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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, 1998
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.
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(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 (978)-952-2200
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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 15, 1999, was approximately $4 million.
As of March 15, 1999, the registrant had 8,392,168 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 28, 1999, are incorporated by reference into
Part III.
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PART I
Item 1. Business
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(a) General Development of Business
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Viisage Technology, Inc. (Viisage or the Company), is a leader in the
emerging field of biometrics technology and in providing digital
identification systems and solutions. The Company focuses on identification
solutions that improve personal convenience and security, deter fraud and
reduce identification program costs. Viisage combines its systems integration
and software design capabilities with its proprietary software and hardware
products and other industry standard products to create complete customized
solutions. These turnkey solutions integrate image and data capture, create
relational databases, incorporate multiple biometrics and improve customers'
ability to move and manage information. Applications can include driver's
licenses, voter registration, national ID's, law enforcement, social services,
access control and PC network and internet access security. To date,
Viisage's primary customers have been government agencies with particular
emphasis on U.S. drivers licensing agencies. Since its inception in 1993, the
Company has captured approximately 30% of the domestic driver's license
market. Viisage products annually produce more than 20 million identification
documents at more than 1,000 locations in 11 states. The Company has also
provided services under subcontracts for projects in Jamaica, the Philippines
and for the U.S. Immigration and Naturalization Service.
The Company began operations in 1993 as a division of Lau Technologies
(Lau), a provider of systems integration services and products for
sophisticated electronic systems. In November 1996, Lau transferred
substantially all of the assets, liabilities and operations of the division to
the Company and the Company completed its initial public offering. The
Company is currently a 65% owned subsidiary of Lau.
On November 3, 1998, the Company's Board of Directors appointed Thomas J.
Colatosti, formerly the Company's Chief Operating Officer, President and Chief
Executive Officer.
During 1997 and 1998, the Company's revenue growth slowed significantly due
primarily to lengthening procurement delays in its principal markets and a
strong competitive market place. The Company believes that the acceptance of
digital identification technology in recent years, its commitment to providing
customized solutions for its customers needs, its expertise in facial imaging
and biometric solutions and its proprietary software and hardware products
will continue to contribute to its growth.
Effective June 1, 1998, the Company reorganized its operations to create a
separate biometrics division to respond to the growing market interest in
biometric solutions. The biometrics division is focused on product, market
and channel development activities in three principal areas: facility access
control; PC network and internet access security; and real-time large database
identification and verification of individuals. The systems integration and
identification card division (SI division) focuses on Viisage's public sector
markets and serves as a channel to existing customers and the public sector
for the Company's biometric
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technologies. The Company believes that it is in the early stages of an
emerging and high growth market for biometric identification solutions,
particularly facial recognition solutions in the government and commercial
markets. In September 1998, the Company's technology partner and principal
shareholder, Lau, was awarded a $2.8 million development contract for facial
recognition systems by the U.S. Department of Defense which involved Viisage
as a subcontractor. The Company believes that the leadership from the Federal
Government in using facial biometrics as well as other recent awards and OEM
arrangements validates the Company's technology and helps create credibility
for the emerging global market.
The SI division provides systems and services principally under contracts
that generally have five to seven 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 size of the database, the level of post-installation
support and the competitive environment. Substantially all of the Company's
revenues are currently derived from SI division 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, the development and implementation
of digital identification systems and solutions. The Company has two
reportable business segments represented by its SI division and biometrics
division discussed in item (a). For financial information about industry
segments see Note 11 of Notes to Financial Statements.
(c) Description of Business
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(i) Principal Products and Services
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Industry Background
The need for proper identification impacts most people every day. The
desire for personal convenience, the significant and increasing costs of fraud
and the growing concern over declining personal security have become driving
forces behind the global need for effective identification solutions.
Starting with only a fake driver's license, an individual is able to create
multiple identities, commit fraud, evade law enforcement and engage in other
criminal activities that have significant financial and societal implications.
Password security and identity card systems can also be compromised if someone
obtains a password or identity card and uses this information to gain
unauthorized access to facilities, networks or information.
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
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printers, and laminated pouches have proven easy to delaminate. Advances in
and the acceptance of digital technology have 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. This ability to move and manage information
helps to increase personal convenience for system users.
As an additional means of improving personal convenience and security and
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 others, with fingerprints enjoying wide usage in
law enforcement. However, unlike other biometrics, a facial image can be
easily verified visually and can be captured in an unobtrusive manner via a
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. The Company generally advocates
the use of multiple biometrics and can incorporate these technologies into its
solutions.
Applications for digital identification systems and biometrics 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 also focusing on the value of sharing databases
to avoid redundant data gathering efforts, distribute information in a timely
manner, increase efficiency and deter fraud. The Company believes that public
and commercial sector applications for digital identification systems and
biometrics will include national ID's, driver's licenses, law enforcement,
voter registration, social services, access control, PC network and internet
access security, ATMs, retail point-of-sale transaction processing and
administration of health care benefits.
The emergence of digital identification systems and biometrics present
significant challenges for integrating these systems with customers' existing
software, hardware and computing environments. Consequently, customers are
seeking complete, integrated solutions to overcome these issues.
Products and Services
Digital Identification Systems
The Company's SI division develops and implements digital identification
systems and solutions and serves as a channel to the public sector for the
biometrics division. The SI
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division's systems can produce identification cards that are virtually tamper
proof and utilize facial recognition and other biometrics with or without
cards for the real-time identification (one-to-many) and verification (one-to-
one) of individuals.
Depending on the customer's needs, the SI division offers ''instant issue''
systems which produce identification cards on location in minutes, and central
production systems which receive the information electronically from the point
of capture and produce cards from a secure off-site processing location which
are later mailed to recipients in several days. The facial images captured by
the SI division's card systems can provide the content (face bases) for
identification and verification applications.
In a Viisage card system the facial image and other information are captured
in digital format at the SI division's PC-based Image Capture Workstation
which usually incorporates the SI division's proprietary SensorMast. Compact
and self-contained, Viisage workstations can easily be linked to a central
image storage device, central card production unit and other remote devices
using an existing network, custom designed data communications or the World
Wide Web. This flexibility makes the Image Capture Workstation ideal for
instant issue, central production, mobile use and multiple site systems. The
Viisage Quality Advisor can be used to assess image quality at the point of
capture. With an instant issue system, a commercially available dye-
sublimation printer produces single-piece, tamper-resistant identification
cards. Alternatively, with a central production system, a high speed
manufacturing unit produces the cards, and an integrated card delivery unit
prepares the cards for mailing. When central production is selected, such
systems incorporate the SI division's proprietary Visual Inspection System for
quality control of all cards produced. Every system delivers top quality,
tamper-resistant identification cards customized to meet the customer's
information, delivery and security needs. A wide range of optional features
are available including bar codes, holographic overlays, ghost imaging,
ultraviolet or micro preprinting, smart cards and a number of other features.
Systems Integration and Software Design Capabilities. In addition to the SI
division's systems integration capabilities, an important aspect of its
services and ability to deliver turnkey solutions for its customers involves
the design of customized software. Viisage's proprietary software controls the
system and integrates the system components, including the SensorMast and
Visual Inspection System and a variety of third party components and
technologies used by its customers. The SI division has designed software to
support all current industry standard operating systems (e.g., Windows NT,
Windows 95, Unix 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 SI division's software design and systems integration
capabilities enable it to accommodate most computing environments and
customers with special requirements.
Proprietary Products. The SI division's proprietary products and related
software are described below:
. The SensorMast is a fully-integrated, secure tower unit which
incorporates computer-controlled image capture equipment. This equipment
includes commercially available
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digital cameras, adjustable lighting, frame grabbers, step motors,
fingerprint and signature capture devices and barcode readers. An
integrated version of the SensorMast also includes the computer in the
SensorMast.
. The Visual Inspection System automatically evaluates cards produced by
the SI division'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, high-speed cameras and sophisticated software,
automates an activity which is otherwise performed manually and is a
potential source of cost savings for customers.
. The Viisage Quality Advisor can be used by customers to ensure proper
image quality. This software product instantly and precisely assesses
image quality against desired standards. Images that fail to meet such
standards are immediately rejected.
Customer Service and Support. Following the installation of its digital
identification systems, the SI division offers extensive customer training and
help desk telephone support as well as ongoing maintenance services. The SI
division'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, the SI division has
contracted with third party service organizations for maintenance support.
Facial Recognition Systems
The Company's biometrics division is developing the Company's biometric
technologies in cooperation with its principal shareholder and technology
partner Lau, with a particular emphasis on facial recognition. The group 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 in most cases by an individual with no
special training. The biometrics division is concentrating on three principal
areas: facility access control; PC network and internet access security; and
real-time large database products. The Company has several on-going facial
recognition identification projects, including projects with the Massachusetts
Department of Transitional Assistance and the Illinois Secretary of State.
Over the last five years, Viisage and Lau have enhanced technology
initially developed by Professor Alex Pentland of the Massachusetts Institute
of Technology (MIT) and have developed products for access control,
surveillance, and real-time large database identification and verification of
individuals. Viisage and Lau each license the underlying MIT technology for
their respective markets 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 developed over the last five years is
integral to making these technologies commercially viable.
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Viisage's patented facial recognition software offers organizations the
ability to create unique identification solutions and both enhances existing
identification solutions and offers opportunities for new applications. Using
a sophisticated algorithm, the software translates the characteristics of a
face into a unique number or eigenface. The eigenface is used by the system
for identification, a one-to-many search of a database, and verification, a
one-to-one match to a specific stored image. The Company's facial recognition
products are unique because they are scalable to databases of millions of
faces. Viisage generally advocates the use of multiple biometrics and can
integrate other biometrics such as iris, voice, signature and fingerprint
technology into its solutions.
Viisage offers several facial recognition software systems that can be
utilized in virtually any solution requiring identification or verification of
an individual. The Company's identification software instantly calculates an
individual's eigenface identifier and can search an existing database of
millions of records in less than 10 seconds for images similar to the image
being searched. Viisage's Face in the Crowd technology can find and identify
specific individuals in a crowd. The system searches real-time for a match
between individuals in the field and images in a database. When a match is
located, the system tracks the individual and reports to the user. Early
adopters are using the software for access control, fraud reduction,
surveillance and law enforcement applications. The software can also be
utilized with other biometrics, PIN's and identification cards or on a stand-
alone basis for a variety of applications such as PC network and internet
access security, ATMs, retail point-of-use and administration of health care
benefits. The Company envisions a day when society could be free from cards,
keys, PIN's and signatures. One's face will be the private, secure and
convenient password of choice.
Sales and Marketing
The SI division markets its products directly through its internal sales
force, and continues 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 SI division also uses its program
management group to identify opportunities with existing customers and
coordinate related selling efforts.
The SI division's systems are generally provided to public sector customers
through a formal bidding process. The 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 proposal is issued, a
six-to-twelve month proposal and award process usually 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
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proposal and bid process, the execution of actual contracts and the
installation of a system can extend over several years. The Company believes
that long sales cycles in its public sector markets will continue. 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.
The biometrics division is a software content provider. Its sales force and
business development activities are focused on establishing OEM and other
distribution arrangements with vendors, systems integrators and service
organizations serving its principal market areas. The SI division and Lau are
also serving as channels for the division's products. The division's
engineering department provides technical support for the division's selling
and channel development activities.
(ii) and (xi) Product Development
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In prior years, the Company developed proprietary software that supports all
current industry standard operating systems and networking environments, and
proprietary image capture and inspection products for its card-based
identification systems. The Company believes that these products will support
its card-based identification system offerings for the foreseeable future.
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's current
development activities are focused on its facial recognition products and the
further commercialization of its facial recognition technology. In addition
to its own development efforts, the Company has benefited and expects to
continue to benefit from on-going research and development conducted by Lau
and, through its license with Facia Reco, from certain research activities at
MIT. 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.
For the years ended December 31, 1998, 1997 and 1996, research and
development expense was $358,000, $152,000 and $235,000, respectively. 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
-----------------------------------
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
generally purchases major contracted assemblies from single vendors to help
ensure high quality, prompt delivery and low cost. The Company
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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.
(iv) Patents, Trademarks and Licenses
--------------------------------
In addition to customized technology developed by the Company to meet
customer requirements, the Company utilizes patented technology and trade
secrets developed by its principal shareholder and technology partner, Lau.
The Company has an exclusive, perpetual, irrevocable, paid-up royalty-free,
worldwide license to use all of the technology owned or controlled by Lau
relating to the Company's 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). Lau has a U.S. patent which runs to
2014 on a card production system used by the Company, has a number of U.S.
patent applications in process for facial recognition technologies, has
copyrighted the SensorMast and has made a copyright filing for the Company's
Visual Inspection System and related proprietary software. Lau has also filed
foreign patent applications, which correspond to three of these domestic
patent applications.
The Company also makes use of patented technology and trade secrets owned
or controlled by Facia Reco 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 extends
until the expiration of the final patent included in the license and includes
Facia Reco's rights to use patented facial recognition technology of MIT,
which rights are exclusive through June 1, 2001, except for certain rights
granted to sponsors of the MIT Media Lab and certain research rights.
Thereafter, Facia Reco's patent license with MIT extends to 2010 on a non-
exclusive basis. MIT has applied to extend its patent rights to certain
jurisdictions in Europe and in Singapore. Further, at Lau's request and
expense, broadened claims for the MIT patent have been allowed by the U.S.
Patent and Trademark Office. The Company's license agreement with Facia Reco
provides for a royalty of $350 per machine copy incorporating the licensed
technology. Until June 1, 2001, a minimum annual royalty applies of,
generally, $21,000 for the U.S. rights and an amount ranging from $21,000 to
$42,000 for the non-U.S. rights.
The Company has registered its "Viisage" trademark with the U.S. Patent and
Trademark Office.
There can be no assurance that the Company's efforts to prevent the
misappropriation of the intellectual property used in its business will be
successful. Further, there can be no assurance that any of the additional
U.S. or foreign patents applied for by Lau or the foreign
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patents applied for by MIT will be issued or that, if issued, they will
provide protection against competitive technologies or will be held valid and
enforceable if challenged. Finally, 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 patent and copyrights.
(v) Seasonality
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The Company's SI division operations are not seasonal since contracts are
awarded and performed throughout the year. However, the Company believes its
public sector business is subject to cyclical procurement delays that may be
related to state-wide election cycles. Biometric division revenues have not
been material to date and operations are not expected to be seasonal.
(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. As discussed more fully in Management's Discussion and
Analysis of Financial Condition and Results of Operations, the Company plans
to raise capital, as needed, to fund biometric division activities.
(vii) Customers and End Users
-----------------------
The following lists and categorizes the Company's customers and end users as
of December 31, 1998:
<TABLE>
<CAPTION>
STATE DEPARTMENTS OF MOTOR VEHICLES OTHER STATE AND LOCAL AGENCIES
<S> <C>
Arizona Department of Transportation Connecticut Department of Social Services
Arkansas Office of Driver Services Massachusetts Department of Transitional
Florida Department of Highway Safety Assistance
and Motor Vehicles* New York Department of Social Services*
Illinois Secretary of State Ohio Department of Public Safety
Massachusetts Registry of Motor Vehicles Wisconsin Department of Corrections
New Mexico Department of Taxation and
Revenue
North Carolina Department of Transportation
Ohio Bureau of Motor Vehicles
Wisconsin Department of Transportation
</TABLE>
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<TABLE>
<CAPTION>
FEDERAL AGENCIES FOREIGN CONTRACTS
<S> <C>
U.S. Immigration and Naturalization Service * Commission on Elections of the Republic of
the Philippines*
</TABLE>
* By subcontract.
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. For 1997, one
customer (Illinois Secretary of State) accounted for an aggregate of 46% of
revenues. For 1998, three customers (Arkansas Office of Driver Services,
Florida Department of Highway Safety and Motor Vehicles and Illinois Secretary
of State) each accounted for over 10% of Company revenues and an aggregate of
40% 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. Since inception in June 1998, revenues for the
biometrics division related solely to a subcontract with Lau and were not
material. However, the SI division has on-going facial recognition projects
(Massachusetts Department of Transitional Assistance, Illinois Secretary of
State and Wisconsin Department of Corrections).
(viii) Backlog
-------
The Company measures backlog based on signed contracts, subcontracts and
customer commitments for which revenue has not yet been recognized. Backlog
does not include amounts for phase-outs or other extension opportunities
included in such contracts. Accordingly, backlog is not necessarily
indicative of future revenue. Backlog amounts relate solely to SI division
contracts. A substantial amount of the such backlog can be cancelled at any
time without penalty, except, in some cases, for the recovery of the Company's
actual committed costs and profit on work performed through the date of
cancellation. Any failure of the Company to meet an agreed-upon schedule could
lead to the cancellation of the related order. The timing of award and
performance on contracts as well as variations in size, complexity and
requirements of the customer and modifications to contract awards may result
in substantial fluctuations in backlog from period to period. Therefore, the
Company believes that backlog cannot be considered a meaningful indicator of
future financial performance.
At December 31, 1998, the Company's backlog was approximately $59 million,
compared to approximately $61 million at December 31, 1997. Approximately 28%
of the Company's backlog as of December 31, 1998, 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,
1998, amounts subject to future negotiation are not material.
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(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 SI division faces competition in the identification systems
market (for both digital and conventional systems) from technologically
sophisticated companies, including Polaroid Corporation and De La Rue,
which, in some cases, have greater technical, financial, and marketing
resources than the Company. A former competitor, NBS Imaging Systems, Inc.,
was acquired by Polaroid during 1998. 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 SI
division'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.
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(xiii) Employees
---------
As of December 31, 1998, the Company had 59 employees. The Company
from time-to-time supplements its employee forces with independent
contractors. As of December 31, 1998, the Company had 7 such contractors.
During 1998, the Company reduced headcount by 8 employees and 10
contractors to reflect the 1998 business plan and reduced headcount by 6
employees in 1999 in connection with the 1999 business plan. 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.
Item 2. Properties
----------
In February 1997, the Company moved to facilities located in
Littleton, Massachusetts. The Company currently uses approximately 15,000
square feet of space and has access to common areas under the terms of a
Use and Occupancy Agreement with Lau Technologies 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
-----------------
The Company does not believe that there are any legal matters that
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
---------------------------------------------------
None.
12
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
The Company's common stock is traded on the NASDAQ National Market
under the symbol VISG. On March 15, 1999, the closing price of the common
stock was $1.50 per share and there were approximately 36 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 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
QUARTER HIGH LOW HIGH LOW
------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C>
First Quarter 7-3/8 4-7/8 14-3/4 9-1/8
Second Quarter 5-3/8 1-15/16 18-1/4 7-7/8
Third Quarter 3-1/2 1-1/4 20-1/2 9-7/8
Fourth Quarter 2-1/4 5/8 12-1/4 5-1/2
</TABLE>
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.
13
<PAGE>
Item 6. 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 Form 10-K.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------
1998 (1) 1997 (2) 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ 16,259 $ 29,388 $ 24,971 $ 11,221 $ 1,257
Project costs............................ 15,957 26,122 19,484 10,361 1,140
---------- ----------- ----------- ----------- -----------
Project margin........................... 302 3,266 5,487 860 117
---------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing...................... 2,195 4,930 1,852 999 1,596
Research and development................. 358 152 235 1,089 201
General and administrative............... 2,247 2,105 1,880 1,204 681
---------- ----------- ----------- ----------- -----------
Total operating expenses................. 4,800 7,187 3,967 3,292 2,478
---------- ----------- ----------- ----------- -----------
Operating income (loss).................. (4,498) (3,921) 1,520 (2,432) (2,361)
Interest expense, net.................... 1,667 441 714 515 40
---------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
cumulative effect of accounting change (6,165) (4,362) 806 (2,947) (2,401)
Income taxes............................. - - 205 - -
---------- ----------- ----------- ----------- -----------
Income (loss) before cumulative effect of
accounting change (6,165) (4,362) 601 (2,947) (2,401)
Cumulative effect of accounting change (1,038) - - - -
---------- ----------- ----------- ----------- -----------
Net income (loss)........................ $ (7,203) $ (4,362) $ 601 $ (2,947) $ (2,401)
========== =========== =========== =========== ===========
Basic net income (loss) per share before
cumulative effect of accounting change $ (0.75) $ (0.54) $ 0.10 $ (0.52) $ (0.42)
Basic net income (loss) per share (3).... $ (0.88) $ (0.54) $ 0.10 $ (0.52) $ (0.42)
========== =========== =========== =========== ===========
Weighted average common shares........... 8,175 8,060 6,022 5,680 5,680
========== =========== =========== =========== ===========
Diluted net income (loss) per share before
cumulative effect of accounting change $ (0.75) $ (0.54) $ 0.09 $ (0.52) $ (0.42)
Diluted net income (loss) per share (3).. $ (0.88) $ (0.54) $ 0.09 $ (0.52) $ (0.42)
========== ============ =========== =========== ===========
Weighted average common shares 8,175 8,060 6,537 5,680 5,680
=========== ============ =========== =========== ===========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------
1998 (1) 1997 (2) 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital..................... $ 11,089 $ 15,261 $ 20,676 $ 7,413 $ 2,509
Total assets........................ 46,444 47,463 36,119 11,285 3,999
Long-term obligations............... 18,058 13,300 4,420 8,319 955
Shareholders' equity................ 12,618 18,736 23,020 - -
Net assets(4)....................... - - - 1,323 1,554
</TABLE>
(1) 1998 amounts reflect the impact of charges of $230 for restructuring,
$1,321 for the early adoption of SOP 98-5, Reporting on the Costs of
Start-Up Activities, and $2,322 to revise project margins and contract
cost-to-complete estimates.
(2) 1997 amounts reflect the impact of charges of $7.6 million for
investments in technology, services and markets.
(3) See note 2 of Notes to Financial Statements for information concerning
the computation of basic and diluted net income (loss) per share.
(4) Net assets represents divisional investment during the time the
Company operated as a division of Lau Technologies.
Item 7. 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
Form 10-K.
OVERVIEW
Viisage is a leader in the emerging field of biometrics technology and
in providing digital identification systems and solutions. The Company
focuses on identification solutions that improve personal convenience and
security, deter fraud and reduce identification program costs. Viisage
combines its systems integration and software design capabilities with its
proprietary software and hardware products and other industry standard
products to create complete customized solutions. These turnkey solutions
integrate image and data capture, create relational databases, incorporate
multiple biometrics and improve customers' ability to move and manage
information. Applications can include driver's licenses, voter
registration, national ID's, law enforcement, social services, access
control and PC network and internet access security. To date, Viisage's
primary customers have been government agencies with particular emphasis on
U.S. drivers licensing agencies. Since its inception in 1993, the Company
has captured approximately 30% of the domestic driver's license market.
Viisage products annually produce more than 20 million identification
documents at more than 1,000 locations in 11 states. The Company has also
provided services under subcontracts for projects in Jamaica, the
Philippines and for the U.S. Immigration and Naturalization Service.
15
<PAGE>
The Company began operations in 1993 as a division of Lau Technologies
(Lau), a provider of systems integration services and products for
sophisticated electronic systems. In November 1996, Lau transferred
substantially all of the assets, liabilities and operations of the division
to the Company and the Company completed its initial public offering. The
Company is currently a 65% owned subsidiary of Lau.
On November 3, 1998, the Company's Board of Directors appointed Thomas
J. Colatosti, formerly the Company's Chief Operating Officer, President and
Chief Executive Officer.
During 1997 and 1998, the Company's revenue growth slowed
significantly due primarily to lengthening procurement delays in its
principal markets and a strong competitive market place. The Company
believes that the acceptance of digital identification technology in recent
years, its commitment to providing customized solutions for its customers
needs, its expertise in facial imaging and biometric solutions and its
proprietary software and hardware products will continue to contribute to
its growth.
Effective June 1, 1998, the Company reorganized its operations to
create a separate biometrics division to respond to the growing market
interest in biometric solutions. The biometrics division is focused on
product, market and channel development activities in three principal
areas: facility access control; PC network and internet access security;
and real-time large database identification and verification of
individuals. The systems integration and identification card division (SI
division) focuses on Viisage's public sector markets and serves as a
channel to existing customers and the public sector for the Company's
biometric technologies. The Company believes that it is in the early stages
of an emerging and high growth market for biometric identification
solutions, particularly facial recognition solutions in the government and
commercial markets. In September 1998, the Company's technology partner and
principal shareholder, Lau, was awarded a $2.8 million development contract
for facial recognition systems by the U.S. Department of Defense which
involved Viisage as a subcontractor. The Company believes that the
leadership from the Federal Government in using facial biometrics as well
as other recent awards and OEM arrangements validates the Company's
technology and helps create credibility for the emerging global market.
The Company is engaged in one business, the development and
implementation of digital identification systems and solutions. As
discussed above, since June 1, 1998, the Company has operated in two
segments. Amounts for the biometrics division prior to the reorganization
are not material or meaningful.
The SI division provides systems and services principally under
contracts that have five to seven 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 size of the database, the level of post-
installation support and the competitive environment. Substantially all of
the Company's revenues are currently derived from the SI division's 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
16
<PAGE>
from a limited number of large contracts. For the years ended December 31,
1998, 1997 and 1996, three customers, one customer and two customers,
respectively, each accounted for more than 10% of the Company's revenues
and an aggregate of 40%, 46% and 50% of revenues for each of 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. However, the
Company believes its public sector business is subject to cyclical
procurement delays that may be related to state-wide election cycles.
Biometric division revenues have not been material to date and operations
are not expected to be seasonal.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 AND 1997
Charges and Accounting Change. During the first quarter of 1998, the
Company recorded charges of approximately $230,000 related to a
restructuring to reduce expenses in line with the Company's revised plan
for 1998. Approximately $50,000 of such charges are included in project
costs, $170,000 are included in sales and marketing expenses and $10,000
are included in general and administrative expenses in the statement of
operations. During the third and fourth quarters of 1998, the Company
recorded charges of $472,000 and $1,850,000, respectively, to revise
project margins and contract cost-to-complete estimates. Approximately
$2,222,000 of such charges are included in project costs and $100,000 are
included in general and administrative expenses in the statement of
operations.
The Company elected early adoption of Statement of Position No. 98-5
(SOP 98-5), Reporting on the Costs of Start-Up Activities, which requires
start-up costs to be expensed as incurred rather than capitalized. The
Company previously capitalized certain start-up costs as pre-contract costs
under SOP 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, and charged such costs to contracts upon award.
As required, the adoption of SOP 98-5 has been made effective as of the
beginning of the year. The cumulative effect of the change in accounting
principle of $1,038,000 was recorded as a one-time charge in the Company's
results for the year. Project costs also include start-up costs of $283,000
which were incurred in the first quarter of 1998.
Revenues. SI division revenues are derived principally from systems
implementation, card production and related services under multi-year
contracts. Biometrics division revenues are derived principally from
software development services. Revenues decreased 45% to $16.3 million for
1998 from $29.4 million in 1997. This decrease reflects the slowdown in new
business awards during 1997 and 1998. Biometrics division revenues for the
period were approximately $500,000, all of which were earned under a
subcontract from Lau.
Project Costs and Margin. SI division project costs consist primarily of
hardware, consumables (printer ribbons, cards, holographic overlays, etc.),
system design, software
17
<PAGE>
development and implementation labor, maintenance and overhead. Biometrics
division project costs consist primarily of labor and related overhead. As
a percentage of revenues, project costs, excluding charges and accounting
change, increased to 82% for 1998 from 71% for 1997. This increase reflects
the impact of lower margin contracts in the overall revenue mix and
overhead variances resulting from lower than anticipated 1998 revenues.
Including charges and accounting change, project costs increased to 98% for
1998 compared to 89% for 1997. This increase reflects the charges discussed
above which are due in part to enhancements to central production
operations and technology and transitioning to an in-house maintenance
organization during 1998. Project margin, excluding charges and accounting
change, decreased 66% to $2.9 million (18% of revenues) for 1998 from $8.5
million (29% of revenues) for 1997. This decrease reflects lower revenues
in 1998 and the increases in project costs discussed above. Including
charges and accounting change, project margin decreased 91% to $302,000 (2%
of revenues) compared to $3.3 million (11% of revenues) for 1997.
Biometrics division project costs for 1998 were $516,000, including a
portion of the overhead variances discussed above.
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, excluding
charges, decreased 23% to $2.0 million from $2.6 million for 1997. This
decrease reflects the reduction in headcount and related expenses in
connection with the restructuring mentioned above. Including charges, sales
and marketing expenses decreased 55% to $2.2 million for 1998 compared to
$4.9 million for 1997. As a percentage of revenues, sales and marketing
expenses, excluding charges, increased to 12% for 1998 from 9% for 1997 due
to the decrease in 1998 revenues discussed above. Including charges, sales
and marketing expenses were 14% for 1998 compared to 17% for 1997. Sales
and marketing expenses since the reorganization for the biometrics division
were $380,000.
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 increased 135% to
$358,000 for 1998 from $152,000 for 1997. Expenditures for 1998 and 1997
relate primarily to the Company's facial recognition products. Such amounts
do not include amounts for specific projects that are allocated to project
costs 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.
18
<PAGE>
General and Administrative. General and administrative expenses consist
principally of compensation for executive management, finance and
administrative personnel and outside professional fees and are shared by
the Company's two divisions. General and administrative expenses, excluding
charges, remained constant at approximately $2.1 million for 1998 and 1997.
Amounts for 1998 reflect the restructuring and reorganization charges
discussed above and the related transfer of certain management expenses to
general and administrative expenses. Including charges, general and
administrative costs increased 7% to $2.3 million. As a percentage of
revenues, general and administrative expenses, excluding charges, increased
to 13% for 1998 compared to 7% for 1997 due primarily to lower revenues in
1998. Including charges, general and administrative costs were 14% of
revenues.
Interest Expense. The increase in net interest expense to $1.7 million for
1998 from $441,000 for 1997 reflects increased borrowings during 1998 and a
reduction in interest earned on cash equivalents in 1998.
Income Taxes. The Company did not record any tax benefit for the 1998 or
1997 losses due to the uncertainty of whether such benefit will be
realized.
YEAR ENDED DECEMBER 31, 1997 AND 1996
Fourth Quarter Charge. During the fourth quarter of 1997, the Company
recorded charges of approximately $7.6 million related to investments in
technology, services and markets that are expected to benefit current and
future customers and result in future revenues. These investments relate
principally to upgrades and enhancements to older systems, enhancements to
central production and data management capabilities and enhancements to
certain systems to facilitate the future use of facial recognition
technologies. These investments demonstrate the Company's commitment to its
customers and to being a leading provider of biometric identification
solutions. Approximately $5.3 million of such charges are included in
project costs and $2.3 million are included in sales and marketing expenses
in the statement of operations.
Revenues. Revenues are derived principally from systems
implementation, card production and related services under multi-year
contracts. Revenues increased 18% to $29.4 million in 1997 from $25.0
million in 1996. This increase was due to an increase in the number of
contracts being performed during 1997.
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, excluding charges,
decreased to 71% for 1997 from 78% for 1996. This decrease reflects cost
savings on design, development and implementation activities related to new
contracts. Including charges, project costs increased to 89% for 1997.
Project margin, excluding charges, increased 56% to $8.5 million (29% of
revenues) from $5.5 million (22% of revenues) for 1996, reflecting the
impact of newer contracts on the overall revenue mix for 1997. Including
charges, project margin decreased 40% to $3.3 million (11% of revenues).
19
<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, excluding
charges, increased 43% to $2.6 million from $1.9 million in 1996. This
increase principally reflects the addition of marketing personnel during
the second half of 1996 and the first half of 1997. Including charges,
sales and marketing expenses increased 166% to $4.9 million in 1997. As a
percentage of revenues, sales and marketing expenses, excluding charges,
increased to 9% from 7% for 1996 due to such expenses increasing at a
greater rate than revenues during 1997. Including charges, sales and
marketing expenses increased to 17% for 1997.
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 35% to
$152,000 in 1997 from $235,000 in 1996, and remained constant as a
percentage of revenues at approximately 1% each year. Expenditures for 1997
and 1996 relate primarily to the Company's facial recognition products.
Such amounts do not include amounts for specific projects that are
allocated to project costs and do not reflect the benefits to the Company
under license arrangements from the research and development efforts of Lau
Technologies and MIT 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 12% to $2.1 million in 1997 from $1.9
million in 1996. The increase in expenses was due primarily to public
company expenses for a full year in 1997 and additional personnel added in
1997. As a percentage of revenues, general and administrative expenses
decreased to 7% in 1997 from 8% in 1996 due to revenues increasing at a
greater rate than such expenses in 1997.
Interest Expense. The decrease in net interest expense to $441,000 in
1997 from $714,000 in 1996 principally reflects the interest earned on cash
equivalents during 1997 as well as the reduced level of borrowings during
the first half of 1997 compared to the first half of 1996.
Income Taxes. The Company did not record any tax benefit for the loss
in 1997 due to the uncertainty of when such benefit will be realized.
Income tax expense for 1996 related principally to corporate taxes for the
period following the transfer discussed above 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, working capital was $11.1 million compared to
$15.3 million at December 31, 1997. The decrease in working capital is due
primarily to the charges and accounting change discussed above.
20
<PAGE>
For the year ended December 31, 1998, operations and investing
activities utilized cash of approximately $3.8 million and $5.4 million,
respectively, principally to fund operating losses and increases in project
assets. Financing was provided primarily by long-term borrowings and the
project lease financing arrangement referred to below.
At December 31, 1998, the Company was not in compliance with certain
covenants included in its revolving credit and project lease financing
facilities. The Company has received waivers of such violations from its
lenders and commitments from its lenders to modify the Company's covenants
in line with its current operating plan. In connection with the bank's
commitment, the revolving credit facility will be amended to provide for
borrowings of up to $10 million through September 30, 1999, $9 million
through December 31, 1999, and $6.5 million through June 30, 2000 at the
prime rate plus 1%. The revolving credit facility is secured by
substantially all of the Company's assets and requires the Company to
maintain certain financial ratios and minimum levels of earnings and
tangible capital funds, as defined. The revolving credit facility also
requires the Company to raise funds, as needed, from other sources to cover
biometrics division expenses. These sources are expected to include a
combination of biometrics division revenues, subordinated debt and equity
capital.
The Company also has a system project lease financing arrangement with
a commercial leasing organization. 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. The Company is also required to maintain certain financial
ratios and minimum levels of tangible capital funds, as defined. As
discussed above, the Company was not in compliance with certain covenants,
but has received waivers and a commitment to amend the covenants to be
consistent with the Company's current operating plan. These project lease
arrangements are accounted for as capital leases. The current arrangement
provides for project financing of up to $15.0 million, which has been
reduced from $25 million to reflect the Company's current operations. At
December 31, 1998, the Company had approximately $14.8 million outstanding
under the lease financing arrangement, and is currently seeking additional
project financing arrangements. Lau has agreed to provide up to
$3.1 million of capital lease financing in 1999.
The Company believes that it will meet its revised debt covenants.
However, this expectation is dependent in part on achieving business
forecasts and raising funds to cover biometrics division expenses. If the
Company does not meet such covenants, the bank and the lessor could require
immediate repayment of amounts outstanding.
During the third quarter, the Company issued 300,000 shares of Common
Stock to Lau Technologies (Lau), its majority shareholder, for $2.00 per
share or $600,000. The Company
21
<PAGE>
also issued 509,091 options to Lau during the third quarter as a financing
fee for Lau's guarantee of certain capital lease financing drawdowns. The
options are exercisable through August 2001 at $2.75 per share. In November
1998, the Company also issued an $800,000, 4% convertible subordinated note
to Lau. The note and related accrued interest are convertible into the
Company's common stock at any time prior to October 15, 1999 at $1.58 per
share.
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 it will require at least $2 million of
additional funding in order to comply with certain covenants in its lending
agreements. The Company has a commitment from Lau for up to $2 million of
additional funding which can be drawn, under certain conditions defined in
the commitment, at various times through February 2000 and plans to raise
additional funding, as needed, from other sources. The Company believes
that if it meets its business forecast for 1999, cash flows from available
borrowings, project leasing, operations and capital raising 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 capital will be available on favorable terms or at all. If the
Company is unable to obtain additional capital, as 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. Failure to obtain additional capital could also result in
violation of debt and project lease financing covenants.
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.
ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 129, Disclosure of
Information about Capital Structure, which establishes standards for
disclosing information about an entity's capital structure. In June 1997,
the FASB issued SFAS No. 130, Reporting Comprehensive Income, which
establishes standards for reporting and disclosure of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. These statements are effective for
fiscal years beginning after December 15, 1997 and require certain
additional disclosures. The adoption of these statements did not have a
significant impact on the Company's current disclosures.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information, which establishes standards for
reporting and disclosure of information about operating segments as well as
disclosures about products and services, geographic areas and major
customers. As required, the Company adopted SFAS No. 131 in
22
<PAGE>
the fourth quarter and has provided the required financial disclosures for
the systems integration and identification card and biometrics divisions.
MARKET RISK
Except for the Company's revolving credit facility, which has a
variable interest rate, the Company has no material exposure to market risk
that could affect its future results of operations and financial condition.
YEAR 2000
The Company continues to assess the potential impact of the year 2000
on the Company's internal business systems, products, and operations. The
Company's year 2000 initiatives include (i) testing and upgrading internal
business systems and facilities; (ii) testing and developing necessary
upgrades for the Company's current products and certain discontinued
products; (iii) contacting key suppliers, vendors, and customers to
determine their year 2000 compliance status; and (iv) developing
contingency plans.
The Company's accounting and information systems provider, Lau, has
advised the Company that its internal business systems are year 2000
compliant. The Company expects that its facilities will be year 2000
compliant by the end of 1999 and problems encountered, if any, will be
remedied by the owners of such facilities.
The Company believes that all of the material products that it
currently sells are year 2000 compliant or can be made compliant with minor
modifications. However, as many of the Company's products are complex,
interact with third-party products, and operate on computer systems that
are not under the Company's control, there can be no assurance that the
Company has identified all of the year 2000 issues with its current
products. The Company is continuing to test and evaluate such products and
may offer upgrades to alternative products where reasonably practicable.
The Company is in the process of identifying and contacting suppliers,
vendors, and customers that are believed to be significant to the Company's
business operations in order to assess their year 2000 readiness. As part
of this effort, the Company is developing questionnaires relating to year
2000 compliance for distribution to its significant suppliers, vendors, and
customers. The Company intends to follow-up and monitor the year 2000
compliant progress of significant suppliers, vendors, and customers that
indicate that they are not year 2000 compliant or that do not respond to
the Company's questionnaires. The Company intends to develop a contingency
plan that will allow its primary business operations to continue despite
disruptions due to year 2000 issues. These plans may include identifying
and securing other suppliers, increasing inventories, and modifying
production facilities and schedules. As the Company continues to evaluate
the year 2000 readiness of its products and significant suppliers, vendors,
and customers, it will modify and adjust its contingency plan as may be
required.
23
<PAGE>
To date, costs incurred in connection with the year 2000 issue have
not been material. The Company does not expect total year 2000 remediation
costs to be material, but there can be no assurance that the Company will
not encounter unexpected costs or delays in achieving year 2000 compliance.
If any of the Company's material suppliers, vendors, or customers
experience business disruptions due to year 2000 issues, the Company might
also be materially adversely affected. While the Company is attempting to
minimize any negative consequences arising from the year 2000 issue, there
can be no assurance that year 2000 issues will not have a material adverse
impact on the Company's business, operations, or financial condition.
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,
risks of year 2000 issues, and general economic and political conditions
and other factors affecting spending by customers.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Information required by this item is included on pages F-1 through F-23 of
this Form 10K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
24
<PAGE>
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 Directors" 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.
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.
25
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
(a), (d) Financial Statements and Schedules
----------------------------------
For a list of financial statements included herein see Index on
page F-1.
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
-------------------
None.
(c) Exhibits
--------
See Exhibit Index on pages 28 and 29.
26
<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 26th day of
April, 1999.
Viisage Technology, Inc.
By: /s/ Thomas J. Colatost
-----------------------------------
Thomas J. Colatosti
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 31st day of March, 1999:
<TABLE>
<CAPTION>
Signature Title
--------- -----
*
<S> <C>
By:_________________________________ Chairman of the Board of Directors
Denis K. Berube
*
By:_________________________________ President and Chief Executive Officer (Principal
Thomas J. Colatosti 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
Charles E. Levine
*
By:_________________________________ Director
Harriet Mouchly-Weiss
*
By:_________________________________ Director
Peter Nessen
*
By:_________________________________ Director
Thomas J. Reilly
*
* By: /s/ Thomas J. Colatosti
--------------------------------
Thomas J. Colatosti
Attorney-in-fact
</TABLE>
27
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
No. DESCRIPTION
- --- -----------
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 November 3, 1998, between the
Registrant and Robert C. Hughes, as amended.
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, as amended (filed as appendix to
October 10, 1997 Schedule 14C Information Statement
10.9 1996 Director Stock Option Plan, as amended (filed as appendix to 1997
proxy statement).
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** Amended and Restated Credit Agreement between the Registrant and State
Street Bank and Trust Company, dated December 7, 1998.
10.13* Subcontract between the Registrant and Information Spectrum, Inc.
(relating to the U.S. Immigration & Naturalization Service), dated as
of October 19, 1995.
10.14* Contract between the Registrant and the North Carolina Department of
Transportation, dated as of April 26, 1996.
10.15*** Purchase Agreement (Project Finance Facility) between the Registrant
and Sanwa Business Credit Corporation, dated as of November 20, 1998,
as amended.
10.16* Contract between the Registrant and Transactive, Inc. (relating to the
New York Department of Social Services), dated as of December 8, 1994,
as amended.
28
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
No. DESCRIPTION
- --- -----------
10.17**** Contract between the Registrant and the Illinois Secretary of State,
dated June 2, 1997, as amended.
10.18 1997 Employee Stock Purchase Plan, filed as appendix to October 10,
1997 Schedule 14C Information Statement
10.19 Employment Agreement, dated as of November 3, 1998, between the
Registrant and Thomas J. Colatosti.
23.1 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)
*** Original agreement filed as an exhibit to the Registrant's Form S-1
Registration Statement dated November 8, 1996 (File No. 333-10649).
Amendment filed as an exhibit to the Registrant's Report on Form 10-K
for the year ended December 31, 1997.
**** Amendment filed as an exhibit to the Registrant's Report on Form 10-K for
the year ended December 31, 1997.
29
<PAGE>
EXHIBIT 23.1
Viisage Technology, Inc.
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
registration statements on Form S-8 (No.'s 333-28695 and 333-42485)
Arthur Andersen LLP
Boston, Massachusetts
April 26, 1999
30
<PAGE>
VIISAGE TECHNOLOGY, INC.
INDEX
PAGE
----
Report of Independent Public Accountants F-2
Balance Sheets as of December 31, 1998 and 1997 F-3
Statements of Operations for the years ended December 31,
1998, 1997 and 1996 F-4
Statements of Changes in Shareholders' Equity/Net Assets
for the years ended December 31, 1998, 1997 and 1996 F-5
Statements of Cash Flows for years ended December 31, 1998, 1997 and 1996 F-6
Notes to Financial Statements F-7
F-1
<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, 1998 and 1997, and the related statements of operations, changes
in shareholders' equity/net assets and cash flows for each of the years in the
three year period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the years in the three year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 19, 1999 (except for note 6 for which
the date is April 26, 1999)
F-2
<PAGE>
VIISAGE TECHNOLOGY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (note 2) $ 166 $ 1,611
Accounts receivable 4,285 3,171
Costs and estimated earnings in excess of billings (note 2) 21,723 25,483
Other current assets (note 3) 683 423
------------- --------------
Total current assets 26,857 30,688
Property and equipment, net (note 4) 18,513 16,046
Other assets (note 3) 1,074 729
------------- --------------
$ 46,444 $ 47,463
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses (note 5) $ 9,090 $ 12,253
Accrued and deferred income taxes (notes 2 and 9) 27 16
Subordinated debt (note 3) 800 -
Current portion of long-term debt (note 6) 2,054 549
Obligations under capital leases (notes 6 and 7) 3,797 2,609
------------- --------------
Total current liabilities 15,768 15,427
Long-term debt (note 6) 6,500 3,505
Obligations under capital leases (notes 6 and 7) 11,558 9,795
------------- --------------
33,826 28,727
------------- --------------
Commitments and contingencies (note 7)
Shareholders' Equity (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; issued and outstanding
8,383,000 in 1998 and 8,066,000 in 1997 8 8
Additional paid-in capital 24,157 23,072
Retained earnings (deficit) (11,547) (4,344)
------------- --------------
Total shareholders' equity 12,618 18,736
------------- --------------
$ 46,444 $ 47,463
============= ==============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-3
<PAGE>
VIISAGE TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
------------- -------------- --------------
<S> <C> <C> <C>
Revenues $ 16,259 $ 29,388 $ 24,971
Project costs (note 2) 15,957 26,122 19,484
------------ ------------ ------------
Project Margin 302 3,266 5,487
------------ ------------ ------------
Operating expenses:
Sales and marketing (note 2) 2,195 4,930 1,852
Research and development 358 152 235
General and administrative (note 2) 2,247 2,105 1,880
------------ ------------ ------------
Total operating expenses 4,800 7,187 3,967
------------ ------------ ------------
Operating income (loss) (4,498) (3,921) 1,520
Interest expense, net 1,667 441 714
------------ ------------ ------------
Income (loss) before income taxes and cumulative
effect of change in accounting principle (6,165) (4,362) 806
Income taxes (notes 2 and 9) - - 205
------------ ------------ ------------
Income (loss) before cumulative effect of change
in accounting principle (6,165) (4,362) 601
Cumulative effect of change in accounting principle (note 2) (1,038) - -
------------ ------------ ------------
Net income (loss) $ (7,203) $ (4,362) $ 601
============ ============ =============
Basic net income (loss) per share before cumulative
effect of change in accounting principle $ (0.75) $ (0.54) $ 0.10
Basic net income (loss) per share $ (0.88) $ (0.54) $ 0.10
============ ============= =============
Weighted average common shares 8,175 8,060 6,022
============ ============= =============
Diluted net income (loss) per share before cumulative
effect of change in accounting principle $ (0.75) $ (0.54) $ 0.09
Diluted net income (loss) per share $ (0.88) $ (0.54) $ 0.09
============ ============ =============
Weighted average common shares 8,175 8,060 6,537
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-4
<PAGE>
VIISAGE TECHNOLOGY, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY/NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
PREFERRED COMMON PAID-IN EARNINGS
STOCK STOCK CAPITAL (DEFICIT) NET ASSETS TOTAL
------------ ------------ --------------- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
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 - - - - 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
Exercise of stock options (note 10) - - 78 - - 78
Net loss - - - (4,362) - (4,362)
------------ ------------ -------------- --------------- ---------- ----------
Balance, December 31, 1997 $ - $ 8 $ 23,072 $ (4,344) $ - $ 18,736
============ ============ ============== =============== ========== ==========
Issuance of stock options (note 3) - - 444 - - 444
Issuance of common stock (note 3) - - 600 - - 600
Exercise of stock options (note 10) - - 41 - - 41
Net loss - - - (7,203) - (7,203)
------------ ------------ -------------- --------------- ---------- ----------
Balance, December 31, 1998 $ - $ 8 $ 24,157 $ (11,547) $ - $ 12,618
============ =========== ============== =============== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-5
<PAGE>
VIISAGE TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996
------------- -------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,203) $ (4,362) $ 601
Adjustments to reconcile net income (loss) to net cash
(used for) provided by operating activities:
Depreciation and amortization 3,022 1,964 612
Cumulative effect of change in accounting principle 1,038 - -
Stock compensation expense - - 238
Changes in operating assets and liabilities:
Accounts receivable (1,114) (1,672) (1,121)
Costs and estimated earnings in excess of billings 2,722 (9,038) (7,767)
Other current assets (260) (85) (338)
Accounts payable and accrued expenses (2,005) 5,259 6,135
Accrued and deferred taxes 11 (174) 190
------------- -------------- -----------------
Net cash used for operating activities (3,789) (8,108) (1,450)
------------- -------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract equipment converted to capital leases (5,244) (7,800) (3,965)
Purchase of system assets (100) (3,900) -
Additions to property and equipment (145) (453) (275)
Decrease (increase) in other assets 99 178 (907)
------------- -------------- -----------------
Net cash used for investing activities (5,390) (11,975) (5,147)
------------- -------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net revolving credit (repayments) borrowings 8,554 - (6,656)
Proceeds from long-term borrowings - 4,100 -
Proceeds from sale/leaseback of equipment 5,244 7,800 3,965
Principal payments on long-term borrowings (4,054) (46) -
Principal payments on obligations under capital leases (2,651) (1,311) (497)
Net proceeds from issuance of common stock 641 78 22,230
Net transactions with parent - - (1,372)
------------- -------------- -----------------
Net cash provided by financing activities 7,734 10,621 17,670
------------- -------------- -----------------
(Decrease) increase in cash and cash equilvalents (1,445) (9,462) 11,073
Cash and cash equivalents, beginning of year 1,611 11,073 -
------------- -------------- -----------------
Cash and cash equivalents, end of year $ 166 $ 1,611 $ 11,073
============= ============== =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for interest $ 1,416 $ 832 $ 781
============= ============== =================
Cash paid during the year for income taxes $ 68 $ 122 $ -
============= ============== =================
NON CASH ACTIVITIES:
Issuance of stock options (note 3) $ 444 $ - $ -
============= ============== =================
Issuance of subordinated debt in exchange for
reduction of accounts payable $ 800 $ - $ -
============= ============== =================
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-6
<PAGE>
VIISAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Business and Basis of Presentation
Viisage Technology, Inc. (Viisage or the Company) is a leader in the
emerging field of biometrics technology and in providing digital
identification systems and solutions. The Company focuses on identification
solutions that improve personal convenience and security, deter fraud and
reduce identification program costs. Viisage combines its systems
integration and software design capabilities with its proprietary software
and hardware products and other industry standard products to create
complete customized solutions. These turnkey solutions integrate image and
data capture, create relational databases, incorporate multiple biometrics
and improve customers' ability to move and manage information. Applications
can include drivers licenses, voter registration, national ID's, law
enforcement, social services, access control and PC network and internet
access security.
The Company is engaged in one business, the development and implementation
of digital identification systems and solutions. Effective June 1, 1998,
the Company reorganized its operations to create a separate biometrics
division to respond to the growing market interest in biometric solutions.
The biometrics division is focused on product, market and channel
development activities in three principal areas: facility access control;
PC network and internet access security; and real-time large database
identification and verification of individuals. The systems integration and
identification card division (SI division) focuses on Viisage's public
sector markets and serves as a channel to existing customers and the public
sector for the Company's biometric technologies. Since June 1, 1998, the
Company has operated in two segments. Amounts for the biometrics division
prior to the reorganization are not material.
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 65% 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.
F-7
<PAGE>
VIISAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) Business and Basis of Presentation (Continued)
The statement of operations for 1996 reflects allocations for the costs of
shared facilities and certain administrative services. Such costs and
expenses were allocated to the Company based on actual usage or other
methods that approximate actual usage. Management believes that the
allocation methods were reasonable and that allocated costs and expenses
approximate what such amounts would have been if the Company had operated
on a stand-alone basis. As discussed more fully in note 3, the Company has
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 for periods prior to the
Transfer 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 for the
periods prior to the Transfer.
(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 include approximately $8 million expected to
be billed and collected after December 31, 1999.
F-8
<PAGE>
VIISAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) Summary of Significant Accounting Policies (Continued)
Charges and Accounting Change
During the first quarter of 1998, the Company recorded charges of
approximately $230,000 related to a restructuring to reduce expenses in
line with the Company's revised plan for 1998. Approximately $50,000 of
such charges are included in project costs, $170,000 are included in sales
and marketing expenses and $10,000 are included in general and
administrative expenses in the statement of operations. During the third
and fourth quarters of 1998, the Company recorded charges of $472,000 and
$1,850,000, respectively, to revise project margins and contract cost-to-
complete estimates. Approximately $2,222,000 of such charges are included
in project costs and $100,000 are included in general and administrative
expenses in the statement of operations.
The Company elected early adoption of Statement of Position No. 98-5 (SOP
98-5), Reporting on the Costs of Start-Up Activities, which requires start-
up costs to be expensed as incurred rather than capitalized. The Company
previously capitalized certain start-up costs as pre-contract costs under
SOP 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, and charged such costs to contracts upon award.
As required, the adoption of SOP 98-5 has been made effective as of the
beginning of the year. The cumulative effect of the change in accounting
principle of $1,038,000 was recorded as a one-time charge in the Company's
results for the year. Project costs also include start-up costs of
$283,000, which were incurred in the first quarter of 1998.
During the fourth quarter of 1997, the Company recorded non-recurring
charges of approximately $7.6 million related to investments in technology,
services and markets that are expected to benefit current and future
customers and result in future revenues. These investments relate
principally to upgrades and enhancements to older systems, enhancements to
central production and data management capabilities and enhancements to
certain systems to facilitate the future use of facial recognition
technologies. Approximately $5.3 million of such charges are included in
project costs and $2.3 million are included in sales and marketing expenses
in the statement of operations.
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,
1997, cash equivalents consisted of short-term repurchase agreements of
$1,229,000 with a commercial bank. These investments are carried at cost,
which approximates market value. At December 31, 1998, there were no
short-term repurchase agreements.
F-9
<PAGE>
VIISAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) Summary of Significant Accounting Policies (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, a $100,000
allowance for doubtful accounts has been recorded for 1998. No amount was
recorded for 1997.
For 1998, 1997 and 1996, three customers, one customer, and two customers,
respectively, each accounted for more than 10% of revenues individually,
and approximately 40%, 46% and 50% in the aggregate of the Company's
revenues, respectively.
At December 31, 1998, 49% of accounts receivable and costs and estimated
earnings in excess of billings related to two 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 to seven 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, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed, 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 software developed for internal use are expensed as
incurred, except for externally purchased software which is capitalized and
depreciated over its estimated useful life not to exceed five years.
F-10
<PAGE>
VIISAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) Summary of Significant Accounting Policies (Continued)
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
files 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, Accounting for
Income Taxes. 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 currently enacted tax rates. 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
Basic net income (loss) per share is computed based on the weighted average
common shares outstanding during the period. Diluted net income (loss) per
share includes the dilutive impact of potential common stock.
For 1998 and 1997, the diluted per share amounts do not reflect the impact
of convertible debt or options outstanding for 2,784,531 and 1,770,550
shares, respectively, because their effect is antidilutive. For 1996,
diluted net income per share reflects the 515,000 share dilutive effect of
common stock options outstanding during 1996 using the treasury stock
method. Except for the convertible debt and options referred to above, the
Company does not have any other potential common stock.
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. SFAS No. 123, Accounting for Stock-Based Compensation,
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 .
F-11
<PAGE>
VIISAGE TECHNONOGY, INC.
NOTES TO FINANCIAL STATEMNETS (CONTINUED)
(2) Summary of Significant Accounting Policies (Continued)
Other Accounting Pronouncements
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure, which establishes standards for disclosing
information about an entity's capital structure. In June 1997, the FASB
issued SFAS No. 130, Reporting Comprehensive Income, which establishes
standards for reporting and disclosure of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. These statements are effective for fiscal
years beginning after December 15, 1997 and require certain additional
disclosures. The adoption of these statements did not have a significant
impact on the Company's current 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, certain 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 revised if the level of services is changed. The Company
utilized the same allocation methods for prior periods. Amounts for 1997
reflect the use of additional services. The amounts for such services were
approximately $636,000 in 1998, $864,000 in 1997 and $660,000 in 1996,
respectively.
The Use and Occupancy Agreement requires the Company to pay its
proportionate share of the cost of shared facilities and office services
including rent, insurance, property taxes, utilities and other operating
expenses, based on square footage or equipment utilized. The annual fee for
facilities and services is revised for changes in space utilized and in
operating expenses. The amounts for facilities and services were
approximately $550,000 in 1998, $512,000 in 1997 and $220,000 in 1996,
respectively. Amounts for 1998 and 1997 reflect the use of additional
space. 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.
F-12
<PAGE>
VIISAGE TECHNONOGY, INC.
NOTES TO FINANCIAL STATEMNETS (CONTINUED)
(3) Other Related Party Transactions (Continued)
The Company purchases certain system components and technical personnel
from Lau Technologies. The amounts for such components and services were
approximately $1.0 million in 1998, $1.9 million in 1997 and $1.7 million
in 1996. During 1998, the Company provided software development services as
a subcontractor to Lau amounting to $500,000.
At December 31, 1998 and 1997, the Company had approximately $596,000 and
$23,000 of accounts receivable due from Lau Technologies, respectively, and
approximately $906,000 and $713,000 of accounts payable due to Lau
Technologies, respectively. The Company also has a 9% note receivable from
Lau Technologies due in monthly installments of principal and interest of
approximately $21,000 through February 28, 2002. At December 31, 1998 and
1997, approximately $197,000 and $194,000 of the note was included in other
current assets, respectively, and the remaining balance of approximately
$472,000 and $664,000 was included in other assets, respectively, in the
accompanying balance sheet.
During the third quarter of 1998, the Company issued 300,000 shares of
Common Stock to Lau, its majority shareholder, for $2.00 per share or
$600,000. The Company also issued to Lau options to purchase 509,091 shares
of common stock during the year as a financing fee for certain guarantees
of capital lease financing drawdowns. The options are exercisable at $2.75
per share through August 2001. The fair market value of the options was
recorded as an addition to deferred financing costs and additional paid-in-
capital.
In November 1998, the Company issued an $800,000, 4% convertible
subordinated note to Lau in exchange for amounts payable to Lau. The note
and related accrued interest are convertible into the Company's common
stock at any time prior to October 15, 1999 at $1.58 per share.
The Company has a commitment from Lau for up to $2 million of additional
funding which can be drawn, under certain conditions defined in the
commitment, at various times through February 2000. In addition, Lau has
agreed to provide up to $3.1 million of capital lease financing in 1999
for a certain contract.
The Company has employment and noncompetition agreements with certain
officers. Such agreements provide for employment and related compensation,
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.
F-13
<PAGE>
VIISAGE TECHNONOGY, INC.
NOTES TO FINANCIAL STATEMNETS (CONTINUED)
(4) Property and Equipment
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Assets held under capital lease $19,225 $13,981
System assets 4,000 3,900
Computer equipment 974 829
------- -------
24,199 18,710
Less--Accumulated depreciation 5,686 2,664
------- -------
$18,513 $16,046
======= =======
</TABLE>
During 1998 and 1997, the Company sold and leased back under capital leases
approximately $5.2 million and $7.8 million, respectively, of system
equipment used to produce identification cards for certain contracts.
In October 1997, Viisage completed a System Sale, License and Subcontract
Agreement (the Agreement) with Unisys Corporation (Unisys). Under the
Agreement, Viisage purchased and licensed certain assets from Unisys and
agreed to perform certain services as Unisys' subcontractor relating to a
digital imaging system for the Florida Department of Highway Safety and
Motor Vehicles. The purchase price was $4 million, consisting of $3.8
million paid in 1997 and two payments of $100,000 each, one made in
December 1998 and the other to be made on October 1, 2000. In addition,
Viisage agreed to additional contingent payments of up to $754,000
depending largely on Unisys' support of Viisage's efforts to generate
incremental revenues from Florida state agencies. The purchase, including
approximately $100,000 of transaction costs, was recorded using the
purchase method of accounting and has been allocated to system assets which
are being amortized over the estimated remaining useful life of the system.
(5) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Accounts payable $3,112 $ 4,483
Accrued contract costs 5,235 6,700
Accrued payroll and related taxes 138 170
Accrued vacation 219 285
Other accrued expenses 386 615
------ -------
$9,090 $12,253
====== =======
</TABLE>
F-14
<PAGE>
VIISAGE TECHNONOGY, INC.
NOTES TO FINANCIAL STATEMNETS (CONTINUED)
(5) Accounts Payable and Accrued Expenses (Continued)
During 1998 and 1997, accrued capital lease interest of approximately
$358,000 and $294,000, respectively, has been transferred from accounts
payable and accrued expenses to obligations under capital leases.
(6) Long-term Debt and Project Lease Arrangements
In December 1998, the Company executed an amended and restated agreement
with a commercial bank to provide a new revolving credit facility to the
Company through June 2000. Outstanding term and revolving credit borrowings
were repaid with funds from the new agreement at closing. At December 31,
1998 the Company was not in compliance with certain covenants included in
its revolving credit and project lease financing facilities. The Company
has received waivers of such violations from its lenders and commitments
from its lenders to modify the Company's covenants in line with its current
operating plan. In connection with the bank's commitment, the revolving
credit facility will be amended to provide for borrowings of up to $10
million through June 30, 1999, $9 million through September 30, 1999, $8
million through December 31, 1999 and $6.5 million through June 30, 2000 at
the prime rate plus 1%. The facility is secured by substantially all of the
Company's assets and requires the Company to maintain certain financial
ratios and minimum levels of earnings and tangible capital funds, as
defined. The revolving credit facility also requires the Company to raise
funds, as needed, from other sources to cover biometrics division expenses.
These sources are expected to include a combination of biometrics division
revenues, subordinated debt and equity capital.
Prior to December 1998, borrowings under the credit facility were unsecured
and had interest rates ranging from prime to 8.1%.
The Company also has a system project lease financing arrangement with a
commercial leasing organization. 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. The Company is also required to maintain certain financial
ratios and minimum levels of tangible capital funds, as defined. As
discussed above, at year-end the Company was not in compliance with certain
covenants, but has received waivers and a commitment to amend the covenants
to be consistent with the Company's current operating plan. These project
lease arrangements are accounted for as capital leases. The current
arrangement provides for project financing of up to $15.0 million, which
has been reduced from $25 million to reflect the Company's current
operations. At December 31, 1998, the Company had approximately $14.8
million outstanding under the lease financing arrangement, and is currently
negotiating additional project financing arrangements. Lau has agreed to
provide up to $3.1 million of capital lease financing in 1999.
F-15
<PAGE>
VIISAGE TECHNONOGY, INC.
NOTES TO FINANCIAL STATEMNETS (CONTINUED)
(6) Long-term Debt and Project Lease Arrangements (Continued)
The Company believes that it will continue to meet its debt covenants.
However, this expectation is dependent in part on achieving business
forecasts and raising funds to cover biometrics division expenses. If the
Company does not meet such covenants, the bank and the lessor could require
immediate repayment of amounts outstanding. As discussed in note 3, the
Company has a commitment from Lau for up to $2 million of additional
funding.
(7) Commitments and Contingencies
Leases
The Company leases certain equipment and facilities used in its operations
and the shared facilities discussed in note 3. Rental expense for operating
leases was approximately $212,000 in 1998, $212,000 in 1997 and $130,000 in
1996.
At December 31, 1998, 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:
1999 $ 4,726 $131
2000 4,447 131
2001 3,820 131
2002 2,483 12
2003 1,943 -
Thereafter 1,134 -
------- ----
Total minimum lease payments 18,553 $405
====
Less--Interest portion 3,198
-------
Present value of net
minimum lease payments 15,355
Less--Current portion 3,797
-------
$11,558
=======
</TABLE>
Litigation
The Company does not believe that there are any legal matters that would
have a material adverse effect on its business, financial condition or
results of operations.
F-16
<PAGE>
VIISAGE TECHNONOGY, INC.
NOTES TO FINANCIAL STATEMNETS (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 costs for this plan amounted to approximately $67,000, $95,000
and $70,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
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
consisted 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>
There was no provision for income taxes for the years ended December 31,
1998 and 1997.
A reconciliation of the federal statutory rate to the Company's effective
tax rate for the years ended December 31, 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Federal statutory rate (34.0)% (34.0)% 4.0 %
State taxes, net of federal benefit (6.0) (6.0) 6.0
Valuation allowance recorded 40.0 40.0 -
Subchapter S earnings not taxed - - (28.0)
Deferred taxes related to Transfer - - 14.0
Other, net - - (1.0)
----- ----- -----
- % - % 25.0 %
===== ===== =====
</TABLE>
F-17
<PAGE>
VIISAGE TECHNONOGY, INC.
NOTES TO FINANCIAL STATEMNETS (CONTINUED)
(9) Income Taxes (Continued)
The components and approximate tax effects of the Company's deferred tax
assets and liabilities as of December 31, 1998, 1997 and 1996 are as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards for tax purposes $ 4,363 $ 1,058
Bases differences related to contract assets (859) 33
Property, plant and equipment (19) 245
Accruals and other reserves 242 228
Other - -
------- -------
Net deferred tax asset before valuation allowance 3,727 1,564
Valuation allowance (3,727) (1,564)
------- -------
Net deferred tax asset $ - $ -
======= =======
</TABLE>
Due to the uncertainty surrounding the realization of the Company's net
deferred tax asset, the Company has provided a full valuation allowance
against this amount.
At December 31, 1998, the Company had available estimated net operating
loss carryforwards for federal tax purposes of approximately $10.9 million
to reduce, subject to certain limitations, future income taxes. These
carryforwards expire from 2111 to 2114 and are subject to review and
possible adjustment by the Internal Revenue Service.
F-18
<PAGE>
VIISAGE TECHNONOGY, INC.
NOTES TO FINANCIAL STATEMNETS (CONTINUED)
(10) Shareholders' Equity
Stock Option Plans
Under the 1996 Management Stock Option Plan and the 1996 Director Stock
Option Plan (the Plans), the Board of Directors may grant incentive and
nonqualified stock options to employees and officers and nonqualified stock
options 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 granted to
date to directors vest over three years from the date of grant. Options
granted to management and employees vest at various rates over periods
ranging from three to seven years or, in some cases, earlier if certain
performance measures are met. The performance measures are based on each $1
million increase in Company value up to approximately $500 million, as
adjusted. All options granted under the Plans expire ten years from the
date of grant.
At December 31, 1998, the Company has reserved 2,057,100 shares of common
stock for issuance under the management plan of which 456,696 shares are
available for future grants, and 176,620 shares of common stock under the
director plan which have all been granted.
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. No stock compensation expense was
recorded in 1998 or 1997 and $238,000 was recorded in 1996. During 1998,
the Company adjusted the exercise price from $13.00 to $2.25 on 177,000
employee options and from $6.25 to $2.25 on 21,000 options granted to
certain management personnel. These options were treated as cancelled and
reissued in the table that follows.
F-19
<PAGE>
VIISAGE TECHNONOGY, INC.
NOTES TO FINANCIAL STATEMNETS (CONTINUED)
(10) Shareholders' Equity (Continued)
A summary of stock option activity under the Plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES OPTION PRICE OPTION PRICE
<S> <C> <C> <C>
Options outstanding, December 31, 1996 1,427,100 $ 2.96 - $4.86 $ 3.20
Granted 362,000 6.25 - 13.00 12.50
Exercised (10,732) 2.96 2.96
Cancelled (7,818) 2.96 2.96
--------- ---------------- ------
Options outstanding, December 31, 1997 1,770,550 $ 2.96 - $13.00 $ 5.07
Granted 1,109,077 0.625 - 4.4375 1.63
Exercised (1,465) 2.96 2.96
Cancelled (1,113,335) 2.96 - 13.00 5.68
--------- ---------------- ------
Options outstanding, December 31, 1998 1,764,827 0.625 - 12.50 $ 2.53
========= ================ ======
Options exercisable, December 31, 1998 550,715 $0.9375 - $12.50 $ 3.17
========= ================ ======
Options available for grant 456,696
=========
</TABLE>
The following table summarizes information about outstanding options as of
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE PRICES NUMBER CONTRACTUAL PRICE PER NUMBER PRICE PER
OUTSTANDING LIFE SHARE EXERCISABLE SHARE
<S> <C> <C> <C> <C> <C>
$0.625 - $0.9375 656,837 9.8 years $ 0.93 58,303 $ 0.94
2.00 - 2.96 1,013,020 7.5 years 2.79 467,412 2.95
4.4375 19,970 9.4 years 4.44 - -
12.50 75,000 8.4 years 12.50 25,000 12.50
--------- -------
1,764,827 550,715
========= =======
</TABLE>
The Company has computed the pro forma disclosures required under SFAS No.
123 for options granted using the Black-Scholes option pricing model
prescribed by SFAS No. 123. The weighted average assumptions used are:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Risk free interest rate 4.63 - 5.7% 6% 6%
Expected dividend yield - - -
Expected lives 8 - 10 years 10 years 10 years
Expected volatility 74% 76% 66%
</TABLE>
F-20
<PAGE>
VIISAGE TECHNONOGY, INC.
NOTES TO FINANCIAL STATEMNETS (CONTINUED)
(10) Shareholders' Equity (Continued)
The total value of options granted from the Company's plans was computed as
approximately $1.1 million for 1998, $3.7 million for 1997 and $4.2 million
for prior periods, respectively. Of these amounts, approximately $1.4
million, $434,000 and $1.4 million would have been charged to operations
for the years ended December 31, 1998, 1997 and 1996, respectively, for
currently vested options and the remaining amounts, $5.8 million, $6.1
million and $2.8 million, would be amortized over the related vesting
periods. The pro forma effect of SFAS No. 123 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income (loss), as reported $(7,203,000) $(4,362,000) $ 601,000
Pro forma net loss (8,566,000) (4,796,000) (225,000)
Basic net income (loss) per share, as reported (0.88) (0.54) 0.10
Pro forma basic net loss per share (1.05) (0.60) (0.04)
Diluted net income (loss) per share, as reported (0.88) (0.54) 0.09
Pro forma diluted net loss per share (1.05) (0.60) (0.04)
</TABLE>
Employee Stock Purchase Plan
In 1997, the Company adopted the 1997 Employee Stock Purchase Plan and
reserved 70,000 shares of common stock for issuance under such plan.
Purchase price is determined by taking the lower of 85% of the closing
price on the first or last day of periods defined in the plan. As of
December 31, 1998, 15,500 shares have been issued and options to purchase
9,471 shares of common stock at $1.06 per share were vested under the plan.
These shares were issued in 1999.
(11) Business Segments, Geographical Information, and Concentration of Risk
The Company is engaged in one business, the development and implementation
of digital identification systems and solutions. Effective June 1, 1998,
the Company reorganized its operations to create two separate divisions,
a biometrics division and a systems integration and identification card
division. Since June 1, 1998, the Company has operated in two segments.
Amounts for the biometrics division prior to the reorganization are not
material. The costs of shared facilities and certain administrative
services have been allocated to each business based on actual usage or
other methods that approximate actual usage. All other costs and expenses
have been allocated to each business based on actual usage. The Company's
accounting policies for its segments are the same as disclosed in Note 2.
Management evaluates segment performance based on operating income.
Substantially all of the Company's revenues are currently derived from the
SI division's 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, 1998, 1997 and 1996, three
customers, one customer and two customers, respectively, each accounted for
more than 10% of the Company's revenues and an aggregate of 40%, 46% and
50% of revenues for each of the years, respectively.
F-21
<PAGE>
VIISAGE TECHNONOGY, INC.
NOTES TO FINANCIAL STATEMNETS (CONTINUED)
(11) Business Segments, Geographical Information, and Concentration of Risk
(Continued)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
BUSINESS SEGMENT INFORMATION
Revenues:
Systems integration division 15,759 29,388 24,971
Biometrics division 500 -- --
--------------------------------------
16,259 29,388 24,971
======================================
Operating Income (Loss):
Systems integration division (3,141) (3,921) 1,520
Biometrics division (1,357) -- --
--------------------------------------
(4,498) (3,921) 1,520
======================================
Total Assets:
Systems integration division 45,881 47,463 36,119
Biometrics division 563 -- --
--------------------------------------
46,444 47,463 36,119
======================================
Depreciation and Amortization:
Systems integration division 2,996 1,964 612
Biometrics division 26 -- --
--------------------------------------
3,022 1,964 612
======================================
Capital Expenditures:
Systems integration division 5,480 12,153 4,240
Biometrics division 9 -- --
--------------------------------------
5,489 12,153 4,240
======================================
GEOGRAPHIC INFORMATION:
Revenues:
United States 15,644 28,149 23,113
International 615 1,239 1,858
--------------------------------------
16,259 29,388 24,971
======================================
</TABLE>
F-22
<PAGE>
VIISAGE TECHNONOGY, INC.
NOTES TO FINANCIAL STATEMNETS (CONTINUED)
(12) Quarterly Financial Data (Unaudited)
The following table sets forth selected quarterly financial data for 1998
and 1997 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
1998
Revenues $ 4,629 $ 2,965 $ 4,242 $ 4,423
Project margin (loss) 633 343 185 (859)
Net loss (1,864) (1,568) (1,286) (2,485)
Basic net loss per share (0.23) (0.19) (0.16) (0.30)
Diluted net loss per share (0.23) (0.19) (0.16) (0.30)
1997
Revenues $ 7,178 $ 8,554 $ 6,026 $ 7,630
Project margin (loss) 2,029 2,474 1,608 (2,845)
Net income (loss) 569 690 107 (5,728)
Basic net income (loss) per share 0.07 0.09 0.01 (0.71)
Diluted net income (loss) per share 0.07 0.08 0.01 (0.71)
</TABLE>
Net income (loss) per share amounts for the first quarter of 1998 have been
restated to reflect the Company's early adoption of SOP 98-5.
The 1998 results reflect the impact of charges and the accounting change
discussed in note 2.
The 1997 fourth quarter amounts reflect the impact of charges for certain
investments in technology, services and markets discussed in note 2.
F-23
<PAGE>
VIISAGE TECHNOLOGY, INC
30 PORTER ROAD
LITTLETON, MASSACHUSETTS 01460
November 3, 1998
Mr. Thomas J. Colatosti
Viisage Technology, Inc.
30 Porter Road
Littleton, Massachusetts 01460
Dear Tom,
I am pleased to offer you the position of President and Chief Executive
Officer of Viisage Technology, Inc. (the "Company") commencing November 3, 1998.
The terms of the offer are as follows:
1. Base Salary: $200,000 per year, subject to annual review by the
-----------
Compensation Committee of the Board of Directors.
2. Bonus: Up to 50% of your base salary, based on annual performance criteria
-----
to be established by the Compensation Committee, beginning at your hire
date as CEO and prorated for 1998 and then annually thereafter.
3. Stock Options: The Company shall grant you options to purchase 596,837
-------------
shares of common stock of the Company at an exercise price of $0.9375 per
share pursuant to the Company's 1996 Management Stock Option Plan. These
options shall vest according to the following schedule:
(a) Options to purchase 298,418 shares shall vest in thirty-six
increments on the first day of each month commencing December 1, 1998, and
continuing thereafter for the next thirty-five months. The first increment
shall be for 8,303 shares and the remaining thirty-five increments shall be
for 8,289 shares.
(b) The remaining options to purchase 298,419 shares shall vest in
three increments of 99,473 shares. The first increment shall vest if the
average NASDAQ price of the Company's common stock for any twenty
consecutive trading days reaches $10.00 per share; the second increment
shall vest when that average NASDAQ price reaches $20.00 for any twenty
consecutive trading days; and the third increment shall vest when that
average NASDAQ price reaches $30.00 for any twenty consecutive trading
days.
<PAGE>
Mr Thomas J. Colatosi
November 3, 1998
Page 2
(c) In all cases, the vesting of these options is conditioned on your
being employed by the Company on the vesting date.
(d) These options are in addition to any options which you have been
granted prior to the date of this agreement.
4. Benefits: Participation in the Company's executive employee benefit plans
--------
as in effect from time to time. A summary of the current executive benefits
has been furnished to you.
5. Severance Agreement: If your employment is terminated by the Company, the
-------------------
Company will continue to pay your then current base salary in accordance
with regular payroll practices for six months following the termination
date; provided that no severance payments shall be made if your employment
with the Company is terminated for "cause" or if executive employment at
your then current base salary is offered to you during that six month
period by Lau Technologies or one of its affiliates. Further, upon the
termination of your employment by the Company, you will be entitled to
receive any bonus earned pursuant to Section 2 above for the period prior
to the termination date. "Cause" shall mean you have (i) been convicted of
or entered a plea of no contest relating to any illegal act that materially
and adversely reflects upon the business, affairs or reputation of Viisage,
or (ii) materially neglected to discharge your responsibilities as an
executive employee of Viisage, provided that any termination under this
clause (ii) shall occur only after the written notice to you and an
opportunity to cure such breach within 30 days of such notice.
6. Noncompetition and Nonsolicitation.
----------------------------------
(a) During your employment with the Company and for one year after
the termination of your employment with the Company, whether for cause or
otherwise, you will not (unless otherwise approved in writing by the
Chairman of the Company) for yourself or on behalf of any other person or
entity, directly or indirectly, engage in any business activity relating to
"developing biometric products." "Developing biometric products" shall mean
involvement in or management of research, developing software, integrating
systems, supporting customers, developing technologies, developing business
or business relations, and development of services for or related to any or
all of the following: identification cards, drivers licenses, image-based
security
<PAGE>
Mr Thomas J. Colatosi
November 3, 1998
Page 3
systems, image-based fraud detection systems, fingerprint analysis, hand
geometry analysis, any biometric system, and any biometric technology.
(b) During your employment with the Company and for one year after
the termination of your employment with the Company, whether for cause or
otherwise, you will not (unless otherwise approved in writing by the
Chairman of the Company) for yourself or on behalf of any other person or
entity, directly or indirectly, solicit, employ or engage any person who
was employed by the Company at any time during the six month period prior
to the termination of your employment with the Company or becomes an
employee of the Company at any time during the six month period after said
termination.
(c) In addition to any other remedies available to it, the Company
will have the right to seek injunctive or other equitable relief to prevent
any violation of this Section 6.
7. Miscellaneous. You will continue to be bound by the intellectual property
-------------
and confidentiality agreement you previously executed and delivered to the
Company. This agreement may only be modified by a written instrument
executed by the Company and you. This agreement will be governed by the
laws of the Commonwealth of Massachusetts, without regard to choice of law
provisions. The failure of either party to exercise any right or the waiver
by either party of any breach, will not prevent a subsequent exercise of
such right or be deemed a waiver of any later breach of the same or any
other term of this agreement. If any provision of this agreement is held to
be invalid, illegal, or unenforceable, such provision will only be modified
to the extent required to be enforceable under applicable law.
If this offer is acceptable, please indicate your acceptance and agreement
by countersigning below.
Very truly yours,
/s/ Denis K. Berube
Denis K. Berube
Chairman
AGREED AND ACCEPTED:
/s/ Tom Colatosti
- ----------------------------
Tom Colatosti
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made as of the 3rd day of November 1998 ("Effective Date") by and
between Viisage Technology, Inc. (the "Employer") and Robert C. Hughes of
Lincoln, Massachusetts (the "Employee").
Recitals
--------
In connection with the Employee's resignation as President and Chief
Executive Officer of the Employer and the termination of his employment
agreement dated February 1, 1996, the Employer desires to continue to employ the
Employee until the Employee's planned May 7, 1999 resignation, and the Employee
desires to continue to be employed by the Employer until his planned
resignation, to perform certain duties as set forth below and on the terms set
forth in this Agreement, such terms to include the adjustment of stock option
grants. Therefore, in consideration of the mutual covenants contained in this
Agreement, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Employer and the Employee
agree as follows:
1. Services to be Rendered. Commencing on the Effective Date, the Employer
-----------------------
will employ the Employee, and the Employee will serve the Employer by reporting
to the Chief Executive Officer and performing those duties which make reasonably
appropriate use of his skills and experience as are assigned to him by the Chief
Executive Officer, subject at all times to the by-laws of Viisage and to the
direction and supervision of Viisage's Board of Directors.
2. Scope. The Employee agrees that during the term of his employment he (i)
-----
shall devote his best efforts and business judgment to the advancement of the
Employer's interests and to the performance of the services described herein and
such other duties as may be reasonably assigned to him by the Board of Directors
of the Employer; and (ii) shall not, without the reasonable consent of the Chief
Executive Officer, engage in any other employment or business, directly or
indirectly, alone or as a member of a partnership or as a director, officer,
employee, consultant or advisor to any business entity; provided, however,
nothing herein shall restrict the Employee from owning not more than five (5%)
percent of the issued and outstanding shares of any publicly-held corporation or
making passive investments in any private business entity which does not compete
with the Employer or any of its affiliates, and which will not interfere with
the performance of his duties hereunder.
3. Term of Employment.
------------------
(a) Termination Date. The Employee's employment under this Agreement shall
----------------
continue until May 7, 1999, provided, however, that the term of employment may
end sooner pursuant to Sections 3(b) or (4) below. The last day of such term is
--------------------
hereinafter referred to as the "Termination Date." Except as expressly provided
for in this Agreement, or as required by law, the Employee shall not be entitled
to any further compensation, bonus, severance, employee benefits, or other
consideration under this Agreement after the Termination Date other than amounts
previously accrued and unpaid prior to the Termination Date. If the Employee
dies, his estate or designated
<PAGE>
beneficiary shall be paid all base salary and incentive compensation earned
through the date of death.
(b) Resignation by Employee. The Employee may resign from his employment
-----------------------
hereunder at any time prior to May 7, 1999 upon ninety (90) days prior written
notice to the Employer. In the event of resignation by the Employee under this
Section 3(b), the Chief Executive Officer may elect to waive the period of
- ------------
notice, or any portion thereof, and, in such event, the Employer will pay the
Employee's salary and bonus through the notice period (or for any remaining
portion of the period). From and after the effective date of such termination by
the Employee of his employment hereunder, the Employer shall have no further
liability to the Employee for severance, compensation, or other benefits, except
as required by law.
4. Provisions Relating to Disability and Cause.
-------------------------------------------
(a) Disability Defined. Disability shall mean the Employee's inability to
------------------
perform his usual and customary duties for the Employer as a result of any
illness, injury, accident, or condition of either a physical or psychological
nature which could reasonably be expected to last more than 180 days during any
period of 365 days, in the written opinion of a duly licensed physician selected
by the Employer who has expertise with the particular disability. The opinion of
the physician shall be conclusive as of its date, absent fraud or manifest
error. If the Employer reasonably believes that the Employee is disabled, the
Employee shall permit the physician to examine him and otherwise cooperate with
the physician's efforts in assessing the disability.
(b) Continuation of Compensation and Benefits. If the Employee is
-----------------------------------------
determined to be disabled in accordance with Section 4(a) above, his base
------------
salary, as described in Section 5(a) below, shall continue to be paid until he
------------
becomes eligible for and receives disability income under the Employer's
disability income plan or, in the absence of a disability income plan at the
time of such disability, until the commencement of disability payments in
accordance with the last sentence of this Section 4(b). While receiving
------------
disability income payments under such plan, the Employee shall not receive any
compensation under Section 5 (except a payment which has already been earned but
---------
is payable as of a later date), but shall continue to participate in the
Employer's benefit plans until his employment under this Agreement terminates
or, if later, the date specified in such plans for termination of participation
in the event of disability. In the absence of a disability income plan at the
time of such disability, the Employer shall pay the Employee benefits equal to
those the Employee would have received, and at the times he would have received
them, if the Employer's current disability income plan were in effect at such
time.
(c) Cause. A termination by the Employer for cause is permitted under this
-----
Agreement in the following circumstances:
(i) the Employee has been convicted of embezzlement, a felony,
theft, crime of moral turpitude or shall have been convicted of or entered a
plea of no contest relating to any illegal act that materially and adversely
reflects upon the business, affairs or reputation of the Employer; or
(ii) the Employee has breached any one or more of the material
provisions of this Agreement, which breach, refusal or failure shall not have
resulted from a breach of any provision
2
<PAGE>
of this Agreement by the Employer; provided that any termination under this
clause (ii) shall occur only after the Employer's written notice of such breach
to the Employee, and the Employee's opportunity to cure such breach within 30
days of such notice, in which event the breach hereunder shall be determined as
of the expiration of such 30 day period.
Termination pursuant to this Section 4(c) shall be without prejudice to any
------------
other right or remedy to which the Employer may be entitled either at law, in
equity or under this Agreement.
5. Compensation and Expenses.
-------------------------
(a) Base Salary. During the term of the Employee's employment hereunder,
-----------
the Employer shall pay the Employee a base salary at a rate of $235,500 per
year, payable in accordance with the Employer's regular payroll practices.
(b) Expenses. The Employee shall be reimbursed by the Employer for
--------
reasonable expenses actually incurred in the course of his employment, subject
to the requirements with respect to substantiation and documentation as may be
specified by the Employer from time to time.
6. Benefit Plans. The Employee shall be entitled to continue to participate in
-------------
any employee benefit plans from time to time in effect for executive officers of
the Employer.
7. Non-Competition. In consideration of the payments to be made to the
---------------
Employee hereunder, notwithstanding termination or expiration of this Agreement
(whether voluntary or involuntary), the Employee covenants and agrees that for a
period of two (2) years from the Termination Date, he will not engage, directly
-------------
or indirectly, in any business competing with a primary business of the Employer
on Termination Date, or which could reasonably be expected to be detrimental to
the business of the Employer, whether as principal, agent, partner, stockholder,
director, consultant, employee or in any other capacity. Nothing herein shall
restrict the Employee from owning not more than five percent (5%) of the issued
and outstanding shares of any publicly-held corporation.
For purposes of this Section 7, the term "Employer" shall include all of
the Employer's affiliates.
8. Non-Solicitation of Customers and Employees. In consideration of the
-------------------------------------------
payments to be made to the Employee hereunder, notwithstanding termination or
expiration of this Agreement (whether voluntary or involuntary), the Employee
covenants and agrees that during the term of this Agreement, and for a period of
two (2) years after the Termination Date, he will not, as an employee, agent,
- -------------
servant, or in any other capacity for himself or for any person, corporation,
partnership, organization, association or other entity, directly or indirectly,
deal with, represent, contact, pursue, call upon, solicit, accept, receive,
employ or engage any business from:
(i) any customers of the Employer, as such customers exist at any time
during the term of the Employee's employment hereunder; and
(ii) any potential customers of the Employer being actively solicited
during the six (6) month period prior to the Termination Date; and
3
<PAGE>
(iii) any person who was employed by the Employer during the six (6) month
period prior to the Termination Date or becomes an employee of the Employer
during the six (6) month period after the Termination Date.
Promptly following the Termination Date, the Employer shall provide the
Employee with a list of those customers and potential customers with respect to
which this Section 8 shall apply. For purposes of this Section 8, the term
---------
"Employer" shall include all of the Employer's affiliates.
9. Confidentiality. The Employee shall not at any time, whether during or
---------------
after the termination of his employment hereunder, reveal to any person,
corporation, partnership, organization, association or any entity any of the
trade secrets or confidential information concerning proprietary products and
plans, internal financial information including pricing data, internal business,
marketing and strategic plans, customer lists and contracts, marketing plans,
and manufacturing processes of the Employer or any of its affiliates so far as
they have come or may come to his knowledge, except as may be required in the
ordinary course of performing his duties hereunder or except as may be in the
public domain through no fault of the Employee's, and shall keep secret all
matters entrusted to him and shall not use or attempt to use any such
information in any manner which may injure or cause loss or may be calculated to
injure or cause loss, whether directly or indirectly, to the Employer or any of
its affiliates.
Further, the Employee agrees that during his employment hereunder he shall
not make, use or permit to be used any notes, memoranda, drawings, books,
records, lists or other materials of any nature relating to any matter within
the scope of the business of the Employer or its customers or affiliates or
concerning any of their dealings or affairs otherwise than for the benefit of
the Employer. The Employee further agrees that he shall not, after the
Termination Date, use or permit to be used all such notes, memoranda, drawings,
books, records, lists or other materials, it being agreed that any of the
foregoing shall be and remain the sole and exclusive property of the Employer
and that on the Termination Date he shall deliver all of the foregoing, and all
copies thereof, to the Employer, at its main office.
10. Inventions. If at any time or times during his employment under this
----------
Agreement or prior employment agreements, the Employee shall (either alone or
with others) make, conceive, discover, reduce to practice or become possessed of
any invention, modification, discovery, design, development, improvement,
process, formula, data, technique, know-how, secret or intellectual property
right whatsoever or any interest therein (whether or not patentable or
registrable under copyright or similar statutes or subject to analogous
protection) (herein called "Inventions") that relates to the business of the
Employer or any customer of the Employer or any of the products or services
being developed, manufactured or sold by the Company or which may conveniently
be used in relation therewith, or results from tasks assigned to the Employee by
the Employer or results from the use of premises owned, leased or contracted for
by the Employer or its assigns, the Employee shall promptly disclose to the
Employer (or any persons designated by it) each such Invention and hereby
assigns any rights the Employee may have or acquire in the Inventions and
benefits and/or rights resulting therefrom to the Employer and its assigns
without compensation and shall communicate, without cost or delay, and without
publishing the same all available information relating thereto (with all
necessary plans and models) to the Employer.
4
<PAGE>
11. Stock Options. The Employer hereby grants the Employee options to purchase
-------------
50,000 shares of the Employer's common stock at $0.9375 closing price per share
as of the day before the Effective Date and substantially in accordance with the
standard terms and conditions attached to options granted under the Employer's
1996 Management Stock Option Plan, as amended. Provided that the Employee
remains an employee of the Employer through May 6, 1999, the aforementioned
grant of 50,000 options, in the form attached at Exhibit A, will vest thereafter
---------
on the Employee's resignation from the Employer. The Employee acknowledges and
agrees that as of the Effective Date, in addition to the 50,000 options
described above, he holds 183,270 vested options and 445,730 non-vested options
granted under the Employer's 1996 Management Stock Option Plan. Such 445,730
unvested options are hereby cancelled and of no further force or effect.
Contemporaneous with the execution and delivery of this Agreement, and to enable
the Employee to exercise the vested options through February 1, 2006
notwithstanding the termination of the Employee's employment, the 183,270 vested
options are being amended in the form attached as Exhibit B, which amended grant
---------
supersedes the Employee's grant of options issued June 17, 1996.
12. Mutual Releases. In consideration of the Employee's resignation as
---------------
President and Chief Executive Officer, termination of his prior employment
agreement, and his continued employment and compensation by the Employer under
this Agreement, the parties agree that in conjunction with the execution of this
Agreement that they will execute a mutual release in the form attached at
Exhibit C.
- ---------
13. Injunctive Relief. Any breach of this Agreement by the Employee could cause
-----------------
irreparable damage to the Employer and that in the event of such breach the
Employer shall have, in addition to any and all remedies of law, the right to
seek an injunction, specific performance or other equitable relief to prevent
the violation of the Employee's obligations hereunder.
14. Assignment; Binding Nature of Agreement. This Agreement is personal in its
---------------------------------------
nature and neither of the parties hereto shall, without the prior written
consent of the other, assign or transfer this Agreement or any rights or
obligations hereunder other than by operation of law, except that the Employer
may, without consent, assign or transfer this Agreement to any successor
corporation in the event of merger, consolidation or transfer or sale of all or
substantially all of the stock or assets of the Employer, and in such event the
provisions hereof shall be binding upon and inure to the benefit of such
successor corporation. This Agreement shall be binding upon and inure to the
benefit of the Employee and his successors, assigns, personal representations,
heirs and legatees.
15. Notices. Any notice required to be given pursuant to the provisions of this
-------
Agreement shall be in writing and hand-delivered or sent by facsimile to the
Employer at its principal place of business and to the Employee at his resident
address as then shown in the records of the Employer.
16. Limitation of Scope of Agreement. If any provision of this Agreement is
--------------------------------
unenforceable or illegal, the remainder of the Agreement shall remain in full
force and effect. If any one or more of the provisions contained in this
Agreement shall for any reason be held to be excessively broad as to duration,
geographical scope, activity, or subject, such provision shall be construed by
limiting and reducing it so as to be enforceable to the extent compatible with
the applicable law.
5
<PAGE>
17. Law Governing. This Agreement shall be interpreted and its validity and
-------------
effect determined under and in accordance with the laws of The Commonwealth of
Massachusetts.
18. Entire Agreement, etc. This Agreement (and all exhibits and schedules)
---------------------
embodies the entire agreement and understanding between the Employer and the
Employee as of the effective date of this Agreement and supersedes all prior
agreements and understandings relating to the matter of employment of the
Employee by the Employer. Accordingly, the Employee's employment agreement with
the Employer dated February 1, 1996 is of no further force and effect as of the
effective date of this Agreement. This Agreement may be modified or amended only
by a writing signed by the Employee and by an officer of the Employer on behalf
of the Employer. The failure of either party to exercise any right or the waiver
by either party of any breach, will not prevent a subsequent exercise of such
right or be deemed a waiver of any subsequent breach of the same of any other
term of the Agreement.
Agreed, under seal, and effective as of the Effective Date.
VIISAGE TECHNOLOGY, INC.
/s/ Robert C. Hughes By: /s/ Thomas Colatosti
- -------------------------------- -------------------------------
Robert C. Hughes Thomas Colatosti, President and
Chief Executive Officer
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10K FOR THE
YEAR ENDED DECEMBER 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 166
<SECURITIES> 0
<RECEIVABLES> 4,285
<ALLOWANCES> 0
<INVENTORY> 21,723<F1>
<CURRENT-ASSETS> 26,857
<PP&E> 18,513
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,444
<CURRENT-LIABILITIES> 15,768
<BONDS> 18,058<F2>
0
0
<COMMON> 8
<OTHER-SE> 12,610
<TOTAL-LIABILITY-AND-EQUITY> 46,444
<SALES> 16,259
<TOTAL-REVENUES> 16,259
<CGS> 15,957
<TOTAL-COSTS> 20,757<F3>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,667
<INCOME-PRETAX> (6,165)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,165)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,038)
<NET-INCOME> (7,203)
<EPS-PRIMARY> (0.88)
<EPS-DILUTED> (0.88)
<FN>
<F1>REPRESENTS COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS.
<F2>REPRESENTS OBLIGATIONS UNDER CAPITAL LEASES AND LONG TERM DEBT.
<F3>INCLUDES PROJECT COSTS AND OPERATING EXPENSES.
</FN>
</TABLE>
