<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 1996
REGISTRATION NO. 333-10649
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3TOFORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------
VIISAGE TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7373 04-3320515
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION OF CLASSIFICATION CODE)
INCORPORATION OR
ORGANIZATION)
531 MAIN STREET
ACTON, MASSACHUSETTS 01720
(508) 263-8365
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
ROBERT C. HUGHES
CHIEF EXECUTIVE OFFICER
VIISAGE TECHNOLOGY, INC.
531 MAIN STREET
ACTON, MASSACHUSETTS 01720
(508) 263-8365
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES OF ALL COMMUNICATIONS TO:
CHARLES J. JOHNSON, ESQ. MARK H. BURNETT, ESQ.
FINNEGAN, HICKEY, DINSMOOR TESTA, HURWITZ & THIBEAULT, LLP
& JOHNSON, P.C. HIGH STREET TOWER
20 BEACON STREET 125 HIGH STREET
BOSTON, MASSACHUSETTS 02108 BOSTON, MASSACHUSETTS 02110
(617) 523-2500 (617) 248-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, as amended, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, as amended, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Dated November 7, 1996
2,500,000 SHARES
[VIISAGE LOGO APPEARS HERE]
COMMON STOCK
-----------
Of the 2,500,000 shares of Common Stock offered hereby, 2,000,000 shares are
being sold by Viisage Technology, Inc. ("Viisage" or the "Company") and 500,000
shares are being sold by the selling stockholder (the "Selling Stockholder").
See "Principal and Selling Stockholders." The Company will not receive any of
the proceeds from the sale of shares by the Selling Stockholder.
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $9.00 and $11.00 per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price. Application has been made to have the Common Stock
approved for quotation on the Nasdaq National Market under the symbol "VISG."
-----------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 6.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Stockholder
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................ $ $ $ $
Total(3)......................... $ $ $ $
</TABLE>
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(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses, estimated to be $825,000, payable by the
Company.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 375,000 shares
at the Price to Public less the Underwriting Discount to cover over-
allotments, if any. If all such shares are purchased, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
-----------
The Common Stock is offered by the several Underwriters named herein when, as
and if received and accepted by them, subject to their right to reject orders
in whole or in part and subject to certain other conditions. It is expected
that delivery of certificates for the shares will be made at the offices of
Cowen & Company, New York, New York on or about , 1996.
COWEN & COMPANY NEEDHAM & COMPANY, INC.
, 1996.
<PAGE>
[Photograph of the Image Workstation and SensorMast being used by an operator
to capture the image of a card applicant.]
[Photographs or depictions of representative tamper-resistant identification
cards capable of being produced by the Company's systems. Representative cards
are: a driver's license; a law enforcement identification card; a corporate
identification card; and an entitlement program identification card.]
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
[Picture of the card production facility at Viisage.]
[Diagram of representative work flow for a typical client server-based
identification card installation. There will be a brief description of each
step as part of the overall schematic.]
<TABLE>
<S> <C> <C>
[PICTURE] [PICTURE] [PICTURE]
Image Workstation Facebase Image Server Main Frame Computer
</TABLE>
<PAGE>
[Picture and descriptive captions of Viisage hardware products. They will
include:
A workstation displaying an image capture screen;
A SensorMast (camera, light source, signature input);
A "RAID" storage cabinet representing the Image Server technology;
A production printer used by Viisage for card creation; and
A picture of the Viisage Visual Inspection System.]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Prospective investors should carefully consider
the information set forth under the heading "Risk Factors." Unless otherwise
indicated, all information contained in this Prospectus (i) gives effect to the
transfer to the Company from Lau Acquisition Corp., a corporation doing
business as Lau Technologies ("Lau" or "Lau Technologies"), of substantially
all of the assets of Lau's facial imaging and identification systems and
services business (the "Viisage Technology Division") in exchange for the
assumption by the Company of the liabilities of the Viisage Technology Division
and the issuance to Lau of 5,680,000 shares of Common Stock, which will be
completed on the effective date of the registration statement relating to this
offering, and (ii) assumes no exercise of the Underwriters' over-allotment
option. Unless the context otherwise requires, all references to the "Company"
or "Viisage" in this Prospectus refer to Viisage Technology, Inc. and the
Viisage Technology Division.
THE COMPANY
The Company designs, sells and implements turnkey digital identification
systems intended to deter fraud and to reduce customers' identification program
costs. These systems capture facial images, demographic information and other
biological identifiers, produce identification cards, and create relational
databases containing this information. Using its software design and systems
integration capabilities, the Company is able to combine its proprietary
software and hardware products with commercially available components and
customers' existing systems, creating a complete customized solution. In
addition, the Company is developing proprietary facial recognition software
designed to identify individuals in a large database of faces on a real-time
basis.
Historically, identification cards have been produced by enclosing a
photograph and paper product in a laminated pouch. However, since
identification cards are often used to administer rights and benefits, control
access, and serve as a primary means of personal identification, these
laminated cards have been a target for fraud and tampering. The use of
fraudulent driver's licenses, credit cards or other identification cards has
significant financial and societal implications. As a result, both the public
and private sectors are increasing their use of tamper-resistant digital
identification systems. Digital systems enable information and images to be
imbedded within the fabric of the card itself, making the card more resistant
to tampering than laminated pouches.
In addition to deterring fraud, digital identification systems are efficient,
cost-effective and flexible. They facilitate the storage of information in
computer databases, thereby increasing record-keeping efficiency and enabling
information to be shared and distributed across geographic and organizational
boundaries. Digital systems also enable biological identifiers (biometrics),
such as facial images, fingerprints, voice data, or hand geometry, to be stored
in the card itself and in databases as an additional means of reducing fraud
and for other applications.
The Company offers a range of identification card delivery systems to address
a customer's specific needs. The Company provides "instant issue" systems which
produce identification cards on location that can be delivered to recipients in
minutes. Alternatively, the Company offers central processing systems, which
electronically receive information from the point of data capture and produce
cards at a secure off-site processing location for later mailing. The Company's
systems incorporate the Company's proprietary SensorMast workstation, which is
a fully-integrated, secure tower unit for computer-controlled image capture.
Central production systems also include the Company's proprietary Visual
Inspection System, which is used for automated quality assurance. Viisage's
proprietary software and services integrate the various components of its own
SensorMast and Visual Inspection System as well as integrate the Company's
products with a variety of third-party components and technologies used by its
customers. The facial images captured by the Company's identification systems
provide the content for a variety of public and private sector applications of
the Company's facial recognition technologies.
3
<PAGE>
The Company has three proprietary facial recognition products which it
currently is testing in pilot programs and plans to make generally available in
the first quarter of 1997. These products are designed to determine whether a
face appears in a database more than once, or to perform one-to-one face
verification at, for example, a point-of-sale or an automated teller machine
("ATM").
The Company's strategy is to continue to provide complete identification
systems tailored to address specific customer requirements. While the Company
will continue to focus on providing solutions to public sector customers
worldwide, it also believes that there are significant opportunities to
leverage its public sector expertise into a variety of commercial applications.
The Company will continue its commitment to product development with a focus on
facial recognition technologies for a large number of public and private sector
applications.
The Company's proprietary digital identification system products are
currently operating at over 365 locations under multi-year contracts with
twelve public sector agencies (either via contract or, in certain
circumstances, as a subcontractor). These systems produce driver's licenses,
welfare cards, pistol permits, prison cards, electronic benefits transfer cards
and immigration cards. The Company believes there is a large demand in the
public sector for identification systems that not only incorporate digital
technology to deter fraud and reduce costs, but also store data for convenient
access and dissemination. The Company also believes its technology is well
suited for a variety of commercial applications including access to ATMs,
networks, databases, and facilities, as well as for retail point-of-sale
transaction processing and benefits administration.
Prior to this offering, the Company has operated as the Viisage Technology
Division of Lau Technologies, a provider of systems integration services and
products for sophisticated electronic systems. Upon the completion of this
offering, Lau Technologies will own approximately 67% (approximately 64% if the
over-allotment option is exercised in full) of the Company's outstanding Common
Stock.
The Company's principal executive offices are located at 531 Main Street,
Acton, Massachusetts 01720, and the Company's telephone number is (508) 263-
8365.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered:
By the Company............... 2,000,000 shares
By Selling Stockholder....... 500,000 shares
Common Stock to be outstanding
after the offering............ 7,680,000 shares(1)
Use of proceeds................ To repay certain indebtedness and for general
corporate purposes, including working capital
Proposed Nasdaq National Market
symbol........................ VISG
</TABLE>
- --------
(1) Excludes 1,427,100 shares of Common Stock reserved for issuance upon the
exercise of options which have been granted, with a weighted average
exercise price of $3.20 per share, under the Company's 1996 Management
Stock Option Plan and 1996 Director Stock Option Plan. See "Management--
Incentive and Stock Plans."
4
<PAGE>
SUMMARY FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
---------------------------- --------------------------
1993 1994 1995 JULY 2, 1995 JUNE 30, 1996
-------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $ 505 $ 1,257 $ 11,221 $ 5,395 $11,870
Operating income
(loss)................ (1,472) (2,361) (2,432) (1,118) 464
Net income (loss)...... (1,472) (2,401) (2,947) (1,251) 74
Net income (loss) per
share(2).............. $ (0.24) $ (0.39) $ (0.47) $ (0.20) $ 0.01
Weighted average number
of common shares(2)... 6,225 6,225 6,225 6,225 6,225
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------
PRO FORMA
PRO FORMA(3) AS ADJUSTED(3)(4)
------------ -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ -- $ 8,966
Working capital................................. 9,077 18,043
Total assets.................................... 14,959 23,925
Long-term obligations........................... 10,203 1,394
Net assets(5)................................... 802 --
Stockholders' equity............................ -- 18,577
</TABLE>
- --------
(1) The summary financial data are derived from the financial statements of the
Viisage Technology Division and cover the period from the Viisage
Technology Division's inception through June 30, 1996.
(2) See Note 2 of the Notes to the Financial Statements for information
concerning the computation of net income (loss) per share.
(3) Pro forma amounts reflect the estimated net deferred income tax liability
that will be recorded as a result of the transfer by Lau of the assets and
liabilities of the Viisage Technology Division to the Company as discussed
in "Relationship and Certain Transactions with Lau Technologies" and Notes
1 and 2 of the Notes to Financial Statements.
(4) Adjusted to give effect to the sale of 2,000,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $10.00 per share, after deducting the estimated underwriting discount
and offering expenses payable by the Company, and the application of the
net proceeds thereof. See "Use of Proceeds" and "Capitalization."
(5) Net assets represent Lau's net investment in the Company during the time
the Company operated as the Viisage Technology Division.
----------------
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed in "Risk
Factors."
Viisage, Viisage Technology, SensorMast, Visual Inspection System and
Electronic Facial Identification Systems are trademarks of the Company. All
other trademarks or trade names referred to in this Prospectus are the property
of their respective owners.
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. This Prospectus contains certain forward-looking statements.
Actual results could differ materially from those projected in the forward-
looking statements as a result of certain of the risk factors set forth below
and elsewhere in this Prospectus. In addition to the other information in this
Prospectus, prospective investors should carefully consider the following risk
factors in evaluating an investment in the Company and its business before
purchasing any shares of Common Stock offered hereby.
HISTORY OF LOSSES; POTENTIAL ADDITIONAL CAPITAL REQUIREMENTS
The business operations of the Company commenced in 1993 and have resulted
in losses from inception through December 31, 1995. As of June 30, 1996, the
Company had a cumulative net loss of approximately $6.8 million. Although the
Company was profitable during the first two quarters of 1996, there can be no
assurance that the Company will be profitable for the remainder of 1996 or
that it will sustain profitability on either a quarterly or annual basis.
Further, no assurance can be given that the Company will not need to raise
additional funds through public or private financings. Expansion of the
Company's business, including the financing of the development, production and
installation of its digital identification systems, will require the Company
to make significant project expenditures. If the net proceeds of this offering
and its other available cash resources prove to be insufficient (due to
unanticipated expenses or otherwise), the Company may be required to seek
additional financing or curtail its expansion activities. The Company may
determine, depending upon the opportunities available to it, to seek
additional debt or equity financing to fund the cost of continuing expansion.
To the extent that the Company obtains equity financing or finances an
acquisition with equity securities, such issuances of equity securities could
result in dilution to the interests of the Company's stockholders. There can
be no assurance that additional financing will be available to the Company on
acceptable terms, or at all. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
FLUCTUATIONS IN QUARTERLY RESULTS MAY ADVERSELY AFFECT MARKET PRICE OF COMMON
STOCK
The Company has experienced fluctuations in its quarterly operating results
and anticipates that such fluctuations will continue and could intensify. The
Company's quarterly operating results are affected by a number of factors that
could materially and adversely affect revenues and profitability, including
the size of customer contracts, the timing of contract awards and the timing
of the Company's performance on contracts; competitive conditions including
pressures inherent in the competitive bidding process; the availability and
cost of key components; modifications to contracts after their award;
financing costs related to large project expenditures which are often
necessary at the outset of a customer contract; changes in management
estimates incident to accounting for contracts; the timing of the introduction
or market acceptance of new or enhanced products and services offered by the
Company or its competitors; variations in the mix of products and services
sold by the Company; and general economic and political conditions and other
factors affecting project spending by customers. Further, the sales cycles for
the Company's products typically involve lengthy marketing and procurement
processes. After a contract is awarded, delays in the design and start-up of a
system may require that revenues associated with such implementation be
recognized later than originally anticipated. Such delays have caused, and may
in the future cause, material fluctuations in the Company's operating results.
The Company's revenues in any period are generally derived from large orders
from a limited number of customers. As the Company's project margin on such
orders can differ significantly, the Company's overall margin may vary
significantly from period to period. In addition, project margin may be
adversely affected by competitive pressures, or customer requirements.
Accordingly, there can be no assurance that the Company will be able to
sustain satisfactory project margins. The Company also may choose to reduce
prices or increase spending in response to competition or to pursue new market
opportunities, all of which may adversely affect the Company's business,
operating results and financial condition.
6
<PAGE>
Due to the foregoing factors, and the risks associated with the timing of
revenue recognition discussed below, it is possible that the Company's results
of operations could fail to meet the expectations of securities analysts or
investors. In such event, or in the event that adverse conditions prevail or
are perceived to prevail, the price of the Company's Common Stock would likely
be materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Results."
RISKS ASSOCIATED WITH THE TIMING OF REVENUE RECOGNITION
The Company expects to continue investing in the research, development and
engineering of its systems, software and products, as well as in the Company's
sales and marketing efforts. Given these and other fixed costs that the
Company will incur, a small variation in the timing of revenue recognition
could cause material variations in operating results from quarter to quarter
and may result in losses or have a material adverse effect on the Company's
business, results of operations or financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON LARGE ORDERS AND CUSTOMER CONCENTRATION
The Company's revenues have primarily been, and are expected to be, derived
from large orders from a limited number of customers.
The Company provides systems and services principally under contracts that
have five-year terms, with several annual renewals after the initial contract
term and include an implementation period of up to twelve months after the
contract has been awarded. Contracts generally provide for a fixed price for
the system and/or for each card produced. Contract prices vary depending on,
among other things, design and integration complexities, the nature and number
of workstations and sites, the projected number of cards to be produced, the
level of post-installation support and the competitive environment. The
Company recognizes revenues and project costs using the percentage of
completion method based on labor costs incurred and/or cards produced. These
amounts are typically higher during the implementation phase of a contract due
to the higher level of labor costs incurred during this period. Contract
losses, if any, and changes in management estimates incident to accounting for
contracts are recognized in the period in which they become determinable.
Generally, contracts provide for billing when contract milestones are met
and/or cards are produced.
Revenues from a single customer accounted for all of the Company's 1993 and
1994 revenues. Three customers each accounted for greater than 10% of the
Company's revenues in 1995; in the aggregate, these three customers accounted
for approximately 85% of the Company's 1995 revenues. Four customers each
accounted for greater than 10% of the Company's revenues during the six months
ended June 30, 1996; in the aggregate, these four customers accounted for
approximately 81% of the Company's revenues during the first six months of
1996. The loss of any large customer could have a material adverse impact on
the Company's business, operating results and financial condition. See
"Business--Customers and End Users." As of June 30, 1996, 77% of the Company's
accounts receivable and costs and estimated earnings in excess of billings
related to four customers.
There can be no assurance that the Company will continue to obtain large
orders on a consistent basis. The Company's inability to obtain sufficient
large orders would have a material adverse effect on the Company's business,
operating results and financial condition. Moreover, the timing of the award
of and performance on such orders may cause the operating results of the
Company in any given quarter to differ from operating results in other
quarters and from estimates of securities analysts or investors, which could
adversely affect the trading price of the Company's Common Stock. Customer
disputes regarding contract performance, or the Company's inability to
collect, or delays in collecting, accounts receivable from any major customer
could also have a material adverse effect on the Company's business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview" and "--Quarterly
Results."
RISKS ASSOCIATED WITH LENGTHY SALES AND IMPLEMENTATION CYCLES
Historically, the Company's revenues have depended upon the decision of a
public sector agency to install a digital identification system and to procure
such a system from the Company. Such purchasing decisions are
7
<PAGE>
often subject to delays associated with the lengthy procurement processes that
typically accompany large public sector capital expenditures. The Company's
systems therefore often have a lengthy sales cycle while the customer prepares
system specifications and requests for proposals, evaluates all aspects of bid
proposals and obtains approvals for the selection of the Company's systems.
Typically, six to twelve months may elapse between a new customer's initial
evaluation of the Company's system and bid proposal and the execution of a
contract. Another six to twelve months may elapse before final implementation
of the system while the system is being designed and products are being
integrated. Further, customers may seek to modify the system either during or
after the implementation of the system. During the sales and implementation
cycles, the Company expends substantial funds and management effort yet often
has to defer billing because of contractual terms. Any significant failure by
the Company to execute a contract or successfully implement a system after
expending such funds and effort or interruptions in the operation of a system
could have a material adverse effect on its business, operating results and
financial condition. It may be difficult to predict accurately the sales cycle
of any large order. If one or more large orders fail to be implemented as
forecasted for a quarter, the Company's revenues and operating results for
such quarter could be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview" and "--Quarterly Results."
BURDENS IMPOSED BY PUBLIC SECTOR CUSTOMERS
The Company currently derives substantially all of its revenues from public
sector customers or contractors for such customers. There are significant
risks inherent in depending on such customers which may cause material
fluctuations in the Company's operating results. For each contract with a
public sector customer, the Company is typically subject to a protracted
procurement process which includes a detailed written response to the
customer's request for proposal, sealed competitive bids, system
demonstrations, the design of software which addresses customer-specified
needs and the integration of Company and third-party products. The process can
also include political influences, award protests initiated by unsuccessful
bidders and changes in budgets or appropriations which are beyond the
Company's control. Contracts with public sector customers are typically
subject to procurement policies which may be onerous and may include profit
limitations and rights of the agency to terminate for convenience or if funds
are unavailable. Contracts typically provide for a fixed price for the system
and/or for each card produced, in which case the Company bears the risk of
cost overruns. Some public sector customers require liquidated damages for
defective products and/or for delays or interruptions caused by system
failures. Payments under some public sector contracts are subject to achieving
implementation milestones, and the Company has had, and may in the future
have, differences with customers as to whether milestones have been achieved.
Although these risks also generally apply to the Company's competitors, there
can be no assurance that the Company will continue to be successful in
marketing and selling its systems and products to public sector customers.
Because increased penetration of the public sector market is important to the
Company's future success, the failure of the Company to achieve such market
penetration due to these or other factors could have a material adverse effect
on the Company's business, operating results and financial condition. See
"Business--Customers and End Users" and "--Sales and Marketing."
LIMITED HISTORY OF OPERATIONS; NO HISTORY AS A SEPARATE COMPANY
The Company has been operated as a division of Lau Technologies since its
inception in 1993 and has no operating history as a separate concern. The
Company's historical financial statements reflect the period when the Company
was a division of Lau. Since its inception, the Viisage Technology Division
received certain financial, accounting, marketing and other services from Lau.
While the Company will continue to receive certain services from Lau after the
completion of this offering, there can be no assurance that the Company's
operating results will not be adversely affected as a result of the reduction
of general service assistance from Lau. See "Relationship and Certain
Transactions with Lau Technologies--Administration and Services Agreement."
EXPOSURE TO RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON TECHNOLOGICAL
DEVELOPMENT
The markets for the Company's products and services are characterized by
rapidly changing technologies, the increasingly sophisticated needs of
customers, and evolving industry standards. The introduction of products
8
<PAGE>
and services by either the Company or its competitors that embody new
technologies or the emergence of new industry standards could render the
Company's existing or future products and services obsolete. The Company's
future performance will depend upon its ability to address the increasingly
sophisticated needs of its customers by enhancing its products and services
and by developing, introducing and integrating on a timely basis new products
and services that are compatible with emerging industry standards and are
responsive to evolving end-user requirements. The development and integration
of new, technologically-advanced products, services and enhancements are
complex and uncertain processes requiring high levels of innovation, as well
as the accurate anticipation of technological and market trends. Any failure
by the Company to anticipate or respond adequately to technological
developments or end-user requirements, or any significant delays in product
and service development, introduction or integration, could result in a loss
of competitiveness or revenue.
There can be no assurance that the Company will be successful in developing
and marketing new or enhanced products and services on a timely basis (if at
all), that the Company will not experience difficulties that could delay or
prevent the successful development, introduction, sale and integration of
these products and services, or that any of its new products and services will
adequately meet the requirements of the marketplace and achieve or sustain
market acceptance. If the Company is unable, for any technological or other
reason, to develop, introduce and sell its products and services in a timely
manner, the Company's business, operating results and financial condition
could be materially adversely affected. From time to time, the Company or its
present or future competitors may announce new or enhanced products and
services, capabilities, or technologies that have the potential to replace or
shorten the life cycles of the Company's existing products and services. There
can be no assurance that the announcement of new or enhanced products and
services will not cause customers to delay or alter their purchasing decisions
in anticipation of such products and services, which could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Products and Services," "--
Competition" and "--Intellectual Property and Proprietary Rights."
A significant aspect of the Company's strategy is to introduce systems and
products which use its facial recognition technologies. The Company's facial
recognition products have not yet been fully deployed for any customer.
Moreover, there can be no assurance that the Company's facial recognition
technologies will be able to operate with databases that are large enough to
satisfy customer needs or that the Company's competitors will not develop the
ability to provide a similar or better system. See "Business--The Viisage
Solution" and "--Strategy."
RISKS ASSOCIATED WITH MANAGING EXPANSION OF OPERATIONS
Since its inception in 1993, the Company has experienced substantial growth
in its revenues and operations, and has undergone substantial changes in its
business that have placed significant demands on the Company's management,
working capital and financial and management control systems. Failure to
upgrade the Company's operating, management and financial control systems or
difficulties encountered during such upgrades could adversely affect the
Company's business, financial condition and results of operations. Although
the Company believes that its systems and controls are adequate to address its
current needs, there can be no assurance that such systems will be adequate to
address any future expansion of the Company's business. The Company's results
of operations will be adversely affected if revenues do not increase
sufficiently to compensate for the increase in operating expenses resulting
from expansion and there can be no assurance that expansion will be profitable
or that it will not adversely affect the Company's business, results of
operations and financial condition. In addition, the success of any future
expansion plans will depend in part upon the Company's ability to continue to
improve and expand management and financial control systems and to attract,
retain and motivate key personnel. There can be no assurance that the Company
will be successful in these regards. See "Business--Sales and Marketing" and
"--Employees," and "Management--Executive Officers and Directors."
INTENSE COMPETITION
The market for the Company's products and services is extremely competitive
and management expects this competition to intensify as the markets in which
the Company's products and services are sold continue to develop.
9
<PAGE>
The Company faces competition in the identification systems market (for both
digital and conventional systems) from technologically sophisticated
companies, including Polaroid Corporation, Unisys Corporation, DataCard
Corporation, and NBS Imaging Systems, Inc., all of which have substantially
greater technical, financial, and marketing resources than the Company. In
some cases, the Company may be competing with an entity which has a pre-
existing relationship with a potential customer which could put the Company at
a significant competitive disadvantage. As the digital identification market
expands, additional competitors may seek to enter the market.
In the field of biometric identification, the Company competes with other
facial recognition providers as well as other providers of biometric
solutions. Fingerprint recognition solutions have a long history of use,
particularly in law enforcement applications. Other current suppliers of
facial recognition solutions are software development firms. The Company
expects that as the market for biometric solutions develops, larger companies
with greater resources will enter the market and competition will intensify.
To be successful in the future, the Company must continue to respond
promptly and effectively to the challenges of technological change and its
competitors' innovations by continually enhancing its own product and service
offerings. There can be no assurance, however, that the Company will continue
to compete favorably or that the Company will be successful in the face of
increasing competition from new products and enhancements introduced by
existing competitors or new companies entering the market. See "Business--
Competition."
RISK OF SYSTEM FAILURES; FAILURE TO MEET PERFORMANCE CRITERIA
The success of the Company is largely dependent upon its ability to provide
complex systems which can operate on an "as needed" basis. Customer contracts
typically specify quality standards and include liquidated damage obligations
for product or system failures. Although the Company attempts to mitigate the
risk of system failure by, in some cases, deploying back-up systems and having
skilled maintenance personnel on call, product or system failures could result
in increased costs, lower margins, liquidated damage payment obligations and
damage to the Company's reputation. Such damage could result in contract
terminations and have a material adverse effect on the Company's business,
operating results and financial condition and on its ability to attract new
customers.
Systems and products as complex as those offered by the Company can contain
undetected errors. There can be no assurance that errors will not be found in
systems after implementation, resulting in loss or delay in market acceptance,
increased service and maintenance costs, or damage to the Company's standing
in its industry. Such loss or delay may have a material adverse effect on the
Company's business, financial condition or results of operations.
The Company's contracts typically require that identification cards that
become defective within a specified number of years be replaced without
additional charge. Historically, the digital identification card industry has
experienced problems with color dye-migration. Although the Company has
subjected its cards to tests that are designed to assess their durability, the
Company's cards have not been subject to actual use over an extended number of
years. A substantial failure of the Company's cards to meet performance
requirements could have a material adverse effect upon the Company's business,
operating results and financial condition. See "Business--Products and
Services."
RISK OF TAMPERING
The Company's systems produce identification cards which can have
significant value to those intent on committing fraud. Accordingly, the
Company's systems or the cards produced by those systems may be susceptible to
tampering attempts. If the Company's systems or cards do not prove to be
sufficiently tamper-resistant, relations with customers could be strained,
customer contracts could be cancelled or not renewed and, as a result, there
could be a material adverse effect on the Company's business, operating
results, financial condition and reputation.
10
<PAGE>
RISK OF MISIDENTIFICATION OR FAILURE TO MAKE ACCURATE IDENTIFICATIONS
The Company's facial recognition technologies are being designed to, among
other things, detect fraud, control access and provide point-of-sale
verification. Although the Company's customers will be responsible for the
application of the Company's systems, the Company could be susceptible to
claims from individuals who are wrongly accused of fraud, denied access or
denied the opportunity to make a purchase. Moreover, the Company could be
liable if its facial recognition technologies fail to detect such fraud and
material damage results. Such liability could have a material adverse effect
on the Company's business, operating results, financial condition and
reputation. See "Business--Products and Services."
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS; POTENTIAL
COSTS OF ENFORCEMENT OR DEFENSE
The Company's business is substantially dependent on intellectual property
which it licenses from Lau Technologies and Facia Reco Associates, Limited
Partnership ("Facia Reco"). See "Business--Intellectual Property and
Proprietary Rights" and "Relationship and Certain Transactions with Lau
Technologies--License Agreement." Lau currently has four U.S. patent
applications outstanding and has made corresponding copyright filings which
relate to the Company's SensorMast, Visual Inspection System and proprietary
software. Lau has filed foreign patent applications which correspond to three
of these domestic applications. The Company's license agreement with Facia
Reco includes the right to use and sublicense certain U.S. patents and
registered copyrights for facial recognition systems which Facia Reco licenses
from the Massachusetts Institute of Technology and Intelligent Vision Systems,
Inc. The Massachusetts Institute of Technology has applied to extend its
patent rights to certain jurisdictions in Europe and in Singapore. One of
Lau's four filed patent applications is directed to an enhancement of one of
the patents licensed to Lau by Facia Reco. At Lau's request and expense, the
Massachusetts Institute of Technology has filed for a broadening reissue
patent. Any broadening reissue patent will be licensed through Facia Reco.
There can be no assurance that any of the U.S. or foreign patents applied
for by Lau or the foreign patents applied for by the Massachusetts Institute
of Technology will be issued or that, if issued, they will provide protection
against competitive technologies or will be held valid and enforceable if
challenged. Moreover, there can be no assurance that the Company's competitors
would not be able to design around any such proprietary right or obtain rights
that the Company would need to license or circumvent in order to practice
under these patents and copyrights. See "Business--Intellectual Property and
Proprietary Rights."
The Company may be notified, from time to time, that it is infringing
certain patents and other intellectual property rights of others. The Company
has been subject to such claims in the past. For example, the Company recently
received a letter from an attorney on behalf of the holder of a patent on a
system for scanning and encoding images from a personal identification card.
Although the Company believes that its products and systems do not infringe
such patent, there can be no assurance that this or other patent holders will
not initiate patent litigation. Litigation, which could result in substantial
cost to and diversion of resources of the Company, may be necessary to enforce
patents or other intellectual property rights of the Company or to defend the
Company against claimed infringement of the rights of others. In the event of
an adverse ruling in such litigation, the Company might be required to
discontinue the use of certain processes, cease the manufacture, use and sale
of infringing products and services, expend significant resources to develop
non-infringing technology or obtain licenses to the competing technology. No
assurance can be given that licenses will be obtainable on acceptable terms or
at all, that the damages for infringement will not be assessed or that
litigation will not occur. The failure to obtain necessary licenses or other
rights or adverse or protracted litigation arising out of any such claims
could have a material adverse effect on the Company's business, financial
condition and operating results. See "Business--Intellectual Property and
Proprietary Rights."
In addition, the Company's ability to develop new technologies will depend
on the continued innovation, technical expertise and know-how of its employees
and consultants. Although the Company has a policy of requiring its employees
and consultants to execute confidentiality agreements, there can be no
assurance that this procedure will be adequate to prevent misappropriation of
the Company's technology, nor can the Company be
11
<PAGE>
assured that its competitors will not independently develop technologies that
are substantially equivalent or superior to those of the Company. See
"Business--Intellectual Property and Proprietary Rights."
DEPENDENCE ON SOLE OR LIMITED SOURCES OF SUPPLY
The Company relies to a substantial extent on outside vendors to manufacture
or develop certain components and software which are integrated with the
Company's systems, some of which are obtained from a single supplier or a
limited group of suppliers. The Company's reliance on outside vendors
generally, and a sole or a limited group of suppliers in particular, involves
several risks, including a potential inability to obtain an adequate supply of
required components and reduced control over quality, pricing and timing of
delivery of components. Because the production of certain of these components
is specialized and requires long lead times, there can be no assurance that
delays or shortages caused by vendors will not occur. Any inability to obtain
adequate deliveries, or any other circumstance that would require the Company
to seek alternative sources of supply, could delay implementation of the
Company's systems, increase its project costs and materially adversely affect
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Manufacturing."
DEPENDENCE ON KEY PERSONNEL
The Company's performance depends to a significant extent upon a number of
senior management and technical personnel. The loss of the services of one or
more key employees could have a material adverse effect on the Company. The
Company does not maintain key-person life insurance on any of its key
employees. The Company's future financial results will depend in large part
upon its ability to attract and retain highly skilled technical, managerial
and marketing personnel and the ability of its officers and key employees to
manage growth successfully, to implement appropriate management information
systems and controls and to continue successful development of new products
and services and enhancements to existing products and services. Competition
for such personnel is intense, and there can be no assurance that the Company
will continue to be successful in attracting and retaining the personnel it
requires to develop successfully new and enhanced products. In addition, the
Company has long-standing relationships with certain independent consultants
which are important to the Company's ability to develop its products in a
timely manner. The disruption of any of these relationships could have a
material adverse effect on the Company. See "Business--Employees" and
"Management."
RISKS ASSOCIATED WITH INTERNATIONAL ACTIVITIES
The Company expects sales to customers located outside the United States to
increase in significance as it expands its international marketing efforts.
Risks inherent in the Company's international business activities include
difficulties in staffing and managing international operations, difficulties
in enforcing intellectual property rights, currency fluctuations and currency
management issues, imposition of public sector controls, trade restrictions,
political and economic instability and the burdens of complying with a wide
variety of foreign laws and regulations. To the extent that the Company is
unable to expand international sales in a timely and cost-effective manner,
the Company's business could be materially adversely affected. See "Business--
Strategy."
NO PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will
develop or be sustained or that the market price of the Common Stock will not
decline below the initial public offering price. The initial public offering
price for the Common Stock to be sold in this offering will be determined by
agreement between the Company and the Representatives of the Underwriters and
may not be indicative of future market prices. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The market price of the Common Stock could be subject to
significant fluctuations in response to the Company's operating results and
other factors, including announcements of developments related to the
Company's business, general industry conditions or the worldwide economy,
announcements of technological innovations, new products, product enhancements
or
12
<PAGE>
services by the Company or its competitors, developments in patents or other
intellectual property rights and developments in the Company's relationships
with customers and suppliers. In addition, in recent years the stock market
has experienced large price and volume fluctuations that have often been
unrelated to the operating performance of specific companies or market
sectors. Such fluctuations, as well as general economic and market conditions,
could have a material adverse effect on the market price of the Company's
Common Stock.
RISKS ASSOCIATED WITH CONTROL BY LAU TECHNOLOGIES
Following the completion of this offering, Lau will own approximately 67% of
the Company's outstanding Common Stock (approximately 64% if the Underwriters'
over-allotment option is exercised). As a result, Lau will be able to control
matters requiring approval by the stockholders of the Company, including the
election of all of the directors and most corporate actions. The voting power
of Lau could have the effect of causing, delaying or preventing a change in
control of the Company. There can be no assurance that Lau's ability to
prevent or cause a change in control of the Company will not have a material
adverse effect on the price of the Common Stock. See "Principal and Selling
Stockholders."
POTENTIAL CONFLICTS OF INTEREST
The Company has entered into certain agreements with Lau which govern
certain aspects of the parties' relationship on an ongoing basis, including
the licensing of certain technologies and the provision of certain
administrative services and facilities. Under the terms of such agreements,
Lau has reserved the right to use such technologies in a certain field. See
"Business--Intellectual Property and Proprietary Rights." In addition, the
Company and Lau have covenanted not to compete with each other for ten years.
Further, the Company's Chairman of the Board of Directors is an employee of
Lau and is married to Lau's majority stockholder. There can be no assurance
that conflicts of interest between Lau and the Company will not arise with
respect to the contractual arrangements, any services which might be provided
by Lau in the future or other matters. Any adverse change in the Company's
relationship with Lau could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Relationship and
Certain Transactions with Lau Technologies."
POTENTIAL ADVERSE IMPACT OF ANTITAKEOVER PROVISIONS ON MARKET PRICE OF SHARES
The Company's Certificate of Incorporation and By-laws contain provisions
that could discourage a proxy contest or make more difficult the acquisition
of a substantial block of the Company's Common Stock. For example, the
Company's Certificate of Incorporation requires that any action required or
permitted to be taken by stockholders of the Company must be effected at a
duly called annual or special meeting of stockholders and, unless approved in
advance by the Board, may not be effected by any consent in writing. The By-
laws require specified advance notice by a stockholder of a proposal or
director nomination which such stockholder desires to present to any annual or
special meeting of stockholders. The Certificate of Incorporation and By-laws
also provide for a classified Board of Directors, and members of the Board may
be removed only for cause upon the affirmative vote of holders of at least
two-thirds of the shares of capital stock of the Company issued and
outstanding and entitled to vote. Furthermore, the affirmative vote of the
holders of at least two-thirds of the capital stock issued and outstanding and
entitled to vote is required to amend or repeal these provisions. In addition,
the Board of Directors, without further approval, may issue preferred or
common stock that could have the effect of delaying, deterring or preventing a
change in control of the Company. The issuance of preferred stock could also
adversely effect the voting power of the holders of Common Stock, including
the loss of voting control to others. The Company has no present plans to
issue any preferred or additional shares of Common Stock. See "Description of
Capital Stock."
Following this offering, the Company will become subject to the antitakeover
provisions of Section 203 of the Delaware General Corporation Law, which will
prohibit the Company from engaging in a "business
13
<PAGE>
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed
manner. The application of Section 203 may limit the ability of stockholders
to approve a transaction that they deem to be in their best interests. The
foregoing and other provisions of the Certificate of Incorporation and By-laws
and the application of Section 203 could have the effect of deterring certain
takeovers or delaying or preventing certain changes in control or management
of the Company, including transactions in which the stockholders might
otherwise receive a premium for their shares over then current market prices.
See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have a total of 7,680,000
shares of Common Stock outstanding, of which the 2,500,000 shares offered
hereby will be freely tradable without restriction under the Securities Act of
1933, as amended (the "Securities Act"), by persons other than "affiliates" of
the Company, as defined under the Securities Act. The remaining 5,180,000
shares of Common Stock outstanding are "restricted securities" as that term is
defined by Rule 144 and Rule 701 as promulgated under the Securities Act (the
"Restricted Shares"). All 5,180,000 Restricted Shares will be eligible for
sale upon the expiration of the respective two-year holding periods subject to
the conditions of Rule 144, such holding periods to expire on or around the
second anniversary of the date of this Prospectus. The Securities and Exchange
Commission (the "Commission") has proposed certain amendments to Rule 144 that
would reduce by one year the holding periods required for shares subject to
Rule 144 to become eligible for resale in the public market. This proposal, if
adopted, would permit earlier resale of shares of Common Stock currently
subject to holding periods under Rule 144. No assurance can be given
concerning whether or when the proposal will be adopted by the Commission.
Furthermore, all 5,180,000 Restricted Shares are subject to a lock-up
agreement expiring 180 days following the date of this Prospectus. Such
agreements provide that Cowen & Company may, in its sole discretion and at any
time without notice, release all or a portion of the shares subject to these
lock-up agreements. Following the date of this Prospectus, the Company intends
to register on one or more registration statements on Form S-8 approximately
1,437,750 shares of Common Stock issuable under its stock option plans. Of the
shares issuable under its option plans, 1,427,100 shares were subject to
outstanding options as of October 8, 1996, of which 255,600 options were
exercisable within 180 days following the date of this Prospectus. These
255,600 options and the shares of Common Stock issuable upon the exercise
thereof are subject to lock-up agreements described above. Shares covered by
such registration statements will be eligible for sale in the public market
after the effective date of such registration. See "Management--Incentive and
Stock Plans" and "Shares Eligible for Future Sale."
IMMEDIATE AND FUTURE DILUTION
Purchasers of Common Stock offered hereby will incur immediate and
substantial dilution from the initial public offering price. Additional
dilution will occur upon the exercise of outstanding stock options. See
"Dilution."
LACK OF DIVIDENDS
The Board of Directors anticipates that for the foreseeable future the
Company's earnings, if any, will be retained for use in the business and that
no cash dividends will be paid on the Common Stock. In addition, the payment
of cash dividends by the Company is expected to be restricted under the
Company's financing facilities, prohibiting the Company from paying any cash
dividends without lenders' prior approvals. See "Dividend Policy."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by it hereby are estimated to be $17,775,000 ($21,262,500
if the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $10.00 per share and after deducting the
estimated underwriting discount and offering expenses payable by the Company.
Viisage will not receive any of the proceeds from the sale of Common Stock by
the Selling Stockholder. The primary purposes of this offering are to repay
certain indebtedness, increase the Company's equity capital and financial
flexibility, create a public market for the Common Stock, facilitate future
access by the Company to public capital markets and provide working capital to
fund the Company's growth.
The Company intends to use a portion of the net proceeds to repay all of the
Company's indebtedness under a bank line of credit maintained by Lau, of which
approximately $8.8 million was outstanding as of June 30, 1996. Lau's credit
facility provides a line of credit of up to $15.0 million, bears interest at
the lender's base rate or LIBOR-based options (7.6% as of June 30, 1996) and
matures on June 30, 1998. The Company has used the proceeds from the line of
credit for working capital. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." The Company is negotiating its own credit facility to take effect
after completion of this offering.
The Company expects to use the remainder of the net proceeds from this
offering for general corporate purposes, including working capital. The
Company may also use a portion of such net proceeds for acquisitions of
businesses, products or technologies that are complementary to those of the
Company. While the Company from time to time evaluates such potential
acquisitions, the Company currently has no understandings, commitments or
agreements with respect to any acquisitions. Except as stated above, the
Company has not determined the amounts it plans to expend with respect to each
of the expected uses or the timing of such expenditures. As a consequence,
management will have the discretion to allocate the net proceeds from this
offering. The amounts actually expended for each use may vary significantly
depending on a number of factors, including the amount of future revenues, the
amount of cash generated or used by the Company's operations, the progress of
the Company's product development efforts, technological advances, the status
of competitive products and services and acquisition opportunities presented
to the Company. Pending such uses, the net proceeds of this offering will be
invested in short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. The Company currently intends to retain
future earnings to fund the development and growth of its business. See "Risk
Factors--Lack of Dividends."
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 (i) on an actual basis, (ii) on a pro forma basis, reflecting the
estimated net deferred income tax liability that will be recorded as a result
of the transfer by Lau of its Viisage Technology Division to Viisage as
discussed in "Relationship and Certain Transactions with Lau Technologies" and
Notes 1 and 2 of the Notes to Financial Statements and (iii) as adjusted to
reflect the transactions with respect to the transfer by Lau of the Viisage
Technology Division to the Company as discussed in "Relationship and Certain
Transactions with Lau Technologies," which transfer shall be completed on the
effective date of the registration statement relating to this offering, and
the sale by the Company of the Common Stock offered hereby at an assumed
initial public offering price of $10.00 per share and the application of the
net proceeds therefrom. The table should be read in conjunction with the
Financial Statements of the Company and related notes thereto. See also "Use
of Proceeds," "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-----------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term obligations......... $ 512 $ 512 $ 512
======= ======= =======
Long-term debt................................... 8,809 8,809 --
Capital lease obligations........................ 1,394 1,394 1,394
Net assets....................................... 902 802 --
Shareholders' equity:
Preferred Stock, $.001 par value, 2,000,000
shares authorized, no shares outstanding actu-
al, pro forma and as adjusted................. -- -- --
Common Stock, $.001 par value, 20,000,000
shares authorized, no shares issued and out-
standing actual and pro forma; 7,680,000
shares issued and outstanding as adjusted(1).. -- -- 8
Additional paid-in capital..................... -- -- 18,569
Retained earnings.............................. -- -- --
------- ------- -------
Total stockholders' equity..................... -- -- 18,577
------- ------- -------
Total capitalization......................... $11,105 $11,005 $19,971
======= ======= =======
</TABLE>
- --------
(1) Excludes 1,437,750 shares of Common Stock reserved for issuance upon the
exercise of options, of which 1,427,100 have been granted under the
Company's 1996 Management Stock Option Plan and 1996 Director Stock Option
Plan. See "Management--Incentive and Stock Plans."
16
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1996 was
$802,000, or $0.14 per share. Pro forma net tangible book value per share is
determined by dividing the number of shares of Common Stock outstanding into
the tangible net worth (tangible assets less total liabilities) of the Company
after giving effect to the transactions with Lau that are incident to the
formation of the Company. See "Relationship and Certain Transactions with Lau
Technologies." After giving effect to the sale by the Company of the 2,000,000
shares of Common Stock offered by it hereby, at an assumed initial public
offering price of $10.00 per share, and the application of the net proceeds
thereof (after deducting estimated underwriting discount and offering
expenses), the pro forma net tangible book value of the Company at June 30,
1996 would have been $18,577,000, or $2.42 per share. This represents an
immediate increase in the net tangible book value of $2.28 per share to Lau
and an immediate dilution of $7.58 per share to new investors. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $10.00
Pro forma net tangible book value........................... $ .14
Increase in net tangible book value attributable to new in-
vestors.................................................... 2.28
-----
Pro forma net tangible book value after this offering......... 2.42
------
Pro forma dilution to new investors........................... $ 7.58
======
</TABLE>
The following table sets forth, on a pro forma basis at June 30, 1996, the
number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by Lau, and by
purchasers of the shares of Common Stock offered hereby (at an assumed initial
public offering price of $10.00 per share), before deducting the estimated
underwriting discount and offering expenses payable by the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED (1) TOTAL CONSIDERATION (1)
----------------------- ---------------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholder.... 5,680,000 74.0% $ 902,000(2) 4.3% $ 0.16
New investors........... 2,000,000 26.0 20,000,000 95.7 10.00
------------ -------- -------------- --------
Total................. 7,680,000 100.0% $ 20,902,000 100.0%
============ ======== ============== ========
</TABLE>
- --------
(1) Sales by Lau in this offering will reduce the number of shares held by Lau
to 5,180,000 shares, or 67% (approximately 64% if the over-allotment
option is exercised in full) of the total number of shares to be
outstanding after this offering, and will increase the number of shares
held by new investors to 2,500,000 shares, or 33% of the total shares of
Common Stock outstanding after this Offering. See "Principal and Selling
Stockholders."
(2) The investment by the existing stockholder represents the net assets of
the Company as of June 30, 1996.
The foregoing calculations assume no exercise of stock options after June
30, 1996. At June 30, 1996, 1,427,100 shares of Common Stock were subject to
options at a weighted average exercise price of $3.20 per share under the 1996
Management Stock Option Plan and the 1996 Director Stock Option Plan. To the
extent options are exercised, there will be further dilution to new investors.
See "Risk Factors--Immediate and Future Dilution," "Management--Incentive and
Stock Plans" and Note 9 of Notes to Financial Statements.
17
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for all periods and dates
indicated, except the period ended July 2, 1995, are derived from financial
statements that have been audited by Arthur Andersen LLP, independent public
accountants. Except for the balance sheet as of December 31, 1993, these
financial statements are included elsewhere in this Prospectus. The selected
financial data for the six months ended July 2, 1995 were derived from the
unaudited Statement of Operations of the Company which is included elsewhere
in this Prospectus. In the opinion of management, the unaudited Statement of
Operations has been prepared on the same basis as the audited financial
statements referred to above and includes all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of the Company's
results of operations for the period indicated. The financial data set forth
below covers the period from inception of the business that will comprise the
Company through June 30, 1996. Operating results for the six months ended June
30, 1996 are not necessarily indicative of the results that may be expected
for any future period. The financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements of the Company and
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
-------------------------- -----------------
JULY 2, JUNE 30,
1993 1994 1995 1995 1996
------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................ $ 505 $ 1,257 $ 11,221 $ 5,395 $11,870
Project costs................... 456 1,140 10,361 4,972 9,653
------- ------- -------- ------- -------
Project margin.................. 49 117 860 423 2,217
------- ------- -------- ------- -------
Operating expenses:
Sales and marketing........... 1,185 1,596 999 431 735
Research and development...... 47 201 1,089 597 128
General and administrative.... 289 681 1,204 513 890
------- ------- -------- ------- -------
Total operating expenses.... 1,521 2,478 3,292 1,541 1,753
------- ------- -------- ------- -------
Operating income (loss)......... (1,472) (2,361) (2,432) (1,118) 464
Interest expense................ -- 40 515 133 387
------- ------- -------- ------- -------
Income (loss) before income
taxes.......................... (1,472) (2,401) (2,947) (1,251) 77
Income taxes.................... -- -- -- -- 3
------- ------- -------- ------- -------
Net income (loss)............... $(1,472) $(2,401) $ (2,947) $(1,251) $ 74
======= ======= ======== ======= =======
Net income (loss) per share(1).. $( 0.24) $ (0.39) $ (0.47) $ (0.20) $ 0.01
======= ======= ======== ======= =======
Weighted average number of
common shares (1).............. 6,225 6,225 6,225 6,225 6,225
======= ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996
------------------- --------------------
1993 1994 1995 ACTUAL PRO FORMA(2)
---- ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $368 $2,509 $ 7,413 $ 9,077 $ 9,077
Total assets........................... 914 3,999 11,285 14,959 14,959
Long-term obligations.................. -- 955 8,319 10,203 10,203
Net assets(3).......................... 368 1,554 1,323 902 802
</TABLE>
- --------
(1) See Note 2 of Notes to Financial Statements for information concerning the
computation of net income (loss) per share.
(2) Pro forma amounts reflect the estimated net deferred income tax liability
that will be recorded as a result of the transfer by Lau of its Viisage
Technology Division to Viisage as discussed in "Relationship and Certain
Transactions with Lau Technologies" and Notes 1 and 2 of the Notes to
Financial Statements.
(3) Net assets represent Lau's net investment in the Company during the time
the Company operated as a division of Lau.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and notes
thereto included elsewhere in this Prospectus. The discussion in this
Prospectus contains forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
whenever they appear in this Prospectus. This Company's actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors" as
well as those discussed elsewhere herein.
OVERVIEW
Viisage's objective is to become a leading worldwide provider of digital
identification systems and solutions. The Company designs, sells and
implements turnkey digital identification systems intended to deter fraud and
to reduce customers' identification program costs. These systems capture
facial images, demographic information and other biological identifiers,
produce identification cards, and create relational databases containing this
information. Using its software design and systems integration capabilities,
the Company is able to combine its proprietary software and hardware products
with commercially available components and customers' existing systems,
creating a complete customized solution. In addition, the Company is
developing proprietary facial recognition software designed to identify
individuals in a large database of faces on a real-time basis.
The Company began operations in 1993 as a division of Lau Technologies, a
provider of systems integration services and products for sophisticated
electronic systems. The Viisage Technology Division was formed as part of
Lau's strategy to leverage its capabilities into emerging markets. Prior to
the effective date of this offering, Lau will transfer substantially all of
the assets, liabilities and operations of its Viisage Technology Division to
the Company in exchange for 5,680,000 shares of the Company's Common Stock.
See "Relationship and Certain Transactions with Lau Technologies." Following
these transactions, Lau will own approximately 67% of the Company's Common
Stock (approximately 64% if the over-allotment option is exercised in full).
Viisage's revenues increased from $505,000 in 1993 to $11.2 million in 1995
and $11.9 million for the six months ended June 30, 1996. This growth was due
primarily to an increase in the number of large competitively bid contracts
for card-based digital identification systems awarded to the Company and, to a
lesser extent, contract modifications from these customers. The Company
believes that the increasing acceptance of digital identification technology
in recent years, its commitment to providing customized solutions for its
customers needs, its expertise in facial imaging and its proprietary software
and hardware products have contributed to its growth and will be important to
its future success.
Substantially all of the Company's revenues are currently derived from
public sector customers and contractors to such customers. The Company
believes for the foreseeable future that it will continue to derive a
significant portion of its revenues from a limited number of large contracts.
During 1993 and 1994 one contract accounted for all of the Company's revenues.
For the year ended December 31, 1995 and the six months ended June 30, 1996,
three customers and four customers, respectively, each accounted for more than
10% of the Company's revenues, representing an aggregate of 85% and 81% of
revenues in those periods, respectively.
The Company provides systems and services principally under contracts that
have five-year terms, provide for several annual renewals after the initial
contract term and include an implementation period of up to twelve months
after the contract has been awarded. Contracts generally provide for a fixed
price for the system and/or for each card produced. Contract prices vary
depending on, among other things, design and integration complexities, the
nature and number of workstations and sites, the projected number of cards to
be produced, the level of post-installation support and the competitive
environment.
The Company recognizes revenues and project costs using the percentage of
completion method based on labor costs incurred and/or cards produced. These
amounts are typically higher during the implementation phase
19
<PAGE>
of a contract due to the higher level of labor costs incurred during this
period. Contract losses, if any, are recognized in the period in which they
become determinable. Generally, contracts provide for billing when contract
milestones are met and/or cards are produced.
Project margin improved significantly during the first six months of 1996
due to the Company's ability to reduce project costs by leveraging its
experience with the design, development and implementation of large digital
identification solutions. The Company believes that it will experience further
improvements in project margin principally from cost savings for design,
development and implementation. However, there can be no assurance that such
improvements will be achieved.
The Company's ability to achieve revenue growth and profitability is
dependent upon its ability to add new customers and retain existing customers.
Accordingly, the Company anticipates that it will continue to make significant
expenditures for sales and marketing as the Company adds resources and
initiates operations in additional markets.
In response to customer needs during 1993, 1994 and 1995, the Company
developed proprietary software that supports all current industry standard
operating systems, networking environments and proprietary image capture and
inspection products. Development costs that benefited specific projects were
recorded as project costs and costs that did not benefit specific projects
were recorded as research and development expenses. The Company has not
capitalized any software development costs because costs incurred subsequent
to achieving technological feasibility have not been material. The Company
believes that the software and hardware products developed in prior periods
will support its card-based identification system offerings for the
foreseeable future. In addition to its own development efforts, Viisage has
also benefited from research and development conducted by Lau for projects
that were not related to Viisage and, through Lau's license with Facia Reco
Associates, Limited Partnership ("Facia Reco"), from certain research
activities at the Massachusetts Institute of Technology. Following the
transfer discussed above, the Company believes that it will continue to
benefit from such activities under license arrangements with Lau and Facia
Reco. The Company's ongoing development activities are expected to focus
primarily on facial recognition products and services.
The Company's operations prior to the transfer discussed above were included
in the income tax returns of Lau, an S corporation. After the transfer, the
Company will be subject to federal and state income taxation at the corporate
level and will be required to file its own separate tax returns. The Company
anticipates that it will recognize a non-recurring charge relating to a net
deferred tax liability of approximately $100,000 arising from the change in
its tax status in the quarter in which the transfer occurs.
The Company's results of operations are significantly affected by, among
other things, the timing of award and performance on contracts. As a result,
the Company's revenues and income may fluctuate from quarter to quarter, and
comparisons over longer periods of time may be more meaningful. The Company's
results of operations are not seasonal since contracts are awarded and
performed throughout the year.
RECENT DEVELOPMENTS
The following table shows certain financial information for the periods
ended October 1, 1995 and September 29, 1996. This information is derived from
unaudited financial statements that include, in the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the information for the periods presented. The operating
results for any period are not necessarily indicative of results to be
expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
OCTOBER 1, SEPTEMBER 29, OCTOBER 1, SEPTEMBER 29,
1995 1996 1995 1996
---------- ------------- ---------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues.................... $2,711 $6,258 $8,106 $18,128
Project margin.............. 223 1,542 646 3,759
Operating income (loss)..... (560) 507 (1,678) 971
Net income (loss)........... (748) 285 (1,999) 359
Net income (loss) per
share...................... (0.12) 0.05 (0.32) 0.06
====== ====== ====== =======
Weighted average number of
common shares.............. 6,225 6,225 6,225 6,225
====== ====== ====== =======
</TABLE>
20
<PAGE>
For the three months and nine months ended September 29, 1996, as compared
to the comparable periods for 1995, revenues increased 131% and 124%,
respectively. Project margin increased 592% and 482%, respectively, and as a
percentage of revenues, project margin increased to 25% and 21% for the 1996
periods, from 8% for the 1995 periods. Operating income and net income also
increased significantly. These increases are due primarily to the same factors
discussed in the "--Results of Operations" section below for the six months
ended June 30, 1996.
RESULTS OF OPERATIONS
The following table sets forth certain financial information as a percentage
of revenues for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------ ----------------
JULY 2, JUNE 30,
1993 1994 1995 1995 1996
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues.................... 100 % 100 % 100 % 100 % 100%
Project costs............... 90 91 92 92 81
-------- -------- ------- --- ---
Project margin.............. 10 9 8 8 19
Operating expenses:
Sales and marketing....... 235 127 9 8 6
Research and development.. 9 16 10 11 1
General and
administrative........... 57 54 11 10 8
-------- -------- ------- --- ---
Total operating
expenses............... 301 197 30 29 15
-------- -------- ------- --- ---
Operating income (loss)..... (291) (188) (22) (21) 4
Interest expense............ -- 3 4 2 3
-------- -------- ------- --- ---
Income (loss) before income
taxes...................... (291) (191) (26) (23) 1
Income taxes................ -- -- -- -- --
-------- -------- ------- --- ---
Net income (loss)........... (291)% (191)% (26)% (23)% 1%
======== ======== ======= === ===
</TABLE>
Six Months Ended June 30, 1996 and July 2, 1995
Revenues. Revenues are derived principally from systems implementation, card
production and related services under multi-year contracts. Revenues increased
120% to $11.9 million for the six months ended June 30, 1996 from $5.4 million
for the six months ended July 2, 1995. The increase was due to an increase in
the number of contracts being performed during the six months ended June 30,
1996.
Project Costs and Margin. Project costs consist primarily of hardware,
consumables (printer ribbons, cards, holographic overlays, etc.), system
design, software development and implementation labor, maintenance and
overhead. Project costs increased 94% to $9.7 million for the six months ended
June 30, 1996 from $5.0 million for the six months ended July 2, 1995. This
increase was due to the Company's increased level of contract performance
during the 1996 period. As a percentage of revenues, project costs decreased
to 81% for the 1996 period from 92% for the 1995 period. This decrease
reflects cost savings on design, development and implementation activities
resulting from the Company's increased experience with and resources for
digital identification solutions. Project margin increased 424% to $2.2
million for the six months ended June 30, 1996 from $423,000 for the six
months ended July 2, 1995, reflecting the increase in revenues and cost
savings discussed above. As a percentage of revenues, project margin increased
to 19% for the 1996 period from 8% for the 1995 period.
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation and professional service fees for marketing, bid and proposal and
customer support activities. Sales and marketing expenses increased 71% to
$735,000 for the six months ended June 30, 1996 from $431,000 for the six
months ended July 2, 1995. This increase principally reflects an increase in
proposal activity and the addition of marketing personnel during the first six
months of 1996. As a percentage of revenues, sales and marketing expenses
decreased to 6% for the 1996 period from 8% for the 1995 period due to
revenues increasing at a greater rate than such expenses during the 1996
period.
21
<PAGE>
Research and Development. Research and development expenses consist
principally of compensation, outside services and materials utilized for
product and software development activities that are not related to specific
projects. Research and development expenses decreased 79% to $128,000 for the
six months ended June 30, 1996 from $597,000 for the six months ended July 2,
1995, and decreased as a percentage of revenues to 1% for the 1996 period from
11% for the 1995 period. These decreases reflect the completion in 1995 of the
development of certain proprietary software to support industry standard
computing environments and proprietary hardware products for the Company's
card-based systems and the increase in revenues in the 1996 period described
above. Expenditures for the six months ended June 30, 1996 relate primarily to
the Company's facial recognition products and do not reflect the benefits to
the Company from the efforts of Lau and the Massachusetts Institute of
Technology discussed in the "--Overview" section above.
General and Administrative. General and administrative expenses consist
principally of compensation for executive management, finance and
administrative personnel and outside professional fees. General and
administrative expenses increased 74% to $890,000 for the six months ended
June 30, 1996 from $513,000 for the six months ended July 2, 1995. The
increase in expenses was due primarily to the addition of management personnel
during the fourth quarter of 1995 and increased management activities related
to the growth in the Company's business. As a percentage of revenues, general
and administrative expenses decreased to 8% for the 1996 period from 10% for
the 1995 period due to revenues increasing at a greater rate than such
expenses in the 1996 period. The Company has employment and noncompetition
agreements with certain officers. See "Management--Employment Agreements."
Interest Expense. The increase in interest expense to $387,000 for the six
months ended June 30, 1996 from $133,000 for the six months ended July 2, 1995
principally reflects the increase in the level of borrowings during the six
months ended June 30, 1996.
Years Ended December 31, 1995, 1994, and 1993
Revenues. Revenues increased 793% to $11.2 million in 1995 from $1.3 million
in 1994 and 149% in 1994 from $505,000 in 1993. The increase in 1995 was due
primarily to performance on several contracts awarded during the fourth
quarter of 1994 and the first quarter of 1995. The Company began operations in
1993 and its first contract was awarded late that year. Revenues for 1994 and
1993 were derived solely from this contract and the increase in revenue for
1994 was due to a full year of performance on the aforementioned contract.
Project Costs and Margin. Project costs increased 809% to $10.4 million in
1995 from $1.1 million in 1994 and 150% in 1994 from $456,000 in 1993. These
increases reflect the increased level of contract performance each year. As a
percentage of revenues, project costs increased to 92% in 1995 from 91% in
1994 and 90% in 1993. These percentages reflect additional development costs
incurred to design, develop, and integrate system components and industry
standard software for the first time. Project margin increased 635% to
$860,000 in 1995 from $117,000 in 1994 and 139% in 1994 from $49,000 in 1993
reflecting the increases in revenues and development costs discussed above. As
a percentage of revenues, project margin decreased to 8% in 1995 from 9% in
1994 and 10% in 1993.
Sales and Marketing. Sales and marketing expenses decreased 37% to $1.0
million in 1995 from $1.6 million in 1994 and increased 35% in 1994 from $1.2
million in 1993. The decrease in 1995 reflects improved controls over bid and
proposal costs and the Company's decision not to pursue certain opportunities
due to funding constraints. The increase in expenses for 1994 reflects an
increase in proposal activity. As a percentage of revenues, sales and
marketing expenses decreased to 9% in 1995 from 127% in 1994 and 235% in 1993
due primarily to revenues increasing at a greater rate than such expenses in
the 1996 period.
Research and Development. Research and development expenses increased 442%
to $1.1 million in 1995 from $201,000 in 1994 and increased 328% in 1994 from
$47,000 in 1993. The significant increase in expenses during 1995 reflects the
completion of the development of certain proprietary software to support
industry
22
<PAGE>
standard computing environments and the development of proprietary hardware
products for the Company's card-based systems. As a percentage of revenues,
these expenses decreased to 10% in 1995 from 16% in 1994 and increased in 1994
from 9% in 1993. These fluctuations were due to the increase in revenues each
period at a greater or lesser rate than such expenses.
General and Administrative. General and administrative expenses increased
77% to $1.2 million in 1995 from $681,000 in 1994 and 136% in 1994 from
$289,000 in 1993. These increases reflect the increased level of management
activity due to the growth in the Company's business and the addition of
certain management personnel during the fourth quarter of 1995. As a
percentage of revenues, general and administrative expenses decreased to 11%
in 1995 from 54% in 1994 and 57% in 1993 due primarily to revenues increasing
at a greater rate than such expenses during the 1996 period.
Interest Expense. Interest expense increased to $515,000 in 1995 from
$40,000 in 1994 and none in 1993. These increases were due principally to the
increase in borrowings to fund operations.
QUARTERLY RESULTS
The following table sets forth certain quarterly financial information for
1995 and the first two quarters of 1996. This information is derived from
unaudited financial statements that include, in the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the information for the periods presented. The operating
results for any quarter are not necessarily indicative of results to be
expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------
APRIL 2, JULY 2, OCTOBER 1, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
-------- ------- ---------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $2,549 $2,846 $2,711 $3,115 $5,737 $6,133
Project costs........... 2,313 2,659 2,488 2,901 4,711 4,942
------ ------ ------ ------ ------ ------
Project margin.......... 236 187 223 214 1,026 1,191
------ ------ ------ ------ ------ ------
Operating expenses:
Sales and marketing... 164 267 285 283 356 379
Research and develop-
ment................. 380 217 198 294 85 43
General and adminis-
trative.............. 243 270 300 391 392 498
------ ------ ------ ------ ------ ------
Total operating ex-
penses............. 787 754 783 968 833 920
------ ------ ------ ------ ------ ------
Operating income
(loss)................. (551) (567) (560) (754) 193 271
Interest expense........ 29 104 188 194 187 200
------ ------ ------ ------ ------ ------
Income (loss) before in-
come taxes............. (580) (671) (748) (948) 6 71
Income taxes............ -- -- -- -- -- 3
------ ------ ------ ------ ------ ------
Net income (loss)....... $ (580) $ (671) $ (748) $ (948) $ 6 $ 68
====== ====== ====== ====== ====== ======
</TABLE>
23
<PAGE>
The following table sets forth, as a percentage of revenues, certain
quarterly financial information for 1995 and the first two quarters of 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------
APRIL 2, JULY 2, OCTOBER 1, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
-------- ------- ---------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ 100 % 100 % 100 % 100 % 100 % 100%
Project costs........... 91 93 92 93 82 81
--- --- --- --- --- ---
Project margin.......... 9 7 8 7 18 19
--- --- --- --- --- ---
Operating expenses:
Sales and marketing... 6 9 11 9 6 6
Research and develop-
ment................. 15 8 7 9 2 1
General and adminis-
trative.............. 10 10 11 13 7 8
--- --- --- --- --- ---
Total operating ex-
penses............. 31 27 29 31 15 15
--- --- --- --- --- ---
Operating income
(loss)................. (22) (20) (21) (24) 3 4
Interest expense........ 1 4 7 6 3 3
--- --- --- --- --- ---
Income (loss) before in-
come taxes............. (23) (24) (28) (30) -- 1
Income taxes............ -- -- -- -- -- --
--- --- --- --- --- ---
Net income (loss)....... (23)% (24)% (28)% (30)% -- 1%
=== === === === === ===
</TABLE>
The Company's quarterly results reflect the factors discussed in the "--
Overview" and "--Results of Operations" sections above. Project margin, as a
percentage of revenues, increased in each of the first two quarters of 1996
due to cost savings on design, development and implementation activities for
new contracts.
The Company has experienced fluctuations in its quarterly operating results
and anticipates that such fluctuations will continue and could intensify. The
Company's quarterly operating results are affected by a number of factors that
could materially and adversely affect revenues and profitability, including
the size of customer contracts, the timing of contract awards and the timing
of the Company's performance on contracts; competitive conditions including
pressures inherent in the competitive bidding process; the availability and
cost of key components; modifications to contracts after their award;
financing costs related to large project expenditures which are often
necessary at the outset of a customer contract; changes in management
estimates incident to accounting for contracts; the timing of the introduction
or market acceptance of new or enhanced products and services offered by the
Company or its competitors; variations in the mix of products and services
sold by the Company; and general economic and political conditions and other
factors affecting project spending by customers. Further, the sales cycles for
the Company's products typically involve lengthy marketing and procurement
processes. After a contract is awarded, delays in the design and start-up of a
system may require that revenues associated with such implementation be
recognized later than originally anticipated. Such delays have caused, and may
in the future cause, material fluctuations in the Company's operating results.
The Company's revenues in any period are generally derived from large orders
from a limited number of customers. As the Company's project margin on such
orders can differ significantly, the Company's overall margin may vary
significantly from period to period. In addition, project margin may be
adversely affected by competitive pressures, or customer requirements.
Accordingly, there can be no assurance that the Company will be able to
sustain satisfactory project margins. The Company may also choose to reduce
prices or increase spending in response to competition or to pursue new market
opportunities, all of which may adversely affect the Company's business,
operating results and financial condition.
The Company expects to make continued investments in the research,
development and engineering of its systems, software and products, as well as
in the Company's sales and marketing efforts. Given these and other fixed
costs that the Company will incur, a small variation in the timing of revenue
recognition can cause material variations in operating results from quarter to
quarter and may result in losses or have a material adverse effect on the
Company's business, results of operations or financial condition.
24
<PAGE>
Due to the foregoing factors, it is possible that the Company's results of
operations could fail to meet the expectations of securities analysts or
investors. In such event, or in the event that adverse conditions prevail or
are perceived to prevail, the price of the Company's Common Stock would likely
be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and projects
principally through borrowings under Lau's line of credit facility,
investments by Lau and capital lease financing. The Company has not made
substantial capital expenditures for facilities, office and computer equipment
and has satisfied its needs in these areas principally through leasing.
Cash flows from operations have been negative since inception due to losses
from operations through December 31, 1995 and increases in accounts receivable
and costs and estimated earnings in excess of billings, net of increases in
accounts payable and accrued expenses. Cash flows from financing activities
reflect borrowings under Lau's line of credit facility and investments by Lau
that provided $1.3 million in the first six months of 1996 and $17.0 million
from inception through December 31, 1995 to fund operations.
At June 30, 1996, working capital was $9.1 million compared to $7.4 million
at December 31, 1995. The increase in working capital was due primarily to
increases in accounts receivable and costs and estimated earnings in excess of
billings, net of increases in accounts payable and accrued expenses. Working
capital does not include any cash or cash equivalents and the Company will not
receive any cash or cash equivalents in connection with Lau's transfer of the
Viisage Technology Division to the Company. As part of the transfer, the
Company will also assume certain obligations under Lau's line of credit
facility, approximately $8.8 million at June 30, 1996, and will use a portion
of the proceeds from this offering to repay such borrowings.
The Company is currently negotiating a line of credit arrangement, separate
from that of Lau, that will take effect after the issuance of the shares
offered hereby and the repayment of sums assumed under Lau's credit facility.
The line of credit is expected to provide for borrowings of up to $10.0
million, have a term of two years, provide for interest at prime rate or
LIBOR-based options, include customary financial and other covenants relating
to the maintenance of certain financial ratios (such as leverage and debt
service coverage ratios) and restrict the Company's ability to incur
additional indebtedness (except for the project lease facility described
below).
Lau has a system project lease arrangement, which will be assumed by Viisage
at the time of the transfer, with a commercial leasing organization providing
for system project leases of up to $15.0 million. Pursuant to this
arrangement, the lessor will purchase certain of the Company's digital
identification systems and lease them back to Viisage for deployment with
identified and contracted customers approved by the lessor. The lessor will
retain title to systems and will have an assignment of Viisage's rights under
the related customer contracts, including rights to use the software and
technology underlying the related systems. Under this arrangement, the lessor
will bear the credit risk associated with payments by Viisage's customers, but
Viisage will bear performance and appropriation risk and will generally be
required to repurchase a system in the event of a termination by a customer
for any reason except credit default.
The Company believes that the net proceeds from this offering, together with
cash flow from operations, available borrowings and project leasing, will be
sufficient to meet the Company's working capital and capital expenditure needs
for at least the next 12 months. There can be no assurance, however, that the
Company will be able to obtain such financing on favorable terms or at all. If
the Company is unable to finalize its credit arrangement or is otherwise
unable to obtain additional capital, the Company may be required to reduce the
scope of its presently anticipated expansion, which could adversely affect the
Company's business, financial condition and results of operations.
INFLATION
Although certain of the Company's expenses increase with general inflation
in the economy, inflation has not had a material impact on the Company's
financial results to date.
25
<PAGE>
BUSINESS
OVERVIEW
The Company designs, sells and implements turnkey digital identification
systems intended to deter fraud and to reduce customers' identification
program costs. These systems capture facial images, demographic information
and other biological identifiers, produce identification cards, and create
relational databases containing this information. Using its software design
and systems integration capabilities, the Company is able to combine its
proprietary software and hardware products with commercially available
components and customers' existing systems, creating a complete customized
solution. In addition, the Company is developing proprietary facial
recognition software designed to identify individuals in a large database of
faces on a real-time basis.
The Company's proprietary digital identification system products are
currently operating at over 365 locations under multi-year contracts with
twelve public sector agencies (either via contract or, in certain
circumstances, as a subcontractor). These systems produce driver's licenses,
welfare cards, pistol permits, prison cards, electronic benefits transfer
cards and immigration cards. The Company believes there is a large demand in
the public sector for identification systems that not only incorporate digital
technology to deter fraud and reduce costs, but also store data for convenient
access and dissemination. The Company also believes its technology is well
suited for a variety of commercial applications including access to ATMs,
networks, databases, and facilities, as well as for retail point-of-sale
transaction processing and benefits administration.
INDUSTRY BACKGROUND
Properly identifying individuals entitled to special rights and benefits has
presented problems for both the public and private sectors. Today, various
forms of personal identification cards, often bearing a picture of the proper
owner together with other demographic information, serve as the primary means
of personal identification, providing the owner with the ability to exercise
special rights, obtain benefits and process transactions. As a result of their
importance, identification cards are often the target of fraud and tampering.
The use of false identification cards can have significant financial and
societal implications. A person may use a number of false cards to create
multiple identities or use a single fake card as a basis for fraudulently
obtaining other credentials. For example, a fake driver's license can enable a
person to improperly open or access bank accounts, forge checks, obtain
welfare or other benefits, or buy alcohol while underage. In addition to the
direct costs and effects of improper identification, the indirect costs
associated with the investigation, prosecution and incarceration of offenders
are substantial. Public concern about security has also increased the demand
for identification systems for controlling access to both secure and public
facilities.
In an effort to combat fraud and tampering, photographic identification
cards encapsulated within laminated pouches were developed. However,
photographic identification cards can be replicated using widely available
advanced color copiers and printers, and laminated pouches have proven easy to
delaminate. Further, records of these cards consist primarily of retained
copies, which often require significant amounts of space and are inefficient
to maintain and access.
Advances in and the growing acceptance of digital technology has led to an
increasing demand for digital identification systems to replace existing
systems. Digital systems enable information and images to be captured and
imbedded within the fabric of the card through the use of dye-sublimation
techniques, making digital cards more resistant to tampering than laminated
pouches. Information can be stored in and later accessed from the card itself
through the use of bar codes, magnetic stripes and "smart" cards (cards which
contain computer chips). Digital systems also facilitate the storage of
information in computer databases, thereby reducing the need for manual
record-keeping, file cabinets, and cumbersome indexing systems. Finally,
digital systems can be networked to enable up-to-date information to be shared
and distributed across geographic and organizational boundaries.
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<PAGE>
As an additional means of deterring fraud, identification systems have
increasingly used biometrics (unique biological characteristics) to verify
personal identities. The most prevalent biometric identifiers include
fingerprints, facial images, voice data or hand geometry, with fingerprints
enjoying wide usage in law enforcement. However, unlike a fingerprint, a
facial image can be easily verified visually and can be captured in an
unobtrusive manner via a single photograph, making it a practical means of
identification. When two or more biometric identifiers are used together, the
statistical probability of properly identifying an individual increases.
Applications for digital identification systems are increasing as they
become more sophisticated and easier to use. For example, the typical U.S.
state has multiple licensing or other agencies, including its department of
motor vehicles, which require the verification of personal identity. The
public sector is focusing on the value of sharing databases to avoid redundant
data gathering efforts, distribute information in a timely manner, increase
efficiency and deter fraud. In the private sector, the Company envisions that
applications for digital identification systems will extend to ATMs, retail
point-of-sale transaction processing, the administration of health care
benefits and access to telecommunications services, personal computer networks
and facilities.
The emergence of digital identification systems also presents significant
challenges for integrating these systems with customers' existing software,
hardware and computing environments. Consequently, customers are seeking
complete, integrated solutions to overcome these integration issues.
THE VIISAGE SOLUTION
The Company designs, sells and installs digital identification systems which
provide complete integrated solutions for capturing images and data, producing
and delivering identification cards, and creating and managing relational
databases containing the captured information. These systems can utilize
unique biological identifiers such as facial images, fingerprints, voice data
or hand geometry to help deter fraud and to identify individuals for access
control and transaction authorization purposes.
The Company's systems integration and software design capabilities enable it
to provide complete solutions to customer-specified needs. The Company
provides customized systems integration software and services which link the
Company's proprietary software and hardware products with a wide variety of
commercially available computers, printers, and networks, as well as the
customer's existing systems. The Company believes that its ability to support
all current industry standard platforms, operating systems, databases, and
networks provides it with a significant competitive advantage.
While cards generated by the Company's systems can store and display a
variety of biometrics, the Company has found that the image of a human face is
a biological identifier that is prominent and easy to capture. The Company is
developing proprietary facial recognition software that enables databases of
facial images to be searched quickly and accurately for use in a variety of
fraud deterrence and security applications.
STRATEGY
The Company's objective is to be a leading worldwide provider of digital
identification systems and solutions. The Company intends to enhance these
systems and solutions with its facial recognition products and technologies
under development. Key elements of the Company's strategy are:
. Deliver Complete Integrated Digital Identification Systems. The Company
designs, sells and implements digital identification systems which provide
complete integrated solutions. Consistent with the Company's commitment to
provide customized solutions to meet its customers' specific requirements,
the Company intends to preserve its configurable system architecture to
enable it to integrate a wide variety of commercially available third party
products and to continue to adapt quickly to emerging technologies.
. Establish Leading Public Sector Market Share Worldwide. The Company intends
to focus on providing solutions to public sector customers worldwide, with
a particular current emphasis on domestic sales of solutions which produce
drivers' licenses. State departments of motor vehicles provide major
contract opportunities for the Company because of the large number of
licensed drivers and multiple branch
27
<PAGE>
locations. The complex systems purchased by these entities also provide
ongoing revenue-generating opportunities from product upgrades,
enhancements, and maintenance services. In addition, other state agencies
may desire to access the motor vehicle department's databases to satisfy
their own licensing requirements, potentially leading to incremental
revenues for the Company. Further, the Company plans to leverage its
domestic public sector expertise into government applications worldwide,
such as systems for the delivery of national identification, voting, and
government assistance cards.
. Leverage Public Sector Expertise Into Commercial Applications. The Company
believes significant commercial applications exist for the Company's
digital identification systems and facial recognition capabilities. The
private sector has many of the same technological needs and security
concerns as the public sector, and the Company believes commercial
applications may involve ATMs, networks, databases, and facilities, as well
as retail point-of-sale transaction processing and benefits administration.
. Extend Technological Leadership. The Company believes that its customized
systems and products, proprietary software and hardware, and integration
capabilities make it a technological leader in the digital identification
system market and constitute a competitive advantage. Viisage is committed
to maintaining its technological leadership, developing new systems,
solutions and enhancements, and responding to changes in market demands and
technologies.
. Extend Leadership in Facial Recognition Technologies. The Company believes
that it is among the leaders in facial recognition technologies, and that
facial recognition products could significantly enhance the Company's
digital identification systems and provide it with a competitive advantage.
The Company expects that in the future its facial recognition products will
be used with other vendors' identification systems and as stand-alone
products. The Company believes that its focus on and its presence in the
public sector will enable it to access an extensive database of facial
images (facebase). Furthermore, the Company believes that an extensive
facebase will become increasingly important to a variety of public and
commercial organizations which wish to utilize the Company's proprietary
facial recognition software to perform identification searches.
. Establish Strategic Relationships. An important part of Viisage's strategy
is to establish strong working relationships with strategic partners,
particularly as the Company seeks to expand its international presence. The
Company intends to align itself with firms which have existing
relationships, established distribution channels, or marketing resources in
new markets. Potential partners could include entities which are renowned
in a particular vertical market or firms with an established worldwide
presence. These may include component manufacturers, health care providers,
financial institutions, or computer networking firms.
PRODUCTS AND SERVICES
Viisage provides fully-integrated, turnkey digital identification systems
intended to deter fraud and to reduce customers' identification program costs.
These systems capture facial images, demographic information and other
biological identifiers, produce identification cards and create relational
databases containing this information. Using its design and systems
integration capabilities, the Company combines its proprietary software and
hardware products with commercially available components and customers'
existing systems. In addition, the Company is developing proprietary facial
recognition software designed to identify individuals in a large database of
facial images on a real time basis.
Digital Identification Systems
The Company's digital identification systems provide complete integrated
solutions for recording images and data, producing and delivering tamper-
resistant identification cards, and creating and managing relational databases
containing the recorded information. Depending on the customer's needs, the
Company offers "instant issue" systems which produce identification cards on
location that can be delivered to recipients in minutes, and central
processing systems which receive the information to appear on the cards
electronically from the point of capture and produce cards from a secure off-
site processing location which are later mailed to recipients. The facial
images captured by the Company's systems can provide the content for the
identification and verification applications of the Company's facial
recognition technologies.
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<PAGE>
Operations. The following diagram illustrates the card-production operations
of the Company's systems:
[SCHEMATIC DEPICTION OF VIISAGE'S DIGITAL IDENTIFICATION SYSTEM IN OPERATION.
CLIP ART ACCOMPANIED BY FOLLOWING CAPTIONS]
<TABLE>
<S> <C> <C> <C> <C>
Over The
Counter Printer
Demographic Data
YES
Central
Face Base Instant Production
Image Server Card Issue Facility
NO
Captured Image Viisage
Quality
Inspection
</TABLE>
For both instant issue and central processing systems, Viisage's digital
identification systems utilize an image workstation which incorporates the
Company's proprietary SensorMast. The image workstation captures, inputs, and
retrieves images and biometric and demographic information. With an instant
issue system, a commercially available dye-sublimation printer produces
single-piece, tamper-resistant identification cards on site in minutes.
Alternatively, with a central production system, images are electronically
transmitted to a secure processing location where a high speed manufacturing
unit produces the cards, and an integrated card delivery unit prepares the
cards for mailing. The Company's proprietary Visual Inspection System applies
quality control to all of the cards produced in central processing systems.
Under either process, the systems produce cards with holographic overlays and
digitized images and other biometric and demographic information. Finally, all
such digitized images and biometric and demographic information are stored in
a central database for easy and efficient access and retrieval.
Proprietary Company Products. All of the Company's systems incorporate the
Company's proprietary SensorMast product within the image workstations.
Central production systems also typically include the Company's proprietary
Visual Inspection System for quality assurance. These proprietary products and
related software are described below:
. SensorMast. The SensorMast is a fully-integrated, secure tower unit
developed by the Company which incorporates computer-controlled image
capture equipment. This equipment includes commercially available digital
cameras, adjustable lighting, frame grabbers, step motors, fingerprint and
signature capture devices and barcode readers. These are integrated into
the SensorMast, which in turn is incorporated by the Company into a
specially configured operator's workstation. This integrated workstation
provides operators with a durable and transportable apparatus with which to
capture images and data and initiate the card production process. The
Company's proprietary software controls and integrates the elements within
the SensorMast and links the SensorMast with the rest of the system.
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<PAGE>
. Visual Inspection System. The Visual Inspection System automatically
evaluates cards produced by the Company's central production systems to
determine whether the image and data on a person's identification card
correspond to the information about that person in the system database. If
the information does not match, the Visual Inspection System rejects the
printed card and identifies the defect for immediate corrective action.
This system, which incorporates robotics and high-definition inspection
cameras, automates an activity which is otherwise performed manually and is
a potential source of cost savings for customers. The Company's proprietary
software controls and integrates the various elements of the Visual
Inspection System and audits the central production manufacturing and
delivery systems.
Integration Software and Capabilities. An important aspect of the Company's
services and ability to deliver solutions for its customers involves the
design of customized software. Viisage's proprietary software and services
integrate the various components of its own SensorMast and Visual Inspection
System as well as integrate the Company's products with the variety of third
party components and technologies used by its customers. The Company has
designed software to support all current industry standard operating systems
(e.g., Unix, Windows NT, Windows 95 and OS/2), network protocols (e.g., Novell
Netware, TCP/IP and SNA), database products (e.g., Sybase or Oracle) and
client/server architectures. The Company's software design and systems
integration capabilities enable it to accommodate most computing environments
and customers with special requirements.
Customer Service and Support. The Company believes that customer service and
support are critical to its success and has committed significant resources to
these efforts. Following the installation of its digital identification
systems, the Company offers extensive customer training and help desk
telephone support as well as ongoing maintenance services. The Company's
service and support teams, which vary depending on the customer and contract,
are able to draw extensively upon the expertise of the Company's software and
hardware engineers. For some contracts, particularly when there are a large
number of installations, the Company has contracted with third party service
organizations for maintenance support, a practice the Company intends to
continue.
Contracts and Pricing of Systems and Services. The Company typically
provides its digital identification systems and solutions pursuant to
contracts which generally have five-year terms, provide for renewal options
and have an implementation phase of six-to-twelve months. Particular system
elements, products and services are not separately priced, but are instead
included within an overall contract price that varies depending on, among
other factors, design and integration complexities, the number of sites and
installations, the projected number of cards to be produced, the level of
desired post-installation support and the competitive environment. Depending
on the contract, the Company may also be responsible for the provision of
consumables (printer ribbons, cards, holographic overlays, etc.) required for
the production of cards, in which case the Company builds such costs into its
overall contract price. Consulting services are also available separately. The
Company's contracts are typically awarded pursuant to a formal bid process.
See "--Sales and Marketing" and "Risk Factors--Burdens Imposed by Public
Sector Customers." As of June 30, 1996, the estimated total amount of revenue
under the Company's contracts generally ranges up to $10 million per contract.
Facial Recognition Technologies
Background. The Company is working to improve the technology used in
security and fraud control through the development of facial recognition
technologies. The Company has three facial recognition products which it is
currently testing in pilot programs and plans to make generally available in
the first quarter of 1997. The Company has focused on the facial image as a
key biometric because the human face is a unique and prominent feature that
can be easily captured (in image) by a digital camera and verified visually.
The Company's technologies enable facial databases to be searched quickly and
accurately for identification and verification purposes.
The Company's facial recognition software is based on technology developed
by Professor Alex Pentland of the Massachusetts Institute of Technology. The
Company licenses that technology through Facia Reco, an entity formed by Dr.
Pentland. See "--Intellectual Property and Proprietary Rights." While Dr.
Pentland's software forms the basis of the Company's facial recognition
technologies, the Company believes that the proprietary software it has
developed is integral to making these technologies commercially viable.
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<PAGE>
The Company's facial recognition technologies are based on the premise that
certain facial features tend to be associated with each other. For example,
the combination of a thin nose and high forehead could constitute a face type.
As a person is added to the database, his or her face types--known as
"eigenfaces"--are measured against the eigenfaces of the "average" face
created by the software through its compilation of all the faces in the
database. This average face appears as an androgynous image. The difference
between the eigenfaces of the person being enrolled and the eigenfaces of the
average face is depicted numerically and becomes a unique identifier. The
Company's software calculates that numeric depiction, indexes the data and
stores it in a computer database and allows for searches using the numeric
identifier rather than facial images or other depictions. This numeric
depiction requires less database space and a smaller amount of bandwidth for
electronic communication than a visual image. The Company believes that these
features significantly increase the speed and cost effectiveness of its
products as compared to competing facial recognition technologies based on
neural networks.
The Company's facial recognition technologies are designed to compare one
face to many faces stored in a database ("identification") or to compare one
face to a particular face stored in a database ("verification"). Verification
is less complex than identification because only a single comparison is
necessary, while identification requires many more comparisons. The Company
has recently announced facial recognition products that perform real-time
identification, which the Company believes will be necessary for such products
to achieve market acceptance.
[SCHEMATIC DEPICTION OF FUNCTIONS PERFORMED BY THE COMPANY'S FACIAL
RECOGNITION PRODUCTS]
Facial Recognition Process Flow
Capture Take digital image
Eye-Find Mark eyes electronically
as a reference point
Mask Capture only facial
features
Compare Compare eigenfaces or
"average" face
Identify Create a unique
numerical identifier
Search Face Base Verify or identify
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<PAGE>
For identification searches, the computer constructs the numeric depiction
of the person being enrolled and searches for the closest measurement of a
face already in the database. The software performs a numeric table look-up
and completes the search within seconds. The system then displays images of
the persons in the database which most closely resemble the enrollee's image.
The Company's software can also determine whether a face appears in the
database more than once. This can be used to determine, for example, whether a
person is applying for multiple driver's licenses or welfare benefits. This
approach could also be used to identify an unknown person by comparing his or
her photo image to those of individuals stored in databases.
For verification searches, the software compares the target face to a
particular facial image stored in the database to determine whether there is a
match. Since eigenface measurements can be included in a smart card or on a
barcode, a comparison of the facial data stored on an identification card with
the actual face of the card holder can be used for verification purposes. This
can be used to control access to both secure and public facilities, ATMs and
networks and databases. Verification can also have applications for identity
confirmation at the point of sale or service.
Facial Recognition Products and Services. The Company has three facial
recognition products which it is currently testing in pilot programs and plans
to make generally available in the first quarter of 1997. There can be no
assurance, however, that the pilot programs will be successful or that the
Company will not experience delays or difficulties in the introduction, sale
and integration of these facial recognition products. Nor can there be any
assurance that any of its facial recognition products will adequately meet the
requirements of the marketplace and achieve or sustain market acceptance.
. Viisage Quality Advisor. This software product enables the analysis of the
quality of digital images in a database. Image quality can be measured
against pass/fail criteria set by the customer to identify both substandard
images and more systemic problems or patterns (e.g., that a large
percentage of the images captured at a particular branch are defective).
Viisage Quality Advisor is currently being tested by a state welfare
department.
. Viisage Registry. This software product can be used to enable database
search capabilities by enrolling faces in a database and searching the
database to determine whether a face appears more than once. This search is
used for one-to-many identifications. This product is currently undergoing
testing by a state welfare department.
. Viisage Gallery. This software product is designed to perform one-to-one
face verification at a point-of-sale or transaction device, such as an ATM.
The Company has entered into a letter of intent with a major international
bank for the use of the Viisage Gallery, as well as Viisage's Quality
Advisor and Registry products, in one of its branches.
The Company intends to offer its facial recognition software products as
enhancements to its digital identification systems. The Company also plans to
offer its facial recognition software to customers using other providers'
identification systems and to the users of such third party databases.
PRODUCT DEVELOPMENT
The Company has made research and development an important part of its
operating discipline. The Company's research efforts during its first three
years of operations centered on making its systems capable of supporting a
wide range of computing environments. The Company's current development
activities are focused on its facial recognition products and the further
commercialization of its facial recognition technology. In addition, among
other projects, the Company continues its development activities in the area
of platform engineering and is developing enhancements to the SensorMast as
well as point-of-sale device prototypes.
In addition to its own development efforts, the Viisage Technology Division
has also benefited from research and development conducted by Lau for projects
that were not related to the Viisage Technology Division and, through Lau's
license with Facia Reco, from certain research activities at the Massachusetts
Institute of Technology. Following the transfer discussed above, the Company
believes that it will continue to benefit from such activities under license
arrangements with Lau and Facia Reco. See "Relationships and Certain
Transactions with Lau Technologies--License Agreement."
During the fiscal years ended December 31, 1993, 1994 and 1995, the Company
spent $47,000, $201,000 and $1.1 million respectively, on research and
development; the corresponding figures for the six months ended
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<PAGE>
July 2, 1995 and June 30, 1996 were $597,000 and $128,000, respectively. Such
figures do not include amounts for specific projects that are allocated to
project costs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CUSTOMERS AND END USERS
The Company's solutions are marketed to public and private sector customers
who are concerned about maintaining or increasing security, reducing fraud and
controlling costs. The Company currently has contracts with several state
departments of motor vehicles for the production of drivers' licenses as well
as with other public sector customers to produce welfare cards, pistol
permits, prison cards, electronic benefits transfer cards and immigration
cards. The Company envisions that public sector databases will ultimately have
applications for the private sector. Commercial applications may involve
access to ATMs, computer networks and databases, and facilities, as well as
retail point-of-sale transaction processing and benefits administration.
As of October 8, 1996, the Company's proprietary digital identification
system products were operating at over 365 locations under multi-year
contracts with twelve public sector agencies (either via contract or, in
certain circumstances, as a subcontractor). The following lists and
categorizes those customers and end users:
STATE DEPARTMENTS OF MOTOR VEHICLES
Arizona Department of Transportation
Massachusetts Registry of Motor Vehicles
North Carolina Department of Transportation
Ohio Bureau of Motor Vehicles
OTHER STATE AND LOCAL AGENCIES
Auburn (Massachusetts) Police Department
Connecticut Department of Public Safety
Connecticut Department of Social Services
Massachusetts Department of Transitional Assistance
New York Department of Social Services *
Ohio Department of Public Safety
FEDERAL AGENCIES
U.S. Immigration and Naturalization Service *
FOREIGN CONTRACTS
Electoral Office of Jamaica*
First National Bank of Southern Africa, Limited+
* By subcontract.
+ Letter of intent.
Revenues from the Massachusetts Registry of Motor Vehicles accounted for all
of the Company's 1993 and 1994 revenues. Three customers (Ohio Bureau of Motor
Vehicles, Arizona Department of Transportation and the Massachusetts Registry
of Motor Vehicles) each accounted for over 10% of revenues in 1995. For the
six months ended June 30, 1996, four customers (New York Department of Social
Services, Massachusetts Registry of Motor Vehicles, U.S. Immigration and
Naturalization Service (by subcontract) and Massachusetts Department of
Transitional Assistance) each accounted for over 10% of Company revenues. The
loss of any such customers could have a material adverse impact on the
Company's business, operating results and financial condition. See "Risk
Factors--Dependence on Large Orders and Customer Concentration" and "--Risks
Associated With Lengthy Sales and Implementation Cycles."
33
<PAGE>
SALES AND MARKETING
The Company markets its products directly through its internal sales force,
which consisted of six individuals as of June 30, 1996. As it continues to
increase its bid activity, the Company anticipates that it will increase the
number of its sales and marketing personnel. In addition, the Company intends
to ally strategically with prominent vendors, systems integrators and service
organizations, particularly in international markets, in order to gain access
to such organizations' existing relationships, marketing resources and
credibility in new markets.
The Company's engineering department supports the direct sales staff by
providing pre- and post-sale technical support. This support entails
travelling with sales representatives to help explain the systems, defining
solutions for customers, designing systems for proposal activity, supporting
the implementation process and providing post-implementation support.
The Company's systems are generally provided to public sector customers
through a formal bidding process. The Company's sales and marketing personnel
regularly conduct visits and attend industry trade shows to identify bid
opportunities and particular customer preferences and to establish and
cultivate relationships in advance of any bid. Once a request for proposals is
issued, a six-to-twelve month proposal and award process ensues, followed by
(if the bid is successful) a six-to-twelve month implementation and
installation phase. In the aggregate, the time needed for agencies to secure
funding for systems, the request for proposal and bid process, the execution
of actual contracts and the installation of a system can extend over several
years. Further, customers may seek to modify the system either during or after
the implementation of the system. While this long sales and implementation
cycle requires the commitment of marketing resources and investments of
working capital, the Company believes that it also serves as a barrier to
entry for smaller companies and as an early indicator of potential competitors
for particular projects. For existing customers, a considerably shorter sales
and implementation cycle may be involved. See "Risk Factors--Dependence on
Large Orders and Customer Concentration" and "--Risks Associated With Lengthy
Sales and Implementation Cycles."
BACKLOG
The Company measures backlog based on signed contracts, subcontracts and
customer commitments for which revenue has not yet been recognized. However,
backlog is not necessarily indicative of future revenue. A substantial amount
of the Company's backlog can be cancelled at any time without penalty, except,
in some cases, for the recovery of the Company's actual committed costs and
profit on work performed through the date of cancellation. Any failure of the
Company to meet an agreed-upon schedule could lead to the cancellation of the
related order. The timing of award and performance on contracts as well as
variations in size, complexity and requirements of the customer and
modifications to contract awards may result in substantial fluctuations in
backlog from period to period. Accordingly, the Company believes that backlog
cannot be considered a meaningful indicator of future financial performance.
The Company recognizes revenue on a percentage-of-completion basis. Revenue
recognition may be delayed by the delivery of components, special software
requirements of the customer, or by delays in integration with the customer's
systems. At June 30, 1996, the Company's backlog was approximately $37.0
million, compared to $26.0 million at July 2, 1995. Approximately 30% of the
Company's backlog as of June 30, 1996, is expected to be earned during the
current fiscal year.
MANUFACTURING
Substantially all proprietary subsystems and assemblies are made to the
Company's specifications by contract manufacturers, including Lau. See
"Relationship and Certain Transactions with Lau Technologies." Other non-
proprietary system components, such as personal computers, printers and
related components, are purchased from third-party vendors. The Company's
manufacturing operations consist solely of integration and testing. Systems go
through several levels of testing, including configuration to customer
specifications, prior to installation.
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<PAGE>
The Company generally purchases major contracted assemblies from single
vendors to help ensure high quality, prompt delivery and low cost. The Company
does, however, qualify second sources for most components, contracted
assemblies and purchased subsystems, or at least identifies alternative
sources of supply. The Company believes that the open architecture of its
systems facilitates substitution of components or software when this becomes
necessary or desirable. The Company has from time to time experienced delays
as a result of the availability of component parts and assemblies, although
the Company has never failed to meet a contractual requirement as a result of
such delays. There can be no assurance that the Company will not experience
such problems in the future, or that such problems will not have a material
adverse effect on the Company's operations. See "Risk Factors--Dependence on
Sole or Limited Sources of Supply."
COMPETITION
The market for the Company's products and services is extremely competitive
and management expects this competition to intensify as the markets in which
the Company's products and services are sold continue to develop.
The Company faces competition in the identification systems market (for both
digital and conventional systems) from technologically sophisticated
companies, including Polaroid Corporation, Unisys Corporation, DataCard
Corporation, and NBS Imaging Systems, Inc., all of which have substantially
greater technical, financial, and marketing resources than the Company. In
some cases, the Company may be competing with an entity which has a pre-
existing relationship with a potential customer which could put the Company at
a significant competitive disadvantage. As the digital identification market
expands, additional competitors may seek to enter the market.
The Company believes that competition in the digital identification systems
market is based primarily upon the following factors: systems and product
performance; price; flexibility in terms of accommodating customer needs,
architectures, platforms, systems and networks; and service support. The
relative importance of each of these and other factors depends upon the
specific customer and situation involved. Substantially all of the Company's
sales to new customers have been the result of competitive bidding for
contracts pursuant to public sector procurement rules, which generally
increases the importance of price as a competitive factor. The Company
believes that its competitive strength lies primarily in its systems
integration and software design capabilities, with additional strengths
including system performance and proprietary technologies, system
configuration flexibility, price, and relative ease of use. Nevertheless,
there can be no assurance that the Company will be able to compete
successfully with the companies mentioned above, or that new entrants, which
may include foreign companies which may have substantially greater resources
than the Company, will not seek to enter the digital identification systems.
In the field of biometric identification technology, the Company competes
with other facial recognition providers as well as other providers of
biometric solutions. Fingerprint recognition solutions have a long history of
use, particularly in law enforcement applications. Other current suppliers of
facial recognition solutions are software development firms. The Company
expects that as the market for biometric solutions develops, companies with
significant resources and capabilities may enter the market and competition
will intensify.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's business is substantially dependent on intellectual property
which it licenses from Lau Technologies under an exclusive, perpetual,
irrevocable, paid-up, royalty-free, worldwide license to use all of the
technology relating to the Viisage Technology Division except for controlling
human entry through doorways, gates, turnstiles, or similar thresholds in and
to buildings or facilities located on properties owned or controlled by the
United States federal government, or any other national government, using
apparatus at the entry point ("federal access control"). See "Relationship and
Certain Transactions with Lau Technologies--License Agreement" for a
description of the license with Lau. The Company is also dependent on
technology it licenses from Facia Reco. This license is exclusive in the field
that relates to de-duplicating or querying databases created, controlled
and/or managed by the Company or its sublicensees and/or utilizing, directly
or indirectly, personal identification cards but does not extend to federal
access control. This license includes rights in that same field to Facia
Reco's exclusive license of patented technology from the Massachusetts
Institute of
35
<PAGE>
Technology (except for certain rights granted to sponsors of the Massachusetts
Institute of Technology Media Lab and certain research rights). The Company's
license agreement with Facia Reco terminates upon the expiration of the final
patent covered under or through the license, and provides for a royalty of
$350 per machine copy incorporating the licensed technology. Until the year
2002, a minimum annual royalty applies of, generally, $21,000 for the U.S.
rights and a figure ranging from $21,000 to $42,000 for the non-U.S. rights.
Lau currently has four U.S. patent applications outstanding and has made
copyright filings which relate to the Company's SensorMast, Visual Inspection
System and proprietary software. Lau has filed foreign patent applications
which correspond to three of these domestic applications. The Company's
license agreement with Facia Reco includes the right to use and sublicense
certain U.S. patents and registered copyrights for facial recognition systems
which Facia Reco, licenses from the Massachusetts Institute of Technology and
Intelligent Vision Systems, Inc. The Massachusetts Institute of Technology has
applied to extend its patent rights to certain jurisdictions in Europe and in
Singapore. One of Lau's four filed patent application is directed to an
enhancement of one of the patents licensed to Lau by Facia Reco. At Lau's
request and expense, MIT has filed for a broadening reissue patent. Any
broadening reissue patent will be licensed through Facia Reco.
There can be no assurance that any of the U.S. or foreign patents applied
for by Lau or the foreign patents applied for by the Massachusetts Institute
of Technology will be issued or that, if issued, they will provide protection
against competitive technologies or will be held valid and enforceable if
challenged. Moreover, there can be no assurance that the Company's competitors
would not be able to design around any such proprietary right or obtain rights
that the Company would need to license or circumvent in order to practice
under these patents and copyrights. See "Risk Factors--Limited Protection of
Intellectual Property and Proprietary Rights."
Although there are no pending lawsuits against the Company regarding
infringement of any existing patents or other intellectual property rights,
the Company recently received a letter from an attorney on behalf of the
holder of a patent on a system for scanning and encoding images from a
personal identification card. Although the Company believes that its product
does not infringe such patent, there can be no assurance that such patent
holder will not initiate litigation with respect to this patent or allege
additional claims. There can be no assurance that the Company would prevail in
any litigation seeking damages or expenses from the Company or to enjoin the
Company from selling its products on the basis of any alleged infringement.
See "--Legal Proceedings."
In some cases, litigation or other proceedings may be necessary to defend
against or assert claims of infringement, to enforce patents issued to the
Company or its licensors, to protect trade secrets, know-how or other
intellectual property rights owned by the Company, or to determine the scope
and validity of the proprietary rights of third parties. Such litigation could
result in substantial costs to and diversion of resources by the Company. An
adverse outcome in any such litigation or proceeding could subject the Company
to significant liabilities, require the Company to cease using the subject
technology or require the Company to license the competing technology from the
third party, all of which could have a material adverse effect on the
Company's business, financial condition and results of operations. If any such
licenses are required, there can be no assurance that the Company will be able
to obtain any such license on commercially favorable terms, if at all. See "--
Legal Proceedings."
EMPLOYEES
As of July 12, 1996, the Company had 42 employees, including 9 in
engineering, 21 in operations, 7 in sales and marketing and 5 in general and
administrative positions. The Company from time-to-time supplements its
employee forces with independent contractors. As of July 12, 1996, the Company
had 11 such contractors, mostly in the area of engineering and operations.
The Company believes that its future success will depend in large part upon
its continued ability to recruit and retain highly qualified technical,
managerial and marketing personnel. To date, the Company has been successful
in attracting and retaining skilled employees. None of the Company's employees
is represented by a labor union, and the Company considers its relationship
with its employees to be good.
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<PAGE>
FACILITIES
The Company's facilities are located in Acton, Massachusetts. The Company
occupies approximately 15,000 square feet of space and has access to common
areas under the terms of a Use and Occupancy Agreement with Lau Technologies.
The term of the Use and Occupancy Agreement extends to the end of Lau's lease
for the premises which expires on February 23, 1997, but may be terminated by
the Company on 30 days' prior written notice to Lau. See "Relationship and
Certain Transactions with Lau Technologies--Use and Occupancy Agreement."
LEGAL PROCEEDINGS
The Company recently received a letter from an attorney on behalf of the
holder of a patent on a system for scanning and encoding images from a
personal identification card. Although the Company believes that its product
does not infringe such patent, there can be no assurance that such patent
holder will not initiate litigation with respect to this patent or allege
additional claims. There can be no assurance that the Company would prevail in
any litigation seeking damages or expenses from the Company or to enjoin the
Company from selling its products on the basis of any alleged infringement.
See "Risk Factors--Limited Protection of Intellectual Property and Proprietary
Rights."
On September 23, 1996, three minority shareholders of Lau filed suit against
Lau, the Company and others in Superior Court in Berkshire County,
Massachusetts, alleging that certain defendants breached the fiduciary duty
owed the plaintiffs as shareholders of Lau. The plaintiffs requested, among
other things, an injunction to delay this offering in an effort to obtain a
direct, rather than an indirect, ownership interest in the Company. On October
4, 1996, the Superior Court denied plaintiffs' request for such relief,
although plaintiffs' claims for unspecified money damages remain pending. Lau
has agreed to indemnify and hold the Company harmless for any liabilities
incurred by the Company as a result of judgments, settlements or litigation
expenses arising out of this suit. Accordingly, the Company does not believe
that the resolution of this matter would have a material adverse effect on its
business, financial condition or results of operations.
RELATIONSHIP AND CERTAIN TRANSACTIONS WITH LAU TECHNOLOGIES
Prior to this offering, the Company has operated as the Viisage Technology
Division of Lau Technologies. Viisage Technology, Inc. was incorporated in
Delaware on May 23, 1996. Pursuant to a series of agreements described below,
on the effective date of the registration statement relating to this offering,
Lau will transfer substantially all of the assets and liabilities of its
Viisage Technology Division to Viisage.
Lau Technologies is an integrator of sophisticated electronic systems based
in Acton, Massachusetts. Lau was founded in 1990 and employs approximately 205
people (excluding the employees of the Viisage Technology Division). Its
Chairman, Chief Executive Officer and majority stockholder is Joanna T. Lau.
Denis K. Berube, the Chairman of the Board of Directors of the Company, serves
as the Executive Vice-President and General Manager of Lau and is married to
Ms. Lau. See "Risk Factors--Potential Conflicts of Interest."
ASSET TRANSFER AGREEMENT WITH LAU
The Company and Lau are parties to an Asset Transfer Agreement, which was
amended and restated as of August 20, 1996 (the "Asset Transfer Agreement").
Under the terms of the Asset Transfer Agreement, the Company will, on the
effective date of the registration statement relating to this offering, issue
to Lau 5,680,000 shares of Common Stock (which will comprise all of the
outstanding Common Stock other than the shares being sold in this offering) in
exchange for substantially all of the assets, properties and business formerly
constituting the Viisage Technology Division of Lau. In connection with this
transaction, the Company agreed to assume substantially all the obligations
and liabilities of Lau relating to the Viisage Technology Division. Each party
has covenanted not to compete with the other for ten years. The Company's
obligation not to compete with Lau is limited to the field of federal access
control. The Asset Transfer Agreement, which includes representations and
warranties from each party and indemnification provisions customary for an
agreement of this nature, is conditioned upon the parties' entering into the
Administration and Services Agreement and Use and Occupancy Agreement between
the parties described below.
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<PAGE>
TAX ALLOCATION BETWEEN LAU AND VIISAGE
Prior to the closing of the Asset Transfer Agreement, the Company was
included in Lau's tax returns, but, for accounting purposes, income taxes were
recorded as if the Company had filed its own separate tax returns. After the
closing of the Asset Transfer Agreement, the Company will file its own
separate tax returns. Any tax liability or refund that may arise relating to
periods when the Company was a division of Lau is covered by a tax
indemnification arrangement contained in the Asset Transfer Agreement. The
indemnification provides for Lau to pay or receive reimbursement from the
Company for any tax adjustment relating to the Viisage Technology Division for
all periods prior to the consummation of the asset transfer if such
adjustments will result in tax expense or tax benefit, as the case may be, to
the Company.
LICENSE AGREEMENT
Prior to this offering, the Company operated as a division of Lau and had
broad access to the proprietary and licensed technology of Lau. The Company
has entered into a License Agreement with Lau (the "License Agreement"), to
become effective on the effective date of the registration statement relating
to this offering, pursuant to which Lau has granted Viisage an exclusive,
perpetual, irrevocable, paid-up, royalty-free, worldwide license (with
sublicensing rights) for all of the technology relating to the Viisage
Technology Division. Such license does not allow the Company to use the
technology in the federal access control field. Lau has retained the right to
use such technology solely in the federal access control field. The licensed
rights include all of Lau's technologies relating to SensorMast, the Visual
Inspection System and facial recognition technology developed by Lau. See
"Business--Intellectual Property and Proprietary Rights." In addition, under
the terms of the License Agreement, Lau must disclose and provide to Viisage
improvements to the licensed technology and Viisage must disclose and provide
to Lau modifications it makes to the licensed technology for use in federal
access control without any additional charge. See "Business--Intellectual
Property and Proprietary Rights."
ADMINISTRATION AND SERVICES AGREEMENT
Lau has provided various services to its Viisage Technology Division since
its inception, including, but not limited to, general accounting, data
processing, payroll, human resources, employee benefits administration and
certain executive services. Amounts reflected in the Company's financial
statements as fees charged by Lau reflect the costs of these services, and
amounted to approximately $280,000, $710,000, and $1.1 million, in 1993, 1994,
and 1995, respectively, and $540,000 and $330,000 in the first six months of
1995 and 1996, respectively. The Company does not believe that there would
have been a material impact on its operations if the Company had obtained such
services independent of Lau. See Note 3 of Notes to Financial Statements.
In connection with this offering, the Company and Lau will enter into an
Administration and Services Agreement (the "Services Agreement") for the
purpose of defining their ongoing relationships. Under the Services Agreement,
Lau will make available to the Company for so long as the Use and Occupancy
Agreement between the parties described below remains in effect (February 23,
1997, unless extended by the parties or earlier terminated by Viisage on 30
days' notice) many of the same services currently provided to the Company, and
will be paid for those services a fee of $55,000 per month, subject to
adjustment as described below. This fee, payable in advance on the first day
of each month, has been determined by Lau and the Company to be consistent
with the historical cost for providing these services. Either party may reduce
or modify the level of services to be provided, in which event the fee payable
by the Company will be appropriately reduced or modified. The Services
Agreement provides that Lau will not be liable for any loss or damage suffered
by the Company in connection with Lau's provision of services except to the
extent of the amounts billed or billable. To compensate Lau for fixed costs in
making services available, the Company shall be required to pay fees for such
services whether or not the Company elects to utilize such services until the
Services Agreement is terminated as to those services. The Company believes
that these fees are substantially equivalent to those that would be charged by
such third parties or the cost that would be incurred in providing such
services internally.
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<PAGE>
USE AND OCCUPANCY AGREEMENT
The Company and Lau will enter into a Use and Occupancy Agreement which
contains the terms and conditions relating to the Company's continued use and
occupancy of certain office space for its corporate headquarters, which is
part of the office space currently occupied by Lau. The terms of this
Agreement provide that the Company will have initially the right to occupy the
space at Lau's premises formerly occupied by Viisage Technology Division until
February 23, 1997. The Company will be required to pay Lau an occupancy fee
equal to a percentage of the rent, property taxes, utilities, insurance and
other charges payable by Lau with respect to the premises, based on the
portion of the total area of the premises occupied and related services used
by the Company. The Use and Occupancy Agreement may be terminated by either
Lau on six (6) months' notice or by Viisage on thirty (30) days' notice. The
monthly occupancy fee initially payable by the Company is estimated to be
$18,333 in 1996. Amounts charged by Lau to Viisage for occupancy costs in
prior periods consisted of $40,000, $90,000 and $140,000 in 1993, 1994 and
1995, respectively, and $70,000 and $110,000 for the six months ended July 2,
1995 and June 30, 1996, respectively.
ADDITIONAL TRANSACTIONS
The Company from time to time has purchased or contracted for, and will
likely continue to purchase or contract for from time to time, certain system
components and technical personnel from Lau. The amounts for such components
and services were approximately $282,000 in 1993, $1.4 million in 1994 and
$2.8 million in 1995, and $2.0 million and $1.0 million for the first six
months of 1995 and 1996, respectively.
From the inception of the Viisage Technology Division until July 1, 1996,
entities controlled by Yona Wieder, Vice President Marketing & Sales,
Worldwide Public Sector of the Viisage Technology Division, provided
consulting services to the Division. Amounts paid by Lau (and allocated to the
Viisage Technology Division) to such entities were $199,000, $313,000 and
$519,000 during 1993, 1994 and 1995, respectively, and $221,000 and $289,000
during the first six months of 1995 and 1996, respectively. Until October
1994, such services were provided by Novatech, Inc., a corporation one-third
owned by Mr. Wieder and which he served as President. From October 1994
through June 1996, such services were provided by YW Technologies, Mr.
Wieder's sole proprietorship.
POLICY ON AFFILIATE TRANSACTIONS
The Company has adopted a policy, included in its By-Laws, that all material
transactions between the Company and its officers, directors, and other
affiliates (including Lau and its affiliates) must (i) be disclosed by the
officer, director or affiliate and approved by a majority of the disinterested
members of the Company's Board of Directors; (ii) be disclosed by the officer,
director or affiliate and approved by vote of the stockholders; or (iii) be on
terms no less favorable to the Company than could be obtained from
unaffiliated third parties and determined as fair to the Company by its
directors or the stockholders in accordance with the Delaware General
Corporation Law.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Denis K. Berube....................... 54 Chairman of the Board
Robert C. Hughes...................... 56 President and Chief Executive Officer
William A. Marshall................... 44 Chief Financial Officer and Treasurer
Yona Wieder........................... 48 Vice President Marketing & Sales,
Worldwide Public Sector
Robert J. Schmitt, Jr................. 53 Vice President Marketing & Sales,
Worldwide Private Sector
Charles J. Johnson.................... 41 Director and Secretary
Harriet Mouchly-Weiss(1).............. 54 Director
Peter Nessen(1)(2).................... 60 Director
Thomas J. Reilly(1)(2)................ 57 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
DENIS K. BERUBE has served as Executive Vice President and General Manager
of Lau Technologies since co-founding it in 1990 and has chaired the Viisage
Technology Division Advisory Board since the Board's formation in October
1995. Since the Company's incorporation in May 1996, Mr. Berube has served as
Chairman of its Board of Directors. Mr. Berube is married to Joanna T. Lau,
the Chairman, Chief Executive Officer and majority stockholder of Lau
Technologies.
ROBERT C. HUGHES has served as President and Chief Executive Officer of the
Viisage Technology Division of Lau since August 1995 and holds the same
position with the Company. Mr. Hughes was Vice President, Worldwide Sales and
Service, at Data General Corporation, a computer systems vendor, from April
1993 through March 1995. Mr. Hughes was Chief Operating Officer at Bachman
Information Systems, a provider of software engineering products and services,
from April 1992 to April 1993. He was a senior manager at Digital Equipment
Corporation, a computer systems and services vendor, from December 1976 to May
1992, serving as Corporate Officer and Vice President from 1984 to 1992.
WILLIAM A. MARSHALL has served as Chief Financial Officer of the Viisage
Technology Division of Lau since December 1995 and serves as Chief Financial
Officer and Treasurer of the Company. From September 1994 through November
1995, Mr. Marshall was an independent consultant, providing general management
and financial consulting services. Mr. Marshall was a partner with KPMG Peat
Marwick LLP, a public accounting firm, from July 1987 through August 1994. Mr.
Marshall is a certified public accountant.
YONA WIEDER served as a consultant to the Viisage Technology Division from
its inception through June 1996 and joined the division as its Vice President
of Marketing & Sales, Worldwide Public Sector in July 1996. He holds the same
position with the Company. Mr. Wieder was President and a principal of YW
Technologies, a management consulting and marketing organization, from
September 1994 through June 1996. He was President of Novatech, Inc., a
management consulting organization, from May 1991 to September 1994.
ROBERT J. SCHMITT, JR. has served as Vice President of Marketing & Sales,
Worldwide Private Sector of the Viisage Technology Division since June 1996
and will hold the same position with the Company. Mr. Schmitt was employed by
Digital Equipment Corporation from 1977 through May 1996, serving as Manager
of Technical Support from June 1991 to February 1993 and as Vice President of
Marketing from February 1993 through May 1996.
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<PAGE>
CHARLES J. JOHNSON has served as a Director of Viisage since its
incorporation in May 1996 and earlier served on the Advisory Board of the
Viisage Technology Division. Mr. Johnson is a member of the law firm,
Finnegan, Hickey, Dinsmoor & Johnson, P.C., in Boston, Massachusetts, which
serves as counsel to the Company and Lau.
HARRIET MOUCHLY-WEISS has served as a Director of Viisage since its
incorporation in May 1996, and earlier served on Viisage's Advisory Board. Ms.
Mouchly-Weiss founded Strategy XXI Group, an international communications and
consulting firm in January 1993 and has served as managing partner since that
time. From 1986 to December 1992, Ms. Mouchly-Weiss was President of GCI
International, an international public relations and marketing agency.
PETER NESSEN has served as a Director of Viisage since its incorporation in
May 1996 and earlier served on its Advisory Board. Mr. Nessen has been
Chairman of the Board of NCN Financial Corporation, a private banking firm,
since January 1995. From June 1993 through December 1994, Mr. Nessen was a
Dean at Harvard Medical School, responsible for special projects. Mr. Nessen
was Secretary of Administration and Finance for the Commonwealth of
Massachusetts from January 1991 through May 1993 and managing partner of the
consulting practice in the Boston office BDO Seidman LLP, an accounting firm,
from February 1990 through December 1990.
THOMAS J. REILLY has served as a Director of Viisage since its incorporation
in May 1996 and earlier served on its Advisory Board. Mr. Reilly has been a
self-employed financial consultant since December 1994. From June 1966 through
November 1994, Mr. Reilly was with Arthur Andersen LLP, a public accounting
firm, and became a partner in 1975.
Under the Company's Certificate of Incorporation and By-Laws, the Company's
Board of Directors is divided into three classes. The members of each class of
directors serve for staggered three-year terms. Denis K. Berube is the sole
Class I director (whose term expires in 1997); the Class II directors (whose
term expires in 1998) are Charles J. Johnson and Harriet Mouchly-Weiss; and
the Class III directors (whose term expires in 1999) are Peter Nessen and
Thomas J. Reilly. All directors hold office until the annual meeting of
stockholders at which their term expires and until their successors have been
duly elected and qualified. There are no family relationships between any of
the directors or executive officers of the Company.
Executive officers of the Company are elected by the Board of Directors on
an annual basis and, subject to employment agreements with Messrs. Hughes,
Marshall and Wieder, serve until their successors have been duly elected and
qualified.
DIRECTOR COMPENSATION
From October 1995 to June 1996, each director served on the Advisory Board
to the Viisage Technology Division and in such capacity received $1,000 per
meeting of the Advisory Board. For their service as directors, each director
receives $1,000 per month. The Board has previously met on a monthly basis,
although meetings in the future may be held less frequently. In addition,
directors are reimbursed by the Company for their out-of-pocket expenses in
connection with attending any Board or committee meeting. Directors do not
currently receive any fees for service on any committee of the Board.
Directors also received option grants under the Company's 1996 Directors'
Plan (the "Director Plan"). Under the Director Plan, each director has been
granted an option to purchase 16,330 shares of Common Stock (subject to
adjustment as provided in the Director Plan) at an exercise price equal to
$2.96 per share. Of each director's options, 1,420 shares vest upon the date
of issuance of the shares offered hereby, and 4,970 shares vest upon each of
the first, second and third anniversaries of the issuance of the options. See
"--Incentive and Stock Plans."
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation for the year ended December 31, 1995 of Robert C. Hughes,
President and Chief Executive Officer of the Company.
41
<PAGE>
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
--------------------------- ------------------- ------------
<S> <C> <C> <C>
Robert C. Hughes............................... $67,692 $16,000 $10,139
President and Chief Executive Officer
</TABLE>
- --------
(1) No executive officer of the Company (including Mr. Hughes) earned in
excess of $100,000 in the fiscal year ended December 31, 1995; nor did any
executive officer of the Company receive or hold any restricted stock or
options or benefit from any other long-term compensation plan or program
during such year.
EMPLOYMENT AGREEMENTS
During 1996, Lau Technologies entered into employment agreements with
Messrs. Hughes, Marshall and Wieder which by their terms will become
agreements between the individuals and the Company upon the transfer of the
assets, properties and business of Lau's Visage Technology Division to the
Company. The agreements are substantially similar, varying principally in each
executive's respective title and position and in his respective compensation
level, which in each case includes salary ($220,000 for Mr. Hughes, $140,000
for Mr. Marshall and $165,000 for Mr. Wieder), a discretionary bonus pursuant
to the Company's Executive Incentive Compensation Plan (and, in the case of
Mr. Marshall, a minimum non-discretionary bonus of $35,000 in 1996 and
reimbursement of relocation costs) and certain health, pension and other
benefits (including the stock option awards described below). The employment
agreements expire on February 1, 2001, subject to early termination in the
event of death or disability of the executive or as otherwise provided
therein. The employment agreements also have a two year renewal term. The
Company may terminate the executive's employment with or without "cause" (as
defined therein), but in the event such termination is without "cause" the
executive will be entitled to receive severance pay at the current salary and
bonus levels for two years, in the case of Mr. Hughes, and one year in the
cases of Messrs. Marshall and Wieder. In addition, the executive may terminate
his employment in the event of the Company's "non-performance" (as defined in
the agreements), and will be entitled to the severance described above in the
event of such a termination. The agreements also contain non-competition
provisions which generally survive two years beyond the executive's
termination.
INCENTIVE AND STOCK PLANS
Executive Incentive Compensation Plan
The Company currently maintains an Executive Incentive Compensation Plan for
its executive officers and other key employees of the Company in order to
motivate members of the Company's executive team. Each participant in the
Executive Incentive Compensation Plan may receive a percentage of his or her
base salary based upon the Company's and each participant's individual
performance, as determined by success in meeting established goals approved by
the Chief Executive Officer or the Board of Directors. The Compensation
Committee administers the Plan.
1996 Management Stock Option Plan
On February 1, 1996, Lau Technologies granted nonqualified options to
acquire up to an aggregate 1,167,950 shares of Common Stock of Viisage, at an
exercise price of $2.96 per share, to eight key employees in its Viisage
Technology Division. Robert C. Hughes, the Company's President and Chief
Executive Officer, received options to acquire 639,000 shares. On April 15,
1996, Lau Technologies granted nonqualified options to acquire up to an
additional 177,500 shares of Company Common Stock, at an exercise price of
$4.86 per share, to a ninth key employee of its Viisage Technology Division.
All of these options were ratified by the Board of Directors of the Company
following its incorporation in connection with the adoption of the 1996
Management Stock Option Plan described below (the "Option Plan"). Depending on
the recipient, the options will be vested upon issuance for as few as none or
as much as one-third of the total number of option shares; with respect to Mr.
Hughes' options to purchase 639,000 shares, options to purchase 71,000 of such
shares will vest upon the issuance of the shares of
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<PAGE>
Common Stock being offered hereby. The balance of option shares will vest in
seven years, subject to acceleration in benchmark increments based on each
$1.0 million increase in the current value of the Company's Common Stock over
a base value of $21.0 million (or, with respect to the options granted April
15, 1996, $34.5 million), as measured (i) at each fiscal year end, (ii) upon a
sale or change in control of the Company, or (iii) in the event of a
termination (or constructive termination) of the option holder as an employee
without cause, as of the end of the Company's most recent fiscal quarter
immediately before such termination.
Once a benchmark vesting increment of these nonqualified options has
occurred, the shares so vested will remain vested even if the value of the
Company's Common Stock thereafter declines. Achievement of future benchmarks
will be measured cumulatively based on the highest Common Stock value at which
the last benchmark incremental acceleration of vesting has occurred, without
downward adjustment for intervening declines in Common Stock value. With
limited exceptions (such as continuation of employment by a successor
corporation that assumes the option, or in the case of one employee, the
employee's termination without cause or simultaneous hiring, at the request of
the Company's predecessor, by such predecessor or an affiliate thereof),
vesting ceases and options for vested shares terminate upon termination of
employment.
The Option Plan was adopted by the Board of Directors in June 1996 to
effectuate the option grants agreed to by Lau described above and for the
purpose of providing executive officers and key personnel an opportunity to
have an ownership interest in the Company. The Option Plan is expected to be
approved by Lau in its capacity as the Company's sole stockholder following
the issuance of the common shares to Lau and prior to the issuance of the
Common Stock offered hereby. The Option Plan is administered by the
Compensation Committee of the Board of Directors, which currently consists of
Ms. Mouchly-Weiss and Messrs. Nessen and Reilly. A total of 1,356,100 shares
of Common Stock are reserved for issuance under the Option Plan. Options under
the Plan may be either (a) "incentive options" under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), but only if the Plan
is approved by the Company's stockholders within one year of its adoption by
the Board of Directors, or (b) options that do not qualify under Section 422
of the Code ("nonqualified options"). The Option Plan will remain in effect
indefinitely (except in the case of incentive options, for which the Plan will
expire in ten years), unless earlier terminated by the Board of Directors in
accordance with the Option Plan's terms.
Officers and key employees of the Company, but not directors, are eligible
to receive options under the Option Plan. The exercise price of incentive
options under the Option Plan may not be less than the fair market value of
the underlying shares on the date of grant, except in the case of incentive
options granted to holders of 10% or more of the total combined voting power
of the Company, in which case the exercise price may not be less than 110% of
such fair market value. The exercise price of nonqualified options is to be
determined by the Stock Option Committee at the time of option issuance.
Each option under the Option Plan will have a term not to exceed ten years,
except in the case of incentive options granted to holders of 10% or more of
the total combined voting power of the Company, with respect to which the term
may not exceed five years. The Stock Option Committee will determine the
vesting schedule with respect to any grant of options. All options are subject
to adjustment in certain events, including any merger, consolidation,
reorganization or recapitalization of the Company, and may not be exercised
later than ten years after grant (five years with respect to incentive options
granted to holders of 10% or more of the total combined voting power of the
Company). In the event of a change in control of the Company, the Stock Option
Committee may, in its discretion, (a) terminate all outstanding options with
at least ten days' (and if circumstances permit, up to 30 days') notice, (b)
continue application of the options to the securities of the successor
corporation (with appropriate adjustments), or (c) cause the outstanding
options to be purchased at a price equal to the difference between the
exercise price and the current fair value of the shares then vested under such
options.
The Option Plan may be amended from time to time by the Board of Directors,
subject to the rights of previously issued options, except that any such
amendment will require a stockholder approval: (i) if affecting incentive
options in a manner requiring stockholder approval under the Code at a time,
if any, after the Option Plan has been approved by the Company's stockholders,
or (ii) if stockholder approval is required under any
43
<PAGE>
applicable federal securities law, the Code, or rules of NASDAQ or any stock
exchange on which the Company's stock is listed. If options intended to be
incentive options are issued under the Option Plan and stockholder approval is
not obtained, such options will be treated as nonqualified options.
Shares reserved for issuance under an option that is cancelled or
terminated, and shares that are used in payment of option exercise prices,
will be restored and made available for reissuance of additional options under
the Option Plan. The Option Plan permits reload options. With the reload
option feature, if an option holder pays an option exercise price or option
withholding tax obligation by assignment and delivery of Company shares that
have been owned for more than six months, the option holder automatically will
be issued a new nonqualified option for the number of shares so assigned, with
an exercise price equal to the fair market value on the date of such exercise
and a term equal to the then-remaining term of the underlying pre-existing
option with respect to which such exercise occurred. The existing options will
contain reload option features.
1996 DIRECTOR STOCK OPTION PLAN
On February 1, 1996, Lau Technologies granted nonqualified options to
acquire up to an aggregate of 81,650 shares of Common Stock in the Company to
the members of the Viisage Technology Division Advisory Board who now comprise
the Company's Board of Directors. These options have an exercise price of
$2.96 per share. These options were ratified by the Board of Directors of the
Company following its incorporation and comprise the 1996 Director Stock
Option Plan (the "Director Plan"). The Director Plan expires on December 31,
1998 (unless terminated earlier in accordance with its terms) and will be
administered by the Board of Directors. The options to purchase 16,330 shares
granted to each Director will vest as follows: upon issuance, 1,420 shares,
and upon each of the first, second and third anniversaries of issuance, 4,970
shares. Vesting ceases when an option holder ceases to serve on the Company's
Board of Directors.
Any additional options issued under the Director Plan after this offering
will have an exercise price equal to the current fair market value of shares
of Common Stock on the date of option issuance.
Shares reserved for issuance under an option that is cancelled or
terminated, and shares that are used in payment of option exercise prices,
will be restored and made available for reissuance of additional options under
the Director Plan. The Director Plan does not permit reload options.
401(K) PLAN
The Company will be a participating employer with respect to Lau's existing
401(k) Plan (the "401(k) Plan"), thereby covering the Company's employees who
are at least 21 and who have worked at least three months for the Company or
its predecessor division of Lau. Pursuant to the 401(k) Plan, employees may
elect to reduce their current compensation by the lesser of up to 15% of base
compensation or the statutorily prescribed annual limit ($9,500 in 1996) and
to have the amount of such deduction contributed to the 401(k) plan. The
401(k) Plan permits, but does not require, additional matching and profit
sharing contributions to the 401(k) Plan by the Company on behalf of all
participants in the 401(k) Plan. The 401(k) Plan is intended to qualify under
Section 401(k) of the Code so that deferrals to the 401(k) Plan by employees
or contributions by the Company, and the investment earnings thereon, are not
taxable to employees until withdrawn from the 401(k) Plan and so that
contributions by the Company, if any, will be deductible by the Company when
made. The Company's allocation of costs for all periods was not material.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has heretofore been operated as a division of Lau Technologies.
Accordingly, during the fiscal year ended December 31, 1995, Lau's Board of
Directors (none of whom serve as directors, officers or employees of Viisage)
determined executive officer compensation. Joanna T. Lau, who is a member of
Lau's Board of Directors, is married to the Company's Chairman, Denis K.
Berube. The Company's Board of Directors has established a Compensation
Committee to determine and monitor executive compensation going forward. The
Compensation Committee consists of Ms. Mouchly-Weiss and Messrs. Nessen and
Reilly, none of whom are officers or employees of the Company and none of whom
are directors, officers or employees of Lau.
44
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the date of this Prospectus (i)
assuming the completion of the transactions contemplated in the Asset Transfer
Agreement between the Company and Lau (see "Relationship and Certain
Transactions with Lau Technologies") and (ii) as adjusted to reflect the sale
of 2,000,000 shares by the Company and 500,000 shares by Lau pursuant to this
offering, by (a) each stockholder known by the Company to be the beneficial
owner of more than 5% of the outstanding Common Stock, (b) each director of
the Company, (c) each of the executive officers, (d) all directors and
executive officers as a group, and (e) Lau Technologies. Except as otherwise
indicated, the Company believes that the beneficial owners of the Common Stock
listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable. Shares not outstanding but deemed beneficially
owned by virtue of the right of a person or group to acquire them within 60
days of the date of this Prospectus are treated as outstanding only for
purposes of determining the amount and percent owned by such person or group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING OWNED AFTER OFFERING
-------------------------------- --------------------------
NUMBER OF
SHARES
BEING
NAME AND ADDRESS(1) NUMBER PERCENT OFFERED NUMBER PERCENT
------------------- ------------- --------------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Joanna T. Lau........... 5,681,420(2) 100.0% -- 5,181,420(2) 67.5%
c/o Lau Technologies
531 Main Street
Acton, MA 01720
Denis K. Berube......... 5,681,420(3) 100.0% -- 5,181,420(3) 67.5%
Lau Technologies........ 5,680,000(4)(5) 100.0% 500,000 5,180,000(5) 67.4%
531 Main Street
Acton, MA 01720
Robert C. Hughes........ 71,000(6) 1.2% -- 71,000(6) *
William A. Marshall..... 71,000(6) 1.2% -- 71,000(6) *
Yona Wieder............. 71,000(6) 1.2% -- 71,000(6) *
Robert J. Schmitt, Jr... 35,500(6) * -- 35,500(6) *
Charles J. Johnson...... 1,420(6) * -- 1,420(6) *
Harriet Mouchly-Weiss... 1,420(6) * -- 1,420(6) *
Peter Nessen............ 1,420(6) * -- 1,420(6) *
Thomas J. Reilly........ 1,420(6) * -- 1,420(6) *
All directors and
executive officers as a
group
(9 persons)............ 5,935,600(7) 100.0% -- 5,435,600(7) 68.5%
</TABLE>
- -------
* Less than one percent.
(1) The address of all persons who are directors or executive officers of the
Company is in care of the Company, 531 Main Street, Acton, Massachusetts
01720.
(2) Consists of the shares held by Lau Technologies, of which Ms. Lau owns
approximately 56.0% of the outstanding capital stock, and 1,420 shares
issuable to Denis K. Berube, the spouse of Ms. Lau, pursuant to stock
options exercisable immediately upon the issuance of the shares of Common
Stock being offered hereby. Ms. Lau disclaims beneficial ownership of
those 1,420 shares.
(3) Consists of the shares held by Lau Technologies, of which Mr. Berube's
spouse owns approximately 56.0% of the outstanding capital stock, and
1,420 shares issuable to Mr. Berube pursuant to stock options exercisable
immediately upon the issuance of the shares of Common Stock being offered
hereby. Mr. Berube disclaims beneficial ownership of the shares of Common
Stock held by Lau Technologies.
(4) Represents shares of Common Stock issuable by the Company upon the
completion of the transactions contemplated in the Asset Transfer
Agreement between Lau and the Company, to occur on the effective date of
the registration statement relating to this offering. See "Relationship
and Certain Transactions with Lau Technologies."
(5) Includes shares of Common Stock of the Company held or to be held by Lau
which are subject to certain option rights granted by Lau to the lenders
under its revolving credit facility. See "Shares Eligible for Future
Sale."
(6) Represents shares of Common Stock issuable pursuant to stock options
exercisable immediately upon the issuance of the shares of Common Stock
being offered hereby. The total number of shares issuable under options
granted to Messrs. Hughes, Marshall, Wieder, Schmitt, each director and
all directors and executive officers as a group are 639,000, 213,000,
284,000, 177,500, 16,330 and 1,395,150, respectively.
(7) Represents shares described in Notes 3 and 6.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, $.001 par value per share, and 2,000,000 shares of Preferred
Stock, $.001 par value per share.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Subject to the rights of holders of
outstanding Preferred Stock, if any, the holders of Common Stock are entitled
to receive such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefor. In the event of a
liquidation, dissolution, or winding up of the Company, holders of Common
Stock have the right to a ratable portion of the assets remaining after
payment of liabilities. Holders of Common Stock do not have cumulative voting,
preemptive, redemption, or conversion rights. All outstanding shares of Common
Stock are, and the shares to be sold in this offering will be, fully paid and
non-assessable.
PREFERRED STOCK
The Company's Certificate of Incorporation provides, among other things, for
the authorization of 2,000,000 shares of Preferred Stock, $.001 par value per
share (the "Preferred Stock"). The Board of Directors has the authority,
without further stockholder approval, to issue these shares of Preferred Stock
in one or more series from time to time, and to fix the designations, relative
rights, priorities, preferences, qualifications, limitations and restrictions
thereof. The Company has no immediate plans to issue any Preferred Stock.
While issuance of Preferred Stock could provide needed flexibility in
connection with possible acquisitions and other corporate purposes, such
issuance could also make it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company or discourage an
attempt to gain control of the Company. In addition, the Board of Directors,
without stockholder approval, can issue shares of Preferred Stock with voting
and conversion rights which could adversely affect the voting power and other
rights of the holders of Common Stock. See "--Anti-Takeover Effects of
Provisions of the Company's Charter And By-Laws."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's By-laws provide that the Company, subject to limited
exceptions, will indemnify its directors and officers and may indemnify its
other employees and other agents to the fullest extent permitted by Delaware
law.
In addition, the Company's Certificate of Incorporation provides that, to
the fullest extent permitted by Delaware law, the Company's directors will not
be liable for monetary damages for breach of the directors' fiduciary duty of
care to the Company and its stockholders. The provision in the Certificate of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other forms of non-
monetary relief would remain available under Delaware law. Each director will
continue to be subject to liability for breach of the director's duty of
loyalty to the Company, for acts or omissions not in good faith or involving
intentional misconduct or knowing violations of law, for acts or omissions
that the director believes to be contrary to the best interests of the Company
or its stockholders, for any transaction from which the director derived an
improper personal benefit, for acts or omissions involving a reckless
disregard for the director's duty to the Company or its stockholders when the
director was aware or should have been aware of a risk of serious injury to
the Company or its stockholders, for acts or omissions that constitute an
unexcused pattern of inattention that amounts to be abdication of the
director's duty to the Company or its stockholders, for improper transactions
between the director and the Company and for improper distributions to
stockholders and loans to directors and officers. This provision also does not
affect a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
46
<PAGE>
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE COMPANY'S CHARTER AND BY-LAWS
The Company's Certificate of Incorporation and By-Laws contain several
features that could render it more difficult for a third party to acquire a
controlling interest in Viisage. As discussed above, the Certificate of
Incorporation grants the Board of Directors authority, without stockholder
approval, to issue in one or more series up to 2,000,000 shares of Preferred
Stock. Each series will have the number of shares, designations, preferences,
voting powers, relative rights or privileges that the Board determines, and
the rights of holders of Common Stock will be subject to the rights of holders
of any Preferred Stock issued. Although the issuance of Preferred Stock may
provide the Company flexibility in connection with possible acquisitions and
other purposes, it could also have the effect of making it more difficult for
a third party to acquire a controlling interest in the Company.
The Certificate of Incorporation provides for the division of the Board of
Directors into three classes with staggered three-year terms. See
"Management." Directors may be removed only for cause by the affirmative vote
of the holders of two-thirds of the shares of the Company's voting stock. Any
vacancy on the Board, including a vacancy resulting from an enlargement of the
Board, may only be filled by vote of a majority of the directors then in
office. The classification of the Board and the limitations on the removal of
directors and filling of vacancies make it more difficult for a third party to
acquire control of the Company.
The Certificate of Incorporation also provides that any action required or
permitted to be taken by the stockholders of the Company may only be taken if
it is "properly brought" before an annual or special stockholders' meeting and
may not be taken by written consent in lieu of a meeting unless the action and
taking of action by consent have expressly been approved in advance by the
Board. The Certificate further provides that special meetings of the
stockholders may only be called by the Board, the Chairman of the Board or the
Chief Executive Officer. Under the Company's By-Laws, in order for any matter
to be considered "properly brought" before a meeting, a stockholder must
comply with rigorous requirements regarding advance notice to the Company.
These corporate governance provisions could delay consideration of actions
which may be popular with stockholders until the next stockholders meeting,
unless the Board determines to override the action-by-consent prohibition.
These provisions may also discourage tender offers for the Company's Common
Stock, including tender offers at a price above the then-current market value
of the Common Stock, because an offeror, even if it acquired a majority of the
voting securities, would be able to take action as a stockholder (such as
electing new directors or approving a merger) only at a duly called
stockholders meeting.
Finally, the Company's Certificate and By-Laws require the affirmative vote
of the holders of at least two-thirds of the voting stock to amend or repeal
any of the protective governance provisions described above. See "Risk
Factors--Potential Adverse Impact of Antitakeover Provisions on Market Price
of Shares."
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. That section provides, with certain exceptions, that
a Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate, or associate of such person, who is
an "interested stockholder" for a period of three years from the date that
such person became an interested stockholder unless: (i) the transaction
resulting in a person becoming an interested stockholder, or the business
combination, is approved by the board of directors of the corporation before
the person becomes an interested stockholder; (ii) the interested stockholder
acquires 85% or more of the outstanding voting stock of the corporation in the
same transaction that makes it an interested stockholder (excluding shares
owned by persons who are both officers and directors of the corporation, and
shares held by certain employee stock ownership plans); or (iii) on or after
the date the person becomes an interested stockholder, the business
combination is approved by the corporations board of directors and by the
holders of at least 66 2/3% of the corporation's outstanding voting stock at
an annual or special meeting, excluding shares owned by the interested
stockholder. An "interested stockholder" is defined as any person that is (i)
the owner of 15% or more of the outstanding voting stock of the corporation or
(ii) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
47
<PAGE>
TRANSFER AGENT AND REGISTRAR
The Company has appointed Boston EquiServe Limited Partnership, an affiliate
of BankBoston, as transfer agent and registrar of the Common Stock.
NASDAQ NATIONAL MARKET LISTING
The Company anticipates that the shares of Common Stock will be listed on the
Nasdaq National Market under the symbol "VISG" upon notice of issuance.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 7,680,000 shares of
Common Stock outstanding. Of these 7,680,000 shares, the 2,500,000 shares to
be sold in this offering will be freely tradable in the public market without
restriction under the Securities Act, unless they are purchased by an
"affiliate" of the Company, as that term is defined in Rule 144 promulgated
under the Securities Act.
SALES OF RESTRICTED SHARES
The remaining 5,180,000 shares, all of which will be held by Lau, are
"restricted securities" as defined by Rules 144 or 701 (the "Restricted
Shares"). Restricted securities may be sold in the public market only if they
are registered under the Securities Act or if they qualify for an exemption
from registration under Rules 144, 144(k) or 701 under the Securities Act. In
addition, all Restricted Shares are "locked up," or subject to the lock-up
agreements described below. Subject to Rules 144, 144(k) and 701 and to the
lock-up agreements, 5,180,000 shares will be eligible for sale upon expiration
of their respective two-year holding periods, subject to the restrictions and
conditions of Rule 144, such holding periods to expire on or around the second
anniversary of the date of this Prospectus.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), who has beneficially owned restricted securities
for at least two years is entitled to sell, within any three-month period, a
number of such securities that does not exceed the greater of 1% of the then
outstanding shares of the Common Stock (approximately 76,800 shares, based on
the number of shares to be outstanding after this offering) or the average
weekly trading volume in the public market during the four calendar weeks
preceding the filing of the seller's Form 144, provided certain requirements
concerning availability of public information concerning the Company, manner
of sale and notice of sale are satisfied. A person who is not an affiliate,
has not been an affiliate within three months prior to the sale and has
beneficially owned the restricted securities for at least three years is
entitled to sell such shares under Rule 144(k) without regard to any of the
limitations described above. Rule 144 also provides that affiliates who are
selling shares that are not restricted securities must nonetheless comply with
the same restrictions applicable to restricted securities with the exception
of the holding period requirement. The two- and three-year holding periods
described above do not begin to run until the full purchase price or other
consideration is paid by the person acquiring the restricted securities from
the issuer or an affiliate of the issuer and may include the holding period of
a prior owner who is not an affiliate of the issuer. The Commission has
proposed certain amendments to Rule 144 that would reduce by one year the
holding periods required for shares subject to Rule 144 to become eligible for
resale in the public market.
Securities issued in reliance on Rule 701 (such as shares of Common Stock
issued before the closing of this offering upon the exercise of options
granted under the Option Plan or the Director Plan, if any) are also
Restricted Shares and, beginning approximately 90 days after the date of this
Prospectus, may be resold by persons other than affiliates of the Company
subject only to the manner of sale provisions of Rule 144 and may be resold by
affiliates under Rule 144 without compliance with its two-year holding period
requirement. Outstanding options to purchase 255,600 shares of Common Stock
were fully vested as of October 8, 1996, all of which are subject to 180-day
lock-up agreements.
The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register all shares of Common Stock issued or
issuable under the Option Plan and the Director Plan. See "Management--
Incentive and Stock Plans." The registration statements are expected to be
filed as soon as practicable after the date of this Prospectus and will become
effective immediately upon filing. Shares covered by the registration
statements will be eligible for resale in the public market after the
effective date of the registration statements, subject to the lock-up
agreements described below.
49
<PAGE>
Prior to this offering there has been no public market for the Common Stock
of the Company and no prediction can be made as to the effect, if any, that
market sales or the availability for sale of such shares will have on the
market price of the Common Stock prevailing from time to time. Nevertheless,
sales of substantial numbers of shares in the public market could adversely
affect the market price of the Common Stock and could impair the Company's
ability to raise capital through a sale of its equity securities. See "Risk
Factors--No Prior Trading Market; Potential Volatility of Stock Price."
LOCK-UP AGREEMENTS
The executive officers and directors of the Company and the Selling
Stockholder, who upon the closing of this offering will beneficially own an
aggregate of 255,600 fully vested options to purchase shares of Common Stock
and 5,180,000 shares of Common Stock, respectively, have agreed that they will
not, without the prior written consent of Cowen & Company, sell, offer,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable for any shares of Common Stock for
a period of 180 days after the date of this Prospectus.
REGISTRATION RIGHTS
In fulfillment of a requirement in its revolving credit facility agreement,
Lau has issued to affiliates of its lender and a participating lender two
options to acquire an aggregate of 71,000 of the 5,180,000 shares of Common
Stock of the Company to be held by Lau following this offering. These options
have an exercise price equal to 95% of the initial public offering price
(after deduction of underwriting commissions and discounts), and are
exercisable only if the principal outstanding under Lau's revolving credit
facility has reached or exceeded $12.0 million prior to the issuance of the
Common Stock offered hereby. Lau has also issued to the same parties two
options to acquire an aggregate of 49,700 shares of the Company's Common Stock
to be held by Lau, with an exercise price equal to 95% of the offering price
to the public (after deduction of underwriting commissions and discounts)
contained in the registration statement for the Company's second underwritten
public offering, if any. These options are only exercisable if the principal
outstanding under Lau's facility has reached or exceeded $12.0 million at the
time of any such offering. In addition, Lau has granted the holders of such
options certain registration rights which apply under certain circumstances in
the event any of such options have become eligible for exercise and have been
exercised. First, if the Company has qualified to register securities on Form
S-3 under the Securities Act, holders of more than 50% of the shares under
each of the two lenders' sets of options may request, on one occasion, that
the Company file a registration statement on such form for a public offering
of all or a portion of such shares. Second, the holders of such option shares
have incidental ("piggyback") registration rights with respect to
registrations of the Company's securities, pursuant to which holders may
request that all or any portion of their option shares be included in a
registration statement (other than a registration statement on Form S-4 or S-8
or certain other forms) being filed by the Company for its own account or
otherwise. Lau will pay certain expenses incurred by the Company and the
holders of option shares in exercising the foregoing registration rights. The
lenders' options and attendant registration rights have terms of five years
following the expiration of the lock-up period after the public offering on
which such options' exercise price is based.
50
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholder have agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Cowen &
Company and Needham & Company, Inc. are acting as Representatives (the
"Representatives"), has severally agreed to purchase from the Company and the
Selling Stockholder, the respective number of shares of Common Stock set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Cowen & Company.................................................
Needham & Company, Inc..........................................
---------
Total......................................................... 2,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
closing certificates, opinions and letters from the Company and its counsel
and independent auditors. The nature of the Underwriters' obligations is such
that they are committed to purchase all of the shares of Common Stock being
offered hereby (other than those covered by the over-allotment option
described below) if any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters may allow,
and such dealers may re-allow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time
to time be varied by the Representatives.
The Company has granted the Underwriters an option exercisable for up to 30
days after the date of this Prospectus to purchase up to an aggregate of
375,000 additional shares of Common Stock to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them as shown in the foregoing table bears to the 2,500,000 shares of Common
Stock offered hereby. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the Common Stock offered
hereby.
The Company and the Selling Stockholder have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act and to contribute to payments the Underwriters may be required
to make in respect thereof.
51
<PAGE>
The Company, the Company's executive officers and directors, the Selling
Stockholder and all option holders of the Company have agreed that they will
not, without the prior written consent of Cowen & Company, sell, offer,
contract to sell, or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable for any shares of Common Stock for
a period of 180 days after the date of this Prospectus. See "Shares Eligible
for Future Sale--Lock-up Agreements."
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters do not intend to confirm sales of the shares offered
hereby to any account over which they exercise discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined by
negotiation among the Company, the Selling Stockholder and the
Representatives. Among the factors to be considered in such negotiations are
the prevailing market conditions, the market prices of securities of publicly
traded companies engaged in activities similar to those of the Company, the
Company's financial and operating history and condition, estimates of the
business potential of the Company, the present state of the Company's
development, and other factors deemed relevant. The estimated initial public
offering range set forth on the cover hereof is subject to change as a result
of market conditions and other factors.
LEGAL MATTERS
Certain legal matters in connection with the shares being offered hereby
will be passed upon for the Company by Finnegan, Hickey, Dinsmoor & Johnson,
P.C., Boston, Massachusetts. Charles J. Johnson, who is a Director of the
Company, is a member of the firm of Finnegan, Hickey, Dinsmoor & Johnson, P.C.
Effective upon the issuance and sale of the shares being offered hereby, Mr.
Johnson will hold options to purchase 16,330 shares of Common Stock of the
Company at $2.96 per share, of which options to purchase 1,420 shares shall be
immediately exercisable. See "Management." Certain legal matters in connection
with this offering will be passed upon for the Underwriters by Testa, Hurwitz
& Thibeault, llp, Boston, Massachusetts.
EXPERTS
The financial statements and schedules included in this Prospectus and
elsewhere in the Registration Statement, to the extent and for the periods
indicated in their reports, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement under the
Securities Act with respect to the shares of Common Stock offered hereby (the
"Registration Statement"). This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement and in the schedules and exhibits thereto. For
further information about the Company and the securities offered hereby,
reference is hereby made to the Registration Statement and to the exhibits and
schedules thereto, which may be inspected without charge at the principal
office of the Commission in Washington, D.C. and copies of all or any part of
which may be obtained from the Commission upon payment of the prescribed fees.
Statements made in this Prospectus as to the contents of any contract or other
document are not necessarily complete and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
52
<PAGE>
After consummation of this offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934 and, in
accordance therewith, will file reports, proxy and information statements, and
other information with the Commission. Such reports, proxy and information
statements and other information, and the Registration Statement and exhibits
and schedules thereto filed by the Company with the Commission can be
inspected and copied at the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the Commission located at 7 World Trade Center, Suite
1300, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can be obtained from the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition,
the Company is required to file electronic versions of these documents with
the Commission through the Commission's Electronic Data Gathering, Analysis
and Retrieval (EDGAR) system. The Commission maintains a World Wide Web site
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission.
The Company intends to furnish its stockholders annual reports containing
financial statements audited by independent public accountants. In addition,
the Company intends to furnish stockholders quarterly reports containing
unaudited financial information for each of the first three quarters of each
fiscal year.
53
<PAGE>
VIISAGE TECHNOLOGY, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Balance Sheets as of December 31, 1994 and 1995, June 30, 1996 and Pro
Forma as of June 30, 1996................................................ F-3
Statements of Operations and Net Assets for Each of the Three Years Ended
December 31, 1995 and for the Six Months Ended July 2, 1995 and June 30,
1996..................................................................... F-4
Statements of Cash Flows for Each of the Three Years Ended December 31,
1995 and for the Six Months Ended July 2, 1995 and June 30, 1996......... F-5
Notes to Financial Statements............................................. F-6
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Viisage Technology, Inc.:
We have audited the accompanying balance sheets of Viisage Technology, Inc.
(a Delaware corporation and a majority-owned subsidiary of Lau Acquisition
Corp.) as of June 30, 1996, December 31, 1995 and 1994, and the related
statements of operations and net assets and cash flows for the six-month
period ended June 30, 1996 and for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Viisage Technology, Inc.
as of June 30, 1996, December 31, 1995 and 1994, and the results of its
operations and its cash flows for the six-month period ended June 30, 1996 and
for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Boston, Massachusetts ARTHUR ANDERSEN LLP
August 13, 1996(except for
Notes 1 and 10 for which the date is
November 6, 1996)
F-2
<PAGE>
VIISAGE TECHNOLOGY, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
-------------- JUNE 30, JUNE 30,
1994 1995 1996 1996
------ ------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Accounts receivable...................... $ -- $ 378 $ 2,321 $ 2,321
Costs and estimated earnings in excess of
billings................................ 3,999 8,678 10,606 10,606
Other current assets..................... -- -- 4 4
------ ------- ------- -------
Total current assets................... 3,999 9,056 12,931 12,931
Property and equipment, net (Note 4)....... -- 2,229 2,028 2,028
------ ------- ------- -------
$3,999 $11,285 $14,959 $14,959
====== ======= ======= =======
LIABILITIES AND NET ASSETS
Current liabilities:
Accounts payable and accrued expenses
(Note 5)................................ $1,178 $ 1,153 $ 3,342 $ 3,342
Current maturities of long-term debt..... 312 -- -- --
Obligations under capital leases (Note
7)...................................... -- 490 512 512
------ ------- ------- -------
Total current liabilities.............. 1,490 1,643 3,854 3,854
Long-term debt (Note 6).................... 955 6,656 8,809 8,809
Obligations under capital leases (Note 7).. -- 1,663 1,394 1,394
Deferred income taxes...................... -- -- -- 100
------ ------- ------- -------
2,445 9,962 14,057 14,157
Commitments and contingencies (Note 7)
Net assets (Note 9)........................ 1,554 1,323 902 802
------ ------- ------- -------
$3,999 $11,285 $14,959 $14,959
====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
VIISAGE TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS AND NET ASSETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------- --------------------
JULY 2, JUNE 30,
1993 1994 1995 1995 1996
------- ------- ------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues....................... $ 505 $ 1,257 $11,221 $ 5,395 $11,870
Project costs.................. 456 1,140 10,361 4,972 9,653
------- ------- ------- ------- -------
Project margin................. 49 117 860 423 2,217
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.......... 1,185 1,596 999 431 735
Research and development..... 47 201 1,089 597 128
General and administrative... 289 681 1,204 513 890
------- ------- ------- ------- -------
Total operating expenses .. 1,521 2,478 3,292 1,541 1,753
------- ------- ------- ------- -------
Operating income (loss)........ (1,472) (2,361) (2,432) (1,118) 464
Interest expense............... -- 40 515 133 387
------- ------- ------- ------- -------
Income (loss) before income
taxes......................... (1,472) (2,401) (2,947) (1,251) 77
Income taxes (Note 2).......... -- -- -- -- 3
------- ------- ------- ------- -------
Net income (loss).............. $(1,472) $(2,401) $(2,947) $(1,251) $ 74
======= ======= ======= ======= =======
Net income (loss) per share
(Note 2)...................... $ (0.24) $ (0.39) $ (0.47) $ (0.20) $ 0.01
======= ======= ======= ======= =======
Weighted average number of com-
mon shares
(Note 2)...................... 6,225 6,225 6,225 6,225 6,225
======= ======= ======= ======= =======
Net assets, beginning of
period........................ $ -- $ 368 $ 1,554 $ 1,554 $ 1,323
Net income (loss).............. (1,472) (2,401) (2,947) (1,251) 74
Stock compensation expense..... -- -- -- -- 92
Net transactions with parent... 1,840 3,587 2,716 3,019 (587)
------- ------- ------- ------- -------
Net assets, end of period...... $ 368 $ 1,554 $ 1,323 $ 3,322 $ 902
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
VIISAGE TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------- --------------------
JULY 2, JUNE 30,
1993 1994 1995 1995 1996
------- ------- ------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)............. $(1,472) $(2,401) $(2,947) $(1,251) $ 74
Adjustments to reconcile net
income (loss) to net cash
provided (used) by operating
activities:
Depreciation and
amortization............... -- -- 88 10 228
Stock compensation expense.. -- -- -- -- 92
Changes in operating assets
and liabilities:
Accounts receivable........ (1,115) 1,115 (378) (1,007) (1,943)
Costs and estimated
earnings in excess of
billings.................. -- (4,244) (4,679) (7,312) (1,928)
Other current assets....... (44) 44 -- (12) (4)
Accounts payable and
accrued expenses.......... 791 632 (25) 395 2,189
------- ------- ------- ------- -------
Net cash (used) by
operating activities..... (1,840) (4,854) (7,941) (9,177) (1,292)
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of contract equipment
converted to capital leases.. -- -- (2,216) -- --
Additions to property and
equipment.................... -- -- (101) (71) (27)
------- ------- ------- ------- -------
Net cash (used) by
investing activities..... -- -- (2,317) (71) (27)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net revolving credit
borrowings................... -- 46 6,610 6,360 2,153
Proceeds from long-term
borrowings................... -- 1,580 1,862 -- --
Proceeds from sale/leaseback
of equipment................. -- -- 2,216 -- --
Principal payments on long-
term borrowings.............. -- (359) (3,083) (131) --
Principal payments on
obligations under capital
leases....................... -- -- (63) -- (247)
Net transactions with parent.. 1,840 3,587 2,716 3,019 (587)
------- ------- ------- ------- -------
Net cash provided by
financing activities..... 1,840 4,854 10,258 9,248 1,319
------- ------- ------- ------- -------
Increase (decrease) in cash
and cash equivalents......... -- -- -- -- --
Cash and cash equivalents,
beginning of period.......... -- -- -- -- --
------- ------- ------- ------- -------
Cash and cash equivalents, end
of period.................... $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid during the period
for interest................. $ -- $ 34 $ 465 $ 99 $ 387
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
VIISAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND BUSINESS
Viisage Technology, Inc. (Viisage or the Company) was incorporated in
Delaware on May 23, 1996 as part of a planned reorganization of Lau
Acquisition Corp. (Lau Technologies). The ultimate establishment of the
Company as a separate and independent corporation will involve a series of
transactions, including the initial public offering of the Company's Common
Stock.
On the effective date of the registration statement relating to the initial
public offering, Lau Technologies will transfer substantially all of the
assets, liabilities and operations of its Viisage Technology Division to the
Company in exchange for all of the outstanding capital stock of the Company.
After the closing of such offering, the Company will be an approximately 67%
owned subsidiary of Lau Technologies. These reorganization transactions are
between entities under common control and will be accounted for using
historical amounts in a manner similar to a pooling of interests. The
financial statements for all periods presented reflect the financial position,
results of operations and cash flows of the Viisage Technology Division
business that will comprise the Company. All changes in the Company's equity
prior to the reorganization are reflected in net assets which represent the
net investment of Lau Technologies in the Company.
The statements of operations for all periods presented reflect allocations
for the costs of shared facilities and certain administrative services. Such
costs and expenses have been allocated to the Company based on actual usage or
other methods that approximate actual usage. Management believes that the
allocation methods are reasonable and that allocated costs and expenses
approximate what such amounts would be if the Company had operated on a stand-
alone basis. As discussed more fully in Note 3, the Company has entered into
agreements with Lau Technologies covering certain facilities, equipment and
administrative services after the reorganization. Although the Company has not
filed separate income tax returns for periods prior to the reorganization,
income taxes presented in the financial statements are computed on a separate
return basis taking into consideration the tax-sharing arrangement with Lau
Technologies described in Note 2.
The financial information included herein may not necessarily reflect the
financial position, results of operations and cash flows of the Company in the
future or what the financial position, results of operations and cash flows
would have been had it been a separate, stand-alone company throughout the
periods covered.
The Company designs, sells and implements turnkey digital identification
systems intended to deter fraud and to reduce customers' identification
program costs. These systems capture facial images, demographic information
and other biological identifiers, produce identification cards and create
relational databases containing this information. Using its design and systems
integration capabilities, the Company is able to combine its proprietary
software and hardware products with commercially available components and
customers' existing systems, creating a complete customized solution. In
addition, the Company is developing proprietary facial recognition software
designed to identify individuals in a large database of faces on a real-time
basis.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-6
<PAGE>
VIISAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Contract Revenue and Cost Recognition
The Company provides services principally under contracts that provide for a
fixed price for the system and/or for each card produced. Revenue is
recognized using the percentage of completion method based on labor costs
incurred and/or cards produced. Contract losses, if any, are recognized in the
period in which they become determinable. Costs and estimated earnings in
excess of billings are recorded as a current asset. Billings in excess of
costs and estimated earnings and accrued contract costs are recorded as
current liabilities. Generally, contracts provide for billing when contract
milestones are met and/or cards are produced. Costs and estimated earnings in
excess of billings includes approximately $1.8 million expected to be billed
and collected after June 30, 1997 and approximately $3.1 million for which
payment terms and pricing are related to a subcontract that is currently
subject to negotiations. The subcontract is with a prime contractor that is
currently engaged in negotiations with its customer regarding an increase in
the contract amount for modifications requested by the customer, revised
payment terms and timing of performance. The final amount and payment terms of
the Company's subcontract will be based on the outcome of the prime
contractor's negotiations. Management believes that the prime contractor has
reached an understanding with the customer as to a substantial portion of the
contract modifications related to work performed and to be performed by the
Company. For the six months ended June 30, 1996 and for 1995, the Company
recorded approximately $4.4 million and $0.6 million of revenues and $1.2
million and $0.2 million of project margin, respectively, of which $1.9
million has been collected. These amounts are based in part on management's
best estimate of the final outcome of the negotiations and management believes
the amounts recorded are fully recoverable. However, actual results and/ or
timing of performance could differ based on the outcome of the aforementioned
negotiations.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable and payable and short- and long-term
borrowings, approximate fair values.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents.
Accounts Receivable
Accounts receivable are due principally from government agencies and
contractors to government agencies. Management periodically reviews accounts
receivable for possible uncollectible amounts. In the event management
determines a specific need for an allowance, a provision for doubtful accounts
is provided. Based on management's review, no allowance for doubtful accounts
has been recorded for the periods presented.
All of the Company's revenues related to one customer in 1993 and 1994. For
1995 and the six months ended June 30, 1996, three customers and four
customers, respectively, each accounted for more than 10% of revenues
individually, and approximately 85% and 81%, in the aggregate of the Company's
revenues, respectively.
At June 30, 1996, 77% of accounts receivable and costs and estimated
earnings in excess of billings related to four customers.
Property and Equipment
Property and equipment are recorded at cost or the lesser of fair value or
the present value of minimum lease payments for items acquired under capital
leases. Depreciation and amortization are calculated using the
F-7
<PAGE>
VIISAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
straight-line or usage-based methods over the estimated useful lives of the
related assets that approximate 5 years or the lease term, whichever is
shorter.
Research and Development
Research and development costs are charged to expense as incurred.
Software Development
The Company reviews software development costs incurred in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 86
which requires that certain costs incurred in the development of computer
software to be sold or leased be capitalized once technological feasibility is
reached. The Company has not capitalized any software development costs
because development costs incurred subsequent to the establishment of
technological feasibility have not been material.
Costs related to internally developed software are expensed as incurred.
Externally purchased software costs are capitalized and depreciated over their
remaining useful lives not to exceed three years.
Income Taxes
The Company's operations prior to the reorganization discussed in Note 1,
were included in the income tax returns of Lau Technologies, an S corporation.
Income tax allocations for such periods have been calculated as if the Company
were filing separate income tax returns taking into consideration that
operating losses and tax credits have been utilized by the shareholders of Lau
Technologies.
After the reorganization the Company will file its own separate tax returns.
Any tax liability or refund that may arise relating to periods when the
Company was a division of Lau Technologies is covered by a tax indemnification
arrangement contained in the Asset Transfer Agreement executed in connection
with the reorganization. The indemnification provides for Lau Technologies to
pay or receive reimbursement from the Company for any tax adjustment relating
to the Viisage Technology Division for all periods prior to the effective date
of the reorganization if such adjustments will result in tax expense or tax
benefit, as the case may be, to the Company.
The Company accounts for income taxes under SFAS No. 109. Deferred tax
assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred income tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. As more fully discussed in the pro forma
financial information section, the Company will record a deferred tax
liability and corresponding expense when it becomes a separate entity.
Net Income (Loss) Per Share
Net income (loss) per share is computed based on the weighted average number
of 6,225,000 common and common equivalent shares outstanding during the
period. This number is comprised of 5,680,000 shares of common stock issued in
connection with the reorganization discussed in Note 1 and 545,000 shares
related to common equivalents discussed in Note 9.
Pursuant to certain requirements of the Securities and Exchange Commission,
common and common equivalent shares issued during the 12 months prior to the
initial public offering date (using the treasury stock method and an assumed
initial public offering price of $10.00 per share) have been included in the
calculation of weighted average shares for all periods presented.
F-8
<PAGE>
VIISAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Interim Financial Information
In the opinion of management, the unaudited interim financial statements for
the six months ended July 2, 1995 include all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim period
presented.
The Company's results of operations are significantly affected by, among
other things, the timing of award and performance on contracts. As a result,
the Company's revenue and income may fluctuate from quarter to quarter and
comparisons over longer periods of time may be more meaningful. The results of
operations for the period ended June 30, 1996 are not necessarily indicative
of the operating results to be expected for the full year.
Long-Lived Assets
In 1995, the Financial Accounting Standards Board adopted SFAS No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets To Be
Disposed Of, which is effective for 1996. Adoption of SFAS No. 121 did not
have a material impact on the Company's financial position or results of
operations.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. In
October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation, which is effective for 1996. SFAS No.
123 establishes a fair value based method of accounting for stock-based
compensation plans. The Company has adopted the disclosure only alternative
under SFAS No. 123, which requires disclosure of the pro forma effects on
earnings and earnings per share as if SFAS No. 123 had been adopted as well as
certain other information. See Note 9 for required disclosures.
Pro Forma Financial Information (Unaudited)
The pro forma balance sheet of the Company as of June 30, 1996 reflects the
estimated net deferred income tax liability that will be recorded by the
Company as a result of the reorganization discussed in Note 1. The deferred
income tax liability represents the tax effect of the cumulative differences
between the financial reporting and income tax bases of certain assets and
liabilities on the effective date of the reorganization. The actual deferred
income tax liability recorded will be adjusted to reflect the effect of the
Company's operations for the period from July 1, 1996 through the
reorganization date. The recording of the deferred income tax liability will
result in a corresponding income tax expense that will be recorded in the
statement of operations in the quarter in which the reorganization occurs.
The deferred income tax liability relates principally to differences in the
tax bases and financial statement carrying amounts of balance sheet amounts
related to contracts.
(3) OTHER RELATED PARTY TRANSACTIONS
In connection with the reorganization discussed in Note 1, the Company and
Lau Technologies will enter into an Administration and Services Agreement, a
Use and Occupancy Agreement and a License Agreement.
Under the Administration and Services Agreement, Lau Technologies provides
general accounting, data processing, payroll, human resources, employee
benefits administration and certain executive services to the Company. The
agreement requires the Company to pay a monthly fee based on the estimated
actual cost of such services and permits the Company to terminate selected
services upon 30 days written notice. The annual fee for services is
approximately $660,000 and will be revised if the level of services is
changed. The Company utilized the same allocation methods for prior periods.
Amounts for 1994 and 1995 reflect the use of additional services that were
provided by Company personnel in 1996.
The amounts for such services were approximately $280,000 in 1993, $710,000
in 1994, $1.1 million in 1995 and $540,000 and $330,000 for the six month
periods ended July 2, 1995 and June 30, 1996, respectively.
F-9
<PAGE>
VIISAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Use and Occupancy Agreement requires the Company to pay its
proportionate share of the cost of shared facilities and office services
including rent, insurance, property taxes, utilities and other operating
expenses, based on square footage or equipment utilized. The Agreement expires
on February 23, 1997 and may be terminated by the Company in whole or in part
upon 30 days written notice. The annual fee for facilities and services is
approximately $220,000. See Note 7 for lease information. After the initial
expiration of this Agreement, the Company will continue to share facilities
with Lau Technologies under a comparable arrangement or will utilize separate
facilities.
Company employees will also participate in various Lau Technologies employee
benefit plans following the reorganization. The Company will pay its
proportionate share of the costs of such plans based on the number of
participating employees.
Management believes the methods for allocating expenses and those costs
related to shared facilities and equipment are reasonable and approximate what
these costs would be on a stand-alone basis.
The License Agreement grants the Company an exclusive, worldwide, royalty-
free, paid-up, perpetual, irrevocable license to use proprietary technology
used by the Viisage Technology Division at the time of the reorganization and
improvements thereto. The license excludes the use of such technology for
federal access control as defined in the Agreement.
The Company purchases certain system components and technical personnel from
Lau Technologies. The amounts for such components and services were
approximately $282,000 in 1993, $1.4 million in 1994, $2.8 million in 1995 and
$2.0 million and $1.0 million for the six month periods ended July 2, 1995 and
June 30, 1996, respectively.
The Company has employment and noncompetition agreements with certain
officers. Such agreements provide for employment and related compensation for
initial terms of five years, renewal options for two years, and restrict the
individuals from competing, as defined, with the Company during the terms of
their respective agreements and for up to two years thereafter. The agreements
also provide for stock options under the Company's stock option plan and for
severance payments upon termination under circumstances defined in such
agreements.
(4) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
JUNE 30,
1994 1995 1996
----- ------ --------
<S> <C> <C> <C>
Assets held under capital leases...................... $ -- $2,216 $2,216
Computer equipment.................................... -- 101 128
----- ------ ------
-- 2,317 2,344
Less--Accumulated depreciation and amortization....... -- 88 316
----- ------ ------
$ -- $2,229 $2,028
===== ====== ======
</TABLE>
During 1995, the Company sold and leased back under capital leases
approximately $2.2 million of system equipment used to produce identification
cards for certain contracts.
F-10
<PAGE>
VIISAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
JUNE 30,
1994 1995 1996
------ ------ --------
<S> <C> <C> <C>
Accounts payable...................................... $1,079 $ 835 $1,338
Accrued contract costs................................ -- -- 1,543
Accrued payroll and related taxes..................... 72 108 202
Accrued vacation...................................... 21 136 202
Other accrued expenses................................ 6 74 57
------ ------ ------
$1,178 $1,153 $3,342
====== ====== ======
</TABLE>
(6) BANK BORROWINGS
Long-term debt consists of borrowings under a revolving line of credit
agreement between Lau Technologies and a commercial bank. Borrowings that
relate to the Company's operations will be assumed in connection with the
reorganization discussed in Note 1. Borrowings are unsecured and bear interest
(7.6% at June 30, 1996) at the bank's corporate rate, rates based on the
bank's cost of funds or LIBOR-based options. The arrangement provides for
borrowings of up to $15.0 million, permits the Company to enter into equipment
leases of up to $15.0 million and requires Lau Technologies to maintain
certain financial ratios and minimum tangible net worth. At June 30 1996, Lau
Technologies was in compliance with such covenants. The revolving line of
credit expires on June 30, 1998 and, accordingly, all amounts due have been
classified as long-term.
The Company is negotiating a revolving credit agreement to replace the
existing arrangement. The new agreement is expected to provide for unsecured
borrowings of up to $10.0 million at prime rate or other LIBOR-based options
and permit additional lease obligations. Any agreement, among other things, is
expected to limit the amount the Company may borrow from other sources,
restrict certain expenditures and require the maintenance of debt coverage and
leverage ratios.
(7) LEASES
The Company leases certain equipment used in its operations and the shared
facilities discussed in Note 3. Rental expense for operating leases was
approximately $40,000 in 1993, $90,000 in 1994, $140,000 in 1995 and $70,000
and $110,000 for the six month periods ended July 2, 1995 and June 30, 1996,
respectively.
At June 30, 1996, approximate future minimum rentals under the lease for
shared facilities and capital leases for the six months ended December 31,
1996 and the years ending December 31, thereafter are as follows (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
PERIOD ENDING LEASE LEASE
------------- ------- ---------
<S> <C> <C>
1996....................................................... $ 329 $110
1997....................................................... 659 36
1998....................................................... 659 --
1999....................................................... 559 --
------ ----
Total minimum lease payments............................. 2,206 $146
====
Less--Interest portion..................................... 300
------
Present value of net minimum lease payments................ 1,906
Less--Current portion...................................... 512
------
$1,394
======
</TABLE>
F-11
<PAGE>
VIISAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Lau Technologies has a system project lease arrangement, which will be
assumed by the Company at the time of the reorganization described in Note 1,
with a commercial leasing organization providing for system project leases of
up to $15.0 million. Pursuant to the facility, the lessor will purchase
certain of the Company's digital identification systems and lease them back to
Viisage for deployment with identified and contracted customers approved by
the lessor. The lessor will retain title to the systems and will have an
assignment of Viisage's rights under the related customer contracts, including
rights to use the software and technology underlying the related systems.
Under the facility, the lessor will bear the credit risk associated with
payments by Viisage's customers, but Viisage will bear performance and
appropriation risk and will generally be required to repurchase a system in
the event of a termination by a customer for any reason except credit default.
(8) RETIREMENT PLANS
The Company participates in the Lau Technologies 401(k) plan and pays its
proportionate share of plan expenses based on the number of participants. The
plan permits pretax contributions by participants of up to 15% of base
compensation. The Company may make discretionary matching contributions of up
to 3% of base compensation. Participants are fully vested in their
contributions and vest 20% per year in employer contributions. The Company's
allocation of costs for all periods was not material.
The Company does not offer any postretirement benefits.
(9) STOCK OPTION PLANS
Lau Technologies granted 1,167,950 nonqualified options for the Company's
common stock on February 1, 1996 to management and 81,650 nonqualified options
to directors. The exercise price for such options is $2.96 per share. The
Company granted an additional 177,500 nonqualified options to management on
April 15, 1996 at $4.86 per share, the estimated fair value of such shares at
the grant date. At the closing date of the initial public offering 255,600
options are exercisable. The remaining director options become exercisable
over three years and management options become exercisable in seven years or
earlier if certain performance measures are met. The performance measures are
based on each $1.0 million increase in Company value up to $500 million. In
connection with such options, the Company is recognizing compensation expense
of approximately $700,000 over the estimated vesting period. The amount of
compensation is calculated as the difference between the exercise price and
the fair value of the Company's business on the grant dates based on an
independent third-party appraisal. Stock compensation expense recorded for the
six months ended June 30, 1996 was $92,000. The Company has reserved 1,437,750
shares of common stock for issuance under the Plans of which 10,650 are
available for grant. No options have been exercised or canceled under the
Plans. The options expire ten years from the date of grant.
On June 17, 1996, the Board of Directors of the Company ratified the
foregoing option grants in connection with its adoption of the Stock Option
Plans (the Plans) under which incentive and nonqualified stock options may be
granted to employees and officers and nonqualified stock options may be
granted to directors. Generally, incentive stock options are granted at fair
value and are subject to the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended. Nonqualified options are granted at exercise
prices determined by the Board of Directors. Options vest over periods of up
to seven years and vesting may be accelerated based on performance criteria
set by the Board of Directors.
The Company has computed the pro forma disclosures required under SFAS No.
123 for options granted in 1996 using the Black-Scholes option pricing model
prescribed by SFAS No. 123. The weighted average assumptions used for 1996
are:
<TABLE>
<S> <C>
Risk free interest rate........................................ 6%
Expected dividend yield........................................ --
Expected lives................................................. 10 Years
Expected volatility............................................ 66%
</TABLE>
F-12
<PAGE>
VIISAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The total value of options granted during 1996 was computed as approximately
$4.2 million. Of this amount $510,000 would be charged to operations for the
six months ended June 30, 1996 for currently vested options and the remaining
amount, $3.6 million, would be amortized over the related vesting periods. The
pro forma affect of SFAS No. 123 for the period ended June 30, 1996 is as
follows:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Net income (loss)................................... $74,000 $(206,000)
Net income per share (loss)......................... 0.01 (0.03)
======= =========
</TABLE>
(10) SUBSEQUENT EVENTS
In August 1996, the Company filed a Registration Statement with the SEC
covering the issuance and sale by the Company of approximately 2,000,000
shares of common stock.
In September 1996, Lau Technologies entered into a system project lease
arrangement as described in Note 7 providing for system project leases of up
to $15.0 million, which will be assumed by the Company as a part of the
reorganization described in Note 1.
On the effective date of the aforementioned offering the Company completed
the reorganization discussed in Note 1 and issued 5,680,000 shares of common
stock to Lau Technologies.
The Company plans to use a portion of the proceeds from the aforementioned
sale of common stock to repay long-term debt. Assuming such debt were repaid
at the beginning of the period, net income (loss) per share would have been
($0.34) and $0.05 for the year ended December 31, 1995 and the six months
ended June 30, 1996, respectively.
On September 23, 1996, three minority shareholders of Lau filed suit in
Superior Court in Berkshire County, Massachusetts, alleging that certain
defendants breached the fiduciary duty owed the plaintiffs as shareholders of
Lau. The plaintiffs requested, among other things, an injunction to delay this
offering in an effort to obtain a direct, rather than an indirect, ownership
interest in the Company. On October 4, 1996, the Superior Court denied
plaintiffs' request for such relief, although plaintiffs' claims for
unspecified money damages remain pending. Lau has agreed to indemnify and hold
the Company harmless for any liabilities incurred by the Company as a result
of judgments, settlements or litigation expenses arising out of this suit.
Accordingly, the Company does not believe that the resolution of this matter
would have a material adverse effect on its business, financial condition or
results of operations.
F-13
<PAGE>
[Images and schematic representations of Viisage's facial recognition software
performing enrollment, identification and verification.]
SEE "BUSINESS--PRODUCTS & SERVICES--
FACIAL RECOGNITION TECHNOLOGIES."
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS NOT CONTAINED
HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY
OF THE UNDERWRITERS OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER
THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO
MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 26
Relationship and Certain Transactions with Lau Technologies.............. 37
Management............................................................... 40
Principal and Selling Stockholders....................................... 45
Description of Capital Stock ............................................ 46
Shares Eligible for Future Sale.......................................... 49
Underwriting............................................................. 51
Legal Matters............................................................ 52
Experts.................................................................. 52
Additional Information................................................... 52
Financial Statements..................................................... F-1
</TABLE>
------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIRE-
MENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,500,000 SHARES
[Viisage Logo]
COMMON STOCK
------------------
PROSPECTUS
------------------
COWEN & COMPANY
NEEDHAM & COMPANY, INC.
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by the Company
in connection with the sale of Common Stock being registered, other than the
underwriting discount and commissions. All amounts are estimates except for
the SEC registration fee, the NASD filing fee and the Nasdaq National Market
listing fee. The Company will pay all expenses in connection with the issuance
and distribution of any securities sold by the Selling Stockholder, except for
underwriting discounts and commissions and for any fees of counsel selected by
the Selling Stockholder to act in addition to or lieu of the counsel for the
Selling Stockholder appointed by the Company.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 11,897
NASD filing fee................................................. 3,950
Nasdaq National Market listing fee.............................. 37,700
Securities Act liability insurance coverage..................... 140,000
Printing and engraving expenses................................. 130,000
Legal fees and expenses......................................... 200,000
Accounting fees and expenses.................................... 150,000
Blue sky fees and expenses (including counsel fees)............. 25,000
Transfer agent and registrar fees and expenses.................. 2,500
Miscellaneous................................................... 123,953
--------
Total......................................................... $825,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law affords a Delaware
corporation the power to indemnify its present and former directors and
officers under certain conditions. Article IX of the Restated Certificate of
Incorporation and Article 5 of the By-Laws provide that the Company shall
indemnify each person who at any time is, or shall have been, a director or
officer of the Company, and is threatened to be or is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is,
or was, a director or officer of the Company, or served at the request of the
company as a director, officer, employee, trustee, or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement incurred in connection with any such action, suit or proceeding to
the maximum extent permitted by the Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law gives a Delaware
corporation the power to adopt a charter provision eliminating or limiting the
personal liability of directors to the corporation or its stockholders for
breach of fiduciary duty as directors, provided that such provision may not
eliminate or limit the liability of directors for (i) any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) any
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) any payment of a dividend or approval of a
stock purchase that is illegal under Section 174 of the Delaware Corporation
Law or (iv) any transaction from which the director derived an improper
personal benefit. Article VIII of the Restated Certificate of Incorporation
provides that to the maximum extent permitted by the General Corporation Law
of the State of Delaware, no director of the Company shall be personally
liable to the Company or to any of its stockholders for monetary damages
arising out of such director's breach of fiduciary duty as a director of the
Company. No amendment to or repeal of the provisions of Article VIII shall
apply to or have any effect of the liability or the alleged liability of any
director of the Corporation with respect to any act or failure to act of such
director occurring prior to such amendment or repeal. A principal effect of
such Article VIII is to limit or eliminate the potential liability of the
Company's directors for monetary damages arising from
II-1
<PAGE>
breaches of their duty of care, unless the breach involves one of the four
exceptions described in (i) through (iv) above. Article VIII does not prevent
stockholders from obtaining injunctive or other equitable relief against
directors, nor does it shield directors from liability under federal or state
securities laws.
Section 145 of the Delaware General Corporation Law also affords a Delaware
corporation the power to obtain insurance on behalf of its directors and
officers against liabilities incurred by them in those capacities. The Company
is procuring a directors' and officers' liability and company reimbursement
liability insurance policy that (a) insures directors and officers of the
Company against losses (above a deductible amount) arising from certain claims
made against them by reason of certain acts done or attempted by such
directors or officers and (b) insures the Company against losses (above a
deductible amount) arising from any such claims, but only if the Company is
required or permitted to indemnify such directors or officers for such losses
under statutory or common law or under provisions of the Restated Certificate
of Incorporation or the By-Laws.
Reference is also made to Section 6 of the Underwriting Agreement between
the Company, the Selling Stockholders and the Underwriters, filed as Exhibit
1.1 of this Registration Statement, for a description of indemnification
arrangements between the Company, the Selling Shareholder and the
Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information is furnished with regard to all securities issued
or sold by the Company within the past three years which were not registered
under the Securities Act.
In connection with and prior to the issuance of the shares of Common Stock
being registered hereby, the Company will issue 5,680,000 shares of its Common
Stock to the Selling Shareholder, Lau Technologies ("Lau") in return for Lau's
contribution of the assets, liabilities and business of its Viisage Technology
Division to the Registrant, a transaction exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to Section 4(2) thereof. Lau has represented that, other than with
respect to the 500,000 shares of Common Stock being registered on its behalf
hereunder, it is acquiring the shares for investment purposes and not with a
view to distribution within the meaning of the Securities Act. The stock
certificates representing Lau's unregistered shares will bear restrictive
legends.
On February 1, 1996, Lau granted nonqualified options (i) for 1,167,950
shares of Common Stock in the Company, with an exercise price of $2.96 per
share, to eight employees and (ii) for 81,650 shares of Common Stock in the
Company, with an exercise price of $2.96 per share, to its five serving
directors. On April 15, 1996, Lau granted nonqualified options to acquire an
additional 177,500 shares of Common Stock in the Company, at an exercise price
of $4.86 per share, to a ninth executive employee. All of these options were
ratified by the Board of Directors of the Company on June 17, 1996 following
its incorporation in connection with the Board's adoption of the Company's
1996 Management Stock Option Plan (with respect to grants to executives) and
the 1996 Director Stock Option Plan. No options have been exercised. The
option grants were exempt from the registration requirements of the Securities
Act pursuant to Section 4(2) thereof relating to sales by an issuer not
involving a public offering. In addition, the Company intends to register the
shares subject to options granted under the plans pursuant to Form S-8. Unless
and until such shares are registered, option holders will be required to
represent that they are acquiring their securities for investment purposes and
not with a view to distribution within the meaning of the Securities Act.
Stock certificates representing shares issued pursuant to such options (except
to the extent registered) will bear restrictive legends.
None of the foregoing transactions involved a distribution or public
offering. No underwriters were engaged in connection with the foregoing
issuances of securities, and no underwriting commissions or discounts were
paid.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The Exhibits required to be filed as part of this Registration Statement are
listed in the attached index to Exhibits.
II-2
<PAGE>
(b) Financial Statement Schedules
Financial statement schedules have been omitted because the information
required to be set forth therein is not applicable or is shown in the
Financial Statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered hereunder, the Registrant will, unless in the
opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE TOWN
OF ACTON, COMMONWEALTH OF MASSACHUSETTS, ON THIS 7TH DAY OF NOVEMBER, 1996.
Viisage Technology, Inc.
/s/ Robert C. Hughes
By:_________________________________
Robert C. Hughes
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES INDICATED ON THE 7TH DAY OF NOVEMBER, 1996:
SIGNATURE TITLE
* Chairman of the Board of Directors
By: _________________________________
DENIS K. BERUBE
* President and Chief Executive Officer
By: _________________________________ (Principal Executive Officer)
ROBERT C. HUGHES
* Treasurer and Chief Financial Officer
By: _________________________________ (Principal Financial and Accounting
WILLIAM A. MARSHALL Officer)
* Secretary and Director
By: _________________________________
CHARLES J. JOHNSON
* Director
By: _________________________________
HARRIET MOUCHLY-WEISS
* Director
By: _________________________________
PETER NESSEN
* Director
By: _________________________________
THOMAS J. REILLY
/s/ Robert C. Hughes
*By: ________________________________
ROBERT C. HUGHES
ATTORNEY-IN-FACT
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
<C> <S> <C>
1.1+ Form of Underwriting Agreement.
2.1** Amended and Restated Asset Transfer Agreement, dated as
of August 20, 1996, between the Registrant and Lau
Technologies.
3.1** Restated Certificate of Incorporation of the
Registrant.
3.2** By-Laws of the Registrant.
4.1** Specimen certificates for shares of the Registrant's
Common Stock.
5.1 Opinion of Finnegan, Hickey, Dinsmoor & Johnson, P.C.
10.1** Amended and Restated License Agreement, dated as of
August 20, 1996, between the Registrant and Lau
Technologies.
10.2** Administration & Services Agreement, dated as of
November 1, 1996, between the Registrant and Lau
Technologies.
10.3** Use & Occupancy Agreement, dated as of November 1,
1996, between the Registrant and Lau Technologies.
10.4** License Agreement, dated as of August 20, 1996, between
the Registrant and Facia Reco Associates, Limited
Partnership.
10.5** Employment Agreement, dated as of February 1, 1996,
between the Registrant and Robert C. Hughes.
10.6** Employment Agreement, dated as of February 1, 1996,
between the Registrant and William A. Marshall.
10.7** Employment Agreement, dated as of July 1, 1996, between
the Registrant and Yona Wieder.
10.8** 1996 Management Stock Option Plan.
10.9** 1996 Director Stock Option Plan.
10.10** Form of Option Agreement for the 1996 Management Stock
Option Plan.
10.11** Form of Option Agreement for the 1996 Director Stock
Option Plan.
10.12** Executive Incentive Compensation Plan.
10.13** Subcontract between the Registrant and Information
Spectrum, Inc. (relating to the U.S. Immigration &
Naturalization Service), dated as of October 19, 1995.
10.14** Contract between the Registrant and the North Carolina
Department of Transportation, dated as of April 26,
1996.
10.15** Purchase Agreement (Project Finance Facility) between
the Registrant and Sanwa Business Credit Corporation,
dated as of September 12, 1996.
10.16** Contract between the Registrant and Transactive, Inc.
(relating to the New York Department of Social
Services), dated as of December 8, 1994, as amended.
23.1+ Consent of Arthur Andersen LLP.
23.2 Consent of Finnegan, Hickey, Dinsmoor & Johnson, P.C.
(See Exhibit 5.1 above).
24.1** Power of Attorney.
24.2** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment.
**Previously filed.
+Supersedes previously filed exhibit.
II-5
<PAGE>
Draft Dated 11/6/96
-------------------
2,500,000 Shares/1/
Viisage Technology, Inc.
Common Stock
UNDERWRITING AGREEMENT
----------------------
November, 1996
COWEN & COMPANY
NEEDHAM & COMPANY, INC.
As Representatives of the several Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Dear Sirs:
1. Introductory. Viisage Technology, Inc., a Delaware corporation (the
------------
"Company"), and Lau Acquisition Corp. ("Lau"), a stockholder of the Company (the
"Selling Stockholder") propose to sell, pursuant to the terms of this Agreement,
to the several underwriters named in Schedule A hereto (the "Underwriters," or,
each, an "Underwriter"), an aggregate of 2,500,000 shares of Common Stock, $.001
par value per share (the "Common Stock"), of the Company, of which 2,000,000
shares will be sold by the Company and 500,000 shares will be sold by the
Selling Stockholder. The aggregate of 2,500,000 shares so proposed to be sold
is hereinafter referred to as the "Firm Stock." The respective amounts of the
Firm Stock to be so purchased by the several Underwriters are set forth opposite
their names in Schedule A hereto. The Company also has granted to the
Underwriters, upon the terms and conditions set forth in Section 3 hereof, the
option to purchase up to an additional 375,000 shares of Common Stock (the
"Optional Stock"). The Firm Stock and the Optional Stock are hereinafter
collectively referred to as the "Stock." Cowen & Company ("Cowen") and Needham
& Company, Inc. ("Needham") are acting as representatives of the several
Underwriters and in such capacity are hereinafter referred to as the
"Representatives."
2. (a) Representations and Warranties of the Company and the Selling
-------------------------------------------------------------
Stockholder. The Company and the Selling Stockholder jointly and severally
- -----------
represent and warrant to, and agree with, the several Underwriters that:
________________________________
/1/ Plus an option to purchase up to 375,000 additional shares from the
Company to cover over-allotments.
<PAGE>
-2-
(i) A registration statement on Form S-1 (File No. 333-10649) in the
form in which it became or becomes effective and also in such form as
it may be when any post-effective amendment thereto shall become
effective (the "Registration Statement") with respect to the Stock,
including any preeffective prospectuses included as part of the
registration statement as originally filed or as part of any amendment
or supplement thereto, or filed pursuant to Rule 424 under the
Securities Act of 1933, as amended (the "Securities Act"), and the
rules and regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") thereunder, copies of which
have heretofore been delivered to you, has been carefully prepared by
the Company in conformity with the requirements of the Securities Act
and has been filed with the Commission under the Securities Act; one or
more amendments to such registration statement, including in each case
an amended preeffective prospectus, copies of which amendments have
heretofore been delivered to you, have been so prepared and filed. If
it is contemplated, at the time this Agreement is executed, that a
post-effective amendment to the registration statement will be filed
and must be declared effective before the offering of the Stock may
commence, the term "Registration Statement" as used in this Agreement
means the registration statement as amended by said post-effective
amendment. The term "Registration Statement" as used in this Agreement
shall also include any registration statement relating to the Stock
that is filed and declared effective pursuant to Rule 462(b) under the
Securities Act. All copies of Registration Statements that have been
delivered to you are identical to the electronically transmitted copies
thereof filed with the Commission pursuant to the Commission's
Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"),
except to the extent permitted by Regulation S-T. The term
"Prospectus" as used in this Agreement means the prospectus in the form
included in the Registration Statement, or, (A) if the prospectus
included in the Registration Statement omits information in reliance on
Rule 430A under the Securities Act and such information is included in
a prospectus filed with the Commission pursuant to Rule 424(b) under
the Securities Act, the term "Prospectus" as used in this Agreement
means the prospectus in the form included in the Registration Statement
as supplemented by the addition of the Rule 430A information contained
in the prospectus filed with the Commission pursuant to Rule 424(b) and
(B) if prospectuses that meet the requirements of Section 10(a) of the
Securities Act are delivered pursuant to Rule 434 under the Securities
Act, then (i) the term "Prospectus" as used in this Agreement means the
"prospectus subject to completion" (as such term is defined in Rule
434(g) under the Securities Act) as supplemented by (a) the addition of
Rule 430A information or other information contained in the form of
prospectus delivered pursuant to Rule 434(b)(2) under the Securities
Act or (b) the information contained in the term sheets described in
Rule 434(b)(3) under the Securities Act, and (ii) the date of such
prospectuses shall be deemed to be the date of the term sheets. The
term "Preeffective Prospectus" as used in this Agreement means the
prospectus subject to completion in the form
<PAGE>
-3-
included in the Registration Statement at the time of the initial
filing of the Registration Statement with the Commission, and as such
prospectus shall have been amended from time to time prior to the date
of the Prospectus. For purposes of this Agreement, all references to
the Registration Statement, any Pre-effective Prospectus, the
Prospectus, or any amendment or supplement to any of the foregoing
shall be deemed to include the respective copies thereof filed with the
Commission pursuant to EDGAR.
(ii) The Commission has not issued or, to the knowledge of the
Company or the Selling Stockholder, threatened to issue any order
preventing or suspending the use of any Preeffective Prospectus, and,
at its date of issue, each Preeffective Prospectus conformed in all
material respects with the requirements of the Securities Act and did
not include any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; and, when the Registration Statement became or
becomes effective and at all times subsequent thereto up to and
including the Closing Dates, the Registration Statement and the
Prospectus and any amendments or supplements thereto conformed and will
conform in all material respects to the requirements of the Securities
Act and the Rules and Regulations; and when the Registration Statement
became or becomes effective, neither the Registration Statement nor any
amendment or supplement thereto, included any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading; and, on the Effective Date the Prospectus did not, and on
the Closing Dates the Prospectus will not, contain any untrue statement
of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
-------- -------
foregoing representations, warranties and agreements shall not apply to
information contained in or omitted from any Preeffective Prospectus or
the Registration Statement or the Prospectus or any such amendment or
supplement thereto in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of any
Underwriter, directly or through you, specifically for use in the
preparation thereof; there is no franchise, lease, contract, agreement
or document required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement
which is not described or filed therein as required; and all
descriptions of any such franchises, leases, contracts, agreements or
documents contained in the Registration Statement are accurate
descriptions of such documents in all material respects.
(iii) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as set
forth or contemplated in the Prospectus, the Company has not incurred
any liabilities or obligations, direct
<PAGE>
-4-
or contingent, nor entered into any transactions not in the ordinary
course of business, and there has not been any material adverse change
in the condition (financial or otherwise), properties, business,
management, net worth or results of operations of the Company, or any
change in the capital stock, or any material change in the short-term
or long-term debt of the Company.
(iv) The financial statements, together with the related notes and
schedules, set forth in the Prospectus and elsewhere in the
Registration Statement fairly present, on the basis stated in the
Registration Statement, the financial position and the results of
operations and changes in financial position of the Company at the
respective dates or for the respective periods therein specified. Such
statements and related notes and schedules have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis except as may be set forth in the Prospectus. The
selected financial and statistical data set forth in the Prospectus
under the caption "Selected Financial Data" fairly present, on the
basis stated in the Registration Statement, the information set forth
therein.
(v) Arthur Andersen LLP, who have expressed their opinions on the
audited financial statements and related schedules (if any) included in
the Registration Statement and the Prospectus, are independent public
accountants as required by the Securities Act and the Rules and
Regulations.
(vi) The Company has been duly organized and is validly existing and
in good standing as a corporation under the laws of its jurisdiction of
organization, with power and authority (corporate and other) to own or
lease its business as described in the Prospectus; the Company is in
possession of and operating in material compliance with all franchises,
grants, authorizations, licenses, permits, easements, consents,
certificates and orders required for the conduct of its business as now
being conducted and as described in the Registration Statement and the
Prospectus, all of which are valid and in full force and effect; and
the Company is duly qualified to do business and in good standing as a
foreign corporation in all other jurisdictions where its ownership or
leasing of properties or the conduct of its business requires such
qualification, except to the extent that the failure to be so qualified
would not have a material adverse effect on the Company. The Company
has all requisite power and authority, and all necessary consents,
approvals, authorizations, orders, registrations, qualifications,
licenses and permits of and from all public regulatory or governmental
agencies and bodies to own, lease and operate its properties and
conduct its business as now being conducted and as described in the
Registration Statement and the Prospectus, and no such consent,
approval, authorization, order, registration, qualification, license or
permit contains a materially burdensome restriction not adequately
disclosed in the Registration
<PAGE>
-5-
Statement and the Prospectus. The Company does not own or control,
directly or indirectly, any corporation, partnership, association or
other entity.
(vii) The Company's authorized and outstanding capital stock is on
the date hereof, and will be on the Closing Date, as set forth under
the heading "Capitalization" in the Prospectus; the outstanding shares
of capital stock (including the outstanding shares of Stock) of the
Company conform to the description thereof in the Prospectus and have
been duly authorized and validly issued and are fully paid and
nonassessable, are duly listed on the Nasdaq National Market and have
been issued in compliance with all federal and state securities laws
and were not issued in violation of or subject to any preemptive rights
or similar rights to subscribe for or purchase securities and conform
to the description thereof contained in the Prospectus. Except as
disclosed in and or contemplated by the Prospectus and the financial
statements of the Company and related notes thereto included in the
Prospectus, the Company does not have outstanding any options or
warrants to purchase, or any preemptive rights or other rights to
subscribe for or to purchase any securities or obligations convertible
into, or any contracts or commitments to issue or sell, shares of its
capital stock or any such options, rights, convertible securities or
obligations, except for options granted subsequent to the date of
information provided in the Prospectus pursuant to the Company's
employee and stock option plans as disclosed in the Prospectus. The
description of the Company's stock option and other stock plans or
arrangements, and the options or other rights granted or exercised
thereunder, as set forth in the Prospectus, accurately and fairly
presents the information required to be shown with respect to such
plans, arrangements, options and rights.
(viii) The Stock to be issued and sold by the Company to the
Underwriters hereunder has been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will
be duly and validly issued, fully paid and nonassessable and free of
any preemptive or similar rights and will conform to the description
thereof in the Prospectus.
(ix) Except as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any executive
officers or directors is a party or of which any property of the
Company or any affiliate is subject, which, if determined adversely to
the Company or any executive officers or directors, might individually
or in the aggregate (i) prevent or adversely affect the transactions
contemplated by this Agreement, (ii) suspend the effectiveness of the
Registration Statement, (iii) prevent or suspend the use of the
Preeffective Prospectus in any jurisdiction or (iv) result in a
material adverse change in the condition (financial or otherwise),
properties, business, management, net worth or results of operations of
the Company; and to the knowledge of the Company or the
<PAGE>
-6-
Selling Stockholder, no such proceedings are threatened or contemplated
against the Company or any affiliate by governmental authorities or
others. The Company is not a party nor subject to the provisions of any
material injunction, judgment, decree or order of any court, regulatory
body or other governmental agency or body. The description of the
Company's litigation under the heading "Legal Proceedings" in the
Prospectus is true and correct and complies with the Rules and
Regulations.
(x) The execution, delivery and performance of this Agreement and the
consummation of the transactions herein contemplated will not result in
a breach or violation of any of the terms or provisions of or
constitute a default under any indenture, mortgage, deed of trust,
trust (constructive or other), note, loan agreement, lease, franchise,
license or other material agreement or instrument to which the Company
is a party or by which it or any of its properties is or may be bound,
the Certificate of Incorporation, By-laws or other organizational
documents of the Company, or any judgment, order, decree, law, order,
rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its properties or will result
in the creation of a lien.
(xi) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the
Company of the transactions contemplated by this Agreement, except such
as may be required by the National Association of Securities Dealers,
Inc. (the "NASD") or under the Securities Act or the securities or
"Blue Sky" laws of any jurisdiction in connection with the purchase and
distribution of the Stock by the Underwriters.
(xii) The Company has the full corporate power and authority to
enter into this Agreement and to perform its obligations hereunder
(including to issue, sell and deliver the Stock), and this Agreement
has been duly and validly authorized, executed and delivered by the
Company and is a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except to
the extent that rights to indemnity and contribution hereunder may be
limited by federal or state securities laws or the public policy
underlying such laws.
(xiii) The Company is in all material respects in compliance with,
and conducts its business in material conformity with, all applicable
federal, state, local and foreign laws, rules and regulations
(including but not limited to the Foreign Corrupt Practices Act and any
laws, rules and regulations regarding government contracting and
procurement) or any court or governmental agency or body and the
Company has all permits or licenses required thereunder; to the
knowledge of the Company or the Selling Stockholder, otherwise than as
set forth in the Registration Statement and the Prospectus, no
prospective change in any of such federal or state laws, rules
<PAGE>
-7-
or regulations has been adopted which, when made effective, would have
a material adverse effect on the operations of the Company.
(xiv) The Company has filed all necessary federal, state, local and
foreign income, payroll, franchise and other tax returns and has paid
all taxes shown as due thereon or with respect to any of its
properties, and there is no tax deficiency that has been, or to the
knowledge of the Company or the Selling Stockholder has been threatened
or is likely to be, asserted against the Company or any of its
properties or assets that would adversely affect the financial
position, business or results of operations of the Company.
(xv) No person or entity has the right to require registration of
shares of Common Stock or other securities of the Company because of
the filing or effectiveness of the Registration Statement or, except as
described in the Prospectus, otherwise.
(xvi) Neither the Company nor any of its officers or directors has
taken or will take, directly or indirectly, any action designed or
intended to stabilize or manipulate the price of any security of the
Company, or which caused or resulted in, or which might in the future
reasonably be expected to cause or result in, stabilization or
manipulation of the price of the Common Stock of the Company.
(xvii) The Company has provided you with all financial statements
since inception to the date hereof that are available to the officers
of the Company, including financial statements for the six months ended
June 30, 1996.
(xviii) The Company owns, possesses, or has rights to use all
patents, trademarks, trademark registrations, service marks, service
mark registrations, tradenames, copyrights, copyright registrations,
licenses, inventions, trade secrets and rights (collectively,
"Intellectual Property") necessary for the conduct of its business or
described in the Prospectus as being owned, licensed or used by it.
Other than as described in the Prospectus, the Company has not received
any notice or claim or any challenge by any other person to the rights
of the Company with respect to the Intellectual Property necessary for
the conduct of its business or described in the Prospectus as being
owned, licensed or used by it. To the knowledge of the Company or the
Selling Stockholder, the Company's business as now conducted does not
and will not infringe or conflict with any Intellectual Property or
franchise right of any person. Other than as described in the
Prospectus, no claim has been made against the Company alleging the
infringement by the Company of any Intellectual Property right or
franchise right of any person. The Company owns no patents and, to the
knowledge of the Company or the Selling Stockholder, none of the
patents licensed by the Company are unenforceable or invalid. The
Company, or the Selling Stockholder, as the case may be, has duly and
properly filed or
<PAGE>
-8-
caused to be filed with the United States Patent and Trademark Office
(the "PTO") and applicable foreign and international patent authorities
all patent applications described or referred to in the Prospectus, and
believes it has complied with the PTO's duty of candor and disclosure
for each of the United States patent and patent applications described
or referred to in the Prospectus; notwithstanding that the Company has
been notified by the PTO that its pending patent applications (Serial
Nos. 08/___,___ and 08/___,___) have been rejected over certain prior
art identified by the PTO in such rejections, neither the Company nor
the Selling Stockholder is aware of any facts which would preclude the
grant of a patent from each of its respective patent applications
described or referred to in the Prospectus; neither the Company nor the
Selling Stockholder has knowledge of any facts which would preclude it
from having clear title to its patent applications referenced in the
Prospectus; and neither the Company nor the Selling Stockholder has
terminated or breached, and is not in violation of, any agreement
covering any Intellectual Property rights.
(xix) No breach or default exists in the due performance and
observance by the Company of any term, covenant or condition of its
material contracts. To the knowledge of the Company or the Selling
Stockholder, no other party to any such contract is in material default
under or in breach of any such obligations. The Company has not
received any notice of such default or breach.
(xx) The Company is not involved in any labor dispute nor is any such
dispute threatened. The Company is not aware that (A) any executive,
key employee or significant group of employees of the Company plans to
terminate employment with the Company or (B) any such executive or key
employee is subject to any noncompete, nondisclosure, confidentiality,
employment, consulting or similar agreement that would be violated by
the present or proposed business activities of the Company. The
Company does not have or expect to have any liability for any
prohibited transaction or funding deficiency or any complete or partial
withdrawal liability with respect to any pension, profit sharing or
other plan which is subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), to which the Company makes or ever
has made a contribution and in which any employee of the Company is or
has ever been a participant. With respect to such plans, the Company
is in compliance in all material respects with all applicable
provisions of ERISA.
(xxi) The Company has, and the Company as of the Closing Dates will
have, good and marketable title in fee simple to all real property (if
any) and good and marketable title to all personal property owned by it
which is material to the business of the Company, in each case free and
clear of all liens, encumbrances and defects except such as are
described the Prospectus or such as would not have a material adverse
effect on the Company; and any real property and buildings held
<PAGE>
-9-
under lease by the Company are, or will be as of the Closing Dates,
held by it under valid, subsisting and enforceable leases with such
exceptions as would not have a material adverse effect on the Company,
in each case except as described in or contemplated by the Prospectus.
(xxii) The Company is insured by insurers of financial
responsibility against such losses and risks and in such amounts as are
customary in the business in which it is engaged; and no such insurer
has notified or indicated to the Company that it will not be able to
renew its existing insurance coverage as and when such coverage
expires; and the Company has no reason to believe that, if such
coverage is not renewed, that it will not be able to obtain similar
coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the
condition, financial or otherwise, or the earnings, business or
operations of the Company, except as described in or contemplated by
the Prospectus.
(xxiii) Other than as contemplated by this Agreement, there is no
broker, finder or other party that is entitled to receive from the
Company any brokerage or finder's fee or other fee or commission as a
result of any of the transactions contemplated by this Agreement.
(xxiv) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(xxv) To the knowledge of the Company or the Selling Stockholder,
neither the Company nor any employee or agent of the Company has made
any payment or received or retained any payment in violation of any
law, rule or regulation, which payment, receipt or retention of funds
is of a character required to be disclosed in the Prospectus.
(xxvi) The Company is not or will not become an "investment company"
or an entity "controlled" by an "investment company" as such terms are
defined in the Investment Company Act of 1940, as amended, after the
closing of the offering and the application of the proceeds therefrom.
<PAGE>
-10-
(xxvii) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company as to the
matters covered thereby.
(xxviii) The Company has obtained the written agreement described in
Section 8(k) of this Agreement from each of its officers, directors,
holders of Common Stock and holders of options to purchase Common
Stock.
(xxix) Each of the Amended and Restated Asset Transfer Agreement
dated August 20, 1996 (the "Transfer Agreement"), the Amended and
Restated License Agreement dated August 20, 1996, the Administrations
and Services Agreement dated November 1, 1996, and Use and Occupancy
Agreement dated November 1, 1996, in each case between the Company and
Lau and pursuant to which the Company was initially organized and
capitalized (collectively, the "Organization Agreements") has been duly
and validly authorized, executed and delivered by the Company and is a
valid and binding obligation of the Company enforceable in accordance
with its terms. The execution, delivery and performance of each of the
Organization Agreements by the Company, the consummation of the
transactions therein contemplated and compliance with the terms thereof
do not and will not result in a breach or violation of, or constitute a
default under, the certificate of incorporation, by-laws or other
governing documents of the Company, or any indenture, mortgage, deed of
trust, trust (constructive or other), note, loan agreement, lease,
franchise, license or other material agreement or instrument to which
the Company is a party or by which it is bound, or to which any of its
properties is subject, and do not and will not violate any existing
law, rule, administrative regulation or decree or judgment of any court
or any governmental agency or body having jurisdiction over the Company
or any of its properties, or result in the creation or imposition of
any lien, charge, claim or encumbrance upon any property or asset of
the Company. No consent, approval, authorization or order of any
court, governmental agency or body, financial institution or other
person is required in connection with the consummation of the
transactions contemplated by such Organization Agreements. The
transactions contemplated by the Transfer Agreement have been
consummated.
(b) Representations and Warranties and Agreements of the Selling
------------------------------------------------------------
Stockholder. The Selling Stockholder represents and warrants to, and agrees
- ------------
with, the several Underwriters that:
(i) The Selling Stockholder now has, and on the Closing Dates will
have, valid and marketable title to the Stock to be sold by the Selling
Stockholder, free and clear of any lien, claim, security interest or
other encumbrance, including, without limitation, any restriction on
transfer, and has full right, power and authority to enter into this
Agreement, and, that it is a corporation, duly organized
<PAGE>
-11-
and validly existing and in good standing as a corporation under the
laws of its jurisdiction of organization.
(ii) The Selling Stockholder now has, and on the Closing Dates will
have full right, power and authority and approval required by law to
sell, transfer, assign and deliver the Stock being sold by the Selling
Stockholder hereunder, and each of the several Underwriters will, upon
delivery of and payment for each share of Stock hereunder, acquire
valid and marketable title to all of the Stock being sold to the
Underwriters by the Selling Stockholder, free and clear of any liens,
encumbrances, equities claims, restrictions on transfer or other
defects whatsoever.
(iii) For a period of 180 days after the date of this Agreement,
without the prior written consent of Cowen, the Selling Stockholder
will not directly or indirectly offer, sell, pledge, contract to sell,
grant an option to purchase or otherwise dispose of any shares of
Common Stock held by such Selling Stockholder (including without
limitation any shares of Common Stock that may be deemed to be
beneficially owned by such Selling Stockholder on the date hereof in
accordance with the Rules and Regulations and any shares if Common
Stock which may be issued upon exercise of a stock option or warrant)
or any securities convertible into, derivative of or exercisable or
exchangeable for such Common Stock except for shares of Common Stock
sold by such Selling Stockholder pursuant to this Agreement.
(iv) This Agreement has been duly and validly authorized, executed
and delivered by the Selling Stockholder and is a valid and binding
obligation of the Selling Stockholder, enforceable against the Selling
Stockholder in accordance with its terms, except to the extent that
rights to indemnity and contribution hereunder may be limited by
federal or state securities laws or the public policy underlying such
laws.
(v) The execution, delivery and performance of this Agreement and the
consummation of the transactions herein contemplated will not result in
a breach or violation by the Selling Stockholder of any of the terms or
provisions of, or constitute a default by the Selling Stockholder
under, any indenture, mortgage, deed of trust, trust (constructive or
other), note, loan agreement, lease, franchise, license or other
material agreement or instrument to which the Selling Stockholder is a
party or by which the Selling Stockholder or any of its properties is
or may be bound, or any judgment of any court or governmental agency or
body applicable to the Selling Stockholder or any of its properties, or
to the Selling Stockholder's knowledge, any statute, decree, order,
rule or regulation of any court or governmental agency or body
applicable to the Selling Stockholder or any of its properties.
<PAGE>
-12-
(vi) The Selling Stockholder has reviewed the Registration Statement
and Prospectus, and nothing has come to the attention of the Selling
Stockholder that would lead the Selling Stockholder to believe that (A)
on the Effective Date, the Registration Statement contained any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading and (B) on the Effective Date the
Prospectus did not, and on the Closing Date and any later date on which
Optional Stock is to be purchased the Prospectus will not, contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(vii) The Selling Stockholder owns, and will own as of each Closing
Date, of record and beneficially, the number of shares of Common Stock
of the Company set forth in the Prospectus, free and clear of any
liens, encumbrances, claims or restrictions, except as described in the
Prospectus and except that certain of such shares are reserved for
issuance pursuant to stock option and other benefit plans under which
options to purchase Common Stock of the Company owned by Lau are
granted to certain employees, directors or consultants of the Company.
(viii) Each of the Organization Agreements to which Lau is a party
has been duly and validly authorized, executed and delivered by Lau and
is a valid and binding obligation of Lau enforceable against Lau in
accordance with its terms. The execution, delivery and performance of
each of the Organization Agreements by Lau, the consummation of the
transactions therein contemplated and compliance with the terms thereof
do not and will not result in a breach or violation of, or constitute a
default under, the articles of organization, by-laws or other governing
documents of Lau, or any indenture, mortgage, deed of trust, trust
(constructive or other), note, loan agreement, lease, franchise,
license or other material agreement or instrument to which Lau is a
party or by which it is bound, or to which any of its properties is
subject, and do not and will not violate any existing law, rule,
administrative regulation or decree or judgment of any court or any
governmental agency or body having jurisdiction over Lau or any of its
properties, or result in the creation or imposition of any lien,
charge, claim or encumbrance upon any property or asset of Lau. No
consent, approval, authorization or order of any court, governmental
agency or body, financial institution or other person is required in
connection with the consummation by Lau of the transactions
contemplated by the Organization Agreements.
(ix) The Selling Stockholder has filed all tax returns required to be
filed by it, except for such returns for which its failure to file
would not have a material adverse effect on Lau or the Company, and has
paid all taxes which have become
<PAGE>
-13-
due, including without limitation, all taxes which it is obligated to
withhold for amounts owing to employees, creditors and third parties.
All taxes with respect to which Lau has become obligated pursuant to
elections made by it in accordance with generally accepted practice
have been paid, and adequate reserves have been established for all
taxes accrued but not yet payable. No waivers of statutes of limitation
with respect to any of the returns have been given by or requested from
Lau. There are no liens for taxes (other than for current taxes not yet
due and payable) upon the assets of the Company. Neither Lau nor the
Company is not a party to any agreement, contract, arrangement or plan
that has resulted or would result, separately or in the aggregate, in
the payment of any "excess parachute payments" within the meaning of
Section 280G of the Code. Lau does not have and has not had a permanent
establishment in any foreign country, as defined in any applicable tax
treaty or convention between the United States of America and such
foreign country. Lau and its shareholders made a valid election for the
Company to be treated as an "S corporation," as that term is defined in
Section 1361(a) of the Code, and at all times after such election and
prior to ______, 1996 Lau was qualified as an S corporation.
(x) Neither the Selling Stockholder nor any of its officers or
directors has taken or will take, directly or indirectly any action
designed or intended to stabilize or manipulate the price of any
security of the Company, or which caused or resulted in, or which might
in the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of the Common Stock of the
Company.
(xi) The Selling Stockholder agrees that its obligations hereunder
shall not be terminated by operation of law, whether by liquidation or
distribution of the Selling Stockholder, or any other event.
3. Purchase by, and Sale and Delivery to, Underwriters -- Closing
--------------------------------------------------------------
Dates. The Company and the Selling Stockholder agree, severally and not
- -----
jointly, to sell to the Underwriters the Firm Stock in accordance with Section 1
hereof and on the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Underwriters agree, severally and not jointly, to purchase the Firm
Stock from the Company and the Selling Stockholder, the number of shares of Firm
Stock to be purchased by each Underwriter being set opposite its name in
Schedule A, subject to adjustment in accordance with Section 12 hereof. The
number of shares of Stock to be purchased by each Underwriter from the Company
and the Selling Stockholder hereunder shall bear the same proportion to the
total number of shares of Stock to be purchased by such Underwriter hereunder as
the number of shares of Stock being sold by the Company or the Selling
Stockholder, as the case may be, bears to the total number of shares of Stock
being sold by the Company and the Selling Stockholder, subject to adjustment by
the Representatives to eliminate fractions.
<PAGE>
-14-
The purchase price per share to be paid by the Underwriters to the
Company and the Selling Stockholder will be $ _____ per share (the "Purchase
Price").
The Company and the Selling Stockholder will deliver the Firm Stock to
the Representatives for the respective accounts of the several Underwriters in
the form of definitive certificates, issued in such names and in such
denominations as the Representatives may direct by notice in writing to the
Company given at or prior to 12:00 Noon, New York Time, on the second full
business day preceding the First Closing Date (as defined below) or, if no such
direction is received, in the names of the respective Underwriters or in such
other names as Cowen may designate (solely for the purpose of administrative
convenience) and in such denominations as Cowen may determine, against payment
of the aggregate Purchase Price therefor by wire transfer (same day funds),
payable to the order of the Company and the Selling Stockholder all at the
offices of Finnegan, Hickey, Dinsmoor & Johnson, P.C., Twenty Beacon Street,
Boston, Massachusetts 02108. The time and date of the delivery and closing
shall be at 10:00 A.M., New York Time, on ___________, 1996, in accordance with
Rule 15c6-1 of the Exchange Act. The time and date of such payment and delivery
are herein referred to as the "First Closing Date." The Closing Date and the
location of delivery of, and the form of payment for, the Firm Stock may be
varied by agreement between the Company and Cowen. The Closing Date may be
postponed pursuant to the provisions of Section 12.
The Company and the Selling Stockholder shall make the certificates
for the Stock available to the Representatives for examination on behalf of the
Underwriters not later than 10:00 A.M., New York Time, on the business day
preceding the Closing Date at the offices of Cowen & Company, Financial Square,
New York, New York 10005.
It is understood that Cowen or Needham, individually and not as
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment to the Company on behalf of any Underwriter or Underwriters, for
the Stock to be purchased by such Underwriter or Underwriters. Any such payment
by Cowen or Needham shall not relieve such Underwriter or Underwriters from any
of its or their other obligations hereunder.
The several Underwriters agree to make an initial public offering of
the Firm Stock at the initial public offering price as soon after the
effectiveness of the Registration Statement as in their judgment is advisable.
The Representatives shall promptly advise the Company and the Selling
Stockholder of the making of the initial public offering.
For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Stock as contemplated by the Prospectus, the
Company hereby grants to the Underwriters an option to purchase, severally and
not jointly, up to an aggregate of 375,000 shares. The price per share to be
paid for the Optional Stock shall be the Purchase Price. The option granted
hereby may be exercised as to all or any part of the Optional Stock at any time,
and from time to time, not more than thirty (30) days subsequent to the
effective date of
<PAGE>
-15-
this Agreement. No Optional Stock shall be sold and delivered unless the Firm
Stock previously has been, or simultaneously is, sold and delivered. The right
to purchase the Optional Stock or any portion thereof may be surrendered and
terminated at any time upon notice by the Underwriters to the Company.
The option granted hereby may be exercised by the Underwriters by
giving written notice from Cowen to the Company setting forth the number of
shares of the Optional Stock to be purchased by them and the date and time for
delivery of and payment for the Optional Stock. Each date and time for delivery
of and payment for the Optional Stock (which may be the First Closing Date, but
not earlier) is herein called the "Option Closing Date" and shall in no event be
earlier than two (2) business days nor later than ten (10) business days after
written notice is given. (The Option Closing Date and the First Closing Date are
herein called the "Closing Dates"). Optional Stock shall be purchased for the
account of each Underwriter in the same proportion as the number of shares of
Firm Stock set forth opposite such Underwriter's name in Schedule A hereto bears
to the total number of shares of Firm Stock (subject to adjustment by the
Underwriters to eliminate odd lots). Upon exercise of the option by the
Underwriters, the Company agrees to sell to the Underwriters the number of
shares of Optional Stock set forth in the written notice of exercise and the
Underwriters agree, severally and not jointly and subject to the terms and
conditions herein set forth, to purchase the number of such shares determined as
aforesaid.
The Company will deliver the Optional Stock to the Underwriters in the
form of definitive certificates, issued in such names and in such denominations
as the Representatives may direct by notice in writing to the Company and the
Selling Stockholder given at or prior to 12:00 Noon, New York Time, on the
second full business day preceding the Option Closing Date or, if no such
direction is received, in the names of the respective Underwriters or in such
other names as Cowen may designate (solely for the purpose of administrative
convenience) and in such denominations as Cowen may determine, against payment
of the aggregate Purchase Price therefor by wire transfer (same day funds),
payable to the order of the Company or payable as directed by the Company all at
the offices of Finnegan, Hickey, Dinsmoor & Johnson, P.C., Twenty Beacon Street,
Boston, Massachusetts 02108. The Company shall make the certificates for the
Optional Stock available to the Underwriters for examination not later than
10:00 A.M., New York Time, on the business day preceding the Option Closing Date
at the offices of Cowen & Company, Financial Square, New York, New York 10005.
The Option Closing Date and the location of delivery of, and the form of payment
for, the Option Stock may be varied by agreement between the Company and Cowen.
The Option Closing Date may be postponed pursuant to the provisions of Section
12.
4. Covenants and Agreements of the Company. The Company and the
---------------------------------------
Selling Stockholder covenant and agree with the several Underwriters that:
(a) The Company will (i) if the Company and the Representatives have
determined not to proceed pursuant to Rule 430A, use its best efforts to
cause the
<PAGE>
-16-
Registration Statement to become effective, (ii) if the Company and the
Representatives have determined to proceed pursuant to Rule 430A, use its
best efforts to comply with the provisions of and make all requisite
filings with the Commission pursuant to Rule 430A and Rule 424 of the Rules
and Regulations and (iii) if the Company and the Representatives have
determined to deliver Prospectuses pursuant to Rule 434 of the Rules and
Regulations, to use its best efforts to comply with all the applicable
provisions thereof. The Company will advise the Representatives promptly as
to the time at which the Registration Statement becomes effective, will
advise the Representatives promptly of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement
or of the institution of any proceedings for that purpose, and will use its
best efforts to prevent the issuance of any such stop order and to obtain
as soon as possible the lifting thereof, if issued. The Company will advise
the Representatives promptly of the receipt of any comments of the
Commission or any request by the Commission for any amendment of or
supplement to the Registration Statement or the Prospectus or for
additional information and will not at any time file any amendment to the
Registration Statement or supplement to the Prospectus which shall not
previously have been submitted to the Representatives a reasonable time
prior to the proposed filing thereof or to which the Representatives shall
not have previously approved in writing (such approval not to be
unreasonably withheld or delayed) or which is not in compliance with the
Securities Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon the request of the Representatives, any amendments or supplements to
the Registration Statement or the Prospectus which in the opinion of the
Representatives may be necessary to enable the several Underwriters to
continue the distribution of the Stock and will use its best efforts to
cause the same to become effective as promptly as possible.
(c) If at any time after the effective date of the Registration
Statement when a prospectus relating to the Stock is required to be
delivered under the Securities Act any event relating to or affecting the
Company occurs as a result of which the Prospectus or any other prospectus
as then in effect would include an untrue statement of a material fact, or
omit to state any material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading,
or if it is necessary at any time to amend the Prospectus to comply with
the Securities Act, the Company will promptly notify the Representatives
thereof and will prepare an amended or supplemented prospectus which will
correct such statement or omission; and in case any Underwriter is required
to deliver a prospectus relating to the Stock nine (9) months or more after
the effective date of the Registration Statement, the Company upon the
request of the Representatives and at the expense of such Underwriter will
prepare promptly such prospectus or prospectuses as may be necessary to
permit compliance with the requirements of Section 10(a)(3) of the
Securities Act.
<PAGE>
-17-
(d) The Company will deliver to the Representatives, at or before the
Closing Dates, signed copies of the Registration Statement, as originally
filed with the Commission, and all amendments thereto including all
financial statements and exhibits thereto, and will deliver to the
Representatives such number of copies of the Registration Statement,
including such financial statements, but without exhibits, and all
amendments thereto, as the Representatives may reasonably request. The
Company will deliver or mail to or upon the order of the Representatives,
from time to time until the effective date of the Registration Statement,
as many copies of the Preeffective Prospectus as the Representatives may
reasonably request. The Company will deliver or mail to or upon the order
of the Representatives on the date of the initial public offering, and
thereafter from time to time during the period when delivery of a
prospectus relating to the Stock is required under the Securities Act, as
many copies of the Prospectus, in final form or as thereafter amended or
supplemented as the Representatives may reasonably request; provided,
--------
however, that the expense of the preparation and delivery of any prospectus
-------
required for use nine (9) months or more after the effective date of the
Registration Statement shall be borne by the Underwriters required to
deliver such prospectus.
(e) The Company will make generally available to its stockholders as
soon as practicable, but not later than fifteen (15) months after the
effective date of the Registration Statement, an earnings statement which
will be in reasonable detail (but which need not be audited) and which will
comply with Section 11(a) of the Securities Act, covering a period of at
least twelve (12) months beginning after the "effective date" (as defined
in Rule 158 under the Securities Act) of the Registration Statement.
(f) The Company will cooperate with the Representatives to enable the
Stock to be registered or qualified for offering and sale by the
Underwriters and by dealers under the securities laws of such jurisdictions
as the Representatives may designate, provided that such jurisdictions are
within the United States, Guam or Puerto Rico, and at the request of the
Representatives will make such applications and furnish such consents to
service of process or other documents as may be required of it as the
issuer of the Stock for that purpose; provided, however, that the Company
-------- -------
shall not be required to qualify to do business or to file a general
consent (other than that arising out of the offering or sale of the Stock)
to service of process in any such jurisdiction where it is not now so
subject. The Company will, from time to time, prepare and file such
statements and reports as are or may be required of it as the issuer of the
Stock to continue such qualifications in effect for so long a period as the
Representatives may reasonably request for the distribution of the Stock.
The Company will advise the Representatives promptly after the Company
becomes aware of the suspension of the qualifications or registration of
(or any such exception relating to) the Common Stock of the Company for
offering, sale or trading in any jurisdiction or of any initiation or
threat of any proceeding for any such purpose, and in the event of the
issuance of any orders suspending such qualifications, registration or
exception, the Company will, with the cooperation of the Representatives
use its best efforts to obtain the withdrawal thereof.
<PAGE>
-18-
(g) The Company will furnish to its stockholders annual reports
containing financial statements certified by independent public accountants
and with quarterly summary financial information in reasonable detail which
may be unaudited.
(h) The Company will use its best efforts to list the Stock on the
Nasdaq National Market.
(i) The Company will maintain a transfer agent and registrar for its
Common Stock.
(j) Prior to filing its first six quarterly statements on Form 10-Q,
the Company will have its independent auditors perform a limited quarterly
review of its quarterly numbers.
(k) The Company will not offer, sell, assign, transfer, encumber,
contract to sell, grant an option to purchase or otherwise dispose of any
shares of Common Stock or securities convertible into, derivative of or
exercisable or exchangeable for Common Stock (including, without
limitation, Common Stock of the Company which may be deemed to be
beneficially owned by the Company in accordance with the Rules and
Regulations) during the 180 days after the date of this Agreement (except
with prior written consent of Cowen acting alone or each of the
Representatives acting jointly), other than the Company's sale of Common
Stock hereunder and the Company's issuance of Common Stock upon the
exercise of warrants and stock options which are presently outstanding and
described in the Prospectus or pursuant to the Company's stock option plans
described in the Prospectus.
(l) The Company will apply the net proceeds from the sale of the Stock
as set forth in the description under "Use of Proceeds" in the Prospectus
which description complies in all material respects with the requirements
of Item 504 of Regulation S-K.
(m) The Company will supply you with copies of all correspondence to
and from, and all documents issued to and by, the Commission in connection
with the registration of the Stock under the Securities Act and the
Exchange Act.
(n) Prior to the Closing Dates, the Company will furnish to you, as
soon as they have been prepared, copies of any unaudited interim financial
statements of the Company for any periods subsequent to the periods covered
by the financial statements appearing in the Registration Statement and the
Prospectus.
(o) Prior to the First Closing Date, the Company will issue no press
release or other communications directly or indirectly and hold no press
conference with respect to the Company, its financial condition, results of
operation, business, prospects, assets or
<PAGE>
-19-
liabilities, or the offering of the Stock, without your prior written
consent. For a period of twelve (12) months following the Closing Date, the
Company will use its best efforts to provide to you copies of each press
release or other public communication with respect to the financial
condition, results of operations, business, prospects, assets or
liabilities of the Company at least twenty-four (24) hours prior to the
public issuance thereof or such longer advance period as may reasonably be
practicable.
(p) During the period of five (5) years hereafter, the Company will
furnish to the Representatives, and upon request of the Representatives, to
each of the Underwriters: (i) as soon as practicable after the end of each
fiscal year, copies of the Annual Report of the Company containing the
balance sheet of the Company as of the close of such fiscal year and
statements of income, stockholders' equity and cash flows for the year then
ended and the opinion thereon of the Company's independent public
accountants; (ii) as soon as practicable after the filing thereof, copies
of each proxy statement, Annual Report on Form 10-K, Quarterly Report on
Form 10-Q, Current Report on Form 8-K or other report filed by the Company
with the Commission, or the NASD or any securities exchange; and (iii) as
soon as available, copies of any report or communication of the Company
mailed generally to holders of its Common Stock and (iv) from time to time,
such other information concerning the Company as you may reasonably
request.
5. Payment of Expenses. (a) The Company will pay (directly or by
-------------------
reimbursement) all costs, fees and expenses incurred in connection with or
incident to the performance of the obligations of the Company and of the Selling
Stockholder under this Agreement and in connection with the transactions
contemplated hereby, including but not limited to (i) all expenses and taxes
incident to the issuance and delivery of the Stock to the Representatives; (ii)
all expenses incident to the registration of the Stock under the Securities Act;
(iii) the costs of preparing stock certificates (including printing and
engraving costs); (iv) all fees and expenses of the registrar and transfer agent
of the Stock; (v) all necessary issue, transfer and other stamp taxes in
connection with the issuance and sale of the Stock to the Underwriters; (vi)
fees and expenses of the Company's counsel and the Company's independent
accountants; (vii) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement, each Preeffective Prospectus and the Prospectus (including all
exhibits and financial statements) and all amendments and supplements provided
for herein, the "Agreement Among Underwriters" among the Representatives and the
Underwriters, the Master Selected Dealers' Agreement, the Underwriters'
Questionnaire and the Blue Sky memoranda and this Agreement; (viii) all filing
fees, attorneys fees' and expenses incurred by the Company or the Underwriters
in connection with exemptions from the qualifying or registering (or obtaining
qualification or registration of) all or any part of the Stock for offer and
sale and determination of its eligibility for investment under the Blue Sky or
other securities laws of such jurisdictions as the Representatives may
designate; (ix) all fees and expenses paid or incurred in connection with
filings made with the NASD; and (x) all other reasonable costs and expenses
incident to the performance of their obligations hereunder which are not
otherwise specifically provided for in this Section.
<PAGE>
-20-
(b) The Selling Stockholder will pay (directly or by reimbursement)
all fees and expenses incident to the performance of the Selling Stockholder's
obligations under this Agreement which are not otherwise specifically provided
for herein, including but not limited to any fees and expenses of counsel for
the Selling Stockholder and all expenses and taxes incident to the sale and
delivery of the Stock to be sold by the Selling Stockholder to the Underwriters
hereunder.
(c) In addition to their other obligations under Sections 6(a) and (b)
hereof, the Company and the Selling Stockholder agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding arising out of or based upon (i) any misstatement or omission
or any alleged misstatement or omission or (ii) any breach or inaccuracy in
their representations and warranties, they will reimburse each Underwriter on a
quarterly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
and Selling Stockholder's obligations to reimburse each Underwriter for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, each Underwriter
shall promptly return it to the Company or the Selling Stockholder, as the case
may be, together with interest, compounded daily, determined on the basis of the
prime rate (or other commercial lending rate for borrowers of the highest credit
standing) announced from time to timed by Chemical Bank, New York, New York (the
"Prime Rate"). Any such interim reimbursement payments which are not made to an
Underwriter in a timely manner as provided below shall bear interest at the
Prime Rate from the due date for such reimbursement. This expense reimbursement
agreement will be in addition to any other liability which the Company and the
Selling Stockholder may otherwise have. The request for reimbursement will be
sent to the Company with a copy to the Selling Stockholder. In the event that
the Company fails to make such reimbursement payment within thirty (30) days of
the reimbursement request, the Representatives shall notify the Selling
Stockholder of its obligation to make such reimbursement payments within fifteen
(15) days.
(d) In addition to its other obligations under Section 6(c) hereof,
each Underwriter severally agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any misstatement or omission of a material fact, or
any alleged misstatement or omission of a material fact, described in Section
6(c) hereof which was made in reliance upon, and in conformity with, written
information furnished to the Company by the Underwriters, directly or through
the Representatives, specifically for use in the preparation of the Registration
Statement or the Prospectus, it will reimburse the Company (and, to the extent
applicable, each officer, director, or controlling person or Selling
Stockholder) on a quarterly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial
<PAGE>
-21-
determination as to the propriety and enforceability of the Underwriters'
obligation to reimburse the Company (and, to the extent applicable, each
officer, director, or controlling person or Selling Stockholder) for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Company
(and, to the extent applicable, each officer, director, or controlling person or
Selling Stockholder) shall promptly return it to the Underwriters together with
interest, compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Company within thirty
(30) days of a request for reimbursement shall bear interest at the Prime Rate
from the date of such request. This indemnity agreement will be in addition to
any liability which such Underwriter may otherwise have.
(e) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in paragraph (c) and/or (d) of
this Section 5, including the amounts of any requested reimbursement payments
and the method of determining such amounts, shall be settled by arbitration
conducted under the provisions of and pursuant to the arbitration procedures of
the American Arbitration Association. Any such arbitration must be commenced by
service of a written demand for arbitration or written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in paragraph (c) and/or (d) of
this Section 5 and would not resolve the ultimate propriety or enforceability of
the obligation to reimburse expenses which is created by the provisions of
Section 6.
6. Indemnification and Contribution. (a) The Company agrees to
--------------------------------
indemnify and hold harmless each Underwriter and each person, if any, who
controls such Underwriter within the meaning of the Securities Act and the
respective officers, directors, shareholders, partners and employees of each of
such Underwriter or person who controls such Underwriter (collectively, the
"Underwriter Indemnified Parties" and, each, an "Underwriter Indemnified
Party"), against any losses, claims, damages, liabilities or expenses (including
the reasonable cost of investigating and defending against any claims therefor
and counsel fees incurred in connection therewith) , joint or several, which may
be based upon the Securities Act, the Exchange Act or any other statute or at
common law, on the ground or alleged ground that any Preeffective Prospectus,
the Registration Statement or the Prospectus (or any Preeffective Prospectus,
the Registration Statement or the Prospectus as from time to time amended or
supplemented) includes an untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, unless such statement or omission was made in reliance upon, and
in conformity with, written information furnished to the Company by any
Underwriter, directly or through the Representatives, specifically for use in
the preparation thereof; provided, however, that with respect to any untrue
-------- -------
statement or omission or alleged untrue statement or omission made in any
Registration Statement, the indemnity
<PAGE>
-22-
agreement contained in this subsection (a) shall not inure to the benefit of any
Underwriter Indemnified Party from whom the person asserting any such losses,
claims, damages or liabilities purchased the shares of Stock concerned to the
extent that any such loss, claim, damage or liability of such Underwriter
Indemnified Party results from the fact that a copy of the Prospectus was not
sent or given to such person at or prior to the written confirmation of the sale
of such shares of Stock to such person as required by the Securities Act and if
the untrue statement or omission concerned has been corrected in the Prospectus;
provided, further, that in no case is the Company to be liable with respect to
- -------- -------
any claims made against any Underwriter Indemnified Party against whom the
action is brought unless such Underwriter Indemnified Party shall have notified
the Company in writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim served upon the
Underwriter Indemnified Party, but failure to notify the Company of such claim
shall not relieve it from any liability which it may have to any Underwriter
Indemnified Party otherwise than on account of its indemnity agreement contained
in this paragraph. The Company will be entitled to participate at its own
expense in the defense or, if it so elects, to assume the defense of any suit
brought to enforce any such liability, but if the Company elects to assume the
defense, such defense shall be conducted by counsel chosen by it. In the event
the Company elects to assume the defense of any such suit and retain such
counsel, any Underwriter Indemnified Parties, defendant or defendants in the
suit may retain additional counsel but shall bear the fees and expenses of such
counsel unless (i) the Company shall have specifically authorized in writing the
retaining of such counsel or (ii) the parties to such suit include any such
Underwriter Indemnified Parties, and the Company and such Underwriter
Indemnified Parties at law or in equity have been advised by counsel to the
Underwriters that one or more legal defenses may be available to it or them
which may not be available to the Company, in which case the Company shall not
be entitled to assume the defense of such suit notwithstanding its obligation to
bear the fees and expenses of such counsel. The Company shall not be liable to
indemnify any person for any settlement of any such claim effected without the
Company's consent. This indemnity agreement is not exclusive and will be in
addition to any liability which the Company might otherwise have and shall not
limit any rights or remedies which may otherwise be available at law or in
equity to each Underwriter Indemnified Party.
(b) The Selling Stockholder agrees to indemnify and hold harmless each
Underwriter Indemnified Party against any losses, claims, damages, liabilities
or expenses (including, unless the Selling Stockholder elects to assume the
defense, the reasonable cost of investigating and defending against any claims
therefor and counsel fees incurred in connection therewith), joint or several,
which may be based upon the Securities Act, the Exchange Act or any other
statute or at common law, on the ground or alleged ground that any Preeffective
Prospectus, the Registration Statement or the Prospectus (or any Preeffective
Prospectus, the Registration Statement or the Prospectus, as from time to time
amended and supplemented) includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading, unless such statement or omission was made in
reliance upon, and in conformity with, written information furnished to the
Company by any
<PAGE>
-23-
Underwriter, directly or through the Representatives, specifically for use in
the preparation thereof; provided, however, that with respect to any untrue
-------- -------
statement or omission or alleged untrue statement or omission made in any
Registration Statement, the indemnity agreement contained in this subsection (b)
shall not inure to the benefit of any Underwriter Indemnified Party from whom
the person asserting any such losses, claims, damages or liabilities purchased
the shares of Stock concerned to the extent that any such loss, claim, damage or
liability of such Underwriter Indemnified Party results from the fact that a
copy of the Prospectus was not sent or given to such person at or prior to the
written confirmation of the sale of such shares of Stock to such person as
required by the Securities Act and if the untrue statement or omission concerned
has been corrected in the Prospectus; provided, further, that in no case is such
-------- -------
Selling Stockholder to be liable with respect to any claims made against any
Underwriter Indemnified Party against whom the action is brought unless such
Underwriter Indemnified Party shall have notified such Selling Stockholder in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim served upon the Underwriter
Indemnified Party, but failure to notify such Selling Stockholder of such claim
shall not relieve it from any liability which it may have to any Underwriter
Indemnified Party otherwise than on account of its indemnity agreement contained
in this paragraph. The Selling Stockholder shall be entitled to participate at
its own expense in the defense, or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but, if the Selling Stockholder
elects to assume the defense, such defense shall be conducted by counsel chosen
by it. In the event that the Selling Stockholder elects to assume the defense of
any such suit and retain such counsel, the Underwriter Indemnified Parties,
defendant or defendants in the suit may retain additional counsel but shall bear
the fees and expenses of such counsel unless (i) the Selling Stockholder shall
have specifically authorized the retaining of such counsel or (ii) the parties
to such suit include such Underwriter Indemnified Parties, and the Selling
Stockholder and such Underwriter Indemnified Parties have been advised by
counsel that one or more legal defenses may be available to it or them which may
not be available to the Selling Stockholder, in which case, the Selling
Stockholder shall not be entitled to assume the defense of such suit
notwithstanding its obligation to bear the fees and expenses of such counsel.
The Selling Stockholder against whom indemnity may be sought shall not be liable
to indemnify any person for any settlement of any such claim effected without
such Selling Stockholder's consent. This indemnity agreement is not exclusive
and will be in addition to any liability which the Selling Stockholder might
otherwise have and shall not limit any rights or remedies which may otherwise be
available at law or in equity to each Underwriter Indemnified Party. The Company
and the Selling Stockholder may agree, as among themselves and without limiting
the rights of the Underwriters under this Agreement, as to their respective
amounts of such liability for which they each shall be responsible.
(c) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its directors, each of its officers who have signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act (collectively, the "Company Indemnified
Parties") and the Selling Stockholder and each person, if any, who controls a
Selling Stockholder within the meaning of the Securities Act (collectively,
<PAGE>
-24-
the "Stockholder Indemnified Parties"), against any losses, claims, damages,
liabilities or expenses (including, unless the Underwriter or Underwriters elect
to assume the defense, the reasonable cost of investigating and defending
against any claims therefor and counsel fees incurred in connection therewith),
joint or several, which arise out of or are based in whole or in part upon the
Securities Act, the Exchange Act or any other statute or at common law, on the
ground or alleged ground that any Preeffective Prospectus, the Registration
Statement or the Prospectus (or any Preeffective Prospectus, the Registration
Statement or the Prospectus, as from time to time amended and supplemented)
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances in which they were made, not misleading,
but only insofar as any such statement or omission was made in reliance upon,
and in conformity with, written information furnished to the Company by such
Underwriter, directly or through the Representatives, specifically for use in
the preparation thereof; provided, however, that in no case is such Underwriter
-------- -------
to be liable with respect to any claims made against any Company Indemnified
Party or Stockholder Indemnified Party against whom the action is brought unless
such Company Indemnified Party or Stockholder Indemnified Party shall have
notified such Underwriter in writing within a reasonable time after the summons
or other first legal process giving information of the nature of the claim shall
have been served upon the Company Indemnified Party or Stockholder Indemnified
Party, but failure to notify such Underwriter of such claim shall not relieve it
from any liability which it may have to any Company Indemnified Party or
Stockholder Indemnified Party otherwise than on account of its indemnity
agreement contained in this paragraph. Such Underwriter shall be entitled to
participate at its own expense in the defense, or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but, if such
Underwriter elects to assume the defense, such defense shall be conducted by
counsel chosen by it. In the event that any Underwriter elects to assume the
defense of any such suit and retain such counsel, the Company Indemnified
Parties or Stockholder Indemnified Parties and any other Underwriter or
Underwriters or controlling person or persons, defendant or defendants in the
suit shall bear the fees and expenses of any additional counsel retained by
them, respectively, unless (i) the Underwriter shall have specifically
authorized in writing the retaining of such counsel or (ii) the parties to such
----------
suit include the Company or a Stockholder Indemnified Party, and the
Underwriters and such Company or Stockholder Indemnified Party have been advised
by counsel to the Company or such Stockholder Indemnified Party that one or more
defenses may be available to them which may not be available to the
Underwriters, in which case the Underwriters shall not be entitled to assume the
defense of such suit notwithstanding its obligation to bear fees and expenses of
such counsel. The Underwriter against whom indemnity may be sought shall not be
liable to indemnify any person for any settlement of any such claim effected
without such Underwriter's consent. This indemnity agreement is not exclusive
and will be in addition to any liability which such Underwriter might otherwise
have and shall not limit any rights or remedies which may otherwise be available
at law or in equity to any Company Indemnified Party or Stockholder Indemnified
Party.
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) or (c) above in
<PAGE>
-25-
respect of any losses, claims, damages, liabilities or expenses (or actions in
respect thereof) referred to herein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Stockholder on the one hand and the
Underwriters on the other from the offering of the Stock. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law, then each indemnifying party shall contribute to such amount
paid or payable by such indemnified party in such proportion as is appropriate
to reflect not only such relative benefits but also the relative fault of the
Company and the Selling Stockholder on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholder on the one hand and
the Underwriters on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received by
the Company and the Selling Stockholder bear to the total underwriting discounts
and commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, the Selling
Stockholder or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company, the Selling Stockholder and the Underwriters agree that
it would not be just and equitable if contribution were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, liabilities or
expenses (or actions in respect thereof) referred to above shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating, defending, settling or compromising any
such claim. Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the shares of the Stock underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. The
Underwriters' obligations to contribute are several in proportion to their
respective underwriting obligations and not joint. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
7. Survival of Indemnities, Representations, Warranties, etc. The
---------------------------------------------------------
respective indemnities, covenants, agreements, representations, warranties and
other statements of the Company, the Selling Stockholder and the several
Underwriters, as set forth in this Agreement or made by them, respectively,
pursuant to this Agreement, shall remain in full force and effect,
<PAGE>
-26-
regardless of any investigation made by or on behalf of any Underwriter, the
Selling Stockholder, the Company or any of its officers or directors or any
controlling person, and shall survive delivery of and payment for the Stock.
8. Conditions of Underwriters Obligations. The respective
--------------------------------------
obligations of the several Underwriters hereunder shall be subject to the
accuracy, at and (except as otherwise stated herein) as of the date hereof and
at and as of the Closing Dates, of the representations and warranties made
herein by the Company and the Selling Stockholder, to compliance at and as of
the Closing Dates by the Company and the Selling Stockholder with their
covenants and agreements herein contained and other provisions hereof to be
satisfied at or prior to the Closing Dates, and to the following additional
conditions:
(a) The Registration Statement shall have become effective and no
stop order suspending the effectiveness thereof shall have been issued
and no proceedings for that purpose shall have been initiated or, to
the knowledge of the Company, the Selling Stockholder or the
Representatives, shall be threatened by the Commission, and any
request for additional information on the part of the Commission (to
be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the reasonable
satisfaction of the Representatives. Any filings of the Prospectus,
or any supplement thereto, required pursuant to Rule 424 (b) or Rule
434 of the Rules and Regulations, shall have been made in the manner
and within the time period required by Rule 424(b) and Rule 434 of the
Rules and Regulations, as the case may be.
(b) The Representatives shall have been satisfied that there
shall not have occurred any change prior to the Closing Dates in the
condition (financial or otherwise), properties, business, management,
net worth or results of operations of the Company, or any change in
the capital stock, or any material change in short-term or long-term
debt of the Company, such that (i) the Registration Statement or the
Prospectus, or any amendment or supplement thereto, contains an untrue
statement of fact which, in the opinion of the Representatives, is
material, or omits to state a fact which, in the opinion of the
Representatives, is required to be stated therein or is necessary to
make the statements therein not misleading, or (ii) it is
impracticable in the reasonable judgment of the Representatives to
proceed with the public offering or purchase the Stock as contemplated
hereby.
(c) The Representatives shall be satisfied that no legal or
governmental action, suit or proceeding affecting the Company which is
material and adverse to the Company or which affects or may affect the
Company's or the Selling Stockholder' ability to perform their
respective obligations under this Agreement shall have been instituted
or threatened and there shall have occurred no material adverse
development in any existing such action, suit or proceeding.
<PAGE>
-27-
(d) At the time of execution of this Agreement, the
Representatives shall have received from Arthur Andersen LLP,
independent certified public accountants, a letter, dated the date
hereof, in form and substance satisfactory to the Underwriters.
(e) The Representatives shall have received from Arthur Andersen
LLP, independent certified public accountants, a letter, dated the
Closing Dates, to the effect that such accountants reaffirm, as of the
Closing Dates, and as though made on the Closing Date(s), the
statements made in the letter furnished by such accountants pursuant
to paragraph (d) of this Section 8.
(f) The Representatives shall have received the following
opinions:
(i) from Finnegan, Hickey, Dinsmoor & Johnson, P.C., counsel
for the Company and for the Selling Stockholder, an opinion or
opinions, dated the Closing Dates, to the effect set forth in Exhibits
I and II hereto; and
(ii) from Lahive & Cockfield, patent counsel to the Company
and the Selling Stockholder, an opinion or opinions, dated the Closing
Dates, to the effect set forth in Exhibit III hereto.
(g) The Representatives shall have received from Testa, Hurwitz &
Thibeault, LLP, counsel for the Underwriters, their opinion or
opinions, dated the Closing Dates with respect to the incorporation of
the Company, the validity of the Stock, the Registration Statement and
the Prospectus and such other related matters as they may reasonably
request, and the Company and the Selling Stockholder shall have
furnished to such counsel such documents as they may request for the
purpose of enabling them to pass upon such matters.
(h) The Representatives shall have received a certificate, dated
the Closing Dates, of the Chief Executive Officer or the President and
the chief financial or accounting officer of the Company to the effect
that:
(i) No stop order suspending the effectiveness of the
Registration Statement has been issued, and, to the best of the
knowledge of the signers, no proceedings for that purpose have
been instituted or are pending or contemplated under the
Securities Act;
(ii) Neither any Preeffective Prospectus, as of its date,
nor the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, as of the time when the
Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate,
included any untrue statement of a material fact or omitted
<PAGE>
-28-
to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(iii) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, and except as set forth or contemplated in the
Prospectus, the Company has not incurred any material liabilities
or obligations, direct or contingent, nor entered into any
material transactions not in the ordinary course of business and
there has not been any material adverse change in the condition
(financial or otherwise), properties, business, management, net
worth or results of operations of the Company, or any change in
the capital stock, or any material change in the short-term or
long-term debt of the Company;
(iv) The representations and warranties of the Company in
this Agreement are true and correct at and as of the Closing
Dates, and the Company has complied with all the agreements and
performed or satisfied all the conditions on its part to be
performed or satisfied at or prior to the Closing Dates; and
(v) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, and
except as disclosed in or contemplated by the Prospectus, (i)
there has not been any material adverse change or a development
involving a material adverse change in the condition (financial
or otherwise), properties, business, management, net worth or
results of operations of the Company; (ii) the business and
operations conducted by the Company have not sustained a loss by
strike, fire, flood, accident or other calamity (whether or not
insured) of such a character as to interfere materially with the
conduct of the business and operations of the Company; (iii) no
legal or governmental action, suit or proceeding is pending or
threatened against the Company which is material to the Company,
whether or not arising from transactions in the ordinary course
of business, or which may materially and adversely affect the
transactions contemplated by this Agreement; (iv) since such
dates and except as so disclosed, the Company has not incurred
any material liability or obligation, direct, contingent or
indirect, made any change in its capital stock (except pursuant
to its stock plans), made any material change in its short-term
or funded debt or repurchased or otherwise acquired any of the
Company's capital stock; and (v) the Company has not declared or
paid any dividend, or made any other distribution, upon its
outstanding capital stock payable to stockholders of record on a
date prior to the Closing Date.
<PAGE>
-29-
(i) The Representatives shall have received a certificate, dated
the Closing Dates of the Selling Stockholder to the effect that as of
the Closing Dates its representations and warranties in this Agreement
are true and correct as if made on and as of the Closing Dates, and
that it has performed all its obligations and satisfied all the
conditions on its part to be performed or satisfied at or prior to the
Closing Dates.
(j) The Company and the Selling Stockholder shall have furnished
to the Representatives such additional certificates as the
Representatives may have reasonably requested as to the accuracy, at
and as of the Closing Dates, of the representations and warranties
made herein by them and as to compliance at and as of the Closing
Dates by them with their covenants and agreements herein contained and
other provisions hereof to be satisfied at or prior to the Closing
Dates, and as to satisfaction of the other conditions to the
obligations of the Underwriters hereunder.
(k) Cowen shall have received the written agreements of all
officers, directors and holders of Common Stock and options to
purchase Common Stock that each will not offer, sell, pledge, contract
to sell, grant an option to purchase or otherwise dispose of any
shares of Common Stock held by such person (including without
limitation any shares of Common Stock that may be deemed to be
beneficially owned by such person on the date hereof in accordance
with the Rules and Regulations and shares of Common Stock which may be
issued upon exercise of a stock option or warrant) or any securities
convertible into, derivative of or exercisable or exchangeable for
such Common Stock for the 180 day period after the date of this
Agreement, except for shares of Common Stock sold pursuant to this
Agreement.
(l) The transactions contemplated by the Transfer Agreement have
been consummated.
All opinions, certificates, letters and other documents will be in
compliance with the provisions hereunder only if they are satisfactory in form
and substance to the Representatives. The Company will furnish to the
Representatives conformed copies of such opinions, certificates, letters and
other documents as the Representatives shall reasonably request. If any of the
conditions hereinabove provided for in this Section shall not have been
satisfied when and as required by this Agreement, this Agreement may be
terminated by the Representatives by notifying the Company of such termination
in writing or by telegram at or prior to the Closing Dates, but Cowen shall be
entitled to waive any of such conditions.
9. Effective Date. This Agreement shall become effective immediately
--------------
as to Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16 and 17 and, as to all other
provisions, at 11:00 a.m.
<PAGE>
-30-
New York City time on the first full business day following the effectiveness
of the Registration Statement or at such earlier time after the Registration
Statement becomes effective as the Representatives may determine on and by
notice to the Company or by release of any of the Stock for sale to the public.
For the purposes of this Section 9, the Stock shall be deemed to have been so
released upon the release for publication of any newspaper advertisement
relating to the Stock or upon the release by you of telegrams (i) advising
Underwriters that the shares of Stock are released for public offering or (ii)
offering the Stock for sale to securities dealers, whichever may occur first.
10. Termination. This Agreement (except for the provisions of
-----------
Section 5) may be terminated by the Company at any time before it becomes
effective in accordance with Section 9 by notice to the Representatives and may
be terminated by the Representatives at any time before it becomes effective in
accordance with Section 9 by notice to the Company. In the event of any
termination of this Agreement under this or any other provision of this
Agreement, there shall be no liability of any party to this Agreement to any
other party, other than as provided in Sections 5, 6 and 11 and other than as
provided in Section 12 as to the liability of defaulting Underwriters.
This Agreement may be terminated after it becomes effective by the
Representatives by notice to the Company (i) if, at or prior to the First
Closing Date or the Option Closing Date, trading in securities on any of the New
York Stock Exchange, American Stock Exchange, or the Nasdaq National Market
shall have been suspended or minimum or maximum prices shall have been
established on any such exchange or market, or a banking moratorium shall have
been declared by New York or United States authorities; (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market; (iii) if, at or prior to the First Closing Date or the
Option Closing Date, there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power or of any other
insurrection or armed conflict involving the United States or (B) any change in
financial markets or any calamity or crisis which, in the judgment of the
Representatives, makes it impractical or inadvisable to offer or sell the Firm
Stock or Optional Stock, as applicable, on the terms contemplated by the
Prospectus; (iv) if there shall have been any development or prospective
development involving particularly the business or properties or securities of
the Company or the transactions contemplated by this Agreement, which, in the
judgment of the Representatives, makes it impracticable or inadvisable to offer
or deliver the Firm Stock or the Optional Stock, as applicable, on the terms
contemplated by the Prospectus; (v) if there shall be any litigation or
proceeding, pending or threatened, which, in the judgment of the
Representatives, makes it impracticable or inadvisable to offer or deliver the
Firm Stock or Optional Stock, as applicable, on the terms contemplated by the
Prospectus; or (vi) if there shall have occurred any of the events specified in
the immediately preceding clauses (i) - (v) together with any other such event
that makes it, in the judgment of the Representatives, impractical or
inadvisable to offer or deliver the Firm Stock or Optional Stock, as applicable,
on the terms contemplated by the Prospectus.
<PAGE>
-31-
11. Reimbursement of Underwriters. Notwithstanding any other
-----------------------------
provisions hereof, if this Agreement shall not become effective by reason of any
election of the Company or the Selling Stockholder pursuant to the first
paragraph of Section 10 or shall be terminated by the Representatives under
Section 8 or Section 10, the Company and the Selling Stockholder will bear and
pay the expenses specified in Section 5 hereof and, in addition to their
obligations pursuant to Section 6 hereof, the Company and the Selling
Stockholder will reimburse the reasonable out-of-pocket expenses of the several
Underwriters (including reasonable fees and disbursements of counsel for the
Underwriters) incurred in connection with this Agreement and the proposed
purchase of the Stock, and promptly upon demand the Company will pay such
amounts to you as Representatives.
12. Substitution of Underwriters. If any Underwriter or Underwriters
----------------------------
shall default in its or their obligations to purchase shares of Stock hereunder
and the aggregate number of shares which such defaulting Underwriter or
Underwriters agreed but failed to purchase does not exceed ten percent (10%) of
the total number of shares underwritten, the other Underwriters shall be
obligated severally, in proportion to their respective commitments hereunder, to
purchase the shares which such defaulting Underwriter or Underwriters agreed but
failed to purchase. If any Underwriter or Underwriters shall so default and the
aggregate number of shares with respect to which such default or defaults occur
is more than ten percent (10%) of the total number of shares underwritten and
arrangements satisfactory to the Representatives and the Company for the
purchase of such shares by other persons are not made within forty-eight (48)
hours after such default, this Agreement shall terminate.
If the remaining Underwriters or substituted Underwriters are required
hereby or agree to take up all or part of the shares of Stock of a defaulting
Underwriter or Underwriters as provided in this Section 12, (i) the Company and
the Selling Stockholder shall have the right to postpone the Closing Dates for a
period of not more than five (5) full business days in order that the Company
and the Selling Stockholder may effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary, and (ii) the respective numbers of shares to be
purchased by the remaining Underwriters or substituted Underwriters shall be
taken as the basis of their underwriting obligation for all purposes of this
Agreement. Nothing herein contained shall relieve any defaulting Underwriter of
its liability to the Company, the Selling Stockholder or the other Underwriters
for damages occasioned by its default hereunder. Any termination of this
Agreement pursuant to this Section 12 shall be without liability on the part of
any non-defaulting Underwriter, the Selling Stockholder or the Company, except
for expenses to be paid or reimbursed pursuant to Section 5 and except for the
provisions of Section 6.
13. Notices. All communications hereunder shall be in writing and,
-------
if sent to the Underwriters shall be mailed, delivered or telegraphed and
confirmed to you, as their Representatives c/o Cowen & Company at Financial
Square, New York, New York 10005 except
<PAGE>
-32-
that notices given to an Underwriter pursuant to Section 6 hereof shall be sent
to such Underwriter at the address furnished by the Representatives or, if sent
to the Company, shall be mailed, delivered or telegraphed and confirmed at
Viisage Technology, Inc., 531 Main Street, Acton, MA 01720. With respect to the
Selling Stockholder, notices may be sent to Lau at 531 Main Street, Acton, MA
01720.
14. Successors. This Agreement shall inure to the benefit of and be
----------
binding upon the several Underwriters, the Company and the Selling Stockholder
and their respective successors and legal representatives. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any person
other than the persons mentioned in the preceding sentence any legal or
equitable right, remedy or claim under or in respect of this Agreement, or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of such
persons and for the benefit of no other person; except that the representations,
warranties, covenants, agreements and indemnities of the Company and the Selling
Stockholder contained in this Agreement shall also be for the benefit of the
person or persons, if any, who control any Underwriter or Underwriters within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act, and the indemnities of the several Underwriters shall also be for the
benefit of each director of the Company, each of its officers who has signed the
Registration Statement and the person or persons, if any, who control the
Company or any Selling Stockholder within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act.
15. Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the laws of the State of New York.
16. Authority of the Representatives. In connection with this
--------------------------------
Agreement, you will act for and on behalf of the several Underwriters, and any
action taken under this Agreement by Cowen, as Representative, will be binding
on all the Underwriters.
17. Partial Unenforceability. The invalidity or unenforceability of
------------------------
any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
18. General. This Agreement constitutes the entire agreement of the
-------
parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. In this Agreement, the term
"Company's knowledge" means the knowledge of the Company and the Selling
Stockholder. The section headings in this
<PAGE>
-33-
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company, the Selling Stockholder and the
Representatives.
19. Counterparts. This Agreement may be signed in two (2) or more
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
<PAGE>
-34-
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter and your acceptance shall constitute a binding agreement
between us.
Very truly yours,
VIISAGE TECHNOLOGY, INC.
By:
---------------------------------
Name:
Title:
LAU ACQUISITION CORP.
By:
---------------------------------
Name:
Title:
<PAGE>
-35-
Accepted and delivered in
New York, New York as of
the date first above written.
COWEN & COMPANY
NEEDHAM & COMPANY, INC.
By: COWEN & COMPANY
Acting on their own behalf and as
Representatives of the several
Underwriters referred to in the
foregoing Agreement.
By: Cowen Incorporated,
its general partner
By:
-----------------------------
Name:
Title:
<PAGE>
-36-
SCHEDULE A
<TABLE>
<CAPTION>
Number
of Shares
of Firm Stock
to be
Purchased
---------
Name
- ----
<S> <C>
Cowen & Company................................
Needham & Company, Inc. .......................
---------
Total.................................... 2,500,000
=========
</TABLE>
<PAGE>
-37-
EXHIBITS I AND II
-----------------
FORM OF OPINION TO BE DELIVERED BY COUNSEL TO COMPANY
AND THE SELLING STOCKHOLDER
---------------------------
<PAGE>
-38-
November , 1996
COWEN & COMPANY
NEEDHAM & COMPANY, INC.
as Representatives of the several
Underwriters named in Schedule A
to the Underwriting Agreement
dated November __, 1996 among
the Underwriters, Viisage
Technology, Inc. and Lau Acquisition
Corp.
Ladies and Gentlemen:
This opinion is furnished to you pursuant to Section 8(f)(i) of the
Underwriting Agreement dated November __, 1996 (the "Underwriting Agreement")
among Viisage Technology, Inc., a Delaware corporation (the "Company"), Lau
Acquisition Corp., a Massachusetts corporation (the "Selling Stockholder"), and
the several Underwriters named in Schedule A to the Underwriting Agreement, for
whom you are acting as Representatives, relating to the Company's and Selling
Stockholder's sale of an aggregate 2,500,000 shares of Common Stock, $.001 Par
Value (the "Shares") to the Underwriters. The Company has granted to the
Underwriters an option to purchase 375,000 additional shares of Common Stock.
Capitalized terms used but not defined herein shall have the respective meanings
ascribed to them in the Underwriting Agreement.
We have acted as counsel for the Company and Selling Stockholder with
respect to the issuance and sale of the Shares. We have attended the Closing of
the sale of the Shares held today. We have examined the original or certified
copies of the Certificate of Incorporation of the Company, the Articles of
Organization of the Selling Stockholder, the By-laws of the Company and the
Selling Stockholder, the relevant minutes of the meetings or written consents of
the Board of Directors and stockholders of the Company and Selling Stockholder
through the date hereof, and we have examined a specimen form of the stock
certificate which will evidence ownership of the Shares.
We have also examined the Company's Registration Statement on Form S-1,
Registration No. 333-10649, filed on August 22, 1996 with the Securities and
Exchange Commission (the "SEC") for the registration of the Shares under the
Securities Act of 1933 (the "Act"), as amended by Amendment No. 1 filed on
October 9, 1996, Amendment No. 2 filed on November 4, 1996 and by Amendment No.
3 filed on November 7, 1996 (the "Registration Statement"), and the final
prospectus dated November 8, 1996 in the form filed under Rule 424(b) of the Act
(the "Prospectus").
<PAGE>
-39-
Further, we have examined an executed copy of the Underwriting Agreement
and all other documents (other than the certificates representing the Shares)
listed on Schedule A to the Closing Memorandum pertaining to the sale of the
Shares.
The opinions rendered below "to our knowledge" or on the basis of what we
"know" are based only on the actual knowledge of the attorneys currently with
our firm who have given substantive legal representation to the Company or the
Selling Stockholder.
We have made such examination of the laws of the United States, the
Commonwealth of Massachusetts and the Delaware General Corporation Law as we
have deemed relevant for the purposes of this opinion, but we have not made an
independent review of the laws of any other state or jurisdiction. To the
extent that any of the opinions expressed may require the application of the law
of the State of New York, we have assumed, with your permission, that the
applicable law would be equivalent to that of Massachusetts.
As to certain questions of fact, we have relied on representations or
certificates of officers of the Company or the Selling Stockholder, and of
government officials, upon which representations or certificates we believe it
is justifiable for you and for us to rely. As to the opinion in the first
sentence of paragraph 1 relating to the organization, existence and standing of
the Company in Delaware, we have relied solely upon a certificate of the
Secretary of State of Delaware dated November 7, 1996 and on the date hereof.
As to the opinion in paragraph 22 relating to the organization, existence and
good standing of the Selling Stockholder in Massachusetts, we have relied solely
upon a certificate of the Secretary of State of The Commonwealth of
Massachusetts dated November 7, 1996 and a verbal representation of a
representative of that office on the date hereof. As to the opinion in the
second sentence of paragraph 1 relating to the qualification and standing of the
Company in other jurisdictions, we have relied solely upon certificates of
government officials as of recent dates and no opinion is given with respect to
any day after the date of the applicable certificate. The opinion set forth in
paragraph 5 below as to the effectiveness of the Registration statement is based
solely on a verbal confirmation from N. Sean Harrison, Esquire, of the
Commission on November __, 1996.
We have examined such other papers and made such investigations as to
matters of fact and law as we have considered necessary in order to give the
opinions set forth below.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company has been duly organized and is validly existing and in
good standing as a corporation under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
businesses as described in the Prospectus. [The Company is duly qualified as a
foreign corporation and is in good standing in ____________________________.]
To our knowledge, the Company does not own or control, directly or indirectly,
any corporation, association or other entity.
<PAGE>
-40-
2. On the date hereof, the authorized capital stock of the Company
consists of 20,000,000 shares of Common Stock, $.001 par value per share, and
2,000,000 shares of undesignated Preferred Stock, $.001 par value per share.
The outstanding shares of the capital stock of the Company (including the shares
of stock to be sold by the Selling Stockholder) have been duly authorized and
validly issued, are fully paid and nonassessable, conform to the description
thereof contained in the Prospectus in all material respects and, to our
knowledge, have not been issued in violation of or are subject to any preemptive
right, co-sale right, registration right, right of first refusal or other
similar right, except as described in the Prospectus under the caption "Shares
Eligible for Future Sale -- Registration Rights."
3. The Shares to be issued by the Company have been duly and validly
authorized and, upon delivery and payment therefor as described in the
Underwriting Agreement, will be, validly issued, fully paid and nonassessable
and free and clear of any preemptive or similar rights and will conform to the
description thereof in the Prospectus in all material respects.
4. The authorized and outstanding capital stock of the Company conforms
in all material respects to the description thereof set forth in the Prospectus
under the caption "Description of Capital Stock." The certificates representing
the Shares are in proper form under the Delaware General Corporation Law
assuming conformance with the specimen certificate filed as an Exhibit to the
Registration Statement.
5. The Registration Statement has become effective under the Act and, to
our knowledge, no stop order suspending the effectiveness of the Registration
Statement or suspending or preventing the use of the Prospectus is in effect and
no proceedings for that purpose have been instituted or are pending by the
Commission.
6. The Registration Statement and the Prospectus (except as to the
financial statements, the notes thereto and the related schedules and other
financial operations and statistical data contained therein, as to which we
express no opinion) comply as to form in all material respects with the
requirements of the Act and with the Rules and Regulations.
7. To our knowledge, the Company has not received notice of any claim or
challenge regarding the ownership of any patents, trademarks, service marks,
trade names, licenses, inventions or any other rights described in the
Prospectus. To our knowledge, except as described in the Prospectus under the
caption "Business -- Legal Proceedings," (i) no claim has been made against the
company alleging infringement by the Company of an patent, trademark, service
mark, trade names, trade secret, license or other intellectual property or
franchise rights of any person, (ii) no legal or governmental proceedings are
pending relating to the foregoing, other than review of pending patent
applications, and (iii) no such proceedings are currently threatened by
governmental authorities or others.
8. The statements under the captions "Risk Factors - Shares Eligible",
"Risk Factors - Potential Adverse Impact of Anti-takeover Provisions on Market
Price of Shares", "Risk
<PAGE>
-41-
Factors - Limited Protection of Intellectual Property...", Business -
Intellectual Property and Proprietary Rights," "Business - Legal Proceedings,"
"Management - Incentive and Stock Plans," "Relationship and Certain Transactions
with Lau Technologies," "Principal and Selling Stockholders," "Description of
Capital Stock" and "Shares Eligible for Future Sale" in the Prospectus, only to
the extent that such statements constitute a summary of documents referred to
therein or matters of law, are accurate summaries in all material respects and
fairly present the information called for by the Securities Act and the Rules
and Regulations with respect to such documents and matters. We do not know of
any laws, rules or regulations or legal or governmental proceedings applicable
to the business of the Company required to be described in the Registration
Statement or the Prospectus that are not described as required.
9. To our knowledge, no franchise, lease, contract, agreement or document
which is required to be described in the Registration Statement or Prospectus or
to be filed as an exhibit to the Registration Statement is not described or
filed therein.
10. To our knowledge, except as described in the Prospectus under the
caption "Business -- Legal Proceedings," there are no legal or governmental
proceedings pending or threatened against the Company of a character required to
be disclosed in the Registration Statement or the Prospectus by the Act or the
Rules and Regulations.
11. The Company has the corporate power and authority to enter into the
Underwriting Agreement and to perform its obligations thereunder (including to
issue, sell and deliver the Shares to be issued and sold by it), and the
Underwriting Agreement has been duly and validly authorized, executed and
delivered by the Company.
12. The execution and delivery of the Underwriting Agreement and the issue
and sale of the Shares will not result in a breach or violation of any of the
terms or provisions of or constitute a default under or violate or conflict with
the Certificate of Incorporation or By-laws of the Company or, to our knowledge,
(a) any material provision of any contract or instrument filed as an exhibit to
the Registration Statement, (b) any law of the United States or the Commonwealth
of Massachusetts or the Delaware General Corporation Law, (c) any rule or
regulation of any governmental authority or regulatory body of the Untied States
or the Commonwealth of Massachusetts, (d) any judgment, order or decree of any
court, governmental authority or arbitrator known to us and applicable to the
Company or its properties or assets, or (e) will result in the creation of a
lien.
13. To our knowledge, no person or entity has the right to require
registration of shares of Common Stock or other securities of the Company
because of the filing or effectiveness of the Registration Statement or
otherwise, except as described in the Prospectus under the caption "Shares
Eligible for Future Sale - Registration Rights."
14. No consent, approval, authorization or order of, and no notice to or
filing with, any court or governmental agency or body is required to be obtained
or made by the Company for the issue and sale of the shares pursuant to the
Underwriting Agreement, except such as have
<PAGE>
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been obtained or made and such as may be required under state securities or blue
sky laws or by the National Association of Securities Dealers, Inc., as to which
we express no opinion.
15. The Company is not, and upon the consummation of the transactions
contemplated by the Underwriting Agreement and application of the proceeds as
set forth under the caption "Use of Proceeds" in the Prospectus will not be, an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the investment Company Act of 1940, as amended.
16. The Company has the corporate power and authority to enter into each
of the Organization Agreements to perform its obligations thereunder, and each
of such agreements has been duly and validly authorized, executed and delivered
by the Company and each is a valid and binding obligation of the Company
enforceable against the company in accordance with its terms, subject, as to the
availability of legal remedies, to applicable bankruptcy, reorganization,
insolvency, moratorium, or other similar laws affecting creditors' rights
generally, and to any equitable principles limiting the right to obtain specific
performance of any such obligations. The transactions contemplated by the
Transfer Agreement have been consummated.
17. The Selling Stockholder is the record owner and, to our knowledge, has
valid and marketable title to the Shares to be sold by the Selling Stockholder,
free and clear of any lien, claim, security interest or other encumbrance,
including, without limitation, any restriction on transfer, and has full right,
power and authority to enter into the Underwriting Agreement.
18. To our knowledge, the Selling Stockholder has, upon delivery of and
payment for each of the Shares being sold by the Selling Stockholder, the right,
power and authority, and any approval required by law to sell, transfer, assign
and deliver the Shares being sold by the Selling Stockholder pursuant to the
Underwriting Agreement. Each of the several Underwriters (assuming that the
Underwriters are bona fide purchasers as defined in Section 8-302 of the
Massachusetts Uniform Commercial Code) will acquire valid and marketable title
to all o the Shares being sold to the Underwriters by the Selling Stockholder,
free and clear of any liens, encumbrances, equities claims, restrictions on
transfer or other defects whatsoever.
19. The Selling Stockholder has the corporate power and authority to enter
into the Underwriting Agreement and to perform its obligations thereunder and
the Underwriting Agreement has been duly and validly authorized, executed and
delivered by the Selling Stockholder.
20. The execution and delivery of the Underwriting Agreement and the sale
of Shares by the Selling Stockholder will not result in a breach or violation of
any of the terms or provisions of or constitute a default under or violate or
conflict with the Articles of Organization or By-Laws of the Selling
Stockholder, or, to our knowledge, (a) any provision of any material contract or
instrument to which the Selling Stockholder is a party or by which the Selling
Stockholder is bound, (b) any law of the United States or the Commonwealth of
Massachusetts, (c) any judgment, order or decree of any court, governmental
authority or arbitrator, known to us
<PAGE>
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and applicable to the Selling Stockholder or any of its properties or assets, or
(e) result in the creation of a lien.
21. The Selling Stockholder has the corporate power and authority to enter
into each of the Organization Agreements and to perform its obligations
thereunder, and each of the Organization Agreements has been duly and validly
authorized, executed and delivered by the Selling Stockholder and is a valid and
binding obligation of the Selling Stockholder enforceable against the Selling
Stockholder in accordance with its terms, subject, as to the availability of
legal remedies, to applicable bankruptcy, reorganization, insolvency,
moratorium, or other similar laws affecting creditors' rights generally, and to
any equitable principles limiting the right to obtain specific performance of
any such obligations. To our knowledge, the Selling Stockholder has performed
all of its obligations under the Transfer Agreement defined in the Underwriting
Agreement.
22. The execution, delivery and performance of each of the Organization
Agreements will not result in a breach or violation of any of the terms or
provisions of or constitute a default under or violate or conflict with the
Articles of Organization or By-laws of the Selling Stockholder, or, to our
knowledge, (a) any material provision of any material contract or instrument to
which the Selling Stockholder is a party or by which the Selling Stockholder is
bound, (b) any law of the Untied States or the Commonwealth of Massachusetts or
the Delaware General Corporation Law, (c) any rule or regulation of any
governmental authority or regulatory body of the United States or the
Commonwealth of Massachusetts, (d) any judgment, order or decree of any court,
governmental authority or arbitrator known to us and applicable to the Selling
Stockholder or any of its properties or assets or (e) result in the creation of
a lien.
23. The Selling Stockholder has been duly organized and is validly
existing and in good standing as a corporation under the laws of the
Commonwealth of Massachusetts.
Because the primary purpose of our professional engagement was not to
establish or confirm factual matters or financial, accounting or statistical
matters and because of the wholly or partially non-legal character of many of
the statements contained in the Registration Statement and the Prospectus, we
are not passing upon and do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus (except to the extent expressly set forth in
paragraphs (6) and (8) above) and we make no representation that we have
independently verified the accuracy, completeness or fairness of such statements
(except as aforesaid). Without limiting the foregoing, we assume no
responsibility for, and have not independently verified, the accuracy,
completeness or fairness of the financial statements or notes thereto or the
other financial and statistical data included in the Registration Statement, and
we have not examined the accounting, financial or statistical records from which
such statements, notes and data are derived. We note that, although certain
portions of the Registration Statement (including financial statements) have
been included therein on the authority of "experts" within the meaning of the
Securities Act, we are not such experts with respect to any portion of the
Registration Statement.
<PAGE>
-44-
However, in the course of our acting as counsel for the Company in
connection with the preparation of the Registration Statement and the
Prospectus, we participated in conferences with your representatives,
representatives of the Company, representatives of the Selling Stockholder,
representatives of Testa, Hurwitz & Thibeault, LLP, counsel for the
Underwriters, and representatives of Arthur Anderson, LLP, independent
accountants for the Company, during which conferences the contents of the
Registration Statement and the Prospectus and related matters were discussed.
In addition, we reviewed certain corporate documents furnished to us by the
Company and the Selling Stockholder or otherwise in our possession, including
the exhibits filed with the Registration Statement and the minutes of meetings
of the stockholders and Board of Directors of the Company and the Selling
Stockholder.
Based on our participation in the above-mentioned conferences, our review
of the documents described above, our understanding of applicable law and the
experience we have gained in our practice thereunder, we advise you that nothing
has come to our attention which leads us to believe that the Registration
Statement and any amendment or supplement thereto when such documents become
effective (other than the financial statements, the notes thereto and the
related schedules and other financial and statistical data included in the
Registration Statement, as to which we express no opinion), at the time it
became effective, contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus and any amendment or
supplement thereto (other than the financial statements, the notes thereto and
the related schedules and other financial and statistical data included in the
Prospectus, as to which we express no opinion), as of the date of the Prospectus
or as of the Closing Dates, included or includes an untrue statement of a
material fact or omitted or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
This opinion is rendered pursuant to your request and may be relied upon
solely by the Underwriters.
Very truly yours,
FINNEGAN, HICKEY, DINSMOOR & JOHNSON, P.C.
_____________________________
Member
<PAGE>
-45-
Exhibit III
FORM OF OPINION TO BE DELIVERED
BY PATENT COUNSEL TO COMPANY
----------------------------
<PAGE>
-46-
November __, 1996
Cowen & Company
Needham & Company, Inc.
As Representatives of the several Underwriters
RE: Viisage Technology, Inc.
------------------------
Ladies and Gentlemen:
We have been and are patent counsel to LAU Technologies (the "Company")
with respect to the issued patents, pending patent applications, trade secrets
and other proprietary technology that the Company owns or has rights to. This
opinion is being furnished to you at the request of the Company pursuant to
Section 8(f)(ii) of the Underwriting Agreement dated November __, 1996 between
you and the Company, relating to the sale to you of certain shares of common
stock of the Company.
We are familiar with the technology used by the Company in its business
that is the subject matter of the Company's patent portfolio. We have read the
sections of the Prospectus referring to patents, trade secrets, or other
proprietary information or materials; in particular, we have read the statements
in the Prospectus under the captions "Risk Factors - Limited Protection of
Intellectual Property and Proprietary Rights; Potential Costs of Enforcement or
Defense" and "Business - Intellectual Property and Proprietary Rights."
Subject to the foregoing and the qualifications set forth below we are of
the opinion that:
(i) We are unaware of any facts which would preclude the Company from
having clear title to the Company's patents and patent applications referred to
or described in the Prospectus, except as described in the Prospectus. To the
best of our knowledge, we and the Company have complied with the required duty
of candor and good faith in dealing with the Patent and Trademark Office,
including the duty to disclose to the Office all information believed to be
material to the patentability of each issued U.S. patent or pending application.
We have no knowledge of any facts that would form the basis for a belief that
the Company lacks or will be unable to obtain any rights or licenses to use all
patents and know-how necessary to conduct its business as described in the
Prospectus, except as described in the Prospectus. We have no knowledge of any
facts which would form a basis for a belief that any of the patents or
applications owned or licensed by the Company are unenforceable or invalid, or
would be unenforceable or invalid if issued as patents, except as described in
the Prospectus. We have no knowledge of any patent applications of third
parties, which, if issued, would limit or prohibit the business now conducted or
proposed to be conducted by the Company as described in the Prospectus, except
as described therein. We know of no pending or threatened action, suit,
proceeding or claim by others that the Company is infringing any patent which
could result in any material adverse effect on the Company, except as described
in the Prospectus;
<PAGE>
-47-
(ii) To our knowledge, there are no legal or governmental proceedings
pending relating to Patent rights, other than PTO review of pending applications
for patents, including appeal and reissue proceedings, and, to the best of our
knowledge, no such proceedings are threatened or contemplated by governmental
authorities to others;
(iii) To our knowledge, there are no contracts or other documents material
to the Company's patents or proprietary information other than those described
in the Prospectus; and
(iv) Although we have not verified the accuracy or completeness of the
statements contained in the sections of the Prospectus under the captions noted
hereinabove relating to intellectual property, nothing has come to our attention
that would form a basis for a belief that those sections of the Prospectus
contain any untrue statement of a material fact, or omit to state any material
facts necessary to make the statements made therein not misleading.
In rendering this advice, we have relied as to matters of fact, to the
extent we have deemed proper, upon representations of the Company's officers and
management.
We express no opinion as to the laws of any jurisdiction except the laws of
the Commonwealth of Massachusetts and the laws of the United States of America
to the extent specifically referred to herein.
We assume no obligation to advise you of any changes in the foregoing
subsequent to delivery of this opinion. This opinion has been prepared solely
for the benefit of the several Underwriters in connection with the offering
described in the Prospectus and may not be relied on by any other person, or for
any other purpose, without our written consent. In addition, this opinion
should not be quoted in whole or in part (except in a list of closing
documents), or otherwise be referred to, nor filed with or furnished to any
governmental agency or other person or entity, without the prior written consent
of this firm.
Very truly yours,
LAHIVE & COCKFIELD
By:
------------------------------
John A. Lahive, Jr.
<PAGE>
Exhibit 5.1
November 6, 1996
Viisage Technology, Inc.
531 Main Street
Acton, Massachusetts 01720
Re: Viisage Technology, Inc.
Registration Statement on Form S-1
File No. 333-10649
----------------------------------
Ladies and Gentlemen:
At your request, we are rendering this opinion in connection with a
proposed sale by Viisage Technology, Inc., a Delaware corporation (the
"Company") comprised of (i) up to 2,375,000 shares of Common Stock (of which up
to 375,000 shares are to be issued to cover over-allotments, if any) to be
issued and sold by the Company (the "Primary Shares") and (ii) 500,000 shares of
Common Stock to be sold by the Selling Stockholder (the "Secondary Shares").
We have examined instruments, documents, and records which we deemed
relevant and necessary for the basis of our opinion hereinafter expressed. In
such examination, we have assumed the following: (a) the authenticity of
original documents and the genuineness of all signatures; (b) the conformity to
the originals of all documents submitted to us as copies; and (c) the truth,
accuracy, and completeness of the information, representations, and warranties
contained in the records, documents, instruments, and certificates we have
reviewed.
Based on such examination, we are of the opinion that (i) the Primary
Shares to be issued and sold by the Company (of which up to 375,000 shares are
to be issued to cover over-allotments, if any) are validly authorized shares of
Common Stock, and, when issued against payment of the purchase price therefor,
will be legally issued, fully paid, and nonassessable and (ii) the Secondary
Shares are validly authorized, legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the above-
referenced Registration Statement and to the use of our name whereever it
appears in said Registration Statement, including the Prospectus constituting a
part thereof, as originally filed or as subsequently amended or supplemented.
In giving such consent, we do not consider that we are "experts" within the
meaning of such terms as used in the Securities Act of 1933, as
<PAGE>
Viisage Technology, Inc.
November 6, 1996
Page Two
amended, or the rules and regulations of the Securities and Exchange Commission
issued thereunder, with respect to any part of the Registration Statement,
including this opinion as an exhibit or otherwise.
Very truly yours,
/s/ Finnegan, Hickey, Dinsmoor & Johnson, P.C.
FINNEGAN, HICKEY, DINSMOOR & JOHNSON, P.C.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Viisage Technology, Inc.:
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
Boston, Massachusetts
November 6, 1996
ARTHUR ANDERSEN LLP
