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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20559
FORM 10-K
(Mark One)
(x) Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended September 30, 1999
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number 0-15235
MITEK SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0418827
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
10070 CARROLL CANYON ROAD, SAN DIEGO, CALIFORNIA 92131
(Address of principal executive offices) (Zip Code)
(619) 635-5900
Registrant's telephone number, including area code
NONE
Securities registered pursuant to Section 12(b) of the Act
COMMON STOCK, PAR VALUE $.001 PER SHARE
Securities registered pursuant to Section 12(g) of the Act
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of voting stock held by non-affiliates of
the registrant was $30,850,723 as of December 1, 1999 (computed by reference to
the last sale price of a share of the registrant's Common Stock on that date as
reported by NASDAQ).
There were 10,501,541 shares outstanding of the registrant's Common
Stock as of December 1, 1999.
Documents incorporated by reference in this report: Part II
incorporates certain information by reference form the Annual Report to
Stockholders for the year ended September 30, 1999. Part III incorporates
certain information by reference from the Proxy Statement for the 1999 Annual
Meeting of Stockholders.
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SEC FORM 10 K
FY 99 - PART I - GENERAL INFORMATION
ITEM 1. BUSINESS
GENERAL
Mitek Systems, Inc. (the "Company") was incorporated under the laws of
the State of Delaware in 1986. The Company is primarily engaged in the
development and sale of software products with particular focus on intelligent
character recognition and forms processing technology, products and services for
the document imaging markets.
The Company develops, markets and supports what it believes to be the
most accurate Automated Document Recognition ("ADR") products commercially
available for the recognition of hand printed characters. The Company's unique
proprietary technology recognizes hand printed and machine generated characters
with a level of accuracy that renders the Company's ADR products a viable
alternative to manual data entry in certain applications. The Mitek solution
allows customers that process large volumes of hand printed and machine
generated documents to do so more quickly, with greater accuracy and at reduced
costs.
PRODUCTS AND RELATED MARKETS
AUTOMATED INTELLIGENT CHARACTER RECOGNITION
Since 1992 the Company has developed and marketed ADR products which
enable the automation of costly, labor intensive business functions such as
check and remittance processing, forms processing and order entry. The Company's
ADR products incorporate proprietary neural network software technology for the
recognition and conversion of hand printed and machine generated characters into
digital data. Neural networks are powerful tools for pattern recognition
applications and consist of sets of coupled mathematical equations with adaptive
parameters that self adjust to "learn" various forms and patterns. The Company's
ADR products combine the Company's neural network software technology with an
extensive database of character patterns, enabling them to make fine
distinctions across a wide variety of patterns with high speed, accuracy and
consistency. The Company leverages its core technology across a family of ADR
products that the Company believes offers the highest accuracy commercially
available for the recognition of hand printed characters.
The Company's ADR products incorporate the Company's proprietary
intelligent character recognition (ICR) software engine QuickStrokes(R) API, and
a licensed ICR software engine CheckScript(TM) (a trademark of Parascript LLC).
QuickStrokes(R) API and CheckScript(TM) are sold to original equipment
manufacturers (OEMs) such as BancTec, Unisys, and IBM, and to systems
integrators such as Computer Sciences Corporation. Major end users include
Chevron, GTE, European American Bank, NYNEX, Fleet Bank, National Westminster
and British Telecom. QuickStrokes(R) API can process many foreign character sets
.
The CheckScript(TM) product, used in financial document processing,
combines the Legal Amount Recognition (LAR) capabilities licensed from
Parascript, LLC with the Company's
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proprietary QuickStrokes(R) API Courtesy Amount Recognition (CAR) technology.
This product provides unprecedented accuracy in remittance processing, proof
of deposit, and lock box processing applications.
Leveraging its core technical competency in ICR, the Company has begun
to address the unstructured forms processing market with the introduction of its
Doctus(TM) product. Doctus(TM) incorporates the Company's core ICR technology in
an application designed for end users in a broad variety of industries which
require high volume automated data entry. The Company believes its Doctus(TM)
software is a major innovation in forms processing because it economically
handles both structured and unstructured forms. As a result, it significantly
increases the number and types of forms that can be automatically processed by a
company. Doctus is able to process unstructured forms because it incorporates
forms understanding technology. Mitek is marketing this software under the name
CogniForms. With CogniForms, Doctus automatically classifies unstructured forms
and extracts relevant data from the form contents. The Company has supplied this
new software to several important OEM's in the document processing field.
CheckQuest(TM) is Mitek's affordable, image-enabled check and item processing
solution. It is specifically designed for low- to medium-volume check image
processing applications, such as Proof of Deposit, Retail/Wholesale Lock Box,
and Remittance Processing. These applications are typically found in community
banks, credit unions, utilities and other businesses where processing checks
quickly and accurately is critical. CheckQuest offers many traditional item
processing functions found in high-volume, high-priced systems, at a
significantly lower cost. By utilizing powerful PC desktop computers, new image
item processors designed specifically for lower-volume applications, and the
latest advancements in software development, Mitek is able to offer CheckQuest
solutions at less than one-third the cost of higher-volume systems.
QuickFX(TM) is a software toolkit that provides automatic form ID, form
registration and form/template removal. The Company believes it will
significantly improve automatic data capture (ICR/OCR), forms processing,
document imaging and storage performance. QuickFX(TM) reduces the image size by
removing extraneous information such as pre-printed text, lines, and boxes;
leaving only the filled-in data. It repairs the characters that are left,
ensuring better recognition, enhanced throughput, and higher accuracy rates.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends in part on its
ability to maintain and improve its core technologies, enhance its existing
products and develop new products that meet an expanding range of customer
requirements. The Company intends to expand its existing product offerings and
to introduce new forms processing software solutions. In the development of new
products and enhancements to existing products, the Company uses its own tools
extensively. The Company performs all quality assurance and develops
documentation internally. The Company intends to continue to support industry
standard operating environments.
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The Company's team of specialists in recognition algorithms, software
engineering, user interface design, product documentation and quality
improvement is responsible for maintaining and enhancing the performance,
quality and usability of all of the Company's products. In addition to research
and development, the engineering staff provides customer technical support on an
as needed basis, along with technical sales support.
In order to improve the accuracy of its ADR products, the Company
focuses research and development efforts on continued enhancement of its core
technology and on its database of millions of character images that is used to
"train" the neural network software that forms the core of the Company's ICR
engine. In addition, the Company has expanded its research and development tasks
to include pre- and post-processing of data subject to automated processing.
The Company's research and development organization included sixteen
software engineers at September 30, 1999, including five with advanced degrees.
In the fiscal year ended September 30, 1999, the Company spent approximately
$1,409,000 on research and development and spent approximately $1,343,000 and
$1,393,000 on research and development in each of the fiscal years 1998 and
1997. The 1999, 1998, and 1997 figures do not include $98,000, $878,000, and
$458,000 respectively, that was spent in research and development related to
contract development and was charged to cost of sales.
The Company balances its engineering resources between development of
ICR technology and applications development. Of the sixteen software engineers,
approximately five are involved in ICR research and development of the
QuickStrokes(R) API recognition engine. The remaining staff is involved in
applications development, including the Doctus(TM), QuickFX(TM), and
CheckQuest(TM) products, and customer services and support.
INTELLECTUAL PROPERTY
The Company's success and ability to compete is dependent in part upon
its proprietary technology. The Company relies on a combination of patent,
copyright and trade secret laws and non-disclosure agreements to protect its
proprietary technology. The Company was recently notified that the U.S. Patent
and Trademark Office has approved the issuance of a U.S. patent for its
hierarchical character recognition systems. The patent will cover the
multiple-pass, multiple-expert system that significantly increases the accuracy
of forms processing and item processing applications. The Company may seek to
file additional patents to expand the scope of patent coverage. The Company may
also file future patents to cover technologies under development. There can be
no assurance that patents will be issued with respect to future patent
applications or that the Company's patents will be upheld as valid or will
prevent the development of competitive products.
The Company also seeks to protect its intellectual property rights by
limiting access to the distribution of its software, documentation and other
proprietary information. In addition, the Company enters into confidentiality
agreements with its employees and certain customers, vendors and strategic
partners. There can be no assurance that the steps taken by the Company in this
regard will be adequate to prevent misappropriation of its technology or that
the Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technologies.
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The Company is also subject to the risk of adverse claims and
litigation alleging infringement on the intellectual property rights of others.
In this regard, there can be no assurance that third parties will not assert
infringement claims in the future with respect to the Company's current or
future products or that any such claims will not require the Company to enter
into license arrangements or result in protracted and costly litigation,
regardless of the merits of such claims. No assurance can be given that any
necessary licenses will be available or that, if available, such licenses can be
obtained on commercially reasonable terms.
SALES AND MARKETING
The Company markets its products and services primarily through its
internal, direct sales organization. The Company employs a technically-oriented
sales force with management assistance to identify the needs of existing and
prospective customers. The Company's sales strategy concentrates on those
companies that it believes are key users and designers of automated document
processing systems for high-performance, large volume applications. The Company
currently maintains sales offices in California, Virginia and Florida. In
addition, the Company sells and supports its products through foreign resellers
in Germany, France, Italy, the United Kingdom and Australia. The sales process
is supported with a broad range of marketing programs which include trade shows,
direct marketing, public relations and advertising.
The Company provides maintenance and support on a contractual basis
after the initial product warranty has expired. The Company provides telephone
support and on-site support. Customers with maintenance coverage receive
software releases from the Company. Foreign distributors generally provide
customer training, service and support for the products they sell. Additionally,
the Company's products are supported internationally by periodic distributor and
customer visits by Company management. These visits include attending imaging
shows, as well as sales and training efforts. Technical support is provided by
telephone as well as technical visits in addition to those previously mentioned.
The ability to support international markets has materially assisted
the Company in its international sales effort. International sales accounted for
approximately 22%, 23%, and 41% of the Company's net sales for the fiscal
periods ended September 30, 1999, 1998, and 1997, respectively. The Company
believes that a significant percentage of the products in its domestic sales are
incorporated into systems that are delivered to end users outside the United
States. International sales in the past twelve months were made in nineteen
countries including Australia, Argentina, Brazil, Canada, Denmark, United
Kingdom, France, Finland, Germany, Italy, Japan, Mexico, Netherlands, Norway,
Portugal, Spain and Sweden. The Company sells its products in United States
currency only. The Company relied on a significant portion of its revenues from
one, one and three customers in fiscal periods 1999, 1998, and 1997,
respectively. Sales from these customers aggregated 18%, 33%, and 54% of net
sales for the fiscal periods 1999, 1998, and 1997, respectively.
MAINTENANCE AND SUPPORT
The Company has an internal customer service department that handles
installation and maintenance requirements. The majority of inquiries are handled
by telephone, with occasional
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visits to the customer's facilities. The Company believes that as the
installed base of its products grows, the customer service function will
become a source of recurring revenues. Costs incurred by the Company to
supply maintenance and support services are charged to cost of sales.
COMPETITION
The market for the Company's ADR products is intensely competitive,
subject to rapid change and significantly affected by new product introductions
and other market activities of industry participants. The Company faces direct
and indirect competition from a broad range of competitors who offer a variety
of products and solutions to the Company's current and potential customers. The
Company's principal competition comes from (i) customer-developed solutions;
(ii) direct competition from companies offering ICR systems; and (iii) companies
offering competing technologies capable of recognizing hand-printed and cursive
characters.
It is also possible that the Company will face competition from new
competitors. Moreover, as the market for automated data entry and ICR software
develops, a number of companies with significantly greater resources than the
Company could attempt to enter or increase their presence in the Company's
market either independently or by acquiring or forming strategic alliances with
competitors of the Company or to otherwise increase their focus on the industry.
In addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of the Company's current and
prospective customers.
The Company's QuickStrokes(R) API product and licensed CheckScript(TM)
prOduct compete, to various degrees, with products produced by a number of
substantial competitors such as Computer Gesellschaft Konstanz, a subsidiary of
Siemens. Competition among product providers in this market generally focuses on
price, accuracy, reliability and technical support. The Company believes its
primary competitive advantages are its (i) recognition accuracy with regard to
hand printed characters, (ii) flexibility, since it may operate on a broad range
of computer operating platforms, (iii) scalability and (iv) object-oriented
software designs which can be more readily modified, improved with added
functionality, configured for new products, and ported to new operating systems
and upgrades. Despite these advantages, QuickStrokes(R) API and CheckScript(TM)
competitors have existed longer and have far greater financial resources and
industry connections than the Company.
The Company's Doctus(TM) product competes against complete proprietary
systems offered by software developers, such as GTESS Corporation, RRI, and
Cardiff Software, Inc. In addition, Doctus(TM) faces competition from providers
of recognition systems that incorporate ADR technology such as Microsystems
Technology, Inc., and Captiva. Because Doctus(TM) is based on the Company's
proprietary QuickStrokes(R) API engine, its competitive advantages reflect the
advantages of the QuickStrokes(R) engine. The Company believes its Doctus
software provides the highest levels of automation in the industry. The
Company's document understanding software is the only available commercial
software that does not require extensive rules written by a programmer based on
a large set of training documents. The software automatically "learns" how to
process unstructured forms by reading only a few examples. Competitors in this
market offer both high and low cost systems. The Company's strategy is to
position Doctus(TM) to compete
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successfully in a scalable midrange price while offering a higher degree of
accuracy and greater flexibility than competing systems currently on the
market.
Increased competition may result in price reductions, reduced gross
margins, and loss of market share, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
EMPLOYEES AND LABOR RELATIONS
As of September 30, 1999, the Company employed a total of 36 full-time
and 3 part-time persons plus 1 full-time temporary employee, consisting of 11 in
marketing, sales and support, 15 in research and development, 9 in operations,
and 6 in finance, administration and other capacities. The Company has never had
a work stoppage. None of its employees are represented by a labor organization,
and the Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's principal executive offices, as well as its principal
research and development facility, is located in approximately 21,000 square
feet of leased office building space in San Diego, California, of which the
Company subleases to a third party approximately 9,000 square feet. The lease
and sublease on these facilities expires June 30, 2002. Subsequent to September
30, 1999, the Company subleased 5,397 square feet of additional space adjacent
to its primary location. This sublease expires June 30, 2001. The Company also
leases a sales, customer services and support facility in Virginia. The Company
believes that its existing facilities are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
In the general course of business, the Company, at various times, has
been named in lawsuits. During fiscal 1998, the Company was involved in a number
of legal proceedings. All of these proceedings were resolved in fiscal year
1999, and the costs of these settlements are included in the September 30, 1999
and September 30, 1998 financials.
In October 1998, the Company settled a lawsuit with the two founders of
Technology Solutions, Inc. ("TSI"). The Company had acquired substantially all
of the assets of TSI in June 1997 in exchange for 685,714 unregistered shares of
the Company's common stock and $240,000 cash. Disputes arose between the
Company, TSI, and the principals of TSI. Pursuant to the settlement agreement,
the Company reacquired 591,114 shares of its common stock and a non-exclusive,
not-transferable, perpetual, worldwide, royalty-free license to use key
components of the TSI document imaging systems software; TSI and its principals
reacquired ownership of their technology and software.
The Company agreed in October 1998 to settle a pending lawsuit with
Adaptive Solutions, a Beaverton, Oregon based computer assisted data entry
provider and also settled an employee related lawsuit.
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In October 1998 the Company also revamped their agreement with
Parascript Limited Liability Company (LLC), under which the Company licenses
Parascript's Legal Amount Recognition (LAR) capabilities used in the
CheckScript(TM) product. The Company and Parascript LLC agreed to undo their
cross investment agreement and entered into a new licensing agreement. The new
licensing agreement is not exclusive except for six major customers, and
provides for a reduction in royalty percentages payable. The Company received
all 763,922 shares of unregistered common stock of the Company previously held
by Parascript LLC in exchange for returning its 10% interest in Parascript LLC,
exclusivity for six customers, and reduced royalties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to security holders during the fourth
quarter ended September 30, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Registrant's common equity and related stockholder matters
is incorporated herein by reference to the Company's Annual Report to
Stockholders for the year ended September 30, 1999.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for each of the years in the five-year period
ended September 30, 1999 is incorporated herein by reference to the Company's
Annual Report to Stockholders for the year ended September 30, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations is incorporated herein by reference to the Company's Annual Report
to Stockholders for the year ended September 30, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data and the Independent
Auditor's Report are incorporated herein by reference to the Company's Annual
Report to Stockholders for the year ended September 30, 1999.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by this item is incorporated herein by reference
to the definitive Proxy Statement for the Annual Meeting of Stockholders to be
held in February 2000, under the heading "ELECTION OF DIRECTORS".
ITEM 11. EXECUTIVE COMPENSATION
Information called for by this item is incorporated herein by reference
to the definitive Proxy Statement for the Annual Meeting of Stockholders to be
held in February 2000, under the heading "EXECUTIVE COMPENSATION".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by this item is incorporated herein by reference
to the definitive Proxy Statement for the Annual Meeting of Stockholders to be
held in February 2000, under the heading "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACITONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND
REPORTS ON FORM 8-K
(a) (1) The following documents are included in the Company's Annual
Report to Stockholders for the year ended September 30, 1999:
Independent Auditors' Report
Consolidated Balance Sheets -
For the Years Ended
September 30, 1999 and 1998
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Consolidated Statements of Operations
For the Years Ended
September 30, 1999, 1998, and 1997
Consolidated Statements of Changes in
Stockholders' Equity -
For the Years Ended
September 30, 1999, 1998, and 1997
Consolidated Statements of Cash Flows
For the Years Ended
September 30, 1999,1998, and 1997
Notes to Financial Statements
For the years Ended
September 30, 1999,1998, and 1997
With the exception of the financial statements listed
above and the information incorporated by reference
herein, the Annual Report to Stockholders for the
fiscal year ended September 30, 1999, is not to be
deemed to be filed as part of this report.
(a) (2) Exhibits:
3.1 Certificate of Incorporation of
Mitek Systems of Delaware Inc.
(now Mitek Systems, Inc.), a
Delaware corporation, as amended. (1)
3.2 Bylaws of Mitek Systems, Inc. as
Amended and Restated. (1)
10.1 1986 Stock Option Plan (2)
10.2 1988 Non Qualified Stock Option Plan (2)
10.3 1996 Stock Option Plan(3)
10.4 1999 Stock Option Plan
10.5 401(k) Plan (2)
10.6 $750,000 revolving line of credit Loan Agreement,
Promissory Note, and Commercial Security Agreement
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10.7 $250,000 equipment line of credit Promissory Note
and Commercial Security Agreement
13. Annual Report to Stockholders for the year
ended September 30, 1999.
21. Subsidiaries of the Registrant
23. Independent Auditors' Consent
27. Financial Data Schedule
(1) Incorporated by reference to the exhibits to the Company' Annual Report
on Form 10-K for the fiscal year ended September 30, 1987
(2) Incorporated by reference to the exhibits to the Company's Registration
Statement on Form SB-2 originally filed with the SEC on July 9, 1996
Upon request, the Registrant will furnish a copy of any of the
listed exhibits for $0.50 per page.
(3) Incorporated by reference to the exhibits to the Company's Registration
Statement on Form 10-K for the fiscal year ended September 30, 1998
(b) The following is a list of Current Reports on Form 8-K filed
by the Company during or subsequent to the last quarter of the
fiscal year ended September 30, 1999:
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: December 23, 1999 MITEK SYSTEMS, INC.
By: /S/ JOHN M. THORNTON
---------------------
John M. Thornton,
Chairman of the Board,
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President, Chief Executive Officer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ John M. Thornton December 23, 1999
John M. Thornton,
Chairman of the Board
President, Chief Executive Officer
and Chief Financial Officer
/s/ Gerald I. Farmer December 23, 1999
Gerald I. Farmer, Director
/s/ Daniel E. Steimle December 23, 1999
Daniel E. Steimle, Director
/s/ Sally B. Thornton December 23, 1999
Sally B. Thornton, Director
/s/ James B. DeBello December 23, 1999
James B. DeBello, Director
MITEK SYSTEMS, INC.
INDEX TO EXHIBITS
EXHIBIT
NO. EXHIBIT
3.1 Certificate of Incorporation of
Mitek Systems of Delaware,
Inc. (now Mitek Systems, Inc.)
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a Delaware corporation, as amended. (1)
3.2 Bylaws of Mitek Systems, Inc.
as Amended and Restated. (1)
10.1 1986 Stock Option Plan (2)
10.2 1988 Non Qualified Stock Option Plan (2)
10.3 1996 Stock Option Plan (3)
10.4 1999 Stock Option Plan
10.5 401(k) Plan (2)
10.6 $750,000 revolving line of credit Loan Agreement,
Promissory Note, and Commercial Security Agreement
10.7 $250,000 equipment line of credit Promissory Note
and Commercial Security Agreement
13. Annual Report to Stockholders for the year ended
September 30, 1999.
21. Subsidiaries of the Registrant
23. Independent Auditors' Consent
27. Financial Data Schedule
(1) Incorporated by reference to the exhibits to the Company's Annual Report
on Form 10K for the fiscal year ended September 30, 1987
(2) (2) Incorporated by reference to the exhibits to the Company's Registration
Statement on Form SB-2 originally filed with the SEC on July 9, 1996
(3) Incorporated by reference to the exhibits to the Company's Registration
Statement on Form 10-K for the fiscal year ended September 30, 1998
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EXHIBIT A
MITEK SYSTEMS, INC.
1999 STOCK OPTION PLAN
1. PURPOSE. This Stock Option Plan (the "Plan") is intended to
serve as an incentive to, and to encourage stock ownership by certain
eligible participants rendering services to Mitek Systems, Inc., a Delaware
corporation, and certain affiliates as set forth below (the "Corporation"),
so that they may acquire or increase their proprietary interest in the
Corporation and to encourage them to remain in the service of the Corporation.
2. ADMINISTRATION.
1. COMMITTEE. The Plan shall be administered by the Board
of Directors of the Corporation (the "Board of Directors"), or a committee of
two or more members appointed by the Board of Directors (the "Committee") who
are Non-Employee Directors as defined in Rule 16b-3 promulgated under Section
16 of the Securities Exchange Act of 1934 and an outside director as defined
in Treasury Regulation Section 1.162-27(e)(3). The Committee shall select one
of its members as Chairman and shall appoint a Secretary, who need not be a
member of the Committee. The Committee shall hold meetings at such times and
places as it may determine and minutes of such meetings shall be recorded.
Acts by a majority of the Committee in a meeting at which a quorum is present
and acts approved in writing by a majority of the members of the Committee
shall be valid acts of the Committee.
2. TERM. If the Board of Directors selects a Committee,
the members of the Committee shall serve on the Committee for the period of
time determined by the Board of Directors and shall be subject to removal by
the Board of Directors at any time. The Board of Directors may terminate the
function of the Committee at any time and resume all powers and authority
previously delegated to the Committee.
3. AUTHORITY. The Committee shall have sole discretion
and authority to grant options under the Plan to eligible participants
rendering services to the Corporation or any "parent" or "subsidiary" of the
Corporation, as defined in Section 424 of the Internal Revenue Code of 1986,
as amended (the "Code") ("Parent or Subsidiary"), at such times, under such
terms and in such amounts as it may decide. For purposes of this Plan and any
Stock Option Agreement (as defined below), the term "Corporation" shall
include any Parent or Subsidiary, if applicable. Subject to the express
provisions of the Plan, the Committee shall have complete authority to
interpret the Plan, to prescribe, amend and rescind the rules and regulations
relating to the Plan, to determine the details and provisions of any Stock
Option Agreement, to accelerate any options granted under the Plan and to
make all other determinations necessary or advisable for the administration
of the Plan.
4. TYPE OF OPTION. The Committee shall have full
authority and discretion to determine, and shall specify, whether the
eligible individual will be granted options intended to qualify as incentive
options under Section 422 of the Code ("Incentive Options") or options which
are not intended to qualify under Section 422 of the Code ("Non-Qualified
Options"); provided, however, that Incentive Options shall only be granted to
employees of the Corporation, or a Parent or Subsidiary thereof, and shall be
subject to the special limitations set forth herein attributable to Incentive
Options.
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5. INTERPRETATION. The interpretation and construction by
the Committee of any provisions of the Plan or of any option granted under
the Plan shall be final and binding on all parties having an interest in this
Plan or any option granted hereunder. No member of the Committee shall be
liable for any action or determination made in good faith with respect to the
Plan or any option granted under the Plan.
3. ELIGIBILITY.
1. GENERAL. All directors, officers, employees of and
certain persons rendering services to the Corporation, or any Parent or
Subsidiary relative to the Corporation's, or any Parent's or Subsidiary's
management, operation or development shall be eligible to receive options
under the Plan. The selection of recipients of options shall be within the
sole and absolute discretion of the Committee. No person shall be granted an
Incentive Option under this Plan unless such person is an employee of the
Corporation on the date of grant. No person shall be granted an option under
this Plan unless such person has executed, if requested by the Committee, the
grant representation letter set forth on Exhibit "A," as such Exhibit may be
amended by the Committee from time to time. No person shall be granted more
than 500,000 options in any one year period.
2. TERMINATION OF ELIGIBILITY.
3.2.1 If an optionee ceases to be employed by the
Corporation, or its Parent or Subsidiary, is no longer an officer or member
of the Board of Directors of the Corporation, or no longer performs services
for the Corporation, or its Parent or Subsidiary, for any reason (other than
for "cause," as hereinafter defined, or such optionee's death), any option
granted hereunder to such optionee shall expire three months after the
occurrence giving rise to such termination of eligibility (or 1 year in the
event an optionee is "disabled," as defined in Section 22(e)(3) of the Code)
or upon the date it expires by its terms, whichever is earlier. Any option
that has not vested in the optionee as of the date of such termination shall
immediately expire and shall be null and void. The Committee shall, in its
sole and absolute discretion, decide, utilizing the provisions set forth in
Treasury Regulations Section 1.421-7(h), whether an authorized leave of
absence or absence for military or governmental service, or absence for any
other reason, shall constitute termination of eligibility for purposes of
this Section.
3.2.2 If an optionee ceases to be employed by the
Corporation, or its Parent or Subsidiary, is no longer an officer or member of
the Board of Directors of the Corporation, or no longer performs services for
the Corporation, or its Parent or Subsidiary, and such termination is as a
result of "cause," as hereinafter defined, then all options granted hereunder to
such optionee shall expire on the date of the occurrence giving rise to such
termination of eligibility or upon the date it expires by its terms, whichever
is earlier, and such optionee shall have no rights with respect to any
unexercised options. For purposes of this Plan, "cause" shall mean an optionee's
personal dishonesty, misconduct, breach of fiduciary duty, incompetence,
intentional failure to perform stated obligations, willful violation of any law,
rule, regulation or final cease and desist order, or any material breach of any
provision of this Plan, any Stock Option Agreement or any employment agreement.
2
<PAGE>
3. DEATH OF OPTIONEE AND TRANSFER OF OPTION. In the event
an optionee shall die, an option may be exercised (subject to the condition
that no option shall be exercisable after its expiration and only to the
extent that the optionee's right to exercise such option had accrued at the
time of the optionee's death) at any time within six months after the
optionee's death by the executors or administrators of the optionee or by any
person or persons who shall have acquired the option directly from the
optionee by bequest or inheritance. Any option that has not vested in the
optionee as of the date of death or termination of employment, whichever is
earlier, shall immediately expire and shall be null and void. No option shall
be transferable by the optionee other than by will or the laws of intestate
succession.
4. LIMITATION ON INCENTIVE OPTIONS. No person shall
be granted any Incentive Option to the extent that the aggregate fair market
value of the Stock (as defined below) to which such options are exercisable
for the first time by the optionee during any calendar year (under all plans
of the Corporation as determined under Section 422(d) of the Code) exceeds
$100,000.
4. IDENTIFICATION OF STOCK. The Stock, as defined herein,
subject to the options shall be shares of the Corporation's authorized but
unissued or acquired or reacquired common stock (the "Stock"). The aggregate
number of shares subject to outstanding options shall not exceed 1,000,000
shares of Stock (subject to adjustment as provided in Section 6). If any
option granted hereunder shall expire or terminate for any reason without
having been exercised in full, the unpurchased shares subject thereto shall
again be available for purposes of this Plan. Notwithstanding the above, at
no time shall the total number of shares of Stock issuable upon exercise of
all outstanding options and the total number of shares of Stock provided for
under any stock bonus or similar plan of the Corporation exceed 30% as
calculated in accordance with the conditions and exclusions of Section
260.140.45 of Title 10, California Code of Regulations, based on the shares
of the issuer which are outstanding at the time the calculation is made.
5. TERMS AND CONDITIONS OF OPTIONS. Any option granted
pursuant to the Plan shall be evidenced by an agreement ("Stock Option
Agreement") in such form as the Committee shall from time to time determine,
which agreement shall comply with and be subject to the following terms and
conditions:
1. NUMBER OF SHARES. Each option shall state the
number of shares of Stock to which it pertains.
2. OPTION EXERCISE PRICE. Each option shall state the
option exercise price, which shall be determined by the Committee; provided,
however, that (i) the exercise price of any Incentive Option shall not be
less than the fair market value of the Stock, as determined by the Committee,
on the date of grant of such option, (ii) the exercise price of any option
granted to any person who owns more than 10% of the total combined voting
power of all classes of the Corporation's stock, as determined for purposes
of Section 422 of the Code, shall not be less than 110% of the fair market
value of the Stock, as determined by the Committee, on the date of grant of
such option, and (iii) the exercise price of any Non-Qualified Option shall
not be less than 85% of the fair market value of the Stock, as determined by
the Committee, on the date of grant of such option.
3
<PAGE>
3. TERM OF OPTION. The term of an option granted
hereunder shall be determined by the Committee at the time of grant, but
shall not exceed ten years from the date of the grant. The term of any
Incentive Option granted to an employee who owns more than 10% of the total
combined voting power of all classes of the Corporation's stock, as
determined for purposes of Section 422 of the Code, shall in no event exceed
five years from the date of grant. All options shall be subject to early
termination as set forth in this Plan. In no event shall any option be
exercisable after the expiration of its term.
4. METHOD OF EXERCISE. An option shall be exercised by
written notice to the Corporation by the optionee (or successor in the event
of death) and execution by the optionee of an exercise representation letter
in the form set forth on Exhibit "B," as such Exhibit may be amended by the
Committee from time to time. Such written notice shall state the number of
shares with respect to which the option is being exercised and designate a
time, during normal business hours of the Corporation, for the delivery
thereof ("Exercise Date"), which time shall be at least 30 days after the
giving of such notice unless an earlier date shall have been mutually agreed
upon. At the time specified in the written notice, the Corporation shall
deliver to the optionee at the principal office of the Corporation, or such
other appropriate place as may be determined by the Committee, a certificate
or certificates for such shares. Notwithstanding the foregoing, the
Corporation may postpone delivery of any certificate or certificates after
notice of exercise for such reasonable period as may be required to comply
with any applicable listing requirements of any securities exchange. In the
event an option shall be exercisable by any person other than the optionee,
the required notice under this Section shall be accompanied by appropriate
proof of the right of such person to exercise the option.
5. MEDIUM AND TIME OF PAYMENT. The option exercise price
shall be payable in full on or before the option Exercise Date in any one of
the following alternative forms:
5.5.1 Full payment in cash or certified bank or
cashier's check;
5.5.2 A Promissory Note (as defined below);
5.5.3 Full payment in shares of Stock having a
fair market value on the Exercise Date in the amount equal to the option
exercise price;
5.5.4 Through a special sale and remittance
procedure pursuant to which the optionee shall concurrently provide
irrevocable written instruction to (a) a Corporation-designated brokerage
firm to effect the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate exercise price payable for the
purchased shares plus all applicable Federal, state and local income and
employment taxes required to be withheld by the Corporation by reason of such
exercise and (b) the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm in order to complete the
sale.
5.5.5 A combination of the consideration set forth
in Sections 5.4.1, through 5.4.4 equal to the option exercise price; or
4
<PAGE>
5.5.6 Any other method of payment complying with
the provisions of Section 422 of the Code with respect to Incentive Options,
provided the terms of payment are established by the Committee at the time of
grant and any other method of payment established by the Committee with
respect to Non-Qualified Options.
6. FAIR MARKET VALUE. The fair market value of a share of
Stock on any relevant date shall be determined in accordance with the
following provisions:
5.6.1 If the Stock at the time is neither listed
nor admitted to trading on any stock exchange nor traded in the
over-the-counter market, then the fair market value shall be determined by
the Committee after taking into account such factors as the Committee shall
deem appropriate.
5.6.2 If the Stock is not at the time listed or
admitted to trading on any stock exchange but is traded in the
over-the-counter market, the fair market value shall be the mean between the
highest bid and lowest asked prices (or, if such information is available,
the closing selling price) of one share of Stock on the date in question in
the over-the-counter market, as such prices are reported by the National
Association of Securities Dealers through its NASDAQ system or any successor
system. If there are no reported bid and asked prices (or closing selling
price) for the Stock on the date in question, then the mean between the
highest bid price and lowest asked price (or the closing selling price) on
the last preceding date for which such quotations exist shall be
determinative of fair market value.
5.6.3 If the Stock is at the time listed or
admitted to trading on any stock exchange, then the fair market value shall
be the closing selling price of one share of Stock on the date in question on
the stock exchange determined by the Committee to be the primary market for
the Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no reported sale of Stock on such
exchange on the date in question, then the fair market value shall be the
closing selling price on the exchange on the last preceding date for which
such quotation exists.
7. PROMISSORY NOTE. Subject to the requirements of
applicable state or Federal law or margin requirements, payment of all or
part of the purchase price of the Stock may be made by delivery of a full
recourse promissory note ("Promissory Note"). The Promissory Note shall be
executed by the optionee, made payable to the Corporation and bear interest
at such rate as the Committee shall determine, but in no case less than the
minimum rate which will not cause under the Code (i) interest to be imputed,
(ii) original issue discount to exist, or (iii) any other similar results to
occur. Unless otherwise determined by the Committee, interest on the Note
shall be payable in quarterly installments on March 31, June 30, September 30
and December 31 of each year. A Promissory Note shall contain such other
terms and conditions as may be determined by the Committee; provided,
however, that the full principal amount of the Promissory Note and all unpaid
interest accrued thereon shall be due not later than five years from the date
of exercise. The Corporation may obtain from the optionee a security interest
in all shares of Stock issued to the optionee under the Plan for the purpose
of securing payment under the Promissory Note and may retain possession of
the stock certificates representing such shares in order to perfect its
security interest.
5
<PAGE>
8. RIGHTS AS A SHAREHOLDER. An optionee or successor
shall have no rights as a shareholder with respect to any Stock underlying
any option until the date of the issuance to such optionee of a certificate
for such Stock. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the date
such Stock certificate is issued, except as provided in Section 6.
9. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS.
Subject to the terms and conditions of the Plan, the Committee may modify,
extend or renew outstanding options granted under the Plan, or accept the
surrender of outstanding options (to the extent not exercised) and authorize
the granting of new options in substitution therefor.
10. VESTING AND RESTRICTIONS. The Committee shall have
complete authority and discretion to set the terms, conditions, restrictions,
vesting schedules and other provisions of any option in the applicable Stock
Option Agreement and shall have complete authority to require conditions and
restrictions on any Stock issued pursuant to this Plan; provided, however, that
except with respect to options granted to officers or directors of the
Corporation, options granted pursuant to this Plan shall be exercisable or
"vest" at the rate of at least 20% per year over the 5-year period beginning on
the date the option is granted. Options granted to officers and directors shall
become exercisable or "vest," subject to reasonable conditions, at any time
during any period established by the Corporation.
11. OTHER PROVISIONS. The Stock Option Agreements shall
contain such other provisions, including without limitation, restrictions or
conditions upon the exercise of options, as the Committee shall deem advisable.
6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
6
<PAGE>
1. SUBDIVISION OR CONSOLIDATION. Subject to any required
action by shareholders of the Corporation, the number of shares of Stock
covered by each outstanding option, and the exercise price thereof, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Stock of the Corporation resulting from a subdivision or
consolidation of shares, including, but not limited to, a stock split,
reverse stock split, recapitalization, continuation or reclassification, or
the payment of a stock dividend (but only on the Stock) or any other increase
or decrease in the number of such shares effected without receipt of
consideration by the Corporation. Any fraction of a share subject to option
that would otherwise result from an adjustment pursuant to this Section shall
be rounded downward to the next full number of shares without other
compensation or consideration to the holder of such option.
2. CAPITAL TRANSACTIONS. Upon a sale or exchange of all
or substantially all of the assets of the Corporation, a merger or
consolidation in which the Corporation is not the surviving corporation, a
merger, reorganization or consolidation in which the Corporation is the
surviving corporation and shareholders of the Corporation exchange their
stock for securities or property, a liquidation of the Corporation, or
similar transaction as determined by the Committee ("Capital Transaction"),
this Plan and each option issued under this Plan, whether vested or unvested,
shall terminate, unless such options are assumed by a successor corporation
in a merger or consolidation, immediately prior to such Capital Transaction;
provided, however, that unless the outstanding options are assumed by a
successor corporation in a merger or consolidation, subject to terms approved
by the Committee, all optionees will have the right, during the 15 days prior
to such Capital Transaction, to exercise all vested options. The Corporation
shall, subject to any nondisclosure provisions, attempt to provide optionees
at least 15 days notice of the option termination date. The Committee may
(but shall not be obligated to) (i) accelerate the vesting of any option or
(ii) apply the foregoing provisions, including but not limited to termination
of this Plan and options granted pursuant to the Plan, in the event there is
a sale of 51% or more of the stock of the Corporation in any two year period
or a transaction similar to a Capital Transaction.
3. ADJUSTMENTS. To the extent that the foregoing
adjustments relate to stock or securities of the Corporation, such
adjustments shall be made by the Committee, whose determination in that
respect shall be final, binding and conclusive.
4. ABILITY TO ADJUST. The grant of an option pursuant to
the Plan shall not affect in any way the right or power of the Corporation to
make adjustments, reclassifications, reorganizations or changes of its
capital or business structure or to merge, consolidate, dissolve, liquidate,
sell or transfer all or any part of its business or assets.
5. NOTICE OF ADJUSTMENT. Whenever the Corporation shall
take any action resulting in any adjustment provided for in this Section, the
Corporation shall forthwith deliver notice of such action to each optionee,
which notice shall set forth the number of shares subject to the option and
the exercise price thereof resulting from such adjustment.
6. LIMITATION ON ADJUSTMENTS. Any adjustment, assumption
or substitution of an Incentive Option shall comply with Section 425 of the
Code, if applicable.
7
<PAGE>
7. NONASSIGNABILITY. Options granted under this Plan may not
be sold, pledged, assigned or transferred in any manner other than by will or
by the laws of intestate succession, and may be exercised during the lifetime
of an optionee only by such optionee. Any transfer in violation of this
Section shall void such option, and any Stock Option Agreement entered into
by the optionee and the Corporation regarding such transferred option shall
be void and have no further force or effect. No option shall be pledged or
hypothecated in any way, nor shall any option be subject to execution,
attachment or similar process.
8. NO RIGHT OF EMPLOYMENT. Neither the grant nor exercise of
any option nor anything in this Plan shall impose upon the Corporation or any
other corporation any obligation to employ or continue to employ any
optionee. The right of the Corporation and any other corporation to terminate
any employee shall not be diminished or affected because an option has been
granted to such employee.
9. TERM OF PLAN. This Plan is effective on the date the Plan
is adopted by the Board of Directors and options may be granted pursuant to
the Plan from time to time within a period of ten (10) years from such date,
or the date of any required shareholder approval required under the Plan, if
earlier. Termination of the Plan shall not affect any option theretofore
granted.
10. AMENDMENT OF THE PLAN. The Board of Directors of the
Corporation may, subject to any required shareholder approval, suspend,
discontinue or terminate the Plan, or revise or amend it in any respect
whatsoever with respect to any shares of Stock at that time not subject to
options.
11. APPLICATION OF FUNDS. The proceeds received by the
Corporation from the sale of Stock pursuant to options may be used for
general corporate purposes.
12. RESERVATION OF SHARES. The Corporation, during the term of
this Plan, shall at all times reserve and keep available such number of
shares of Stock as shall be sufficient to satisfy the requirements of the
Plan.
13. NO OBLIGATION TO EXERCISE OPTION. The granting of an option
shall not impose any obligation upon the optionee to exercise such option.
14. APPROVAL OF BOARD OF DIRECTORS AND SHAREHOLDERS. The Plan
shall not take effect until approved by the Board of Directors of the
Corporation. This Plan shall be approved by a vote of the shareholders within
12 months from the date of approval by the Board of Directors. In the event
such shareholder vote is not obtained, all options granted hereunder, whether
vested or unvested, shall be null and void. Further, any stock acquired
pursuant to the exercise of any options under this Agreement may not count
for purposes of determining whether shareholder approval has been obtained.
15. WITHHOLDING TAXES. Notwithstanding anything else to the
contrary in this Plan or any Stock Option Agreement, the exercise of any
option shall be conditioned upon payment by such optionee in cash, or other
provisions satisfactory to the Committee, of all local, state, federal or
other
8
<PAGE>
withholding taxes applicable, in the Committee's judgment, to the exercise or
to later disposition of shares acquired upon exercise of an option.
16. PARACHUTE PAYMENTS. Any outstanding option under the Plan
may not be accelerated to the extent any such acceleration of such option
would, when added to the present value of other payments in the nature of
compensation which becomes due and payable to the optionee would result in
the payment to such optionee of an excess parachute payment under Section
280G of the Code. The existence of any such excess parachute payment shall be
determined in the sole and absolute discretion of the Committee.
17. SECURITIES LAWS COMPLIANCE. Notwithstanding anything
contained herein, the Corporation shall not be obligated to grant any option
under this Plan or to sell, issue or effect any transfer of any Stock unless
such grant, sale, issuance or transfer is at such time effectively (i)
registered or exempt from registration under the Securities Act of 1933, as
amended (the "Act"), and (ii) qualified or exempt from qualification under
the California Corporate Securities Law of 1968 and any other applicable
state securities laws. As a condition to exercise of any option, each
optionee shall make such representations as may be deemed appropriate by
counsel to the Corporation for the Corporation to use any available exemption
from registration under the Act or qualification under any applicable state
securities law.
18. RESTRICTIVE LEGENDS. The certificates representing the
Stock issued upon exercise of options granted pursuant to this Plan will bear
any legends required by applicable securities laws as determined by the
Committee.
19. NOTICES. Any notice to be given under the terms of the Plan
shall be addressed to the Corporation in care of its Secretary at its
principal office, and any notice to be given to an optionee shall be
addressed to such optionee at the address maintained by the Corporation for
such person or at such other address as the optionee may specify in writing
to the Corporation.
20. INFORMATION TO PARTICIPANTS. The Corporation shal make
available to all holders of options the information required pursuant to
Section 260.140.46 of the California Code of Regulations.
As adopted by the Board of Directors on June 10, 1999.
MITEK SYSTEMS, INC., a Delaware corporation
By: __________________________________
John M. Thornton, Chairman
9
<PAGE>
EXHIBIT A
____________, 1999
Mitek Systems, Inc.
10070 Carroll Canyon Road
San Diego, California 92131
Re: 1999 STOCK OPTION PLAN
To Whom It May Concern:
This letter is delivered to Mitek Systems, Inc., a Delaware corporation (the
"Corporation"), in connection with the grant to _________________ (the
"Optionee") of an option (the "Option") to purchase _____ shares of common
stock of the Corporation (the "Stock") pursuant to the Mitek Systems, Inc.
1999 Stock Option Plan dated June 10, 1999 (the "Plan"). The Optionee
understands that the Corporation's receipt of this letter executed by the
Optionee is a condition to the Corporation's willingness to grant the Option
to the Optionee.
In addition, the Optionee makes the following representations and
warranties with the understanding that the Corporation will rely upon them.
1. The Optionee acknowledges receipt of a copy of the Plan and
Agreement. The Optionee has carefully reviewed the Plan and Agreement.
2. The Optionee acknowledges receipt of a prospectus regarding the Plan
which includes the information required by Section (a)(1) of Rule 428 under the
Securities Act of 1933.
3. The Optionee understands and acknowledges that the Option and the
Stock are subject to the terms and conditions of the Plan.
4. The Optionee understands and agrees that, at the time of exercise of
any part of the Option for Stock, the Optionee may be required to provide the
Corporation with additional representations, warranties and/or covenants similar
to those contained in this letter.
5. The Optionee is a resident of the State of __________.
6. The Optionee will notify the Corporation immediately of any change
in the above information which occurs before the Option is exercised in full by
the Optionee.
EXHIBIT A -PAGE 1
<PAGE>
The foregoing representations and warranties are given on
______________, 1999 at ____________________.
OPTIONEE:
--------------------------
EXHIBIT A -PAGE 2
<PAGE>
EXHIBIT B
____________, 1999
Mitek Systems, Inc.
10070 Carroll Canyon Road
San Diego, California 92131
Re: 1999 STOCK OPTION PLAN
To Whom It May Concern:
I (the "Optionee") hereby exercise my right to purchase ___ shares of
common stock (the "Stock") of Mitek Systems, Inc., a Delaware corporation
(the "Corporation"), pursuant to, and in accordance with, the Mitek Systems,
Inc. 1999 Stock Option Plan dated June 10, 1999 (the "Plan") and Stock Option
Agreement (the "Agreement") dated , 1999. As provided in such
Plan, I deliver herewith payment as set forth in the Plan in the amount of
the aggregate option exercise price. Please deliver to me at my address as
set forth above stock certificates representing the subject shares registered
in my name (and (SPOUSE), as (STYLE OF VESTING)).
The Optionee hereby represents and agrees as follows:
1. The Optionee acknowledges receipt of a copy of the Plan and
Agreement. The Optionee has carefully reviewed the Plan and Agreement.
2. The Optionee is a resident of the State of __________.
3. The Optionee represents and agrees that if the Optionee is an
"affiliate" (as defined in Rule 144 under the Securities Act of 1933) of the
Corporation at the time the Optionee desires to sell any of the Stock, the
Optionee will be subject to certain restrictions under, and will comply with all
of the requirements of, applicable federal and state securities laws.
The foregoing representations and warranties are given on
___________________________ at ________________________.
OPTIONEE:
_______________________________________
_____________, President
EXHIBIT B-PAGE 1
<PAGE>
[LETTERHEAD]
PROMISSORY NOTE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$750,000.00 06-08-1999 06-08-2000 01617850-60 410 0027 052 [ILLEGIBLE]
- -------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
BORROWER: MITEK SYSTEMS, INC. LENDER: RANCHO SANTA FE NATIONAL BANK
10070 CARROLL CANYON ROAD RANCHO SANTA FE OFFICE
SAN DIEGO, CA 92131 6110 EL TORDO
P.O. BOX 2388
RANCHO SANTA FE, CA 92067
</TABLE>
<TABLE>
===================================================================================================================
<S> <C> <C>
PRINCIPAL AMOUNT: $750,000.00 INITIAL RATE: 9.250% DATE OF NOTE: JUNE 8, 1999
</TABLE>
PROMISE TO PAY. Mitek Systems, Inc. ("Borrower") promises to pay to RANCHO
SANTA FE NATIONAL BANK ("Lender"), or order, in lawful money of the United
States of America, the principal amount of Seven Hundred Fifty Thousand &
00/100 Dollars ($750,000.00) or so much as may be outstanding, together with
interest on the unpaid outstanding principal balance of each advance.
Interest shall be calculated from the date of each advance until repayment of
each advance.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in
one payment of all outstanding principal plus all accrued unpaid interest on
June 8, 2000. In addition, Borrower will pay regular monthly payments of
accrued unpaid interest beginning July 8, 1999, and all subsequent interest
payments are due on the same day of each month after that. The annual
interest rate for this Note is computed on a 365/360 basis; that is, by
applying the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual
number of days the principal balance is outstanding. Borrower will pay Lender
at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The Interest rate on this Note is subject to change
from time to time based on changes in an index which is Lender's Prime Rate
(the "Index"). This is the rate Lender charges, or would charge, on 90-day
unsecured loans to the most creditworthy corporate customers. This rate may
or may not be the lowest rate available from Lender at any given time. Lender
will tell Borrower the current index rate upon Borrower's request. Borrower
understands that Lender may make loans based on other rates as well. The
interest rate change will not occur more often than each day. The index
currently is 7.750%. The interest rate to be applied to the unpaid principal
balance of this Note will be at a rate of 1.500 percentage points over the
index, resulting in an initial rate of 9.250%. NOTICE: Under no circumstances
will the interest rate on this Note be more than the maximum rate allowed by
applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. In any event, even
upon full prepayment of this Note, Borrower understands that Lender is
entitled to a minimum interest charge of $75.00. Other than Borrower's
obligation to pay any minimum interest charge, Borrower may pay without
penalty all or a portion of the amount owed earlier than it is due. Early
payments will not, unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments of accrued unpaid
interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment of $10.00, whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Borrower defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or any other
agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or Borrower's ability to repay this Note or
perform Borrower's obligations under this Note or any of the Related
Documents. (d) Any representation or statement made or furnished to Lender by
Borrower or on Borrower's behalf is false or misleading in any material
respect either now or at the time made or furnished. (e) Borrower becomes
insolvent, a receiver is appointed for any part of Borrower's property,
Borrower makes an assignment for the benefit of creditors, or any proceeding
is commenced either by Borrower or against Borrower under any bankruptcy or
insolvency laws. (f) Any creditor tries to take any of Borrower's property on
or in which Lender has a lien or security interest. This includes a
garnishment of any of Borrower's accounts with Lender. (g) Any guarantor dies
or any of the other events described in this default section occurs with
respect to any guarantor of this Note. (h) A material adverse change occurs
in Borrower's financial condition, or Lender believes the prospect of payment
or performance of the indebtedness is impaired. (i) Lender in good faith
deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower
has not been given a notice of a breach of the same provision of this Note
within the preceding twelve (12) months, it may be cured (and no event of
default will have occurred) if Borrower, after receiving written notice from
Lender demanding cure of such default; (a) cures the default within fifteen
(15) days; or (b) if the cure requires more than fifteen (15) days,
immediately initiates steps which Lender deems in Lender's sole discretion to
be sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to
pay all amounts declared due pursuant to this section, including failure to
pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, do one or both of the following: (a) increase the variable
interest rate on this Note to 6.500 percentage points over the Index, and (b)
add any unpaid accrued interest to principal and such sum will bear interest
therefrom until paid at the rate provided in this Note (including any
increased rate). Lender may hire or pay someone else to help collect this
Note if Borrower does not pay. Borrower also will pay Lender that amount.
This includes, subject to any limits under applicable law, Lender's
attorney's fees and Lender's legal expenses whether or not there is a
lawsuit, including attorney's fees and legal expenses for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection services.
Borrower also will pay any court costs, in addition to all other sums
provided by law. This Note has been delivered to Lender and accepted by
Lender in the State of California. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of SAN
DIEGO County, the State of California. This Note shall be governed by and
construed in accordance with the laws of the State of California.
<PAGE>
06-08-1999 PROMISSORY NOTE PAGE 2
(CONTINUED)
================================================================================
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest
in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender
all Borrower's right, title and interest in and to, Borrower's accounts with
Lender (whether checking, savings, or some other account), including without
limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh
accounts, and all trust accounts for which the grant of a security interest
would be prohibited by law. Borrower authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all sums owing on this Note
against any and all such accounts.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances
under this Note may be requested either orally or in writing by Borrower or
by an authorized person. Lender may, but need not, require that all oral
requests be confirmed in writing. All communications, instructions, or
directions by telephone or otherwise to Lender are to be directed to Lender's
office shown above. The following party or parties are authorized to request
advances under the line of credit until Lender receives from Borrower at
Lender's address shown above written notice of revocation of their authority:
John Thornton and/or Elliot Wassarman, Borrower agrees to be liable for all
sums either: (a) advanced in accordance with the instructions of an
authorized person or (b) credited to any of Borrower's accounts with Lender.
The unpaid principal balance owing on this Note at any time may be evidenced
by endorsements on this Note or by Lender's internal records, including daily
computer print-outs. Lender with have no obligation to advance funds under
this Note if: (a) Borrower or any guarantor is in default under the terms of
this Note or any agreement that Borrower or any guarantor has with Lender,
including any agreement made in connection with the signing of this Note: (b)
Borrower or any guarantor ceases doing business or is insolvent; (c) any
guarantor seeks, claims or otherwise attempts to limit, modify or revoke such
guarantor's guarantee of this Note or any other loan with Lender; (d)
Borrower has applied funds provided pursuant to this Note for purposes other
than those authorized by Lender; or (e) Lender in good faith deems itself
insecure under this Note or any other agreement between Lender and Borrower.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo
enforcing any of its rights or remedies under this Note without losing them.
Borrower and any other person who signs, guarantees or endorses this Note, to
the extent allowed by law, waive any applicable statute of limitations,
presentment, demand for payment, protest and notice of dishonor. Upon any
change in the terms of this Note, and unless otherwise expressly stated
in writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length
of time) this loan, or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the
party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER
AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY
OF THE NOTE.
BORROWER:
MITEK SYSTEMS, INC.
By: /s/ John Thornton
------------------------------------
John Thornton, Chairman of the Board
================================================================================
<PAGE>
[LETTERHEAD]
[LOAN AGREEMENT]
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$750,000.00 06-08-1999 06-08-2000 01617850-60 410 0027 052 [ILLEGIBLE]
- -------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
BORROWER: MITEK SYSTEMS, INC. LENDER: RANCHO SANTA FE NATIONAL BANK
10070 CARROLL CANYON ROAD RANCHO SANTA FE OFFICE
SAN DIEGO, CA 92131 6110 EL TORDO
P.O. BOX 2388
RANCHO SANTA FE, CA 92067
===================================================================================================================
</TABLE>
THIS LOAN AGREEMENT between Mitek Systems, Inc. ("Borrower") and RANCHO
SANTA FE NATIONAL BANK ("Lender") is made and executed on the following terms
and conditions. Borrower has received prior commercial loans from Lender or
has applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations
from Lender to Borrower, are referred to in this Agreement individually as
the "Loan" and collectively as the "Loans." Borrower understands and agrees
that: (a) in granting, renewing, or extending any Loan, Lender is relying
upon Borrower's representations, warranties, and agreements, as set forth in
this Agreement; (b) the granting, renewing, or extending of any Loan by
Lender at all times shall be subject to Lender's sole judgment and
discretion; and (c) all such Loans shall be and shall remain subject to the
following terms and conditions of this Agreement.
TERM. This Agreement shall be effective as of June 8, 1999, and shall
continue thereafter until all indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
ACCOUNT. The word "Account" means a trade account, account receivable,
or other right to payment for goods sold or services rendered owing to
Borrower (or to a third party grantor acceptable to Lender).
ACCOUNT DEBTOR. The word "Account Debtor" mean the person or entity
obligated upon an Account.
ADVANCE. The word "Advance" means a disbursement of Loan funds under
this Agreement.
BORROWER. The word "Borrower" means Mitek Systems, Inc.. The word
"Borrower" also includes, as applicable, all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
BORROWING BASE. The words "Borrowing Base" mean, as determined by Lender
from time to time, the lesser of (a) $750,000.00; or (b) 80.000% of the
aggregate amount of Eligible Accounts.
BUSINESS DAY. The words "Business Day" mean a day on which commercial
banks are open for business in the State of California.
CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
CASH FLOW. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization.
COLLATERAL. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan,
whether real or personal property, whether granted directly or
indirectly, whether granted now or in the future, and whether granted in
the form of a security interest, mortgage, deed of trust, assignment,
pledge, chattel mortgage, chattel trust, factor's lien, equipment trust,
conditional sale, trust receipt, lien, charge, lien or title retention
contract, lease or consignment intended as a security device, or any
other security or lien interest whatsoever, whether created by law,
contract, or otherwise. The word "Collateral" includes without limitation
all collateral described below in the section titled "COLLATERAL".
DEBT. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all
of Borrower's Accounts which contain selling terms and conditions
acceptable to Lender. The net amount of any Eligible Account against
which Borrower may borrow shall exclude all returns, discounts, credits,
and offsets of any nature. Unless otherwise agreed to by Lender in
writing, Eligible Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an
officer, an employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a
subsidiary of, or affiliated with or related to Borrower or its
shareholders, officers, or directors.
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by
the Account Debtor may be conditional.
(d) Accounts with respect to which Borrower is or may become
liable to the Account Debtor for goods sold or services rendered by
the Account Debtor to Borrower.
(e) Accounts which are subject to dispute, counterclaim, or setoff.
(f) Accounts with respect to which the goods have not been shipped
or delivered, or the services have not been rendered, to the
Account Debtor.
(g) Accounts with respect to which Lender, in its sole discretion,
deems the creditworthiness or financial condition of the Account
Debtor to be unsatisfactory.
(h) Accounts of any Account Debtor who has filed or has had filed
against it a petition in bankruptcy or an application for relief
under any
<PAGE>
06-08-1999 LOAN AGREEMENT PAGE 2
(CONTINUED)
================================================================================
provision of any state or federal bankruptcy, insolvency, or
debtor-in-relief acts; or who has had appointed a trustee, custodian,
or receiver for the assets of such Account Debtor; or who has made an
assignment for the benefit of creditors or has become insolvent or
fails generally to pay its debts (including its payrolls) as such
debts become due.
(i) Accounts with respect to which the Account Debtor is the United
States government or any department or agency of the United
States.
(j) Accounts which have not been paid in full within 90 days or less
from the invoice date.
(k) Foreign Accounts Receivable will be reviewed by Lender for
eligibility.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT".
EXPIRATION DATE. The words "Expiration Date" mean the date of termination
of Lender's commitment to lend under this Agreement.
GRANTOR. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without limitation
all Loans, together with all other obligations, debts and liabilities of
Borrower to Lender, or any one or more of them, as well as all claims by
Lender against Borrower, or any one or more of them; whether now or
hereafter existing, voluntary or involuntary, due or not due, absolute or
contingent, liquidated or unliquidated; whether Borrower may be liable
individually or jointly with others; whether Borrower may be obligated as a
guarantor, surety, or otherwise; whether recovery upon such indebtedness
may be or hereafter may become barred by any statute of limitations; and
whether such indebtedness may be or hereafter may become otherwise
unenforceable.
LENDER. The word "Lender" means RANCHO SANTA FE NATIONAL BANK, its
successors and assigns.
LINE OF CREDIT. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrower's readily marketable securities.
LOAN. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
interests securing indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics, warehousemen,
or carriers, or other like liens arising in the ordinary course of business
and securing obligations which are not yet delinquent; (d) purchase money
liens or purchase money security interests upon or in any property acquired
or held by Borrower in the ordinary course of business to secure
indebtedness outstanding on the date of this Agreement or permitted to be
incurred under the paragraph of this Agreement titled "Indebtedness and
Liens"; (e) liens and security interests which, as of the date of this
Agreement, have been disclosed to and approved by the Lender in writing;
and (f) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to
the net value of Borrower's assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages,
deeds of trust, and all other instruments, agreements and documents,
whether now or hereafter existing, executed in connection with the
Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract,
or otherwise, evidencing, governing, representing, or creating a
Security Interest.
SECURITY INTEREST. The words "Security Interest" mean and include
without limitation any type of collateral security, whether in the form
of a lien charge, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional
sale, trust receipt, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement
to indebtedness owed by Borrower to Lender in form and substance acceptable
to Lender.
TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible
items, but including leaseholds and leasehold improvements) less total
Debt.
WORKING CAPITAL. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the
aggregate amount of such Advances outstanding at any time does not exceed the
Borrowing Base. Within the foregoing limits, Borrower may borrow, partially
or wholly prepay, and reborrow under this Agreement as follows.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is subject
to the following conditions precedent with all documents, instruments,
opinions, reports, and other items required under this agreement to be in
form and substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered
by Borrower to Lender.
(b) Lender shall have received such opinions of counsel, supplemental
opinions, and documents as Lender may request.
(c) The security interests in the collateral shall have been duly
authorized, created, and perfected with first lien priority and shall
be in full force and effect.
(d) All guaranties required by Lender for the Line of Credit shall
have been executed by each Guarantor, delivered to Lender, and be in
full force and effect.
<PAGE>
06-08-1999 LOAN AGREEMENT PAGE 3
(CONTINUED)
================================================================================
(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrower's Accounts, books, records, and
operations, and Lender shall be satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees, costs, and
expenses specified in this Agreement and the Related Documents as
are then due and payable.
(g) There shall not exist at the time of any Advance a condition
which would constitute an Event of Default under this Agreement,
and Borrower shall have delivered to Lender the compliance
certificate called for in the paragraph below titled "Compliance
Certificate."
MAKING LOAN ADVANCES. Advances under the Line of Credit may be requested
either orally or in writing by authorized persons. Lender may, but need
not, require that all oral requests be confirmed in writing. Each
Advance shall be conclusively deemed to have been made at the request of
and for the benefit of Borrower (a) when credited to any deposit account
of Borrower maintained with Lender or (b) when advanced in accordance
with the instructions of an authorized person. Lender, at its option,
may set a cutoff time, after which all requests for Advances will be
treated as having been requested on the next succeeding Business Day.
MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount
of the outstanding Advances shall exceed the applicable Borrowing Base,
Borrower, immediately upon written or oral notice from Lender, shall pay
to Lender an amount equal to the difference between the outstanding
principal balance of the Advances and the Borrowing Base. On the
Expiration Date, Borrower shall pay to Lender in full the aggregate
unpaid principal amount of all Advances then outstanding and all accrued
unpaid interest, together with all other applicable fees, costs and
charges, if any, not yet paid.
LOAN ACCOUNT. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits
and credits as shall be appropriate in connection with the credit
facility. Lender shall provide Borrower with periodic statements of
Borrower's account, which statements shall be considered to be correct
and conclusively binding on Borrower unless Borrower notifies Lender to
the contrary within thirty (30) days after Borrower's receipt of any
such statement which Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all
other Loans, obligations and duties owed by Borrower to Lender, Borrower (and
others, if required) shall grant to Lender Security Interests in such property
and assets as Lender may require (the "Collateral"), including without
limitation Borrower's present and future Accounts and general intangibles.
Lender's Security Interests in the Collateral shall be continuing liens
and shall include the proceeds and products of the Collateral, including
without limitation the proceeds of any insurance. With respect to the
Collateral, Borrower agrees and represents and warrants to Lender:
PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such
financing statements and to take whatever other actions are requested
by Lender to perfect and continue Lender's Security Interests in the
Collateral. Upon request of Lender, Borrower will deliver to Lender any
and all of the documents evidencing or constituting the Collateral, and
Borrower will note Lender's interest upon any and all chattel paper if
not delivered to Lender for possession by Lender. Contemporaneous with
the execution of this Agreement, Borrower will execute one or more UCC
financing statements and any similar statements as may be required by
applicable law, and will file such financing statements and all such
similar statements in the appropriate location or locations. Borrower
hereby appoints Lender as its irrevocable attorney-in-fact for the
purpose of executing any documents necessary to perfect or to continue
any Security Interest. Lender may at any time, and without further
authorization from Borrower, file a carbon, photograph, facsimile, or
other reproduction of any financing statement for use as a financing
statement. Borrower will reimburse Lender for all expenses for the
perfection, termination, and the continuation of the perfection of
Lender's security interest in the Collateral. Borrower promptly will
notify Lender of any change in Borrower's name including any change to
the assumed business names of Borrower. Borrower also promptly will
notify Lender of any change in Borrower's Social Security Number or
Employer Identification Number. Borrower further agrees to notify Lender
in writing prior to any change in address or location of Borrower's
principal governance office or should Borrower merge or consolidate with
any other entity.
COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall,
keep correct and accurate records of the Collateral, all of which
records shall be available to Lender or Lender's representative upon
demand for inspection and copying at any reasonable time. With respect
to the Accounts, Borrower agrees to keep and maintain such records as
Lender may require, including without limitation information concerning
Eligible Accounts and Account balances and agings.
COLLATERAL SCHEDULES. Concurrently with the execution and delivery of
this Agreement, Borrower shall execute and deliver to Lender a schedule
of Accounts and Eligible Accounts, in form and substance satisfactory to
the Lender. Thereafter and at such frequency as Lender shall require,
Borrower shall execute and deliver to Lender such supplemental schedules
of Eligible Accounts and such other matters and information relating to
Borrower's Accounts as Lender may request.
REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of an Eligible
Account; (b) All Account information listed on schedules delivered to
Lender will be true and correct, subject to immaterial variance; and (c)
Lender, its assigns, or agents shall have the right at any time and at
Borrower's expense to inspect, examine, and audit Borrower's records and
to confirm with Account Debtors the accuracy of such Accounts.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender,
as of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any
Loan, and at all times any indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of California
and is validly existing and in good standing in all states in which
Borrower is doing business. Borrower has the full power and authority to
own its properties and to transact the businesses in which it is
presently engaged or presently proposes to engage. Borrower also is duly
qualified as a foreign corporation and is in good standing in all states
in which the failure to so qualify would have a material adverse effect
on its businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this
Agreement and all Related Documents by Borrower, to the extent to be
executed, delivered or performed by Borrower, have been duly authorized
by all necessary action by Borrower, do not require the consent or
approval of any other person, regulatory authority or governmental body,
and do not conflict with, result in a violation of, or constitute a
default under (a) any provision of its articles of incorporation or
organization, or bylaws, or any agreement or other instrument binding
upon borrower or (b) any law, governmental regulation, court decree, or
order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as
of the date of the statement and there has been no material adverse
change in Borrower's financial condition subsequent to the date of the
most recent financial statement supplied to Lender. Borrower has no
material contingent obligations except as disclosed in such financial
statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered will
constitute, legal, valid and binding obligations of Borrower enforceable
against Borrower in accordance with their respective terms.
PROPERTIES. Except for Permitted Liens, Borrower owns and has good title
to all of Borrower's properties free and clear of all Security interests
and has not executed any security documents or financing statements
relating to such properties. All of Borrower's properties are titled in
Borrower's legal name, and Borrower has not used, or filed a financing
statement under, any other name for at least the last five (5) years.
<PAGE>
06-08-1999 LOAN AGREEMENT PAGE 4
(CONTINUED)
================================================================================
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous
substance," "disposal," "release," and "threatened release," as used in
this Agreement, shall have the same meanings as set forth in the
"CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et seq., the Resource Conservation and Recovery Act, 42
U.S.C. Section 6901, et seq., Chapters 8.5 through 7.7 of Division 20 of
the California Health and Safety Code, Section 25100, et seq., or other
applicable state or Federal laws, rules, or regulations adopted pursuant
to any of the foregoing. Except as disclosed to and acknowledged by
Lender in writing, Borrower represents and warrants that: (a) During the
period of Borrower's ownership of the properties, there has been no use,
generation, manufacture, storage, treatment, disposal, release or
threatened release of any hazardous waste or substance by any person on,
under, about or from any of the properties. (b) Borrower has no
knowledge of, or reason to believe that there has been (i) any use,
generation, manufacture, storage, treatment, disposal, release, or
threatened release of any hazardous waste or substance on, under, about
or from the properties by any prior owners or occupants of any of the
properties, or (ii) any actual or threatened litigation or claims of
any kind by any person relating to such matters. (c) Neither Borrower
nor any tenant, contractor, agent or other authorized user of any of the
properties shall use, generate, manufacture, store, treat, dispose of,
or release any hazardous waste or substance on, under, about or from any
of the properties, and any such activity shall be conducted in
compliance with all applicable federal, state, and local laws,
regulations, and ordinances, including without limitation those laws,
regulations and ordinances described above. Borrower authorizes Lender
and its agents to enter upon the properties to make such inspections and
tests as Lender may deem appropriate to determine compliance of
the properties with this section of the Agreement. Any inspections or
tests made by Lender shall be at Borrower's expense and for Lender's
purposes only and shall not be construed to create any responsibility or
liability on the part of Lender to Borrower or to any other person. The
representations and warranties contained herein are based on Borrower's
due diligence in investigating the properties for hazardous waste and
hazardous substances. Borrower hereby (a) releases and waives any future
claims against Lender for indemnity or contribution in the event Borrower
becomes liable for cleanup or other costs under any such laws, and (b)
agrees to indemnify and hold harmless Lender against any and all claims,
losses, liabilities, damages, penalties, and expenses which Lender may
directly or indirectly sustain or suffer resulting from a breach of this
section of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release of a
hazardous waste or substance on the properties. The provisions of this
section of the Agreement, including the obligation to indemnify, shall
survive the payment of the indebtedness and the termination or
expiration of this Agreement and shall not be affected by Lender's
acquisition of any interest in any of the properties, whether by
foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation,
administrative proceeding or similar action (including those for unpaid
taxes) against Borrower is pending or threatened, and no other event has
occurred which may materially adversely affect Borrower's financial
condition or properties, other than litigation, claims, or other events,
if any, that have been disclosed to and acknowledged by Lender in
writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports
of Borrower that are or were required to be filed, have been filed, and
all taxes, assessments and other governmental charges have been paid in
full, except those presently being or to be contested by Borrower in
good faith in the ordinary course of business and for which adequate
reserves have been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in
writing, Borrower has not entered into or granted any Security
Agreements, or permitted the filing or attachment of any Security
Interests on or affecting any of the Collateral directly or indirectly
securing repayment of Borrower's Loan and Note, that would be prior or
that may in any way be superior to Lender's Security Interests and
rights in and to such Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note
and all of the Related Documents are binding upon Borrower as well as
upon Borrower's successors, representatives and assigns, and are legally
enforceable in accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable
Event nor Prohibited Transaction (as defined in ERISA) has occurred with
respect to any such plan, (ii) Borrower has not withdrawn from any such
plan or initiated steps to do so, (iii) no steps have been taken to
terminate any such plan, and (iv) there are no unfunded liabilities
other than those previously disclosed to Lender in writing.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of
business, or Borrower's Chief executive office, if Borrower has more
than one place of business, is located at 10070 Carroll Canyon Road,
San Diego, CA 92131. Unless Borrower has designated otherwise in writing
this location is also the office or offices where Borrower keeps its
records concerning the Collateral.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection
with this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender
will be true and accurate in every material respect on the date as of
which such information is dated or certified; and none of such
information is or will be incomplete by omitting to state any material
fact necessary to make such information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and
agrees that Lender, without independent investigation, is relying upon
the above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations
and warranties shall be continuing in nature and shall remain in full
force and effect until such time as Borrower's indebtedness shall be
paid in full, or until this Agreement shall be terminated in the manner
provided above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will;
LITIGATION. Promptly inform Lender in writing of (a) all material
adverse changes in Borrower's financial condition, and (b) all existing
and a threatened litigation, claims, investigations, administrative
proceedings or similar actions affecting Borrower or any Guarantor which
could materially affect the financial condition of Borrower or the
financial condition of any Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis
and permit Lender to examine and audit Borrower's books and records at
all reasonable times.
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in
no event later than one hundred twenty (120) days after the end of each
fiscal year, Borrower's balance sheet and income statement for the year
ended, audited by a certified public accountant satisfactory to Lender
and, as soon as available, but in no event later than sixty (60) days
after the end of each month, Borrower's balance sheet and profit and
loss statement for the period ended, prepared and certified as correct
to the best knowledge and belief by Borrower's chief financial officer
or other officer or person acceptable to Lender. All financial reports
required to be provided under this Agreement shall be prepared in
accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower as being true and correct.
ADDITIONAL INFORMATION. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payable inventory schedules, budgets, forecasts, tax returns, and other
reports with respect to Borrower's financial condition and business
operations as Lender may request from time to time.
FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and
ratios:
TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not
less than $2,500,000.00.
<PAGE>
06-08-1999 LOAN AGREEMENT PAGE 5
(CONTINUED)
================================================================================
NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible
Net Worth of less than 0.50 to 1.00.
WORKING CAPITAL. Maintain Working Capital in excess of
$1,500,000.00.
CURRENT RATIO. Maintain a ratio of Current Assets to Current
Liabilities in excess of 3.00 to 1.00. Except as provided above,
all computations made to determine compliance with the requirements
contained in this paragraph shall be made in accordance with
generally accepted accounting principles, applied on a consistent
basis, and certified by Borrower as being true and correct.
INSURANCE. Maintain fire and other risk insurance, public
liability insurance, and such other insurance as Lender may require
with respect to Borrower's properties and operations, in form,
amounts, coverages and with insurance companies reasonably
acceptable to Lender. Borrower, upon request of Lender, will
deliver to Lender from time to time the policies or certificates of
insurance in form satisfactory to Lender, including stipulations
that coverages will not be cancelled or diminished without at least
ten (10) days' prior written notice to Lender. Each insurance
policy also shall include an endorsement providing that coverage in
favor of Lender will not be impaired in any way by any act,
omission or default of Borrower or any other person. In connection
with all policies covering assets in which Lender holds or is
offered a security interest for the Loans, Borrower will provide
Lender with such loss payable or other endorsements as Lender may
require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the
policy; (d) the properties insured; (e) the then current property values
on the basis of which insurance has been obtained, and the manner of
determining those values; and (f) the expiration date of the policy. In
addition, upon request of Lender (however not more often than annually).
Borrower will have an independent appraiser satisfactory to Lender
determine, as applicable, the actual cash value or replacement cost of
any Collateral. The cost of such appraisal shall be paid by Borrower.
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all
assessments, taxes, governmental charges, levies and liens, of every
kind and nature, imposed upon Borrower or its properties, income, or
profits, prior to the date on which penalties would attach, and all
lawful claims that, if unpaid, might become a lien or charge upon any of
Borrower's properties, income, or profits. Provided however, Borrower
will not be required to pay and discharge any such assessment, tax,
charge, levy, lien or claim so long as (a) the legality of the same
shall be contested in good faith by appropriate proceedings, and (b)
Borrower shall have established on its books adequate reserves with
respect to such contested assessment, tax, charge, levy, lien or claim
in accordance with generally accepted accounting practices. Borrower,
upon demand on Lender, will furnish to Lender evidence of payment of
the assessments, taxes, charges, levies, liens and claims and will
authorize the appropriate governmental official to deliver to Lender at
any time a written statement of any assessments, taxes, charges, levies,
liens and claims against Borrower's properties, income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and
provisions set forth in this Agreement and in the Related Documents in a
timely manner, and promptly notify Lender if Borrower learns of the
occurrence of any event which constitutes an Event of Default under this
Agreement or under any of the Related Documents.
OPERATIONS. Maintain executive and management personnel with
substantially the same qualifications and experience as the present
executive and management personnel; provide written notice to Lender of
any change in executive and management personnel; conduct its business
affairs in a reasonable and prudent manner and in compliance with all
applicable federal, state and municipal laws, ordinances, rules and
regulations respecting its properties, charters, businesses and
operations, including without limitation, compliance with the Americans
With Disabilities Act and with all minimum funding standards and other
requirements of ERISA and other laws applicable to Borrower's employee
benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable
time to inspect any and all Collateral for the Loan or Loans and
Borrower's other properties and to examine or audit Borrower's books,
accounts, and records and to make copies and memoranda of Borrower's
books, accounts, and records. If Borrower now or at any time hereafter
maintains any records (including without limitation computer generated
records and computer software programs for the generation of such
records) in the possession of a third party, Borrower, upon request of
Lender, shall notify such party to permit Lender free access to such
records at all reasonable times and to provide Lender with copies of any
records it may request, all at Borrower's expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide
Lender at least annually and at the time of each disbursement of Loan
proceeds with a certificate executed by Borrower's chief financial
officer, or other officer or person acceptable to Lender, certifying
that the representations and warranties set forth in this Agreement are
true and correct as of the date of the certificate and further
certifying that, as of the date of the certificate, no Event of Default
exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all
respects with all environmental protection federal, state and local
laws, statutes, regulations and ordinances; not cause or permit to exist,
as a result of an intentional or unintentional action or omission on its
part or on the part of any third party, on property owned and/or
occupied by Borrower, any environmental activity where damage may result
to the environment, unless such environmental activity is pursuant to and
in compliance with the conditions of a permit issued by the appropriate
federal, state or local governmental authorities; shall furnish to
Lender promptly and in any event within thirty (30) days after receipt
thereof a copy of any notice, summons, lien, citation, directive, letter
or other communication from any governmental agency or instrumentality
concerning any intentional or unintentional action or omission on
Borrower's part in connection with any environmental activity whether or
not there is damage to the environment and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such
promissory notes, mortgages, deeds of trust, security agreements,
financing statements, instruments, documents and other agreements as
Lender or its attorneys may reasonably request to evidence and secure
the Loans and to perfect all Security interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent
of Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the
normal course of business and indebtedness to Lender contemplated by
this Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) except as allowed as a Permitted Lien,
sell transfer, mortgage, assign, pledge, lease, grant a security
interest in, or encumber any of Borrower's assets, or (c) sell with
recourse any of Borrower's accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently
engaged, (b) cease operations, liquidate, merge, transfer, acquire or
consolidate with any other entity, change ownership, change its name,
dissolve or transfer or sell Collateral out of the ordinary course of
business, (c) pay any dividends on Borrower's stock (other than
dividends payable in its stock) provided, however that notwithstanding
the foregoing, but only so long as no Event of Default has occurred and
is continuing or would result from the payment of dividends, if Borrower
is a "Subschapter S Corporation" (as defined in the Internal Revenue
Code of 1986, as amended), Borrower
<PAGE>
06-08-1999 LOAN AGREEMENT PAGE 6
(CONTINUED)
================================================================================
may pay cash dividends on its stock to its shareholders from time to
time in amounts necessary to enable the shareholders to pay income taxes
and make estimated income tax payments to satisfy their liabilities
under federal and state law which arise solely from their status as
Shareholders of a Subchapter S Corporation because of their ownership of
shares of stock of Borrower, or (d) purchase or retire any of Borrower's
outstanding shares or alter or amend Borrower's capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance
money or assets, (b) purchase, create or acquire any interest in any
other enterprise or entity, or (c) incur any obligation as surety or
guarantor other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds
if: (a) Borrower or any Guarantor is in default under the terms of this
Agreement or any of the Related Documents or any other agreement that
Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor
becomes insolvent, files a petition in bankruptcy or similar proceedings, or
is adjudged a bankrupt; (c) there occurs a material adverse change in
Borrower's financial condition, in the financial condition of any Guarantor,
or in the value of any Collateral securing any Loan; (d) any Guarantor seeks,
claims or otherwise attempts to limit, modify or revoke such Guarantor's
guaranty of the Loan or any other loan with Lender; or (e) Lender in good
faith deems itself insecure, even though no Event of Default shall have
occurred.
ADDITIONAL PROVISIONS.
Borrower will provide Lender with certified copies of State and Federal tax
returns concurrent with the actual filing.
Borrower to maintain its primary depository relationship with Lender, subject
to the Bank's applicable fees and charges.
Borrower agrees to provide Transaction Reports in a form acceptable to Lender.
Borrower agrees to provide monthly agings of accounts receivables and
accounts payable within 45 days of period end.
Accounts Receivable examinations as required by Lender from time to time and
to be paid for by Borrower.
ADDITIONAL PROVISION TO COMPLIANCE CERTIFICATE PROVISION. Lender hereby
waives the compliance certificate requirement outline in this Loan Agreement.
FINANCIAL COVENANTS.
Borrower to provide Lender with quarterly 10Q's within 90 days of period end.
Borrower agrees to provide Lender with 10K within 120 days of fiscal year end.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest
in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender
all Borrower's right, title and interest in and to, Borrower's accounts with
Lender (whether checking, savings, or some other account), including without
limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh
accounts, and all trust accounts for which the grant of a security interest
would be prohibited by law. Borrower authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all sums owing on the
indebtedness against any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of
Default under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when
due on the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or
failure of Borrower to comply with or to perform any other term,
obligation, covenant or condition contained in any other agreement
between Lender and Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor
default under any loan, extension or credit, security agreement,
purchase or sales agreement, or any other agreement, in favor of any
other creditor or person that may materially affect any of Borrower's
property or Borrower's or any Grantor's ability to repay the Loans or
perform their respective obligations under this Agreement or any of the
Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under
this Agreement or the Related Documents is false or misleading in any
material respect at the time made or furnished, or becomes false or
misleading at any time thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of
any Security Agreement to create a valid and perfected Security
Interest) at any time and for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a
receiver for any part of Borrower's property, any assignment for the
benefit of creditors, any type of creditor workout, or the commencement
of any proceeding under any bankruptcy or insolvency laws by or against
Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help
repossession or any other method, by any creditor of Borrower, any
creditor of any Grantor against any collateral securing the
indebtedness, or by any governmental agency. This includes a
garnishment, attachment, or levy on or of any of Borrower's deposit
accounts with Lender. However, this Event of Default shall not apply if
there is a good faith dispute by Borrower or Grantor, as the case may
be, as to the validity or reasonableness of the claim which is the basis
of the creditor or forfeiture proceeding, and if Borrower or Grantor
gives Lender written notice of the creditor or forfeiture proceeding and
furnishes reserves or a surety bond for the creditor or forfeiture
proceeding satisfactory to Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the indebtedness or any Guarantor
dies or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the indebtedness. Lender, at its
option, may, but shall not be required to, permit the Guarantor's estate
to assume unconditionally the obligations arising under the guaranty in
a manner satisfactory to Lender, and in doing so, cure the Event of
Default.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent
(25%) or more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or
performance of the indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHT TO CURE. If any default, other than a Default on indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been
given a notice of a similar default within the preceding twelve (12)
months, it may be cured (and no Event of Default will have occurred) if
Borrower or Grantor, as the case may be, after receiving written notice
from Lender demanding cure of such default: (a) cures the default within
fifteen (15) days; or (b) if the cure requires more than fifteen (15)
days, immediately initiates steps which Lender deems in Lender's sole
discretion to be sufficient to cure the default and thereafter continues
and completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's option,
all indebtedness immediately will become due
<PAGE>
06-08-1999 LOAN AGREEMENT PAGE 7
(CONTINUED)
================================================================================
and payable, all without notice of any kind to Borrower, except that in the
case of an Event of Default of the type described in the "insolvency"
subsection above, such acceleration shall be automatic and not optional. In
addition, Lender shall have all the rights and remedies provided in the
Related Documents or available at law, in equity, or otherwise. Except as may
be prohibited by applicable law, all of Lender's rights and remedies shall be
cumulative and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part
of this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment
to this Agreement shall be effective unless given in writing and signed
by the party or parties sought to be charged or bound by the alteration
or amendment.
APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND
ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT,
BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF
THE COURTS OF SAN DIEGO COUNTY, THE STATE OF CALIFORNIA. THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA.
CAPTION HEADINGS. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or define
the provisions of this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any
other matter relating to the Loan, and Borrower hereby waives any rights
to privacy it may have with respect to such matters. Borrower
additionally waives any and all notices of sale of participation
interests, as well as all notices of any repurchase of such
participation interests. Borrower also agrees that the purchasers of
any such participation interests will be considered as the absolute
owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the
sale of such participation interests. Borrower further waives all
rights of offset or counterclaim that it may have now or later against
Lender or against any purchaser of such a participation interest and
unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or
insolvency of any holder of any interest in the Loans. Borrower further
agrees that the purchaser of any such participation interests may
enforce its interests irrespective of any personal claims or defenses
that Borrower may have against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification
and collection of this Agreement or in connection with the Loans made
pursuant to this Agreement. Lender may pay someone else to help collect
the Loans and to enforce this Agreement, and Borrower will pay that
amount. This includes, subject to any limits under applicable law,
Lender's attorneys' fees and Lender's legal expenses, whether or not
there is a lawsuit, including attorneys' fees for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all
other sums provided by law.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise
required by law), and shall be effective when actually delivered or when
deposited with a nationally recognized overnight courier or deposited in
the United States mail, first class, postage prepaid, addressed to the
party to whom the notice is to be given at the address shown above. Any
party may change its address for notices under this Agreement by giving
formal written notice to the other parties, specifying that the purpose
of the notice is to change the party's address. To the extent permitted
by applicable law, if there is more than one Borrower, notice to any
Borrower will constitute notice to all Borrowers. For notice purposes,
Borrower will keep Lender informed at all times of Borrower's current
address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision
of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible,
any such offending provision shall be deemed to be modified to be within
the limits of enforceability or validity; however, if the offending
provision cannot be so modified, it shall be stricken and all other
provisions of this Agreement in all other respects shall remain valid
and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of
any provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower"
as used herein shall include all subsidiaries and affiliates of
Borrower. Notwithstanding the foregoing however, under no circumstances
shall this Agreement be construed to require Lender to make any Loan or
other financial accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure
to the benefit of Lender, its successors and assigns. Borrower shall
not, however, have the right to assign its rights under this Agreement
or any interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by
Borrower in this Agreement or in any certificate or other instrument
delivered by Borrower to Lender under this Agreement shall be considered
to have been relied upon by Lender and will survive the making of the
Loan and delivery to Lender of the Related Documents, regardless of any
investigation made by Lender or on Lender's behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of
this Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender.
No delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by
Lender of a provision of this Agreement shall not prejudice or constitute
a waiver of Lender's right otherwise to demand strict compliance with that
provision or any other provision of this Agreement. No prior waiver by
Lender, nor any course of dealing between Lender and Borrower, or between
Lender and any Grantor, shall constitute a waiver of any of Lender's
rights or of any obligations of Borrower or of any Grantor as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent in subsequent instances where such consent
is required, and in all cases such consent may be granted or withheld in
the sole discretion of Lender.
<PAGE>
06-08-1999 LOAN AGREEMENT PAGE 8
(CONTINUED)
================================================================================
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT,
AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF JUNE 8, 1999.
BORROWER:
MITEK SYSTEMS, INC.
BY: /s/ John Thornton
--------------------------------------
JOHN THORNTON, CHAIRMAN OF THE BOARD
LENDER:
RANCHO SANTA FE NATIONAL BANK
BY: /s/ [ILLEGIBLE]
--------------------------------------
AUTHORIZED OFFICER
================================================================================
<PAGE>
[LETTERHEAD]
DISBURSEMENT REQUEST AND AUTHORIZATION
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PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$750,000.00 06-08-1999 06-08-2000 01617850-60 410 0027 052 [ILLEGIBLE]
- -------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
BORROWER: MITEK SYSTEMS, INC. LENDER: RANCHO SANTA FE NATIONAL BANK
10070 CARROLL CANYON ROAD RANCHO SANTA FE OFFICE
SAN DIEGO, CA 92131 6110 EL TORDO
P.O. BOX 2388
RANCHO SANTA FE, CA 92067
===================================================================================================================
</TABLE>
LOAN TYPE. This is a Variable Rate (1.500% over RANCHO SANTA FE NATIONAL BANK
PRIME RATE, making an initial rate of 9.250%), Revolving Line of Credit Loan
to a Corporation for $750,000.00 due on June 8, 2000. This is a secured
renewal loan.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for (please
initial):
/ / _____ PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES OR PERSONAL INVESTMENT.
/X/ [ILLEGIBLE] BUSINESS (INCLUDING REAL ESTATE INVESTMENT).
SPECIFIC PURPOSE. The specific purpose of this loan is: 3rd annual renewal
of Line of Credit, funds to be used to supplement working capital pending
collection of Accounts Receivable.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will
be disbursed until all of Lender's conditions for making the loan have been
satisfied. Please disburse the loan proceeds of $750,000.00 as follows:
<TABLE>
<S> <C>
AMOUNT PAID TO OTHERS ON BORROWER'S BEHALF: $750,000.00
$260,000.00 UNDISBURSED
--------------
NOTE PRINCIPAL: $750,000.00
</TABLE>
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
<TABLE>
<S> <C>
PREPAID FINANCE CHARGES PAID IN CASH: $1,875.00
$1,875.00 POINTS
--------------
TOTAL CHARGES PAID IN CASH: $1,875.00
</TABLE>
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT
AND THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL
CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO
LENDER. THIS AUTHORIZATION IS DATED JUNE 8, 1999.
BORROWER:
MITEK SYSTEMS, INC.
BY: /s/ John Thornton
--------------------------------------
JOHN THORNTON, CHAIRMAN OF THE BOARD
================================================================================
<PAGE>
[LETTERHEAD]
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$750,000.00 06-08-1999 06-08-2000 01617850-60 410 0027 052 [ILLEGIBLE]
- -------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
BORROWER: MITEK SYSTEMS, INC. LENDER: RANCHO SANTA FE NATIONAL BANK
10070 CARROLL CANYON ROAD RANCHO SANTA FE OFFICE
SAN DIEGO, CA 92131 6110 EL TORDO
P.O. BOX 2388
RANCHO SANTA FE, CA 92067
===================================================================================================================
</TABLE>
THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN MITEK SYSTEMS,
INC. (REFERRED TO BELOW AS "GRANTOR"); AND RANCHO SANTA FE NATIONAL BANK
(REFERRED TO BELOW AS "LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS
TO LENDER A SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS
AND AGREES THAT LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH
RESPECT TO THE COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY
HAVE BY LAW.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
COLLATERAL. The word "Collateral" means the following described property of
Grantor, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT AND GENERAL
INTANGIBLES, TOGETHER WITH THE FOLLOWING SPECIFICALLY DESCRIBED
PROPERTY: SPECIFIC COLLATERAL LISTED ON EXHIBIT "A" MADE APART HEREOF
CONSISTING OF ONE (1) PAGE
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and substitutions
for any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral
section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of
Grantor's right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or
data on electronic media.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
GRANTOR. The word "Grantor" means Mitek Systems, Inc., its successors and
assigns.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in connection
with the Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means the Indebtedness evidenced by
the Note, including all principal and interest, together with all other
Indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents.
LENDER. The word "Lender" means RANCHO SANTA FE NATIONAL BANK, its
successors and assigns.
NOTE. The word "Note" means the note or credit agreement dated June 8,
1999, in the principal amount of $750,000.00 from Mitek Systems, Inc. to
Lender, together with all renewals of, extensions of, modifications of,
refinancings of, consolidations of and substitutions for the note or credit
agreement.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual security
interest in and hereby assigns, conveys, delivers, pledges, and transfers all
of Grantor's right, title and interest in and to Grantor's accounts with
Lender (whether checking, savings, or some other account), including all
accounts held jointly with someone else and all accounts Grantor may open in
the future, excluding, however, all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by
law. Grantor authorizes Lender, to the extend permitted by applicable law,
to charge or setoff all Indebtedness against any and all such accounts.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Grantor will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Grantor hereby appoints Lender as its
irrevocable attorney-in-fact for the purpose of executing any
<PAGE>
06-08-1999 COMMERCIAL SECURITY AGREEMENT PAGE 2
(CONTINUED)
================================================================================
documents necessary to perfect or to continue the security interest granted
in this Agreement. Lender may at any time, and without further
authorization from Grantor, file a carbon, photographic or other
reproduction of any financing statement or of this Agreement for use as a
financing statement. Grantor will reimburse Lender for all expenses for
the perfection and the continuation of the perfection of Lender's security
interest in the Collateral. Grantor promptly will notify Lender before any
change in Grantor's name including any change to the assumed business names
of Grantor. THIS IS A CONTINUING SECURITY AGREEMENT AND WILL CONTINUE IN
EFFECT EVEN THOUGH ALL OR ANY PART OF THE INDEBTEDNESS IS PAID IN FULL AND
EVEN THOUGH FOR A PERIOD OF TIME GRANTOR MAY NOT BE INDEBTED TO LENDER.
NO VIOLATION. The execution and delivery of this Agreement will not
violate any law or agreement governing Grantor or to which Grantor is a
party, and its certificate or articles of incorporation and bylaws do not
prohibit any term or condition of this Agreement.
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear
to be on the Collateral. At the time any account becomes subject to a
security interest in favor of Lender, the account shall be a good and valid
account representing an undisputed, bona fide indebtedness incurred by the
account debtor, for merchandise held subject to delivery instructions or
theretofore shipped or delivered pursuant to a contract of sale, or for
services theretofore performed by Grantor with or for the account debtor;
there shall be no setoffs or counterclaims against any such account; and no
agreement under which any deductions or discounts may be claimed shall have
been made with the account debtor except those disclosed to Lender in
writing.
LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and (d)
all other properties where Collateral is or may be located. Except in the
ordinary course of its business, Grantor shall not remove the Collateral
from its existing locations without the prior written consent of Lender.
REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent
the Collateral consists of intangible property such as accounts, the
records concerning the Collateral) at Grantor's address shown above, or at
such other locations as are acceptable to Lender. Except in the ordinary
course of its business, including the sales of inventory, Grantor shall not
remove the Collateral from its existing locations without the prior written
consent of Lender. To the extent that the Collateral consists of vehicles,
or other titled property, Grantor shall not take or permit any action which
would require application for certificates of title for the vehicles
outside the State of California, without the prior written consent of
Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to
buyers who qualify as a buyer in the ordinary course of business. A sale
in the ordinary course of Grantor's business does not include a transfer in
partial or total satisfaction of a debt or any bulk sale. Grantor shall
not pledge, mortgage, encumber or otherwise permit the Collateral to be
subject to any lien, security interest, encumbrance, or charge, other than
the security interest provided for in this Agreement, without the prior
written consent of Lender. This includes security interests even if junior
in right to the security interests granted under this Agreement. Unless
waived by Lender, all proceeds from any disposition of the Collateral (for
whatever reason) shall be held in trust for Lender and shall not be
commingled with any other funds; provided however, this requirement shall
not constitute consent by Lender to any sale or other disposition. Upon
receipt, Grantor shall immediately deliver any such proceeds to Lender.
TITLE. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.
COLLATERAL SCHEDULES AND LOCATIONS. As often as Lender shall require, and
insofar as the Collateral consists of accounts and general intangibles,
Grantor shall deliver to Lender schedules of such Collateral, including
such information as Lender may require, including without limitation names
and addresses of account debtors and agings of accounts and general
intangibles. Insofar as the Collateral consists of inventory and
equipment, Grantor shall deliver to Lender, as often as Lender shall
require, such lists, descriptions, and designations of such Collateral as
Lender may require to identify the nature, extent, and location of such
Collateral. Such information shall be submitted for Grantor and each of
its subsidiaries or related companies.
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall
have the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of
all cases involving the return, rejection, repossession, loss or damage of
or to any Collateral; of any request for credit or adjustment or of any
other dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral.
TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, attorneys' fees or other charges that could accrue as
a result of foreclosure or sale of the Collateral. In any contest Grantor
shall defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender as an
additional obligee under any surety bond furnished in the contest
proceedings.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly
with all laws, ordinances, rules and regulations of all governmental
authorities, now or hereafter in effect, applicable to the ownership,
production, disposition, or use of the Collateral. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as Lender's
interest in the Collateral, in Lender's opinion, is not jeopardized.
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien
on the Collateral, used for the generation, manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund
Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"),
the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et
seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901,
et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health
and Safety Code, Section 25100, et seq., or other applicable state or
Federal laws, rules, or regulations adopted pursuant to any of the
foregoing. The terms "hazardous waste" and "hazardous substance" shall
also include, without limitation, petroleum and petroleum by-products or
any fraction thereof and asbestos. The representations
<PAGE>
06-08-1999 COMMERCIAL SECURITY AGREEMENT PAGE 3
(CONTINUED)
================================================================================
and warranties contained herein are based on Grantor's due diligence in
investigating the Collateral for hazardous wastes and substances. Grantor
hereby (a) releases and waives any future claims against Lender for
indemnity or contribution in the event Grantor becomes liable for cleanup
or other costs under any such laws, and (b) agrees to indemnify and hold
harmless Lender against any and all claims and losses resulting from a
breach of this provision of this Agreement. This obligation to indemnify
shall survive the payment of the Indebtedness and the satisfaction of this
Agreement.
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and
liability coverage together with such other insurance as Lender may require
with respect to the Collateral, in form, amounts, coverages and basis
reasonably acceptable to Lender and issued by a company or companies
reasonably acceptable to Lender. Grantor, upon request of Lender, will
deliver to Lender from time to time the policies or certificates of
insurance in form satisfactory to Lender, including stipulations that
coverages will not be cancelled or diminished without at least ten (10)
days' prior written notice to Lender and not including any disclaimer of
the Insurer's liability for failure to give such a notice. Each
insurance policy also shall include an endorsement providing that
coverage in favor of Lender will not be impaired in any way by any act,
omission or default of Grantor or any other person. In connection with
all policies covering assets in which Lender holds or is offered a
security interest, Grantor will provide Lender with such loss payable or
other endorsements as Lender may require. If Grantor at any time fails
to obtain or maintain any insurance as required under this Agreement,
Lender may (but shall not be obligated to) obtain such insurance as
Lender deems appropriate, including if it so chooses "single interest
insurance," which will cover only Lender's interest in the Collateral.
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration.
If Lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient amount of the proceeds to pay all of the
Indebtedness, and shall pay the balance to Grantor. Any proceeds which
have not been disbursed within six (6) months after their receipt and which
Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the Indebtedness.
INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be created
by monthly payments from Grantor of a sum estimated by Lender to be
sufficient to produce, at least fifteen (15) days before the premium due
date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shall
constitute a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance
premiums required to be paid by Grantor. The responsibility for the
payment of premiums shall remain Grantor's sole responsibility.
INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to
Lender reports on each existing policy of insurance showing such
information as Lender may reasonably request including the following:
(a) the name of the insurer; (b) the risks insured; (c) the amount of
the policy; (d) the property insured; (e) the then current value on the
basis of which insurance has been obtained and the manner of determining
that value; and (f) the expiration date of the policy. In addition,
Grantor shall upon request by Lender (however not more often than
annually) have an independent appraiser satisfactory to Lender
determine, as applicable, the cash value or replacement cost of the
Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
Agreement or the Related Documents, provided that Grantor's right to possession
and beneficial use shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security interest in
such Collateral. Until otherwise notified by Lender, Grantor may collect any of
the Collateral consisting of accounts. At any time and even though no Event of
Default exists, Lender may exercise its rights to collect the accounts and to
notify account debtors to make payments directly to Lender for application to
the Indebtedness. If Lender at any time has possession of any Collateral,
whether before or after an Event of Default, Lender shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral if
Lender takes such action for that purpose as Grantor shall request or as Lender,
in Lender's sole discretion, shall deem appropriate under the circumstances, but
failure to honor any request by Grantor shall not of itself be deemed to be a
failure to exercise reasonable care. Lender shall not be required to take any
steps necessary to preserve any rights in the Collateral against prior parties,
nor to protect, preserve or maintain any security interest given to secure the
Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due
on the Indebtedness.
OTHER DEFAULTS. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other agreement between Lender and
Grantor.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
collateral documents to create a valid and perfected security interest or
lien) at any time and for any reason.
INSOLVENCY. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Grantor.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral
<PAGE>
06-08-1999 COMMERCIAL SECURITY AGREEMENT PAGE 4
(CONTINUED)
================================================================================
security the Indebtedness. This includes a garnishment of any of Grantor's
deposit accounts with Lender. However, this Event of Default shall not
apply if there is a good faith dispute by Grantor as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount
determined by Lender, in its sole discretion, as being an adequate reserve
or bond for the dispute.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or such Guarantor dies
or becomes incompetent. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in manner satisfactory to Lender,
and, in doing so, cure the Event of Default.
ADVERSE CHANGE. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Grantor has not been given a prior notice of a breach of the
same provision of this Agreement, it may be cured (and no Event of Default
will have occurred) if Grantor, after Lender sends written notice demanding
cure of such default, (a) cures the default within fifteen (15) days; or
(b), if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the California Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all
or any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If
the Collateral contains other goods not covered by this Agreement at the
time of repossession, Grantor agrees Lender may take such other goods,
provided that Lender makes reasonable efforts to return them to Grantor
after repossession.
SELL THE COLLATERAL. Lender shall have full power to sell, lease,
transfer, or otherwise deal with the Collateral or proceeds thereof in its
own name or that of Grantor. Lender may sell the Collateral at public
auction or private sale. Unless the Collateral threatens to decline
speedily in value or is of a type customarily sold on a recognized market,
Lender will give Grantor reasonable notice of the time after which any
private sale or any other intended disposition of the Collateral is to be
made. The requirements of reasonable notice shall be met if such notice is
given at least ten (10) days, or such lesser time as required by state law,
before the time of the sale or disposition. All expenses relating to the
disposition of the Collateral, including without limitation the expenses of
retaking, holding, insuring, preparing for sale and selling the Collateral,
shall become a part of the Indebtedness secured by this Agreement and
shall be payable on demand, with interest at the Note rate from date of
expenditure until repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender
shall have the following rights and remedies regarding the appointment
of a receiver: (a) Lender may have a receiver appointed as a matter of
right, (b) the receiver may be an employee of Lender and may serve
without bond, and (c) all fees of the receiver and his or her attorney
shall become part of the Indebtedness secured by this Agreement and
shall be payable on demand, with interest at the Note rate from date of
expenditure until repaid.
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in
such order of preference as Lender may determine. Insofar as the Collateral
consists of accounts, general intangibles, insurance policies,
instruments, chattel paper, choses in action, or similar property, Lender
may demand, collect, receipt for, settle, compromise, adjust, sue for,
foreclose, or realize on the Collateral as Lender may determine, whether or
not Indebtedness or Collateral is then due. For these purposes, Lender
may, on behalf of and in the name of Grantor, receive, open and dispose of
mail addressed to Grantor; change any address to which mail and payments
are to be sent; and endorse notes, checks, drafts, money orders, documents
of title, instruments and items pertaining to payment, shipment, or
storage of any Collateral. To facilitate collection, Lender may notify
account debtors and obligors on any Collateral to make payments directly to
Lender.
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining
on the Indebtedness due to Lender after application of all amounts received
from the exercise of the rights provided in this Agreement. Grantor shall
be liable for a deficiency even if the transaction described in this
subsection is a sale of accounts or chattel paper.
OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies
of a secured creditor under the provisions of the Uniform Commercial Code,
as may be amended from time to time. In addition, Lender shall have and
may exercise any or all other rights and remedies it may have available at
law, in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether
evidenced by this Agreement or the Related Documents or by any other
writing, shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude
pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Grantor under this Agreement, after
Grantor's failure to perform, shall not affect Lender's right to declare a
default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted
by Lender in the State of California: If there is a lawsuit, Grantor agrees
upon Lender's request to submit to the jurisdiction of the courts of the
State of California. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone else to help enforce this Agreement, and Grantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there is
a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Grantor also shall pay all court costs
<PAGE>
06-08-1999 COMMERCIAL SECURITY AGREEMENT PAGE 5
(CONTINUED)
================================================================================
and such additional fees as may be directed by the court.
CAPTION HEADINGS. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or define
the provisions of this Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise
required by law), and shall be effective when actually delivered or when
deposited with a nationally recognized overnight courier or deposited in
the United States mail, first class, postage prepaid, addressed to the
party to whom the notice is to be given at the address shown above. Any
party may change its address or notices under this Agreement by giving
formal written notice to the other parties, specifying that the purpose
of the notice is to change the party's address. To the extent permitted
by applicable law, if there is more than one Grantor, notice to any
Grantor will constitute notice to all Grantors. For notice purposes,
Grantor will keep Lender informed at all times of Grantor's current
address(es).
POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and
lawful attorney-in-fact, irrevocably, with full power of substitution to
do the following: (a) to demand, collect, receive, receipt for, sue and
recover all sums of money or other property which may now or hereafter
become due, owing or payable from the Collateral; (b) to execute, sign
and endorse any and all claims, instruments, receipts, checks, drafts
or warrants issued in payment for the Collateral; (c) to settle or
compromise any and all claims arising under the Collateral, and, in the
place and stead of Grantor, to execute and deliver its release and
settlement for the claim; and (d) to file any claim or claims or to take
any action or institute or take part in any proceedings, either in its
own name or in the name of Grantor, or otherwise, which in the discretion
of Lender may seem to be necessary or advisable. This power is given as
security for the indebtedness, and the authority hereby conferred is and
shall be irrevocable and shall remain in full force and effect until
renounced by Lender.
PREFERENCE PAYMENTS. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
SEVERABILITY. If a court of competent jurisdiction finds any provision
of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible,
any such offending provision shall be deemed to be modified to be within
the limits of enforceability or validity; however, if the offending
provision cannot be so modified, it shall be stricken and all other
provisions of this Agreement in all other respects shall remain valid
and enforceable.
SUCCESSOR INTERESTS. Subject to the limitations set forth above on
transfer of the Collateral, this Agreement shall be binding upon and
inure to the benefit of the parties, their successors and assigns.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender.
No delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by
Lender of a provision of this Agreement shall not prejudice or
constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this Agreement.
No prior waiver by Lender, nor any course of dealing between Lender and
Grantor, shall constitute a waiver of any of Lender's rights or of any of
Grantor's obligations as to any future transactions. Whenever the consent
of Lender is required under this Agreement, the granting of such consent
by Lender in any instance shall not constitute continuing consent to
subsequent instances where such consent is required and in all cases such
consent may be granted or withheld in the sole discretion of Lender.
WAIVER OF CO-OBLIGOR'S RIGHTS. If more than one person is obligated
for the indebtedness, Borrower irrevocably waives, disclaims and
relinquishes all claims against such other person which Borrower has or
would otherwise have by virtue of payment of the indebtedness or any
part thereof, specifically including but not limited to all rights of
indemnity, contribution or exoneration.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL
SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS
DATED JUNE 8, 1999.
GRANTOR:
Mitek Systems, Inc.,
By: /s/ John Thornton
------------------------------------
JOHN THORNTON, CHAIRMAN OF THE BOARD
================================================================================
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$750,000.00 06-08-1999 06-08-2000 01617850-60 410 0027 052 [ILLEGIBLE]
- -------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
BORROWER: MITEK SYSTEMS, INC. LENDER: RANCHO SANTA FE NATIONAL BANK
10070 CARROLL CANYON ROAD RANCHO SANTA FE OFFICE
SAN DIEGO, CA 92131 6110 EL TORDO
P.O. BOX 2388
RANCHO SANTA FE, CA 92067
===================================================================================================================
</TABLE>
INSURANCE REQUIREMENTS. Mitek Systems, Inc. ("Grantor") understands that
insurance coverage is required in connection with the extending of a loan or
the providing of other financial accommodations to Grantor by Lender. These
requirements are set forth in the security documents. The following minimum
insurance coverages must be provided on the following described collateral
(the "Collateral"):
COLLATERAL: All inventory and Equipment, including Specific collateral listed
on Exhibit "A" made apart hereof consisting of one (1) page.
TYPE. All risks, including fire, theft and liability.
AMOUNT. Full insurable value.
BASIS. Replacement value.
ENDORSEMENTS. Lender's loss payable clause with stipulation that
coverage will not be cancelled or diminished without a minimum of
ten (10) days' prior written notice to Lender.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance company
Grantor may choose that is reasonably acceptable to Lender. Grantor
understands that credit may not be denied solely because insurance was not
purchased through Lender.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Lender, ten (10)
days from the date of this Agreement, evidence of the required insurance as
provided above, with an effective date of June 8, 1999, or earlier. Grantor
acknowledges and agrees that if Grantor fails to provide any required
insurance or fails to continue such insurance in force, Lender may do so at
Grantor's expenses as provided in the applicable security document. The cost
of any such insurance, at the option of Lender, shall be payable on demand or
shall be added to the indebtedness as provided in the security document.
GRANTOR ACKNOWLEDGES THAT IF LENDER SO PURCHASES ANY SUCH INSURANCE, THE
INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE TO THE
COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN THE
COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE
ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE
REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral, Grantor
authorizes Lender to provide to any person (including any insurance agent or
company) all information Lender deems appropriate, whether regarding the
Collateral, the loan or other financial accomodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO
PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JUNE 8,
1999.
GRANTOR:
Mitek Systems, Inc.
By: /s/ John Thornton
------------------------------------
JOHN THORNTON, CHAIRMAN OF THE BOARD
==============================================================================
FOR LENDER USE ONLY
INSURANCE VERIFICATION
DATE:_________________________
AGENT'S NAME:
ADDRESS:
INSURANCE COMPANY:
POLICY NUMBER:_________________________________________________
EFFECTIVE DATES:_______________________________________________
COMMENTS:______________________________________________________
==============================================================================
Lic. No. 0503692
[LOGO]
-------- Barry K. Moore
PRESIDENT
1331 Morena Boulevard - San Diego, CA 92110-1580
P.O. Box 85532 - San Diego, CA 92186-5532
(619)275-6191 - FAX: (619)275-6530
<PAGE>
[LETTERHEAD]
PROMISSORY NOTE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$250,000.00 06-08-1999 06-08-2000 01617850-61 410 0027 052 [Illegible]
- -------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
BORROWER: MITEK SYSTEMS, INC. LENDER: RANCHO SANTA FE NATIONAL BANK
10070 CARROLL CANYON ROAD RANCHO SANTA FE OFFICE
SAN DIEGO, CA 92131 6110 EL TORDO
P.O. BOX 2388
RANCHO SANTA FE, CA 92067
</TABLE>
<TABLE>
===================================================================================================================
<S> <C> <C>
PRINCIPAL AMOUNT: $250,000.00 INITIAL RATE: 9.250% DATE OF NOTE: JUNE 8, 1999
</TABLE>
PROMISE TO PAY. Mitek Systems, Inc. ("Borrower") promises to pay to RANCHO
SANTA FE NATIONAL BANK ("Lender"), or order, in lawful money of the United
States of America, the principal amount of Two Hundred Fifty Thousand &
00/100 Dollars ($250,000.00) or so much as may be outstanding, together with
interest on the unpaid outstanding principal balance of each advance.
Interest shall be calculated from the date of each advance until repayment
of each advance.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in
one payment of all outstanding principal plus all accrued unpaid interest on
June 8, 2000. In addition, Borrower will pay regular monthly payments of
accrued unpaid interest beginning July 8, 1999, and all subsequent interest
payments are due on the same day of each month after that. The annual
interest rate for this Note is computed on a 365/360 basis; that is, by
applying the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual
number of days the principal balance is outstanding. Borrower will pay Lender
at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an index which is Lender's Prime Rate
(the "Index"). This is the rate Lender charges, or would charge, on 90-day
unsecured loans to the most creditworthy corporate customers. This rate may
or may not be the lowest rate available from Lender at any given time. Lender
will tell Borrower the current Index rate upon Borrower's request. Borrower
understands that Lender may make loans based on other rates as well. The
interest rate change will not occur more often than each day. The Index
currently is 7.750%. The interest rate to be applied to the unpaid principal
balance of this Note will be at a rate of 1,500 percentage points over the
index, resulting in an initial rate of 9.250%. NOTICE: Under no circumstances
will the interest rate on this Note be more than the maximum rate allowed by
applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. In any event, even
upon full prepayment of this Note, Borrower understands that Lender is
entitled to a minimum interest charge of $75.00. Other than Borrower's
obligation to pay any minimum interest charge, Borrower may pay without
penalty all or a portion of the amount owed earlier than it is due. Early
payments will not, unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments of accrued unpaid
interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $10.00, whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Borrower defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or any other
agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or borrower's ability to repay this Note or
perform Borrower's obligations under this Note or any of the Related Documents.
(d) Any representation or statement made or furnished to Lender by Borrower
or on Borrower's behalf is false or misleading in any material respect either
now or at the time made or furnished. (e) Borrower becomes insolvent, a
receiver is appointed for any part of Borrower's property, Borrower makes an
assignment for the benefit of creditors, or any proceeding is commenced
either by Borrower or against Borrower under any bankruptcy or insolvency
laws. (f) Any creditor tries to take any of Borrower's property on or in
which Lender has a lien or security interest. This includes a garnishment of
any of Borrower's accounts with Lender. (g) Any guarantor dies or any of the
other events described in this default section occurs with respect to any
guarantor of this Note. (h) A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or performance
of the Indebtedness is impaired. (i) Lender in good faith deems itself
insecure.
If any default, other than a default in payment, is curable and if Borrower
has not been given a notice of a breach of the same provision of this Note
within the preceding twelve (12) months, it may be cured (and no event of
default will have occurred) if Borrower, after receiving written notice from
Lender demanding cure of such default; (a) cures the default within fifteen
(15) days; or (b) if the cure requires more than fifteen (15) days,
immediately initiates steps which Lender deems in Lender's sole discretion to
be sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to
pay all amounts declared due pursuant to this section, including failure to
pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, do one or both of the following: (a) increase the variable
interest rate on this Note to 6.500 percentage points over the index, and (b)
add any unpaid accrued interest to principal and such sum will bear interest
therefrom until paid at the rate provided in this Note (including any
increased rate). Lender may hire or pay someone else to help collect this Note
if Borrower does not pay. Borrower also will pay Lender that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses whether or not there is a lawsuit, including
attorneys' fees and legal expenses for bankruptcy proceedings (including
efforts to modify or vacate any automatic stay or injunction), appeals, and
any anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law. THIS NOTE HAS
BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA.
IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE
JURISDICTION OF THE COURTS OF SAN DIEGO COUNTY, THE STATE OF CALIFORNIA. THIS
NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA.
<PAGE>
06-08-1999 PROMISSORY NOTE PAGE 2
(CONTINUED)
================================================================================
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with
Lender (whether checking, savings, or some other account), including without
limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh
accounts, and all trust accounts for which the grant of a security interest
would be prohibited by law. Borrower authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all sums owing on this Note
against any and all such accounts.
LINE OF CREDIT. This Note evidences a straight line of credit. Once the
total amount of principal has been advanced, Borrower is not entitled to
further loan advances. Advances under this Note may be requested either
orally or in writing by Borrower or by an authorized person. Lender may, but
need not, require that all oral requests be confirmed in writing. All
communications, instructions, or directions by telephone or otherwise to
Lender are to be directed to Lender's office shown above. The following party
or parties are authorized to request advances under the line of credit until
Lender receives from Borrower at Lender's address shown above written notice
of revocation of their authority: JOHN THORNTON, CHAIRMAN OF THE BOARD; AND/OR
ELLIOT WASSARMAN, PRESIDENT/CHIEF EXECUTIVE OFFICER. Borrower agrees to be
liable for all sums either: (a) advanced in accordance with the instructions
of an authorized person or (b) credited to any of Borrower's accounts with
Lender. The unpaid principal balance owing on this Note at any time may be
evidenced by endorsements on this Note or by Lender's internal records,
including daily computer print-outs. Lender will have no obligation to
advance funds under this Note if: (a) Borrower or any guarantor is in default
under the terms of this Note or any agreement that Borrower or any guarantor
has with Lender, including any agreement made in connection with the signing
of this Note; (b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan
with Lender; (d) Borrower has applied funds provided pursuant to this Note
for purposes other than those authorized by Lender; or (e) Lender in good
faith deems itself insecure under this Note or any other agreement between
Lender and Borrower.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo
enforcing any of its rights or remedies under this Note without losing them.
Borrower and any other person who signs, guarantees or endorses this Note, to
the extent allowed by law, waive any applicable statute of limitations,
presentment, demand for payment, protest and notice of dishonor. Upon any
change in the terms of this Note, and unless otherwise expressly stated in
writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length
of time) this loan, or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the
party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER
AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY
OF THE NOTE.
BORROWER:
MITEK SYSTEMS, INC.
By: /s/ John Thornton
------------------------------------
JOHN THORNTON, CHAIRMAN OF THE BOARD
================================================================================
<PAGE>
[LETTERHEAD]
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$250,000.00 06-08-1999 06-08-2000 01617850-61 410 0027 052 [Illegible]
- -------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
BORROWER: MITEK SYSTEMS, INC. LENDER: RANCHO SANTA FE NATIONAL BANK
10070 CARROLL CANYON ROAD RANCHO SANTA FE OFFICE
SAN DIEGO, CA 92131 6110 EL TORDO
P.O. BOX 2388
RANCHO SANTA FE, CA 92067
===================================================================================================================
</TABLE>
THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN MITEK SYSTEMS,
INC. (REFERRED TO BELOW AS "GRANTOR"); AND RANCHO SANTA FE NATIONAL BANK
(REFERRED TO BELOW AS "LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS
TO LENDER A SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS
AND AGREES THAT LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH
RESPECT TO THE COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY
HAVE BY LAW.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Commercial Security
Agreement, as this Commercial Security Agreement may be amended or
modified from time to time, together with all exhibits and schedules
attached to this Commercial Security Agreement from time to time.
COLLATERAL. The word "Collateral" means the following described property
of Grantor, whether now owned or hereafter acquired, whether now
existing or hereafter arising, and wherever located:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT AND GENERAL
INTANGIBLES, TOGETHER WITH THE FOLLOWING SPECIFICALLY DESCRIBED
PROPERTY: SPECIFIC COLLATERAL LISTED ON EXHIBIT "A"
In addition, the word "Collateral" includes all the following, whether
now owned or hereafter acquired, whether now existing or hereafter
arising, and wherever located:
(a) All attachments, accessions, accessories, tools, parts,
supplies, increases, and additions to and all replacements of and
substitutions for any property described above.
(b) All products and produce of any of the property described in
this Collateral section.
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or
other disposition of any of the property described in this
Collateral section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described
in this Collateral section, whether in the form of a writing,
photograph, microfilm, microfiche, or electronic media, together
with all of Grantor's right, title, and interest in and to all
computer software required to utilize, create, maintain, and process
any such records or data on electronic media.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
GRANTOR. The word "Grantor" means Mitek Systems, Inc., its successors
and assigns.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the indebtedness.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced
by the Note, including all principal and interest, together with all
other indebtedness and costs and expenses for which Grantor is
responsible under this Agreement or under any of the Related Documents.
LENDER. The word "Lender" means RANCHO SANTA FE NATIONAL BANK, its
successors and assigns.
NOTE. The word "Note" means the note or credit agreement dated June 8,
1999, in the principal amount of $250,000.00 from Mitek Systems, Inc. to
Lender, together with all renewals of, extensions of, modifications of,
refinancings of, consolidations of and substitutions for the note or
credit agreement.
RELATED DOCUMENTS. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the indebtedness.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual security
interest in and hereby assigns, conveys, delivers, pledges, and transfers all
of Grantor's right, title and interest in and to Grantor's accounts with
Lender (whether checking, savings, or some other account), including all
accounts held jointly with someone else and all accounts Grantor may open in
the future, excluding, however, all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by
law. Grantor authorizes Lender, to the extent permitted by applicable law, to
charge or setoff all indebtedness against any and all such accounts.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such
financing statements and to take whatever other actions are requested by
Lender to perfect and continue Lender's security interest in the
Collateral. Upon request of Lender, Grantor will deliver to Lender any
and all of the documents evidencing or constituting the Collateral, and
Grantor will note Lender's interest upon any and all chattel paper if
not delivered to Lender for possession by Lender. Grantor hereby
appoints Lender as its irrevocable attorney-in-fact for the purpose of
executing any
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06-08-1999 COMMERCIAL SECURITY AGREEMENT PAGE 2
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documents necessary to perfect or to continue the security interest
granted in this Agreement. Lender may at any time, and without further
authorization from Grantor, file a carbon, photographic or other
reproduction of any financing statement or of this Agreement for use as
a financing statement. Grantor will reimburse Lender for all expenses for
the perfection and the continuation of the perfection of Lender's security
interest in the Collateral. Grantor promptly will notify Lender before any
change in Grantor's name including any change to the assumed business
names of Grantor.
NO VIOLATION. The execution and delivery of this Agreement will not
violate any law or agreement governing Grantor or to which Grantor is a
party, and its certificate or articles of incorporation and bylaws do
not prohibit any term or condition of this Agreement.
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral
have authority and capacity to contract and are in fact obligated as
they appear to be on the Collateral. At the time any account becomes
subject to a security interest in favor of Lender, the account shall be
a good and valid account representing an undisputed, bona fide
indebtedness incurred by the account debtor, for merchandise held
subject to delivery instructions or theretofore shipped or delivered
pursuant to a contract of sale, or for services theretofore performed by
Grantor with or for the account debtor; there shall be no setoffs or
counterclaims against any such account; and no agreement under which any
deductions or discounts may be claimed shall have been made with the
account debtor except those disclosed to Lender in writing.
LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will
deliver to Lender in form satisfactory to Lender a schedule of real
properties and Collateral locations relating to Grantor's operations,
including without limitation the following: (a) all real property owned
or being purchased by Grantor; (b) all real property being rented or
leased by Grantor; (c) all storage facilities owned, rented, leased, or
being used by Grantor; and (d) all other properties where Collateral is
or may be located. Except in the ordinary course of its business,
Grantor shall not remove the Collateral from its existing locations
without the prior written consent of Lender.
REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the
extent the Collateral consists of intangible property such as accounts,
the records concerning the Collateral) at Grantor's address shown above,
or at such other locations as are acceptable to Lender. Except in the
ordinary course of its business, including the sales of Inventory,
Grantor shall not remove the Collateral from its existing locations
without the prior written consent of Lender. To the extent that the
Collateral consists of vehicles, or other titled property, Grantor shall
not take or permit any action which would require application for
certificates of title for the vehicles outside the State of California,
without the prior written consent of Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or
accounts collected in the ordinary course of Grantor's business, Grantor
shall not sell, offer to sell, or otherwise transfer or dispose of the
Collateral. While Grantor is not in default under this Agreement,
Grantor may sell inventory, but only in the ordinary course of its
business and only to buyers who qualify as a buyer in the ordinary
course of business. A sale in the ordinary course of Grantor's business
does not include a transfer in partial or total satisfaction of a debt
or any bulk sale. Grantor shall not pledge, mortgage, encumber or
otherwise permit the Collateral to be subject to any lien, security
interest, encumbrance, or charge, other than the security interest
provided for in this Agreement, without the prior written consent of
Lender. This includes security interests, even if junior in right to the
security interests granted under this Agreement. Unless waived by
Lender, all proceeds from any disposition of the Collateral (for
whatever reason) shall be held in trust for Lender and shall not be
commingled with any other funds; provided however, this requirement
shall not constitute consent by Lender to any sale or other disposition.
Upon receipt, Grantor shall immediately deliver any such proceeds to
Lender.
TITLE. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.
COLLATERAL SCHEDULES AND LOCATIONS. As often as Lender shall require,
and insofar as the Collateral consists of accounts and general
intangibles, Grantor shall deliver to Lender schedules of such
Collateral, including such information as Lender may require, including
without limitation names and addresses of account debtors and agings of
accounts and general intangibles. Insofar as the Collateral consists of
inventory and equipment, Grantor shall deliver to Lender, as often as
Lender shall require, such lists, descriptions, and designations of such
Collateral as Lender may require to identify the nature, extent, and
location of such Collateral. Such information shall be submitted for
Grantor and each of its subsidiaries or related companies.
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not
commit or permit damage to or destruction of the Collateral or any part
of the Collateral. Lender and its designated representatives and agents
shall have the right at all reasonable times to examine, inspect, and
audit the Collateral wherever located. Grantor shall immediately notify
Lender of all cases involving the return, rejection, repossession, loss
or damage of or to any Collateral; of any request for credit or
adjustment or of any other dispute arising with respect to the
Collateral; and generally of all happenings and events affecting the
Collateral or the value or the amount of the Collateral.
TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon
this Agreement, upon any promissory note or notes evidencing the
Indebtedness, or upon any of the other Related Documents. Grantor may
withhold any such payment or may elect to contest any lien if Grantor is
in good faith conducting an appropriate proceeding to contest the
obligation to pay and so long as Lender's interest in the Collateral is
not jeopardized in Lender's sole opinion. If the Collateral is subjected
to a lien which is not discharged within fifteen (15) days, Grantor
shall deposit with Lender cash, a sufficient corporate surety bond or other
security satisfactory to Lender in an amount adequate to provide for the
discharge of the lien plus any interest, costs, attorneys' fees or other
charges that could accrue as a result of foreclosure or sale of the
Collateral. In any contest Grantor shall defend itself and Lender and
shall satisfy any final adverse judgment before enforcement against the
Collateral. Grantor shall name Lender as an additional obligee under any
surety bond furnished in the contest proceedings.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply
promptly with all laws, ordinances, rules and regulations of all
governmental authorities, now or hereafter in effect, applicable to the
ownership, production, disposition, or use of the Collateral. Grantor
may contest in good faith any such law, ordinance or regulation and
withhold compliance during any proceeding, including appropriate
appeals, so long as Lender's interest in the Collateral, in Lender's
opinion, is not jeopardized.
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the
Collateral never has been, and never will be so long as this Agreement
remains a lien on the Collateral, used for the generation, manufacture,
storage, transportation, treatment, disposal, release or threatened
release of any hazardous waste or substance, as those terms are defined
in the Comprehensive Environmental Response, Compensation, and Liability
Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the
Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499
("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section
1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the
California Health and Safety Code, Section 25100, et seq., or other
applicable state or Federal laws, rules, or regulations adopted pursuant
to any of the foregoing. The terms "hazardous waste" and "hazardous
substance" shall also include, without limitation, petroleum and
petroleum by-products or any fraction thereof and asbestos. The
representations and warranties contained herein are based on Grantor's
due diligence in investigating the Collateral for hazardous wastes and
substances.
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Grantor hereby (a) releases and waives any future claims against Lender
for indemnity or contribution in the event Grantor becomes liable for
cleanup or other costs under any such laws, and (b) agrees to indemnify
and hold harmless Lender against any and all claims and losses resulting
from a breach of this provision of this Agreement. This obligation to
indemnify shall survive the payment of the Indebtedness and the
satisfaction of this Agreement.
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain
all risks insurance, including without limitation fire, theft and
liability coverage together with such other insurance as Lender may
require with respect to the Collateral, in form, amounts, coverages and
basis reasonably acceptable to Lender and issued by a company or
companies reasonably acceptable to Lender. Grantor, upon request of
Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without
at least ten (10) days' prior written notice to Lender and not including
any disclaimer of the Insurer's liability for failure to give such a
notice. Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any
way by any act, omission or default of Grantor or any other person. In
connection with all policies covering assets in which Lender holds or is
offered a security interest, Grantor will provide Lender with such loss
payable or other endorsements as Lender may require. If Grantor at any
time fails to obtain or maintain any insurance as required under this
Agreement, Lender may (but shall not be obligated to) obtain such
insurance as Lender deems appropriate, including if it so chooses
"single interest insurance," which will cover only Lender's interest in
the Collateral.
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender
of any loss or damage to the Collateral. Lender may make proof of loss
if Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed
Collateral, Lender shall, upon satisfactory proof of expenditure, pay or
reimburse Grantor from the proceeds for the reasonable cost of repair or
restoration. If Lender does not consent to repair or replacement of the
Collateral, Lender shall retain a sufficient amount of the proceeds to
pay all of the Indebtedness, and shall pay the balance to Grantor. Any
proceeds which have not been disbursed within six (6) months after their
receipt and which Grantor has not committed to the repair or restoration
of the Collateral shall be used to prepay the Indebtedness.
INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be
created by monthly payments from Grantor of a sum estimated by Lender to
be sufficient to produce, at least fifteen (15) days before the premium
due date, amounts at least equal to the insurance premiums to be paid.
If fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shall
constitute a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance
premiums required to be paid by Grantor. The responsibility for the
payment of premiums shall remain Grantor's sole responsibility.
INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to
Lender reports on each existing policy of insurance showing such
information as Lender may reasonably request including the following:
(a) the name of the insurer; (b) the risks insured; (c) the amount of
the policy; (d) the property insured; (e) the then current value on the
basis of which insurance has been obtained and the manner of determining
that value; and (f) the expiration date of the policy. In addition,
Grantor shall upon request by Lender (however not more often than
annually) have an independent appraiser satisfactory to Lender
determine, as applicable, the cash value or replacement cost of the
Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and
except as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
Agreement or the Related Documents, provided that Grantor's right to
possession and beneficial use shall not apply to any Collateral where
possession of the Collateral by Lender is required by law to perfect Lender's
security interest in such Collateral. Until otherwise notified by Lender,
Grantor may collect any of the Collateral consisting of accounts. At any time
and even though no Event of Default exists, Lender may exercise its rights to
collect the accounts and to notify account debtors to make payments directly
to Lender for application to the Indebtedness. If Lender at any time has
possession of any Collateral, whether before or after an Event of Default,
Lender shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral if Lender takes such action for that purpose
as Grantor shall request or as Lender, in Lender's sole discretion, shall
deem appropriate under the circumstances, but failure to honor any request
by Grantor shall not of itself be deemed to be a failure to exercise
reasonable care. Lender shall not be required to take any steps necessary to
preserve any rights in the Collateral against prior parties, nor to protect,
preserve or maintain any security interest given to secure the Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without
limitation all taxes, liens, security interests, encumbrances, and other
claims, at any time levied or placed on the Collateral. Lender also may (but
shall not be obligated to) pay all costs for insuring, maintaining and
preserving the Collateral. All such expenditures incurred or paid by Lender
for such purposes will then bear interest at the rate charged under the Note
form the date incurred or paid by Lender to the date of repayment by Grantor.
All such expenses shall become a part of the indebtedness and, at Lender's
option, will (a) be payable on demand, (b) be added to the balance of the
Note and be apportioned among and be payable with any installment payments to
become due during either (i) the term of any applicable insurance policy or
(ii) the remaining term of the Note, or (c) be treated as a balloon payment
which will be due and payable at the Note's maturity. This Agreement also
will secure payment of these amounts. Such right shall be in addition to all
other rights and remedies to which Lender may be entitled upon the occurrence
of an Event of Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of
Default under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when
due on the Indebtedness.
OTHER DEFAULTS. Failure of Grantor to comply with or to perform any
other term, obligation, covenant or condition contained in this
Agreement or in any of the Restated Documents or in any other agreement
between Lender and Grantor.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor
default under any loan, extension of credit, security agreement,
purchase or sales agreement, or any other agreement, in favor of any
other creditor or person that may materially affect any of Borrower's
property or Borrower's or any Grantor's ability to repay the Loans or
perform their respective obligations under this Agreement or any of the
Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of
any collateral documents to create a valid and perfected security
interest or lien) at any time and for any reason.
INSOLVENCY. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Grantor.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral
securing the Indebtedness. This includes a garnishment of any of
Grantor's deposit accounts with Lender. However, this Event of Default
shall
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not apply if there is a good faith dispute by Grantor as to the validity
or reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount
determined by Lender, in its sole discretion, as being an adequate reserve
or bond for the dispute.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or such Guarantor
dies or becomes incompetent. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in a manner satisfactory to
Lender, and, in doing so, cure the Event of Default.
ADVERSE CHANGE. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of
the Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Grantor has not been given a prior notice of a breach of
the same provision of this Agreement, it may be cured (and no Event of
Default will have occurred) if Grantor, after Lender sends written
notice demanding cure of such default, (a) cures the default within
fifteen (15) days; or (b), if the cure requires more than fifteen (15)
days, immediately initiates steps which Lender deems in Lender's sole
discretion to be sufficient to cure the default and thereafter continues
and completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a
secured party under the California Uniform Commercial Code. In addition and
without limitation, Lender may exercise any one or more of the following
rights and remedies:
ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender
all or any portion of the Collateral and any and all certificates of
title and other documents relating to the Collateral. Lender may require
Grantor to assemble the Collateral and make it available to Lender at a
place to be designated by Lender. Lender also shall have full power to
enter upon the property of Grantor to take possession of and remove the
Collateral. If the Collateral contains other goods not covered by this
Agreement at the time of repossession, Grantor agrees Lender may take
such other goods, provided that Lender makes reasonable efforts to return
them to Grantor after repossession.
SELL THE COLLATERAL. Lender shall have full power to sell, lease,
transfer, or otherwise deal with the Collateral or proceeds thereof in
its own name or that of Grantor. Lender may sell the Collateral at
public auction or private sale. Unless the Collateral threatens to
decline speedily in value or is of a type customarily sold on a
recognized market, Lender will give Grantor reasonable notice of the
time after which any private sale or any other intended disposition of
the Collateral is to be made. The requirements of reasonable notice shall
be met if such notice is given at least ten (10) days, or such lesser
time as required by state law, before the time of the sale or
disposition. All expenses relating to the disposition of the Collateral,
including without limitation the expenses of retaking, holding,
insuring, preparing for sale and selling the Collateral, shall become
a part of the Indebtedness secured by this Agreement and shall be payable
on demand, with interest at the Note rate from date of expenditure until
repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender
shall have the following rights and remedies regarding the appointment
of a receiver: (a) Lender may have a receiver appointed as a matter of
right, (b) the receiver may be an employee of Lender and may serve
without bond, and (c) all fees of the receiver and his or her attorney
shall become part of the Indebtedness secured by this Agreement and
shall be payable on demand, with interest at the Note rate from date of
expenditure until repaid.
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from
the Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness
in such order of preference as Lender may determine. Insofar as the
Collateral consists of accounts, general intangibles, insurance
policies, instruments, chattel paper, choses in action, or similar
property, Lender may demand, collect, receipt for, settle, compromise,
adjust, sue for, foreclose, or realize on the Collateral as Lender may
determine, whether or not Indebtedness or Collateral is then due. For
these purposes, Lender may, on behalf of and in the name of Grantor,
receive, open and dispose of mail addressed to Grantor; change any
address to which mail and payments are to be sent; and endorse notes,
checks, drafts, money orders, documents of title, instruments and items
pertaining to payment, shipment, or storage of any Collateral. To
facilitate collection, Lender may notify account debtors and obligors on
any Collateral to make payments directly to Lender.
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the
Collateral, Lender may obtain a judgment against Grantor for any
deficiency remaining on the Indebtedness due to Lender after application
of all amounts received from the exercise of the rights provided in this
Agreement. Grantor shall be liable for a deficiency even if the
transaction described in this subsection is a sale of accounts or
chattel paper.
OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and
remedies of a secured creditor under the provisions of the Uniform
Commercial Code, as may be amended from time to time. In addition,
Lender shall have and may exercise any or all other rights and remedies
it may have available at law, in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether
evidenced by this Agreement or the Related Documents or by any other
writing, shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude
pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Grantor under this Agreement,
after Grantor's failure to perform, shall not affect Lender's right to
declare a default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part
of this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment
to this Agreement shall be effective unless given in writing and signed
by the party or parties sought to be charged or bound by the alteration
or amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and
accepted by Lender in the State of California. If there is a lawsuit,
Grantor agrees upon Lender's request to submit to the jurisdiction of
the courts of the State of California. This Agreement shall be governed
by and construed in accordance with the laws of the State of California.
ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone else to help enforce this Agreement, and Grantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there
is a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic
stay or injunction), appeals, and any anticipated post-judgment
collection services. Grantor also shall pay all court costs and such
additional fees as may be directed by the court.
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CAPTION HEADINGS. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or define
the provisions of this Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise
required by law), and shall be effective when actually delivered or when
deposited with a nationally recognized overnight courier or deposited in
the United States mail, first class, postage prepaid, addressed to the
party to whom the notice is to be given at the address shown above. Any
party may change its address for notices under this Agreement by giving
formal written notice to the other parties, specifying that the purpose
of the notice is to change the party's address. To the extent permitted
by applicable law, if there is more than one Grantor, notice to any
Grantor will constitute notice to all Grantors. For notice purposes,
Grantor will keep Lender informed at all times of Grantor's current
address(es).
POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and
lawful attorney-in-fact, irrevocably, with full power of substitution to
do the following: (a) to demand, collect, receive, receipt for, sue and
recover all sums of money or other property which may now or hereafter
become due, owing or payable from the Collateral; (b) to execute, sign
and endorse any and all claims, instruments, receipts, checks, drafts
or warrants issued in payment for the Collateral; (c) to settle or
compromise any and all claims arising under the Collateral, and, in the
place and stead of Grantor, to execute and deliver its release and
settlement for the claim; and (d) to file any claim or claims or to take
any action or institute or take part in any proceedings, either in its
own name or in the name of Grantor, or otherwise, which in the discretion
of Lender may seem to be necessary or advisable. This power is given as
security for the Indebtedness, and the authority hereby conferred is and
shall be irrevocable and shall remain in full force and effect until
renounced by Lender.
PREFERENCE PAYMENTS. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
Indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
SEVERABILITY. If a court of competent jurisdiction finds any provision
of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible,
any such offending provision shall be deemed to be modified to be within
the limits of enforceability or validity; however, if the offending
provision cannot be so modified, it shall be stricken and all other
provisions of this Agreement in all other respects shall remain valid
and enforceable.
SUCCESSOR INTERESTS. Subject to the limitations set forth above on
transfer of the Collateral, this Agreement shall be binding upon and
inure to the benefit of the parties, their successors and assigns.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender.
No delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by
Lender of a provision of this Agreement shall not prejudice or
constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this Agreement.
No prior waiver by Lender, nor any course of dealing between Lender and
Grantor, shall constitute a waiver of any of Lender's rights or of any of
Grantor's obligations as to any future transactions. Whenever the
consent of Lender is required under this Agreement, the granting of such
consent by Lender in any instance shall not constitute continuing
consent in subsequent instances where such consent is required and in
all cases such consent may be granted or withheld in the sole discretion
of Lender.
WAIVER OF CO-OBLIGOR'S RIGHTS. If more than one person is obligated
for the Indebtedness, Borrower irrevocably waives, disclaims and
relinquishes all claims against such other person which Borrower has or
would otherwise have by virtue of payment of the Indebtedness or any
part thereof, specifically including but not limited to all rights of
indemnity, contribution or exoneration.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL
SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS
DATED JUNE 8, 1999.
GRANTOR:
MITEK SYSTEMS, INC.,
BY: /s/ John Thornton
------------------------------------
JOHN THORNTON, CHAIRMAN OF THE BOARD
================================================================================
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$250,000.00 06-08-1999 06-08-2000 01617850-61 410 0027 052 [ILLEGIBLE]
- -------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
BORROWER: MITEK SYSTEMS, INC. LENDER: RANCHO SANTA FE NATIONAL BANK
10070 CARROLL CANYON ROAD RANCHO SANTA FE OFFICE
SAN DIEGO, CA 92131 6110 EL TORDO
P.O. BOX 2388
RANCHO SANTA FE, CA 92067
===================================================================================================================
</TABLE>
INSURANCE REQUIREMENTS. Mitek Systems, Inc. ("Grantor") understands that
insurance coverage is required in connection with the extending of a loan or
the providing of other financial accommodations to Grantor by Lender. These
requirements are set forth in the security documents. The following minimum
insurance coverages must be provided on the following described collateral
(the "Collateral"):
COLLATERAL: ALL INVENTORY AND EQUIPMENT, INCLUDING SPECIFIC COLLATERAL LISTED
ON EXHIBIT "A".
TYPE. All risks, including fire, theft and liability.
AMOUNT. Full insurable value.
BASIS. Replacement value.
ENDORSEMENTS. Lender's loss payable clause with stipulation that
coverage will not be cancelled or diminished without a minimum of
ten (10) days' prior written notice to Lender.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance company
Grantor may choose that is reasonably acceptable to Lender. Grantor
understands that credit may not be denied solely because insurance was not
purchased through Lender.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Lender, ten (10)
days from the date of this Agreement, evidence of the required insurance as
provided above, with an effective date of June 8, 1999, or earlier. Grantor
acknowledges and agrees that if Grantor fails to provide any required
insurance or fails to continue such insurance in force, Lender may do so at
Grantor's expense as provided in the applicable security document. The cost
of any such insurance, at the option of Lender, shall be payable on demand or
shall be added to the Indebtedness as provided in the security document.
GRANTOR ACKNOWLEDGES THAT IF LENDER SO PURCHASES ANY SUCH INSURANCE, THE
INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE TO THE
COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN THE
COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE
ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE
REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS.
AUTHORIZATION. For purpose of insurance coverage on the Collateral, Grantor
authorizes Lender to provide to any person (including any insurance agent or
company) all information Lender deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO
PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JUNE 8,
1999.
GRANTOR:
MITEK SYSTEMS, INC.
BY: /s/ John Thornton
------------------------------------
JOHN THORNTON, CHAIRMAN OF THE BOARD
==============================================================================
FOR LENDER USE ONLY
INSURANCE VERIFICATION
DATE:__________________________ PHONE:__________________
AGENT'S NAME:
ADDRESS:
INSURANCE COMPANY: Same - Goreham Moore Associates
POLICY NUMBER(S):____________________
EFFECTIVE DATES:_________________
COMMENTS:________________________
==============================================================================
<PAGE>
[LETTERHEAD]
DISBURSEMENT REQUEST AND AUTHORIZATION
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$250,000.00 06-08-1999 06-08-2000 01617850-61 410 0027 052 [ILLEGIBLE]
- -------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
BORROWER: MITEK SYSTEMS, INC. LENDER: RANCHO SANTA FE NATIONAL BANK
10070 CARROLL CANYON ROAD RANCHO SANTA FE OFFICE
SAN DIEGO, CA 92131 6110 EL TORDO
P.O. BOX 2388
RANCHO SANTA FE, CA 92067
===================================================================================================================
</TABLE>
LOAN TYPE. This is a Variable Rate (1.500% over RANCHO SANTA FE NATIONAL
BANK PRIME RATE, making an initial rate of 9.250%), Non-Revolving Line of
Credit Loan to a Corporation for $250,000.00 due on June 8, 2000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for (please
initial):
/ /____ PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES OR PERSONAL INVESTMENT.
/x/JMT BUSINESS (INCLUDING REAL ESTATE INVESTMENT).
SPECIFIC PURPOSE. The specific purpose of this loan is: First renewal of
IGLOC - To purchase specific equipment.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will
be disbursed until all of Lender's conditions for making the loan have been
satisfied. Please disburse the loan proceeds of $250,000.00 as follows:
AMOUNT PAID TO OTHERS ON BORROWER'S BEHALF: $250,000.00
$250,000.00 UNDISBURSED
-----------
NOTE PRINCIPAL: $250,000.00
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
PREPAID FINANCE CHARGES PAID IN CASH: $250.00
$250.00 Loan Processing Fee
-------
TOTAL CHARGES PAID IN CASH: $250.00
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT
AND THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL
CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO
LENDER. THIS AUTHORIZATION IS DATED JUNE 8, 1999.
BORROWER:
MITEK SYSTEMS, INC.
BY: /s/ John M. Thornton
------------------------------------
JOHN THORNTON, CHAIRMAN OF THE BOARD
================================================================================
<PAGE>
1999 LETTER TO THE SHAREHOLDERS
Dear Fellow Shareholders,
During the fiscal year ended September 30, 1999, we produced rapid operating
growth, significantly increased our market value and positioned the Company for
continued gains in fiscal year 2000 and beyond.
The reason for our current success and excellent future prospects?
We are leading a quiet, but powerful revolution in the way business reads and
processes difficult documents such as checks and forms. We are increasing our
role in this revolution - still in its early stages - by evolving from being a
provider of world-leading character recognition engines to becoming a source of
entire solutions in the handling of handwritten and the many other difficult
documents including unstructured forms.
SUMMARY OF RESULTS
In the fiscal year, we increased revenues 50% by:
- - expanding our OEM relationships with such important partners as BancTec, IBM
and Unisys
- - adding new products through our own technology development and with major
partners
Also in the fiscal year, we produced strong profitability by:
- - augmenting sales and marketing efforts by increasing our marketing
alliances with the small number of OEMs which dominate the item processing
market
- - gaining economies of scale from the size and number of major orders
from our partners
- - improving operating productivity by better meeting deadlines, delivering
products and managing cash
Through these gains, we were able to produce a return on beginning total assets
of 33% from pre-tax profit, and a return on beginning equity of 47%, giving
Mitek an enviable return record on invested capital. If present trends continue,
we expect to continue providing the strong returns in the current fiscal year
ending September 30, 2000. All of this is driven by superior technology
addressing a large and growing market.
PERFORMANCE DETAILS
The Company's performance in the fiscal year ended September 30, 1999 compared
favorably to the prior year. In each of the four quarters revenues and net
income improved. In addition to the strong financial results of each quarter, we
made continued progress toward building for future growth. An important part of
these gains was the addition of key personnel in sales and engineering. This new
leadership helped leverage our growing body of new products and customer
solutions. We believe it will also help us continue to develop new technologies
and products, enhance existing products, and thereby ensure our strong position
worldwide.
For the twelve months ended September 30, 1999, we reported net income of
$2,026,000, or $0.20 per basic and $0.19 per diluted share, compared with a net
loss of ($1,497,000) or ($0.13) per basic and diluted share for the 1998 fiscal
year. At fiscal year end, the Company had cash of $1,398,589 and no bank debt.
Mitek's plan to expand OEM relationships and leverage relationships with
blue-chip OEM customers has enabled Mitek to form new alliances with three key
companies in 1999: IBM, Unisys and Science Applications International
Corporation (SAIC). Mitek has added new OEMs and new product lines to existing
OEM relationships. This has permitted Mitek to supply its recognition engine to
IBM for integration in IBM's ImagePlus Intelligent Forms Processing Solution
(IFP). The Company has also supplied a customized recognition engine to Unisys
for inclusion in its SoftCAR+ solution. Significant orders were realized in the
fiscal year as a result of both the IBM and Unisys agreements. Mitek and SAIC
have signed a worldwide sales and technology agreement to commercialize SAIC's
document classification software.
NEW PRODUCTS
1
<PAGE>
In April, Mitek introduced Doctus(TM), its new, universal document capture and
forms processing system, which won the highly coveted, "Best of AIIM" award at
the AIIM 1999 show and conference. With the unique document understanding
capabilities of Doctus, the Company has a competitive advantage over other
traditional forms processing providers.
As a result of the SAIC relationship, Mitek intends to trademark the new
collaborative product, CogniForms(TM). CogniForms provides for the automated
processing of unstructured documents, such as invoices, bills of lading or other
documents with no predefined format. CogniForms offers new opportunities and
enables a wide range of new applications for many Mitek partners and customers
because it represents a fundamental advance in automated document processing.
The Company also introduced CheckQuest(TM), an affordable check imaging and
remittance processing solution designed specifically for organizations with low-
to medium-volume document processing requirements (e.g., community banks, credit
unions, utility companies).
Mitek's dedication to internal research and development has enabled the Company
to capitalize on its competitive advantages in the forms processing market. The
Company remains focused on the application of its core proprietary technology
(character recognition, understanding unstructured forms and check imaging) to
the check processing and forms processing market. Mitek's core technology
involves a continual research and development effort driven by whatever new
recognition features are needed by end users and OEM customers. Mitek's unique
forms processing software can automatically "learn" to process a wide variety of
unstructured form types. The growth opportunities in the unstructured forms and
check imaging market merit a significant allocation of the Company's resources
and should lead to additional product offerings and partnerships.
PERSONNEL
At Mitek, people continue to be our most important asset. This year we added key
personnel in the areas of sales, product development and operations in order to
better support Mitek's expanded product line, in addition to increased customer
shipments. The Company continues to be a leader in the development of
Intelligent Character Recognition (ICR) products and technology, and employs
some of the world's leading scientists and engineers. We believe we have the
expertise and the commitment to advance our core technology and to continue
converting that technology to powerful new products and existing product
enhancements.
STRATEGIC GROWTH PLAN
We believe we are positioned to meet the challenges of the coming years due to
our healthy balance sheet, powerful leadership and strong market position.
Management has developed a growth plan for achieving the Company's goals in
fiscal 2000. We have opportunities for further growth of revenues and earnings,
which includes capitalizing on the large and growing unstructured document
processing market, plus the virtually untapped market for check imaging systems
at small to mid-tier community banks. We are actively advancing "breakthrough"
technology that could revolutionize the way businesses process documents.
As a result, we enter the new century with great confidence.
Sincerely,
John M. Thornton
President and Chief Executive Officer
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET SALES
Net sales were $9,741,000, $6,501,000, and $4,842,000 for fiscal 1999,
1998, and 1997, respectively. The increase in net sales in fiscal 1999 compared
to fiscal 1998 and 1997 is the result of increases in new and existing products,
services, and customers.
GROSS MARGIN AND OPERATIONS RECLASSIFICATION
The Company has evolved to a primarily software products company from a
hardware/software products company.
GROSS MARGIN
Gross margins were $8,254,000, $4,503,000, and $3,084,000, for fiscal
1999, 1998, and 1997, respectively. Stated as a percentage of net sales, gross
margin for the corresponding periods were 85%, 69%, and 64%, respectively. The
increase in gross margin resulted primarily from increased sales, changes in
product mix, and a decrease in goodwill and license amortization charged to cost
of sales. The increase in gross margin stated as a percentage of sales resulted
primarily from product mix and decreased goodwill and license amortization
charged to cost of sales
OPERATIONS
Operations expenses were $597,000, $430,000 and $418,000 for fiscal
1999, 1998 and 1997, respectively. Stated as a percentage of net sales,
operations expenses were 6%, 7% and 9%, respectively. The increase in expenses
is primarily attributable to staff additions, while the decrease as a percentage
of net sales is primarily attributable to increased revenues.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1,711,000, $1,622,000, and
$1,428,000 for fiscal 1999, 1998 and 1997, respectively. Stated as a percentage
of net sales, general and administrative expenses for the corresponding periods
were 18%, 25%, and 29%, respectively. The increases in expenses in the current
fiscal year were primarily attributable to costs associated with outside
professional services, legal fees and staff additions, while the decrease in the
percentage of net sales is primarily attributable to increased revenues.
Page 1
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenses were $1,409,000, $1,343,000, and
$1,393,000 for fiscal 1999, 1998, and 1997, respectively. The 1999, 1998, and
1997 amounts do not include $98,000, $878,000, and $458,000, respectively, that
was spent in research and development related to contract development and
charged to cost of sales. Research and development expenses before charges to
cost of sales were $1,507,0000, $2,221,000, and $1,851,000 for fiscal 1999,
1998, and 1997, respectively. The decrease in the absolute amount of expenses
from 1998 to 1999 is the result of engineering staff reductions and the
elimination of certain engineering projects. The increase in the absolute amount
of expenses and the increase in amounts charged to cost of sales in fiscal 1998
versus fiscal 1997 is primarily a result of the Technology Solutions Inc.
acquisition (TSI); TSI engineering staff were primarily engaged in contract
development, which expenses were charged to cost of sales. Stated as a
percentage of net sales, research and development expenses before charges to
cost of sales for the corresponding periods were 15%, 34%, and 38%,
respectively. The decrease as a percentage of net sales for fiscal year is
primarily attributable to both the decrease in absolute dollar expenditures as
well as the increase in revenues.
SELLING AND MARKETING
Selling and marketing expenses were $2,510,000, $1,671,000, and
$2,102,000 for fiscal 1999, 1998 and 1997, respectively. Stated as a percentage
of net sales, selling and marketing expenses for the corresponding periods were
26%, 26%, and 43%, respectively. The increase in expenses in the current fiscal
year is primarily attributable to the addition of personnel and increased
marketing efforts on certain products. The decrease as a percentage of net sales
is primarily attributable to the increase in revenues. The decrease in selling
and marketing expenses as an absolute amount and as a percentage of net sales
from 1997 to 1998 is primarily attributed to a reduction of the sales force due
to the reorganization of the Company in the first half of fiscal 1998.
OTHER CHARGES
For the fiscal year end 1998, other charges totaling $689,000, consist of
several non-recurring charges to operations. The charges consist of the
following components:
- - GOODWILL IMPAIRMENT -In June 1997 the Company purchased substantially all
of the assets of Technology Solutions, Inc., a software developer and
solution provider of document image processing systems. One of the key
employees of the Company, a former principle of Technology Solutions, Inc.,
opted to resign his employment. The unexpected departure, in the opinion of
management, detrimentally impacted the future cash flows of the Company. A
$293,000 goodwill impairment was recorded in the first quarter of fiscal
1998. See Note 2 of the consolidated financial statements.
Page 2
<PAGE>
- - LICENSE FEE IMPAIRMENT - In April, 1997 the Company entered into an
exclusive software licensing agreement with Parascript LLC. In December,
1997 Parascript notified the Company of its dissatisfaction with the
Company's progress in marketing the software affected by the license
agreement, along with assertion that the Company had committed material
breach of contract. The Company has strongly and vigorously denied the
claims. A proposed solution to the dispute by Parascript included
converting the Company's exclusive to a non-exclusive software license. In
addition, the Company over-estimated the availability and the performance
of the product and anticipated prices for the software affected by the
agreement. The adversarial condition of the relationship coupled with the
decreased expectations, in the opinion of management, would have
detrimentally impacted the future cash flows of the Company. As such, the
Company recorded a license fee impairment in the amount of $196,000. See
Note 10 of the consolidated financial statements.
- - INVENTORY RESERVES - The Company has traditionally sold its QuickStrokes
Application Programmer Interface products with various acceleration
hardware boards. Decreasing prices coupled with the higher speeds of
general hardware have rapidly altered the market need for these
acceleration boards. The largest customer utilizing these acceleration
boards has informed the Company of its intent to discontinue the offering
of these products in the domestic market. As a result, the Company recorded
a reserve for inventory obsolescence in the amount of $200,000 during the
fiscal 1998.
INTEREST INCOME
Net interest income was $28,000, $73,000, and $94,000 for fiscal 1999,
1998 and 1997, respectively. Stated as a percentage of net sales, net interest
income for the corresponding periods was 0.3%, 1%, and 2%, respectively. The
decrease in interest income in the current year is primarily the result of lower
invested funds during the year.
OTHER EXPENSES - NET
Other expenses for fiscal year 1998 resulted from reserves for the
recruitment and employment ($166,000) and resignation ($204,000) of Elliot
Wassarman as President and Chief Executive Officer of the company during fiscal
1998, $35,000 to settle an employee related lawsuit, $53,000 to settle
Technology Solutions, Inc. acquisition legal matters, and $45,000 to settle a
customer dispute. These reserves were reduced by a reversal of $175,000 reserved
for TEMPEST in fiscal 1997, and a $34,000 gain from the sale of the Company's
fax business in January 1998 in a cash transaction. The gross proceeds of the
sale were $420,000 in cash, offset by the carrying value of the assets sold of
($308,000) and costs related to the transaction of ($78,000).
Other expenses in fiscal 1997 were the result of a $175,000 reserve for
claims asserted against the company by the purchaser of the Company's TEMPEST
business in March 1995 and the write off of purchased research and development
costs in the amount of $228,000.
Page 3
<PAGE>
INCOME TAXES
For the current fiscal year, the Company recorded an income tax
provision of $29,000. For fiscal 1998 and 1997, the Company did not record an
income tax provision or benefit for income taxes.
NET INCOME (LOSS)
In the current fiscal year, the Company recorded net income of
$2,026,000. In fiscal 1998 and fiscal 1997, the Company recorded a net loss of
($1,497,000) and ($2,566,000), respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its cash needs primarily from increased
profits in the fourth quarter of fiscal 1999 and fiscal 1998, collection of
accounts and notes receivable, and execution of operations within budget.
Net cash used in operating activities during the year ended September
30, 1999 was $316,000. The primary use of cash from operating activities was an
increase in accounts receivable of $2,771,000 and a decrease in accounts payable
of $87,000. The primary source of cash from operating activities was a decrease
in inventory of $158,000. Higher receivables resulted primarily from increased
sales. The decrease in accounts payable resulted primarily from payment for
litigation settlements.
The Company's working capital and current ratio was $4,816,000 and 3.81
at September 30, 1999, and $2,517,000 and 2.40 at September 30, 1998. At
September 30, 1999, total liabilities to equity ratio was .31 to 1 compared to
.43 to 1 a year earlier. As of September 30, 1999, total liabilities were less
by $87,000 than on September 30, 1998.
During fiscal 1999, the Company renewed its line of credit from its
bank, Rancho Santa Fe National Bank, in the amount of $750,000, which expires on
June 8, 2000. Interest is payable at prime plus 1.5 percentage points. In
addition, the Company renewed its equipment credit line in the amount of
$250,000 under similar terms and conditions. There were no borrowings under the
working capital or equipment lines of credit as of September 30, 1999 or
September 30, 1998. The Company believes that together with existing cash,
credit available under the credit lines, and cash generated from operations,
funds will be sufficient to finance its operations for the next twelve months.
All cash in excess of working capital requirements will be kept in short term,
investment grade securities.
YEAR 2000
Historically, most computer databases, as well as embedded microprocessors in
computer systems and industrial equipment, were designed with date data fields
which used only two digits of the year. Most computer programs, computers, and
embedded
Page 4
<PAGE>
microprocessors controlling equipment were programmed to assume that all two
digit dates were preceded by "19", causing "00" to be interpreted as the year
1900. This formerly common practice now could result in a computer system or
embedded microprocessor which fails to recognize properly a year that begins
with "20", rather than "19". This in turn could result in computer system
miscalculations or failures, as well as failures of equipment controlled by
date-sensitive microprocessors, and is generally referred to as the "Year
2000 problem."
1. THE COMPANY'S STATE OF YEAR 2000 READINESS. In 1997 the Company began to
formulate a plan to address its year 2000 issues. The Company's Year 2000 plan
now contemplates five phases: Awareness, Assessment, Remediation, Testing, and
Implementation.
Awareness involves ensuring that employees who deal with the Company's
computer assets, and all managers, executives and directors, understand the
nature of the Year 2000 problem and the adverse effects on the business
operations of the Company that would result from the failure to become and
remain Year 2000 ready. Assessment involves the identification and
inventorying of all computer assets of the Company (both information
technology systems and embedded microprocessors) and the determination as to
whether such assets will properly recognize a year that begins with "20",
rather than "19". Computer hardware, software and firmware, and embedded
microprocessors, that, among other things, properly recognize a year
beginning with "20" are said to be "Year 2000 ready". Remediation involves
the repair or replacement of computer assets that are not Year 2000 ready.
Testing involves the validation of the actions taken in the remediation
phase. Implementation is the installation and integration of remediated and
tested computer assets into an overall information technology and embedded
microprocessor system that is Year 2000 ready.
These phases have substantial overlap. The Company has completed Awareness
phases (4th Quarter 1998) Assessment phases (4th Quarter 1998) Remediation
phases (4th Quarter 1998) Testing (2nd Quarter 1999) and Implementation (3rd
Quarter 1999) phases. The Company has assigned Noel Flynn, Vice President of
Operations/Customer Support, the responsibility for overseeing the timely
completion of each phase of the Company's Year 2000 plan.
The Company believes that all employees who deal with the Company's computer
assets, and all levels of the Company's management, appreciate the importance of
Year 2000 readiness and understand that achieving such readiness is primarily a
business problem, not merely a technology problem. The Company has also
communicated directly with its vendors of goods and services in an attempt to
assure that its key vendors are aware of the importance the Company places on
Year 2000 readiness.
The Company began its assessment of its internal computer systems in 1997.
Computers and applications were identified, assessed and ranked for critical
importance to the operations of the Company. Since then, the Company has
modified and tested such applications and replaced the one system that was not
Year 2000 compliant. The
Page 5
<PAGE>
Company currently has addressed all computer systems that are critical to its
operations as of September 1999.
The Company has completed its assessment of the potential for Year 2000
problems with embedded microprocessors in its equipment, and has remedied all
non-compliant equipment as of September 1999.
The Company has mailed information concerning Year 2000 readiness to vendors of
goods and services. The Company is not presently dependent upon any single
source and supply for critical components or services for its products, and
believes it can acquire such products from a number of suppliers. The Company
expects to continue discussions with all of its vendors of goods and services
during 1999 to attempt to ensure the uninterrupted supply of such goods and
services and to develop contingency plans in the event of the failure of any
vendors to become and remain Year 2000 ready.
The Company currently estimates the total cost of completing all five phases of
its Year 2000 plan, will not exceed $50,000.
2. THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES. If any computer hardware,
software applications, or embedded microprocessors critical to the Company's
operations have been overlooked in the assessment or remediation phases, if any
of the Company's remediated or replaced internal computer systems fail the
testing phase, there could be a material adverse effect on the Company's results
of operations, liquidity and financial condition of a magnitude which the
Company has not yet fully analyzed.
In addition, the Company has not yet been assured that (1) the computer systems
of all of its "key" or "mission critical" vendors of goods and services will be
Year 2000 ready in a timely manner or that (2) the computer systems of third
parties with which the Company's computer systems exchange data will be Year
2000 ready both in a timely manner and in a manner compatible with continued
data exchange with the Company's computer systems.
If the vendors of the Company's most important goods and services, or the
suppliers of the Company's necessary energy, telecommunications and
transportation needs, fail to provide the Company with (1) the materials and
services which are necessary to produce, distribute and sell its product, (2)
the electrical power and other utilities necessary to sustain its operations, or
(3) reliable means of transporting supplies to its customers, such failure could
have a material adverse effect on the results of operations, liquidity and
financial condition of the Company.
The Company's customers are primarily banks and financial institutions or
entities that provide financial services to those industries. The banking
industry has indicated it may experience severe problems associated with the
Year 2000 problem. Banks and other financial institutions are spending
significant capital resources to remedy their own Year 2000 issues. These
expenditures may reduce budgeted funds that would otherwise be available to
acquire new technologies and systems from the Company and other suppliers. To
the extent that those customers experience or continue to experience
significant capital
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<PAGE>
costs for Year 2000 compliance, the demand for the Company's products may be
reduced because of budgetary constraints.
Page 7
<PAGE>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,398,589 $ 1,740,760
Accounts receivable - net 5,006,081 2,234,640
Note receivable 0 56,478
Inventories 58,082 123,909
Prepaid expenses and other assets 69,232 161,437
----------------------------------
Total current assets 6,531,984 4,317,224
PROPERTY AND EQUIPMENT - net 281,571 192,135
OTHER ASSETS 575,298 1,626,413
==================================
TOTAL ASSETS $ 7,388,853 $ 6,135,772
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 738,195 $ 650,206
Accrued payroll and related taxes 720,300 242,427
Unearned maintenance income 203,408 201,568
Other accrued liabilities 53,885 705,836
----------------------------------
Total current liabilities 1,715,788 1,800,037
LONG-TERM LIABILITIES 51,040 54,187
----------------------------------
Total liabilities 1,766,828 1,854,224
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY
Common stock - $.001 par value; 20,000,000
shares authorized, 10,438,854 and 11,573,152 issued
and outstanding in 1999 and 1998, respectively 10,439 11,573
Additional paid-in capital 8,507,613 9,191,887
Accumulated deficit (2,896,027) (4,921,912)
----------------------------------
Total stockholders' equity 5,622,025 4,281,548
==================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,388,853 $ 6,135,772
==================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 9,741,297 $ 6,500,968 $ 4,841,555
COST OF SALES 1,487,114 1,997,907 1,757,820
-----------------------------------------------------
GROSS MARGIN 8,254,183 4,503,061 3,083,735
COSTS AND EXPENSES:
Operations 597,031 430,123 418,295
General and administrative 1,710,964 1,621,940 1,427,525
Research and development 1,409,393 1,343,422 1,392,817
Selling and marketing 2,510,336 1,670,677 2,101,615
Other charges 0 689,000 0
Interest (income) expense - net (28,426) (72,645) (93,910)
-----------------------------------------------------
Total costs and expenses 6,199,298 5,682,517 5,246,342
-----------------------------------------------------
OPERATING INCOME(LOSS) 2,054,885 (1,179,456) (2,162,607)
OTHER EXPENSES - NET 0 (317,260) (403,512)
-----------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 2,054,885 (1,496,716) (2,566,119)
PROVISION FOR INCOME TAXES 29,000 0 0
-----------------------------------------------------
NET INCOME (LOSS) $ 2,025,885 $(1,496,716) $(2,566,119)
=====================================================
-----------------------------------------------------
EARNINGS (LOSS) PER SHARE - BASIC $ 0.20 $ (0.13) $ (0.25)
=====================================================
-----------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 10,359,458 11,564,239 10,093,007
=====================================================
-----------------------------------------------------
EARNINGS (LOSS) PER SHARE - DILUTED $ 0.19 $ (0.13) $ (0.25)
=====================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND -----------------------------------------------------
COMMON SHARE EQUIVALENTS OUTSTANDING - DILUTED 10,755,277 11,564,239 10,093,007
=====================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, September 30, 1996 $ 7,783 $ 3,503,634 $ (859,077) $ 2,652,340
Issuance of common stock for cash, net of costs 2,250 4,087,066 0 4,089,316
Exercise of stock options 34 38,688 0 38,722
Exercise of warrants 20 29,980 0 30,000
Issuance of common stock in connection with
acquisition and investment 1,450 1,505,221 0 1,506,671
Net loss 0 0 (2,566,119) (2,566,119)
------------------------------------------------------------
Balance, September 30, 1997 11,537 9,164,589 (3,425,196) 5,750,930
Exercise of stock options 36 27,298 0 27,334
Net loss 0 0 (1,496,716) (1,496,716)
------------------------------------------------------------
Balance, September 30, 1998 11,573 9,191,887 (4,921,912) 4,281,548
Shares reacquired in connection with settlement
of TSI dispute (See Note 2) (591) (368,855) 0 (369,446)
Shares reacquired in connection with revised
Parascript agreement (See Note 10) (764) (476,687) 0 (477,451)
Repurchase of common stock (20) (14,130) 0 (14,150)
Fair value of stock options issued to non-employees 0 29,674 0 29,674
Exercise of stock options 241 145,724 0 145,965
Net Income 0 0 2,025,885 2,025,885
============================================================
Balance, September 30, 1999 $ 10,439 $ 8,507,613 $ (2,896,027) $ 5,622,025
============================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
OPERATING ACTIVITIES
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 2,025,885 $ (1,496,716) $ (2,566,119)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 325,325 488,518 680,370
(Gain) loss on sale of property and equipment 3,907 1,847 (140)
Goodwill and license fee impairment 0 489,000 0
Gain on sale of FAX business 0 (34,256) 0
Write off of IID investment 0 0 228,512
Fair value of stock options issued to non-employees 29,674 0 0
Changes in assets and liabilities:
Accounts receivable (2,771,441) 128,387 (606,518)
Inventories, prepaid expenses, and other assets 158,032 (203,841) (757,846)
Accounts payable, accrued payroll and related taxes,
unearned maintenance income, and other accrued liabilities (87,396) 424,508 313,535
----------------------------------------------
Net cash used in operating activities (316,014) (202,553) (2,708,206)
INVESTING ACTIVITIES
Purchases of property and equipment (214,850) (109,285) (150,079)
Acquisition of Technology Solutions, Inc. - net 0 0 (240,000)
Proceeds from note receivable 56,478 348,753 0
Proceeds from sale of property and equipment 400 100 140
Proceeds from sale of Fax business 0 420,000 0
----------------------------------------------
Net cash provided by (used in) investing activities (157,972) 659,568 (389,939)
FINANCING ACTIVITIES
Repurchase of common stock (14,150) 0 0
Proceeds from borrowings 0 0 150,000
Repayment of notes payable and long-term liabilities 0 (4,706) (159,189)
Proceeds from exercise of stock options and warrants 145,965 27,334 68,722
Net proceeds from sales of stock 0 0 4,089,316
----------------------------------------------
Net cash provided by financing activities 131,815 22,628 4,148,849
----------------------------------------------
NET INCREASE (DECREASE) IN CASH (342,171) 479,643 1,050,704
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,740,760 1,261,117 210,413
==============================================
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,398,589 $ 1,740,760 $ 1,261,117
==============================================
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION
Cash paid for interest $ - $ - $ 3,165
Income tax refund received $ - $ - $ 30,185
Cash paid for income taxes $ 26,053 $ - $ 13,500
</TABLE>
See notes to consolidated financial statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Mitek Systems, Inc. (the "Company") is a designer,
manufacturer and marketer of advanced character recognition products for
intelligent forms processing applications ("Character Recognition") and, in
fiscal 1998, started emphasizing document imaging system products and solutions
systems integration services.
Basis of Consolidation - The consolidated financial statements include
accounts of Mitek Systems, Inc. and its wholly-owned subsidiary, Mitek Systems
Canada, Incorporated on June 21, 1995. All intercompany transactions and
balances are eliminated in consolidation. The business of the Canadian
corporation was sold in January 1998 - see Note 3.
Cash and Cash Equivalents - Cash equivalents are defined as highly
liquid financial instruments with original maturities of three months or less. A
substantial portion of the Company's cash and cash equivalents is deposited with
one financial institution. The Company monitors the financial condition of the
financial institution and does not believe that the deposit is subject to a
significant degree of risk.
Accounts Receivable - Accounts receivable are net of an allowance for
doubtful accounts of $326,886 and $125,000 on September 30, 1999 and 1998,
respectively. The provision for bad debts was $ 273,529, $ 92,877, and $210,566
for the years ended September 30, 1999, 1998 and 1997, respectively.
Inventories - Inventories are recorded at average cost. The Company
recorded a $200,000 reserve for inventory obsolescence during the first quarter
of fiscal 1998. Major classes of inventories, net of obsolescence reserves, on
September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Raw materials $ 29,703 $ 14,177
Finished Goods 28,379 109,732
--------- --------
Total $ 58,082 $123,909
========= ========
</TABLE>
Property and Equipment - Following is a summary of property and
equipment as of September 30, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Property and equipment - at cost:
Equipment $1,076,511 $1,038,974
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Furniture and fixtures 104,507 92,118
Leasehold improvements 52,984 52,984
-----------------------
1,234,002 1,184,076
Less: accumulated depreciation and amortization 952,431 991,941
-----------------------
Total $ 281,571 $ 192,135
=======================
</TABLE>
Other Assets - Other assets consisted of the following at September 30,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Goodwill - net $ 0 $ 537,832
Prepaid software rights - TSI - net 126,290 0
Prepaid software rights - PFP Pro - net 149,996 200,000
Prepaid license/support fees - net 283,691 202,476
Investment in Parascript 0 668,814
Other - net 15,321 17,291
------------------------
Total - net $ 575,298 $1,626,413
=======================
</TABLE>
The Company monitors events or changes in circumstances that may
indicate that the carrying amount of goodwill and intangible assets may not be
recoverable. If these factors indicate that such asset is not recoverable, as
determined based upon undiscounted cash flows before interest charges of the
asset over the remaining amortization period, the carrying value of the asset
will be reduced.
Goodwill impairment -In June, 1997 the Company purchased substantially
all of the assets of Technology Solutions, Inc. a software developer and
solution provider of document image processing systems. One of the key employees
of the Company, a former principal of Technology Solutions, Inc., resigned his
employment in December, 1997. The unexpected departure, in the opinion of
management, detrimentally impacted the future cash flows of the Company. The
Company determined the fair value of the goodwill by evaluating the expected
future net cash flows in accordance with SFAS 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The evaluation
indicated the carrying value of the goodwill exceeded the fair value, resulting
in an impairment loss of $293,000 in the first quarter of fiscal 1998, included
in Other Charges in the accompanying consolidated statements of operations. On
October 20,1998, the Company settled a pending lawsuit with the two founders of
Technology Solutions, Inc. - see Note 2. This settlement did not result in an
additional impairment of goodwill.
License Fee impairment - In April 1997 the Company entered into an
exclusive software licensing agreement with Parascript Limited Liability
Company (Parascript). In December 1997, Parascript notified the Company of
its dissatisfaction with the
Page 2
<PAGE>
Company's progress in marketing the software affected by the license
agreement, along with an assertion that the Company had committed material
breach of contract. The Company strongly and vigorously denied the claims. In
addition, the Company over-estimated the availability and the performance of
the product and anticipated prices for the software affected by the
agreement. The adversarial condition of the relationship coupled with the
decreased expectations, in the opinion of management, would have
detrimentally impacted the future cash flows of the Company. The Company
determined the fair value of the license fee, paid for the exclusive license,
by evaluating the expected future net cash flows in accordance with SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of. The evaluation resulted in an impairment loss of $196,000
in the first quarter of fiscal 1998, included in Other Charges in the
accompanying consolidated statements of operations. On October 16, 1998, the
Company entered into a new agreement with Parascript - see Note 10.
Inventory Reserves - The Company traditionally sold its QuickStrokes(R)
Application Programmer Interface products with various acceleration hardware
boards. Decreasing prices coupled with the higher speeds of general hardware
rapidly altered the market need for these acceleration boards. The largest
customer utilizing these acceleration boards informed the Company of its intent
to discontinue the offering of these products in the domestic market. As a
result, the Company recorded a reserve for inventory obsolescence in the amount
of $200,000 in the first quarter of fiscal 1998, included in Other Charges in
the accompanying consolidated statements of operations. At September 30, 1999
the reserve balance is $49,151 and the Company is attempting to sell its
remaining acceleration hardware boards.
Depreciation and Amortization - Depreciation and amortization of
property and equipment, goodwill, prepaid license/support fees and prepaid
software rights are provided using the straight-line method over estimated
useful lives ranging from three to five years. Depreciation and amortization of
property and equipment totaled $121,322, $114,502, and $127,622 for the years
ended September 30, 1999, 1998 and 1997, respectively. Amortization of prepaid
license/support fees and prepaid software rights totaled $202,248, $374,016, and
$552,748 for the years ended September 30, 1999, 1998 and 1997, respectively.
Warranty - The Company previously accrued a warranty cost for
acceleration hardware boards sold. During early fiscal 1998 the decreasing
prices and increasing performance of general computing hardware rapidly altered
the market need for these acceleration boards. The Company currently sells
primarily software only and discontinued accruing warranty costs. On September
30, 1999 and 1998, other accrued liabilities included an accrued warranty
liability of $-0- and $10,000, respectively. Warranty expenses were $-0-, $-0-,
and $18,814 the years ended September 30, 1999, 1998 and 1997, respectively.
Revenue Recognition - The Company recognizes revenues in accordance
with the American Institute of Certified Public Accountants Statement of
Position No. 97-2, Software Revenue Recognition. Accordingly, software product
revenues are recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the
Page 3
<PAGE>
Company's fees are fixed and determinable, and collectibility is probable.
Product maintenance revenues are amortized over the length of the maintenance
contract, which is usually twelve months. Unearned contract maintenance
revenue is included in Current Liabilities as unearned income in the
accompanying balance sheet at September 30, 1999.
Research and Development - Research and development costs are expensed in the
period incurred.
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 Accounting for Income Taxes,
which requires the use of the liability method for deferred income taxes - see
Note 6.
Earnings (Loss) Per Share - The Company calculates earnings (loss) per
share in accordance with Statement of Financial Accounting Standards No. 128,
Earnings per Share. Basic earnings per share is based on the weighted average
number of common shares outstanding during the period. Diluted earnings per
share also gives effect to all potential dilutive common shares outstanding
during the period, such as options and warrants.
Consolidated Statements of Cash Flows - Significant non-cash investing
and financing activities were comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1999 1998 1997
<S> <C> <C> <C>
Shares exchanged for the assets of Technology
Solutions, Inc. (Note 2) 0 0 $837,857
Shares exchanged for investment in Parascript LLC
(Note 10) 0 0 $668,814
Shares of unregistered common stock reacquired
pursuant to settlement agreement (Note 2) $369,446 0 0
Shares of unregistered common stock reacquired
pursuant to revised cross investment and
licensing agreements (Note 10) $477,451 0 0
</TABLE>
Accounting 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 contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates.
Stock Based Compensation - Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, was effective for the
Company beginning October 1, 1996. SFAS No. 123 requires expanded disclosures of
Page 4
<PAGE>
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Corporations are permitted, however, to continue to
apply Accounting Principles Board ("APB") Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company continued to apply APB Opinion No. 25 to its stock-based
compensation awards to employees and disclosed the required pro forma effect on
net income and earnings per share.
Comprehensive Income - Effective October 1, 1998, the Company adopted Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income. There
are no material current differences between net income and comprehensive income
and, accordingly, no amounts have been reflected in the accompanying
consolidated financial statements.
Segment Reporting - The Company adopted Statement of Financial Accounting
Standards No. 131, Disclosures About Segments of an Enterprise and Related
Information, during 1999. The implementation of this standard results in the use
of a management approach in identifying segments of an enterprise. Management
has determined that segment disclosures are not appropriate because the Company
operates in only one segment.
Derivative Instruments - During 1998, Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
was issued effective for all fiscal quarters for fiscal years beginning after
June 15, 1999. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company does not expect the
adoption of this statement to materially effect the consolidated financial
statements.
Reclassifications - Certain prior years balances have been reclassified to
conform to the 1999 presentation.
2. ACQUISITIONS
On October 11, 1996, the Company purchased certain technologies from
Instant Information Deutschland (IID), a Munich, Germany based value-added
distributor of Mitek Networks. The purchase price was $257,000; $87,000 payable
in cash and the relief of all debt owed to Mitek by IID in the amount of
$170,000. As part of the purchase, the Company has exclusive licensing rights to
use copyrights associated with the purchased technology. The licensing rights
are freely transferable, worldwide and royalty-free. The purchase will enable
the Company to sell certain technologies directly into the German marketplace
which were previously distributed by IID. The carrying value was written off in
fiscal 1997.
On September 30, 1998, the Company purchased the software rights (source
code) to its PFP Pro Product, previously licensed from VALIData Sistemas de
Captura, S.A. de
Page 5
<PAGE>
C.V., for $200,000 in cash paid in October, 1998. This $200,000 is included
as prepaid software rights - PFP Pro in other assets at September 30, 1998
and is being amortized over 48 months as a component of cost of sales.
On June 3, 1997, the Company purchased substantially all of the assets of
Technology Solutions, Inc., a Chantilly, Virginia based software developer and
solution provider of document image processing systems. The purchase price
consisted of issuing 685,714 unregistered shares of the Company's common stock
and $240,000 cash payment. The purchase resulted in $1,065,107 of goodwill, to
be amortized over 60 months as a component of cost of sales A $293,000 goodwill
impairment was recorded in the first quarter of fiscal 1998. Disputes arose
between the Company, TSI, and the principals of TSI. On October 20,1998, the
Company entered into an agreement with TSI and its principals in settlement of
all claims and cross-claims. Pursuant to this agreement, the Company reacquired
591,114 shares of its unregistered common stock and a non-exclusive,
non-transferable, perpetual, worldwide, royalty-free license to use key
components of the TSI document imaging systems software. TSI and its principals
reacquired ownership of their technology and software. This settlement did not
result in an impairment of goodwill. The remaining unamortized goodwill balance
after this transaction of $168,366 was allocated to the software rights retained
and is being amortized over 48 months, as a component of cost of sales.
3. SALE OF FAX BUSINESS
On January 30, 1998, the Company sold its Fax Products assets in a cash
transaction, resulting in a gain of $34,000 included in Other Expenses - Net on
the Consolidated Statement of Operations. The gross proceeds of the sale were
$420,000 in cash, offset by the net carrying value of the assets sold of
($308,000) and costs related to the transaction of ($78,000).
4. STOCKHOLDERS' EQUITY
OPTIONS - The Company has stock option plans for executives and key
individuals who make significant contributions to the Company. The 1986 plan
provides for the purchase of up to 630,000 shares of common stock through
incentive and non-qualified options. The 1986 plan expired on September 30, 1996
and no additional options may be granted under this plan. The 1988 plan provides
for the purchase of up to 650,000 shares of common stock through non-qualified
options. The 1988 plan expired on September 13, 1998. For both plans, options
must be granted at fair market value and for a term of not more than six years.
Employees owning in excess of 10% of the outstanding stock are excluded from the
plans.
The 1996 plan provides for the purchase of up to 1,000,000 shares of common
stock through incentive and non-qualified options. Options must be granted at
fair market value and for a term of not more than ten years. Employees owning in
excess of 10% of the outstanding stock are included in the plan on the same
terms except that the options must be granted for a term of not more than five
years. The 1996 plan maximized in February, 1999 and no additional options may
be granted under this plan.
Page 6
<PAGE>
The 1999 plan provides for the purchase of up to 1,000,000 shares of common
stock through incentive and non-qualified options. Incentive options must be
granted at fair market value while non-qualified options may be granted at no
less than 85% of fair market value, and for a term of not more than ten
years. Employees owning in excess of 10% of the outstanding stock are
included in the plan on the same terms except that the options must be
granted for a term of not more than five years.
Information concerning stock options granted by the Company under all plans for
the years ended September 30, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
SHARES PRICE RANGE
<S> <C> <C>
Balance, September 30, 1996 741,584 .656 - 2.250
Granted 630,250 1.030 - 3.375
Exercised (34,402) .656 - 1.438
Cancelled (359,766) 1.219 - 3.750
---------- ---------------
Balance, September 30, 1997 977,666 .656 - 3.750
Granted 1,798,802 .89 - 1.250
Exercised (35,693) .656 - 1.38
Cancelled (1,187,359) .656 - 3.68
---------- ---------------
Balance, September 30, 1998 1,553,416 .67 - 2.125
Granted 1,162,953 .4375 - 3.50
Exercised (240,738) .4375 - 1.38
Cancelled (1,140,533) .4375 - 1.25
---------- ---------------
Balance, September 30, 1999 1,335,098 .4375 - 3.50
========== ===============
</TABLE>
The weighted average remaining contractual life was 7.5 years for the
outstanding stock options at September 30, 1999, with a weighted average
exercise price of $1.67. At September 30, 1999, options for 606,993 shares
remained available for granting under the 1999 option plan. At September 30,
1999, options for 485,061 shares were exercisable with a weighted average
exercise price for these options of $1.19.
All stock options are granted at fair market value of the Company's
common stock at the grant date. The weighted average fair value of the stock
options granted during fiscal 1999 was $0.95. The fair value of each stock
option grant is estimated on the date of the grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants in 1999: risk-free interest rate of 5.5%; expected dividend yield of 0%;
expected life of 3 years; and expected volatility of 99%. Stock options
generally expire between six to ten years from the grant date. Stock options
generally vest over a three year period, with one thirty sixth becoming
exercisable on each of the monthly anniversaries of the grant date.
The Company accounts for its options in accordance with Accounting
Principles
Page 7
<PAGE>
Board Opinion No. 25, under which no compensation cost has been recognized
for employee stock option awards. Had compensation cost been determined
consistent with SFAS No. 123, the Company's pro forma net income and earnings
per share for fiscal 1997 would have been ($2,715,014) and ($.26),
respectively, the Company's pro forma net loss and net loss per share for
fiscal 1998 would have been ($2,005,401) and ($.17), respectively, and the
Company's pro forma net income and net income per share for fiscal 1999 would
have been $1,440,842 and $.13, respectively. Because the SFAS No. 123 method
of accounting has not been applied to options granted prior to October 1,
1995, the resulting pro forma compensation cost may not be representative of
that to be expected in future years.
Sale of Common stock - In the first quarter of fiscal 1997, the Company
undertook a secondary public offering in which a total of 2,250,000 shares of
common stock were sold at $2.25 per share, providing the Company with net
proceeds of $4,089,316.
5. LINE OF CREDIT - BANK
In June 1999, the Company renewed its working capital line of credit
from its Bank, Rancho Santa Fe National Bank ("Bank") for $750,000. The line of
credit expires on June 8, 2000 and interest is payable at prime plus 1.5
percentage points. In addition, the Company renewed its equipment credit line in
the amount of $250,000 under similar terms and conditions. There were no
borrowings under the working capital or equipment lines of credit as of
September 30, 1999. The Company believes that together with existing cash,
credit available under the extended credit line, and cash generated from
operations, funds will be sufficient to finance its operations for the next
twelve months. All cash in excess of working capital requirements will be kept
in short term, investment grade securities.
Page 8
<PAGE>
6. INCOME TAXES
For the years ended September 30, 1999, 1998 and 1997, the Company's
provision for income taxes were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Federal - current $29,000 $-0- $-0-
State - current -0- -0- -0-
--------- --- ---
Total $29,000 $-0- $-0-
======== ===== ====
</TABLE>
There was no provision for deferred income taxes in 1999, 1998, or 1997. Under
FAS No. 109, deferred income tax liabilities and assets reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's net deferred tax liabilities
and assets as of September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
Reserves not currently deductible $ 161,000 $ 58,000
Book depreciation and amortization in excess of tax 438,000 119,000
Research credit carryforwards 529,000 529,000
AMT credit carryforward 49,000 19,000
Net operating loss carryforwards 247,000 1,280,000
Capitalized research and development costs 347,000 230,000
Uniform capitalization (20,000) 9,000
Other 133,000 311,000
----------- ---------
Total deferred tax assets 1,884,000 2,555,000
Valuation allowance for net deferred tax assets (1,884,000) (2,555,000)
----------- ----------
Total $ 0 $ 0
============= ==========
</TABLE>
The Company has provided a valuation allowance against deferred tax
assets recorded as of September 30, 1999 and 1998 due to uncertainties regarding
the realization of such assets.
The research credit and net operating loss carryforwards expire during
the years 2005 to 2011. The federal net operating loss carryforward at September
30, 1999 totaled $689,000.
The differences between the provision for income taxes and income taxes computed
using the U.S. federal income tax rate were as follows for the years ended
September 30:
Page 9
<PAGE>
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Amount computed using statutory rate (34%) $ 698,000 $(508,900)
Net change in valuation reserve for deferred tax assets (671,000) 503,000
Non-deductible items 7,000 8,757
State income taxes
Other (5,000) (2,857)
--------- ---------
Provision for income taxes $ 29,000 $ 0
========= =========
</TABLE>
7. LONG-TERM LIABILITIES
As of September 30, 1999 and 1998, long term liabilities were as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred rent payable - see Note 8 $41,973 $50,187
Non current deposits 9,067 4,000
------- -------
Total $51,040 $54,187
======= =======
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
LEASES - The Company's offices and manufacturing facilities are leased
under non-cancelable operating leases. The primary facilities lease expires on
June 30, 2002. In addition, the Company leases office space in Sterling, VA
which expires December 31, 2003. The lease payments are expensed on a
straight-line basis over the lease term.
The Company signed an agreement to sub-lease office space adjacent to its
primary offices, effective May 1, 1998 through June 30, 2002. In addition the
Company signed an agreement to sub-lease office space it previously occupied in
Chantilly, VA, effective January 1, 1999 through July 31, 2002.
Future annual minimum rental payments payable by the Company and annual minimum
sub-lease amounts under non-cancelable leases are as follows:
<TABLE>
<CAPTION>
OPERATING SUB-LEASE
LEASES (INCOME)
<S> <C> <C>
YEAR ENDING SEPTEMBER 30:
2000 $283,510 $(171,274)
2001 294,128 (175,782)
2002 241,939 (147,449)
Thereafter 32,579 0
-------- ----------
Total $852,156 $(494,505)
======== ==========
</TABLE>
Page 10
<PAGE>
Rent expense for operating leases, net of sub-lease income, for the years
ended September 30, 1999, 1998 and 1997 totaled $167,141, $271,502, and
$196,323, respectively.
Page 11
<PAGE>
9. PRODUCT REVENUES AND SALES CONCENTRATIONS
Product Revenues - During fiscal years 1999 , 1998 and 1997, the
Company's revenues were derived primarily from the Character Recognition Product
line. Revenues by product line as a percentage of net sales are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1999 1998 1997
<S> <C> <C> <C>
Character recognition 94% 85% 87%
Other 6% 15% 13%
</TABLE>
Sales Concentrations - For the years ended September 30, 1999, 1998 and
1997, the Company had the following sales concentrations:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1999 1998 1997
<S> <C> <C> <C>
Customers to which sales were
in excess of 10% of total sales
* Number of customers 1 1 3
* Aggregate percentage of sales 10% 33% 54%
Foreign Sales - primarily Europe 22% 23% 41%
</TABLE>
10. LICENSING AGREEMENT
In April 1997 the Company entered into an exclusive software licensing
agreement with Parascript Limited Liability Company (Parascript). The terms of
the agreement required the Company to pay Parascript $650,000 cash, and lend
Parascript $250,000 cash to be repaid in part from the royalties due Parascript
(the $250,000 loan was repaid during the year ended September 30, 1998). In
addition, the entities entered into a cross investment agreement providing
Parascript with 763,922 shares of unregistered common stock of the Company
valued at $668,814 in exchange for a 10% interest in Parascript. The investment
in Parascript was accounted for on the cost method and is included in Other
Assets in the accompanying Balance Sheet at September 30, 1998.
On October 16, 1998 the Company and Parascript agreed to undo their
cross investment agreement and entered into a new licensing agreement. The new
licensing agreement is not exclusive except for six major customers, and
provides for a reduction in royalty percentages payable. The Company received
763,922 shares of unregistered common stock of the Company previously held by
Parascript valued at $477,451 in exchange for returning its 10% interest in
Parascript, exclusivity for six customers, and reduced royalties. The difference
between the carrying value of the investment in Parascript of $668,814 at
September 30, 1998 and the $477,451 value on October 16,
Page 12
<PAGE>
1998 of $191,363 was recorded as prepaid license rights and is being
amortized over 48 months as a component of cost of sales.
* * * * * *
Page 13
<PAGE>
INDEPENDENT AUDITORS' REPORT
Mitek Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Mitek Systems,
Inc. (the "Company") as of September 30, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 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. These 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
September 30, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1999, in
conformity with generally accepted accounting principles.
San Diego, California
December 7, 1999
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
(Nos. 33-3888, 333-23707, and 333-80567) of Mitek Systems, Inc. on Form S-8 of
our report dated December 7, 1999, appearing in this Annual Report on Form 10-K
of Mitek Systems, Inc. for the year ended September 30, 1999.
San Diego, California
December 21, 1999
Page 14
<PAGE>
SUPPLEMENTAL INFORMATION
CORPORATE OFFICE
Mitek Systems, Inc.
10070 Carroll Canyon Road
San Diego, California 92131
(858) 635-5900
REGIONAL OFFICE
107 Carpenter Drive, Suite 120
Sterling, Virginia 20164
(703) 318-7030
CORPORATE OFFICERS
John M. Thornton, Chairman, President,
Chief Executive Officer and Chief Financial Officer
David Pintsov, Senior Vice President
Dennis Brittain, Chief Technical Officer
William Boersing, Vice President Sales & Marketing
Noel Flynn, Vice President Operations
TRANSFER AGENT
Chase Mellon Shareholder Services
400 S. Hope Street, Fourth Floor, Los Angeles, California 90071
AUDITORS
Deloitte & Touche, LLP
701 B Street, Suite 1900, San Diego, California 92101
DIRECTORS
John M. Thornton (1), (2), Chairman, President, Chief Executive Officer and
Chief Financial Officer
Sally B. Thornton (1), Investor
Daniel E. Steimle (1), (2), Chief Financial Officer, Transmeta Corporation
James B. DeBello (2), President, Chief Executive Officer and Director,
CollegeClub.Com
Gerald I. Farmer, Ph.D.
NOTES
(1) Compensation Committee
(2) Audit Committee
FORM 10-K REPORT
Copies of the Company's Form 10-K report to the Securities and Exchange
Commission, are available free to stockholders and may be obtained by writing or
calling Secretary, Mitek Systems, Inc., 10070 Carroll Canyon Road, San Diego,
California 92131, phone (858) 635-5900.
1
<PAGE>
STOCKHOLDERS:
As of December 1, 1999, there were 561 holders of record of Mitek Systems,
Inc. Common Stock.
DIVIDENDS
Mitek Systems, Inc. has paid no dividends on its common stock since its
incorporation and currently intends to retain all earnings for use in its
business. Payment of dividends is restricted by the terms of outstanding debt
obligations.
COMMON STOCK MARKET (1)
PRICE RANGE (2)
<TABLE>
<CAPTION>
1999 1998
FISCAL QUARTER LOW HIGH LOW HIGH
<S> <C> <C> <C> <C>
1ST 0.4 1.37 .875 1.75
2ND 1.06 2.06 .53125 1.40625
3RD 1.31 2.93 .84375 1.25
4TH 2.5 4.37 .4375 1.125
</TABLE>
(1) The Company's common stock is traded on NASDAQ Small Cap Market under the
symbol "MITK" and the closing bid price on December 1, 1999 was $ 4.06.
(2) Bid quotations compiled by National Association of Securities Dealers, Inc.,
represents inter-dealer quotations and not necessarily actual transactions.
SELECTED FINANCIAL DATA
The table below sets forth selected financial data for each of the
years in the five-year period ended September 30, 1999.
<TABLE>
<CAPTION>
($000 EXCEPT PER SHARE DATA) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Sales $9,741 $6,501 $4,282 $8,154 $6,633
Net income (loss) 2,026 (1,497) (2,566) 1,229 (69)
Net income (loss) per share .19 (0.13) (.25) 0.16 (0.01)
Total assets 7,389 6,136 7,188 3,762 2,864
Long-term liabilities 51 55 22 6 57
Stockholders' equity 5,622 4,282 5,751 2,652 1,343
</TABLE>
<PAGE>
EXHIBIT 21
MITEK SYSTEMS CANADA INC.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-3888 of Mitek Systems, Inc. on Form S-8 of our report dated November 6, 1999,
appearing in the Annual Report on Form 10-K of Mitek Systems, Inc. for the year
ended September 30, 1999.
Deloitte & Touche LLP
San Diego, California
December 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 1,398,589
<SECURITIES> 0
<RECEIVABLES> 5,332,967
<ALLOWANCES> 326,886
<INVENTORY> 58,082
<CURRENT-ASSETS> 6,531,984
<PP&E> 1,234,002
<DEPRECIATION> 952,431
<TOTAL-ASSETS> 7,388,853
<CURRENT-LIABILITIES> 1,715,788
<BONDS> 51,040
0
0
<COMMON> 10,439
<OTHER-SE> 5,611,586
<TOTAL-LIABILITY-AND-EQUITY> 7,388,853
<SALES> 9,741,297
<TOTAL-REVENUES> 9,741,297
<CGS> 1,487,114
<TOTAL-COSTS> 6,227,724
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,054,885
<INCOME-TAX> 29,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,025,885
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.19
</TABLE>
