<PAGE>
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 000-22221
FIELDWORKS, INCORPORATED
(Exact name of registrant as specified in its charter)
Minnesota 41-1731723
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
7631 Anagram Drive
Eden Prairie, Minnesota 55344
(Address of principal executive offices)
(Zip Code)
(952) 974-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
The number of shares of the registrant's Common Stock, $.001 par value,
outstanding as of November 13, 2000 was 8,894,426.
--------------------------------------------------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
FIELDWORKS, INCORPORATED
Consolidated Balance Sheets
<TABLE>
<CAPTION>
October 1, January 2,
2000 2000
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 86,786
Accounts receivable, net of allowance for doubtful accounts of $251,550 and
$259,600, respectively 2,826,778 5,060,928
Inventories 3,081,111 4,513,664
Prepaid expenses and other 541,698 509,574
------------------------------------------------------------------------------------------------------------------
Total current assets 6,449,587 10,170,952
------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Computers and equipment 2,282,754 2,213,933
Furniture and fixtures 943,795 1,093,232
Leasehold improvements 331,736 435,813
Less: Accumulated depreciation (2,425,805) (2,076,345)
------------------------------------------------------------------------------------------------------------------
Property and equipment, net 1,132,480 1,666,633
DEPOSITS AND OTHER ASSETS, NET 119,369 175,958
------------------------------------------------------------------------------------------------------------------
Total Assets $ 7,701,436 $12,013,543
------------------------------------------------------------------------------------------------------------------
</TABLE>
-2-
<PAGE>
FIELDWORKS, INCORPORATED
Consolidated Balance Sheets
<TABLE>
<CAPTION>
October 1, January 2,
2000 2000
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Line of credit $ 841,400 $ 1,761,731
Notes payable
Note to Kontron, due September 2001 2,500,000 --
Subordinated note, due September 2001 3,000,000 --
Note to Kontron for operating line, due December 15, 2000 1,114,721 --
Less: Discount on notes payable (790,999) --
--------------------------------------------------------------------------------------------------------------------------
Notes payable, net 5,823,722 --
Accounts payable 3,415,309 3,763,468
Accrued warranty and product upgrade 509,254 649,894
Accrued compensation and benefits 587,828 668,309
Other accrued liabilities 1,631,859 497,117
Deferred revenue 718,108 961,593
Current maturities of capitalized lease obligations 9,204 40,229
--------------------------------------------------------------------------------------------------------------------------
Total current liabilities 13,536,684 8,342,341
CAPITALIZED LEASE OBLIGATIONS, less current maturities 39,913 39,571
SUBORDINATED NOTES PAYABLE:
Notes payable -- 3,000,000
Less: Discount on notes payable -- (771,750)
--------------------------------------------------------------------------------------------------------------------------
Notes payable, net -- 2,228,250
--------------------------------------------------------------------------------------------------------------------------
Total liabilities 13,576,597 10,610,162
--------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (DEFICIT):
Series B Convertible Preferred Stock, $.001 par value, 4,250,000 shares authorized; 4,250 --
4,250,000 issued and outstanding at October 1, 2000
Series C Convertible Preferred Stock, $.001 par value, 500,000 shares authorized; 500 --
500,000 issued and outstanding at October 1, 2000
Common stock, $.001 par value, 30,000,000 shares authorized; 8,894,426 8,894 8,894
issued and outstanding
Additional paid-in capital 26,732,755 21,226,081
Accumulated deficit (32,621,560) (19,831,594)
--------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) (5,875,161) 1,403,381
--------------------------------------------------------------------------------------------------------------------------
$ 7,701,436 $ 12,013,543
==========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
<PAGE>
FIELDWORKS, INCORPORATED
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
---------------------------- ---------------------------
October 1, October 3, October 1, October 3,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 3,435,695 $ 4,784,431 $ 11,832,756 $18,312,977
COST OF SALES 6,150,130 3,538,376 12,901,196 13,095,256
-------------------------------------------------------------------------------------------------------------------
Gross profit (loss) (2,714,435) 1,246,055 (1,068,440) 5,217,721
-------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Sales and marketing 1,341,415 1,561,435 3,623,717 4,033,387
General and administrative 1,092,036 704,016 3,223,606 2,258,160
Research and development 1,052,685 818,526 3,597,784 2,485,641
Restructuring and severance costs 376,827 399,978 376,827 399,978
-------------------------------------------------------------------------------------------------------------------
Total operating expenses 3,862,963 3,483,955 10,821,934 9,177,166
-------------------------------------------------------------------------------------------------------------------
Operating loss (6,577,398) (2,237,900) (11,890,374) (3,959,445)
INTEREST EXPENSE AND OTHER, net (407,954) (35,821) (899,592) (54,277)
-------------------------------------------------------------------------------------------------------------------
NET LOSS $(6,985,352) $(2,273,721) $(12,789,966) $(4,013,722)
---------------------------------------------------------------------------------------------------------------------
BENEFICIAL CONVERSION FEATURE
APPLICABLE TO PREFERRED SHAREHOLDERS (270,833) -- (520,833) --
---------------------------------------------------------------------------------------------------------------------
NET LOSS
APPLICABLE TO COMMON SHAREHOLDERS $(7,256,185) $(2,273,721) $(13,310,799) $(4,013,722)
-------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER COMMON SHARE:
Net loss per common share $(.82) $(.26) $(1.50) $(.45)
-------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 8,894,426 8,894,426 8,894,426 8,867,821
-------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
FIELDWORKS, INCORPORATED
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
-------------------------------------
October 1, October 3,
2000 1999
-------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(12,789,966) $(4,013,722)
Adjustments to reconcile net loss to net cash used for
operating activities-
Depreciation and amortization 643,490 495,734
Non-cash consulting expense -- 9,500
Non-cash financing costs 418,251 --
Loss on disposal of property and equipment 159,213 --
Change in operating items:
Accounts receivable 2,234,150 173,682
Inventories 1,432,553 (690,715)
Prepaid expenses and other 24,465 (484,719)
Accounts payable (348,159) 1,170,708
Accrued expenses 913,621 (133,747)
Deferred revenue (243,485) 84,980
---------------------------------------------------------------------------------------------------------
Net cash used for operating activities (7,555,867) (3,388,299)
---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment (302,250) (503,946)
Cash received from sales of property and equipment 33,700 --
---------------------------------------------------------------------------------------------------------
Net cash used for investing activities (268,550) (503,946)
---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Borrowings from Kontron 3,614,721 3,000,000
Proceeds from issuance of preferred stock 5,073,924 --
Proceeds from issuance of common stock -- 70,499
Net line of credit borrowings (repayments) (920,331) 327,650
Payment of capitalized lease obligations (30,683) (21,120)
---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 7,737,631 3,377,029
---------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS (86,786) (515,216)
CASH AND CASH EQUIVALENTS, beginning of period 86,786 1,690,469
---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ -- $ 1,175,253
---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 341,592 $ 85,162
NONCASH FINANCING ACTIVITIES:
Issuance of warrants $ 437,500 $ 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.
-5-
<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 2, 2000. 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:
October 1, January 2,
2000 2000
-----------------------------------
Raw materials $1,605,982 $3,159,548
Work in process 329,274 575,694
Finished goods 1,145,855 778,422
-------------------------------------------------------------------------------
Total $3,081,111 $4,513,664
===============================================================================
In the third quarter of fiscal year 2000, the Company recorded $3.1 million
of write-downs related to excess and obsolete inventory parts associated with
product line close-outs, changes in outsourcing arrangements and other
technological and market developments.
3. Financing Transactions:
On June 29, 2000, the Company entered into a Purchase and Option Agreement
(the "Purchase Agreement") with FWRKS Acquisition Corp., a wholly-owned
subsidiary of Kontron Embedded Computers AG ("Kontron"). This agreement was
amended on August 16, 2000. Under the amended equity option to be exercised by
Kontron, Kontron will acquire 6 million shares of common stock of FieldWorks for
a purchase price of $5.4 million. In addition, the option Kontron previously
granted to Industrial-Works Holding Co., LLC ("IWHC") was amended. As amended,
IWHC has an option to acquire 62,000 shares of Kontron in exchange for preferred
shares of FieldWorks that are convertible into 3.4 million shares of FieldWorks
common stock. Both of these matters were approved via a special shareholder
meeting held on October 27, 2000 and, upon satisfaction of all closing
conditions, the final closing of these transactions is expected to occur on
approximately December 1, 2000. After closing, Kontron would own approximately
52% of the Company's common stock.
On June 30, 2000, the Company received $2.5 million from Kontron in the
form of a subordinated note which bears interest at 11% per annum (payable
monthly) and matures in September 2001. Kontron also received warrants to
purchase 1.25 million shares of common stock exercisable at $1.00 per share. The
warrants are exercisable until November 15, 2000 and were recorded at their
estimated fair value of $437,500 at the date of issuance.
On March 31, 2000, the Company issued 500,000 shares of the Company's
Series C Convertible Participating Preferred Stock to Industrial-Works Holding
Co., LLC. The Company recorded a $250,000 charge relating to the beneficial
conversion feature associated with this preferred stock. The Company issued a
warrant to Industrial-Works to purchase 100,000 shares of common stock with an
exercise price of $2.00 per share in connection with this transaction.
Subsequent to March 31, 2000, the conversion rate was adjusted to such that the
holders have the right to receive a total of 1,041,666 shares of common stock
upon conversion of the Series C Convertible Participating Preferred Stock. In
connection with this coversion rate adjustment, an additional beneficial
conversion feature of $270,833 was recorded.
On February 22, 2000, the Company issued 4,250,000 shares of Series B
Convertible Participating Preferred Stock (each share of which is initially
convertible into one share of Common Stock) to Industrial-Works Holding Co.,
LLC, a wholly owned subsidiary of Glenmount International L.P. Industrial-Works
Holding Co., LLC, also received a warrant to purchase 500,000 shares of common
stock with an exercise price to $1.00 per share. The transaction was approved at
a special meeting of shareholders held on February 7, 2000. The Company intends
to use the net proceeds for market expansion and new product development as well
as for working capital and general corporate purposes.
-6-
<PAGE>
Additionally, the Company and Kontron have entered into agreements whereby
Kontron is committed to provide up to $5 million of operating cash to the
Company, of which $1.1 million was outstanding at October 1, 2000. Borrowings
under these credit line agreements bear interest at 11% per annum (payable
monthly), and are due on December 15, 2000.
4. Change in Nasdaq Listing Status:
Effective with the open of business on August 25, 2000, the Company's
Common Stock was delisted from the Nasdaq SmallCap Market for failure to
demonstrate sustained compliance with the net tangible assets listing
requirement, and began trading on the Over The Counter Bulletin Board under the
symbol "FWRX." Following the closing of the Kontron transaction discussed in
Note 3, the Company will decide whether to re-apply for listing of its Common
Stock on Nasdaq. Since the Company will have had a change in control, the
Company would have to satisfy the requirements for initial listing of its
securities.
5. Restructuring and Severance Costs:
On August 17, 2000, the Company announced certain organizational
restructuring changes related to the Kontron transaction. The management
reorganization was designed to reduce ongoing administrative and operating
expenses, and further streamline the organization in preparation for Kontron's
increased involvement with FieldWorks. Employee severance and associated costs
totaling $376,827 were recorded in the third quarter ended October 1, 2000.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. When used in
this Form 10-Q and in future filings by the Company with the Securities and
Exchange Commission, in the Company's press releases and in oral statements made
with the approval of an authorized executive officer, the words or phrases
"believes," "anticipates," "expects," "intends," "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 in this report and in the Company's other 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 2, 2000.
-8-
<PAGE>
Results of Operations
The following table sets forth certain financial data expressed as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
--------------------------------------------------------------
October 1, October 3, October 1, October 3,
2000 1999 2000 1999
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Cost of sales 179 74 109 72
-----------------------------------------------------------------------------------------------------------------
Gross profit (79) 26 (9) 28
Operating expenses:
Sales and marketing 39 33 31 22
General and administrative 32 15 27 12
Research and development 30 17 30 14
Restructuring and severance costs 11 8 3 2
-----------------------------------------------------------------------------------------------------------------
Total operating expenses 112 73 91 50
-----------------------------------------------------------------------------------------------------------------
Operating loss (191) (47) (100) (22)
Interest income (expense) and other, net (12) (1) (8) *
-----------------------------------------------------------------------------------------------------------------
Net loss (203) (48) (108) (22)
-----------------------------------------------------------------------------------------------------------------
Beneficial conversion feature --
applicable to preferred shareholders (8) (4) --
-----------------------------------------------------------------------------------------------------------------
Net loss
applicable to common shareholders (211)% (48)% (112)% (22)%
-----------------------------------------------------------------------------------------------------------------
</TABLE>
*Less than .5%.
Net Sales. The Company's net sales decreased $1.4 million, or 29%, to
$3.4 million in the third quarter of fiscal year 2000 from $4.8 million in the
third quarter of fiscal 1999 and decreased 35% to $11.8 million in the first
nine months of fiscal year 2000 from $18.3 million for the comparable period in
1999. The decrease was due to cash constraints by the Company that delayed
ordering of parts by our outsource partners and the subsequent delays in
shipments. Additionally, the Company experienced delays in the introduction of
its FW8000 workstation which negatively impacted sales for the first two
quarters of fiscal year 2000.
Two customers accounted for greater than 10% of net sales in the third
quarter of fiscal year 2000, Equitable Gas Company and Franklin County, Ohio,
representing $0.4 million and $0.3 million of the Company's net sales,
respectively.
International sales were $0.4 million, or 12% of net sales, for the third
quarter of fiscal year 2000 compared to $2.7 million, or 15% of net sales, for
the comparable period in 1999. The decrease is due to the strength of the U.S.
dollar against foreign currencies and the uncertainty in our distribution
channels regarding the effects of the pending Kontron acquisition. The majority
of international sales, 73% and 69% of net sales for the third quarter of 2000
and 1999, respectively, are in Europe.
Gross Margin. Gross margin decreased to ($2.7) million, or (79)% of net
sales, for the third quarter of fiscal year 2000 from $1.2 million, or 26% of
net sales for the third quarter of 1999. Gross margin decreased to ($1.1)
million, or (9)% of net sales for the first nine months of fiscal year 2000 from
$5.2 million, or 28% of net sales, for the first nine months of 1999. Gross
margin for the third quarter and nine months ended October 1, 2000 were
significantly impacted by $3.1 million of write-downs which resulted from
product line close-outs, changes in outsourcing arrangements and other
technological and market developments. 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, large customer
contracts (with the associated volume discounts) and outsourcing expenses.
-9-
<PAGE>
The Company outsourced certain manufacturing activities during the first
quarter of fiscal year 2000. Repair and final integration work are expected to
remain at the Company for the near future.
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 were $1.3 million
for the third quarter of fiscal year 2000 compared to $1.6 million for the third
quarter of 1999. As a percentage of net sales, sales and marketing expenses
increased to 39% for the third quarter of fiscal year 2000 from 33% for the
third quarter of 1999. In the first nine months of fiscal year 2000, sales and
marketing expenses were $3.6 million and 31% of net sales as compared to $4.0
million and 22% of net sales in the first nine months of 1999. The Company
plans to continue expanding its resale channels through Value Added Resellers
(VARs) as well as moderately increase its advertising and promotion costs within
its target markets. Additionally, Kontron has begun distribution of the
Company's products.
General and Administrative. General and administrative expenses include the
Company's executive, finance and administration, human resources, and
information services departments. These expenses increased to $1.1 million for
the quarter ended October 1, 2000, from $0.7 million for the quarter ended
October 3, 1999. As a percentage of net sales, general and administrative
expenses increased to 32% for the quarter ended October 1, 2000, from 15% for
the quarter ended October 3, 1999. General and administrative expenses were $3.2
million, or 27% of net sales for the first nine months of fiscal year 2000 as
compared to $2.3 million, or 12% of net sales for the comparable period in 1999.
The increase is primarily due to the fees associated with the management
services agreement related to the investment by Industrial-Works Holding Co.,
LLC.
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 increased to $1.1 million in the third quarter of
fiscal year 2000 from $0.8 million for the third quarter of 1999. As a
percentage of net sales, research and development costs were 30% and 17% for the
third quarter of 2000 and 1999, respectively. Research and development expenses
increased to $3.6 million for the first nine months of fiscal year 2000 from
$2.5 million for the comparable period in 1999. As a percentage of net sales,
research and development expenses increased to 30% for the first nine months of
fiscal year 2000 from 14% for the first nine months of 1999. The increase was
primarily due to the Company's product re-design expenses to incorporate
embedded systems technology and reduce product costs. The Company anticipates
that research and development costs will be shared with Kontron in the future
and synergy will be gained by the combined efforts.
Severance and Restructuring Costs. Severance and restructuring costs were
$0.3 million, or 11% of net sales in the third quarter and 3% of net sales for
the nine-month period. These costs related primarily to severance and other
employee costs associated with the management restructuring announced in August
2000.
Interest Expense and Other, Net. Net interest expense was approximately
$342,000 for the third quarter of fiscal year 2000 compared to net interest
expense of $36,000 for the comparable period in 1999. Net interest expense for
the first nine months of fiscal year 2000 was $834,000 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, interest payments
on its subordinated notes and interest payments to Kontron for the operational
cash credit line. In addition, financing costs of $882,000 related to warrants
issued in September 1999 are being amortized over the two-year term of the note.
Financing costs of $437,500 related to warrants issued to Kontron in June 2000
are being amortized through the period ending September 2001, the maturity date
of the related note.
-10-
<PAGE>
Liquidity and Capital Resources
During the first nine months of fiscal year 2000, the Company incurred a
net loss of $12.8 million and experienced significant negative cash flow from
operations. The Company has also been deferring vendor payments and taking other
actions in an effort to conserve cash. This has resulted in several key vendors
placing the Company on a "hold" status with respect to future purchases.
In addition to these operational liquidity constraints, the Company has
been out of compliance throughout fiscal year 2000 with the financial covenants
in its line of credit agreement. Written waivers of default have been obtained
through October 1, 2000; however, there can be no assurance that the line of
credit lender will continue to grant waivers in the future. This line of credit
expires on November 18, 2000. The Company is currently pursuing alternatives
related to extension, restructuring or replacement of this line of credit. There
can be no assurance that such financing will be available to the Company.
The Company also has significant debt repayment obligations in the
remainder of fiscal year 2000 and in 2001, including $1.1 million payable to
Kontron in December 2000 under the operating credit line discussed below, and a
total of $5.5 million due in September 2001 under outstanding note agreements.
Management believes that the proceeds of $5.4 million from the anticipated
December 2000 Kontron equity investment will only be partially sufficient to
fund operating cash requirements and debt payments in the remainder of fiscal
year 2000 and in 2001. Accordingly, the Company expects that additional funding
sources will be required, to potentially include additional borrowings or
investments from Kontron or other sources. The Company is currently evaluating
various possible cash flow arrangements. However, there can be no assurance as
to the outcome of these efforts, including whether financing will be available
to the Company, or if available, whether it would be in terms favorable to the
Company and its shareholders.
As a result of the foregoing, the Company has been advised by its
independent public accountants that if these liquidity matters are not
adequately resolved prior to the completion of their audit of the Company's
financial statements for the year ending December 31, 2000, their auditors'
report on those financial statements may be qualified as being subject to the
resolution of such matters.
On September 28, 2000 (revised November 9, 2000), the Company entered into
credit line agreements with Kontron, to provide up to $5 million of cash for
operations. Borrowings under these agreements bear interest at 11% per annum
(payable monthly), and are due on December 15, 2000.
On June 29, 2000, the Company entered into a Purchase and Option Agreement
with FWRKS Acquisition Corp., a wholly-owned subsidiary of Kontron Embedded
Computers AG (Kontron). The agreement was amended on August 16, 2000. Under the
amended equity option to be exercised by Kontron, Kontron will acquire 6 million
shares of common stock of FieldWorks for a purchase price of $5.4 million. In
addition, the option Kontron previously granted to Industrial-Works Holding Co.,
LLC ("IWHC") was amended. As amended, IWHC has an option to acquire 62,000
shares of Kontron in exchange for preferred shares of FieldWorks that are
convertible into 3.4 million shares of FieldWorks common stock. Both of these
issues were approved via a special shareholders meeting held on October 27, 2000
and, upon satisfaction of all closing conditions, the final closing of these
transactions is expected to occur on approximately December 1, 2000. After
closing, Kontron would own approximately 52% of the Company's common stock.
In addition, the Company received $2.5 million from Kontron on June 30,
2000 in the form of a subordinated note which bears interest at 11% per annum
and matures in September 2001. Kontron also received warrants to purchase 1.25
million shares of common stock exercisable at $1.00 per share. The warrants are
exercisable until November 15, 2000, and were recorded at their estimated fair
value of $437,500 at the date of issuance.
On March 31, 2000, the Company issued 500,000 shares of the Company's
Series C Convertible Participating Preferred Stock to Industrial-Works Holding
Co., LLC. The Company recorded a $250,000 charge relating to the beneficial
conversion feature associated with this preferred stock. The Company issued a
warrant to Industrial-Works to purchase 100,000 shares of common stock with an
exercise price of $2.00 per share in connection with this
-11-
<PAGE>
transaction. Subsequent to March 31, 2000, the conversion rate was adjusted such
that the holders have the right to receive a total of 1,041,666 shares of common
stock upon conversion of the Series C Convertible Participating Preferred Stock.
In connection with this conversion rate adjustment, an additional beneficial
conversion feature of $270,833 was recorded.
On February 22, 2000, the Company completed a $4.25 million equity
investment by Industrial-Works Holding Co., LLC. In exchange for the $4.25
million investment, the Company issued 4,250,000 shares of Series B Convertible
Participating Preferred Stock (each share of which is initially convertible into
one share of common stock). Industrial-Works Holding Co., LLC, also received a
warrant to purchase 500,000 shares of common stock at $1.00 per share. The
transaction was approved at a special meeting of shareholders held on February
7, 2000.
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 of
$882,000 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
9.5%. 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 1, 2000, the interest rate was 13.5%. The line of credit balance was
$0.8 million as of October 1, 2000, as compared to $1.8 million at January 2,
2000. 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 $0.9 million as of October 1, 2000 and $3.0
million as of January 2, 2000. The agreement contains a covenant requiring
cumulative year-to-date profit on a quarterly basis. The Company remains out of
compliance with the covenant as of October 1, 2000, 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.
As discussed above, the Company and Kontron are currently evaluating
alternatives with respect to this line of credit.
Cash used for operating activities totaled $7.6 million for the first nine
months of fiscal year 2000. The Company's accounts receivable decreased $2.2
million to $2.8 million at October 1, 2000 from $5.0 million at January 2, 2000
due to timing of increased sales at the end of the fourth quarter in 1999.
Inventories decreased to $3.1 million at October 1, 2000, from $4.5 million at
January 2, 2000.
During the first nine months of fiscal year 2000, the Company purchased
$0.3 million of property, plant and equipment. The expenditures related
primarily to manufacturing tooling for vendors of the Company's FW8000 Series
Workstation Platform.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates
on borrowings under the Company's line of credit agreement. The line of credit
bears interest based on the Prime Lending Rate. At October 1, 2000, the Company
had $0.8 million outstanding. Based on analysis, interest rate shifts would have
an immaterial impact on the Company.
The Company currently has no derivative financial instruments or derivative
commodity instruments outstanding.
-12-
<PAGE>
PART II. OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of its
business. Although the Company cannot predict the outcome of any such legal
actions, management believes that there is no pending legal proceeding against
or involving the Company for which the outcome is likely to have a material
adverse effect upon the Company's financial position, results of operations or
cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 29, 2000, the Company entered into a Purchase and Option Agreement
with FWRKS Acquisition Corp., a wholly-owned subsidiary of Kontron Embedded
Computers AG (Kontron). The agreement was amended on August 16, 2000. Under
the amended equity option to be exercised by Kontron, Kontron will acquire 6
million shares of common stock of FieldWorks for a purchase price of $5.4
million. In addition, the option Kontron previously granted to Industrial-Works
Holding Co., LLC ("IWHC") was amended. As amended, IWHC has an option to
acquire 62,000 shares of Kontron in exchange for preferred shares of FieldWorks
that are convertible into 3.4 million shares of FieldWorks common stock. Both of
these issues were approved via a special shareholders meeting held on October
27, 2000 and, upon satisfaction of all closing conditions, the final closing of
these transactions is expected to occur on approximately December 1, 2000.
The sale and issuance of the securities described above were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act or Regulation D promulgated thereunder as transactions by an
issuer not involving a public offering, where the purchasers represented their
intention to acquire securities for investment purposes only and not with a view
to or for sale in connection with any distribution thereof, and received or had
access to adequate information about the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of shareholders was held on October 18, 2000 to approve
the sale and transfer of FieldWorks stock to Kontron Embedded Computers AG and
its wholly owned subsidiary, FWRKS Acquisition Corp. FieldWorks shareholders
approved the sale of 6 million shares of common stock by FieldWorks to FWRKS
Acquisition Corp; however the meeting was adjourned for the purpose of
soliciting additional votes for approval of the transfer of shares from
Industrial-Works Holding Co., LLC to Kontron. The approval of this transfer
required a vote of a majority of the issued and outstanding shares of
FieldWorks, excluding any shares owned by Kontron, Industrial-Works and their
affiliates. The special meeting was adjourned until October 27, 2000.
A subsequent special meeting of shareholders was held on October 27, 2000.
The shareholders voted in favor of both matters by the following votes:
-13-
<PAGE>
Votes Votes
For Withheld
----- --------
Issuance of 6,000,000 shares of Common Stock to 10,622,113 65,495
FWRKS Acquisition Corp., a wholly owned subsidiary of
Kontron Embedded Computers AG ("Kontron")
Transfer of shares of Series B Preferred Stock of the 4,335,740 89,328
Company owned by Industrial-Works Holding Co., LLC
that are convertible into 3,400,000 shares of Common
Stock of the Company to Kontron to purchase 62,000
Bearer Shares
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 3.1 Second Amended and Restated Articles of Incorporation of
the Company (incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement filed on Form S-1,
File No. 333-18335)
Exhibit 3.2 Second Amended and Restated Bylaws of the Company
(incorporated by reference to Exhibit 3.4 to the Company's
Registration Statement filed on Form S-1, File No. 333-
18335)
Exhibit 10.1 Sublease agreement between FieldWorks, Inc. and Four 51,
Inc. dated July 19, 2000 (filed herewith)
Exhibit 10.2 Agreement and Consent Regarding Sublease between CSM
Properties, Inc., FieldWorks, Inc. and Four 51, Inc. dated
August 8, 2000 (filed herewith)
Exhibit 10.3 Purchase of Shares between Kontron Embedded Computers AG
and Robert Szymborski dated August 15, 2000 (filed
herewith)
Exhibit 27.1 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K: One report on Form 8-K was filed by the Company during
the fiscal quarter ended October 1, 2000. The report, dated August 17, 2000,
stated that the Company and Kontron entered into an Operating Agreement and
Kontron was issued a revised equity option to acquire six million common shares
of the Company. In addition, the Company announced a reorganization and
reduction of its management team.
-14-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIELDWORKS, INCORPORATED
Date: November 15, 2000 /s/ David G. Mell
--------------------------------------
David G. Mell, Chief Executive Officer
(as authorized officer)
-15-
