UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the period ended: September 30, 1996
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Commission file number: 0-24820
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VIDEO SENTRY CORPORATION
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(Exact name of small business issuer as specified in its charter)
Minnesota 41-1679157
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
6365 CARLSON DRIVE, EDEN PRAIRIE, MN 55346
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(Address of principal executive offices)
(612) 934-9900
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(Issuer's telephone number)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve (12) months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past ninety (90) days.
Yes __X__ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 par value - 4,841,962 shares as of October 31, 1996.
Total number of pages: 29
Exhibit index on page: 12
VIDEO SENTRY CORPORATION
FORM 10-QSB
THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1996
INDEX
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PART I--FINANCIAL INFORMATION PAGE
Item 1 -- Financial Statements 3
Item 2 -- Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7
PART II--OTHER INFORMATION
Item 1 -- Legal Proceedings 10
Item 2 -- Changes in Securities 10
Item 3 -- Defaults Upon Senior Securities 10
Item 4 -- Submission of Matters to a Vote
of Security Holders 10
Item 5 -- Other Information 10
Item 6 -- Exhibits and Reports on Form 8K 10
Signatures 11
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BALANCE SHEETS
VIDEO SENTRY CORPORATION
September 30, December 31,
1996 1995
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(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 99,002 $ 221,606
Accounts Receivable 1,540,468 2,595,939
Inventory 2,399,035 2,552,706
Prepaid Expenses 110,161 106,775
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Total Current Assets 4,148,666 5,477,026
Property and Equipment:
Office Furniture and Equipment 554,300 553,399
Production Equipment 116,261 97,441
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670,561 650,840
Less Accumulated Depreciation (300,259) (164,360)
----------- -----------
370,302 486,480
Other Assets:
Patent and Organizational Costs (less
amortization of $30,552 and $25,328) 11,458 16,682
Software Development Costs 720,790 635,223
----------- -----------
732,248 651,905
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TOTAL ASSETS $ 5,251,216 $ 6,615,411
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 1,659,538 $ 2,223,969
Notes Payable 2,110,180 --
Accrued Expenses 323,568 464,905
Customer Deposits 14,000 28,013
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Total Current Liabilities 4,107,286 2,716,887
Rent Abatement 16,163 22,028
Shareholders' Equity:
Common Stock, $.01 par value, Authorized-10,000,000 shares;
Issued and Outstanding September 30, 1996-4,841,962 shares,
December 31, 1995-4,727,184 shares 48,420 47,272
Additional Paid-In Capital 7,862,934 7,577,361
Accumulated Deficit (6,783,587) (3,748,137)
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Total Shareholders' Equity 1,127,767 3,876,496
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,251,216 $ 6,615,411
=========== ===========
Note: Balance Sheet at December 31, 1995 derived from audited financial
statements at that date.
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS (UNAUDITED)
VIDEO SENTRY CORPORATION
Three Months Ended Nine Months Ended
September 30 September 30
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1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 605,250 $ 2,500,820 $ 2,000,382 $ 7,768,362
Cost of Sales 919,533 1,926,397 3,085,708 5,899,273
----------- ----------- ----------- -----------
Gross Profit (314,283) 574,423 (1,085,326) 1,869,089
Operating Expenses:
Research, Development, Engineering 76,433 194,329 320,514 467,151
Sales and Marketing 171,291 266,397 543,537 546,610
General and Administrative 316,450 337,085 1,002,918 937,723
----------- ----------- ----------- -----------
564,174 797,811 1,866,969 1,951,484
----------- ----------- ----------- -----------
Operating Income (Loss) (878,457) (223,388) (2,952,295) (82,395)
Interest Income 0 15,605 104 96,967
Interest Expense (49,379) (1,756) (83,259) (1,756)
----------- ----------- ----------- -----------
Pre-Tax Income (Loss) (927,836) (209,539) (3,035,450) 12,816
Income Tax Expense 450
----------- ----------- ----------- -----------
Net Income (Loss) ($ 927,836) ($ 209,539) ($3,035,450) $ 12,366
=========== =========== =========== ===========
Net Income (Loss) Per Share ($ 0.19) ($ 0.04) ($ 0.63) $ 0.00
=========== =========== =========== ===========
Weighted Average Shares
and Share Equivalents 4,841,962 4,715,026 4,808,529 5,207,965
=========== =========== =========== ===========
See notes to condensed financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (UNAUDITED)
VIDEO SENTRY CORPORATION
Nine Months Ended
September 30
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1996 1995
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<S> <C> <C>
Operating Activities:
Net Income (Loss) ($3,035,450) $ 12,365
Non-Cash Expenses Included in Income:
Depreciation and Amortization 141,124 81,569
Rent Abatement (5,865) 2,269
Changes in Operating Assets & Liabilities:
(Increase) Decrease in Accounts Receivable 1,055,470 (1,662,610)
(Increase) Decrease in Inventories and Prepaids 150,286 (1,276,290)
Increase (Decrease) in Accounts Payable and Accruals (705,769) 1,089,828
Increase (Decrease) in Customer Deposits (14,013) (92,997)
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Net Cash Used in Operating Activities (2,414,217) (1,845,866)
Investing Activities:
Purchases of Property & Equipment (19,721) (345,820)
Purchases of Investments -- (1,317,032)
Maturity of Investments -- 2,116,883
Purchased Software Development (85,567) (590,520)
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Net Cash Used in Investing Activities (105,288) (136,489)
Financing Activities:
Net Borrowings from Notes Payable 2,110,180 --
Proceeds from Exercise of Stock Options 286,721 208,695
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Net Cash Provided by Financing Activities 2,396,901 208,695
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Net Decrease in Cash and Cash Equivalents (122,604) (1,773,660)
Cash & Cash Equivalents at Beginning of Period 221,606 2,902,536
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Cash and Cash Equivalents at End of Period $ 99,002 $ 1,128,876
=========== ===========
See notes to condensed financial statements.
</TABLE>
VIDEO SENTRY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1996
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-QSB and Item 10 of Regulation
S-B. Accordingly, they do not include all of the information and 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. Operating results for the three month and nine month periods ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. For further information, refer
to the financial statements and footnotes thereto included in the Company's
annual report on Form 10-KSB for the year ended December 31, 1995.
NOTE 2 - INVENTORIES
Inventories consist primarily of raw materials, components and assembled
components on site.
NOTE 3 - SOFTWARE COSTS
The Company capitalizes software costs purchased from outside parties for its
point-of-sale product. The Company will amortize software costs based on units
sold or straight-line over three years, which ever is less. Amortization will
begin when the software product is tested and complete and the Company begins
selling the product.
NOTE 4 - WARRANTY COSTS
The Company's warranty policy generally provides for one year coverage on
defective equipment. Warranty costs are recorded as period costs when incurred.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Third Quarter and Nine Months Ended September 30, 1996)
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. This Form 10-QSB and other materials filed or to be
filed by the Company with the Securities and Exchange Commission, as well as
other written materials or oral statements that the company may make or publish
from time to time, contain forward-looking statements relating to such matters
as plans for future expansion, other business development activities,
anticipated financial performance, business prospects, and similar matters. Such
forward-looking statements by their nature involve substantial risks and
uncertainties, and actual results may differ materially from the anticipated
results or other expectations expressed in the forward-looking statements. These
risks and uncertainties include, but are not limited to, dependence on
significant customers, the need to attract and retain additional sales personnel
and the need for additional capital, as well as the risks and uncertainties
described herein.
RESULTS OF OPERATIONS
SALES. Sales for the third quarter ended September 30, 1996 were $605,000, a
decrease of 76% compared to sales of $2,501,000 for the third quarter of 1995.
For the nine months ended September 30, 1996 sales were $2,000,000, a decrease
of 74% compared to sales of $7,768,000 for the first nine months of 1995. The
decrease in sales was due to delays in the ability of several new and existing
customers to move forward with purchasing decisions, in part as a result of the
initial quality issues with respect to vendor-supplied components for the
Century Vision system, which was introduced in 1995. Although the quality issues
have been corrected and new vendors selected, these issues have affected 1996
sales. The decrease in sales was also due to significant turnover of the
Company's sales force. The Company has hired and is training new sales people.
For the first nine months of 1996, approximately 84% of total sales were to two
customers with multiple locations. One of these customers accounted for
approximately 69% of total sales. The Company expects sales to this customer to
be a significant percentage of total sales during the remainder of 1996.
GROSS PROFIT. Gross profit for the third quarter of 1996 was ($314,000),
compared to $574,000 for the third quarter of 1995. Gross profit for the first
nine months of 1996 was ($1,085,000), compared to $1,869,000 for the first nine
months of 1995. The decrease in gross profit for the third quarter and first
nine months of 1996 was due to the significant decrease in sales and related
installation activity, higher unabsorbed manufacturing overhead and higher
warranty and service costs as the Company increased its service organization to
support the increased number of installed customer sites. The decrease in the
Company's gross profit margin for 1996 was due to the lower level of sales with
which to leverage the fixed manufacturing, installation and service department
costs included in cost of sales. The decrease in the gross profit margin was
also due to the Company's increased investment in customer support and training
capabilities. The Company expects that the reduced material costs of its new
SentryVision system should provide an increase in the gross profit margin when
sales increase.
OPERATING EXPENSES. Operating expenses for the third quarter of 1996 were
$564,000, a decrease of 29% compared to $798,000 for the third quarter of 1995.
For the first nine months of 1996, operating expenses were $1,867,000, a
decrease of 4% over the first nine months of 1995. Research, development and
engineering expenses decreased 61% in the third quarter and 31% in the first
nine months of 1996, since the Company completed development of its second
generation system in 1995. Sales and marketing expenses decreased 36% in the
third quarter of 1996 due to a reduction of the Company's sales force. General
and administrative expenses decreased 6% in the third quarter due to cost
reduction efforts, but increased 7% for the first nine months of 1996 due to the
addition of management personnel and higher insurance and bad debt costs
compared to the first nine months of 1995. Operating expenses as a percentage of
sales were 93% for both the third quarter and the first nine months of 1996,
compared to 32% for the third quarter and 25% for the first nine of 1995. The
increase in operating expenses as a percentage of sales in 1996 was due to the
lower level of sales compared to 1995.
INTEREST EXPENSE. Net interest expense was $49,000 for the third quarter and
$83,000 for the first nine months of 1996, compared to net interest income of
$14,000 for the second quarter and $95,000 for the first nine months of 1995.
The Company earned interest income in 1995 from the investment of its cash
balances.
NET LOSS. Net loss for the third quarter of 1996 was $928,000, or $.19 per
share, compared to a net loss of $210,000, or $.04 per share, for the third
quarter of 1995. Net loss for the first nine months of 1996 was $3,035,000, or
$.63 per share, compared to net income of $12,000, or $.00 per share, for the
first nine months of 1995. The net losses in 1996 were the result of the
significant decrease in sales and gross profit for those periods.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through private and
public sales of Common Stock for which the Company has received an aggregate of
$7,600,000 in net proceeds, and borrowings under a line of credit and notes
payable. Working capital at September 30, 1996 was $41,000.
In March 1996, the Company entered into a $2,500,000 working capital line of
credit with a bank. The line of credit is secured by substantially all the
assets of the Company and the personal guarantee of the Company's President. The
line of credit accrues interest at a rate equal to 3% above the bank's reference
rate and matures in March 1998. Borrowing availability under the line of credit
is based on 80% of eligible accounts receivable and a maximum of $250,000 of
inventory. At September 30, 1996, the loan balance under the line of credit was
$1,106,000 and remaining availability was minimal. Eligible accounts receivable
increase as customer installations are completed and final billings are made.
In May 1996, the Company received $500,000 under a promissory note from Robert
D. Furst, Jr., one of the Company's directors, with interest at 10% and secured
by all of the assets of the Company. In July 1996, the Company received $250,000
under a promissory note from an investor, with interest at 10% and secured by
all of the assets of the Company. In September 1996, the Company received
$1,000,000 under a promissory note from another investor, which bears interest
at 10% and is secured by all of the assets of the Company. This promissory note
is subordinated to the bank line of credit. Both of the previous promissory
notes were repaid in full in September 1996. In October 1996, the Company
received $125,000 from Robert D. Furst, Jr. under a promissory note which allows
the Company to borrow up to $500,000, with interest at 10% and matures in
January 1997. This promissory note is secured by all of the assets of the
Company and is subordinated to the bank line of credit.
During the first nine months of 1996, cash used in operations was primarily for
payments to vendors and to fund the operating loss. The Company also invested
$86,000 in purchased software costs for its point of sale system during the
first nine months of 1996.
The Company anticipates that its working capital needs will continue to increase
due to operating losses and the expected growth in the business and expects that
it will need to raise additional capital through debt or equity financing. There
is no assurance that such additional financing will be available when needed or
on terms which are acceptable to the Company. In October 1996, Video Sentry
Corp. and Knogo North America, Inc. agreed to merge into a new publicly traded
entity to be called Sentry Technology Corp. The Company believes that its
anticipated capital needs will be satisfied by the completion of the merger,
which is subject to shareholder approval.
The Company has not been significantly impacted by inflation since its inception
and did not have any material commitments for fixed assets as of September 30,
1996.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
See Exhibit Index on page following signatures
b. Reports on Form 8-K
No reports on Form 8-K were filed during the three
months ended September 30, 1996.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VIDEO SENTRY CORPORATION
-------------------------------
(Registrant)
November 13, 1996 /s/ Robert D. Furst, Jr.
- ---------------------------- -------------------------------
Date Robert D. Furst, Jr.
Chairman and
Chief Executive Officer
November 13, 1996 /s/ Ronald W. McClurg
- ---------------------------- -------------------------------
Date Ronald W. McClurg
Chief Financial Officer and
Secretary
EXHIBIT INDEX TO FORM 10-QSB
Exhibit No. Description Page
- ----------- ---------------------------------------------- ----
10.1 Promissory Note dated September 23,
1996 between the Company and Kieth M. Rudman 13
10.2 Security Agreement dated September 23, 1996
between the Company and Kieth M. Rudman 15
10.3 Promissory Note dated October 31, 1996
between the Company and Robert D. Furst, Jr. 21
10.4 Security Agreement dated September 23, 1996
betwwen the Company and Robert D. Furst, Jr. 23
11.1 Computation of Net Income (Loss) per share 29
27 Financial Data Schedule
PROMISSORY NOTE
$1,000,000.00 September 23, 1996
1. FOR VALUE RECEIVED, VIDEO SENTRY CORPORATION, a Minnesota corporation (the
"Borrower"), hereby promises to pay to the order of KEITH M. RUDMAN, his
successors and assigns (the "Holder"), at 419 Sheridan Road, Winnetka, Illinois
60093, the sum of One Million and no/100 Dollars ($1,000,000.00), in lawful
money of the United States and immediately available funds, inclusive of
interest on the unpaid balance accruing as of the date hereof at a rate equal at
all times to ten percent (10%) per annum.
2. The outstanding balance of this Note in an amount equal to the unpaid
principal balance and all unpaid interest outstanding as of January 1, 1997
shall be due and payable in full on said date (the "Maturity Date").
3. The outstanding balance of this Note may be prepaid at any time at the option
of the Borrower, in whole or in part without premium or penalty.
4. As used herein, the term "Event of Default" shall mean and include any one or
more of the following events:
(a) the Borrower shall fail to pay any amounts required to be paid by the
Borrower under this Note within 10 days after written notice thereof to the
Borrower;
(b) the Borrower shall file a petition in bankruptcy or for reorganization
or for an arrangement pursuant to any present or future state or federal
bankruptcy act or under any similar federal or state law, or shall be
adjudicated a bankrupt or insolvent, or shall make a general assignment for
the benefit of its creditors, or shall be unable to pay its debts generally
as they become due; or if an order for relief under any present or future
federal bankruptcy act or similar state or federal law shall be entered
against the Borrower; or if a petition or answer requesting or proposing
the entry of such order for relief or the adjudication of the Borrower as a
debtor or bankrupt or reorganization under any present or future state or
federal bankruptcy act or any similar federal or state law shall be filed
in any court and such petition or answer shall not be discharged or denied
within sixty (60) days after the filing thereof; or if a receiver, trustee
or liquidator of the Borrower or of all or substantially all of the assets
of the Borrower shall be appointed in any proceeding brought against the
Borrower and shall not be discharged within sixty (60) days of such
appointment; or if the Borrower shall consent to or acquiesce in such
appointment; or if more than $10,000 worth of property of the Borrower
shall be levied upon or attached in any proceeding; or
(c) the Borrower shall liquidate, dissolve, terminate or suspend (for a
period of sixty (60) days or more) its business operations, or sell all or
substantially all of its assets, without the prior written consent of the
Holder.
5. Upon the occurrence of an Event of Default or any time thereafter, the Holder
shall have the right to, at its option, declare the entire balance then
remaining unpaid on this Note to be immediately due and payable, and the same
shall thereupon be immediately due and payable, together with all interest
accrued hereon (and to be accrued hereon through the Maturity Date), without
notice or demand.
6. Upon the occurrence of an Event of Default or at any time thereafter, the
Borrower promises to pay all costs of collection of this Note, including but not
limited to reasonable attorneys' fees, paid or incurred by the Holder on account
of such collection, whether or not suit is filed with respect thereto and
whether such cost or expense is paid or incurred, or to be paid or incurred,
prior to or after the entry of judgment.
7. Demand, presentment, protest and notice of nonpayment and dishonor of this
Note are hereby waived.
8. This Note shall be governed by and construed in accordance with the laws of
the State of Minnesota.
9. This Note is secured pursuant to a Security Agreement of even date herewith.
BORROWER:
VIDEO SENTRY CORPORATION
By: /s/ Leonard W. Kedrowski
Leonard W. Kedrowski
Its Chief Executive Officer
SECURITY AGREEMENT
THE SECURITY AGREEMENT, is made as of this 23rd day of September, 1996, by VIDEO
SENTRY CORPORATION, a Minnesota corporation (the "Debtor"), in favor of KEITH M.
RUDMAN, an Illinois resident ("Secured Party").
In order to secure the payment of the Promissory Note dated September 23rd,
1996, executed by the Debtor and payable to the order of Secured Party in the
original principal amount of $1,000,000.00 (the "Note"), and each and every
other debt, liability and obligation of every type and description which Debtor
may now or at any time hereafter owe to Secured Party (whether such debt,
liability or obligation now exists or is hereafter created or incurred, whether
it arises under or is evidenced by this Agreement or any other present or future
instrument or agreement or by operation of law, and whether it is or may be
direct or indirect, due or to become due, absolute or contingent, primary or
secondary, liquidated or unliquidated, or sole, joint, several or joint and
several) (all such debts, liabilities and obligations of Debtor to Secured Party
herein collectively referred to as the "Secured Obligations"), Debtor hereby
agrees as follows:
1. SECURITY INTEREST AND COLLATERAL. In order to secure the payment and
performance of the Secured Obligations, Debtor hereby grants to Secured Party a
security interest (herein called the "Security Interest") in and to the
following property (hereinafter collectively referred to as the "Collateral"):
any and all furniture, fixtures, machinery, equipment,
inventory, accounts, prepaid insurance, supplies,
patents, patent rights, copyrights, trademarks, trade
names, goodwill, royalty rights, franchise rights,
chattel paper, license rights, documents, instruments,
general intangibles and any and all other goods, now
owned or hereafter acquired by the Debtor and wherever
located,
together with all substitutions and replacements for and products and proceeds
of any of the foregoing property and, in the case of all tangible Collateral,
together with (i) all accessories, attachments, parts, equipment, accessions and
repairs now or hereafter attached or affixed to or used in connection with any
such goods, and (ii) all warehouse receipts, bills of lading and other documents
of title now or hereafter covering such goods.
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Debtor hereby represents and
warrants to, and covenants and agrees with, Secured Party as follows:
(a) Debtor's chief executive office is located at 6365 Carlson Drive, Eden
Prairie, Minnesota 55346 and it keeps and will keep all of its books
and records with respect to all of its accounts at such address.
(b) During the preceding one (1) year Debtor has not changed its name or
operated or conducted business under any trade name or "d/b/a" which
is different from its corporate name. Debtor shall promptly notify
Secured Party of any change in such name or if it operates or conducts
business under any trade name or "d/b/a" which is different from such
name.
(c) Debtor has (or will have at the time Debtor acquires rights in
Collateral hereafter acquired or arising) and will maintain absolute
title to each item of Collateral free and clear of all security
interests, liens and encumbrances, except the Security Interest, a
first priority security interest granted to Debtor's primary lender,
and such other security interests as Secured Party make consent to in
writing (the Security Interest and such other security interests are
hereinafter collectively referred to as the "Permitted Interests"),
and will defend the Collateral against all claims or demands of all
persons other than Secured Party and those holding Permitted
Interests. Debtor will not sell or otherwise dispose of the Collateral
or any interest therein except sales of inventory and/or equipment in
the ordinary course of business.
(d) Other than transportation of merchandise and inventory in the ordinary
course of business, Debtor will not permit any Collateral to be
located in any state (and, if county filing is required, in any
county) in which a financing statement covering such Collateral is
required to be, but has not in fact been, filed.
(e) All rights to payment and all instruments, documents, chattel papers
and other agreements constituting or evidencing Collateral are (or
will be when arising or issued) the valid, genuine and legally
enforceable obligation, subject to no defense, set-off or counterclaim
(other than those arising in the ordinary course of business) of each
account debtor or other obligor named therein or in Debtor's records
pertaining thereto as being obligated to pay such obligation. Debtor
will not agree to any modification, amendment or cancellation of any
such obligation without Secured Party's prior written consent, and
will not subordinate any such right to payment to claims of other
creditors of such account debtor or other obligor.
(f) Debtor will (i) keep all Collateral in good repair, working order and
condition, normal depreciation excepted, and will, from time to time,
replace any worn, broken or defective parts thereof; (ii) other than
taxes and other governmental charges contested in good faith and by
appropriate proceedings, promptly pay all taxes and other governmental
charges levied or assessed upon or against any Collateral or upon or
against the creation, perfection or continuance of the Security
Interest; (iii) keep all Collateral free and clear of all security
interests, liens and encumbrances except the Permitted Interests; (iv)
at all reasonable times, permit Secured Party or its representatives
to examine or inspect any Collateral, wherever located, and to
examine, inspect and copy Debtor's books and records pertaining to the
Collateral and its business and financial condition and to discuss
with account debtors and other obligors requests for verifications of
amounts owed to Debtor; (v) keep accurate and complete records
pertaining to the Collateral and pertaining to Debtor's business and
financial condition and will submit to Secured Party such periodic
reports concerning the Collateral and Debtor's business and financial
condition as Secured Party may from time to time reasonably request;
(vi) promptly notify Secured Party of any loss or material damage to
any Collateral in excess of $10,000 or of any material adverse change,
known to Debtor, in the prospect of payment of any sums due on or
under any instrument, chattel paper or account constituting
Collateral; (vii) if Secured Party at any time so requests promptly
deliver to Secured Party any instrument, document or chattel paper
constituting Collateral, duly endorsed or assigned by Debtor to
Secured Party; (viii) at all times keep all Collateral insured against
risks of fire (including so called extended coverage), theft,
collision (in case of collateral consisting of motor vehicles) and
such other risks and in such amounts as Secured Party may reasonably
request, with any loss payable to Secured Party to the extent of its
interest and notify the Secured Party in writing of any loss or damage
to the Collateral or any part; (ix) from time to time execute such
financing statements as Secured Party may reasonably deem required to
be filed in order to perfect the Security Interest and, if any
Collateral is covered by a certificate of title, execute such
documents as may be required to have the Security Interest properly
noted on a certificate of title; (x) pay when due or reimburse Secured
Party on demand for all costs of collection of any of the Secured
Obligations and all other out-of-pocket expenses (including in each
case all attorneys' fees) incurred by Secured Party in connection with
the creation, perfection, satisfaction or enforcement of the Security
Interest or the execution or creation, continuance or enforcement of
this Agreement or any or all of the Secured Obligations including
expenses incurred in any litigation or bankruptcy or insolvency
proceedings; (xi) execute, deliver or endorse any and all instruments,
documents, assignments, security agreements and other agreements and
writings which Secured Party may at any time reasonably request in
order to secure, protect, perfect or enforce the Security Interest and
Secured Party's rights under this Agreement, including, without
limitation, an assignment of claim with respect to any account which
is a government receivable; (xii) not use or keep any Collateral, or
permit it to be used or kept, for any unlawful purpose or in violation
of any federal, state or local law, statute or ordinance; (xiii)
permit Secured Party at any time and from time to time to send
requests (after the occurrence of an event of default under the Note
or this Security Agreement) to account debtors or other obligors for
verification of amounts owed to Debtor; and (xiv) not permit any
Collateral to become part of or to be affixed to any real property,
without first assuring to the reasonable satisfaction of Secured Party
that the Security Interest will be prior and senior to any interest or
lien then held or thereafter acquired by any mortgagee of such real
property or the owner or purchaser of any interest therein. If Debtor
at any time fails to perform or observe any agreement contained in
this Section 2(i), and if such failure shall continue for a period of
ten (10) calendar days after Secured Party gives Debtor written notice
thereof (or, in the case of the agreements contained in clauses (viii)
and (ix) of this Section 2(i), immediately upon the occurrence of such
failure, without notice or lapse of time) Secured Party may (but need
not) perform or observe such agreement on behalf and in the name,
place and stead of Debtor (or, at Secured Party's option, in Secured
Party's own name) and may (but need not) take any and all other
actions which Secured Party may reasonably deem necessary to cure or
correct such failure (including, without limitation, the payment of
taxes, the satisfaction of security interests, liens or encumbrances
(other than Permitted Interests), the performance of obligations under
contracts or agreements with account debtors or other obligors, the
procurement and maintenance of insurance, the execution of financing
statements, the endorsement of instruments, and the procurement of
repairs, transportation or insurance); and, except to the extent that
the effect of such payment would be to render any loan or forbearance
of money usurious or otherwise illegal under any applicable law,
Debtor shall thereupon pay Secured Party on demand the amount of all
moneys expended and all costs and expenses (including reasonable
attorneys' fees) incurred by Secured Party in connection with or as a
result of Secured Party's performing or observing such agreements or
taking such actions, together with interest thereon from the date
expended or incurred by Secured Party at the rate provided for in the
Note. To facilitate the performance or observance by Secured Party of
such agreements of Debtor, Debtor hereby irrevocably appoints (which
appointment is coupled with an interest) Secured Party, or its
delegate, as the attorney-in-fact of Debtor with the right (but not
the duty) from time to time to create, prepare, complete, execute,
deliver, endorse or file, in the name and on behalf of Debtor, any and
all instruments, documents, financing statements, applications for
insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by Debtor under this Section 2.
3. ASSIGNMENT OF INSURANCE. Debtor hereby assigns to Secured Party, as
additional security for the payment of the Secured Obligations, any and all
moneys (including but not limited to proceeds of insurance and refunds of
unearned premiums) due or to become due under, and all other rights of Debtor
under or with respect to, any and all policies of insurance covering the
Collateral, and Debtor hereby directs the issuer of any such policy to pay any
such moneys to the Secured Party. Upon the occurrence of an event of default
under the Note or this Security Agreement, and at any time thereafter, Secured
Party may (but need not) in its own name or in Debtor's name, execute and
deliver proofs of claim, receive all such moneys (subject to Debtor's rights),
endorse checks and other instruments representing payment of such monies, and
adjust, litigate, compromise or release any claim against the issuer of any such
policy.
4. COLLECTION OF ACCOUNTS. Pursuant to Minn. Stat. Section 336.9-502, Secured
Party may, or at Secured Party's request, Debtor shall, after the occurrence of
an event of default under the Note or this Security Agreement, and at any time
thereafter, notify any account debtor or any obligor on an instrument to make
payment directly to a post office box specified by and under the sole control of
Secured Party, whether or not Secured Party was theretofore making collections
with respect thereto, and Secured Party shall be entitled to take control of any
proceeds thereof. If so requested by Secured Party, Debtor shall insert
appropriate language on each invoice directing its customers to make payment to
such post office box. Debtor hereby authorizes and directs Secured Party to
deposit into a special collateral account to be established and maintained with
Secured Party all checks, drafts and cash payments, received in said lock box.
All deposits in said collateral account shall constitute proceeds of Collateral
and shall not constitute payment of any of the Secured Obligations. At its
option, Secured Party may, at any time, apply finally collected funds on deposit
in said collateral account to the payment of the Secured Obligations in such
order of application as Secured Party may determine, or permit Debtor to
withdraw all or any part of the balance on deposit in said collateral account.
If a collateral account is so established Debtor agrees that it will promptly
deliver to Secured Party for deposit into said collateral account, all payments
on accounts and chattel paper received by it. All such payments shall be
delivered to secured Party in the form received (except for Debtor's endorsement
where necessary). Until so deposited, all payments on accounts and chattel paper
received by the Debtor shall be held in trust by Debtor for and as the property
of Secured Party and shall not be commingled with any funds or property of
Debtor.
5. REMEDIES. Upon the occurrence of an event of default under the Note or this
Security Agreement, and at any time thereafter, Secured Party may exercise any
one or more of the following rights or remedies if any or all of the Secured
Obligations are not paid when due: (i) exercise and enforce any or all rights
and remedies available after default to a secured party under the Uniform
Commercial Code, including but not limited to the right to take possession of
any Collateral, proceeding without judicial process or by judicial process
(without a prior hearing or notice thereof, which Debtor hereby expressly
waives), and the right to sell, lease or otherwise dispose of or use any or all
of the Collateral; (ii) Secured Party may require Debtor to assemble the
Collateral and make it available to Secured Party at a place to be designated by
Secured Party which is reasonably convenient to both parties; (iii) exercise its
rights under any lessors' agreements regardless of whether or not the Debtor is
in default under such leases; and (iv) exercise or enforce any or all other
rights or remedies available to Secured Party by law or agreement against the
Collateral, against Debtor or against any other person or property. Secured
Party is hereby granted a non-exclusive, worldwide and royalty-free license to
use or otherwise exploit all trademarks, franchises, copyrights and patents of
Debtor that Secured Party deems necessary or appropriate to the disposition of
any Collateral. If notice to Debtor of any intended disposition of Collateral or
any other intended action is required by law in a particular instance, such
notice shall be deemed commercially reasonable if given (in the manner specified
in Section 6 hereof) at least ten (10) calendar days prior to the date of
intended disposition or other action.
6. MISCELLANEOUS. This Agreement does not contemplate a sale of accounts or
chattel paper, and, as provided by law, Debtor is entitled to any surplus and
shall remain liable for any deficiency. This Agreement can be waived, modified,
amended, terminated or discharged, and the Security Interest can be released,
only explicitly in a writing signed by Secured Party. A waiver signed by Secured
Party shall be effective only in the specific instance and for the purpose
given. Mere delay or failure to act shall not preclude the exercise or
enforcement of any of Secured Party's rights or remedies. All rights and
remedies of Secured Party shall be cumulative and may be exercised singularly or
concurrently, at Secured Party's option, and the exercise or enforcement of any
one such right or remedy shall neither be a condition to nor bar the exercise or
enforcement of any other. All notices to be given to Debtor shall be deemed
sufficiently given if deposited in the United States mails, registered or
certified, postage prepaid, or personally delivered to Debtor at its address set
forth in the Paragraph 2(a) hereof. Secured Party's duty of care with respect to
Collateral in its possession (as imposed by law) shall be deemed fulfilled if
Secured Party exercises reasonable care in physically safe keeping such
Collateral or, in the case of Collateral in the custody or possession of a
bailee or other third person, exercises reasonable care in the selection of the
bailee or other third person, and Secured Party need not otherwise preserve,
protect, insure or care for any Collateral. Secured Party shall not be obligated
to preserve any rights Debtor may have against any other party, to realize on
the Collateral at all or in any particular manner or order, or to apply any cash
proceeds of Collateral in any particular order of application. This Agreement
shall be binding upon and inure to the benefit of Debtor and Secured Party and
their respective heirs, representatives, successors and assigns and shall take
effect when signed by Debtor and delivered to Secured Party, and Debtor waives
notice of Secured Party's acceptance hereof. Secured Party may execute this
Agreement if appropriate for the purpose of filing, but the failure of Secured
Party to execute this Agreement shall not affect or impair the validity or
effectiveness of this Agreement. Except to the extent otherwise required by law,
this Agreement shall be governed by the laws of the State of Minnesota and,
unless the context otherwise requires, all terms used herein which are defined
in Articles 1 and 9 of the Uniform Commercial Code, as in effect in said state
shall have the meanings therein stated and all capitalized terms used herein
which are defined in the Note shall have the meanings therein stated. If any
provision or application of this Agreement is held unlawful or unenforceable in
any respect, such illegality or unenforceability shall not affect other
provisions or applications which can be given effect, and this Agreement shall
be construed as if the unlawful or unenforceable provision or application had
never been contained herein or prescribed hereby. All representations and
warranties contained in this Agreement shall survive the execution, delivery and
performance of this Agreement and the creation and payment of the Secured
Obligations.
IN WITNESS WHEREOF, Debtor has executed and delivered to Secured Party this
Security Agreement as of the day and year first above written.
VIDEO SENTRY CORPORATION
By: /s/ Leonard W. Kedrowski
Leonard W. Kedrowski
Its Chief Executive Officer
PROMISSORY NOTE
$500,000.00 October 31, 1996
1. FOR VALUE RECEIVED, VIDEO SENTRY CORPORATION, a Minnesota corporation (the
"Borrower"), hereby promises to pay to the order of ROBERT D. FURST, JR., his
successors and assigns (the "Holder"), at 3900 Walden Road, Deephaven, Minnesota
55391, the sum of Five Hundred Thousand and no/100 Dollars ($500,000.00), in
lawful money of the United States and immediately available funds, inclusive of
interest on the unpaid balance accruing as of the date hereof at a rate equal at
all times to ten percent (10%) per annum.
2. The outstanding balance of this Note in an amount equal to the unpaid
principal balance and all unpaid interest outstanding as of January 1, 1997
shall be due and payable in full on said date (the "Maturity Date").
3. The outstanding balance of this Note may be prepaid at any time at the option
of the Borrower, in whole or in part without premium or penalty.
4. As used herein, the term "Event of Default" shall mean and include any one or
more of the following events:
(a) the Borrower shall fail to pay any amounts required to be paid by the
Borrower under this Note within 10 days after written notice thereof to the
Borrower;
(b) the Borrower shall file a petition in bankruptcy or for reorganization
or for an arrangement pursuant to any present or future state or federal
bankruptcy act or under any similar federal or state law, or shall be
adjudicated a bankrupt or insolvent, or shall make a general assignment for
the benefit of its creditors, or shall be unable to pay its debts generally
as they become due; or if an order for relief under any present or future
federal bankruptcy act or similar state or federal law shall be entered
against the Borrower; or if a petition or answer requesting or proposing
the entry of such order for relief or the adjudication of the Borrower as a
debtor or bankrupt or reorganization under any present or future state or
federal bankruptcy act or any similar federal or state law shall be filed
in any court and such petition or answer shall not be discharged or denied
within sixty (60) days after the filing thereof; or if a receiver, trustee
or liquidator of the Borrower or of all or substantially all of the assets
of the Borrower shall be appointed in any proceeding brought against the
Borrower and shall not be discharged within sixty (60) days of such
appointment; or if the Borrower shall consent to or acquiesce in such
appointment; or if more than $10,000 worth of property of the Borrower
shall be levied upon or attached in any proceeding; or
(c) the Borrower shall liquidate, dissolve, terminate or suspend (for a
period of sixty (60) days or more) its business operations, or sell all or
substantially all of its assets, without the prior written consent of the
Holder.
5. Upon the occurrence of an Event of Default or any time thereafter, the Holder
shall have the right to, at its option, declare the entire balance then
remaining unpaid on this Note to be immediately due and payable, and the same
shall thereupon be immediately due and payable, together with all interest
accrued hereon (and to be accrued hereon through the Maturity Date), without
notice or demand.
6. Upon the occurrence of an Event of Default or at any time thereafter, the
Borrower promises to pay all costs of collection of this Note, including but not
limited to reasonable attorneys' fees, paid or incurred by the Holder on account
of such collection, whether or not suit is filed with respect thereto and
whether such cost or expense is paid or incurred, or to be paid or incurred,
prior to or after the entry of judgment.
7. Demand, presentment, protest and notice of nonpayment and dishonor of this
Note are hereby waived.
8. This Note shall be governed by and construed in accordance with the laws of
the State of Minnesota.
9. This Note is secured pursuant to a Security Agreement of even date herewith.
BORROWER:
VIDEO SENTRY CORPORATION
By: /s/ Ron McClurg
Its V.P. Finance
SECURITY AGREEMENT
THE SECURITY AGREEMENT, is made as of this 31st day of October, 1996, by VIDEO
SENTRY CORPORATION, a Minnesota corporation (the "Debtor"), in favor of ROBERT
D. FURST, JR., a Minnesota resident ("Secured Party").
In order to secure the payment of the Promissory Note dated October 31, 1996,
executed by the Debtor and payable to the order of Secured Party in the original
principal amount of $500,000.00 (the "Note"), and each and every other debt,
liability and obligation of every type and description which Debtor may now or
at any time hereafter owe to Secured Party (whether such debt, liability or
obligation now exists or is hereafter created or incurred, whether it arises
under or is evidenced by this Agreement or any other present or future
instrument or agreement or by operation of law, and whether it is or may be
direct or indirect, due or to become due, absolute or contingent, primary or
secondary, liquidated or unliquidated, or sole, joint, several or joint and
several) (all such debts, liabilities and obligations of Debtor to Secured Party
herein collectively referred to as the "Secured Obligations"), Debtor hereby
agrees as follows:
1. SECURITY INTEREST AND COLLATERAL. In order to secure the payment and
performance of the Secured Obligations, Debtor hereby grants to Secured Party a
security interest (herein called the "Security Interest") in and to the
following property (hereinafter collectively referred to as the "Collateral"):
any and all furniture, fixtures, machinery, equipment,
inventory, accounts, prepaid insurance, supplies,
patents, patent rights, copyrights, trademarks, trade
names, goodwill, royalty rights, franchise rights,
chattel paper, license rights, documents, instruments,
general intangibles and any and all other goods, now
owned or hereafter acquired by the Debtor and wherever
located,
together with all substitutions and replacements for and products and proceeds
of any of the foregoing property and, in the case of all tangible Collateral,
together with (i) all accessories, attachments, parts, equipment, accessions and
repairs now or hereafter attached or affixed to or used in connection with any
such goods, and (ii) all warehouse receipts, bills of lading and other documents
of title now or hereafter covering such goods.
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Debtor hereby represents and
warrants to, and covenants and agrees with, Secured Party as follows:
(a) Debtor's chief executive office is located at 6365 Carlson Drive, Eden
Prairie, Minnesota 55346 and it keeps and will keep all of its books
and records with respect to all of its accounts at such address.
(b) During the preceding one (1) year Debtor has not changed its name or
operated or conducted business under any trade name or "d/b/a" which
is different from its corporate name. Debtor shall promptly notify
Secured Party of any change in such name or if it operates or conducts
business under any trade name or "d/b/a" which is different from such
name.
(c) Debtor has (or will have at the time Debtor acquires rights in
Collateral hereafter acquired or arising) and will maintain absolute
title to each item of Collateral free and clear of all security
interests, liens and encumbrances, except the Security Interest, a
first priority security interest granted to Debtor's primary lender,
and such other security interests as Secured Party make consent to in
writing (the Security Interest and such other security interests are
hereinafter collectively referred to as the "Permitted Interests"),
and will defend the Collateral against all claims or demands of all
persons other than Secured Party and those holding Permitted
Interests. Debtor will not sell or otherwise dispose of the Collateral
or any interest therein except sales of inventory and/or equipment in
the ordinary course of business.
(d) Other than transportation of merchandise and inventory in the ordinary
course of business, Debtor will not permit any Collateral to be
located in any state (and, if county filing is required, in any
county) in which a financing statement covering such Collateral is
required to be, but has not in fact been, filed.
(e) All rights to payment and all instruments, documents, chattel papers
and other agreements constituting or evidencing Collateral are (or
will be when arising or issued) the valid, genuine and legally
enforceable obligation, subject to no defense, set-off or counterclaim
(other than those arising in the ordinary course of business) of each
account debtor or other obligor named therein or in Debtor's records
pertaining thereto as being obligated to pay such obligation. Debtor
will not agree to any modification, amendment or cancellation of any
such obligation without Secured Party's prior written consent, and
will not subordinate any such right to payment to claims of other
creditors of such account debtor or other obligor.
(f) Debtor will (i) keep all Collateral in good repair, working order and
condition, normal depreciation excepted, and will, from time to time,
replace any worn, broken or defective parts thereof; (ii) other than
taxes and other governmental charges contested in good faith and by
appropriate proceedings, promptly pay all taxes and other governmental
charges levied or assessed upon or against any Collateral or upon or
against the creation, perfection or continuance of the Security
Interest; (iii) keep all Collateral free and clear of all security
interests, liens and encumbrances except the Permitted Interests; (iv)
at all reasonable times, permit Secured Party or its representatives
to examine or inspect any Collateral, wherever located, and to
examine, inspect and copy Debtor's books and records pertaining to the
Collateral and its business and financial condition and to discuss
with account debtors and other obligors requests for verifications of
amounts owed to Debtor; (v) keep accurate and complete records
pertaining to the Collateral and pertaining to Debtor's business and
financial condition and will submit to Secured Party such periodic
reports concerning the Collateral and Debtor's business and financial
condition as Secured Party may from time to time reasonably request;
(vi) promptly notify Secured Party of any loss or material damage to
any Collateral in excess of $10,000 or of any material adverse change,
known to Debtor, in the prospect of payment of any sums due on or
under any instrument, chattel paper or account constituting
Collateral; (vii) if Secured Party at any time so requests promptly
deliver to Secured Party any instrument, document or chattel paper
constituting Collateral, duly endorsed or assigned by Debtor to
Secured Party; (viii) at all times keep all Collateral insured against
risks of fire (including so called extended coverage), theft,
collision (in case of collateral consisting of motor vehicles) and
such other risks and in such amounts as Secured Party may reasonably
request, with any loss payable to Secured Party to the extent of its
interest and notify the Secured Party in writing of any loss or damage
to the Collateral or any part; (ix) from time to time execute such
financing statements as Secured Party may reasonably deem required to
be filed in order to perfect the Security Interest and, if any
Collateral is covered by a certificate of title, execute such
documents as may be required to have the Security Interest properly
noted on a certificate of title; (x) pay when due or reimburse Secured
Party on demand for all costs of collection of any of the Secured
Obligations and all other out-of-pocket expenses (including in each
case all attorneys' fees) incurred by Secured Party in connection with
the creation, perfection, satisfaction or enforcement of the Security
Interest or the execution or creation, continuance or enforcement of
this Agreement or any or all of the Secured Obligations including
expenses incurred in any litigation or bankruptcy or insolvency
proceedings; (xi) execute, deliver or endorse any and all instruments,
documents, assignments, security agreements and other agreements and
writings which Secured Party may at any time reasonably request in
order to secure, protect, perfect or enforce the Security Interest and
Secured Party's rights under this Agreement, including, without
limitation, an assignment of claim with respect to any account which
is a government receivable; (xii) not use or keep any Collateral, or
permit it to be used or kept, for any unlawful purpose or in violation
of any federal, state or local law, statute or ordinance; (xiii)
permit Secured Party at any time and from time to time to send
requests (after the occurrence of an event of default under the Note
or this Security Agreement) to account debtors or other obligors for
verification of amounts owed to Debtor; and (xiv) not permit any
Collateral to become part of or to be affixed to any real property,
without first assuring to the reasonable satisfaction of Secured Party
that the Security Interest will be prior and senior to any interest or
lien then held or thereafter acquired by any mortgagee of such real
property or the owner or purchaser of any interest therein. If Debtor
at any time fails to perform or observe any agreement contained in
this Section 2(i), and if such failure shall continue for a period of
ten (10) calendar days after Secured Party gives Debtor written notice
thereof (or, in the case of the agreements contained in clauses (viii)
and (ix) of this Section 2(i), immediately upon the occurrence of such
failure, without notice or lapse of time) Secured Party may (but need
not) perform or observe such agreement on behalf and in the name,
place and stead of Debtor (or, at Secured Party's option, in Secured
Party's own name) and may (but need not) take any and all other
actions which Secured Party may reasonably deem necessary to cure or
correct such failure (including, without limitation, the payment of
taxes, the satisfaction of security interests, liens or encumbrances
(other than Permitted Interests), the performance of obligations under
contracts or agreements with account debtors or other obligors, the
procurement and maintenance of insurance, the execution of financing
statements, the endorsement of instruments, and the procurement of
repairs, transportation or insurance); and, except to the extent that
the effect of such payment would be to render any loan or forbearance
of money usurious or otherwise illegal under any applicable law,
Debtor shall thereupon pay Secured Party on demand the amount of all
moneys expended and all costs and expenses (including reasonable
attorneys' fees) incurred by Secured Party in connection with or as a
result of Secured Party's performing or observing such agreements or
taking such actions, together with interest thereon from the date
expended or incurred by Secured Party at the rate provided for in the
Note. To facilitate the performance or observance by Secured Party of
such agreements of Debtor, Debtor hereby irrevocably appoints (which
appointment is coupled with an interest) Secured Party, or its
delegate, as the attorney-in-fact of Debtor with the right (but not
the duty) from time to time to create, prepare, complete, execute,
deliver, endorse or file, in the name and on behalf of Debtor, any and
all instruments, documents, financing statements, applications for
insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by Debtor under this Section 2.
3. ASSIGNMENT OF INSURANCE. Debtor hereby assigns to Secured Party, as
additional security for the payment of the Secured Obligations, any and all
moneys (including but not limited to proceeds of insurance and refunds of
unearned premiums) due or to become due under, and all other rights of Debtor
under or with respect to, any and all policies of insurance covering the
Collateral, and Debtor hereby directs the issuer of any such policy to pay any
such moneys to the Secured Party. Upon the occurrence of an event of default
under the Note or this Security Agreement, and at any time thereafter, Secured
Party may (but need not) in its own name or in Debtor's name, execute and
deliver proofs of claim, receive all such moneys (subject to Debtor's rights),
endorse checks and other instruments representing payment of such monies, and
adjust, litigate, compromise or release any claim against the issuer of any such
policy.
4. COLLECTION OF ACCOUNTS. Pursuant to Minn. Stat. Section 336.9-502, Secured
Party may, or at Secured Party's request, Debtor shall, after the occurrence of
an event of default under the Note or this Security Agreement, and at any time
thereafter, notify any account debtor or any obligor on an instrument to make
payment directly to a post office box specified by and under the sole control of
Secured Party, whether or not Secured Party was theretofore making collections
with respect thereto, and Secured Party shall be entitled to take control of any
proceeds thereof. If so requested by Secured Party, Debtor shall insert
appropriate language on each invoice directing its customers to make payment to
such post office box. Debtor hereby authorizes and directs Secured Party to
deposit into a special collateral account to be established and maintained with
Secured Party all checks, drafts and cash payments, received in said lock box.
All deposits in said collateral account shall constitute proceeds of Collateral
and shall not constitute payment of any of the Secured Obligations. At its
option, Secured Party may, at any time, apply finally collected funds on deposit
in said collateral account to the payment of the Secured Obligations in such
order of application as Secured Party may determine, or permit Debtor to
withdraw all or any part of the balance on deposit in said collateral account.
If a collateral account is so established Debtor agrees that it will promptly
deliver to Secured Party for deposit into said collateral account, all payments
on accounts and chattel paper received by it. All such payments shall be
delivered to secured Party in the form received (except for Debtor's endorsement
where necessary). Until so deposited, all payments on accounts and chattel paper
received by the Debtor shall be held in trust by Debtor for and as the property
of Secured Party and shall not be commingled with any funds or property of
Debtor.
5. REMEDIES. Upon the occurrence of an event of default under the Note or this
Security Agreement, and at any time thereafter, Secured Party may exercise any
one or more of the following rights or remedies if any or all of the Secured
Obligations are not paid when due: (i) exercise and enforce any or all rights
and remedies available after default to a secured party under the Uniform
Commercial Code, including but not limited to the right to take possession of
any Collateral, proceeding without judicial process or by judicial process
(without a prior hearing or notice thereof, which Debtor hereby expressly
waives), and the right to sell, lease or otherwise dispose of or use any or all
of the Collateral; (ii) Secured Party may require Debtor to assemble the
Collateral and make it available to Secured Party at a place to be designated by
Secured Party which is reasonably convenient to both parties; (iii) exercise its
rights under any lessors' agreements regardless of whether or not the Debtor is
in default under such leases; and (iv) exercise or enforce any or all other
rights or remedies available to Secured Party by law or agreement against the
Collateral, against Debtor or against any other person or property. Secured
Party is hereby granted a non-exclusive, worldwide and royalty-free license to
use or otherwise exploit all trademarks, franchises, copyrights and patents of
Debtor that Secured Party deems necessary or appropriate to the disposition of
any Collateral. If notice to Debtor of any intended disposition of Collateral or
any other intended action is required by law in a particular instance, such
notice shall be deemed commercially reasonable if given (in the manner specified
in Section 6 hereof) at least ten (10) calendar days prior to the date of
intended disposition or other action.
6. MISCELLANEOUS. This Agreement does not contemplate a sale of accounts or
chattel paper, and, as provided by law, Debtor is entitled to any surplus and
shall remain liable for any deficiency. This Agreement can be waived, modified,
amended, terminated or discharged, and the Security Interest can be released,
only explicitly in a writing signed by Secured Party. A waiver signed by Secured
Party shall be effective only in the specific instance and for the purpose
given. Mere delay or failure to act shall not preclude the exercise or
enforcement of any of Secured Party's rights or remedies. All rights and
remedies of Secured Party shall be cumulative and may be exercised singularly or
concurrently, at Secured Party's option, and the exercise or enforcement of any
one such right or remedy shall neither be a condition to nor bar the exercise or
enforcement of any other. All notices to be given to Debtor shall be deemed
sufficiently given if deposited in the United States mails, registered or
certified, postage prepaid, or personally delivered to Debtor at its address set
forth in the Paragraph 2(a) hereof. Secured Party's duty of care with respect to
Collateral in its possession (as imposed by law) shall be deemed fulfilled if
Secured Party exercises reasonable care in physically safe keeping such
Collateral or, in the case of Collateral in the custody or possession of a
bailee or other third person, exercises reasonable care in the selection of the
bailee or other third person, and Secured Party need not otherwise preserve,
protect, insure or care for any Collateral. Secured Party shall not be obligated
to preserve any rights Debtor may have against any other party, to realize on
the Collateral at all or in any particular manner or order, or to apply any cash
proceeds of Collateral in any particular order of application. This Agreement
shall be binding upon and inure to the benefit of Debtor and Secured Party and
their respective heirs, representatives, successors and assigns and shall take
effect when signed by Debtor and delivered to Secured Party, and Debtor waives
notice of Secured Party's acceptance hereof. Secured Party may execute this
Agreement if appropriate for the purpose of filing, but the failure of Secured
Party to execute this Agreement shall not affect or impair the validity or
effectiveness of this Agreement. Except to the extent otherwise required by law,
this Agreement shall be governed by the laws of the State of Minnesota and,
unless the context otherwise requires, all terms used herein which are defined
in Articles 1 and 9 of the Uniform Commercial Code, as in effect in said state
shall have the meanings therein stated and all capitalized terms used herein
which are defined in the Note shall have the meanings therein stated. If any
provision or application of this Agreement is held unlawful or unenforceable in
any respect, such illegality or unenforceability shall not affect other
provisions or applications which can be given effect, and this Agreement shall
be construed as if the unlawful or unenforceable provision or application had
never been contained herein or prescribed hereby. All representations and
warranties contained in this Agreement shall survive the execution, delivery and
performance of this Agreement and the creation and payment of the Secured
Obligations.
IN WITNESS WHEREOF, Debtor has executed and delivered to Secured Party this
Security Agreement as of the day and year first above written.
VIDEO SENTRY CORPORATION
By: /s/ Ron McClurg
Its V.P. Finance
EXHIBIT 11.1
<TABLE>
<CAPTION>
COMPUTATION OF NET INCOME (LOSS) PER SHARE
VIDEO SENTRY CORPORATION
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding 4,841,962 4,715,026 4,808,529 4,655,755
PRIMARY:
Net effect of dilutive stock options and
warrants - based on treasury stock
method using average market price -- -- -- 552,210
----------- ----------- ----------- -----------
TOTAL 4,841,962 4,715,026 4,808,529 5,207,965
=========== =========== =========== ===========
Net Income (Loss) ($ 927,836) ($ 209,539) ($3,035,450) $ 12,366
=========== =========== =========== ===========
Net Income (Loss) per share ($ 0.19) ($ 0.04) ($ 0.63) $ 0.00
=========== =========== =========== ===========
FULLY DILUTED:
Weighted average shares outstanding 4,841,962 4,715,026 4,808,529 4,655,755
Net effect of dilutive stock options and
warrants - based on treasury stock
method using ending market price
if higher than average market price -- -- -- 522,210
----------- ----------- ----------- -----------
TOTAL 4,841,962 4,715,026 4,808,529 5,207,965
=========== =========== =========== ===========
Net Income (Loss) ($ 927,836) ($ 209,539) ($3,035,450) $ 12,366
=========== =========== =========== ===========
Net Income (Loss) per share ($ 0.19) ($ 0.04) ($ 0.63) $ 0.00
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 99,002
<SECURITIES> 0
<RECEIVABLES> 1,540,468
<ALLOWANCES> 0
<INVENTORY> 2,399,035
<CURRENT-ASSETS> 4,148,666
<PP&E> 670,561
<DEPRECIATION> 300,259
<TOTAL-ASSETS> 5,251,216
<CURRENT-LIABILITIES> 4,107,286
<BONDS> 0
0
0
<COMMON> 48,420
<OTHER-SE> 1,079,347
<TOTAL-LIABILITY-AND-EQUITY> 5,251,216
<SALES> 2,000,382
<TOTAL-REVENUES> 2,000,382
<CGS> 3,085,708
<TOTAL-COSTS> 3,085,708
<OTHER-EXPENSES> 1,866,969
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,155
<INCOME-PRETAX> (3,035,450)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,035,450)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,035,450)
<EPS-PRIMARY> (.63)
<EPS-DILUTED> (.63)
</TABLE>
