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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________.
Commission File Number 000-21559
VIISAGE TECHNOLOGY, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3320515
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Porter Road, Littleton, MA 01460
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508)-952-2200
-----------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of exchange on which registered
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Common Stock $.001 par value NASDAQ National Market
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 6, 1997,was approximately $34,080,000.
As of March 6, 1997, the registrant had 8,055,000 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1996, are incorporated by reference into Parts I and II.
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 21, 1997, are incorporated by reference into
Part III.
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PART 1
Item 1. Business
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(a) General Development of Business
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Viisage Technology, Inc. (Viisage or the Company) develops and implements
turnkey digital identification systems and solutions intended to deter fraud,
reduce customers' identification program costs and improve security. The
Company combines its systems integration and software design capabilities with
its proprietary software and hardware products to create complete customized
solutions. Viisage's products are currently operating at over 450 locations.
Applications can include systems and cards for national IDs, driver's
licenses, social services, voter registration, law enforcement, corrections,
healthcare, financial services, retail and access control. Viisage is also
commercializing patented facial recognition technology for the real-time
identification and verification of individuals.
The Company began operations in 1993 as a division of Lau Technologies, a
provider of systems integration services and products for sophisticated
electronic systems. On November 6, 1996, Lau transferred substantially all of
the assets, liabilities and operations of the division to the Company in
exchange for 5,680,000 shares of the Company's common stock and the Company
completed its initial public offering in November 1996. The Company is
currently a 64% owned subsidiary of Lau Technologies. All references to
"Viisage" or "the Company" for the periods prior to the transfer, refer to the
Viisage Technology Division of Lau Technologies.
Viisage has experienced significant revenue growth since 1993. The Company
believes that the increasing acceptance of and demand for 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. The Company provides systems and services principally under contracts
that have five-year terms and provide for several annual renewals after the
initial contract term. 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.
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.
(b) Financial Information about Industry Segments
----------------------------------------------
The Company is engaged in one business segment; the design and
implementation of digital identification systems and solutions intended to
deter fraud, reduce identification program costs and improve security.
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(c) Description of Business
-----------------------
(i) Principal Products and Services
--------------------------------
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 computer systems and
networks and 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.
As an additional means of deterring fraud, identification systems have
increasingly used biometrics (unique biological characteristics) to verify
personal identities. Biometric identifiers include facial images,
fingerprints, iris scans, retinal scans, voice data, hand geometry and
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others, 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.
Products and Services
The Company develops and implements turnkey digital identification systems
which provide complete integrated solutions for capturing images and data,
producing and delivering tamper-resistant 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 and others to help deter fraud, reduce costs and
improve security.
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 patented 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.
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Digital Identification Systems
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 (face bases) for the identification and verification
applications of the Company's facial recognition technologies.
For both instant issue and central processing systems, Viisage's digital
identification systems utilize an image capture workstation which incorporates
the Company's proprietary SensorMast. The image capture 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,
retrieval and management.
System Integration and Software Design Capabilities. In addition to the
Company's systems integration capabilities, an important aspect of its
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.
Proprietary Company Products. All of the Company's systems incorporate the
Company's proprietary SensorMast product within the image capture
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
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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.
. 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.
Customer Service and Support. 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.
Facial Recognition Technologies
The Company is working to improve the technology used in security and fraud
control through the development of facial recognition technologies. 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 Associates Limited
Partnership (Facia Reco), an entity formed by Dr. Pentland. 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.
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
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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.
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 testing in pilot programs that have been
generally available since the first quarter of 1997.
. 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).
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. 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.
. 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 offers 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.
Sales and Marketing
The Company markets its products directly through its internal sales
force, which consisted of seven individuals as of December 31, 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 traveling
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.
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(ii) and (xi) Product Development
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The Company has made research and development an important part of its
operating discipline. In response to customer needs during 1993, 1994 an
1995, the Company developed proprietary software that supports all current
industry standard operating systems and 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. The Company's current
development activities are focused on its facial recognition products and the
further commercialization of its facial recognition technology. The Company
continues its development activities in the area of platform engineering and,
among other projects, is developing enhancements to the SensorMast as well as
point-of-sale device prototypes. In addition to its own development efforts,
the Company has benefited and expects to continue to benefit from research and
development conducted by Lau Technologies for projects that are not related to
Viisage and, through its license with Facia Reco, from certain research
activities at the Massachusetts Institute of Technology. The Company also
benefits from research and development activities conducted by the
manufacturers of the components integrated into the Company's systems such as
PC's, printers, etc.
During the fiscal years ended December 31, 1994, 1995 and 1996 the Company
spent $201,000, $1.1 million and $235,000, respectively, on research and
development. Such amounts do not include amounts for specific projects that
are allocated to project costs or the benefits from the other research and
development activities referred to above.
(iii) Manufacturing and Sources of Supply
-----------------------------------
Substantially all proprietary subsystems and assemblies are made to the
Company's specifications by contract manufacturers, including 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. 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
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requirement as a result of such delays. There can be no assurance that the
Company will not experience such problems in the future.
(iv) Patents, Trademarks and Licences
--------------------------------
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 business 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''). 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 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.
The Company protects its intellectual property as trade secrets and, where
appropriate, uses trademarks or registers its products. In addition, Lau
currently has several 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. At Lau's request and expense, MIT obtained a broadening patent
which is 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.
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Although there are no pending lawsuits against the Company regarding
infringement of any existing patents or other intellectual property rights,
the Company has in the past 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. The Company believes, based on the advice of its
patent counsel, that none of its products infringe such patent. However, there
can be no assurance that such patent holder will not initiate litigation with
respect to this patent or allege additional claims.
(v) Seasonality
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The Company's operations are not seasonal since contracts are awarded and
performed throughout the year.
(vi) Working Capital Requirements
----------------------------
The Company is generally required to fund the development and
implementation of large digital identification system projects for public
sector customers. Historically, the Company has utilized bank borrowings and
project lease financing to meet these needs. There are no special
requirements or customer terms that are expected to have a material adverse
effect on the Company's working capital.
(vii) Customers and End Users
-----------------------
The following lists and categorizes the Company's customers and end users
as of December 31, 1996:
<TABLE>
<CAPTION>
STATE DEPARTMENTS OF MOTOR VEHICLES OTHER STATE AND LOCAL AGENCIES
<S> <C>
Arizona Department of Transportation Auburn (Massachusetts) Police Department
Massachusetts Registry of Motor Vehicles Connecticut Department of Public Safety
New Mexico Department of Taxation and Connecticut Department of Social Services
Revenue Massachusetts Department of Transitional
North Carolina Department of Transportation Assistance
Ohio Bureau of Motor Vehicles New York Department of Social Services *
Wisconsin Department of Transportation Ohio Department of Public Safety
FEDERAL AGENCIES FOREIGN CONTRACTS
U.S. Immigration and Naturalization Service * Electoral Office of Jamaica*
First National Bank of Southern Africa,
Limited
</TABLE>
* By subcontract.
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Revenues from three customers (Ohio Bureau of Motor Vehicles, Arizona
Department of Transportation and the Massachusetts Registry of Motor Vehicles)
each accounted for over 10% and an aggregate of 85% of revenues of revenues in
1995. For 1996, two customers (New York Department of Social Services and
North Carolina Department of Transportation) each accounted for over 10% of
Company revenues and an aggregate of 50% of revenues for the year. The loss of
any such customers could have a material adverse impact on the Company's
business, operating results and financial condition.
(viii) 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 canceled 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 December 31, 1996, the Company's backlog was approximately $34
million, compared to approximately $30 million at December 31, 1995.
Approximately 33% of the Company's backlog as of December 31, 1996, is
expected to be earned during the current fiscal year.
(ix) Government Contacts
-------------------
Government contracts are generally subject to termination for convenience
or lack of appropriation at the election of the subject agency. At December
31, 1996, amounts subject to future negotiation are not material.
(x) 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
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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.
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.
(xi) Research and Development
------------------------
See Product Development Section
(xii) Environmental Protection Regulations
------------------------------------
The Company believes that compliance by the Company with federal, state and
local environmental regulations will not have a material adverse effect on its
financial position or results of operations.
(xiii) Employees
---------
As of December 31, 1996, the Company had 47 employees. The Company from
time-to-time supplements its employee forces with independent contractors. As
of December 31, 1996, the Company had 28 such contractors. None of the
Company's employees is represented by a labor union, and the Company considers
its relationship with its employees to be good.
(d) Financial Information about Foreign and Domestic Operations and Export
----------------------------------------------------------------------
Sales
------
The Company's foreign operations and export sales are currently not
material.
13
<PAGE>
Item 2. Properties
----------
In February 1997, the Company moved to facilities located in Littleton,
Massachusetts. The Company occupies approximately 23,000 square feet of
space and has access to common areas under the terms of a Use and Occupancy
Agreement with Lau Technologies through February 2002. The Company believes
that its facilities are in good condition and are suitable and adequate for
its present operations and that suitable space is available if such lease is
not extended.
Item 3. Legal Proceedings
------------------
On September 23, 1996, three minority shareholders of Lau Technologies
filed suit against Lau Technologies, 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
Technologies. The plaintiffs requested, among other things, an injunction to
delay the Company's public 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
Technologies 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.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
----------------------------------------------------------------------
Information concerning the market and market price for the registrant's
stock, $.001 par value, and dividend policy is included under the sections
labeled "Common Stock Information" and "Dividend Policy" in the registrant's
1996 Annual Report to Shareholders and is incorporated herein by reference.
Item 6. Selected Financial Data
-----------------------
The information required under this item is included under the section
labeled "Selected Financial Information" in the registrant's 1996 Annual
Report to Shareholders and is incorporated herein by reference.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
The information required under this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the registrant's 1996 Annual Report to Shareholders and is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The financial statements required under this item are included in the
registrant's 1996 Annual Report to Shareholders and are incorporated herein
by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
---------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The information concerning directors required under this item is
incorporated herein by reference from the material contained under the
caption "Election of Director" in the registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A, not later than 120 days after the close of the fiscal
year. The information concerning delinquent filers pursuant to Item 405 of
Regulation S-K is incorporated herein by reference from the material
contained under the heading "Compliance with Section 16(a)" in the
registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the close of the fiscal year.
Item 11. Executive Compensation
----------------------
The information required under this item is incorporated herein by
reference from the material contained under the caption "Executive
Compensation" in the registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, not
later than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The information required under this item is incorporated herein by
reference from the material contained under the caption "Security Ownership"
in the registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later
than 120 days after the close of the fiscal year.
15
<PAGE>
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The information required under this item is incorporated herein by
reference from the material contained under the caption "Certain Relationships
and Related Transactions" in the registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A,
not later than 120 days after the close of the fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
(a), (d) Financial Statements and Schedules
----------------------------------
(1) The financial statements set forth in the list below are filed as
part of this Report.
(2) There are no financial statement schedules filed as part of this
Report.
(3) Exhibits filed herewith or incorporated herein by reference are set
forth in Item 14(c) below.
List of Financial Statements and Schedules Referenced in this
--------------------------------------------------------------
Item 14
-------
Information incorporated by reference from Exhibit 13 filed
herewith:
Balance Sheets
Statements of Operations
Statements of Changes in Stockholders' Equity/Net Assets
Statements of Cash Flows
Notes to Financial Statements
Report of Independent Public Accountants
Financial Statement Schedules
All schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the
financial statements or in the notes thereto.
(b) Reports on Form 8-K
-------------------
During the quarter ended December 31, 1996, the Company was not
required to file, and did not file, any Current Report on Form 8-K.
(c) Exhibits
--------
See Exhibit Index on page 18.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 28th day of March,
1997.
Viisage Technology, Inc.
By: /s/ Robert C. Hughes
----------------------------------
Robert C. Hughes
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on the 28th day of March, 1997:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*
By:________________________________ Chairman of the Board of Directors
Denis K. Berube
*
By:________________________________ President and Chief Executive Officer
Robert C. Hughes (Principal Executive Officer)
*
By:________________________________ Vice President, Chief Financial Officer and Treasurer
William A. Marshall (Principal Financial and Accounting Officer)
*
By:________________________________ Secretary and Director
Charles J. Johnson
*
By:________________________________ Director
Harriet Mouchly-Weiss
*
By:________________________________ Director
Peter Nessen
*
By:_______________________________ Director
Thomas J. Reilly
*
*By: /s/ Robert C. Hughes
______________________________
Robert C. Hughes
Attorney-in-fact
</TABLE>
17
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
- ------- ----
NO. DESCRIPTION NO
--- ----------- --
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.
10.1* Amended and Restated License Agreement, dated as of August 20,
1996, between the Registrant and Lau Technologies.
10.2* Form of Administration and Services Agreement between the
Registrant and Lau Technologies.
10.3* Form of Use and Occupancy Agreement 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** Revolving Credit Facility between the Registrant and State
Street Bank and Trust Company, dated November 22, 1996.
10.13* Contract between the Registrant and the North Carolina
Department of Transportation, dated as of April 26, 1996.
10.14* Purchase Agreement (Project Finance Facility) between the
Registrant and Sanwa Business Credit Corporation, dated as
of September 12, 1996.
18
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
- ------- ----
NO. DESCRIPTION NO
--- ----------- --
13 Annual Report to Shareholders for the year ended December 31,
1996 (only those portions incorporated herein by reference).
23 Consent of Arthur Andersen LLP.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
* Filed as an exhibit to the registrant's Form S-1 Registration Statement
dated November 8, 1996 (File No. 333-10649)
** Filed as an exhibit to the registrant's Quarterly Report on Form 10-Q for
the quarter ended September 29, 1996 (File No. 000-21559)
19
<PAGE>
EXHIBIT 13
SELECTED FINANCIAL DATA
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 Annual Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993
------------- --------------- --------------- -------------
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Revenues............................... $24,971 $11,221 $ 1,257 $ 505
Project costs.......................... 19,484 10,361 1,140 456
------------- --------------- --------------- -------------
Project margin......................... 5,487 860 117 49
------------- --------------- --------------- -------------
Operating expenses:
Sales and marketing.................. 1,852 999 1,596 1,185
Research and development............. 235 1,089 201 47
General and administrative........... 1,880 1,204 681 289
------------- --------------- --------------- -------------
Total operating expenses......... 3,967 3,292 2,478 1,521
------------- --------------- --------------- -------------
Operating income (loss)................ 1,520 (2,432) (2,361) (1,472)
Interest expense, net.................. 714 515 40 -
------------- --------------- --------------- -------------
Income (loss) before income taxes...... 806 (2,947) (2,401) (1,472)
Income taxes........................... 205 - - -
------------- --------------- --------------- -------------
Net income (loss)...................... $ 601 $(2,947) $(2,401) $(1,472)
============= =============== =============== =============
Net income (loss) per share(1)......... $ 0.09 $ (0.47) $ (0.39) $(0.24)
============= =============== =============== =============
Weighted average common and equivalent
shares.............................. 6,587 6,225 6,225 6,225
============= =============== =============== =============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993
------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital........................ $20,676 $ 7,413 $ 2,509 $ 368
Total assets........................... 36,119 11,285 3,999 914
Long-term obligations.................. 4,420 8,319 955 -
Stockholders' equity................... 23,020 - - -
Net assets(2).......................... - 1,323 1,554 368
</TABLE>
(1) See note 2 of Notes to Financial Statements for information concerning the
computation of net income (loss) per share.
(2) Net assets represent divisional investment during the time the Company
operated as a division of Lau Technologies.
13-1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in the
section below entitled "Certain Factors that may Affect Future Results." The
cautionary statements made herein should be read as being applicable to all
related forward-looking statements in this Annual Report.
OVERVIEW
Viisage develops and implements turnkey digital identification systems and
solutions intended to deter fraud, reduce customers' identification program
costs and improve security. The Company combines its systems integration and
software design capabilities with its proprietary software and hardware products
to create complete customized solutions. Viisage's products are currently
operating at over 450 locations. Applications can include systems and cards for
national ID's, driver's licenses, social services, voter registration, law
enforcement, corrections, healthcare, financial services, retail and access
control. Viisage is also commercializing patented facial recognition technology
for the real-time identification and verification of individuals.
The Company began operations in 1993 as a division of Lau Technologies, a
provider of systems integration services and products for sophisticated
electronic systems. On November 6, 1996, Lau transferred substantially all of
the assets, liabilities and operations of the division to the Company in
exchange for 5,680,000 shares of the Company's common stock and the Company
completed its initial public offering in November 1996. The Company is
currently a 64% owned subsidiary of Lau Technologies.
Viisage has experienced significant revenue growth since 1993. The Company
believes that the increasing acceptance of and demand for 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.
The Company provides systems and services principally under contracts that
have five-year terms and provide for several annual renewals after the initial
contract term. 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. 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. For the years ended December 31, 1995 and
1996, three customers and two customers, respectively, each accounted for more
than 10% of
13-2
<PAGE>
the Company's revenues and an aggregate of 85% and 50% of revenues for the
years, respectively.
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.
RESULTS OF OPERATIONS
The following table sets forth certain financial information as a percentage of
revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
----- ----- ------
<S> <C> <C> <C>
Revenues........................... 100% 100% 100%
Project costs..................... 78 92 91
---- ---- -----
Project margin..................... 22 8 9
Operating expenses:
Sales and marketing............ 7 9 127
Research and development....... 1 10 16
General and administrative..... 8 11 54
---- ---- -----
Total operating expenses. 16 30 197
---- ---- -----
Operating income(loss)............. 6 (22) (188)
Interest expense, net.............. 3 4 3
---- ---- -----
Income (loss) before income taxes.. 3 (26) (191)
Income taxes....................... 1 - -
---- ---- -----
Net income (loss).................. 2 % (26)% (191)%
==== ==== =====
</TABLE>
Years ended December 31, 1996 and 1995
Revenues. Revenues are derived principally from systems implementation,
card production and related services under multi-year contracts. Revenues
increased 123% to $25.0 million in 1996 from $11.2 million in 1995. This
increase was due to an increase in the number of contracts being performed
during 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. As a
percentage of revenues, project costs decreased to 78% for 1996 from 92% for
1995. 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
538% to $5.5 million (22% of revenues) for 1996 from $860,000 (8% of revenues)
for 1995, reflecting the increase in revenues and cost savings discussed above.
The Company believes it could experience further improvements in project margin
from project cost savings and improved pricing. However, there can be no
assurance that such improvements will be achieved.
13-3
<PAGE>
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 85% to $1.9
million in 1996 from $1.0 million in 1995. This increase principally reflects
an increase in proposal activity and the addition of marketing personnel during
1996. As a percentage of revenues, sales and marketing expenses decreased to 7%
for 1996 from 9% for 1995 due to revenues increasing at a greater rate than such
expenses during 1996. The Company anticipates that it will continue to make
significant expenditures for sales and marketing as it adds resources and
initiates operations in additional markets.
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 78% to $235,000 in 1996 from $1.1
million in 1995, and decreased as a percentage of revenues to 1% for 1996 from
10% for 1995. These decreases reflect the completion in 1995 of proprietary
software to support all industry standard computing environments and
proprietary hardware products for the Company's card-based systems and the
increase in revenues in 1996. The Company believes that the software and
hardware products developed in prior periods will support its card-based systems
offerings for the foreseeable future. Expenditures for 1996 relate primarily to
the Company's facial recognition products and do not reflect the benefits to the
Company under license arrangements from the research and development efforts of
Lau Technologies and the Massachusetts Institute of Technology for projects that
are not directly related to the Company.
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 56% to $1.9 million in 1996 from $1.2 million in 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 1996 from 11% for 1995 due to
revenues increasing at a greater rate than such expenses in 1996.
Interest Expense. The increase in net interest expense to $714,000 in 1996
from $515,000 in 1995 principally reflects the increase in the level of
borrowings during 1996. This increase was partially offset by interest earned
on the net proceeds from the Company's initial public offering.
Income Taxes. The Company's operations prior to the transfer discussed
above were included in the income tax returns of Lau Technologies, an S
corporation. Income tax expense for 1996 relates principally to corporate taxes
for the period following the transfer and a deferred tax charge of $110,000
relating to the cumulative differences between the financial reporting and
income tax bases of certain assets and liabilities as of the transfer date.
13-4
<PAGE>
Years Ended December 31, 1995 and 1994.
Revenues. Revenues increased 793% to $11.2 million in 1995 from $1.3
million in 1994. This increase 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 were derived solely from this contract.
Project Costs and Margin. As a percentage of revenues, project costs
increased to 92% in 1995 from 91% in 1994. 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 (8% of revenues) in 1995 from $117,000 (9% of revenues) in
1994 reflecting the increases in revenues and development costs discussed above.
Sales and Marketing. Sales and marketing expenses decreased 37% to $1.0
million in 1995 from $1.6 million in 1994. This decrease reflects improved
controls over bid and proposal costs and the Company's decision not to pursue
certain opportunities due to funding constraints. As a percentage of revenues,
sales and marketing expenses decreased to 9% in 1995 from 127% in 1994 due
primarily to revenues increasing at a greater rate than such expenses during
1995.
Research and Development. Research and development expenses increased 442%
to $1.1. million in 1995 from $201,000 in 1994. The significant increase in
expenses during 1995 reflects the completion of certain proprietary software to
support all industry 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
due to the increase in revenues at a greater rate than such expenses in 1995.
General and Administrative. General and administrative expenses increased
77% to $1.2 million in 1995 from $681,000 in 1994. This increase reflects 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 due primarily to revenues
increasing at a greater rate than such expenses during 1995.
Interest Expense. Interest expense increased to $515,000 in 1995 from
$40,000 in 1994 due principally to the increase in borrowings to fund
operations.
LIQUIDITY AND CAPITAL RESOURCES
In November 1996, the Company completed an initial public offering of its
common stock and received net proceeds of approximately $22.2 million. The
Company used approximately $8.8 million of the proceeds to repay long-term
borrowings assumed in connection with the transfer discussed above.
13-5
<PAGE>
At December 31, 1996, working capital was $20.7 million compared to $7.4
million at December 31, 1995. The increase in working capital was due primarily
to the proceeds from the initial public offering in November and increases in
accounts receivable and costs and estimated earnings in excess of billings, net
of increases in accounts payable and accrued expenses.
For the year ended December 31, 1996, operations and investing activities
utilized cash of approximately $1.5 million and $5.1 million, respectively,
principally to fund the working capital increases discussed above and increases
in project assets and other assets. Financing was provided by the initial
public offering and the project lease financing arrangement referred to below.
The Company has a revolving line of credit with a commercial bank that
provides for unsecured borrowings of up to $10.0 million through June 1998 at
the prime rate or other LIBOR-based options. This agreement requires the
Company to maintain certain financial ratios and minimum levels of earnings and
tangible net worth. The Company also has a system project lease financing
arrangement with a commercial leasing organization providing for project
financing of up to $15.0 million. Pursuant to this arrangement, the lessor
purchases certain of the Company's digital identification systems and leases
them back to Viisage for deployment with identified and contracted customers
approved by the lessor. The lessor retains title to systems and has 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 bears the credit risk associated with payments by
Viisage's customers, but Viisage bears performance and appropriation risk and is
generally required to repurchase a system in the event of a termination by a
customer for any reason except credit default. These project lease arrangements
are accounted for as capital leases. At December 31, 1996, the Company had $10
million available under the revolving line of credit and approximately $11
million available under the lease financing arrangement.
The Company has historically not made substantial capital expenditures for
facilities, office and computer equipment and has satisfied its needs in these
areas principally through leasing.
The Company believes that the net proceeds from its initial public
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 the foreseeable future. There can be no
assurance, however, that additional financing, if needed, will be available on
favorable terms or at all. If the Company is unable to obtain additional
capital, if needed, on acceptable terms the Company may be unable to take full
advantage of future opportunities or respond to competitive pressures, 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.
13-6
<PAGE>
ACCOUNTING PRONOUNCEMENT
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, which
establishes standards for computing and presenting earnings per share for
entities with publicly held common stock or potential common stock. SFAS No.
128 is effective for periods ending after December 15, 1997 and early adoption
is not permitted. Under the new pronouncement, earnings (loss) per share would
not be materially different from the amounts presented.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in an environment that involves a number of risks,
some of which are beyond the Company's control. Forward-looking statements in
this document and those made from time to time by the Company through its senior
management are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements concerning
future plans or results are necessarily only estimates and actual results could
differ materially from expectations. Certain factors that could cause or
contribute to such differences include, among other things, potential
fluctuations in quarterly results, the size and timing of award and performance
on contracts, dependence on large contracts and a limited number of customers,
lengthy sales and implementation cycles, changes in management estimates
incident to accounting for contracts, availability and cost of key components,
market acceptance of new or enhanced products and services, proprietary
technology and changing technology, competitive conditions, system performance,
management of growth, dependence on key personnel and general economic and
political conditions and other factors affecting spending by customers.
13-7
<PAGE>
Viisage Technology, Inc.
Balance Sheets
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents (note 2) $11,073 $ -
Accounts receivable 1,499 378
Costs and estimated earnings in excess of billings 16,445 8,678
Other current assets (note 3) 338 -
- --------------------------------------------------------------------------------
Total current assets 29,355 9,056
Property and equipment, net (note 4) 5,857 2,229
Other assets (note 3) 907 -
- --------------------------------------------------------------------------------
$36,119 $11,285
================================================================================
Liabilities and Stockholders' Equity/Net Assets
Current Liabilities:
Accounts payable and accrued expenses (note 5) $ 7,288 $ 1,153
Accrued and deferred income taxes (notes 2 and 9) 190 -
Obligations under capital leases (notes 6 and 7) 1,201 490
- --------------------------------------------------------------------------------
Total current liabilities 8,679 1,643
Long-term debt (note 6) - 6,656
Obligations under capital leases (notes 6 and 7) 4,420 1,663
- --------------------------------------------------------------------------------
13,099 9,962
- --------------------------------------------------------------------------------
Commitments and contingencies (note 7)
Stockholders' Equity/Net Assets (notes 1 and 10):
Preferred stock, $.001 par value;
2,000,000 shares authorized; none issued - -
Common stock, $.001 par value;
20,000,000 shares authorized;
8,055,000 shares issued and outstanding 8 -
Additional paid-in capital 22,994 -
Retained earnings 18 -
Net assets - 1,323
- --------------------------------------------------------------------------------
Total stockholders' equity/net assets 23,020 1,323
- --------------------------------------------------------------------------------
$36,119 $11,285
================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
13-8
<PAGE>
Viisage Technology, Inc.
Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $24,971 $11,221 $ 1,257
Project costs 19,484 10,361 1,140
- --------------------------------------------------------------------------------
Project margin 5,487 860 117
- --------------------------------------------------------------------------------
Operating Expenses:
Sales and marketing 1,852 999 1,596
Research and development 235 1,089 201
General and administrative 1,880 1,204 681
- --------------------------------------------------------------------------------
Total operating expenses 3,967 3,292 2,478
- --------------------------------------------------------------------------------
Operating income (loss) 1,520 (2,432) (2,361)
Interest expense, net 714 515 40
- --------------------------------------------------------------------------------
Income (loss) before income taxes 806 (2,947) (2,401)
Income taxes (notes 2 and 9) 205 - -
- --------------------------------------------------------------------------------
Net income (loss) $ 601 $ (2,947) $(2,401)
- --------------------------------------------------------------------------------
Net income (loss) per share (note 2) $ 0.09 $ (0.47) $ (0.39)
- --------------------------------------------------------------------------------
Weighted average common and equivalent
shares (note 2) 6,587 6,225 6,225
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13-9
<PAGE>
Viisage Technology, Inc.
Statements of Changes in Stockholders' Equity/Net Assets
(in thousands)
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-in Retained
Stock Stock Capital Earnings Net Assets Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ - $ - $ - $ - $ 368 $ 368
Net loss - - - - (2,401) (2,401)
Net transactions with parent - - - - 3,587 3,587
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 - - - - 1,554 1,554
Net loss - - - - (2,947) (2,947)
Net transactions with parent - - - - 2,716 2,716
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 - - - - 1,323 1,323
Net income - - - - 583 583
Stock compensation expense - - - - 166 166
Net transactions with parent - - - - (1,372) (1,372)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, November 6, 1996 (note 1) - - - - 700 700
Issuance of common stock in
exchange for net assets (note 1) - 6 694 - (700) -
Issuance of common stock in
initial public offering (notes 1
and 10) - 2 22,228 - - 22,230
Net income - - - 18 - 18
Stock compensation expense - - 72 - - 72
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ - $ 8 $ 22,994 $ 18 $ - $ 23,020
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
13-10
<PAGE>
Viisage Technology, Inc.
Statements Of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 601 $(2,947) $(2,401)
Adjustments to reconcile net income (loss)
to net cash (used) by operating activities:
Depreciation and amortization 612 88 -
Stock compensation expense 238 - -
Changes in operating assets and liabilities:
Accounts receivable (1,121) (378) 1,115
Costs and estimated earnings in excess of billings (7,767) (4,679) (4,244)
Other current assets (338) - 44
Accounts payable and accrued expenses 6,135 (25) 632
Accrued and deferred income taxes 190 - -
- -----------------------------------------------------------------------------------------------------------------------------
Net cash (used) by operating activities (1,450) (7,941) (4,854)
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of contract equipment converted to capital leases (3,965) (2,216) -
Additions to property and equipment (275) (101) -
Increase in other assets (907) - -
- -----------------------------------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (5,147) (2,317) -
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net revolving credit (repayments) borrowings (6,656) 6,610 46
Proceeds from long-term borrowings - 1,862 1,580
Proceeds from sale/leaseback of equipment 3,965 2,216 -
Principal payments on long-term borrowings - (3,083) (359)
Principal payments on obligations under capital leases (497) (63) -
Net proceeds from initial public offering 22,230 - -
Net transactions with parent (1,372) 2,716 3,587
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 17,670 10,258 4,854
- -----------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 11,073 - -
Cash and cash equivalents, beginning of year - - -
Cash and cash equivalents, end of year $ 11,073 $ - $ -
- -----------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information:
Cash paid during the year for interest $ 781 $ 465 $ 34
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13-11
<PAGE>
Viisage Technology, Inc.
Notes to Financial Statements
(1) Business and Basis of Presentation
Viisage Technology, Inc. (Viisage or the Company) develops and implements
turnkey digital identification systems and solutions intended to deter fraud,
reduce customers' identification program costs and improve security. The
Company combines its systems integration and software design capabilities with
its proprietary software and hardware products to create complete customized
solutions. Viisage's products are currently operating at over 450 locations.
Applications can include systems and cards for national ID's, driver's
licenses, social services, voter registration, law enforcement, corrections,
healthcare, financial services, retail and access control. In addition,
Viisage is commercializing patented facial recognition technology for the
real-time identification and verification of individuals.
Viisage was incorporated in Delaware on May 23, 1996 as part of a planned
reorganization of Lau Acquisition Corp. (Lau Technologies or Lau). On
November 6, 1996, Lau Technologies completed the transfer of 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 (the
Transfer), and as discussed more fully in note 10, the Company completed its
initial public offering in November 1996. The Company is currently an
approximately 64% owned subsidiary of Lau Technologies. These transactions
were between entities under common control and were accounted for using
historical amounts in a manner similar to a pooling of interests. The
financial statements for all periods presented prior to the Transfer reflect
the financial position, results of operations and cash flows of the Viisage
Technology Division business that comprise the Company. All changes in the
Company's equity prior to the Transfer 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 entered into agreements with Lau
Technologies covering certain facilities, equipment and administrative services
after the Transfer. Although the Company has not filed separate income tax
returns for periods prior to the Transfer, 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.
(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.
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. Retainages and amounts subject to future negotiation are not material.
Costs and estimated earnings in excess of billings includes approximately $6.5
million expected to be billed and collected after December 31, 1997.
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
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. At December 31, 1996, cash
equivalents consisted of short-term Eurodollar investments with a commercial
bank. These investments are carried at cost which approximates market value.
13-12
<PAGE>
Viisage Technology, Inc.
Notes to Financial Statements (Continued)
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 1994. For 1996 and
1995, two customers and three customers, respectively, each accounted for more
than 10% of revenues, and approximately 50% and 85% in the aggregate of the
Company's revenues, respectively.
At December 31, 1996, 54% of accounts receivable and costs and estimated
earnings in excess of billings related to three 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 straight-line or usage-
based methods over the estimated useful lives of the related assets that
approximate five 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 five years.
Income Taxes
The Company's operations prior to the Transfer 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.
Subsequent to the Transfer, the Company will file separate tax returns. Any tax
liability or refund that may arise for 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 Transfer. 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 Transfer 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.
Net Income (Loss) Per Share
Net income (loss) per share is computed based on the weighted average number of
common and common equivalent shares outstanding during the period. 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 the initial public offering
price of $10.50 per share) have been included in the calculation of weighted
average common and common equivalent shares for periods prior to the offering.
For 1996, weighted average shares is comprised of 6,022,000 shares of common
stock and 565,000 shares related to common equivalents. For 1995 and 1994,
weighted average shares are comprised of 5,680,000 shares of common stock and
545,000 shares related to common equivalents.
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share, which establishes standards for computing and presenting
earnings per share for entities with publicly held common stock or potential
common stock. SFAS No. 128 is effective for periods ending after December 15,
1997 and early adoption is not permitted. Under the new pronouncement, earnings
(loss) per share would not be materially different from the amounts presented.
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.
13-13
<PAGE>
Viisage Technology, Inc.
Notes to Financial Statements (Continued)
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 10 for required disclosures.
(3) Other Related Party Transactions
In connection with the Transfer discussed in note 1, the Company and Lau
Technologies entered 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 1995 and 1994 reflect the
use of additional services that were provided by Company personnel in 1996. The
amounts for such services were approximately $660,000 in 1996, $1.1 million in
1995, and $710,000 in 1994.
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. In February 1997, the Company and Lau
Technologies moved to larger facilities and extended the Agreement through
February 2002. The annual fee for facilities and services is approximately
$500,000 and will be revised for changes in operating expenses. The amounts for
facilities and services were approximately $220,000 in 1996, $140,000 in 1995
and $90,000 in 1994. See note 7 for lease information.
Company employees participate in various Lau Technologies employee benefit
plans. The Company pays 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 Transfer and improvements
thereto. The license excludes the use of such technology for federal access
control as defined in the License Agreement.
The Company purchases certain system components and the services of technical
personnel from Lau Technologies. The amounts for such components and services
were approximately $1.7 million in 1996, $2.8 million in 1995 and $1.4 million
1994.
At December 31, 1996, the Company had approximately $180,000 of accounts
receivable due from Lau Technologies and approximately $100,000 of accounts
payable due to Lau Technologies. The Company also has a $1 million 9% note
receivable from Lau Technologies due in monthly installments of principal and
interest of approximately $21,000 through February 2002. At December 31, 1996,
approximately $150,000 of the note was included in other current assets and the
remaining amount was included in other assets in the accompanying balance sheet.
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, 1996 1995
- -------------------------------------------------------------------
<S> <C> <C>
Assets held under capital leases $6,181 $2,216
Computer equipment 376 101
- -------------------------------------------------------------------
6,557 2,317
Less-Accumulated depreciation 700 88
- -------------------------------------------------------------------
$5,857 $2,229
===================================================================
</TABLE>
During 1996 and 1995, the Company sold and leased back under capital leases
approximately $4.0 million and $2.2 million, respectively, of system equipment
used to produce identification cards for certain contracts.
13-14
<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, 1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Accounts payable $2,072 $ 835
Accrued contract costs 4,353 -
Accrued payroll and related taxes 445 90
Accrued vacation 224 136
Other accrued expenses 194 92
- ------------------------------------------------------------------
$7,288 $1,153
==================================================================
</TABLE>
(6) Revolving Credit and Project Lease Arrangements
The Company has a revolving credit agreement with a commercial bank that
provides for unsecured borrowings of up to $10 million through June 1998 at the
prime rate or other LIBOR-based options. The agreement requires the Company to
maintain certain financial ratios and minimum levels of earnings and tangible
net worth. The Company was in compliance with such covenants at December 31,
1996 and there were no borrowings outstanding.
Prior to the Transfer discussed in note 1, long-term debt consisted of
borrowings under a revolving line of credit agreement between Lau Technologies
and a commercial bank. Such borrowings related solely to the Company's
operations and, accordingly, were assumed in connection with the Transfer and
repaid in November 1996.
The Company has a system project lease arrangement with a commercial leasing
organization providing for system project leases of up to $15 million. Pursuant
to the facility, the lessor purchases certain of the Company's digital
identification systems and leases them back to Viisage for deployment with
identified and contracted customers approved by the lessor. The lessor retains
title to the systems and has 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 bears the credit
risk associated with payments by Viisage's customers, but Viisage bears
performance and appropriation risk and is generally required to repurchase a
system in the event of a termination by a customer for any reason except credit
default. At December 31, 1996, the Company had approximately $11 million
available under this arrangement.
(7) Commitments and Contingencies
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 $130,000 in 1996, $100,000 in 1995 and $55,000 in 1994.
At December 31, 1996, approximate future minimum rentals under the lease for
shared facilities and capital leases are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Lease
- -----------------------------------------------------------
<S> <C> <C>
Year ending:
1997 $1,628 $ 198
1998 1,823 212
1999 1,723 212
2000 1,163 212
2001 582 212
Thereafter - 34
- -----------------------------------------------------------
Total minimum lease payments 6,919 $1,080
===========================================================
Less-Interest portion 1,298
Present value of net minimum
lease payments 5,621
Less-Current portion 1,201
- ------------------------------------------
$4,420
==========================================
</TABLE>
Litigation
On September 23, 1996, three minority shareholders of Lau Technologies filed
suit against Lau Technologies, 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 Technologies. The
plaintiffs requested, among other things, an injunction to delay the Company's
public 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 Technologies 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.
13-15
<PAGE>
Viisage Technology, Inc.
Notes to Financial Statements (Continued)
(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 this plan amounted to approximately $70,000 for the year ended
December 31, 1996. Amounts for the other years were not material.
The Company does not offer any postretirement benefits.
(9) Income Taxes
As discussed in notes 1 and 2, the Company was treated as an S corporation prior
to the Transfer and operating losses and tax credits for prior periods have been
utilized by the shareholders of Lau Technologies. In connection with the
Transfer, the Company changed its tax status and recorded a deferred tax
provision of $110,000 relating to the cumulative differences between the
financial reporting and income tax bases of certain assets and liabilities as of
the Transfer date.
The provision for income taxes for the year ended December 31, 1996 consists of
the following (in thousands):
<TABLE>
<CAPTION>
Current Deferred Total
- -----------------------------------------------------------
<S> <C> <C> <C>
Federal $ 7 $132 $139
State 25 41 66
- -----------------------------------------------------------
$32 $173 $205
===========================================================
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective tax
rate for the year ended December 31, 1996 is as follows:
<TABLE>
<S> <C>
Federal statutory rate 34.0%
State taxes, net of federal benefit 6.0
Subchapter S earnings not taxed (28.0)
Deferred taxes related to Transfer 14.0
Other, net (1.0)
- -----------------------------------------------------------
25.0%
- -----------------------------------------------------------
</TABLE>
The components and approximate tax effects of the Company's deferred tax assets
and liabilities as of December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Accruals and other reserves $325
Other 30
- ------------------------------------------------------------------------
Total gross deferred tax assets 355
- ------------------------------------------------------------------------
Deferred tax liabilities:
Bases differences related to contract assets 517
Other 11
- ------------------------------------------------------------------------
Total gross deferred tax liabilities 528
- ------------------------------------------------------------------------
Net deferred tax liability $173
- ------------------------------------------------------------------------
</TABLE>
The net deferred tax liability is included in accrued and deferred income taxes
in the accompanying 1996 balance sheet.
(10) Stockholders' Equity
Initial Public Offering
In November 1996, the Company completed an initial public offering of 2,875,000
shares of its common stock, of which 2,375,000 shares (including the over-
allotment option) were sold by the Company and 500,000 shares were sold by Lau
Technologies, the selling stockholder. The offering price was $10.50 per share
and the net proceeds to the Company were approximately $22,230,000, net of
underwriting discounts and other offering expenses.
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. Lau
Technologies 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. 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
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 year ended December 31,
1996 was $238,000. The Company has reserved 1,437,750 shares of common stock for
issuance under the plans of which 10,650 are available for grant. At
13-16
<PAGE>
Viisage Technology, Inc.
Notes to Financial Statements (Continued)
December 31, 1996, 488,062 options were exercisable at a weighted average
exercise price per share of $3.20 over a weighted average remaining contractual
life of approximately nine years. 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 the 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>
The total value of options granted during 1996 was computed as approximately
$4.2 million. Of this amount, $1.4 million would be charged to operations for
the year ended December 31, 1996 for currently vested options and the remaining
amount, $2.8 million, would be amortized over the related vesting periods. The
pro forma effect of SFAS No. 123 for the year ended December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
As Reported Pro Forma
- ----------------------------------------------------------
<S> <C> <C>
Net income (loss) $601,000 $(225,000)
Net income (loss) per share 0.09 (0.03)
</TABLE>
(11) Quarterly Financial Data (Unaudited)
The following table sets forth selected quarterly financial data for 1996 and
1995 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Revenues $5,737 $6,133 $6,258 $6,843
Project margin 1,026 1,191 1,542 1,728
Net income 6 68 285 242
Net income per share -- 0.01 0.05 0.03
1995
Revenues $2,549 $2,846 $2,711 $3,115
Project margin 236 187 223 214
Net loss (580) (671) (748) (948)
Net loss per share (0.09) (0.11) (0.12) (0.15)
</TABLE>
13-17
<PAGE>
Report of Independent Public Accountants
To Viisage Technology, Inc.:
We have audited the accompanying balance sheets of Viisage Technology, Inc. as
of December 31, 1996 and 1995, and the related statements of operations, changes
in stockholders' equity/net assets and cash flows for each of the years in the
three-year period ended December 31, 1996. 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
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 7, 1997
13-18
<PAGE>
Directors and Officers
Directors
Denis K. Berube, Chairman /(3)/ Thomas J. Reilly /(1,2)/
Executive Vice President - Retired Partner
Chief Operating Officer, Lau Technologies Arthur Andersen LLP
Charles J. Johnson /(3,4)/ Harriet Mouchly-Weiss /(2,4)/
Principal, Finnegan, Hickey, Managing Partner,
Dinsmoor & Johnson, P.C. Strategy XXI Group
Peter Nessen /(1,2)/ /(1)/ Audit Committee
Chairman of the Board /(2)/ Compensation Committee
NCN Financial Corporation /(3)/ Executive Committee
/(4)/ Marketing Committee
Officers
Robert C. Hughes Robert J. Schmitt, Jr.
President and Chief Executive Officer Vice President, Marketing and Sales
Worldwide Private Sector
Thomas J. Colatosti Yona Wieder
Vice President, Operations Vice President, Marketing and Sales
Worldwide Public Sector
William A. Marshall
Vice President,
Chief Financial Officer and Treasurer
13-19
<PAGE>
Corporate and Investor Information
Corporate Offices
Viisage Technology, Inc.
30 Porter Road
Littleton, MA 01460
508-952-2200
Common Stock Information
The Company's common stock is traded on the NASDAQ National Market under the
symbol VISG. At March 6, 1997, the closing sale price of the common stock was
$12.00 per share and there were approximately 13 holders of record of the
Company's common stock. The quarterly high and low closing prices, as reported
by NASDAQ, of Viisage's common stock in 1996 were as follows:
<TABLE>
Quarter Ended High Low
- ---------------------------------------------------------
<S> <C> <C>
March 31 $ -- $ --
June 30 -- --
September 29 -- --
December 31* 15-1/2 12-1/16
</TABLE>
*Public trading commenced on November 8, 1996.
Dividend Policy
The Company presently intends to retain earnings for use in the operation and
expansion of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future.
Shareholder Contact and Form 10-K
Shareholders and prospective investors are welcome to call or write to Viisage
with questions or requests for additional information. Copies of Viisage's Form
10-K filed with the Securities and Exchange Commission for the year ended
December 31, 1996 are also available. Inquires should be directed to: William A.
Marshall, Vice President, Chief Financial Officer and Treasurer, at Viisage's
corporate offices.
Transfer Agent
For information or assistance regarding individual stock records, transactions
or stock certificates contact:
Boston EquiServe Limited Partnership
150 Royall Street
Canton, MA 02021
617-575-2000
Independent Public Accountants
Arthur Andersen LLP
225 Franklin Street
Boston, MA 02110
Legal Counsel
Finnegan, Hickey, Dinsmoor & Johnson, P.C.
20 Beacon Street
Boston, MA 02108
13-20
<PAGE>
EXHIBIT 23
Viisage Technology, Inc.
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated February 7, 1997.
Arthur Andersen LLP
Boston, Massachusetts
March 28, 1997
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
We, the undersigned officers and directors of Viisage Technology, Inc.,
hereby severally constitute and appoint Denis K. Berube, Robert C. Hughes and
William A. Marshall, and each of them singly, our true and lawful attorneys with
full power to them, and each of them singly, to sign for us and in our names in
the capacities indicated below, all Annual Reports on Form 10-K required to be
filed by Viisage Technology, Inc., hereby ratifying and confirming all
signatures as they may be signed by our said attorneys, or any of them, to said
Forms 10-K.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
By: /s/ Denis K. Berube Chairman of the Board of Directors
---------------------------
Denis K. Berube
By: /s/ Robert C. Hughes President and Chief Executive Officer
--------------------------- (Principal Executive Officer)
Robert C. Hughes
By: /s/ William A. Marshall Treasurer and Chief Financial Officer
--------------------------- (Principal Financial and Accounting
William A. Marshall Officer)
By: /s/ Charles J. Johnson Secretary and Director
---------------------------
Charles J. Johnson
By: /s/ Harriet Mouchly-Weiss Director
---------------------------
Harriet Mouchly-Weiss
By: /s/ Peter Nessen Director
---------------------------
Peter Nessen
By: /s/ Thomas J. Reilly Director
---------------------------
Thomas J. Reilly
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,073
<SECURITIES> 0
<RECEIVABLES> 1,499
<ALLOWANCES> 0
<INVENTORY> 16,445<F1>
<CURRENT-ASSETS> 29,355
<PP&E> 5,857
<DEPRECIATION> 0
<TOTAL-ASSETS> 36,119
<CURRENT-LIABILITIES> 8,679
<BONDS> 4,420<F2>
0
0
<COMMON> 8
<OTHER-SE> 23,012
<TOTAL-LIABILITY-AND-EQUITY> 36,119
<SALES> 24,971
<TOTAL-REVENUES> 24,971
<CGS> 19,484
<TOTAL-COSTS> 23,451<F3>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 714
<INCOME-PRETAX> 806
<INCOME-TAX> 205
<INCOME-CONTINUING> 601
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 601
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
<FN>
<F1>Represents costs and estimated earnings in excess of billings.
<F2>Represents obligations under capital leases.
<F3>Includes project costs and operating expenses.
</FN>
</TABLE>
