------------
4SOURCE OF FUNDS OO
- --------------------------------------------------------------------------------
5CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) OR 2(e) [_]
- --------------------------------------------------------------------------------
6CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- --------------------------------------------------------------------------------
NUMBER 7 SOLE VOTING POWER
OF 4,250,000 Shares
SHARES
ENEFICIALLYB
OWNED BY
EACH
REPORTING
PERSON
WITH
-------------------------------------------------------------------
8 SHARED VOTING POWER
NONE
-------------------------------------------------------------------
9 SOLE DISPOSITIVE POWER
4,250,000 Shares
-------------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
NONE
- --------------------------------------------------------------------------------
11AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
PERSON
4,250,000 Shares
- --------------------------------------------------------------------------------
12CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (7) EXCLUDES CERTAIN SHARES [X]
- --------------------------------------------------------------------------------
13PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (7)
Approximately 32% (Based on 8,894,426 Shares reported
as outstanding as of November 9, 1999)
- --------------------------------------------------------------------------------
14TYPE OF REPORTING PERSON
OO
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
E-6
<PAGE>
SCHEDULE 13D
CUSIP No. 31659 P 10 3 Page 5 of 12 Pages
1Name of Reporting Person S.S. OR I.R.S. IDENTIFICATION
NO. OF ABOVE PERSON
- --------------------------------------------------------------------------------
Glenmount Investment, LLC
2CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
(a) [_]
(b) [X]
- --------------------------------------------------------------------------------
3SEC USE ONLY
- --------------------------------------------------------------------------------
4SOURCE OF FUNDS OO
- --------------------------------------------------------------------------------
5CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) OR 2(e) [_]
- --------------------------------------------------------------------------------
6CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- --------------------------------------------------------------------------------
NUMBER 7 SOLE VOTING POWER
OF 4,250,000 Shares
SHARES
ENEFICIALLYB
OWNED BY
EACH
REPORTING
PERSON
WITH
-------------------------------------------------------------------
8 SHARED VOTING POWER
NONE
-------------------------------------------------------------------
9 SOLE DISPOSITIVE POWER
4,250,000 Shares
-------------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
NONE
- --------------------------------------------------------------------------------
11AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
PERSON
4,250,000 Shares
- --------------------------------------------------------------------------------
12CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (7) EXCLUDES CERTAIN SHARES [X]
- --------------------------------------------------------------------------------
13PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (7)
Approximately 32% (Based on 8,894,426 Shares reported
as outstanding as of November 9, 1999)
- --------------------------------------------------------------------------------
14TYPE OF REPORTING PERSON
OO
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
E-7
<PAGE>
SCHEDULE 13D
CUSIP No. 31659 P 10 3 Page 6 of 12 Pages
1Name of Reporting Person S.S. OR I.R.S. IDENTIFICATION
NO. OF ABOVE PERSON
- --------------------------------------------------------------------------------
Michael E. Johnson
2CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
(a) [_]
(b) [X]
- --------------------------------------------------------------------------------
3SEC USE ONLY
- --------------------------------------------------------------------------------
4SOURCE OF FUNDS OO
- --------------------------------------------------------------------------------
5CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) OR 2(e) [_]
- --------------------------------------------------------------------------------
6CITIZENSHIP OR PLACE OF ORGANIZATION
United States
- --------------------------------------------------------------------------------
NUMBER 7 SOLE VOTING POWER
OF 4,250,000 Shares
SHARES
ENEFICIALLYB
OWNED BY
EACH
REPORTING
PERSON
WITH
-------------------------------------------------------------------
8 SHARED VOTING POWER
NONE
-------------------------------------------------------------------
9 SOLE DISPOSITIVE POWER
4,250,000 Shares
-------------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
NONE
- --------------------------------------------------------------------------------
11AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
PERSON
4,250,000 Shares
- --------------------------------------------------------------------------------
12CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (7) EXCLUDES CERTAIN SHARES [X]
- --------------------------------------------------------------------------------
13PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (7)
Approximately 32% (Based on 8,894,426 Shares reported
as outstanding as of November 9, 1999)
- --------------------------------------------------------------------------------
14TYPE OF REPORTING PERSON
IN
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
E-8
<PAGE>
SCHEDULE 13D
CUSIP No. 31659 P 10 3 Page 7 of 12 Pages
1Name of Reporting Person S.S. OR I.R.S. IDENTIFICATION
NO. OF ABOVE PERSON
- --------------------------------------------------------------------------------
Robert D.D. Forbes
2CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
(a) [_]
(b) [X]
- --------------------------------------------------------------------------------
3SEC USE ONLY
- --------------------------------------------------------------------------------
4SOURCE OF FUNDS OO
- --------------------------------------------------------------------------------
5CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) OR 2(e) [_]
- --------------------------------------------------------------------------------
6CITIZENSHIP OR PLACE OF ORGANIZATION
Canada
- --------------------------------------------------------------------------------
NUMBER 7 SOLE VOTING POWER
OF 4,250,000 Shares
SHARES
ENEFICIALLYB
OWNED BY
EACH
REPORTING
PERSON
WITH
-------------------------------------------------------------------
8 SHARED VOTING POWER
NONE
-------------------------------------------------------------------
9 SOLE DISPOSITIVE POWER
4,250,000 Shares
-------------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
NONE
- --------------------------------------------------------------------------------
11AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
PERSON
4,250,000 Shares
- --------------------------------------------------------------------------------
12CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (7) EXCLUDES CERTAIN SHARES [X]
- --------------------------------------------------------------------------------
13PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (7)
Approximately 32% (Based on 8,894,426 Shares reported
as outstanding as of November 9, 1999)
- --------------------------------------------------------------------------------
14TYPE OF REPORTING PERSON
IN
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
E-9
<PAGE>
This statement on Schedule 13D ("Statement") is filed by Industrial-Works
Holding Corp., a Delaware corporation ("IWH"), Glenmount International, L.P., a
Delaware limited partnership and sole shareholder of IWH ("GILP"), Glenmount,
LLC, a Delaware limited liability company and manager of GILP ("GLLC"),
Glenmount Investment, LLC, a Delaware limited liability company and the general
partner of GILP ("GILC"), and the managers of GLLC to report their interest in
shares of a new class of Preferred Stock (the "Preferred Stock"), convertible
into shares of Common Stock (the "Shares") of Fieldworks, Incorporated, a
Minnesota corporation. The Preferred Stock is not an equity security registered
under the Securities Exchange Act of 1934.
ITEM 1. SECURITY AND ISSUER.
(a) The name of the subject company is Fieldworks, Incorporated, a Minnesota
corporation (the "Issuer"). The address of the Issuer's principal executive
offices is 7631 Anagram Drive, Eden Prairie, Minnesota, 55344.
(b) The class of equity securities to which this Statement relates is Common
Stock.
ITEM 2. IDENTITY AND BACKGROUND.
Industrial-Works Holdings Corp. is a Delaware corporation formed on
September 16, 1999, and is engaged in the business of acquiring, holding, and
selling investment property, primarily in the form of securities. Its principal
business address is 19200 Von Karman Avenue, Suite 400, Irvine, California
92612.
Glenmount International, L.P. is a Delaware limited partnership organized on
January 21, 1998, and is engaged in the business of acquiring, holding, and
disposing of securities. Its principal business address is 19200 Von Karman
Avenue, Suite 400, Irvine, California 92612.
Glenmount, LLC is a Delaware limited liability company organized on January
21, 1998, and is engaged in the business of managing investments. Its principal
business address is 19200 Von Karman Avenue, Suite 400, Irvine, California
92612.
Glenmount Investment, LLC is a Delaware limited liability company organized
on January 21, 1998, and is engaged in the business of acting as the general
partner of Glenmount International, L.P. Its principal business address is
19200 Von Karman Avenue, Suite 400, Irvine, California 92612.
Michael E. Johnson is a Managing Director of Glenmount International, L.P.
He has been a director of Glenmount Investment, LLC, the general partner of
Glenmount International, L.P., since February 1998. He was a founder of
Glenmount International, L.P., and has been Managing Director of Glenmount,
LLC, the manager of Glenmount International, L.P., since January 1998. Mr.
Johnson's principal business address is 19200 Von Karman Avenue, Suite 400,
Irvine, California 92612. Mr. Johnson is a United States citizen.
Robert D.D. Forbes is a Managing Director of Glenmount International, L.P.
Mr. Forbes has been a director of Glenmount Investment, LLC, the general
partner of Glenmount International, L.P., since February 1998. He was a founder
of Glenmount International, L.P., and has been Managing Director of Glenmount,
LLC, the manager of Glenmount International, L.P., since January 1998. Mr.
Forbes' principal business address in the United States is 19200 Von Karman
Avenue, Suite 400, Irvine, California 92612. Mr. Forbes is a citizen of Canada.
During the last five years, none of the persons filing this Statement has
been convicted in a criminal proceeding (excluding traffic violations or
similar misdemeanors) or was a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such
proceeding any such person was or is subject to a judgment, decree or final
order enjoining further violations of, or prohibiting activities subject to,
federal or state securities laws or finding any violation of such laws.
E-10
<PAGE>
ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
IWH is obtaining the funds to purchase the Shares reported on this Statement
through a capital contribution from its sole shareholder, GILP. GILP is
obtaining the funds from its partners through a capital call.
ITEM 4. PURPOSE OF TRANSACTION.
The parties filing this Statement believe that holding an interest in the
Shares is an attractive investment, and that such investment will enable the
Issuer to enhance its performance and provide a return to its shareholders. IWH
has acquired the right to purchase 4,250,000 shares of the Preferred Stock,
convertible into an equal number of Shares, and to acquire a warrant to
purchase 500,000 Shares (the "Warrant") pursuant to the terms of a Securities
Purchase Agreement, dated as of November 20, 1999, between the Issuer and IWH
(the "Purchase Agreement"). The Securities Purchase Agreement, which is Exhibit
7.a to this Statement, contains customary covenants, conditions,
representations and warranties and requires the approval of the Issuer's
shareholders. In connection with its acquisition of an interest in the Issuer,
IWH will be entitled to hold 3 of the 7 seats on the Issuer's Board of
Directors (the "Issuer's Board"), will have the ability to control certain
actions that may be taken by the Issuer, and may under some circumstances be
entitled to expand the Issuer's Board to 9 and elect 5 members. In addition to
the Purchase Agreement, the Issuer has entered into a Management Services
Agreement and a Voting Agreement in connection with IWH's investment, the terms
of which benefit IWH. A Management Services Agreement, dated as of November 20,
1999, was entered into between the Issuer and GLLC, the manager of GILP (the
"Management Agreement"). Under the terms of the Management Agreement, GLLC will
provide active support to the management of the Issuer for a one year term with
respect to corporate strategies and financial operations, among other matters.
The Voting Agreement (delivered December 1, 1999), by and among the Issuer,
certain shareholders of the Issuer, and IWH (the "Voting Agreement"), provides
that all parties thereto will vote their shares in favor of the transactions
contemplated by the Purchase Agreement, and IWH's nominees to the Issuer's
Board.
The reporting persons expect to influence the operations of the Issuer
pursuant to the terms of the Purchase Agreement, Management Agreement, and
Voting Agreement. Based upon the results of their ongoing review of the
Issuer's operations and economic and other considerations, including the
availability of, and alternative uses of, investment funds, the reporting
persons may determine to acquire additional Shares, to sell Shares, or to seek
changes in the Issuer. However, aside from acquiring seats on the Issuer's
Board and providing management services to the Issuer as discussed above, at
this time the persons filing this Statement do not have any plans or proposals
which would relate to, or would result in, any transaction, change or other
occurrence with respect to the Issuer or the Shares as is listed in paragraphs
(a) through (j) of Item 4 in Schedule 13D.
ITEM 5. INTEREST IN SECURITIES OF THE ISSUER.
Pursuant to the terms of the Purchase Agreement, assuming approval by the
Issuer's shareholders, IWH presently has a right to acquire 4,750,000 Shares,
4,250,000 directly through the acquisition and conversion of the Preferred
Stock, and 500,000 upon exercise of the Warrant (which is contingent upon the
Issuer's share price reaching specified levels). Based upon the number of
Shares reported as outstanding on November 9, 1999, the acquisition of
4,250,000 Shares represents approximately 32% of the outstanding stock of the
Issuer. The Warrant is not presently exercisable, and will be exercisable in
the future only if certain conditions relating to the Issuer's share price,
which conditions are outside the control of IWH, are satisfied. Therefore, the
500,000 Shares issuable upon exercise of the Warrant presently are excluded
from the total number of Shares owned by, and the calculation of the number of
Shares beneficially owned by, the persons filing this Statement. The Preferred
Stock and the Warrant described in this Statement will be acquired pursuant to
the Purchase Agreement, at a closing following approval by the Issuer's
shareholders, expected to be on or before January 31, 2000.
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As the sole shareholder of IWH, GILP has indirect beneficial ownership of
the Shares described in this Statement because it owns all of the interests in
IWH and can influence voting, purchase or dispositions of the Shares by IWH. As
the manager of GILP, GLLC may be deemed to have indirect beneficial ownership
of the Shares described in this Statement because it can influence the
decisions of GILP with respect to the voting, purchase or dispositions of the
Shares by IWH. As the general partner of GILP, GILC may be deemed to have
indirect beneficial ownership of the Shares described in this Statement because
it can influence the decisions of GILP with respect to the voting, purchase or
dispositions of the Shares by IWH. As Managing Directors of GLLC, and directors
of GILC, each of Mr. Johnson and Mr. Forbes may be deemed to have indirect
beneficial ownership of the Shares that will be directly held by IWH, and
indirectly beneficially owned by each of GILP, GLLC, and GILC, because each of
them can directly influence the decisions of GLLC and GILC, and therefore may
control the voting and disposition of such Shares.
If the Issuer's shareholders do not approve the transactions contemplated by
the Purchase Agreement, IWH will be entitled to receive a warrant for 250,000
Shares. Such Shares are not deemed beneficially owned at this time.
In the past sixty days, no Shares have been acquired or disposed of by the
reporting persons.
ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS WITH RESPECT TO SECURITIES OF
THE ISSUER.
The persons filing this Statement disclaim the existence of a group and,
except as noted, disclaim beneficial ownership of the Shares held by the other
persons filing this Statement. Except for the Purchase Agreement, the Voting
Agreement, the Management Agreement, and the agreement among the reporting
persons to file a joint statement on Schedule 13-D, there are no controls,
arrangements or understandings among the reporting persons and other parties
with respect to securities of the Issuer.
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS.
7.a Agreement to File a Joint Statement on Schedule 13-D.
7.b Securities Purchase Agreement, dated as of November 20, 1999, by and
among Fieldworks, Incorporated, and Industrial-Works Holding Corp. *
7.c Voting Agreement by and among Fieldworks, Incorporated, certain
shareholders of Fieldworks, Incorporated, and Industrial-Works
Holding Corp. (Exhibit D to Securities Purchase Agreement)*
NOTE: Items marked with a "*" have previously been filed with the
Securities Exchange Commission as Exhibit 99.1 to the Form 8-K of
Fieldworks, Incorporated, dated November 24, 1999, and are hereby
incorporated by reference.
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SIGNATURES
After due inquiry and to the best of my knowledge and belief, I certify that
the information set forth in this statement is true, complete and correct.
Dated: December 3, 1999
Industrial-Works Holding Corp.
/s/ Michael E. Johnson
By: _________________________________
Michael E. Johnson, President
Glenmount International, L.P.
By: Glenmount Investment, LLC,
General Partner
/s/ Michael E. Johnson
By: _________________________________
Michael E. Johnson, Managing
Director
/s/ Robert D.D. Forbes
By: _________________________________
Robert D.D. Forbes, Managing
Director
Glenmount Investment, LLC
/s/ Michael E. Johnson
By: _________________________________
Michael E. Johnson, Managing
Director
/s/ Robert D.D. Forbes
By: _________________________________
Robert D.D. Forbes, Managing
Director
Glenmount, LLC
/s/ Michael E. Johnson
By: _________________________________
Michael E. Johnson, Managing
Director
/s/ Robert D.D. Forbes
By: _________________________________
Robert D.D. Forbes, Managing
Director
/s/ Michael E. Johnson
_____________________________________
MICHAEL E. JOHNSON, an individual
/s/ Robert D.D. Forbes
_____________________________________
ROBERT D.D. FORBES, an individual
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APPENDIX F
FORM OF CERTIFICATE OF DESIGNATION OF
SERIES OF PREFERRED STOCK
FIELDWORKS, INCORPORATED
STATEMENT OF DESIGNATION
OF
RIGHTS, PREFERENCES AND LIMITATIONS
OF
SERIES B CONVERTIBLE PARTICIPATING PREFERRED STOCK
The undersigned hereby certifies that the following resolutions
establishing the Series B Convertible Participating Preferred Stock of
Fieldworks, Incorporated, a Minnesota corporation (the "Company"), pursuant to
Section 302A.401 of the Minnesota Business Corporation Act were duly adopted
by the Board of Directors of the Company on November , :
WHEREAS, the Board of Directors believes that it is in the best interests
of the Company to create a class of preferred stock designated as the Series B
Convertible Participating Preferred Stock.
RESOLVED, that the Resolution Establishing the Series, Setting Forth the
Designation and Fixing the Relative Rights and Preferences of Series B
Convertible Participating Preferred Stock, attached hereto as Exhibit A, is
hereby adopted.
FURTHER RESOLVED, that the officers of the Company are authorized and
directed to prepare, execute, acknowledge and file such Certificate of
Designation with the Secretary of State of Minnesota.
IN WITNESS WHEREOF, the undersigned, the President and Chief Executive
Officer of the Company, being duly authorized on behalf of the corporation,
has executed this document the day of , .
FIELDWORKS, INCORPORATED
By:____________________________________
[Name] ______________________________
President and Chief Executive
Officer
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FIELDWORKS, INCORPORATED
RESOLUTION ESTABLISHING THE SERIES,
SETTING FORTH THE DESIGNATION AND FIXING
THE RELATIVE RIGHTS AND PREFERENCES OF
SERIES B CONVERTIBLE PATICIPATING PREFERRED STOCK
Pursuant to the powers expressly granted to the Board of Directors of
Fieldworks, Incorporated, a Minnesota corporation (the "Company"), by the
provisions of the Articles of Incorporation of the Company and Chapter 302A of
the Minnesota Business Corporation Act, the Board of Directors of the Company
duly established by written action of the Board of Directors a series of shares
consisting of 4,250,000 shares, with the designation of the series and the
relative rights and preferences of the series as follows:
1. Designation. The designation of the series of shares is Series B
Convertible Participating Preferred Stock (the "Series B Shares") and the
number of shares of such series is 4,250,000.
2. Dividends. Dividends shall be payable on the Series B Shares out of funds
legally available for the declaration of dividends only if and when declared by
the Board of Directors. In no event shall any dividend be paid or declared, nor
shall any distribution be made, on the Common Stock, unless the holders of the
Series B Shares shall have consented thereto and shall participate in such
dividend on a pro rata basis with the holders of Common Stock, counting the
Series B Shares on an as-if-converted basis.
3. Liquidation Preference. In the event of any liquidation, the holders of
the Series B Shares then outstanding shall be entitled to receive out of the
assets of the Company, prior and in preference to any distribution of any of
the assets or surplus funds of the Company to the holders of the Common Stock
or any other class of shares of preferred stock of the Company ranking junior
to the Series B Shares with respect to payments upon Liquidation (such
preferred stock hereinafter called "Junior Liquidation Stock"), and junior to
any such distribution to the holders of any class of shares of the Company
ranking senior to the Series B Shares in such respect, an amount equal to $1.00
per share plus any accrued and unpaid dividends thereon for each Series B Share
(the "preferred amount"). Following any distribution of assets or surplus funds
of the Company to the holders of any outstanding series of Junior Liquidation
Stock, the remainder of any such assets or, surplus funds shall be distributed
to the holders of the Common Stock until each holder shall have received an
amount per share equal to the preferred amount. Thereafter, any remaining
assets or funds shall be distributed pro rata to the holders of the Common
Stock and the holders of the Series B Preferred Stock, counting Series B Shares
on an as-if-converted basis. If upon the occurrence of any Liquidation, the
assets and funds of the Company available for the distribution to its
shareholders shall be insufficient to pay the holders of the Series B Shares
the full preferred amount to which they shall be entitled, the holders of the
Series B Shares shall share ratably in any distribution of such assets and
surplus funds in proportion to the Series B Shares held by them.
4. Voting Rights. Each holder of record of Series B Shares shall be entitled
to notice of and to attend all meetings of the shareholders of the Company and
shall be entitled at each such meeting to a number of votes for each Series B
Share held equal to the number of shares of Common Stock into which each share
of Series B Shares is then convertible. Each holder of Common Stock shall have
one vote on all matters submitted to the shareholders for each share of Common
Stock standing in the name of such holder on the books of the Company. Except
as otherwise provided in this Section 4 and in Section 5, and except as
otherwise required by agreement or law, the holders of the Series B Shares and
the holders of Common Stock of the Company shall vote as a single class on all
matters submitted to the shareholders.
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5. Special Voting Rights for Directors.
(a) Other than as provided in paragraphs (b) and (c) below of this
Section 5, the number of directors of the Company shall be fixed at seven
(7).
(b) So long as any Series B Shares remain outstanding, the holders of
the Series B Shares shall have the right, voting as a class, to elect three
(3) directors of the Company, and shall have the right under the
circumstances described in paragraph (c) below, voting as a class, to elect
two (2) additional directors of the Company (each such director, a "Series
B Director"). Such holders shall have the exclusive right to (i) terminate
any Series B Director during his or her term of office, with or without
cause; and (ii) to fill any vacancy among the Series B Directors.
(c) The holders of the Series B Shares, acting by a majority vote, shall
have the right to compel the Company to take all necessary action to
increase the number of directors from seven (7) to nine (9), and the right
to appoint two (2) additional directors to fill the vacancies created by
such increase, upon the occurrence of any one or more of the following
(each a "Triggering Event"):
(i)the Company incurs operating losses in excess of $1,000,000 for
the fourth quarter of 1999;
(ii)the Company incurs operating losses in excess of $100,000 for
the first quarter of 2000;
(iii)the Company incurs an operating loss in any amount for the
second quarter of 2000;
(iv)the Company achieves operating income of less than $200,000 in
the third quarter of 2000;
(v)the Company achieves operating income of less than $400,000 in
the fourth quarter of 2000;
(vi)the Company achieves operating income of less than $600,000 in
the first quarter of 2001;
(vii)the Company achieves operating income of less than $800,000 in
the second quarter of 2001; or
(viii)the Company achieves operating income of less than $1,000,000
in any quarter commencing with the third quarter of 2001.
(d) As used in this Section 5, "operating income" and "operating losses"
shall mean, for any period, the amount of operating income or losses for
such period, if any, determined in accordance with generally accepted
accounting principles applied in a manner consistent with the application
of such principles in periods prior to 1999, provided that the impact of
any expenses directly attributable to the Management Services Agreement,
dated November , 1999, between the Company and Glenmount, LLC and
revenues or expenses directly attributable to (a) any reversal of prior
inventory, warranty or other reserves, (b) any sale of assets (other than
inventory in the ordinary course), and (c) any business acquired by the
Company after the date hereof through merger, acquisition of securities,
acquisition of assets or otherwise, in each case, shall be excluded from
the determination of operating income or operating losses pursuant to this
sentence.
(e) This right of the holders of the Series B Shares to name two
additional directors shall lapse, and the number of Company directors shall
reduce to seven, if, six months after the election of two additional Series
B directors, the holders of the Series B shares have not exercised the
conversion rights granted in Section 7 below.
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<PAGE>
6. Protective Provisions. The Company shall not take any of the following
actions without the prior affirmative written consent of the holders of at
least two-thirds (2/3) of the Series B Shares:
(a) alter, change or amend (by merger or otherwise) any of the rights,
preferences or privileges of the Series B Shares;
(b) other than as provided in Section 5(c) hereof, amend, restate,
alter, modify or repeal (by merger or otherwise) the Articles of
Incorporation or the Bylaws of the Company, including, without limitation,
amending, restating, modifying or repealing (by merger or otherwise) (i)
any certificate of designation or preferences (as in effect from time to
time) relating to any series of preferred stock or (ii) any of the rights,
preferences and privileges of any other class of capital stock, or the
terms or provisions of any option or convertible security;
(c) (i) create, authorize or issue any securities or shares of any such
class or series of securities which rank senior to or on parity with the
Series B Shares; (ii) create, authorize or issue any securities or shares
of any such class or series of securities the holders of which have the
right to cast more than one vote per share, and/or have the right, voting
as a class or series, to elect one or more members of the Board of
Directors; (iii) create, authorize or issue any securities or shares of any
such class or series of securities convertible into, or exercisable,
redeemable or exchangeable for, shares of any of the foregoing; (iv)
increase or decrease the authorized number of shares of any of the
foregoing; or (v) increase or decrease the authorized number of Series B
Shares;
(d) (i) initiate or suffer to exist any Liquidation Event with respect
to the Company, (ii) enter into any merger or consolidation with any other
Person that results in the holders of the Company's capital stock
immediately prior to such transaction owning less than fifty percent (50%)
of the voting power of the successor entity's capital stock after such
transaction or (iii) otherwise discontinue or dispose of more than ten
percent (10%) of the assets of the business of the Company, taken as a
whole. For purposes of this Section 6, "Liquidation Event" shall mean any
of the following events: (i) the commencement by the Company of a voluntary
case under the bankruptcy laws of the United States, as now or hereafter in
effect, or the commencement of an involuntary case against the Company,
which petition shall not be opposed within fifteen (15) days or be
dismissed within sixty (60) days after commencement thereof; (ii) the
appointment of a custodian for, or the taking charge by a custodian of, all
or substantially all of the property of the Company; (iii) the commencement
by the Company or on its behalf or with its consent of any proceeding under
any reorganization, arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency or liquidation or similar law of any jurisdiction
whether now or hereafter in effect; (iv) the commencement by anyone without
the Company's consent of any proceeding of the type set forth in the
preceding clause (iii) which is not controverted within fifteen (15) days
thereof and dismissed within sixty (60) days after the commencement
thereof; (v) the adjudication of the Company as insolvent or bankrupt, or
the adoption by the Company of a plan of liquidation, (vi) the occurrence
of any Change of Control; or (vii) the filing of a certificate of
dissolution on behalf of the Company with the Secretary of State of the
State of Minnesota; in any of cases (i) through (vi) above, in a single
transaction or series of related transactions. For purposes of this Section
6(d), a "Change of Control" shall be deemed to have occurred upon (i) the
consummation of a tender for or purchase of more than fifty percent (50%)
of the Company's Common Stock by a third party other than the holder of a
majority of the Series B Stock, in a single transaction or series of
related transactions, or (ii) any other transaction such that the
shareholders of the Company immediately prior to the consummation of such
transaction possess less than fifty percent (50%) of the voting securities
of the surviving or continuing entity immediately after the transaction, in
a single transaction or a series of related transactions unless such
transactions have been approved by the vote of all Series B Directors.
(e) initiate or suffer to exist any recapitalization of the Company, or
reclassify any authorized capital stock of the Company into any other class
or series of Capital Stock of the Company;
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<PAGE>
(f) redeem any shares of the Company's capital stock;
(g) (i) acquire, in one or a series of transactions, any equity
ownership interest, by way of merger or otherwise, in any Person, or any
asset or assets of any Person, where the aggregate consideration payable in
connection with such acquisition (including, without limitation, cash
consideration, the fair market value of any securities and the net present
value of any deferred consideration) is at least $1,000,000, or (ii) make
any capital expenditures in excess of $500,000 individually or $1,000,000
for any fiscal year;
(h) change the number of directors of the Company to a number other than
seven (7), or, under the circumstances in Section 5(c), nine (9), or the
manner in which the directors are selected, except as set forth in Section
5(c) hereof;
(i) make any material change in the nature of its business as conducted
on the date the Series B Shares are issued, or fail to conduct its business
in the ordinary course consistent with past practice;
(j) sell, transfer, convey, lease or dispose of, outside the ordinary
course of business, any material assets or properties of the Company,
whether now or hereafter acquired, in any transaction or transactions that
call for payments in excess of $500,000;
(k) establish or purchase any subsidiary;
(l) enter into any agreements, transactions or leases not in the
ordinary course of the Company's business as conducted on the date hereof
that call for payments in excess of $250,000;
(m) incur any new or additional indebtedness which exceeds $500,000,
provided that this clause (m) shall not prohibit the extension, renewal,
amendment or refinancing (including refinancings with other lenders) of the
Company's existing credit facility with Spectrum Commercial Services, a
division of Lyon Financial Services, Inc. on terms no more restrictive than
those contained in the General Credit and Security Agreement dated November
19, 1998 as amended on August 20,1999, (except that interest rate "spreads"
may increase by no more than 50 basis points over prime and principal
amounts advanced against accounts receivable or inventory (but no other
amounts of principal) may increase or decrease provided that advance rates
are no greater than those currently in effect);
(n) other than as set forth in an annual compensation plan approved by
the Series B Directors, increase management compensation with respect to
any Person in an amount greater than ten percent (10%) in any single fiscal
year (including without limitation by issuance of warrants, options or
other contingent compensation), or hire any employee whose annual
compensation will exceed $125,000; or
(o) except for transactions on customary and reasonable terms, enter
into any transaction with (i) any Affiliate of the Company, (ii) any
employee of the Company, (iii) any holder of more than five percent (5%) of
the outstanding capital stock of any class or series of capital stock of
the Company, (iv) any member of the immediate family of any Person set
forth in clauses (i), (ii) and (iii) above, or (v) any corporation,
partnership, trust or other entity in which any Person set forth in clauses
(i), (ii), (iii) or (iv) above, or member of the family of any such Person,
is a director, officer, trustee, partner or holder of more than five
percent (5%) of the outstanding capital stock thereof. For purposes of this
Agreement, the members of the "immediate family" of any Person shall
consist of the spouse, parents, children, siblings, mothers- and fathers-
in-law, sons- and daughters-in-law, and brothers- and sisters-in-law of
such Person.
7. Conversion Rights.
(a) At Option of Holders. Holders of Series B Shares may, at their
option, upon surrender of the certificates therefor, convert any or all of
their Series B Shares into fully paid and nonassessable shares of Common
Stock at any time. The right of holders of Series B Shares to convert their
shares shall be
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<PAGE>
exercised by surrendering for such purpose to the Company or any transfer
agent for the Series B Shares, and at such other office or offices, if any,
as the Board of Directors may designate, certificates representing the
Series B Shares to be converted, duly endorsed in blank or accompanied by
proper instruments of transfer. Upon the surrender of certificates
representing the Series B Shares to be converted, the person converting
such shares shall be deemed to be the holder of record of the Common Stock
(and such other securities and property as the holders of Series B Shares
may be entitled to upon the conversion thereof, as hereinafter provided)
issuable upon such conversion, and all rights with respect to the Series B
Shares surrendered shall forthwith terminate except the right to receive
the Common Stock or other securities, cash or other assets receivable upon
such conversion as herein provided.
(b) Conversion Rate/Conversion Price. In addition to the adjustments
required by Section 7(e) and 7(f), the conversion of Series B Shares into
Common Stock shall be governed by the following: Series B Shares shall be
convertible into that number of fully paid and nonassessable shares of
Common Stock (calculated as to each conversion to the nearest 1/100th of a
share) as shall be determined by multiplying the "Conversion Rate,"
determined as hereinafter provided, in effect at the time of conversion by
the product of (i) the number of shares of Series B Shares to be converted
and (ii) the "Initial Conversion Price" applicable to the shares of Series
B Shares being converted (as hereinafter defined) and dividing the product
of such multiplication by the "Conversion Price" applicable to the Series B
Shares being converted, determined as hereinafter provided, in effect at
the time of conversion and making any adjustments required by Section 7(e)
hereof. The conversion rate shall initially be one and shall be adjusted
from time to time as provided in Section 7(e) (such conversion rate, as so
adjusted from time to time, being referred to herein as the "Conversion
Rate"). The "Initial Conversion Price" for the Series B Shares shall be the
price per Series B Share paid to the company upon the issuance thereof. The
conversion price for Series B Shares shall initially be equal to the
Initial Conversion Price and shall be adjusted from time to time as
provided in Section 7(f) (the conversion price for Series B Shares, as so
adjusted from time to time, being herein referred to as the "Conversion
Price" applicable to such Series B Shares).
(c) Reservation of Shares. A number of shares of authorized but unissued
Common Stock of the Company sufficient to provide for the conversion of all
of the Series B Shares outstanding upon the basis herein provided
("Conversion Common Stock") shall at all times be reserved by the Company,
free from preemptive rights, for such conversion. If the Company shall
issue any securities or make any change in its capital structure that would
change the number of shares of Common Stock into which each Series B Share
shall be convertible as herein provided, the Company shall at the same time
also make proper provision so that thereafter there shall be a sufficient
number of additional shares of capital stock authorized and reserved, free
from preemptive rights, for conversion of the outstanding Series B Shares
on the new basis. The Company shall comply with all securities laws
regulating the offer and delivery of shares of Common Stock upon conversion
of Series B Shares and shall list such shares on any national securities
exchange on which the Common Stock is listed or have such shares admitted
for quotation on the Nasdaq National or Small Cap Market if the Common
Stock is admitted for quotation thereon.
(d) Fractional Shares. No fractional shares of Common Stock shall be
issued upon the conversion of Series B Shares but, in lieu of any fraction
of a share of Common Stock that would otherwise be issuable in respect of
the aggregate number of such shares surrendered for conversion at one time
by the same holder, the Company shall pay in cash an amount equal to the
product of (a) the "Closing Price" (as defined in the next sentence) of a
share of Common Stock on the last trading day before the relevant
conversion date and (b) such fraction of a share. The "Closing Price" for
each day shall be the last reported sale price regular way or, in case no
sale takes place on such day, the average of the closing bid and asked
prices regular way on such day, in either case as reported on the New York
Stock Exchange Composite Tape, or, if the Common Stock is not listed or
admitted to trading on such Exchange, on the principal national securities
exchange on which the Common Stock is listed or admitted to trading, or, if
the Common Stock is not listed or admitted to trading on any national
securities exchange, on the Nasdaq
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<PAGE>
National or Small Cap Market, or, if the Common Stock is not admitted for
quotation on the Nasdaq National or Small Cap Market, the average of the
high bid and low asked prices on such day as recorded by the National
Association of Securities Dealers, Inc. through Nasdaq, or, if the National
Association of Securities Dealers, Inc. through Nasdaq shall not have
reported any bid and asked prices for the Common Stock on such day, the
average of the bid and asked prices for such day as furnished by any New
York Stock Exchange member firm selected from time to time by the Company
for such purpose, or, if no such bid and asked prices can be obtained from
any such firm, the fair market value of one share of the Common Stock on
such day as determined in good faith by the Board of Directors of the
Company.
(e) Conversion Rate Adjustments. Subject to Section 7(f) hereof, if the
Company shall (A) subdivide its outstanding Common Stock into a greater
number of shares, (B) combine the shares of its outstanding Common Stock
into a smaller number of shares or (C) declare a dividend upon its shares
of Common Stock payable in shares of Common Stock, then in each such case
the Conversion Rate in effect immediately prior thereto shall be
proportionately adjusted so that the holder of any shares of any Series B
Shares thereafter surrendered for conversion shall be entitled to receive,
to the extent permitted by applicable law, the number and kind of shares of
capital stock of the Company that such holder would have owned or have been
entitled to receive after the happening of such event had such Series B
Shares been converted immediately prior to the record date for such event
(or if no record date is established in connection with such event, the
effective date for such action). An adjustment pursuant to this Section
7(e) shall become effective immediately after the record date in the case
of a stock dividend or distribution, or immediately after the effective
date in the case of a subdivision, combination or reclassification.
(f) Conversion Price Adjustments. With respect to Series B Shares, if
and whenever the Company shall issue or sell any shares of its Common Stock
or any securities convertible into or exercisable or exchangeable for
shares of Common Stock ("Convertible Securities") for a consideration per
share (in the case of the sale of any Convertible Securities, the amount,
if any, payable for such Convertible Security and upon the exercise or
conversion thereof (and/or upon the exercise or conversion of the
securities receivable upon such exercise or conversion) for each share of
Common Stock receivable thereby shall be included in determining such
consideration per share) less than the Conversion Price applicable to the
Series B Shares, in effect immediately prior to the time of such issuance
or sale, then, forthwith upon such issuance or sale, such higher Conversion
Price(s) for the Series B Shares shall be reduced to a price (calculated to
the nearest tenth of a cent) determined by dividing (x) an amount equal to
the sum of (A) the number of shares of Common Stock outstanding immediately
prior to such issuance or sale multiplied by such higher Conversion Price
plus (B) the aggregate consideration, if any, received or receivable by the
Company for the shares of Common Stock issued or issuable upon the exercise
of any issued Convertible Security (and/or upon the exercise or conversion
of the security receivable upon such exercise or conversion), by (y) an
amount equal to the sum of (A) the number of shares of Common Stock
outstanding immediately prior to such issuance or sale plus (B) the number
of shares of Common Stock thus issued or sold or receivable upon the
exercise or conversion of the Convertible Securities (or the securities
receivable upon the exercise or conversion of such Securities). If any
Convertible Securities taken into account in any such adjustment of a
Conversion Price subsequently expire without exercise, such Conversion
Price shall be recomputed to eliminate the effect of such expired
Convertible Securities. However, no adjustment pursuant to this Section
7(f) shall be required upon the issuance of shares of Common Stock upon
conversion of any shares of preferred stock, including the Series B Shares,
outstanding prior to such issuance or sale or upon the exercise of options
available under the 1996 Directors Stock Option Plan or the 1999 Long-term
Incentive Plan of the Company as in effect prior to November 1, 1999.
(g) Consolidations, Mergers, Sales of Assets, Reclassifications and
Certain Dividends. In case of any (A) consolidation or merger of the
Company with any other company (other than the merger of a subsidiary of
the Company into the Company in a transaction in which the Company is the
surviving corporation and the outstanding shares of capital stock of the
Company are not exchanged for or converted
F-7
<PAGE>
into any other securities, cash or other property), (B) sale or transfer of
all or substantially all of the assets of the Company for cash, securities
or other property, (C) any share exchange pursuant to which all of the
outstanding shares of Common Stock are converted into other securities or
property, or (D) issuance of any shares of the Company's capital stock in
connection with a reclassification of the Common Stock, the Company shall,
prior to or at the time of such transaction, make appropriate provision or
cause appropriate provision to be made so that the holders of each Series B
Share then outstanding shall have the right thereafter to receive the kind
and amount of shares of stock and other securities and property receivable
upon such consolidation, merger, sale, transfer, share exchange or
reclassification by a holder of the number of shares of Common Stock into
which such Series B Shares could have been converted immediately prior to
the effective date of such consolidation, merger, sale, transfer, share
exchange or reclassification. If in connection with any such consolidation,
merger, sale, transfer, share exchange or reclassification, each holder
Common Stock is entitled to elect to receive either securities, cash or
other assets upon completion of such transaction, the Company shall provide
or cause to be provided to each holder of Series B Shares the right to
elect the securities, cash or other assets into which the Series B Shares
held by such holder shall be convertible after completion of any such
transaction on the same terms and subject to the same conditions applicable
to holders of the Common Stock (including, without limitation, notice of
the right to elect, limitations on the period in which such election shall
be made and the effect of failing to exercise the election).
(h) Rounding. All calculations hereunder, unless otherwise specified,
shall be made to the nearest cent or to the nearest 1/100th of a share, as
the case may be.
(i) Notices. Whenever the Conversion Rate or a Conversion Price is
adjusted as herein provided, the Company shall give prompt notice by mail
to the holders of the outstanding Series B Shares of such adjustment, which
notice shall set forth the adjustment and the new Conversion Rate or
Conversion Price. Notwithstanding the foregoing, failure by the Company to
give such notice or a defect in such notice shall not affect the binding
nature of such corporate action of the Company.
(j) Common Stock Defined. As used herein, the term "Common Stock" shall
mean and include the presently authorized Common Stock of the Company and
shall also include any capital stock of any class of the Company (other
than the Series B Shares) hereafter authorized which shall have the right
to vote on all matters submitted to the shareholders of the Company and
shall not be limited to a fixed sum or percentage in respect of the rights
of the holders thereof to participate in dividends or in the distribution
of assets upon the occurrence of any Liquidation Event of the Company.
8. Preemptive Rights. If Company offers to sell its common stock, securities
convertible into common stock, or any other debt (excluding debt securities
issued to banks or other financial institutions) or equity securities other
than the issuance of options or shares to employees, directors and consultants
which have been approved by the Series B Directors (the "Additional
Securities") it will first offer to the holders of the Series B Shares, or, if
applicable, Conversion Common Stock the right to purchase a portion of the
Additional Securities such that such holders' aggregate percentage ownership of
the Company on a fully diluted basis ("Purchasers' Percentage") will be
unchanged. The offer shall set forth the number of shares to be sold, the
price, and material terms and conditions.
The right of the holders to purchase in the aggregate Additional Securities
up to but not more than the Purchaser's Percentage may be exercised as follows:
(a) the Company shall provide each holder with written notice of the
number of securities to be issued and the cash price therefor;
(b) each holder shall have the right to purchase that percentage of such
securities equal to the ratio that the number of shares of Conversion
Common Stock held by such holder bears to the total number of shares of
Conversion Common Stock held by all holders;
F-8
<PAGE>
(c) second, if not all holders elect to purchase their pro rata share,
then as to the excess of the amount of Purchaser's Percentage over the
shares taken by holders electing to purchase their pro rata part (such
excess to be referred to as the "Unsubscribed Shares"), the holders who do
so elect shall be offered the right to acquire pro rata among themselves
based on their holdings of Conversion Common Stock; and
(d) if after such offer, any of the Unsubscribed Shares remain unsold,
as to such unsold Unsubscribed Shares, as the holders who agreed to
purchase their pro rata part of the Unsubscribed Shares may agree, all
within thirty (30) days of notice by the Company of such proposed issuance.
The Company may, within thirty (30) days, sell the remaining securities not
to be purchased by the holders to third parties on the terms and conditions set
forth in the offer delivered to holders, and the holders shall be required to
deliver the consideration to Company for the securities being purchased by the
holders at the same time such third parties are required to deliver their
consideration to Company.
Notwithstanding anything in this Section 8 to the contrary, the holders'
rights under this Section 8 shall not apply to (i) the securities of the
Company outstanding immediately prior to the issuance of the initial Series B
Shares; (ii) shares of common stock issued in connection with any stock split,
stock dividends or recapitalization of Company or upon conversion of the Series
B Shares; (iv) any borrowings, direct or indirect from financial institutions
by the Company, whether or not presently authorized, evidenced by any type of
debt instrument with no equity features; (v) securities issued pursuant to an
effective registration statement filed with the SEC in connection with a
registered public offering; (vi) equity securities issued to a financial
institution in connection with any lease financing or debt financing of the
Company approved by a two-thirds (2/3) vote of the Board of Directors; or (vii)
any transaction in which all directors of the Company elect for this Section 8
not to apply.
F-9
<PAGE>
FIELDWORKS, INCORPORATED
SPECIAL MEETING
Thursday, January 27, 2000
3:00 p.m. Central Time
Minneapolis Marriott, Southwest
5801 Opus Parkway
Minnetonka, Minnesota
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FIELDWORKS, INCORPORATED
7631 Anagram Drive, Eden Prairie, MN 55344 Proxy
- --------------------------------------------------------------------------------
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints David G. Mell and Karen L. Engebretson, and each
of them, with full power to appoint a substitute, to vote all shares the
undersigned is entitled to vote at the Special Meeting of Shareholders of
Fieldworks, Incorporated to be held on January 27, 2000, and at all adjournments
thereof, as specified below on the matters referred to, and, in their
discretion, upon any other matters which may be brought before the meeting:
If no choice is specified, the proxy will be voted "FOR" each item.
See reverse for voting instructions.
<PAGE>
Please mark, sign and date your proxy card and return it in the postage-paid
envelope provided.
Please detach here
- --------------------------------------------------------------------------------
The Board of Directors Recommends a vote FOR Items 1 and 2.
1. Approval of the transactions contemplated [_]For [_]Against [_]Abstain
by that certain Securities Purchase
Agreement dated as of November 20, 1999
between FieldWorks, Inc. ( the "Company")
and Industrial-Works Holding Corp.
("Industrial-Works"), a wholly owned
subsidiary of Glenmount International,
L.P., including the issuance and sale
to Industrial-Works of 4,250,000 shares of
Series B Convertible Participating Preferred
Stock of the Company (the "Series B Shares"),
the issuance of a warrant to purchase 500,000
shares of the Company's Common Stock, and the
issuance of Common Stock upon exercise of the
warrant and conversion of the Series B Shares.
2. Approval of that certain Voting Agreement [_]For [_]Against [_]Abstain
dated as of November 20, 1999 by and among
the Company, Industrial-Works, and certain
officers and directors of the Company and
their affiliates, together with approval of
the voting rights of the shares subject to
the Voting Agreement.
3. To vote with discretionary authority upon
such other matters as may come before the
meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS
PROVIDED BY THE UNDERSIGNED SHAREHOLDER, THIS PROXY WILL BE VOTED "FOR" ITEMS 1
AND 2 LISTED HEREIN, AND UPON ALL OTHER MATTERS, THE PROXIES SHALL VOTE AS THEY
DEEM IN THE BEST INTERESTS OF THE COMPANY.
Dated:_________________________, 2000
Address Change? Mark Box [_]
Indicate changes below:
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Signature(s) in Box
Please sign exactly as your name(s) appear
on Proxy. If held in joint tenancy, all
persons must sign. Trustees, administrators,
etc., should include title and authority.
Corporations should provide full name of
corporation and title of authorized officer
signing the Proxy.
