UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1999
--------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------------------------------------
Commission File Number: 0-18856
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DIGITAL BIOMETRICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1545069
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5600 Rowland Road, Minnetonka, Minnesota 55343
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(612) 932-0888
--------------
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
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 filing requirements
for the past 90 days. [x] Yes [ ] No
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date.
Common Stock, $.01 par value January 31, 2000 - 16,341,607 shares
---------------------------- ------------------------------------
(Class) (Outstanding)
1
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1999
INDEX
PART I - FINANCIAL INFORMATION:
PAGE
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED BALANCE SHEETS 4
CONSOLIDATED STATEMENTS OF OPERATIONS 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 18
PART II - OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. (a) EXHIBITS 19
(b) REPORTS ON FORM 8-K 19
SIGNATURES 20
2
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DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1999
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in this Form 10-Q include forward-looking statements made within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. As provided for under the Private Securities
Litigation Reform Act, the Company cautions investors that actual results of
future operations may differ from those anticipated in forward-looking
statements due to a number of factors, including the Company's ability to
maintain profitability, introduce new products and services, build profitable
revenue streams around new product and service offerings, maintain loyalty and
continued purchasing of the Company's products by existing customers, execute on
customer delivery and installation schedules, collect outstanding accounts
receivable and manage the concentration of accounts receivable and other credit
risks associated with selling products and services to governmental entities and
other large customers, create and maintain satisfactory distribution and
operations relationships with automated fingerprint identification system
("AFIS") vendors, attract and retain key employees, secure timely and
cost-effective availability of product components, meet increased competition,
maintain adequate working capital and liquidity, including the availability of
financing as may be required, and upgrade products and develop new technologies.
For a more complete description of such factors, see "Risk Factors" under Item 7
of the Company's Form 10-K report for the year ended September 30, 1999.
3
<PAGE>
DIGITAL BIOMETRICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,234,490 $ 3,175,868
Accounts receivable, less allowance for doubtful accounts of $134,015
and $128,587, respectively 6,494,060 7,415,334
Inventory (note 4) 3,094,776 2,972,998
Prepaid expenses and other costs 223,442 195,887
------------ ------------
Total current assets 14,046,768 13,760,087
------------ ------------
Property and equipment 2,807,232 2,744,454
Less accumulated depreciation and amortization (1,923,588) (1,783,030)
------------ ------------
883,644 961,424
------------ ------------
Patents, trademarks, copyrights and licenses, net of accumulated
amortization of $74,690 and $73,019, respectively 22,473 17,054
Deferred issuance costs on convertible debentures, net of accumulated
amortization of $66,783 and $66,222, respectively (note 7) -- 8,216
------------ ------------
$ 14,952,885 $ 14,746,781
============ ============
Current liabilities:
Accounts payable $ 667,819 $ 1,826,451
Deferred revenue 2,932,500 2,319,828
Accrued warranty 805,479 745,104
Accrued installation costs 1,392,757 1,107,200
Other accrued expenses (note 6) 938,682 1,319,403
Current installments of capital lease obligations 51,888 57,292
------------ ------------
Total current liabilities 6,789,125 7,375,278
Capital lease obligations, less current installments 77,150 93,077
Convertible debentures (note 7) -- 148,097
------------ ------------
Total liabilities 6,866,275 7,616,452
------------ ------------
Stockholders' equity (note 8):
Preferred stock, undesignated, par value $.01 per share, 5,000,000
shares authorized, none issued -- --
Common stock, $.01 par value. Authorized, 40,000,000 shares; issued
and outstanding 16,269,476 and 16,017,629 shares, respectively 162,695 160,176
Additional paid-in capital 47,657,998 47,157,996
Deferred compensation (67,875) (75,500)
Accumulated deficit (39,666,208) (40,112,343)
------------ ------------
Total stockholders' equity 8,086,610 7,130,329
------------ ------------
$ 14,952,885 $ 14,746,781
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
DIGITAL BIOMETRICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Identification systems $ 5,773,261 $ 1,346,119
Maintenance 1,068,722 831,789
Systems integration services -- 189,760
------------ ------------
Total revenues 6,841,983 2,367,668
------------ ------------
Cost of revenues:
Identification systems 3,934,251 901,853
Maintenance 781,143 686,913
Systems integration services -- 100,504
------------ ------------
Total cost of revenues 4,715,394 1,689,270
------------ ------------
Gross margin 2,126,589 678,398
------------ ------------
Selling, general and administrative expenses:
Sales and marketing 586,029 426,025
Engineering and development 493,454 634,944
General and administrative 639,198 651,480
------------ ------------
Total expenses 1,718,681 1,712,449
------------ ------------
Income (loss) from operations 407,908 (1,034,051)
Other income (expense):
Interest income 40,095 6,275
Interest expense (note 8) (5,221) (164,647)
Other income (expense) 3,353 --
------------ ------------
Total other income (expense) 38,227 (158,372)
------------ ------------
Net income (loss) $ 446,135 $ (1,192,423)
============ ============
Net income (loss) per common share $ 0.03 $ (0.09)
============ ============
Net income (loss) per common share - assuming dilution $ 0.03 $ (0.09)
============ ============
Weighted average common shares outstanding 16,133,544 13,820,713
============ ============
Weighted average common shares outstanding - assuming dilution 17,500,465 13,820,713
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
DIGITAL BIOMETRICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 446,135 $(1,192,423)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for doubtful accounts receivable 5,428 (12,361)
Deferred compensation amortization 12,125 15,000
Depreciation and amortization 157,264 148,145
Gain on disposal of fixed assets (3,353) --
Interest expense amortization for the
intrinsic value of the beneficial
conversion feature of convertible
debentures -- 125,000
Interest expense on debentures converted
into common stock 12,350 9,490
Changes in operating assets and liabilities:
Accounts receivable 915,846 1,192,023
Inventories (121,778) (46,870)
Prepaid expenses (27,555) (447)
Accounts payable (1,158,632) (617,324)
Deferred revenue 612,672 161,899
Accrued expenses 119,972 (254,416)
----------- -----------
Net cash provided by (used in) operating activities 970,474 (472,284)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (79,321) (80,374)
Proceeds from disposal of property and equipment 10,018 --
Patents, trademarks, copyrights and licenses (7,090) --
----------- -----------
Net cash used in investing activities (76,393) (80,374)
----------- -----------
Cash flows from financing activities:
Issuance of convertible debentures, net -- 450,111
Principal payments on capital lease obligations (21,331) (10,143)
Exercise of options 185,872 --
Net line of credit advances -- 17,326
----------- -----------
Net cash provided by financing activities 164,541 457,294
----------- -----------
Increase (decrease) in cash and cash equivalents 1,058,622 (95,364)
Cash and cash equivalents at beginning of period 3,175,868 840,616
----------- -----------
Cash and cash equivalents at end of period $ 4,234,490 $ 745,252
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Digital Biometrics, Inc., (the "Company," "Digital Biometrics" or
"DBI") is a leading provider of identification information systems that employ
"biometric" technology, which is the science of identifying individuals by
measuring distinguishing biological characteristics. DBI's biometric
identification and information technology services enable law enforcement and
other government agencies to identify suspects and manage information on
individuals, and help commercial employers and government agencies to conduct
background checks on applicants for employment or permits. DBI's offerings
include computer-based fingerprinting and photographic systems, software tools,
multi-media data storage and communications servers, and the systems integration
and software development services required to implement identification
management systems.
Under new management since 1997, Digital Biometrics has evolved from a
single-product, live-scan hardware supplier to an identification management
systems company. DBI continues to expand its product line and information
technology services to further penetrate the law enforcement market, while
introducing new products and services for emerging applicant-processing and
security markets among commercial and government customers. DBI's systems are
used wherever background identification checks and licensing are needed. Typical
customers include: U.S. government agencies, such as the Immigration and
Naturalization Service (INS) and the U.S. Postal Service; local and state
police; the military; school districts; financial institutions; utilities; and
casinos.
The Company's main products are special-purpose, computer-based systems
for "live-scan" fingerprint capture. These live-scan systems employ patented,
high-resolution optics and specialized hardware and software, combined with
industry-standard computer hardware and software, to create highly optimized,
special-purpose systems which capture, digitize, print and transmit
forensic-grade fingerprint and photographic images.
Also, the Company is engaged in a joint venture with Lakes Gaming, Inc.
(formerly known as Grand Casinos, Inc.), TRAK 21 Development, LLC, to develop,
test and market an automated wagering tracking system based on technology
developed by the Company. This system is intended to track the betting activity
of casino patrons playing blackjack.
A majority of the Company's revenues in the three-month periods ended
December 31, 1999 and 1998 were derived from live-scan systems sales,
photographic image capture systems, maintenance and applications development
services to governmental customers. The Company's sales have historically
included large purchases by a relatively small number of customers. This
concentration of sales among few relatively large customers is expected to
continue in the foreseeable future. Furthermore, the nature of government
markets and procurement processes is expected to result in continued
quarter-to-quarter fluctuations in the Company's revenues and earnings which are
and will continue to be difficult to predict.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with
7
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. For further information,
refer to financial statements and footnotes thereto included in the Company's
annual report on Form 10-K for the year ended September 30, 1999.
The consolidated financial statements include the accounts of Digital
Biometrics, Inc. and its wholly owned subsidiary Integral Partners, Inc. All
significant intercompany balances and transactions have been eliminated on
consolidation.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 which provides the staff's views in applying
generally accepted accounting principles to selected revenue recognition issues.
The Company will be required to adopt the new standard beginning with the first
quarter of fiscal 2001. The Company does not expect adoption to have a
significant effect on its consolidated statement of operations or financial
position.
(2) SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company extends credit to substantially all of its customers.
Approximately 93% and 94%, respectively, of customer accounts receivable at
December 31, 1999 and September 30, 1999 were from government agencies, of which
44% and 53%, respectively, were from two customers. Revenues from two customers
in the three-month period ended December 31, 1999 accounted for 36% and 13% of
total revenues, and revenues from three customers in the three-month period
ended December 31, 1998 accounted for 14%, 11% and 11% of total revenues. Export
revenues for the three-month period ended December 31, 1999 were less than 1% of
total revenues compared to 1% of total revenues for the same prior-year period.
(3) STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments and certificates of deposit purchased with an
original maturity date of three months or less to be cash equivalents.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Three Months Ended
December 31,
1999 1998
----------- ----------
Cash paid during the period for interest $3,510 $9,174
=========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
In October 1999, the Company issued 116,369 shares of common
stock for the conversion of principal aggregating $150,000 of the 1997
Debentures plus $12,252 of accrued interest.
8
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
Effective with his appointment to the Company's Board of
Directors on December 14, 1999, the Company granted 1,125 shares of
restricted common stock to a non-employee director. The grant resulted
in $4,500 in additional common stock issued and an equal amount of
deferred compensation expense that is being amortized on a
straight-line basis over the three-year vesting period.
For additional supplemental disclosure of non-cash investing
and financing activities see notes 7 and 8.
(4) INVENTORY
Inventory is valued at standard cost which approximates the lower of
first-in, first-out (FIFO) cost or market. Inventory consists of the following:
December 31, September 30,
1999 1999
------------ -------------
Components and subassemblies $2,191,613 $2,307,600
Work in process 453,871 434,714
Finished goods 449,292 230,684
------------ -------------
$3,094,776 $2,972,998
============ =============
(5) LINES OF CREDIT
Effective January 1, 2000, the Company established an inventory and
receivables financing line of credit for the lesser of eligible inventory and
receivables or $2,000,000 with Riverside Bank. Borrowings under this line of
credit are secured by all the assets of the Company. This line of credit
replaced the Company's previous line of credit agreement. The line bears
interest at a rate of 0.5% (one half percent) above the prime rate. The line
will expire in November 2000.
(6) OTHER ACCRUED EXPENSES
Other accrued expenses consists of:
December 31, September 30,
1999 1999
------------ -------------
Accrued salaries, bonuses and commissions $ 362,035 $ 773,106
Accrued vacation 218,542 195,757
Other accrued expenses 358,105 350,540
------------ -------------
$ 938,682 $ 1,319,403
============ =============
9
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
(7) 8% CONVERTIBLE SUBORDINATED DEBENTURES
On December 1, 1997, the Company entered into a convertible
subordinated debenture purchase agreement ("Purchase Agreement") with a private
investor, providing for the Company's issuance and sale of up to an aggregate of
$2,500,000 of 8% Convertible Subordinated Debentures (the "1997 Debentures") in
tranches of $500,000 each. The first four tranches were funded during fiscal
1998. The fifth tranche was funded in November 1998.
The intrinsic value of the beneficial conversion feature was $125,000
for the three-month period ending December 31, 1998 and has been recorded as
additional paid-in capital and interest expense in fiscal 1999. In October 1999,
the Company issued 116,369 shares of common stock for the conversion of the
final remaining principal aggregating $150,000 plus $12,252 of accrued interest
at an average conversion price of $1.39 per share.
(8) STOCKHOLDERS' EQUITY
During the three-month period ended December 31, 1999, the Company
granted stock option awards to non-executive employees for the purchase of an
aggregate of 123,000 shares of common stock. These options are exercisable at
prices from $3.36 to $4.00 per share and expire between 2006 and 2009.
During the three-month period ended December 31, 1999, the Company
granted a stock option award to a contractor for the purchase of 1,000 shares of
common stock. The option is exercisable at a price of $3.36 per share and
expires in 2006. The option is valued at $2,572 and is being amortized over the
three-year vesting period. The grant resulted in a $266 charge to sales and
marketing expense during the three-month period ended December 31, 1999.
Effective with his appointment to the Company's Board of Directors on
December 14, 1999, a stock option was granted to a non-employee director for the
purchase of 4,000 shares of common stock. The option is exercisable at a price
of $4.00 per share, the fair market value at date of grant, and expires on
December 14, 2004.
Effective December 31, 1999, the Company issued 45,855 shares of common
stock to satisfy the Company's discretionary matching to employees electing
participation in the Company's 401(k) retirement plan. This issuance increased
common stock and additional paid-in capital by $154,761 and reduced accrued
compensation by the same amount.
10
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
(9) NET INCOME (LOSS) PER COMMON SHARE
The per share computations are based on the weighted average number of
common shares outstanding during the periods.
Three Months Ended
December 31,
-------------------------
1999 1998
----------- -----------
Shares outstanding at beginning of period 16,017,629 13,661,832
Shares issued under retirement plan 45,855 67,828
Restricted stock awards, net of forfeitures 1,125 --
Exercise of options and warrants 88,498 --
Shares issued upon conversion of debentures 116,369 306,827
----------- -----------
Shares outstanding at end of period 16,269,476 14,036,487
=========== ===========
Weighted average common shares 16,133,544 13,820,713
Dilutive common shares assumes:
Options 869,928 --
Warrants 496,993 --
----------- -----------
Weighted average common shares
outstanding - assuming dilution 17,500,465 13,820,713
=========== ===========
Net income (loss) $ 446,135 $(1,192,423)
=========== ===========
Net income (loss) per common share $ 0.03 $ (0.09)
=========== ===========
Net income (loss) per common share -
assuming dilution $ 0.03 $ (0.09)
=========== ===========
The following is a summary of those securities outstanding at December
31 for the respective periods, which have been excluded from the calculations
because the effect on net income (loss) per common share would not have been
dilutive:
For the Three-Month Period
Ended December 31,
--------------------------
1999 1998
---------- ---------
Options 27,500 2,154,600
Warrants 112,893 605,893
Convertible debentures -- 1,029,727
11
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
As more fully described in the subsection "Risk Factors" under Item 7
of the Company's Form 10-K report for the year ended September 30, 1999, this
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These include statements regarding intent,
belief or current expectations of the Company and its management and are made in
reliance upon the "safe harbor" provisions of the Securities Litigation Reform
Act of 1995. Stockholders and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
a number of risks and uncertainties that may cause the Company's actual results
to differ materially from the results discussed in the forward-looking
statements.
Digital Biometrics, Inc., (the "Company," "Digital Biometrics" or
"DBI") is a leading provider of identification information systems that employ
"biometric" technology, which is the science of identifying individuals by
measuring distinguishing biological characteristics. DBI's biometric
identification systems and information technology services enable law
enforcement and other government agencies to identify and manage information
about individuals, and help commercial employers and government agencies to
conduct background checks on applicants for employment or permits. DBI's
offerings include computer-based fingerprinting and photographic systems,
software tools, multi-media data storage and communications servers, and the
systems integration and software development services required to implement
identification management systems.
Under new management since 1997, Digital Biometrics has evolved from
essentially a single-product live-scan hardware supplier to an identification
information systems company. DBI continues to expand its product line and
information technology services to further penetrate the law enforcement market,
while introducing new products and services for the emerging
applicant-processing and security markets among commercial and government
customers. Typical customers include: U.S. government agencies, such as the
Immigration and Naturalization Service (INS) and the U.S. Postal Service; local
and state police; the military; school districts; financial institutions;
utilities; and casinos.
The Company's main products are special-purpose, computer-based systems
for "live-scan" fingerprint capture. These live-scan systems employ patented,
high-resolution optics and specialized hardware and software, combined with
industry-standard computer hardware and software, to create highly optimized,
special-purpose systems which capture, digitize, print and transmit
forensic-grade fingerprint and photographic images.
The Company's strategy is to continue to market live-scan systems to
law enforcement agencies and to expand its product and service offerings and the
markets it serves. The law enforcement market for live-scan biometric products
is well established. The Company believes there is growing demand from other
governmental and commercial markets to employ identification
12
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
information technologies in enrollment and applicant processing applications.
Digital Biometrics is aggressively pursuing these emerging markets.
Also, the Company is engaged in a joint venture with Lakes Gaming,
Inc., formerly known as Grand Casinos, Inc., named TRAK 21 Development, LLC, to
develop, test and market an automated wagering tracking system based on
technology developed by the Company. This system is intended to track the
betting activity of casino patrons playing blackjack.
The law enforcement market and government procurement processes are
subject to budgetary, economic and political considerations which vary
significantly from state to state and among different agencies. These
characteristics, together with the increasing level of competition within the
live-scan electronic fingerprint industry, have resulted (and are expected to
continue to result) in an irregular revenue cycle for the Company.
The Company generally recognizes product sales on the date of shipment
for orders which are f.o.b. origin and upon delivery for f.o.b. destination,
although recognition at some later milestone is not uncommon based on the terms
of specific customer contracts. Revenue for professional services contracts and
systems integration services revenues are recognized using the percentage of
completion method, completed contract basis or on a time-and-materials basis.
Revenues from maintenance and repair contracts are recognized over the period of
the agreement. Services revenues are recognized when the related services are
performed. The Company's standard terms of sale are payment due net in thirty
days, f.o.b. Digital Biometrics, Inc. Terms of sale and shipment may, however,
be subject to negotiation and may affect the Company's timing and criteria for
revenue recognition.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1998
Total revenues were $6,842,000 for the three months ended December 31,
1999 compared to $2,368,000 for the same prior-year period. Identification
systems revenues were $5,773,000 compared to $1,346,000 in the same prior-year
period. This 329% increase is due primarily to an increase in the number of
live-scan systems sold during the three months ended December 31, 1999 including
the desktop model DBI FingerPrinter CMS and revenues from the Company's
photographic image systems and palm scanners.
Revenues from two customers in the three-month period ended December
31, 1999 accounted for 36% and 13% of total revenues, and revenues from three
customers in the same prior year period accounted for 14%, 11% and 11% of total
revenues. Export revenues for the three-month period ended December 31, 1999
were less than 1% of total revenues compared to 1% of total revenues for the
same prior-year period.
Maintenance revenues were $1,069,000 for the three months ended
December 31, 1999 compared to $832,000 for the same prior-year period, an
increase of 28%. This increase is due
13
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
primarily to a larger installed base of live-scan systems covered by maintenance
agreements and, to a lesser extent, an increase in revenue from additional
services.
There were no systems integration services revenues for the three
months ended December 31, 1999 compared to $190,000 for the same prior-year
period, due to the impact of refocusing Integral Partners, Inc. on
identification-related opportunities. Systems integration revenues during the
prior-year period were generated from the Company's wholly owned subsidiary
Integral Partners.
Overall gross margins for the three months ended December 31, 1999 were
31%, as compared to 29% of revenues for the same prior-year period.
Gross margins on identification systems revenues were 32% for the three
months ended December 31, 1999 compared to 33% in the same prior-year period.
This decrease is due primarily to volume discounts during the current-year
three-month period, partially offset by reduced product costs from economies of
scale.
Maintenance margins for the three months ended December 31, 1999 and
1998 were 27% and 17%, respectively. The increase in maintenance margins is due
primarily to the 28% increase in revenues from the larger installed base and
reduced costs resulting from the establishment of regional customer service
operations.
There was no gross margin generated from systems integration services
revenues for the three months ended December 31, 1999 compared to 47% gross
margin for the same prior-year period.
Sales and marketing expenses for the three-month period ended December
31, 1999 were 9% of total revenues compared to 18% for the same three-month
prior-year period. The decrease in sales and marketing costs as a percentage of
total revenue is due primarily to the increase in revenues. The increase in
absolute dollars of sales and marketing expenses for the current-year
three-month period is due primarily to an increase in personnel-related costs
and commissions associated with the increase in revenues. Engineering and
development expenses were 7% of total revenues for the three-month period ended
December 31, 1999 compared to 27% for the same period a year ago. This decrease
is due primarily to increased revenues resulting in improved economies of scale,
and decreased engineering expenses associated with Integral Partners, Inc.
Engineering expenses for the current-year three-month period are net of $239,000
of costs related to a Federally funded demonstration project grant. The Company
expects an increase in absolute dollars for engineering and development expenses
in future periods. General and administrative expenses for the three-month
periods ended December 31, 1999 and 1998 were 9% and 28%, respectively, of total
revenues. The decrease in general and administrative expenses as a percentage of
total revenue is due primarily to an increase in revenues resulting in improved
economies of scale and a decrease in personnel-related costs associated with
Integral Partners, Inc.
Interest income increased to $40,000 for the three months ended
December 31, 1999 from $6,000 for the same period in fiscal 1999 due to higher
cash balances.
Interest expense decreased to $5,000 for the three months ended
December 31, 1999 from $165,000 for the same prior-year period. The decrease is
primarily due to a $125,000 non-cash
14
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
charge during the prior-year three-month period for the intrinsic value of the
beneficial conversion feature of convertible debentures, reduced balance of
convertible debentures and reduced borrowings on a line of credit.
The Company generated a net income for the three-month period ended
December 31, 1999 of $446,000, or $0.03 per share, as compared to a net loss of
$1,192,000, $0.09 per share, for the same prior-year period.
INFLATION
The Company does not believe inflation has significantly affected
revenues or expenses.
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1999, the Company had carryforwards of net operating
losses of approximately $34,500,000 that may allow the Company to reduce future
income taxes that would otherwise be payable. Of this amount approximately
$2,330,000 relates to compensation associated with the exercise of non-qualified
stock options which, when realized, would result in approximately $932,000
credited to additional paid-in capital. The carryforwards expire annually
beginning in 1999. The annual limitation on use of net operating losses is
calculated by multiplying the value of the corporation immediately prior to the
change in ownership by the published U.S. Internal Revenue Service long-term
federal tax exempt rate. A total of $2,800,000 of the net operating loss
carryforwards at December 31, 1999 is subject to an annual net operating loss
limitation, estimated at $350,000, resulting from the change in control of the
Company which occurred, for income tax purposes, on December 14, 1990, the date
of the Company's initial public offering. If the limited carryforward amount for
any tax year exceeds the regular taxable income for such year, then the unused
portion may generally be carried forward to increase the annual limitation for
the following year. Utilization of net operating losses aggregating $31,700,000
which were incurred subsequent to the change of ownership are not limited.
However, any future ownership change could create a limitation with respect to
these loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Effective January 1, 2000, the Company established an inventory and
receivables financing line of credit for the lesser of eligible inventory and
receivables or $2,000,000 with Riverside Bank. Borrowings under this line of
credit are secured by all the assets of the Company. The line bears interest at
a rate of 0.5% (one half percent) above the prime rate. The line will expire in
November 2000. This line of credit replaced the Company's previously outstanding
line of credit.
For the period from the Company's inception in 1985 through December
31, 1999, the Company's cumulative deficit was $39,666,000. The Company
generated its first net income during fiscal 1999.
15
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
At December 31, 1999, the Company had $4,234,000 in cash and cash
equivalents. Historically, the Company has been reliant on the availability of
outside capital to sustain its operations. Management believes that cash, cash
equivalents, and other working capital provided from operations, together with
available financing sources, are sufficient to meet current and foreseeable
operating requirements of the Company's current business. Additional capital may
be required if the Company seeks to expand into new business areas.
ANALYSIS OF CASH FLOWS FROM OPERATIONS
Net cash provided by operating activities was $970,000 for the three
months ended December 31, 1999 compared to $472,000 of net cash used in the same
prior-year period. This favorable cash flow impact resulted primarily from the
net income generated during the current-year period, an increase in deferred
maintenance revenue and increases in installation and warranty accruals to
support the higher volume of identification systems revenue, partially offset by
decreased accounts payable balances during the current-year period.
Net cash used in investing activities of $76,000 for the three months
ended December 31, 1999 approximated the $80,000 used in investing activities
the same prior-year period.
Net cash provided by financing activities was $165,000 for the
three-month period ended December 31, 1999 compared to $457,000 during the same
prior-year period. Cash from financing activities was provided primarily from
stock option exercises during the current-year period and from the issuance of
convertible debentures during the prior-year period.
YEAR 2000 PHENOMENON
Computers, software and other equipment utilizing microprocessors that
use only two digits to identify a year in a date field may be unable to
accurately process certain date-based information, including correct leap year
recognition, at or after January 1, 2000. This is commonly referred to as the
"Year 2000" phenomenon. Digital Biometrics is addressing the potential effects
of the Year 2000 phenomenon on its business.
INTERNAL SYSTEMS
The Company has evaluated and reviewed Company internal systems that
could pose Year 2000 risks and corrected problems as they were identified. DBI
has requested and received Year 2000 readiness statements from each of its major
suppliers of hardware and software products used for internal business
applications, including computer and network software and equipment, and
telephone equipment. The Company will continue to monitor internal system
requirements and correct Year 2000 deficiencies as deemed necessary.
The Company believes that the majority of its internal information
systems are Year 2000 compliant, such that they are able to distinguish
accurately between 20th century and 21st century dates, and that the cost of
converting or replacing those that are not Year 2000 compliant are not material
in relation to the Company's financial position or results of operations.
However, there can
16
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
be no assurance that unforeseen difficulties or costs will not arise. Although
the Company has received Year 2000 readiness statements from each of its major
suppliers, it is possible that various business functions which require the
interaction of the Company's systems with those of suppliers or customers will
fail or malfunction in the Year 2000.
Year 2000 compliance statements have been received from the Company's
information systems suppliers for products supplied to the Company. Based on
these favorable statements, the Company does not believe there is any potential
material adverse effect or cost as pertains to Year 2000 issues. The Company
believes that hardware and software products for its internal systems are
available for purchase from alternative suppliers should its current vendors
fail to conform to Year 2000 compliance.
VENDOR-SUPPLIED PRODUCT COMPONENTS AND SERVICES
The Company has received correspondence from most of its vendors and
all of its critical suppliers, manufacturers, and other service providers as to
Year 2000 readiness of their operations and the products and services that they
provide to the Company. The Company has developed contingency plans to lessen
its risks with respect to the failure of third parties to be Year 2000 ready.
However, such failure, including failures of any contingency plans, remains a
possibility and may have a material adverse affect on the Company's results of
operations and financial condition.
COMPANY PRODUCTS
Management believes that the Company's 1133S TENPRINTER and DBI
FingerPrinter CMS systems, including options, shipped beginning January 1999,
are and will continue to be Year 2000 compliant. The Company evaluated products
sold prior to this date for Year 2000 suitability, the specific nature of
possible non-compliance, and the potential impact on DBI's customers. The
results have been communicated to the Company's customers in writing as product
generations were evaluated. Evaluation of the 1133S TENPRINTER and 1133R
TENPRINTER products have been completed with notification of compliance
communicated to the Company's customers in writing during fiscal 1999.
Based on results of tests, the Company has concluded that 1133S
TENPRINTER systems shipped prior to January 1999, were not Year 2000 compliant
with respect to certain date-sensitive functions, but can be made compliant with
software modifications. These modifications require changes to the operating
system of the affected products. The 1133S operating system is sourced from an
outside vendor, and then augmented by DBI to meet the particular requirements of
DBI's products. Consequently, achieving Year 2000 compliance requires obtaining
certain operating system modifications from the operating system vendor, which
are in turn incorporated by the Company into its applications and then
distributed by DBI to its customers. Year 2000 upgrades for the 1133S TENPRINTER
are being provided to customers with DBI maintenance agreements free of any
additional charge. Owners of non-compliant 1133S TENPRINTER systems that do not
have maintenance agreements with DBI may purchase Year 2000 upgrade software and
installation services from the Company.
17
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition, based on test results, the Company has also determined
that models of the TENPRINTER prior to the 1133S are not Year 2000 compliant
with respect to certain date-sensitive functions. The Company has tested Year
2000 compliance on legacy software releases on a product-by-product basis, and
has communicated to customers the specific functions which may not perform
properly. As with the 1133S, the underlying operating systems of prior models of
the TENPRINTER were sourced from outside vendors. Vendors no longer support
operating systems on models prior to the 1133S. Thus, no vendor assistance for
Year 2000 upgrading is available to Digital Biometrics, making the task of
upgrading these operating systems for Year 2000 compliance very difficult and
uneconomical. Some customers may continue to use non-compliant TENPRINTERs by
avoiding the use of non-compliant date-sensitive functions. To the best of the
Company's knowledge, the Company has no obligation to upgrade models of its
TENPRINTER product prior to the 1133S to Year 2000 compliance, and the Company
has no present plans to develop or offer any such upgrades. In the event that
the Company is required to offer Year 2000 compliance on TENPRINTER systems
prior to the 1133S without compensation, the Company may be materially adversely
affected. Customers with non-compliant systems may purchase the Company's
TENPRINTER 1133S or DBI FingerPrinter CMS systems.
The Company's revenue in fiscal 2000 may be adversely affected if
current and prospective customers delay procurements, installation or other
activities related to purchases of products and services of the Company in order
to evaluate and/or correct Year 2000 issues with other vendors.
COST OF YEAR 2000 COMPLIANCE TO THE COMPANY
The cost of the Company's software development addressing Year 2000
compliance of its live-scan products was approximately $29,000. The software
upgrades have been completed at a cost to the Company of approximately $167,000.
Additional information about the Year 2000 issue and the Company's
compliance program is available at the Company's web site at
www.digitalbiometrics.com.
Achieving Year 2000 compliance is dependent on a number of factors,
many of which are not within the Company's control. In the event that the above
assessment of the Company's situation regarding Year 2000 issues is incorrect,
the Company's business and its results of operations may be materially adversely
affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material lawsuits pending or, to the Company's
knowledge, threatened against the Company.
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No changes since September 30, 1999
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. (a) EXHIBITS
Exhibit 10.12 Loan Agreement dated November 19, 1999 between the
Company and Riverside Bank.
Exhibit 10.13 Commercial Security Agreement dated November 19, 1999
between the Company and Riverside Bank.
Exhibit 10.14 Promissory Note, dated November 19, 1999, made by the
Company in favor of Riverside Bank.
Exhibit 27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Company during
the three-month period ended December 31, 1999.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DIGITAL BIOMETRICS, INC.
------------------------
(Registrant)
February 14, 2000 /s/ John J. Metil
------------------------
John J. Metil
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
20
EXHIBIT 10.12
LOAN AGREEMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$2,000,000.00 11-19-1999 11-19-2000 90241693 01 3000 127732 DS
- ------------------------------------------------------------------------------------------------------------------------
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>
Borrower: DIGITAL BIOMETRICS, INC. Lender: RIVERSIDE BANK
5600 ROWLAND ROAD, SUITE 205 PLYMOUTH
MINNETONKA, MN 55343 2655 CAMPUS DRIVE
PLYMOUTH, MN 55441
THIS LOAN AGREEMENT between DIGITAL BIOMETRICS, INC. ("Borrower") and RIVERSIDE
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 November 19, 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 words "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 DIGITAL BIOMETRICS, 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) $2,000,000.00; or (b) the sum of (i)
70.000% of the aggregate amount of Eligible Accounts, plus (ii) 33.333% of
the aggregate amount of Eligible Inventory (not to exceed in corresponding
Loan amount based on Eligible Inventory $500,000).
Business Day. The words "Business Day" mean a day on which commercial
banks are open for business in the State of Minnesota.
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 the Account Debtor is not a
resident of the United States, except to the extent such Accounts
are supported by insurance, bonds or other assurances satisfactory
to Lender.
(e) 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.
(f) Accounts which are subject to dispute, counterclaim, or setoff.
(g) Accounts with respect to which the goods have not been shipped
or delivered, or the services have not been rendered, to the Account
Debtor.
(h) Accounts with respect to which Lender, in its sole discretion,
deems the creditworthiness or financial condition of the Account
Debtor to be unsatisfactory.
(i) 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 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.
(j) Accounts with respect to which the Account Debtor is the United
States government or any department or agency of the United States.
<PAGE>
11-19-1999 LOAN AGREEMENT Page 2
Loan No 90241693 (Continued)
(k) Accounts which have not been paid in full within 90 DAYS from
the invoice date.
Eligible Inventory. The words "Eligible Inventory" mean, at any time, all
of Borrower's Inventory as defined below except:
(a) Inventory which is not owned by Borrower free and clear of all
security interests, liens, encumbrances, and claims of third
parties.
(b) Inventory which Lender, in its sole discretion, deems to be
obsolete, unsalable, damaged, defective, or unfit for further
processing.
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.
Inventory. The word "Inventory" means all of Borrower's raw materials,
work in process, finished goods, merchandise, parts and supplies, of every
kind and description, and goods held for sale or lease or furnished under
contracts of service in which Borrower now has or hereafter acquires any
right, whether held by Borrower or others, and all documents of title,
warehouse receipts, bills of lading, and all other documents of every type
covering all or any part of the foregoing. Inventory includes inventory
temporarily out of Borrower's custody or possession and all returns on
Accounts.
Lender. The word "Lender" means RIVERSIDE 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 term "Tangible Net Worth" shall 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) and Related
Party Notes less total debt. The term "Related Party Notes" shall mean all
notes due from companies affiliated by common ownership, officers,
directors, stockholders, or employees. The term "Debt" shall mean all of
Borrower's liabilities excluding subordinated debt. The term "Subordinated
Debt" shall 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.
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
<PAGE>
11-19-1999 LOAN AGREEMENT Page 3
Loan No 90241693 (Continued)
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.
(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrower's Accounts, Inventory, 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.
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, general intangibles, and Inventory.
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. With respect to the Inventory,
Borrower agrees to keep and maintain such records as Lender may require,
including without limitation information concerning Eligible Inventory and
records itemizing and describing the kind, type, quality, and quantity of
Inventory, Borrower's Inventory costs and selling prices, and the daily
withdrawals and additions to Inventory.
Collateral Schedules. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender schedules of
Accounts and Inventory and Eligible Accounts and Eligible Inventory, 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 Eligible
Inventory and such other matters and information relating to the Accounts
and Inventory 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 Concerning Inventory. With respect to the
Inventory, Borrower represents and warrants to Lender: (a) All Inventory
represented by Borrower to be Eligible Inventory for purposes of this
Agreement conforms to the requirements of the definition of Eligible
Inventory; (b) All Inventory values listed on schedules delivered to
Lender will be true and correct, subject to immaterial variance; (c) The
value of the Inventory will be determined on a consistent accounting
basis; (d) Except as agreed to the contrary by Lender in writing, all
Eligible Inventory is now and at all times hereafter will be in Borrower's
physical possession and shall not be held by others on consignment, sale
on approval, or sale or return; (e) Except as reflected in the Inventory
schedules delivered to Lender, all Eligible Inventory is now and at all
times hereafter will be of good and merchantable quality, free from
defects; (f) Eligible Inventory is not now and will not at any time
hereafter be stored with a bailee, warehouseman, or similar party without
Lender's prior written consent, and, in such event, Borrower will
concurrently at the time of bailment cause any such bailee, warehouseman,
or similar party to issue and deliver to Lender, in form acceptable to
Lender, warehouse receipts in Lender's name evidencing the storage of
Inventory; and (g) Lender, its assigns, or agents shall have the right at
any time and at Borrower's expense to inspect and examine the Inventory
and to check and test the same as to quality, quantity, value, and
condition.
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:
<PAGE>
11-19-1999 LOAN AGREEMENT Page 4
Loan No 90241693 (Continued)
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Delaware 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.
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., 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 5600 ROWLAND ROAD, SUITE 205, MINNETONKA, MN
55343. Unless Borrower has designated otherwise in writing this location
is also the office or offices where Borrower keeps its records concerning
the Collateral.
Year 2000. Borrower warrants and represents that all software utilized in
the conduct of Borrower's business will have appropriate capabilities and
compatibility for operation to handle calendar dates falling on or after
January 1, 2000, and all information pertaining to such calendar dates, in
the same manner and with the same functionality as the software does
respecting calendar dates failing on or before December 31, 1999. Further,
Borrower warrants and represents that the data-related user interface
functions, data-fields, and data-related program instructions and
functions of the software include the indication of the century.
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.
<PAGE>
11-19-1999 LOAN AGREEMENT Page 5
Loan No 90241693 (Continued)
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 all
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 ninety (90) 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 thirty (30) 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
payables, 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. Additional information
shall be delivered according to the following schedule: BORROWER SHALL
PROVIDE LENDER WITH AN ACCOUNTS RECEIVABLE AGING, A BORROWING BASE
CERTIFICATE, AND AN INVENTORY LISTING NO LATER THAN THIRTY DAYS AFTER EACH
MONTH END. Financial Covenants and Ratios. Comply with the following
covenants and ratios:
Tangible Net Worth. Maintain a minimum Tangible Net Worth of not
less than $7,000,000.00 at September 30,1999 and monthly thereafter,
$7,500,000.00 at September 30, 2000 and monthly thereafter.
Net Worth Ratio. Maintain a ratio of Total Liabilities to Tangible
Net Worth of less than 1.20 at September 30, 1999 and monthly
thereafter. Current Ratio. Maintain a ratio of Current Assets to
Current Liabilities in excess of 1.75 to 1.00.
Income. Maintain not less than the following income level: Minimum
Profitability equal to or greater than $500,000.00 for Financial
Year End September 30, 2000.
For purposes of this Agreement and to the extent the following terms are
utilized in this Agreement, the term "Tangible Net Worth" shall 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) and
Related Party Notes less total debt. The term "Related Party Notes" shall
mean all notes due from companies affiliated by common ownership,
officers, directors, stockholders, or employees. The term "Debt" shall
mean all of Borrower's liabilities excluding subordinated debt. The term
"Subordinated Debt" shall 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. The term
"Working Capital" shall mean Borrower's current assets, excluding prepaid
expenses, less Borrower's current liabilities. The term "Liquid Assets"
shall mean Borrower's cash on hand plus Borrower's receivables. The term
"Cash Flow" shall mean net income after taxes, and exclusive of
extraordinary gains and income, plus depreciation and amortization. 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 Fees and Charges. In addition to all other agreed upon fees and
charges, pay the following: $10,000.00.
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 of 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.
<PAGE>
11-19-1999 LOAN AGREEMENT Page 6
Loan No 90241693 (Continued)
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.
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 "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1986, as amended), Borrower
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.
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.
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.
<PAGE>
11-19-1999 LOAN AGREEMENT Page 7
Loan No 90241693 (Continued)
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.
Year 2000 Compliance Failure. Failure to meet the deadlines required in
the Year 2000 Compliance Agreement to be Year 2000 Compliant or a
reasonable likelihood that Borrower cannot be Year 2000 Compliant on or
before December 31, 1999.
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 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 Minnesota. If there is a lawsuit, Borrower
agrees upon Lender's request to submit to the jurisdiction of the courts
of HENNEPIN County, the State of Minnesota. This Agreement shall be
governed by and construed in accordance with the laws of the State of
Minnesota.
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 addressees).
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
<PAGE>
11-19-1999 LOAN AGREEMENT Page 8
Loan No 90241693 (Continued)
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.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND
BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF NOVEMBER 19, 1999.
BORROWER:
DIGITAL BIOMETRICS, INC.
By: /s/ JOHN METIL, EVP, COO & CFO
LENDER:
RIVERSIDE BANK
By: /s/ DUANE SATHER 12/30/99
Authorized Officer
LASER PRO, Reg.U.S. Pal.& T.M.off., ver. 3.28b (c) 1999 CFI ProServices, Inc.All
rights reserved. [MN-C40 E3.28 F3.28 P3.28a 90241693.LN CL.OVL ]
EXHIBIT 10.13
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>
$2,000,000.00 11-19-1999 11-19-2000 90241693 01 3000 127732 DS
- ------------------------------------------------------------------------------------------------------------------------
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>
Borrower: DIGITAL BIOMETRICS, INC. Lender: RIVERSIDE BANK
5600 ROWLAND ROAD, SUITE 205 PLYMOUTH
MINNETONKA, MN 55343 2655 CAMPUS DRIVE
PLYMOUTH, MN 55441
THIS COMMERCIAL SECURITY AGREEMENT is entered into between DIGITAL BIOMETRICS,
INC. (referred to below as "Grantor"); and RIVERSIDE 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
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 DIGITAL BIOMETRICS, 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. In addition, the
word 'Indebtedness" includes all other obligations, debts and liabilities,
plus interest thereon, of Grantor, or any one or more of them, to Lender,
as well as all claims by Lender against Grantor, or any one or more of
them, whether existing now or later; whether they are voluntary or
involuntary, due or not due, direct or indirect, absolute or contingent,
liquidated or unliquidated; whether Grantor may be liable individually or
jointly with others; whether Grantor may be obligated as guarantor,
surety, accommodation party 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 RIVERSIDE BANK, its successors and
assigns.
Note. The word "Note" means the note or credit agreement dated November
19, 1999, in the principal amount of $2,000,000.00 from DIGITAL
BIOMETRICS, 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 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
<PAGE>
11-19-1999 COMMERCIAL SECURITY AGREEMENT Page 2
Loan No 90241693 (Continued)
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 Minnesota, 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., 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. 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
<PAGE>
11-19-1999 COMMERCIAL SECURITY AGREEMENT Page 3
Loan No 90241693 (Continued)
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.
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 Grantors 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 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.
<PAGE>
11-19-1999 COMMERCIAL SECURITY AGREEMENT Page 4
Loan No 90241693 (Continued)
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 Minnesota 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 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 Minnesota. If there is a lawsuit, Grantor agrees
upon Lender's request to submit to the jurisdiction of the courts of
HENNEPIN County, the State of Minnesota. This Agreement shall be governed
by and construed in accordance with the laws of the State of Minnesota.
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.
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).
<PAGE>
11-19-1999 COMMERCIAL SECURITY AGREEMENT Page 5
Loan No 90241693 (Continued)
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.
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.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED NOVEMBER 19,
1999.
GRANTOR:
DIGITAL BIOMETRICS, INC.
By: /s/ JOHN METIL, EVP, COO & CFO
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.27a (c) 1999 CFI ProServices, Inc.
All rights reserved. [MN-E40 E3.27 F3.27 P3.27 90241693.LN CI.OVL]
EXHIBIT 10.14
PROMISSORY NOTE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$2,000,000.00 11-19-1999 11-19-2000 90241693 01 3000 127732 DS
- ------------------------------------------------------------------------------------------------------------------------
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>
Borrower: DIGITAL BIOMETRICS, INC. Lender: RIVERSIDE BANK
5600 ROWLAND ROAD, SUITE 205 PLYMOUTH
MINNETONKA, MN 55343 2655 CAMPUS DRIVE
PLYMOUTH, MN 55441
Principal Amount: $2,000,000.00 Initial Rate: 9.000%
Date of Note: November 19, 1999
PROMISE TO PAY. DIGITAL BIOMETRICS, INC. ("Borrower") promises to pay to
RIVERSIDE BANK ("Lender"), or order, in lawful money of the United States of
America, the principal amount of Two Million & 00/100 Dollars ($2,000,000.00) 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 in one payment of all outstanding principal
plus all accrued unpaid interest on November 19, 2000. In addition, Borrower
will pay regular monthly payments of accrued unpaid interest beginning December
19, 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 independent index which is the PRIME RATE OF
INTEREST AS PUBLISHED EACH BUSINESS DAY IN THE MONEY RATES SECTION OF THE WALL
STREET JOURNAL (the "Index'). The Index is not necessarily the lowest rate
charged by Lender on its loans. If the Index becomes unavailable during the term
of this loan, Lender may designate a substitute index after notice to Borrower.
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 8.500% per annum. The interest rate to be applied to the unpaid
principal balance of this Note will be at a rate of 0.500 percentage points over
the Index, resulting in an initial rate of 9.000% per annum. NOTICE: Under no
circumstances will the interest rate on this Note be more than the maximum rate
allowed by applicable law.
PREPAYMENT. 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. Except for the foregoing, 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 unpaid portion of the regularly scheduled payment.
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) 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. (d) 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.
(e) 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. (f) Any guarantor dies or any of the other
events described in this default section occurs with respect to any guarantor of
this Note. (g) A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired. (h) Failure to meet the deadlines required in the Year
2000 Compliance Agreement to be Year 2000 Compliant or a reasonable likelihood
that Borrower cannot be Year 2000 Compliant on or before December 31, 1999. (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. 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. If not
prohibited by applicable law, 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 Minnesota. If there is a lawsuit,
Borrower agrees upon Lender's request to submit to the jurisdiction of the
courts of HENNEPIN County, the State of Minnesota. This Note shall be governed
by and construed in accordance with the laws of the State of Minnesota.
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.
COLLATERAL. This Note is secured by ALL CORPORATE ASSETS PER COMMERCIAL SECURITY
AGREEMENT DATED NOVEMBER 19, 1999.
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. 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 Lenders
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 by Lenders
<PAGE>
11-19-1999 PROMISSORY NOTE Page 2
Loan No 90241693 (Continued)
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.
LOAN AGREEMENT. AN EXHIBIT, TITLED "LOAN AGREEMENT," IS ATTACHED TO THIS NOTE
AND BY THIS REFERENCE IS MADE A PART OF THIS NOTE JUST AS IF ALL THE PROVISIONS,
TERMS AND CONDITIONS OF THE LOAN AGREEMENT HAD BEEN FULLY SET FORTH IN THIS
NOTE.
GENERAL PROVISIONS. 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
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.
SECTION DISCLOSURE. This loan is made under Minnesota Statutes, Section 47.59.
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:
DIGITAL BIOMETRICS INC.
By: /s/ JOHN METIL, EVP, COO & CFO
Variable Rate, Line of Credit
LASER PRO, Reg. U.S. Pat. & T.M. Off., ver. 3.27a (c) 1999 CFI ProServices, Inc.
All rights reserved. [MN-D20 E3.27 F3.27 P3.27 90241693.LN C1.OVL]
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000868373
<NAME> DIGITAL BIOMETRICS INC
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,234,490
<SECURITIES> 0
<RECEIVABLES> 6,628,075
<ALLOWANCES> 134,015
<INVENTORY> 3,094,776
<CURRENT-ASSETS> 14,046,768
<PP&E> 2,807,232
<DEPRECIATION> 1,923,588
<TOTAL-ASSETS> 14,952,885
<CURRENT-LIABILITIES> 6,789,125
<BONDS> 0
0
0
<COMMON> 162,695
<OTHER-SE> 7,923,915
<TOTAL-LIABILITY-AND-EQUITY> 14,952,885
<SALES> 5,773,261
<TOTAL-REVENUES> 6,841,983
<CGS> 3,934,251
<TOTAL-COSTS> 4,715,394
<OTHER-EXPENSES> 1,718,681
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,221
<INCOME-PRETAX> 446,135
<INCOME-TAX> 0
<INCOME-CONTINUING> 446,135
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 446,135
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
