-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AVadQCex+ppiB8fd0AMMaLeUCAr5tuSL91bnUzzKkTCVefm+KoUcB2k2yQ4ceIYZ FBNIxCxZjlOjMhVqCJInCg== 0000897101-02-000103.txt : 20020414 0000897101-02-000103.hdr.sgml : 20020414 ACCESSION NUMBER: 0000897101-02-000103 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VISIONICS CORP CENTRAL INDEX KEY: 0000868373 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 411545069 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-72031 FILM NUMBER: 02549317 BUSINESS ADDRESS: STREET 1: 5600 ROWLAND RD CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129320888 MAIL ADDRESS: STREET 1: 5600 ROWLAND RD STREET 2: 5600 ROWLAND RD CITY: MINNETONKA STATE: MN ZIP: 55343 FORMER COMPANY: FORMER CONFORMED NAME: DIGITAL BIOMETRICS INC DATE OF NAME CHANGE: 19930328 10-Q 1 visionics020798_10q.txt VISIONICS CORPORATION FORM 10-Q 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, 2001 -------------------------------------------------- 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 --------------------------------------------------------- VISIONICS CORPORATION (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) (952) 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, 2002 - 28,841,202 shares ---------------------------- ------------------------------------ (Class) (Outstanding) 1 VISIONICS CORPORATION THREE MONTHS ENDED DECEMBER 31, 2001 INDEX PART I - FINANCIAL INFORMATION: - ------------------------------- PAGE ITEM 1. CONSOLIDATED 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 20 PART II - OTHER INFORMATION: - ---------------------------- ITEM 1. LEGAL PROCEEDINGS 21 ITEM 2. CHANGES IN SECURITIES 21 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21 ITEM 5. OTHER INFORMATION 21 ITEM 6. (a) EXHIBITS 21 (b) REPORTS ON FORM 8-K 21 SIGNATURES 22 - ---------- 2 VISIONICS CORPORATION THREE MONTHS ENDED DECEMBER 31, 2001 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, 2001. 3 VISIONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
December 31, September 30, 2001 2001 ------------- ------------- Current assets: Cash and cash equivalents $ 32,343,559 $ 9,716,772 Restricted cash (note 5) 80,915 80,915 Accounts receivable, less allowance for doubtful accounts of $233,000 and $266,000, respectively 5,399,971 6,704,761 Inventory (note 6) 6,604,537 5,999,894 Prepaid expenses and other costs 544,380 452,847 ------------- ------------- Total current assets 44,973,362 22,955,189 ------------- ------------- Property and equipment 5,178,412 4,775,102 Less accumulated depreciation and amortization (3,250,250) (3,052,603) ------------- ------------- 1,928,162 1,722,499 ------------- ------------- Software development costs, net of accumulated amortization of $333,288 and $294,338, respectively 644,686 683,635 Other assets, net of accumulated amortization of $74,971 and $71,435, respectively 53,784 54,556 ------------- ------------- $ 47,599,994 $ 25,415,879 ============= ============= Current liabilities: Accounts payable $ 1,375,810 $ 1,690,642 Deferred revenue (note 2) 7,121,155 7,653,552 Other accrued expenses (note 8) 1,055,635 1,460,576 Current installments of notes payable 12,976 16,857 Current installments of capital lease obligations -- 2,406 ------------- ------------- Total current liabilities 9,565,576 10,824,033 Deferred revenue, excluding current portion 1,044,703 1,101,614 Notes payable, excluding current installments 9,664 12,258 Capital lease obligations, excluding current installments -- 1,134 ------------- ------------- Total liabilities 10,619,943 11,939,039 ------------- ------------- Stockholders' equity (note 9): 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 28,799,140 and 25,431,298 shares, respectively 287,991 254,313 Additional paid-in capital 85,183,608 60,090,870 Deferred compensation (107,875) (126,250) Accumulated deficit (48,382,014) (46,748,577) Accumulated other comprehensive income (loss) (1,659) 6,484 ------------- ------------- Total stockholders' equity 36,980,051 13,476,840 ------------- ------------- $ 47,599,994 $ 25,415,879 ============= =============
See accompanying notes to consolidated financial statements. 4 VISIONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended December 31, 2001 2000 ------------ ------------ Revenue: Live scan identification systems $ 4,177,635 $ 4,802,486 Live scan maintenance 2,462,250 1,718,417 FaceIt license 521,069 381,333 FaceIt services 317,987 296,501 ------------ ------------ Total revenue 7,478,941 7,198,737 ------------ ------------ Cost of revenue: Live scan identification systems 2,445,238 3,139,879 Live scan maintenance 1,707,935 1,352,046 FaceIt license 136,643 64,740 FaceIt services 226,996 247,743 ------------ ------------ Total cost of revenue 4,516,812 4,804,408 ------------ ------------ Gross margin 2,962,129 2,394,329 ------------ ------------ Selling, general and administrative expenses: Sales and marketing 1,405,278 1,136,698 Engineering and development 1,984,795 1,144,911 General and administrative 1,350,054 948,038 Non-recurring charges -- 706,011 ------------ ------------ Total expenses 4,740,127 3,935,658 ------------ ------------ Loss from operations (1,777,998) (1,541,329) Other income (expense), net 161,734 71,941 ------------ ------------ Loss before income taxes (1,616,264) (1,469,388) Provision for income taxes 17,173 -- ------------ ------------ Loss before accounting change (1,633,437) (1,469,388) Cumulative effect of change in accounting principle -- (1,435,652) ------------ ------------ Net loss $ (1,633,437) $ (2,905,040) ============ ============ Loss per common share - basic and assuming dilution - --------------------------------------------------- Loss before accounting change $ (0.06) $ (0.07) Cumulative effect of change in accounting principle -- (0.06) ------------ ------------ Net loss per common share $ (0.06) $ (0.13) ============ ============ Weighted average common shares outstanding 27,761,927 23,162,974 ============ ============
See accompanying notes to consolidated financial statements. 5 VISIONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended December 31, ----------------------------- 2001 2000 ------------ ------------ Cash flows from operating activities: Net loss $ (1,633,437) $ (2,905,040) Adjustments to reconcile net loss to net cash used in operating activities: Provision for doubtful accounts receivable (32,995) -- Stock-based compensation 118,140 118,482 Depreciation and amortization 210,319 244,432 Amortization of software development costs 38,949 36,271 Write-off of intangible assets -- 607 Loss on disposal of fixed assets 471 -- Changes in operating assets and liabilities: Restricted cash -- (625,000) Accounts receivable 1,337,785 3,416,763 Inventories (604,643) (1,146,673) Prepaid expenses (91,533) (354,642) Security deposits and other assets -- 76,310 Accounts payable and accrued expenses (450,028) (956,968) Deferred revenue (589,308) 1,810,858 ------------ ------------ Net cash used in operating activities (1,696,280) (284,600) ------------ ------------ Cash flows from investing activities: Purchase of property and equipment (412,916) (310,252) Patents, trademarks, copyrights and licenses (2,765) (5,386) ------------ ------------ Net cash used in investing activities (415,681) (315,638) ------------ ------------ Cash flows from financing activities: Principal payments on capital lease obligations (3,540) -- Repayment of notes payable (6,475) (3,592) Net proceeds from private placement of common stock 18,907,398 -- Exercise of stock options and warrants 5,849,508 109,678 ------------ ------------ Net cash provided by financing activities 24,746,891 106,086 ------------ ------------ Effect of exchange rates on cash (8,143) 1,216 Increase (decrease) in cash and cash equivalents 22,626,787 (492,936) Cash and cash equivalents at beginning of period 9,716,772 3,623,574 ------------ ------------ Cash and cash equivalents at end of period $ 32,343,559 $ 3,130,638 ============ ============
See accompanying notes to consolidated financial statements. 6 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (UNAUDITED) (1) DESCRIPTION OF BUSINESS Visionics Corporation ("Visionics" or "Company") is in the business of empowering identification through the use of biometrics, the science of identifying individuals by measuring distinguishable physical or behavioral characteristics. The Company is a leading provider of biometric technologies and identification information systems that employ "biometric" technology. Biometrics is used to determine physical access or logical access. Our biometric identification technology, systems and information technology services enable customers to identify individuals for physical or logical access; help commercial employers and government agencies to conduct background checks on applicants for employment or permits; or verify identity for the purposes of issuing identification documents, conducting transactions, or conducting criminal investigations. Our product and service offerings include computer-based face recognition, fingerprinting, and photographic systems, software tools, multi-media data storage and communications servers, and the systems integration and software development services required to deploy and use these systems. A majority of the Company's revenues in the three-month periods ended December 31, 2001 and 2000 were derived from product sales, 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. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of its wholly owned subsidiary Visionics Technology Corporation located in New Jersey and its wholly owned British subsidiary, Visionics Ltd. All material intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with 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, 2001 that has been filed with the SEC. (b) ACCOUNTING CHANGE In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101") which provides the staff's views in applying generally accepted accounting principles to selected revenue recognition issues. In October 2000, the SEC provided interpretive guidance for SAB 101. Effective October 1, 2000, the Company changed its method of accounting for certain identification systems revenue. Since most of the equipment the Company sells includes installation provided by the Company, under SAB 101, a significant portion of revenue recognition is deferred until installation, particularly where the equipment is integrated to an outside network. Prior to October 1, 2000 the Company generally recognized product revenue on the date of shipment for orders which were f.o.b. origin and upon 7 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (UNAUDITED) delivery for f.o.b. destination. The Company recorded a $1,436,000 cumulative effect of an accounting change in the three-month period ended December 31, 2000 with the adoption of SAB 101. Under this accounting change, $3,890,000 of revenue recorded in periods prior to October 1, 2000 was recorded as revenue again as the equipment was installed in fiscal 2001. (c) EFFECT OF NEW ACCOUNTING STANDARDS In August 2001, the Financial Accounting Standards Board issued FASB Statement No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (Statement 144), which supersedes both FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (Statement 121) and the accounting and reporting provisions of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 retains the fundamental provisions in Statement 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement 121. For example, Statement 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). The Company has adopted Statement 144 effective October 1, 2001. There was no material impact on the Company's financial statements with its adoption. (3) SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK The Company extends credit to substantially all of its customers. Approximately 76% of customer accounts receivable at December 31, 2001 were from government agencies, of which 26% was from one customer. Approximately 85% of customer accounts receivable at September 30, 2001 were from government agencies, of which 54% was from three customers. Revenue from two customers in the three-month period ended December 31, 2001 accounted for 38% of total revenue, and revenue from one customer in the three-month period ended December 31, 2000 accounted for 20% of total revenue. Foreign revenue for the three-month period ended December 31, 2001 was 4% of total revenue compared to 2% the same prior-year period. (4) 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. 8 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (UNAUDITED) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - CASH PAID FOR: Three Months Ended December 31, 2001 2000 ---------- ---------- Interest $ 1,645 $ 1,111 Income taxes 17,173 -- (5) RESTRICTED CASH Pursuant to normal contractual terms of a federally funded development grant, the Company was required to establish either a performance bond or an escrow account equal to the amounts payable to certain major subcontractors for the project aggregating $625,000. Since the Company was in a strong cash position, it chose to establish the escrow and avoid the cost of the performance bond. The amount held in escrow is released upon proof of payment to the subcontractors. The restricted balance as of December 31, 2001 is $80,915. (6) 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, 2001 2001 ------------ ------------ Components and subassemblies $ 4,052,235 $ 3,595,310 Work in process 670,688 556,279 Finished goods 687,500 417,225 Finished goods shipped to customers awaiting installation 1,194,114 1,431,080 ------------ ------------ $ 6,604,537 $ 5,999,894 ============ ============ (7) LINES OF CREDIT The Company has an inventory and receivables financing line of credit for the lesser of eligible inventory and receivables or $2,000,000. 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 on March 30, 2003. There were no borrowings under this line at December 31, 2001. 9 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (UNAUDITED) (8) OTHER ACCRUED EXPENSES Other accrued expenses consists of: December 31, September 30, 2001 2001 ------------ ------------ Accrued salaries, bonuses and commissions $ 110,618 $ 523,286 Accrued vacation 509,974 411,809 Accrued warranty costs 103,351 135,332 Other accrued expenses 331,692 390,149 ------------ ------------ $ 1,055,635 $ 1,460,576 ============ ============ (9) STOCKHOLDERS' EQUITY During the three-month period ended December 31, 2001, the Company granted stock option awards to employees for the purchase of an aggregate of 612,200 shares of common stock. These options are exercisable at prices ranging form $13.20 to $15.20 per share and expire in 2008. On December 31, 2001, the Company issued 18,696 shares of common stock to satisfy the Company's 2001 discretionary matching to employees electing participation in the Company's 401(k) retirement plan. The issuance increased common stock and additional paid-in capital by $269,745 and reduced accrued compensation by the same amount. In November 2001, the Company issued options to acquire an aggregate of 20,000 shares of the Company's common stock with an exercise price of $15.41 per share for services provided. The Company has recorded compensation expense in the amount of $85,284 related to the granting of these options for the three-month period ending December 31, 2001. In October 2001, the Company issued a warrant to purchase up to 25,000 shares of common stock at an exercise price of $13.20 per share as compensation for services in connection with an equity financing. The warrant expires on October 23, 2006. (10) PRIVATE PLACEMENT On October 11, 2001, the Company closed on a private placement offering of common stock and warrants. A total of 1,801,800 shares were sold to accredited investors at a price of $11.10 each. Net proceeds to the Company were approximately $18,907,000. The Company issued a warrant to purchase up to 36,036 shares of common stock at an exercise price of $16.86 per share to an investment-banking firm as partial compensation for services rendered in the private placement. The warrant expires on October 11, 2006. 10 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (UNAUDITED) (11) 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, ---------------------------- 2001 2000 ------------ ------------ Shares outstanding at beginning of period 25,431,298 23,115,781 Shares issued under retirement plan 18,696 73,923 Exercise of options and warrants 1,547,346 63,633 Shares issued for private placement 1,801,800 -- ------------ ------------ Shares outstanding at end of period 28,799,140 23,253,337 ============ ============ Weighted average common shares outstanding - basic and diluted 27,761,927 23,162,974 Net loss $ (1,633,437) $ (2,905,040) ============ ============ Net loss per common share - basic and diluted $ (0.06) $ (0.13) ============ ============ 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 loss per common share is anti-dilutive: For the Three-Month Period Ended December 31, --------------------------- 2001 2000 --------------------------- Options 2,877,562 3,799,044 Warrants 579,834 585,017 11 VISIONICS CORPORATION THREE MONTHS ENDED DECEMBER 31, 2001 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, 2001 and Form S-3 filed on October 30, 2001, 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. Visionics Corporation is a provider of identification technologies and systems that employ "biometric" technology, which is the science of identifying individuals by measuring distinguishing biological characteristics. Through its respective business lines - live scan, FaceIt, IBIS and BNP- the Company delivers enabling technology, platforms, products and systems for biometric identification, with a specific focus on facial recognition and forensic-quality fingerprint identification. We have evolved from essentially a single-product live scan hardware supplier to an identification information systems company. We have two established product lines and two product lines in various stages of development. FINGERPRINT LIVE SCAN - These systems combine patented, high-resolution optics and specialized hardware and software with industry-standard computers. They capture, digitize and transmit forensic-grade fingerprint images and related data to large-scale databases. The database systems, along with fingerprint matching algorithms, are maintained on equipment supplied by other vendors called Automated Fingerprint Identification Systems ("AFIS"). Images submitted to these databases must be in compliance with federally mandated image quality standards. If an AFIS finds a match, the Company's systems will receive a return message of the identity and background of the individual being checked. Visionics' live scan systems are normally configured in network environments. The integration of our systems into complex information networks is frequently crucial to the delivery of the appropriate information to meet a customer's requirements. Our TENPRINTER(R) and FingerPrinter CMS live scan systems are used by government agencies, law enforcement, airports, banks and other commercial institutions in the U.S. 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. Typical customers include: U.S. government agencies, such as the Immigration and Naturalization Service ("INS") and U.S. Postal Service; local and state police; United States armed forces; school districts; financial institutions; utilities; and casinos. 12 VISIONICS CORPORATION THREE MONTHS ENDED DECEMBER 31, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FACEIT(R) FACE RECOGNITION - FaceIt(R) is an award-winning facial recognition software engine that allows computers to rapidly and accurately detect and recognize faces. FaceIt(R) is a core technology that enables a broad range of products and applications built by developers and partners (original equipment manufacturers "OEMs", value-added resellers "VARs" and system integrators). These include enhanced CCTV systems, identity fraud applications and authentication systems for information security, access control, travel, banking and e-commerce. Our FaceIt(R) technology product offerings include software development toolkits, run-time licenses and application software. FaceIt(R) technology partners include IBM Informix and EDS. IDENTIFICATION BASED INFORMATION SYSTEM ("IBIS") - IBIS is a patented wireless, real-time mobile identification system that combines expertise in biometric capture and connectivity. The system is capable of capturing photographs and forensic quality fingerprints for transmission to law enforcement and other legacy databases. IBIS is comprised of software tools, multi-media data storage and communications servers, and the systems integration and software development services that are required to implement identification management systems. A complete management reporting database and audit trail is included. The IBIS system has been undergoing testing in Hennepin County, Minnesota and in the cities of Redlands and Ontario in California. BIOMETRIC NETWORK PLATFORM ("BNP") - The BNP is a development stage technology framework for building scalable biometric solutions. The BNP is made up of the following: Biometric Network Appliances ("BNAs") - BNAs are individual hardware components within the BNP platform. Each component is dedicated to performing a specific task such as capturing a facial image, creating a biometric template, and matching the images against a database. Each BNA within a network contains programming logic for connecting to each other or to standard security and information systems. Today the BNAs are enabled by the Company's FaceIt(R) technology, however, eventually we intend to support other biometrics including fingerprint. Application-Specific Business Logic - While the BNAs are dedicated to performing one specific task surrounding identification, the business logic tells what action should be taken based on either a match being made or not. For example, in some applications, a positive match may allow someone to gain access to an area, while in another application, it may restrict access of the person identified. By combining the different BNAs with application-specific business logic, a wide range of scalable solutions - such as large database searching, surveillance and enterprise security - can be easily built. The Company has developed an off-the-shelf system based on the BNP, called FaceIt(R) ARGUS, for surveillance applications in order to meet market demand and help promote the BNP concept overall. The Company expects its partners to develop other scalable applications using the BNAs by creating their own application-specific business logic. Visionics 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 Visionics. This system is intended to track the betting activity of casino patrons playing blackjack. Visionics has no material ongoing liability as a result of the joint venture. Visionics' financial results would not be materially impacted if TRAK 21 Development, LLC were dissolved. 13 VISIONICS CORPORATION THREE MONTHS ENDED DECEMBER 31, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER GENERAL The law enforcement market and government procurement processes are subject to budgetary, economic and political considerations that 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. ACCOUNTING POLICIES In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management must make decisions which impact the reported amounts and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, management applies judgment based on its understanding and analysis of the relevant circumstances. Note 1 to the consolidated financial statements provides a summary of the significant accounting policies followed in the preparation of the financial statements. The Company's critical accounting policies include the following: REVENUE RECOGNITION - ------------------- SOFTWARE LICENSES - Revenue from software licenses is recognized when all of the following conditions have been satisfied: completion of a written license arrangement; delivery of the software with no significant post delivery obligations of the Company; the fee is fixed or determinable; and payment is due within one year and collection is probable. Revenue from sublicense arrangements with resellers is recognized upon shipment of the software, if there are no significant post-delivery obligations, the reseller is creditworthy, and if the terms of arrangement are such that the payment terms are not subject to price adjustment, are non-cancelable and non-refundable. Revenue from sublicensing arrangements with significant post contract customer support ("PCS") (in excess of one year), including enhancements and upgrades, where significant vendor specific objective evidence does not exist to allocate the fee to the software and PCS, is recognized along with the PCS ratably over the period during which PCS is expected to be provided. Revenue from consulting services is recognized as work is performed. EQUIPMENT - Revenue from product sales is usually recognized upon installation, although recognition may from time to time occur at a different time based on the terms of specific customer contracts. SERVICES - Revenue for professional and systems integration services is recognized using the percentage of completion method, completed contract method or on a time-and-materials basis. Revenue from maintenance and repair contracts is recognized over the period of the agreement. Service revenue is recognized when the related service is performed. Deferred revenue represents amounts that the Company has billed to customers pursuant to contractual terms and does not meet the Company's policy for recognizing revenue. 14 VISIONICS CORPORATION THREE MONTHS ENDED DECEMBER 31, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company sometimes receives grant funding. If the grant is to pursue technological advances where the Company will be investing its own monies simultaneously with the grant funding, the funds are recorded as an offset to the development costs. If the grant received represents full funding, the funding is recorded as revenue and the associated costs as cost of sales using the percentage of completion contract accounting method. WARRANTY COSTS - -------------- Estimated product warranty costs for live scan systems are accrued when the revenue is recognized and is based on its experience. Revenue for live scan systems is usually recognized at time of installation. VALUATION OF ACCOUNTS RECEIVABLE - -------------------------------- Management reviews accounts receivable to determine which are doubtful of collection. In making the determination of the appropriate allowance for doubtful accounts, management considers the Company's history of write-offs, relationships with its customers, and the overall credit worthiness of its customers. VALUATION OF INVENTORY - ---------------------- Management reviews obsolescence to determine that inventory items deemed obsolete are appropriately reserved. In making the determination management considers the Company's history of write-offs, future sales of related products, and quantity of inventory at the balance sheet date assessed against each parts past usage rates and future expected usage rates. CAPITALIZED SOFTWARE DEVELOPMENT COSTS - -------------------------------------- Research and development costs consist principally of salaries and benefits paid to the Company's employees in the development of software products. The Company's policy is to expense all research and development costs as incurred until technological feasibility is established. Commencing with the establishment of technological feasibility and concluding at the time the product is ready for market, software development costs are capitalized. Technological feasibility is defined as being established when product design and a working model of the software product has been completed and tested. The costs of those products that have met the technological feasibility criteria have been capitalized. Annual amortization of capitalized software development costs is calculated as the greater of the amount computed using (a) the ratio of actual revenue from a product to the total of current and anticipated related revenues from the product or (b) the economic life of the product, estimated to be five years, on a straight-line basis. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2000 Total revenue increased 4% to $7,479,000 for the three months ended December 31, 2001 compared to $7,199,000 in the same prior-year period. Live scan identification systems revenue 15 VISIONICS CORPORATION THREE MONTHS ENDED DECEMBER 31, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS decreased 13% to $4,178,000 compared to $4,802,000 in the same prior-year period. The decrease is primarily due to a decrease in the number of live scan system installations, partially offset by a favorable product mix. These systems are primarily sold to government agencies. The nature of government markets and procurement processes result in unpredictable quarter-to-quarter fluctuations. Live scan maintenance revenue was $2,462,000 for the three months ended December 31, 2001 compared to $1,718,000 for the same prior-year period, an increase of 43%. This increase is due primarily to a larger installed base of live scan systems covered by maintenance agreements. FaceIt license revenue increased 37% to $521,000 for the three months ended December 31, 2001 compared to $381,000 for the same prior-year period. Approximately $80,000 of this increase was generated from an increase revenue from its subsidiary in the United Kingdom. FaceIt service revenue increased 7% to $318,000 for the three months ended December 31, 2001 compared to $297,000 for the same prior-year period. This increase is primarily due to providing custom development services to additional customers. FaceIt service revenue in the prior-year three-month period was primarily provided under one United States government contract. Revenue from two customers in the three-month period ended December 31, 2001 accounted for 38% of total revenue, and revenues from one customer in the same prior-year period accounted for 20% of total revenue. Foreign revenue for the three-month period ended December 31, 2001 and 2000 was 4% and 2%, respectively, of total revenue. Overall gross margin for the three months ended December 31, 2001 and 2000 was 40% and 33%, respectively. Gross margin on live scan identification systems revenue was 41% for the three months ended December 31, 2001 compared to 35% in the same prior-year period. Gross margins benefited the current-year period from a favorable product mix and, to a lesser extent, lower product warranty costs. Live scan maintenance margin for the three months ended December 31, 2001 and 2000 was 31% and 21%, respectively. This increase is due in part to improved product reliability. The maintenance staff does new installations as well as provides maintenance services. The Company has increased staffing in this area to accommodate the growing install base. When they are performing installation and warranty work their time is charged to identification cost of sales. Gross margin on FaceIt license revenue decreased to 74% for the three-month period ended December 31, 2001 from 83% during the same prior-year period due primarily to an increase in personnel-related costs for licensing administration and post contract customer support. FaceIt service margin increased to 29% during the current-year three-month period from 16% during the same prior-year period. The increase in margin is due primarily to services provided to commercial customers that have higher billable rates than government contracts. FaceIt service revenue in the prior-year three-month period was primarily provided under one United States government contract. 16 VISIONICS CORPORATION THREE MONTHS ENDED DECEMBER 31, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sales and marketing expense for the three-month period ended December 31, 2001 was $1,405,000 or 19% of total revenue compared to $1,137,000 or 16% of total revenue for the same prior-year period. The increase in sales and marketing expense is due primarily to an increase in personnel and promotional activities for new product marketing. The Company expects sales and marketing expenses to be in a similar range in the second quarter of fiscal 2002, dropping to 14 to 16 percent of total revenue during the second half of the fiscal year. Engineering and development expense was $1,985,000 or 27% of total revenue for the three-month period ended December 31, 2001 compared to $1,145,000 or 16% of total revenue in the same prior-year period. The increase in expense is due primarily to an increase in personnel and new product development costs related to IBIS, the biometric network platform and other new products. In addition, there was a decrease in billable customer contracts for custom software development. Engineering expenses for the three-month periods ended December 31, 2001 and 2000 are net of $21,000 and $159,000, respectively, of costs related to a federally funded demonstration project grant. The Company expects engineering and development expenses to be in a similar range in the second quarter of fiscal 2002, dropping to 13 to 15 percent of total revenue during the second half of the fiscal year. General and administrative expense for the three-month periods ended December 31, 2001 was $1,350,000 or 18% of total revenue compared to $948,000 or 13% of total revenue in the same prior-year period. The increase in expense is due primarily to legal costs associated with licensing agreements, professional recruitment services and a $85,000 non-cash charge for the valuation of stock options granted to a contractor. The Company expects general and administrative expenses to be in a similar dollar range in the second quarter of fiscal 2002, with a decrease as a percent of total revenue during the second half of the fiscal year. Non-recurring charges for the three-month period ended December 31, 2000 of $706,000 consist primarily of professional service costs associated with merger activities. Other income, net increased to $162,000 for the three months ended December 31, 2001 from $72,000 for the same prior-year period due primarily to an increase in interest income from higher cash balances. The provision of income taxes of $17,000 for the current-year three-month period is due to state income taxes. The Company generated a net loss for the three-month period ended December 31, 2001 of $1,633,000, or $0.06 per share loss, as compared to a net loss of $2,905,000, or $0.13 per share loss, for the same prior-year period. The cumulative effect of the change in accounting principle resulted in a $0.06 per share loss during the prior-year three-month period. The effect on the prior-year three-month period for the non-recurring charges of $706,000 equates to a $0.03 per share loss. INFLATION The Company does not believe inflation has significantly affected revenues or expenses. 17 VISIONICS CORPORATION THREE MONTHS ENDED DECEMBER 31, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NET OPERATING LOSS CARRYFORWARDS At December 31, 2001, the Company had carryforwards of net operating losses of approximately $51,427,000 that may allow the Company to reduce future income taxes that would otherwise be payable. The carryforwards are subject to the limitation provisions of Internal Revenue Code sections 382 and 383. These sections provide limitations on the availability of net operating losses and credits to offset current taxable income and related income taxes when an ownership change has occurred. Any future ownership change could create a limitation with respect to loss carryforwards not currently subject to an annual limitation. Approximately $11,108,000 of the $51,427,000 net operating loss carryforwards relates to compensation associated with the exercise of non-qualified stock options which, when realized, would result in approximately $4,443,000 credited to additional paid-in capital. LIQUIDITY AND CAPITAL RESOURCES GENERAL The Company established an inventory and receivables financing line of credit for the lesser of eligible inventory and receivables or $2,000,000 with Associated Bank Minnesota. 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 on March 30, 2003. There were no borrowings under this line at December 31, 2001. At December 31, 2001, the Company had $32,344,000 in cash and cash equivalents and $81,000 of restricted cash. On October 11, 2001, the Company closed on a private placement offering of common stock and warrants. A total of 1,801,800 shares were sold to accredited investors at a price of $11.10 each. Net proceeds to the Company approximated $19 million. 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 business as it has existed historically. Management may from time to time determine that the competitive position of Visionics may be enhanced through substantial and increased investments in product and technology development programs and/or marketing initiatives. Management may determine to make such investments despite its assessment that gross margin during the investment period will be less than the expenses to be incurred, thus resulting in an anticipated loss during the period. ANALYSIS OF CASH FLOWS FROM OPERATIONS Net cash used in operating activities was $1,696,000 for the three months ended December 31, 2001 compared to $285,000 in the same prior-year period. Cash flow from operating activities benefited the current year-period from a reduction in the net loss and a smaller increase in inventory, the prior-year period benefited from more customer prepayments of maintenance services and accounts receivable collections. 18 VISIONICS CORPORATION THREE MONTHS ENDED DECEMBER 31, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net cash used in investing activities increased to $416,000 for the three months ended December 31, 2001 from $316,000 the same prior-year period due primarily to an increase in the purchase of equipment to support new product development, computer equipment, and leasehold improvements. Net cash provided by financing activities was $24,747,000 for the three-month period ended December 31, 2001 compared to $106,000 during the same prior-year period. Cash from financing activities during the current-year period was provided primarily from a private placement of common stock that closed on October 11, 2001, and to a lesser extent, stock option and warrant exercises. 19 VISIONICS CORPORATION THREE MONTHS ENDED DECEMBER 31, 2001 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to certain market risks with our $2 million line of credit of which there were no borrowings outstanding at December 31, 2001. The line bears interest at a rate of one half percent (0.5%) above the prime rate. The Company is subject to foreign currency exposure, primarily with the British Pound and the Euro. At December 31, 2001 the Company's exposure to foreign currency fluctuations is not significant and primarily related to the Company's translation adjustment to convert its United Kingdom subsidiary into U.S. dollars. 20 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 None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. (a) EXHIBITS Exhibit 10.20 Change in Terms Agreement dated December 19, 2001 between the Company and Associated Bank Minnesota. Exhibit 10.21 Business Loan Agreement dated December 19, 2001 between the Company and Associated Bank Minnesota. (b) REPORTS ON FORM 8-K The Company filed a report on Form 8-K with the Securities and Exchange Commission on October 18, 2001 announcing that it closed on a private placement offering of common stock and warrants. A total of 1,801,800 shares were sold to accredited investors at a price of $11.10 each with total net proceeds to the Company of approximately $19.0 million. The Company issued warrants to purchase up to 36,036 shares of common stock at an exercise price of $16.86 per share to an investment-banking firm as partial compensation for services rendered in the private placement. 21 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. VISIONICS CORPORATION -------------------------- (Registrant) February 14, 2002 /s/ Robert F. Gallagher -------------------------- Robert F. Gallagher Chief Financial Officer 22 EX-10.20 3 visionics020798_ex10-20.txt CHANGE IN TERMS AGREEMENT EXHIBIT 10.20 CHANGE IN TERMS AGREEMENT
- ------------------------------------------------------------------------------------------------------ PRINCIPAL LOAN DATE MATURITY LOAN NO CALL / COLL ACCOUNT OFFICER INITIALS $2,000,000.00 12-19-2001 3-30-2003 9002 5277329 M2U - ------------------------------------------------------------------------------------------------------ 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. Any item above containing "***" has been omitted due to text length limitations. - -------------------------------------------------------------------------------------------------------
BORROWER: VISIONICS CORPORATION LENDER: ASSOCIATED BANK MINNESOTA 5600 ROWLAND ROAD STE 205 PLYMOUTH OFFICE MINNETONKA, MN 55343 2655 CAMPUS DRIVE PLYMOUTH, MN 55441 PRINCIPAL AMOUNT: $2,000,000.00 INITIAL RATE: 5.500% DATE OF AGREEMENT: DECEMBER 19, 2001 DESCRIPTION OF EXISTING INDEBTEDNESS. PROMISSORY NOTE DATED NOVEMBER 19,1999 IN THE ORIGINAL AMOUNT OF $2,000,000.00. DESCRIPTION OF COLLATERAL. ALL CORPORATE ASSETS PER COMMERCIAL SECURITY AGREEMENT DATED NOVEMEBR 19, 1999. DESCRIPTION OF CHANGE IN TERMS. EXTEND MATURITY DATE. PROMISE TO PAY. VISIONICS CORPORATION ("BORROWER") PROMISES TO PAY TO ASSOCIATED BANK MINNESOTA ("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 MARCH 30, 2003. IN ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ALL ACCRUED UNPAID INTEREST DUE AS OF EACH PAYMENT DATE, BEGINNING JANUARY 19, 2002, WITH ALL SUBSEQUENT INTEREST PAYMENTS TO BE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. INTEREST ON THIS AGREEMENT IS COMPUTED ON A 365/360 SIMPLE INTEREST 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. VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to change from time to time based on changes in an index which is Lender's Prime Rate (the "Index"). This is the rate Lender charges, or would charge, on 90-day unsecured loans to the most creditworthy corporate customers. This rate may or may not be the lowest rate available from Lender at any given time. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often than each DAY. Borrower understands that Lender may make loans based on other rates as well. THE INDEX CURRENTLY IS 4.750% PER ANNUM. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THE NOTE WILL BE AT A RATE OF 0.500 PERCENTAGE POINTS OVER THE INDEX, RESULTING IN AN INITIAL RATE OF 5.500% PER ANNUM. NOTWITHSTANDING THE FOREGOING, THE VARIABLE INTEREST RATE OR RATES PROVIDED FOR IN THE NOTE WILL BE SUBJECT TO THE FOLLOWING MINIMUM AND MAXIMUM RATES. NOTICE: Under no circumstances will the interest rate on the Note be less than 5.500% per annum or more than the maximum rate allowed by applicable law. REPAYMENT. 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, early payments will reduce the principal balance due. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Agreement, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: ASSOCIATED BANK MINNESOTA, PLYMOUTH OFFICE, 2655 CAMPUS DRIVE, PLYMOUTH, MN 55441. 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. INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final maturity, Lender, at its option, may, if permitted under applicable law, increase the variable interest rate on this Agreement to 2.500 percentage points over the Index. The interest rate will not exceed the maximum rate permitted by applicable law. DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: PAYMENT DEFAULT. Borrower fails to make any payment when due under the Indebtedness. OTHER DEFAULTS. Borrower fails 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 to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. DEFAULT IN FAVOR OF THIRD PARTIES. Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to perform Borrower's obligations under this Agreement or any of the Related Documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. 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 or by any governmental agency against any collateral securing the Indebtedness. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower 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. CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. CHANGE IN TERMS AGREEMENT Loan No: 9002 (Continued) Page 2 ADVERSE CHANGE. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. INSECURITY. Lender in good faith believes itself insecure. CURE PROVISIONS. 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 Agreement 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: (1) cures the default within thirty (30) days; or (2) if the cure requires more than thirty (30) 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 Agreement and all accrued unpaid interest immediately due, and then Borrower will pay that amount. ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect this Agreement if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's reasonable attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including reasonable attorneys' fees, expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF MINNESOTA. THIS AGREEMENT HAS BEEN ACCEPTED BY LENDER IN THE STATE OF MINNESOTA. RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff 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, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect Lender's charge and setoff rights provided in this paragraph. LINE OF CREDIT. This Agreement evidences a revolving line of credit. Advances under this Agreement 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 Agreement at any time may be evidenced by endorsements on this Agreement or by Lenders internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Agreement if: (A) Borrower or any guarantor is In default under the terms of this Agreement or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Agreement; (8) 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 Agreement or any other loan with Lender; (D) Borrower has applied -ids provided pursuant to this Agreement for purposes other than those authorized by Lender; or (E) Lender in good faith believes itself insecure. CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender's right to strict performance of the obligation(s) as changed, nor obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accommodation makers, will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions. 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. SUCCESSORS AND ASSIGNS. Subject to any limitations stated in this Agreement on transfer of Borrower's interest, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Collateral becomes vested in a person other than Borrower, Lender, without notice to Borrower, may deal with Borrower's successors with reference to this Agreement and the Indebtedness by way of forbearance or extension without releasing Borrower from the obligations of this Agreement or liability under the Indebtedness. MISCELLANEOUS PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Agreement without losing them. Borrower and any other person who signs, guarantees or endorses this Agreement, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Agreement, and unless otherwise expressly stated in writing, no party who signs this Agreement, 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. The obligations under this Agreement are joint and several. SECTION DISCLOSURE. This loan is made under Minnesota Statutes, Section 47.59. CHANGE IN TERMS AGREEMENT Loan No: 9002 (Continued) Page 3 PIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE AGREEMENT. BORROWER: VISIONICS CORPORATION BY: /s/ Robert F. Gallagher ------------------------------------ ROBERT F. GALLAGHER, CHIEF FINANCIAL OFFICER OF VISIONICS CORPORATION EX-10.21 4 visionics020798_ex10-21.txt BUSINESS LOAN AGREEMENT EXHIBIT 10.21 BUSINESS LOAN AGREEMENT (ASSET BASED)
- ------------------------------------------------------------------------------------------------------ PRINCIPAL LOAN DATE MATURITY LOAN NO CALL / COLL ACCOUNT OFFICER INITIALS $2,000,000.00 12-19-2001 3-30-2003 9002 5277329 M2U - ------------------------------------------------------------------------------------------------------ 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. Any item above containing "***" has been omitted due to text length limitations. - -------------------------------------------------------------------------------------------------------
BORROWER: VISIONICS CORPORATION LENDER: ASSOCIATED BANK MINNESOTA 5600 ROWLAND ROAD STE 205 PLYMOUTH OFFICE MINNETONKA, MN 55343 2655 CAMPUS DRIVE PLYMOUTH, MN 55441 THIS BUSINESS LOAN AGREEMENT (ASSET BASED) DATED DECEMBER 19, 2001, IS MADE AND EXECUTED BETWEEN VISIONICS CORPORATION ("BORROWER") AND ASSOCIATED BANK MINNESOTA ("LENDER") 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 OR OTHER FINANCIAL ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR SCHEDULE ATTACHED TO THIS AGREEMENT ("LOAN"). 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, AND (B) ALL SUCH LOANS SHALL BE AND REMAIN SUBJECT TO THE TERMS AND CONDITIONS OF THIS AGREEMENT. TERM. This Agreement shall be effective as of December 19, 2001, and shall continue in full force and effect until such time as all of Borrower's Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, afforneys' fees, and other fees and charges, or until such time as the parties may agree in writing to terminate this Agreement. 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: (1) Lender shall have received evidence that this Agreement and all Related Documents have been duly authorized, executed, and delivered by Borrower to Lender. (2) Lender shall have received such opinions of counsel, supplemental opinions, and documents as Lender may request. (3) 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. (4) All guaranties required by Lender for the credit facility(ies) shall have been executed by each Guarantor, delivered to Lender, and be in full force and effect. (5) 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. (6) 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. (7) There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance certificate called for in the paragraph below titled "Compliance Certificate." MAKING LOAN ADVANCES. Advances under this credit facility, as well as directions for payment from Borrower's accounts, may be requested 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 (1) when credited to any deposit account of Borrower maintained with Lender or (2) 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 Primary Credit Facility and performance of all other Loan, 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. 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 financing statements and all documents perfecting Lender's Security Interest 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 and instruments 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 Lender 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 before any change in Borrower's name including any change to the assumed business names of Borrower, Borrower also promptly will notify Lender before 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. BUSINESS LOAN AGREEMENT (ASSET BASED) Loan No: 9002 (Continued) Page 2 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. Records related to Accounts (Receivables) are or will be located at . 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. Records related to Inventory are or will be located at . The above is an accurate and complete list of all locations at which Borrower keeps or maintains business records concerning Borrower's collateral. COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender schedules of Accounts and Inventory and schedules of Eligible Accounts and Eligible Inventory in form and substance satisfactory to the Lender. Thereafter supplemental schedules shall be delivered according to the following schedule: REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the Accounts, Borrower represents and warrants to Lender: (1) 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; (2) All Account information listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; and (3) 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: (1) All Inventory represented by Borrower to be Eligible Inventory for purposes of this Agreement conforms to the requirements of the definition of Eligible Inventory; (2) All Inventory values listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; (3) The value of the Inventory will be determined on a consistent accounting basis; (4) 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; (5) 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; (6) 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 name evidencing the storage of Inventory; and (7) 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. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial Advance and each subsequent Advance under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all of the conditions set forth in this Agreement and in the Related Documents. LOAN DOCUMENTS. Borrower shall provide to Lender the following documents for the Loan: (1) the Note; (2) Security Agreements granting to Lender security interests in the Collateral; (3) financing statements and all other documents perfecting Lender's Security Interests; (4) evidence of insurance as required below; (5) together with all such Related Documents as Lender may require for the Loan; all in form and substance satisfactory to Lender and Lender's counsel. BORROWER'S AUTHORIZATION. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents. In addition, Borrower shall have provided such other resolutions, authorizations, documents and instruments as Lender or its counsel, may require. FEES AND EXPENSES UNDER THIS AGREEMENT. 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. REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct. NO EVENT OF DEFAULT. There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement or under any Related Document. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: ORGANIZATION. Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of Delaware. Borrower is duly authorized to transact business in all other states in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign corporation in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Borrower maintains an office at 5600 ROWLAND *RD STE205, MINNETONKA, MN 55343. Unless Borrower has designated otherwise in writing, the principal office is the office at which Borrower keeps its books and records including its records concerning the Collateral. Borrower will notify Lender prior to any change in the location of Borrower's state of organization or any change in Borrower's name. Borrower shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or q uasi-g overn mental authority or court applicable to Borrower and Borrower's business activities. ASSUMED BUSINESS NAMES. Borrower has filed or recorded all documents or filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names under which Borrower does business: NONE. AUTHORIZATION. Borrower's execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision of Borrower's articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower's properties. FINANCIAL INFORMATION. Each of Borrower's financial statements 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 Borrower is required to give under this Agreement when delivered will constitute legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. PROPERTIES. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of BUSINESS LOAN AGREEMENT (ASSET BASED) Loan No: 9002 (Continued) Page 3 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. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period of Borrower's ownership of Borrower's Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral. (2) Borrower has no knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws; (b) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance of the Collateral 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 Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) 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 (2) agrees to Indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses, including attorneys' fees, consultants' fees, and costs 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 Collateral. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender's acquisition of any interest In any of the Collateral, 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 of Borrower's tax returns and reports 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 (if any), and all Related Documents are binding upon the signers thereof, as well as upon their successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will: NOTICES OF CLAIMS AND LITIGATION. Promptly inform Lender in writing of (1) all material adverse changes in Borrower's financial condition, and (2) 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 GAAP, 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 the following: ANNUAL STATEMENTS. 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. INTERIM STATEMENTS. As soon as available, but in no event later than 40 days after the end of each fiscal quarter, Borrower's balance sheet and profit and loss statement for the period ended, prepared by Borrower. ADDITIONAL REQUIREMENTS. BORROWING BASE CERTIFICATE & ACCOUNTS RECEIVABLE AGING ARE REQUIRED ONLY WHEN THE LINE IS IN USE. All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct. ADDITIONAL INFORMATION. Furnish such additional information and statements, as Lender may request from time to time. FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and ratios: TANGIBLE NET WORTH REQUIREMENTS. Maintain a minimum Tangible Net Worth of not less than: $20,000,000.00. Other Net Worth requirements are as follows: AS OF DECEMBER 31, 2001 AND QUARTERLY THEREAFTER. In addition, Borrower shall comply with the following net worth ratio requirements: DEBT / WORTH RATIO. Maintain a ratio of Debt / Worth not in excess of 1.000 TO 1.000. The ratio "Debt / Worth" means Borrower's Total Liabilities divided by Borrower's Tangible Net Worth. This leverage ratio will be evaluated as of quarter-end. OTHER REQUIREMENTS. CURRENT RATIO EQUAL TO OR GREATER THAN 2.0:1 AT 12/31/01 AND QUARTERLY THEREAFTER. 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 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 BUSINESS LOAN AGREEMENT (ASSET BASED) Loan No: 9002 (Continued) Page 4 provide Lender with such lender's 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: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (6) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. OTHER AGREEMENTS. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, Income, or profits. PERFORMANCE. Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in writing of any default in connection with any agreement. 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. ENVIRONMENTAL STUDIES. Promptly conduct and complete, at Borrower's expense, all such investigations, studies, samplings and testings as may be requested by Lender or any governmental authority relative to any substance, or any waste or by-product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive, at or affecting any property or any facility owned, leased or used by Borrower. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the conduct of Borrower's properties, businesses and operations, and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender's sole opinion, Lender's interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender's interest. INSPECTION. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. COMPLIANCE CERTIFICATES. Unless waived in writing by Lender, provide Lender at least annually, with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects with any and all Environmental Laws; not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower's 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, assignments, 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. LENDER'S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower's failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents, Lender on Borrower's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any 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 Borrower. All such expenses will 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 (1) the term of any applicable insurance policy; or (2) 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. 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. (1) 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, (2) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets (except as allowed as Permitted Liens), or (3) sell with recourse any of Borrower's accounts, except to Lender. CONTINUITY OF OPERATIONS. (1) Engage in any business activities substantially different than those in which Borrower is presently engaged, (2) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however BUSINESS LOAN AGREEMENT (ASSET BASED) Loan No: 9002 (Continued) Page 5 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 Borrower's stock, or purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. LOANS, ACQUISITIONS AND GUARANTIES. (1) Loan, invest in or advance money or assets, (2) purchase, create or acquire any interest in any other enterprise or entity, or (3) 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 dies, becomes incompetent or 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; or (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. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff 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, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect Lender's charge and setoff rights provided in this paragraph. DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: PAYMENT DEFAULT. Borrower fails to make any payment when due under the Loan. OTHER DEFAULTS. Borrower fails 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 to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. DEFAULT IN FAVOR OF THIRD PARTIES. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's or any Grantor's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents, FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. 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. DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason. 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 or by any governmental agency against any collateral securing the Loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower 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 any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. In the event of a death, 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 any 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 Loan is impaired. INSECURITY. Lender in good faith believes 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: (1) cure the default within thirty (30) days; or (2) if the cure requires more than thirty (30) days, immediately initiate steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continue and complete 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 further 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 BUSINESS LOAN AGREEMENT (ASSET BASED) Loan No: 9002 (Continued) Page 6 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, ATTORNEYS' FEES; EXPENSES. Borrower agrees to pay upon demand all of Lender's costs and expenses, including Lender's reasonable attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's reasonable attorneys' fees and legal expenses whether or not there is a lawsuit, including reasonable attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also 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. 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 Loan 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 Borrower 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 Loan 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 Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. 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. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF MINNESOTA. THIS AGREEMENT HAS BEEN ACCEPTED BY LENDER IN THE STATE OF MINNESOTA. NO WAIVER BY LENDER. 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 of Borrower's or any 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. NOTICES. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. 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. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower's current address. Unless otherwise provided or required by law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers. SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement. 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 in this Agreement shall include all of Borrower's subsidiaries and affiliates. 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 of Borrower's subsidiaries or affiliates. SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on behalf of Borrower shall bind Borrower's successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign Borrower's rights under this Agreement or any interest therein, without the prior written consent of Lender. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees that in extending Loan Advances, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the extension of Loan Advances and delivery to Lender of the Related Documents, shall be continuing in nature, shall be deemed made and redated by Borrower at the time each Loan Advance is made, 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. TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Agreement. DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement: ACCOUNT. The word "Account" means a trade account, account receivable, other receivable, or other right to payment for goods sold or services rendered owing to Borrower (or to a third party grantor acceptable to Lender). ADVANCE. The word "Advance" means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower's behalf under the terms and conditions of this Agreement. AGREEMENT. The word "Agreement" means this Business Loan Agreement (Asset Based), as this Business Loan Agreement (Asset Based) may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement (Asset Based) from time to time. BUSINESS LOAN AGREEMENT (ASSET BASED) Loan No: 9002 (Continued) Page 7 BORROWER. The word "Borrower" means VISIONICS CORPORATION, and all other persons and entities signing the Note in whatever capacity. BORROWING BASE. The words "Borrowing Base" mean, as determined by Lender from time to time, the lesser of (1) $2,000,000.00 or (2) the sum of (a) 80.000% of the aggregate amount of Eligible Accounts, plus (b) 50.000% of the aggregate amount of Eligible Inventory. BUSINESS DAY. The words "Business Day" mean a day on which commercial banks are open in the State of Minnesota. COLLATERAL. The word "Collateral" means 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, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral 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 also Includes without limitation all collateral described in the Collateral section of this Agreement. 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: (1) Accounts with respect to which the Account Debtor is employee or agent of Borrower. (2) Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with Borrower or its shareholders, officers, or directors. (3) 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. (4) 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. (5) Accounts which are subject to dispute, counterclaim, or setoff. (6) Accounts with respect to which the goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor. (7) Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory. (8) 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. (9) 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: (1) Inventory which is not owned by Borrower free and clear of all security interests, liens, encumbrances, and claims of third parties. (2) Inventory which Lender, in its sole discretion, deems to be obsolete, unsalable, damaged, defective, or unfit for further processing. ENVIRONMENTAL LAWS. The words "Environmental Laws" mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation 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 C'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 thereto or common law, and shall also include pollutants, contaminants, polychlorinated biphenyls, asbestos, urea formaldehyde, petroleum and petroleum products, and agricultural chemicals. EVENT OF DEFAULT. The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement. EXPIRATION DATE. The words "Expiration Date" mean the date of termination of Lender's commitment to lend under this Agreement. GAAP. The word "GAAP" means generally accepted accounting principles. GRANTOR. The word "Grantor" means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest. GUARANTOR. The word "Guarantor" means any guarantor, surety, or accommodation party of any or all of the Loan. GUARANTY. The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of,the Note. HAZARDOUS SUBSTANCES. The words "Hazardous Substances" mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words "Hazardous Substances" are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term "Hazardous Substances" also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents. 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 ASSOCIATED BANK MINNESOTA, its successors and assigns. LOAN. The word "Loan" means any and all 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 BUSINESS LOAN AGREEMENT (ASSET BASED) Loan No: 9002 (Continued) Page 8 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 the Note executed by Borrower in the principal amount of $2,000,000.00 dated December 19, 2001, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement. PERMITTED LIENS. The words "Permitted Liens" mean (1) liens and security interests securing Indebtedness owed by Borrower to Lender; (2) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (3) 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; (4) 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"; (5) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (6) 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. PRIMARY CREDIT FACILITY. The words "Primary Credit Facility" mean the credit facility described in the Line of Credit section of this Agreement. RELATED DOCUMENTS. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan. 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, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral 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. TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total debt. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT (ASSET BASED) IS DATED DECEMBER 19,2001. BORROWER: VISIONICS CORPORATION BY: /s/ Robert F. Gallagher ------------------------------------ ROBERT F. GALLAGHER, CHIEF FINANCIAL OFFICER OF VISIONICS CORPORATION LENDER: ASSOCIATED BANK MINNESOTA BY: /s/ Duane Sather ---------------------------------- AUTHORIZED SIGNER -----END PRIVACY-ENHANCED MESSAGE-----