<PAGE>
As filed with the Securities and Exchange Commission on October 5, 1999
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
VIISAGE TECHNOLOGY, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3320515
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(State of Incorporation) (I.R.S. Employer Identification No.)
30 Porter Road Littleton, MA 01460
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices, including zip code)
Thomas J. Colatosti
President and Chief Executive Officer
Viisage Technology, Inc.
30 Porter Road
Littleton, MA 01460
- -------------------------------------------------------------------------------
(Name and address of agent for service)
(617) 952-2200
- -------------------------------------------------------------------------------
(Telephone number, including area code, of agent for service)
Copy to:
Charles J. Johnson, Esq.
Finnegan, Hickey, Dinsmoor & Johnson, P.C.
175 Federal Street
Boston, Massachusetts 02110
(617) 523-2500
Approximate date of commencement of proposed sale to public: From time to time,
after this registration statement becomes effective. If any of the securities
being registered on this form are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933, check the following box.
[X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box.[_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================
Title of securities Amount to be Proposed Proposed Amount of
to be registered registered maximum maximum Registration fee
price offering aggregate
per share/1/ offering
price/1/
=================================================================================================
<S> <C> <C> <C> <C>
Common Stock, 1,846,972 $2.00 $3,693,944 $1,027
$0.001 par value
=================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457 under the Securities Act solely for the
purpose of calculating the registration fee based upon the average of the high
and low sale prices of our common stock on September 30, 1999 on the Nasdaq
National Market.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state which prohibits the offer or sale.
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION, DATED OCTOBER 5, 1999
1,846,972 Shares
Viisage Technology, Inc.
COMMON STOCK
_____________________________________________________________________________
Certain of our stockholders are registering up to 1,846,972 shares of our
common stock. The selling stockholders may offer and sell their shares publicly
or through private transactions at prevailing market prices or at negotiated
prices.
We will not receive any of the proceeds from the sale of the shares by the
selling stockholders. We have agreed to bear all expenses (other than selling
discounts, concessions or commissions) in connection with the registration and
sale of the shares that the selling stockholders are offering.
Our common stock is listed on The Nasdaq National Market under the symbol
"VISG." The last reported sale price of our shares on September 30, 1999 was
$2.0625 per share.
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 5.
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or passed upon the accuracy
or adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus is October 5, 1999.
<PAGE>
TABLE OF CONTENTS
-----------------
Page
Prospectus Summary................................................ 1
The Offering...................................................... 3
Summary Financial Data............................................ 4
Risk Factors...................................................... 5
Use of Proceeds................................................... 10
Price Range of Common Stock....................................... 10
Dividend Policy................................................... 10
Capitalization.................................................... 11
Selected Financial Data........................................... 12
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 13
Business.......................................................... 23
Relationship and Certain Transactions with Lau Technologies....... 35
Management........................................................ 37
Description of Capital Stock...................................... 48
Selling Stockholders and Plan of Distribution..................... 52
Transfer Agent and Registrar...................................... 54
Legal Matters..................................................... 54
Experts........................................................... 54
Where You Can Find More Information............................... 54
Financial Statements.............................................. F-1
<PAGE>
You should only rely on the information contained in this document or to which
we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. This information in this document may only be
accurate on the date of this document.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights certain information found in greater detail
elsewhere in this prospectus. In addition to this summary, we urge you to read
the entire prospectus carefully, especially the risks of investing in our common
stock discussed under "Risk Factors" on page 5 before you decide to buy our
common stock.
Overview of Our Business
Viisage is a leader in the emerging field of biometrics technology and in
providing digital identification systems and solutions.
Our identification systems and solutions improve personal convenience and
security, deter fraud and reduce identification program costs. We create
complete customized solutions by combining our systems integration capabilities,
software design capabilities, proprietary software and hardware products, and
standard products in the industry. Our turnkey solutions (1) integrate image and
data capture, (2) create relational databases, (3) incorporate multiple
biometrics, and (4) improve customers' abilities to move and manage information.
Customers can apply our technology to:
. drivers' licenses
. voter registration cards
. national identification cards
. law enforcement and corrections applications
. social services applications
. facility access control and surveillance, and
. personal computer network and internet access security.
Our primary customers for these products are United States drivers
licensing agencies. Since our inception in 1993, we have captured approximately
30% of the domestic driver's license market. Each year, our products facilitate
the production of more than 20 million identification documents at about 1,500
locations throughout 12 states and in two foreign countries.
Our biometrics technology includes our patented facial recognition products
used for access control, PC network and internet access security and the real-
time large database identification and verification of individuals. Our
"Face-in-the-Crowd" products can recognize real-time facial images in a crowd
from video and can be used for access control and surveillance. We have current
projects for a police surveillance system in Western Europe and for public
sector customers in Massachusetts, Wisconsin and Illinois, where we have
deployed the world's largest facial recognition database.
<PAGE>
Our principal executive offices are located at 30 Porter Road, Littleton,
Massachusetts 01460, our telephone number is (978) 952-2200 and our internet
website address on the world wide web is Viisage.com. The contents of our
website are not part of this prospectus. In this prospectus, we refer to Viisage
Technologies, Inc., a Delaware corporation, as "Viisage", the "Company", "we",
"us" and "our".
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by selling stockholders.................................... 1,846,972 shares
Common stock offered by Viisage................................................. 0 shares
Common stock outstanding before offering........................................ 8,585,745 shares
Common stock outstanding after offering......................................... 8,585,745 shares
Use of proceeds................................................................. The selling stockholders are
offering from time to time
all of the shares offered by
this prospectus. We will not
receive any proceeds from
these sales of shares.
Nasdaq National Market symbol................................................... VISG
</TABLE>
The number of shares of common stock outstanding after this offering is based on
shares of our common stock outstanding as of September 30, 1999. This
calculation also:
. excludes 1,110,390 shares of common stock issuable upon the conversion of
all of our outstanding series A convertible preferred stock, assuming
conversion at 77% of the market price on the Nasdaq National Market on
September 30, 1999, which are being registered hereunder;
. excludes 736,582 shares of common stock underlying the warrants, stock
options, and convertible debt outstanding as of September 30, 1999 which
are being registered hereunder which are exercisable at prices between
$1.44 and $4.00;
. excludes 1,881,823 shares of common stock issuable upon exercise of all
options outstanding under our 1996 Management Stock Plan and our 1996
Director Stock Option Plan as of September 30, 1999, at prices between
$0.93 and $12.50; and
. excludes 1,375,968 shares of common stock underlying other stock options
and convertible debt outstanding as of September 30, 1999 at prices between
$1.26 and $2.75.
<PAGE>
SUMMARY FINANCIAL DATA
The following tables set forth our summary financial data. You should read this
information together with the financial statements and the notes to those
statements appearing elsewhere in this prospectus and the information under
"Selected Financial Data" on page 12 and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on page 13.
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
------------------------------------------------------ ------------------------
1994 1995 1996 1997 (2) 1998 (3) June 28, June 27,
---- ---- ---- -------- -------- 1998(3) 1999
in thousands, except per share amounts ------- --------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues...................................... $ 1,257 $11,221 $24,971 $ 29,388 $ 16,259 $ 7,594 $ 9,145
Operating income (loss)....................... (2,361) (2,432) 1,520 (3,921) (4,498) (1,626) (25)
Net income (loss)............................. (2,401) (2,947) 601 (4,362) (7,203) (3,432) (1,098)
Diluted net income (loss) per share (1)....... (0.42) (0.52) 0.09 (0.54) (0.88) (0.43) (0.13)
Weighted average common shares................ 5,680 5,680 6,537 8,060 8,175 8,067 8,440
Balance Sheet Data:
Working capital............................... $11,740
Total assets.................................. 46,007
Long-term obligations......................... 17,341
Shareholders' equity.......................... 11,644
</TABLE>
(1) See note 2 of Notes to Financial Statements for information concerning the
computation of basic and diluted net income (loss) per share.
(2) 1997 amounts reflect the impact of charges of $7.6 million for investments
in technology, services and markets.
(3) December 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. June 1998 amounts reflect the
restructuring charges and SOP adoption.
<PAGE>
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should carefully consider the following information about these risks, together
with the other information contained in this prospectus, before you decide
whether to buy our common stock. If any of the following risks actually occur,
our business, results of operations and financial condition would likely suffer.
In any such case, the market price of our common stock could decline, and you
may lose all or part of the money you paid to buy our common stock.
The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties, including those not presently known to us or
that we currently deem immaterial, may also impair our business.
Our business depends on large public sector contracts which can involve
delays.
Our business largely depends on a limited number of large public sector
contracts. These contracts result from purchasing decisions made by public
sector agencies that are often subject to political influence, onerous
procurement procedures, budget changes and award protests. These factors can
cause delays which make our quarterly results difficult to predict. This can
also make our ability to meet analysts' expectations equally uncertain and
adversely affect the price of our common stock.
Our quarterly results could be volatile and may cause our stock price to
fluctuate.
We have experienced fluctuations in our quarterly operating results and
expect those fluctuations to continue. Our quarterly results are affected by,
among other things, factors such as
. the size and timing of contract awards
. the timing of our contract performance
. variations in the mix of our products and services, and
. contract losses and changes in management estimates incident to
accounting for contracts.
The loss of any significant customer could cause our revenue to decline.
For 1998 and the first six months of 1999, three customers each accounted
for over 10% of our revenues and a total of 40% and 50% of our revenues for 1998
and 1999, respectively. The loss of any significant customer could cause our
revenue to decline and thus have an adverse material effect on our business and
financial condition.
We have had a history of losses and are currently not profitable.
Our business operations began in 1993 and, except in 1996, have resulted in
net losses
<PAGE>
from inception through June 27, 1999. At June 27, 1999, we had an
accumulated deficit of $12,645,000. Investments in our biometrics division have
resulted in a net loss of $1,098,000 for the period. We intend to continue to
invest in the development of our biometrics division and thus we cannot predict
when or if we will ever achieve overall profitability. Further, no assurance
can be given that we will not need to raise additional funds through public or
private financings.
Our leverage creates financial and operating risk that could limit the
growth of our business.
We have a significant amount of indebtedness. As of June 27, 1999, we
had approximately $17 million in long-term debt, lease financing and
subordinated convertible debt. Our leverage could have important consequences
to us including:
. limiting our ability to obtain necessary financing for future working
capital
. limiting our ability to finance the acquisition of equipment needed to
meet customer requirements
. limiting our ability to finance the development of new technologies
. requiring that we use a substantial portion of our cash flow from
operations for debt service and not other purposes, and
. requiring us to comply with financial and operating covenants which
could cause an event of default under our debt instruments.
Further, our ability to make principal and interest payments under long-term
indebtedness and bank loans will be dependent upon our future performance, which
is subject to financial, economic and other factors affecting us, some of which
are beyond our control.
We may be unable to obtain additional capital required to fund our operations
and finance our growth.
The installation of our digital identification systems requires significant
capital expenditures. Although we have been successful in the past in obtaining
project financing, we will have ongoing capital needs. If we are unable to
obtain additional funds in a timely manner or on acceptable terms, we may not be
able to fund our operations or expand our business to meet our plans. In
addition, the further development of our biometric and other advanced
technologies is expected to require additional capital. If we are unable to
obtain capital when we need it, we may have to restructure our business or delay
or abandon our development and expansion plans. That could have a material
adverse effect on our business and financial condition.
Our reliance on sole and single-source suppliers could cause delays or
increases in project costs.
We rely on outside vendors to manufacture or develop components, software
and consumables which are used for our systems and services. Some of these
items are obtained from a single supplier or a limited group of suppliers. Our
inability to obtain adequate deliveries or alternative sources of supply could
cause delays or increases in project costs.
<PAGE>
If our target customers do not accept our biometric technologies, our
growth may be restricted.
Our growth plan assumes, in part, that biometric technologies will gain
widespread market acceptance. Although we have had recent success with several
projects, the widespread market acceptance of biometric technologies remains
uncertain.
If we fail to keep pace with changing technologies, we may not win new
customers.
Our market is characterized by rapidly changing customer requirements and
evolving industry standards. If we cannot keep pace with these changes, our
business could suffer. To achieve our goals, we need to develop cost-effective
business solutions and methodologies to keep pace with continuing changes in
industry standards and customer preferences.
System failures could seriously damage our business.
We depend on our ability to provide customers with complex systems which
can operate on an "as needed" basis. Although we deploy back up systems, system
failures could result in increased costs, lower margins, liquidated damage
payment obligations and harm to our reputation. This could result in contract
terminations and have a material adverse effect on our business and financial
results.
We are controlled by a single stockholder which could result in it taking
actions which other stockholders do not approve.
Lau Technologies ("Lau") owns approximately 65% of our outstanding common
stock. As a result, Lau is currently able to control matters requiring approval
by our stockholders, including the election of all of the directors and most
corporate actions. We have also entered into certain agreements with Lau,
including the licensing of technologies and the provision of administrative
services and facilities. Under the terms of the license agreements, Lau has
reserved the right to use biometric and other technologies in the federal access
control field. There can be no assurance that conflicts of interest will not
arise out of these contractual arrangements.
Competition from new entrants and bigger, more established competitors with
greater financial resources could diminish our business opportunities and limit
our growth.
The business areas in which we compete are intensely competitive and
subject to rapid technological change. We expect competition to continue and
intensify. Some of our competitors, notably Polaroid Corporation, have greater
financial resources and name recognition than we have. Our competitors may be
able to respond more quickly to technological developments and changes in
customers' needs.
<PAGE>
Misappropriation of our intellectual property could harm our reputation, affect
our competitive position and cost us money.
We believe our intellectual property, including our proprietary
methodologies, is important to our success and competitive position. If we are
unable to protect our intellectual property against others' unauthorized use,
our reputation among existing and potential customers could be damaged and our
competitive position adversely affected.
Our strategies to deter misappropriation could be undermined in light of
the following risks:
. non-recognition of the proprietary nature of or inadequate protection of
our methodologies in the United States or foreign countries
. undetected misappropriation of our proprietary methodologies, and
. development of similar software or applications by our competitors.
The materialization of any of these risks could require us to spend
significant amounts to defend our rights and could divert our managerial
resources. In addition, our proprietary methodologies may decline in value or
our rights to them may be unenforceable.
Others could claim that we infringe on their intellectual property rights
which may result in substantial costs, diversion of resources and management
attention, and harm to our reputation.
Although we believe that our products and services do not infringe the
intellectual property rights of others, we cannot give any assurances that we
can successfully defend an infringement claim. A successful infringement claim
against us could materially and adversely affect us in the following ways:
. we may be liable for damages and litigation costs, including attorneys'
fees
. we may be enjoined from further use of the intellectual property
. we may have to license the intellectual property, incurring licensing
fees
. we may have to develop a non-infringing alternative, which could be
costly and delay projects, and
. we may have to indemnify clients with respect to losses incurred as a
result of our infringement of the intellectual property.
<PAGE>
Regardless of the outcome, an infringement claim could result in
substantial costs, diversion of resources and management attention, termination
of customer contracts and harm to our reputation.
Problems related to the Year 2000 issue could require us to incur unanticipated
delays and expenses in the operation of our business.
Although we believe our products are Year 2000 compliant, many of our
products are complex, interact with third-party products, and operate on
computer systems that are not under our control. Year 2000 problems could cause
us to incur unanticipated delays and expenses in the operation of our business.
These delays and expenses could have a material adverse effect on our business
and financial condition.
Our failure to meet Nasdaq National Market System listing requirements
could adversely affect the market for our common stock.
Although our common stock is listed on the Nasdaq National Market System,
continued listing on the National Market System is subject to our ability to
maintain a $5 million public float and to satisfy other Nasdaq criteria. If we
are unable to satisfy this criteria in the future, we could be required to apply
for listing on the Nasdaq SmallCap Market, which may result in less market
visibility and thus adversely affect the price of our common stock..
You may be subject to dilution.
A class of our preferred stock is outstanding that is convertible into $1.5
million of common stock at a discount of either 85% or 77% of the then-current
market price, depending on the timing of the conversion. We also have
convertible debt, warrants and stock options outstanding that could result in
dilution for our common stockholders.
You should not expect dividends from us.
We do not expect to declare or pay any cash dividends in the near future.
___________________
This prospectus also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described above and elsewhere in this
prospectus. We assume no obligation to update any forward-looking statements or
reason why actual results might differ.
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the selling stockholders' sale of
shares.
PRICE RANGE OF COMMON STOCK
Our common stock is listed on The Nasdaq National Market under the symbol
"VISG." The following is the range of high and low closing prices on The Nasdaq
National Market for the common stock for the periods indicated.
<TABLE>
<CAPTION>
High Low
-------- -------
<S> <C> <C>
Calendar Year 1997
First Quarter 14-3/4 9-1/8
Second Quarter 18-1/4 7-7/8
Third Quarter 20-1/2 9-7/8
Fourth Quarter 12-1/4 5-1/2
Calendar Year 1998
First Quarter 7-3/8 4-7/8
Second Quarter 5-3/8 1-15/16
Third Quarter 3-1/2 1-1/4
Fourth Quarter 2-1/4 5/8
Calendar Year 1999
First Quarter 1-13/16 1-2/32
Second Quarter 1-5/8 3/4
Third Quarter (through September 30, 1999) 2-1/2 1-3/16
</TABLE>
The last sale price of the common stock on The Nasdaq National Market on
September 30, 1999 was $2.0625.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and we have no plans
to do so in the foreseeable future. We intend to retain earnings, if any, to
develop and expand our business. In addition, the terms of our credit facilities
and the series A preferred stock restrict our ability to pay cash dividends on
our common stock. We also expect the terms of agreements governing any future
indebtedness to restrict our ability to pay cash dividends.
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 27, 1999 on an
actual basis and on a pro forma basis, reflecting the issuance of 1,500 shares
of our Series A preferred stock on June 30, 1999, as discussed in Note 3 of
Notes to Condensed Financial Statements, and after deducting discounts and
estimated offering expenses. This information should be read in conjunction with
our financial statements and notes appearing elsewhere in this prospectus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 13 and "Selected Financial Data" on page 12.
<TABLE>
<CAPTION>
As of June 27, 1999
-------------------
Actual Pro forma
------ ---------
(dollars in thousands)
<S> <C> <C>
Current portion of long-term obligations
Current portion of long-term debt................ $ 2,724 $ 2,724
Obligations under capital leases................. 3,709 3,709
Convertible subordinated debt.................... 800 800
-------- --------
$ 7,233 $ 7,233
======== ========
Long-term debt........................................ $ 6,500 $ 6,500
Capital lease obligations............................. 9,841 9,841
Convertible subordinated debt......................... 1,000 1,000
Shareholder's Equity
Convertible Preferred stock, $.001 par value,
2,000,000 shares authorized, no shares
outstanding actual, 1,500 Series A shares
outstanding pro forma......................... -- 831
Common stock, $0.001 par value, 20,000,000 shares
authorized, 8,440,000 shares issued and
outstanding.................................. 8 8
Additional paid-in-capital........................ 24,281 24,804
Retained deficit.................................. (12,645) (12,645)
-------- --------
Total shareholder's equity........................ $ 11,644 $ 12,998
-------- --------
Total capitalization.................................. $ 28,985 $ 30,339
======== ========
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for all periods and dates
indicated, except the periods ended June 28, 1998 and June 27, 1999, are derived
from our audited financial statements. The selected financial data as of and for
the six month periods ended 1998 and 1999 were derived from our unaudited
Condensed Financial Statements which are included elsewhere in this Registration
Statement. In the opinion of management, these financial statements have been
prepared on the same basis as the audited financial statements referred to above
and include all adjustments, consisting only of normal recurring accruals,
necessary for a fair presentation of our financial position and results of
operations for the periods indicated. Operating results for the six months ended
June 27, 1999 are not necessarily indicative of the results that may be expected
for any future period. The financial data set forth below should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and our Financial Statements and related notes thereto
included elsewhere in this Registration Statement.
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, ------------------
----------------------------------------------------- June 28, June 27,
1994 1995 1996 1997 (3) 1998 (4) 1998 (4) 1999
------ ------ ----- ------- ------- ------- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................................ $ 1,257 $ 11,221 $ 24,971 $ 29,388 $ 16,259 $ 7,594 $ 9,145
Project costs....................................... 1,140 10,361 19,484 26,122 15,957 6,618 7,578
------- --------- ---------- -------- --------- ------- -------
Project margin...................................... 117 860 5,487 3,266 302 976 1,567
------- --------- ---------- -------- --------- ------- -------
Operating expenses:
Sales and marketing............................... 1,596 999 1,852 4,930 2,195 1,448 430
Research and development.......................... 201 1,089 235 152 358 119 167
General and administrative........................ 681 1,204 1,880 2,105 2,247 1,035 995
------- --------- ---------- -------- --------- ------- -------
Total operating expenses........................ 2,478 3,292 3,967 7,187 4,800 2,602 1,592
------- --------- ---------- -------- --------- ------- -------
Operating income (loss)............................. (2,361) (2,432) 1,520 (3,921) (4,498) (1,626) (25)
Interest expense, net............................... 40 515 714 441 1,667 768 1,073
------- --------- ---------- -------- --------- ------- -------
Income (loss) before income taxes and
cumulative effect of change in accounting principle (2,401) (2,947) 806 (4,362) (6,165) (2,394) (1,098)
Income taxes........................................ - - 205 - - -
------- --------- ---------- -------- --------- ------- -------
Income (loss) before cumulative effect of change
in accounting principle............................. (2,401) (2,947) 601 (4,362) (6,165) (2,394) (1,098)
Cumulative effect of change in accounting principle - - - - (1,038) (1,038)
------- --------- ---------- -------- --------- ------- -------
Net income (loss)................................... $(2,401) $ (2,947) $ 601 $ (4,362) $ (7,203) $(3,432) (1,098)
------- --------- ---------- -------- --------- ------- -------
Basic net income (loss) per share before
cumulative effect of change in accounting principle $ (0.42) $ (0.52) $ 0.10 $ (0.54) $ (0.75) $ (0.30) (0.13)
Basic net income (loss) per share (1)............... $ (0.42) $ (0.52) $ 0.10 $ (0.54) $ (0.88) $ (0.43) (0.13)
======= ========= ========== ======== ========= ======= =======
Weighted average common shares...................... 5,680 5,680 6,022 8,060 8,175 8,067 8,440
======= ========= ========== ======== ========= ======= =======
Diluted net income (loss) per share before
cumulative effect of change in accounting principle $ (0.42) $ (0.52) $ 0.09 $ (0.54) $ (0.75) $ (0.30) (0.13)
Diluted net income (loss) per share (1) ............ $ (0.42) $ (0.52) $ 0.09 $ (0.54) $ (0.88) $ (0.43) (0.13)
======= ========= ========== ======== ========= ======= =======
Weighted average common shares 5,680 5,680 6,537 8,060 8,175 8,067 8,440
======= ========= ========== ======== ========= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, June 27,
---------------------------------------------------------------- ---------
1994 1995 1996 1997 (3) 1998 (4) 1999
---------- ---------- ---------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital............ $2,509 $ 7,413 $20,676 $ 15,261 $ 11,089 $11,740
Total assets............... 3,999 11,285 36,119 47,463 46,444 46,007
Long-term obligations...... 955 8,319 4,420 13,300 18,058 17,341
Shareholders' equity....... - - 23,020 18,736 12,618 11,644
Net assets (2)............. 1,554 1,323 - - - -
</TABLE>
(1) See Note 2 of Notes to Financial Statements for information concerning the
computation of basic and diluted net income (loss) per share.
(2) Net assets represents divisional investment during the time the Company
operated as a division of Lau.
(3) 1997 amounts reflect the impact of charges of $7.6 million for investments
in technology, services and markets.
(4) December, 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. June 1998 amounts reflect the
restructuring charge and SOP adoption.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the "Selected Financial Data" on page 12 and the financial statements and notes
included elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. Our 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 "Risk
Factors" on page 5, as well as 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 prospectus.
Overview
Viisage is a leader in the emerging field of biometrics technology and in
providing digital identification systems and solutions. We focus on
identification solutions that improve personal convenience and security, deter
fraud and reduce identification program costs. We combine our systems
integration and software design capabilities with our 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,
our primary customers have been government agencies with particular emphasis on
U.S. drivers licensing agencies. Since Viisage's inception in 1993, we have
captured approximately 30% of the domestic driver's license market. Our products
annually produce more than 20 million identification documents approximately
1,500 locations in 12 states. We have also provided services under subcontracts
for projects in Jamaica, the Philippines and for the U.S. Immigration and
Naturalization Service.
Viisage 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 us and we completed our
initial public offering. Lau currently owns 65% of Viisage.
Since 1997, our revenue growth has slowed due primarily to lengthening
procurement cycles in our principal markets and a strong competitive
marketplace. We believe that the acceptance of digital identification
technology in recent years, our commitment to providing customized solutions for
our customers needs, our expertise in facial imaging and biometric solutions and
our proprietary software and hardware products will continue to contribute to
our growth.
<PAGE>
Effective June 1, 1998, we reorganized our 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 our public sector markets
and serves as a channel to existing customers and the public sector for our
biometric technologies.
We are engaged in one business, the development and implementation of
digital identification systems and solutions. As discussed above, since June 1,
1998, we have 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 our revenues are currently derived from the
SI division's public sector customers and contractors to such customers. We
believe for the foreseeable future that we will continue to derive a significant
portion of our revenues from a limited number of large contracts. For the years
ended December 31, 1996, 1997 and 1998 and the six months ended June 27, 1999,
two customers, one customer, three customers and three customers, respectively,
each accounted for more than 10% of the our revenues and an aggregate of 50%,
46%, 40%, and 50% of revenues for each of the periods, respectively.
Our results of operations are significantly affected by, among other
things, the timing of award and performance on contracts. As a result, our
revenues and income may fluctuate from quarter to quarter, and comparisons over
longer periods of time may be more meaningful. Our results of operations are not
seasonal since contracts are awarded and performed throughout the year. However,
we believe our 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
Six Months Ended June 27, 1999 and June 28, 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
and services. Revenues increased 20% to $9.1 million compared to $7.6 million
for the same period in 1999. Revenues for 1999 relate solely to the SI division
and reflect the impact of new business awards in the second half of
<PAGE>
1998.
Project Costs and Margin. SI division project costs consist primarily of
hardware, consumables (printer ribbons, cards, holographic overlays, etc.),
system design, software development and implementation labor, maintenance and
overhead. As a percentage of revenues, project costs decreased to 83% for 1999
from 87% for the comparable period in 1998. As discussed more fully under the
discussion for the year ended 1998, project costs for 1999 reflect the impact of
lowering project margin estimates in the third and fourth quarters of 1998, as
well as the impact of new business on the overall revenue mix. Project costs for
1998 include approximately $283,000 of start-up costs and $50,000 of
restructuring costs. Project costs for 1998 do not reflect the impact of margin
adjustments made at the end of 1998. Project margin increased 61% to $1.6
million (17% of revenues) from $976,000 (12% of revenues) for the same period in
1998. This improvement reflects the changes in project costs discussed above.
Biometrics division project costs consist primarily of labor and related
overhead. Biometrics division project costs for the periods were not material.
Sales and Marketing. Sales and marketing expenses consist primarily of
payroll and related costs and professional service fees for marketing, bid and
proposal and customer support activities. SI division sales and marketing
expenses, excluding non-recurring charges, decreased 86% to $185,000 from
$1,278,000 for the comparable period in 1998. Total sales and marketing expenses
for 1998 include restructuring costs of approximately $170,000. The decrease in
SI division sales and marketing expenses for 1999 reflects the restructuring and
related headcount reductions, the allocation of certain marketing resources to
the biometrics division beginning in June 1998, more focused marketing efforts
and our on-going cost reduction efforts. As a percentage of revenues, SI
division sales and marketing expenses, excluding non-recurring charges, were 2%
of sales compared to 17% for the same period in 1998. Biometrics division sales
and marketing expenses for 1999 were $85,000 and $245,000, respectively.
Research and Development. Research and development expenses consist
principally of payroll and related costs, outside services and materials
utilized for product and software development activities that are not related to
specific projects. There were no SI division research and development expenses
for 1999 or 1998. Biometrics division research and development expenses were
$167,000 compared to $119,000 for the same period in 1998. Such amounts do not
include amounts for specific projects that are allocated to project costs and do
not reflect the benefits we receive 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 us.
General and Administrative. General and administrative expenses consist
principally of payroll and related costs for executive management, finance and
administrative personnel and outside professional fees and are shared by our two
divisions. General and administrative expenses decreased 4% to $995,000 from
$1,035,000 for the same period in 1998. As a percentage of revenues, general and
administrative expenses were 11% of revenues compared to 14% for the same period
in 1998.
<PAGE>
Interest Expense. The increase in net interest expense to $1,073,000 from
$768,000 for the same period in 1998 reflects increased borrowings and rates
during 1999.
Income Taxes. We did not record any tax benefit for the 1999 and 1998
losses due to the uncertainty of when such benefit will be realized.
Year ended December 31, 1998 and 1997
- -------------------------------------
Charges and Accounting Change. During the first quarter of 1998, we
recorded charges of approximately $230,000 related to a restructuring to reduce
expenses in line with our 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, we 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.
We 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. We 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 our results for the year. Project costs also include start-
up costs of $283,000 which were incurred in the first quarter of 1998.
Revenues. 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. As a percentage of revenues, SI division 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
<PAGE>
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, 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 increased 135%
to $358,000 for 1998 from $152,000 for 1997. Expenditures for 1998 and 1997
relate primarily to our facial recognition products. Such amounts do not include
amounts for specific projects that are allocated to project costs and do not
reflect the benefits we receive 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 us.
General and Administrative. 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. We 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, we 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
<PAGE>
the future use of facial recognition technologies. These investments demonstrate
our commitment to our 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 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. Revenues are derived principally from systems
implementation, card production and related services.
Project Costs and Margin. 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).
Sales and Marketing. 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 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 our 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 we receive under license arrangements from the
research and development efforts of Lau Technologies and MIT for projects that
are not directly related to us.
General and Administrative. 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.
<PAGE>
Income Taxes. We 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 June 27, 1999, working capital was $11.7 million compared to $11.1
million at December 31, 1998. Costs and estimated earnings in excess of
billings, a component of working capital, includes approximately $9 million and
$8 million expected to be billed and collected after June 27, 2000 and December
31, 1999, respectively.
For the six months ended June 27, 1999, operating and investing activities
provided cash of approximately $170,000 and $94,000, respectively, which was
used to repay capital lease obligations. For the year ended December 31, 1998,
operating 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, we were not in compliance with certain covenants
included in our revolving credit and lease financing facilities. During the
first quarter we received waivers of such violations from our lenders and our
covenants were modified in line with our current operating plan. At June 27,
1999, we have a revolving credit facility with a commercial bank that provides
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%. We have approximately $9,224,000 outstanding under this credit
facility at June 27, 1999. The revolving credit facility is secured by
substantially all of our assets and requires us to maintain certain financial
ratios and minimum levels of earnings and tangible capital funds, as defined. As
of June 27, 1999, we are in compliance with these covenants. The revolving
credit facility also requires us 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.
We also have a system project lease financing arrangement with a commercial
leasing organization. Pursuant to this arrangement, the lessor purchases certain
of our digital identification systems and leases them back to us for deployment
with identified and contracted customers approved by the lessor. The lessor
retains title to systems and has an assignment of our 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 our customers, but we bear performance
and appropriation risk and are generally required to repurchase a system in the
event of a termination by a customer for any reason except credit default.
Viisage is also required to maintain certain financial ratios and minimum levels
of tangible capital funds, as defined. As of June 27, 1999, we are in compliance
with these covenants. These project lease arrangements are accounted for as
capital leases. The current arrangement provides for project financing of up to
$15.0 million. At June 27, 1999, we had approximately $13.6 million outstanding
under the
<PAGE>
lease financing arrangement. We also have a similar project lease financing
arrangement with Lau that provides for up to $3.1 million of capital lease
financing in 1999.
We believe that we will meet our debt covenants. However, this expectation
is dependent in part on achieving business forecasts and raising funds to cover
biometrics division expenses. If we do not meet such covenants, the bank and
the lessor could require immediate repayment of amounts outstanding.
During the third quarter of 1998, we issued 300,000 shares of common stock
to Lau for $2.00 per share or $600,000. We 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, we issued an $800,000, 4%
convertible subordinated note to Lau. The note and related accrued interest are
convertible into our common stock at any time prior to October 15, 1999 at $1.58
per share. In May 1999, we received a commitment from Lau to lend us up to
$2,000,000 in exchange for a 4% convertible subordinated note through February
2000. Amounts drawn under the note, with Lau's consent, and related accrued
interest are convertible at Lau's option into shares of our common stock at any
time prior to December 31, 2000 at $1.26 per share. In May 1999, we borrowed
$1,000,000 under this commitment. We plan to raise additional funding, as
needed, from other sources.
In July 1999, we completed a $1.5 million private placement of series A
convertible preferred stock (the "preferred stock") and warrants with a private
equity fund. The preferred stock accrues dividends at 7% per annum, payable in
cash or stock at our option upon conversion. Subject to certain limits on the
number of shares the holder can convert at any one time, the holder can convert
up to 50% of the preferred stock into shares of our common stock beginning six
months after closing and the balance beginning nine months after closing.
Shares can be converted at the lesser of $3.00 per share or 85% of the market
price prior to conversion of our common stock for conversions within ten months
from the closing date or 77% of the market price prior to conversion for
conversions after ten months from the closing date. Subject to certain volume
limitations, the preferred stock is required to be converted into our common
stock on June 30, 2002. We have the right at any time to redeem the preferred
shares. This transaction was an exempt transaction under Section 4(2) of the
Securities Act of 1933, as amended. In connection with this transaction, we paid
an investment banking fee of $112,500 and warrants to purchase 75,000 shares of
our common stock, exercisable for three years, at an exercise price of $1.79 per
share which was 130% of the then current closing price of our common stock. We
also issued warrants to purchase 75,000 shares of our common stock, exercisable
for three years, at an exercise price of $1.58 per share to the investor.
We have historically not made substantial capital expenditures for
facilities, office and computer equipment and have satisfied our needs in these
areas principally through leasing.
We believe that if we meet our business forecast for 1999, cash flows from
available borrowings, project leasing, operations and capital raising will be
sufficient to meet our working
<PAGE>
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 we are unable to obtain additional capital, as needed, on
acceptable terms we may be unable to take full advantage of future opportunities
or respond to competitive pressures, which could adversely affect our business,
financial condition and results of operations. Failure to obtain additional
capital could also result in violation of debt and project lease financing
covenants.
Market Risk
Except for our revolving credit facility, which has a variable interest
rate, we have no material exposure to market risk that could affect our future
results of operations and financial condition.
Year 2000
We continue to assess the potential impact of the year 2000 on our internal
business systems, products, and operations. Our year 2000 initiatives include
(i) testing and upgrading internal business systems and facilities; (ii) testing
and developing necessary upgrades for our current product and certain
discontinued products; (iii) contacting key suppliers, vendors, and customers to
determine their year 2000 compliance status; and (iv) developing contingency
plans.
Our accounting and information systems provider, Lau, has advised us that
its internal business systems are year 2000 compliant. We expect that our
facilities will be year 2000 compliant by the end of 1999 and the owners of such
facilities will remedy problems encountered, if any.
We believe that all of the material products that we currently sell are
year 2000 compliant or can be made compliant with minor modifications. However,
as many of our products are complex, interact with third-party products, and
operate on computer systems that are not under our control, there can be no
assurance that we have identified all of the year 2000 issues with our current
products. We are continuing to test and evaluate such products and may offer
upgrades to alternative products where reasonably practicable.
Viisage is in the process of identifying and contacting suppliers, vendors,
and customers that are believed to be significant to our business operations in
order to assess their year 2000 readiness. As part of this effort, we are using
questionnaires relating to year 2000 compliance and intend 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. We also intend
to develop a contingency plan that will allow our 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 we continue to evaluate the year 2000
readiness of our products and significant suppliers, vendors, and customers, we
will modify and adjust our contingency plan as may be required.
<PAGE>
To date, costs incurred in connection with the year 2000 issue have not
been material. We do not expect total year 2000 remediation costs to be
material, but there can be no assurance that we will not encounter unexpected
costs or delays in achieving year 2000 compliance. If any of our material
suppliers, vendors, or customers experience business disruptions due to year
2000 issues, we might also be materially adversely affected. While we are
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 our business, operations, or financial condition.
Certain Factors That May Affect Future Results
We operate in an environment that involves a number of risks, some of which
are beyond our control. Forward-looking statements in this document and those
made from time to time by our 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.
Inflation
Although certain of our expenses increase with general inflation in the
economy, inflation has not had a material impact on our financial results to
date.
Accounting Pronouncements
There are no accounting pronouncements pending adoption that are expected
to have a significant impact our current disclosures.
<PAGE>
BUSINESS
Overview
Viisage is a leader in the emerging field of biometrics technology and in
providing digital identification systems and solutions.
Our identification systems and solutions improve personal convenience and
security, deter fraud and reduce identification program costs. We create
complete customized solutions by combining our systems integration capabilities,
software design capabilities, proprietary software and hardware products, and
standard products in the industry. Our turnkey solutions (1) integrate image
and data capture, (2) create relational databases, (3) incorporate multiple
biometrics, and (4) improve customers' abilities to move and manage information.
Customers can apply our technology to:
. drivers' licenses
. voter registration cards
. national identification cards
. law enforcement and corrections applications
. social services applications
. facility access control and surveillance, and
. personal computer network and internet access security.
Our biometrics division develops and markets biometrics technology that
includes our patented facial recognition products used for access control, PC
network and internet access security and the real-time large database
identification and verification of individuals. Our "Face-in-the-Crowd" products
can recognize real-time facial images in a crowd from video and can be used for
access control and surveillance applications. We focus on facial images as a key
biometric because the human face is a unique and prominent feature, and a
digital camera easily captures a facial image. In addition, most individuals can
visually verify human facial features without special training.
Viisage was formed in 1993 as a division of Lau, a systems integration
services and products provider for sophisticated electronic systems. In November
1996, Lau transferred substantially all of the assets, liabilities and
operations of the division to Viisage. At that time, we also completed an
initial public offering. Lau currently owns 65% of Viisage and remains our
technology partner.
Industry Background
Most people need proper identification on a daily basis. The desire for
personal convenience, the significant and increasing costs of fraud, and the
growing concern over declining personal security have created the global need
for effective identification solutions.
<PAGE>
For example, an individual can use a fake driver's license to create multiple
identities, commit fraud, evade law enforcement and engage in other criminal
activities. Additionally, individuals can compromise security systems by
fraudulently obtaining a password or identity card and using it to gain
unauthorized access to facilities, networks or information. The development of
photographic identification cards encapsulated within laminated pouches
attempted to combat such fraud and tampering. However, individuals can replicate
photographic identification cards using widely available advanced color copiers
and printers, and laminated pouches have proven easy to delaminate.
There exists an increasing demand for digital identification systems to
replace the existing systems due to advances in, and the acceptance of, digital
technology. Digital systems enable the fabric of the card to capture information
and images through the use of dye-sublimation techniques. The benefits of
digital systems are that:
. digital cards are significantly more resistant to tampering than
laminated pouches
. customers can store information in, and later access information 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, and thereby reduce the need for manual record-keeping, file
cabinets, and cumbersome indexing systems, and
. digital systems can be networked to enable customers to share up-to-date
information and distribute it across geographic and organizational
boundaries. The ability to move and manage information increases
personal convenience for system users.
Additionally, identification systems using biometrics, or unique biological
characteristics, to verify personal identities improve personal convenience,
improve security, and deter fraud. Biometric identifiers include:
. facial images
. fingerprints
. iris scans
. retinal scans
. voice data, and
. hand geometry.
Each of these biometrics has limitations relative to accuracy, ease of use, and
availability. Facial recognition has unique advantages over other biometrics in
that it is the most accurate, non-intrusive biometric technology. Moreover,
unlike other biometric identifiers, it is the most intuitive way to recognize
people and is one of the easiest biometrics to collect both overtly and
discreetly through photography. Facial recognition technology is therefore a
practical means of
<PAGE>
personal identification.
As the technology relating to applications for digital identification
systems and biometrics becomes more sophisticated and user-friendly, the
public's demand for the applications increases. For example, multiple licensing
or other agencies, including departments of motor vehicles, exist in most
American states. These agencies have a need for secure identification cards and
identification and verification solutions.
We believe that public and commercial sector applications for digital
identification systems and biometrics include:
. national identifications
. driver's licenses
. law enforcement
. voter registration
. social services
. access control
. personal computer network and internet access security
. automated teller machines
. retail point-of-sale transaction processing, and
. administration of health care benefits.
The Viisage Solution
We operate our business through two separate divisions - a systems
integration and identification card division ("SI Division") that delivers
secure quality identification solutions, and a biometrics division that responds
to the growing market demand for biometric solutions.
Our SI Division develops and implements digital identification systems and
solutions and serves as a channel for the biometrics division to the public
sector. The SI Division produces identification cards that are virtually tamper-
proof. It also implements facial recognition technology and other biometrics
with and without cards for the real-time identification and verification of
individuals.
The SI Division offers our customers "instant issue" systems which produce
identification cards on location in minutes. Central production systems receive
the information electronically from the point of capture, produce cards from a
secure off-site processing location, and then mail the cards to recipients
within several days. The SI Division card systems capture the facial images in
digital format at the Image Capture Workstation and can thereby provide the
content (face bases) for identification and verification applications. The
personal computer-based workstation often incorporates the SI Division's
proprietary SensorMast unit. See "Products and Services" on page 26. Our
workstations are compact and self-contained, and we typically network them 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
<PAGE>
Web. This flexibility makes the Image Capture Workstation ideal for instant
issue, central production, mobile use and multiple site systems.
Additionally, we can use our Quality Advisor to assess image quality at the
point of capture. In an instant issue system, dye-sublimation printers produce
single-piece, tamper-resistant identification cards. Alternatively, in a central
production system, a high speed manufacturing unit produces the cards, and an
integrated card delivery unit prepares the cards for mailing. Central production
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. We also offer our customers a wide
range of optional features, including:
. bar codes
. holographic overlays
. ghost imaging
. ultraviolet or micro preprinting
. smart cards, and
. a number of other security and information features.
The biometrics division develops our biometric technologies in cooperation
with Lau, our principal shareholder and technology partner. We particularly
focus on facial recognition technology. We believe that the facial image is a
key biometric because the human face is a unique and prominent feature that most
individuals without special training can verify visually. Digital cameras can
also easily capture the image of the human face. The biometrics division
concentrates on developing technology for three principal areas:
. facility access control and surveillance
. personal computer network and internet access security, and
. real-time large database products.
We are involved in several on-going facial recognition identification projects,
including projects with the Massachusetts Department of Transitional Assistance,
Wisconsin Department of Corrections, Illinois Secretary of State, and as a
subcontractor to Lau for a police surveillance system in Western Europe.
Products and Services
SI Division
- -----------
The SI Division has developed the following proprietary products and
related software:
. SensorMast. The SensorMast is a fully-integrated, secure tower unit
which incorporates computer-controlled image capture equipment. The
equipment includes:
<PAGE>
. commercially available digital cameras
. adjustable lighting
. frame grabbers
. step motors
. fingerprint and signature capture devices, and
. bar code readers.
An integrated version includes the computer in the SensorMast.
. Visual Inspection System. The Visual Inspection System automatically
evaluates cards produced by the SI Division's central production
systems. Its evaluation determines whether the image and data on a
person's identification card corresponds 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 incorporates
robotics, high-speed cameras and sophisticated software to automate an
activity otherwise performed manually. The Visual Inspection System is
therefore a potential cost-effective technology for customers.
. Viisage Quality Advisor. Customers can use our Viisage Quality Advisor
to ensure proper image quality. This software product instantly and
precisely assesses image quality against desired standards. We
immediately reject images that fail to meet such standards.
We also integrate our systems with and into our customers' existing
software, hardware and computing environments and design customized software to
deliver turnkey solutions to our customers.
Our proprietary software controls the system and integrates the system
components, including SensorMast, Visual Inspection System, and a variety of
third party components and technologies which our customers use. The SI Division
has designed software to support all current industry:
. standard operating systems, such as Windows NT, Windows 95, Unix and
OS/2
. network protocols, such as Novell Netware, TCP/IP and SNA
. database products, such as Sybase or Oracle, and
. client/server architectures.
The SI division's software design and systems integration capabilities
enable it to accommodate customers with special requirements in most computing
environments.
Customer Service and Support. In addition to installing its digital
identification systems, the SI Division offers its customers extensive customer
training, help desk telephone support, consumables procurement and management,
and ongoing maintenance services. The SI
<PAGE>
Division's service and support teams, which vary depending on the customer and
contract, rely on the expertise of our software and hardware engineers. In some
cases, we have contracted with third party service organizations to provide
maintenance support.
Biometrics Division
- -------------------
Viisage and Lau have enhanced the facial recognition technology initially
developed by Professor Alex Pentland of the Massachusetts Institute of
Technology ("MIT"). We have developed products for access control, surveillance,
and real-time large database identification and verification of individuals. We
each license the underlying MIT technology for our respective markets through
Facia Reco Associates Limited Partnership ("Facia Reco"), an entity which Dr.
Pentland formed. Although Dr. Pentland's software serves as the basis of our
facial recognition technologies, we believe that the proprietary software which
we developed over the last five years is essential to making these technologies
commercially viable.
Our patented facial recognition software offers customers the ability to
create unique identification solutions which enhance existing identification
solutions and offer opportunities for new applications. Our software uses a
sophisticated algorithm to translate facial characteristics into a unique number
or eigenface. Our system uses the eigenface for identification, a one-to-many
search of a database, and verification, a one-to-one match to a specific stored
image. Our facial recognition products are unique because they are scaleable to
databases of millions of faces.
We offer several facial recognition software systems that customers can
utilize in virtually any solution that requires identification or verification
of an individual. For example, Viisage's identification software instantly
calculates an individual's eigenface identifier, and searches an existing
database of millions of records in less than 10 seconds for similar images. Our
Face-in-the-Crowd technology finds and identifies specific individuals in a
crowd by searching 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 of our identification and Face-in-the-
Crowd technology use the software for access control, fraud reduction,
surveillance and law enforcement applications. Customers can also use the
software with other biometrics, personal identification numbers and
identification cards, or by itself for a variety of applications.
We envision a day when society will be free from access cards, keys,
personal identification numbers and signatures, and your face will be the
private, secure and convenient password of choice.
Research and Development
- ------------------------
We have developed proprietary software in prior years to support all
current industry standard operating systems and networking environments. We have
also developed proprietary image capture products and inspection products for
our card-based identification systems. We
<PAGE>
believe that these products will support our card-based identification system
offerings in the foreseeable future. We record development costs for specific
projects as project costs, and costs that do not benefit specific projects as
research and development expenses. We have not capitalized any software
development costs because the costs which we have incurred subsequent to
attaining technological feasibility have been immaterial.
Our current development activities focus on our facial recognition products
and further commercialization of our facial recognition technology. In addition
to our own development efforts, we have benefited, and expect to continue to
benefit, from Lau's on-going research and development and from certain research
activities at MIT. We also benefit from research and development activities
which the manufacturers of components integrated into our systems conduct. For
the years ended December 31, 1996, 1997, 1998 and for the first six months of
1999, research and development expenses were $235,000, $152,000, $358,000 and
$167,000, respectively. Such figures do not include amounts for specific
projects that we allocate to project costs, or the cost of others' research and
development activities from which we benefit.
Sales and Marketing Process
SI Division
- -----------
The SI Division markets its products through its internal sales force. The
SI Division strategically partners with lending systems integrators and service
organizations. Internationally, we form partnerships with established quality
local or multinational companies. These alliances provide us with access to such
organizations' existing relationships and marketing resources, and with
credibility in new markets. Our engineering department supports the internal
sales staff by providing pre- and post-sale technical support to customers. This
support entails:
. conducting joint customer calls
. 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 managers to identify opportunities with
existing customers and coordinate related selling efforts.
The SI Division provides systems and services generally for five to seven
years under contracts that include several annual renewal options. The contracts
usually establish 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 the customer intends to produce
<PAGE>
. the size of the database
. the level of post-installation support required, and
. the competitive environment.
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,
particular customer preferences, and to establish and cultivate relationships.
Agencies may require several years to secure funding for systems, complete the
request for proposal and bid processes, execute actual contracts, and install
systems. Our customers may also seek to modify the system either during or after
its implementation.
We believe that long sales cycles in our public sector markets will
continue and will require the commitment of marketing resources and investments
of working capital. We also believe, though, that the long sales cycles serve as
a barrier for smaller companies to enter the market and provide us with early
indicators of potential competitors for particular projects. Shorter sales and
implementation cycles may be involved for existing public and private sector
customers.
Biometrics Division
- -------------------
The biometrics division is a software content provider. Our sales force and
business development activities focus on establishing original equipment
manufacturer and other distribution arrangements with vendors, systems
integrators and service organizations that serve our principal market areas. The
SI Division and Lau also serve as marketing channels for the division's
products. The biometrics division's engineering department provides technical
support for the division's sales and channel development activities.
Manufacturers and Suppliers
Contract manufacturers, including Lau, manufacture proprietary subsystems
and assemblies to our specifications. We purchase other non-proprietary system
components, such as personal computers, printers and related components, from
third-party vendors. We generally purchase major contracted assemblies from
single vendors to ensure high quality, prompt delivery and low cost. We have
occasionally experienced delays due to unavailability of component parts and
assemblies. Consequently, we qualify second sources for most components,
contracted assemblies and purchased subsystems, and at least identify
alternative sources of supply. We believe that our systems' open architecture
facilitates necessary or desirable substitution of components or software.
Intellectual Property
We develop and customize technology to meet our customers' requirements,
and also
<PAGE>
utilize patented technology and trade secrets that Lau has developed. We have an
exclusive, perpetual, irrevocable, paid-up royalty-free worldwide license to use
all of the technology that Lau owns or controls relating to our business. This
license does not include the field that controls human entry through doorways,
gates, turnstiles, or similar thresholds in and to buildings or facilities
located on United States federal government property, or property of any other
national government, through use of apparatus at the entry point ("federal
access control field"). Lau ownership of intellectual property includes:
. a U.S. patent on a card production system which we use that expires in
2014
. a number of U.S. patent applications in process for facial recognition
technologies
. a copyright for SensorMast
. a copyright application filing for our Visual Inspection System and
related proprietary software, and
. foreign patent applications, which correspond to three of the U.S.
patent applications.
We also license patented technology and trade secrets from Facia Reco
relating to de-duplicating or querying databases which we or our sublicensees
create, control and/or manage and which directly or indirectly utilize personal
identification cards. Such license excludes federal access control. Our license
agreement with Facia Reco provides that we pay a royalty of $350 per machine
copy that incorporates the licensed technology. Until June 1, 2001, we must pay
a minimum annual royalty of approximately $21,000 for the U.S. rights, and an
amount ranging from $21,000 to $42,000 per year for the foreign rights. This
license expires when the final patent included in the license expires. The
license also includes Facia Reco's rights to use MIT's patented facial
recognition technology exclusively through June 1, 2001, except for certain
research rights and rights MIT granted to sponsors of the MIT Media Lab.
Thereafter, Facia Reco's patent license from MIT extends to 2010 on a non-
exclusive basis. MIT has also applied to extend its patent rights to certain
jurisdictions in Europe and in Singapore. Further, at Lau's request and expense,
the U.S. Patent and Trademark Office broadened claims for the MIT patent.
We have registered the "Viisage" trademark with the U.S. Patent and
Trademark Office.
Customers and End Users
The following lists and categorizes our material customers and end users as
of September 30, 1999:
<TABLE>
STATE DEPARTMENTS OTHER STATE AND LOCAL AGENCIES
OF MOTOR VEHICLES
<S> <C>
- - Arizona Department of Social Services - Connecticut Department of Transportation
- - Arkansas Office of Driver Services - Massachusetts Department of Transitional Assis
- - Florida Department of Highway Safety - New York Department of Social Services*
and Motor Vehicles* - Ohio Department of Public Safety
</TABLE>
<PAGE>
<TABLE>
<S> <C>
- - Illinois Secretary of State - Wisconsin Department of Corrections
- - Massachusetts Registry of Motor Vehicles
- - New Mexico Department of Taxation and
Revenue
- - North Carolina Department of Transportation
- - Ohio Bureau of Motor Vehicles
- - Wisconsin Department of Transportation
- - South Carolina Department of Public Safety
FEDERAL AGENCIES FOREIGN CONTRACTS
- - U.S. Immigration and Naturalization -Commission on Elections of the Republic
Service* of the Philippines*
-Electoral Office of Jamaica
</TABLE>
(* By subcontract)
For the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 27, 1999, two customers, one customer, three customers and three
customers, respectively, each accounted for more than 10% of the our revenues
and an aggregate of 50%, 46%, 40%, and 50% of revenues for each of the periods,
respectively.
Backlog
We measure our backlog based on signed contracts, subcontracts and customer
commitments for which we have not yet recognized revenue. 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.
Our customers can cancel a substantial amount of our backlog at any time without
penalty, except for the recovery of our actual committed costs and profit on
work performed through the cancellation date. Our failure to meet an agreed-upon
schedule could also lead to the cancellation of the related order. Several
factors may create substantial fluctuations in backlog from time to time, such
as:
. the timing of contract awards
. the timing of contract performance
. size of the project, and
. modifications to contract awards.
Therefore, we do not consider backlog a meaningful indicator of future financial
performance.
As of June 27, 1999, our backlog was approximately $55 million, compared to
approximately $59 million as of December 31, 1998. We expect to earn
approximately 24% of our backlog as of July 27, 1999 during the remainder of the
current fiscal year.
<PAGE>
Government Contacts
Government contracts are generally subject to termination for convenience
or lack of appropriation at the election of the subject agency. As of December
31, 1998, amounts subject to future negotiation were not material.
Competition
The market for Viisage's products and services is extremely competitive. We
expect this competition to intensify as the markets in which we sell our
products and services continue to develop. In some cases, we may have a
significant competitive disadvantage because we may be competing with an entity
that has a pre-existing relationship with a potential customer.
SI Division.
- -----------
The SI Division largely faces competition in the identification systems
market for both digital and conventional systems from Polaroid Corporation. In
1998, Polaroid acquired a former competitor, NBS Imaging Systems, Inc.
We believe that competition in the digital identification systems market is
based primarily upon the following factors:
. price
. service support
. systems and product performance, and
. flexibility in terms of accommodating customer needs, architectures,
platforms, systems and networks.
The relative importance of each factor 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 pursuant to public sector
procurement rules. The bidding process generally increases the importance of
price as a competitive factor. We believe that our competitive advantage is cost
effectiveness, quality, reliable and consistent service, systems integration and
software design capabilities, and a responsive corporate structure.
Biometrics Division.
- -------------------
In the field of biometric identification technology, we compete with other
facial recognition providers as well as other providers of biometric solutions.
For example, public agencies, and law enforcement agencies in particular, have
long used fingerprint recognition solutions. Other current suppliers of facial
recognition solutions are software development firms. We expect that as the
market for biometric solutions develops, companies with significant resources
and capabilities may enter the market and our competition will intensify.
<PAGE>
Employees
As of September 30, 1999, we employed 60 people. We supplement our employee
forces with independent contractors and temporary employees. As of September 30,
1999, we employed 1 independent contractor and 12 temporary employees, 5 of whom
provided services through temporary placement agencies. None of our employees
are represented by labor unions, and we believe that we have a good relationship
with our employees.
Properties
In February 1997, Viisage moved to facilities located in Littleton,
Massachusetts. We currently use approximately 15,000 square feet of space and
have access to common areas under the terms of a Use and Occupancy Agreement
with Lau through February 2002. See "Relationship and Certain Transactions With
Lau Technologies" on page 35. We believe that our facilities are in good
condition, are suitable and adequate for our present operations, and that
suitable space is available if Lau does not extend such lease.
Legal Proceedings
We do not believe that any legal matters exist that would have a material
adverse effect on our business, financial condition or results of operations.
<PAGE>
RELATIONSHIP AND CERTAIN TRANSACTIONS WITH LAU TECHNOLOGIES
Prior to 1996, we operated as the Viisage Technology Division of Lau.
Viisage Technology, Inc. was incorporated in Delaware on May 23, 1996. On
November 6, 1996, Lau transferred substantially all of the assets and
liabilities of its Viisage Technology Division to us in exchange for shares of
our common stock. Immediately following that transfer, we completed an initial
public offering.
Asset Transfer Agreement
Viisage and Lau entered into an Asset Transfer Agreement, as amended and
restated as of August 20, 1996 (the "Asset Transfer Agreement"). Pursuant to
the Asset Transfer Agreement, we issued to Lau 5,680,000 shares of common stock
(comprising all of our outstanding common stock other than the shares sold in
the initial public offering) in exchange for substantially all of the assets,
properties and business formerly constituting the Viisage Technology Division of
Lau. In connection with this transaction, we agreed to assume substantially all
of Lau's obligations and liabilities relating to the Viisage Technology
Division. Each party covenanted not to compete with the other for ten years. Our
obligation not to compete with Lau is limited to the field of federal access
control as defined in the Asset Transfer Agreement.
License Agreements
We have entered into the following licensing agreements with Lau:
. Amended and Restated License Agreement, dated August 20, 1996 which
became effective November 6, 1996. Under that license agreement, Lau
granted us an exclusive, perpetual, irrevocable, paid-up, royalty-
free, worldwide license (with sublicensing rights) for all of the
technology relating to the Viisage Technology Division at the time of
transfer, and for all improvements to such technology. This license
does not permit us to use the technology in the federal access control
field as defined in the Asset Transfer Agreement.
. License Agreement, dated February 23, 1998, pursuant to which we
granted Lau a nonexclusive, nontransferable right to utilize certain
of our proprietary technology to distribute Face-in-the-Crowd products
in Europe.
. License Agreement, dated as of March 31, 1999, pursuant to which we
granted Lau a nonexclusive, nontransferable right to utilize certain
of our proprietary technology to distribute Face-in-the-Crowd products
for United States airports and federal agencies.
<PAGE>
Administration and Services Agreement
In connection with the asset transfer described above, we entered into an
Administration and Services Agreement (the ''Services Agreement'') with Lau
dated November 1, 1996. Under the Services Agreement, Lau provides certain
general accounting, data processing, payroll, human resources, employee benefits
administration and other executive services to us. The Services Agreement
requires us to pay a monthly fee based on the estimated actual cost of such
services and permits us to terminate selected services upon 30 days' written
notice. The cost for these services was $636,000 and $177,000 for 1998 and the
six months ended June 27, 1999, respectively.
Use and Occupancy Agreement
We have also entered into a Use and Occupancy Agreement ("Use and Occupancy
Agreement") with Lau dated November 1, 1996, which contains the terms and
conditions relating to our continued use and occupancy of certain office space
for our corporate headquarters. The Use and Occupancy Agreement requires us to
pay our 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 we utilize. In February, 1997, we
moved to larger facilities and extended the Use and Occupancy Agreement through
February, 2002. The cost for facilities and services was $550,000 and $140,000
for 1998 and the six months ended June 27, 1999, respectively.
Additional Transactions
We issued subordinated debt and options to Lau, as set forth in the section
entitled "Security Ownership" on page 43. From time to time, we purchase certain
system components and the services of technical personnel from Lau. The amounts
for such components and services was approximately $1 million and $35,000 for
1998 and the six months ended June 27, 1999, respectively. In addition, Lau has
provided us with equipment lease financing and has agreed, in certain
circumstances, to guarantee certain of our contract obligations in exchange for
stock options and cash compensation.
Policy on Affiliate Transactions
We have adopted a policy, included in our bylaws, that all material
transactions between Viisage, and our officers, directors, and other affiliates
(including Lau and its affiliates) must:
. be disclosed by the officer, director or affiliate and approved by a
majority of the disinterested members of our board of directors;
. be disclosed by the officer, director or affiliate and approved by vote of
the stockholders; or
. be on terms no less favorable to us than could be obtained from
unaffiliated third parties, and determined as fair to us by our directors
or stockholders in accordance with the Delaware General Corporation Law.
<PAGE>
MANAGEMENT
Executive Officers, Directors and Significant Employees
Our executive officers and directors, and their ages as of September 30,
1999, are as follows:
<TABLE>
<CAPTION>
Name Age Current Office Held
---- --- -------------------
<S> <C> <C>
Thomas J. Colatosti 51 President and Chief Executive Officer
Iftikhar A. Ahmad 48 Vice President Engineering
Denis K. Berube 56 Chairman of the Board of Directors
Charles J. Johnson 44 Director
Charles E. Levine 46 Director
Harriet Mouchly-Weiss 56 Director
Peter Nessen 63 Director
Thomas J. Reilly 60 Director
</TABLE>
Thomas J. Colatosti, 51, became our President and Chief Executive Officer
on November 3, 1998. From July 8, 1998 until November 3, 1998, Mr. Colatosti
served as our Chief Operating Officer. Before that, he served as Vice President,
Operations of Viisage, which he joined on December 30, 1996. From April 1995
through December 1996, Mr. Colatosti was President and Chief Executive Officer
of CIS, a software and systems integration company. Mr. Colatosti held various
finance, sales, and operations positions with Digital Equipment Corporation from
1973 to March 1995, serving as Vice President of the Northeast Region from 1993
through 1995, and Vice President of the Federal Systems Division from 1991 to
1993.
Iftikhar A. Ahmad, 48, became our Vice President Engineering in March 1999.
From November 1996 until March 1999, Mr. Ahmad was a Director in our Software
Engineering Department. From January 1995 to November 1996, he was a senior
consultant in Lau's Systems Engineering Department and prior to that he held
various senior engineering positions at Digital Equipment Corporation.
Denis K. Berube, 56, has been the chairman of our board of directors since
our incorporation in 1996. He chaired the Advisory Board of the Viisage
Technology Division of Lau since its formation in October 1995. Mr. Berube is
Executive Vice President and Chief Operating Officer of Lau, which has employed
him since 1990.
Charles J. Johnson, 44, has served as a director of Viisage since its
incorporation in May 1996. He earlier served on the Advisory Board of the
Viisage Technology Division of Lau. Mr. Johnson is a principal of the law firm
of Finnegan, Hickey, Dinsmoor & Johnson, P.C. in Boston, Massachusetts, which
serves as counsel to us and Lau. Finnegan, Hickey, Dinsmoor & Johnson, P.C. will
continue to provide legal services to us during 1999.
<PAGE>
Charles E. Levine, 46, has served as Chief Marketing and Sales Officer of
Sprint PCS since January 1997. Mr. Levine served as Senior Vice President of
Octel Services, a provider of voice systems services, from October 1994 through
September 1996, after which he enjoyed a few months off before joining Sprint
PCS. From October 1993 to October 1994, Mr. Levine was Chief Executive Officer
and Director of CFT Systems, a company focusing on developing software for
field-based utility workers. Mr. Levine was a Vice President at AT&T from
February 1987 to October 1993, with marketing, product management, and general
management responsibilities.
Harriet Mouchly-Weiss, 56, has served as a director of Viisage since its
incorporation in May 1996, and earlier served on the Advisory Board of the
Viisage Technology Division of Lau. Ms. Mouchly-Weiss founded Strategy XXI
Group, an international communications and consulting firm in January 1993. She
has served as the managing partner of Strategy XXI since that time. From 1986 to
December 1992, Ms. Mouchly-Weiss was President of GCI International, an
international public relations and marketing agency.
Peter Nessen, 63, has served as a director of Viisage since its
incorporation in May 1996, and earlier served on the Advisory Board of the
Viisage Technology Division of Lau. Mr. Nessen served as Chairman of the Board
of NCN Financial Corporation, a private banking firm, since January 1995. From
June 1993 through December 1994, Mr. Nessen was a Dean at Harvard Medical
School, responsible for special projects. Mr. Nessen was Secretary of
Administration and Finance for the Commonwealth of Massachusetts from January
1991 through May 1993. He also served as managing partner of a consulting
practice in the Boston office of BDO Seidman LLP, a public accounting firm, from
February 1990 through December 1990.
Thomas J. Reilly, 60, has served as a director of Viisage since its
incorporation in May 1996, and earlier served on the Advisory Board of the
Viisage Technology Division of Lau. Mr. Reilly has been a self-employed
financial consultant since December 1994. From June 1966 through November 1994,
Mr. Reilly worked at Arthur Andersen LLP, a public accounting firm, and became a
partner in 1975.
Pursuant to our restated certificate of incorporation, our board of
directors has set the number of directors at six. In addition, the restated
certificate of incorporation provides that there shall be three classes of
directors. Further, each director shall serve for a term of three years and
until his or her successor is elected and qualified or until his or her earlier
resignation, death, or removal. Our stockholders elect one class of directors at
each annual meeting for a three year term.
The Class I directors (whose terms expire in 2000) are Denis K. Berube and
Charles E. Levine. The Class II directors (whose terms expire in 2001) are
Charles J. Johnson and Harriet Mouchly-Weiss. The Class III directors (whose
terms expire in 2002) are Thomas J. Reilly and Peter Nessen. There are no family
relationships between any of our directors or executive officers.
<PAGE>
Committees of the Board of Directors
The board has established a compensation committee, audit committee, and
marketing committee, all of which are comprised of outside directors.
The Compensation Committee. The compensation committee is comprised of Mr.
--------------------------
Reilly (chair), Ms. Mouchly-Weiss, and Mr. Nessen, none of whom are officers or
employees of Viisage. The compensation committee (1) reviews senior management
performance, (2) recommends executive compensation, and (3) administers our
Executive Incentive Compensation Plan, 1996 Management Stock Option Plan, as
amended, and the 1997 Employee Stock Purchase Plan. During 1998, the
compensation committee met three times.
The Audit Committee. The audit committee, comprised of Messrs. Nessen
-------------------
(chair) and Reilly, (1) reviews the scope of our internal controls, (2)
recommends the selection of our independent public accountants, (3) reviews the
scope of the audit with the independent public accountants, and (4) reviews the
results of the audit. During 1998, the audit committee met four times.
The Marketing Committee. The marketing committee, comprised of Ms.
-----------------------
Mouchly-Weiss (chair), Mr. Johnson, Mr. Nessen, and Mr. Levine, reviews and
makes recommendations regarding our marketing strategy and plans.
We do not have a nominating committee of the board of directors, and the
board of directors undertakes all nominating functions.
Director Compensation
Each director currently receives a monthly retainer of $3,000 payable in
our common stock. We pay no additional fees for attending board or committee
meetings.
Directors also receive option grants for nonqualified options under our
1996 Director Stock Option Plan, as amended (the "Director Plan"). Options to
purchase an aggregate 201,616 shares have been issued which enable each director
to purchase 35,496 shares of common stock (except for Mr. Levine, who joined the
board more recently and has options to purchase 24,136 shares), subject to
adjustment as provided in the Director Plan and subject to various vesting
requirements. Vesting occurs only if the option holder is serving on the board
on the vesting date.
Executive Compensation
The following table provides summary information concerning compensation of
our Chief Executive Officer and each of the four other most highly paid
executive officers during the fiscal years ended December 31, 1998, 1997, and
1996, if applicable.
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Annual Compensation/(1)/ Long Term
Compensation
Awards
- --------------------------------------------------------------------------------------------------------------
Name and Year Salary Incentive/(2)/ Securities All Other
Principal Ended Underlying Compensation/(3)/
Position /(1)/ 12/31 Options (#)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Thomas J. 1998 $179,000 $15,000 717,837 $ 14,400
Colatosti, 1997 $172,600 $22,000 121,000 $ 14,000
President
and Chief
Executive
Officer
- --------------------------------------------------------------------------------------------------------------
Robert C. 1998 $235,500 ----- 233,270 $ 21,000
Hughes, 1997 $221,250 ----- 629,000 $ 17,000
Former 1996 $220,000 $75,000 639,000 $ 15,000
President
and Chief
Executive
Officer
- --------------------------------------------------------------------------------------------------------------
William A. 1998 $192,600 ----- 213,000 $ 14,500
Marshall, 1997 $180,000 ----- 213,000 $ 17,000
Former 1996 $140,000 $47,000 213,000 $ 74,000
Vice
President,
Chief
Financial
Officer and
Treasurer
- --------------------------------------------------------------------------------------------------------------
Iftikhar A. 1998 $130,000 ----- 35,000 $1,957.54
Ahmad, 1997 $ 96,000 $28,000 35,000 $2,377.53
Vice 1996 $ 96,000 ----- 7,100 $2,243.32
President
Engineer-
ing
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Yona 1998 $180,000 ----- 284,000 $ 15,200
Wieder, 1997 $180,000 $ 5,000 284,000 $ 14,000
Former 1996 $ 79,000 $27,000 284,000 $163,000
Vice
President,
Marketing
and Sales
Worldwide
Public
Sector
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Ahmad, who joined Lau on July 24, 1995 and Viisage in 1996, became Vice
President of Engineering in July 1998 (and served as Director of Software
Engineering immediately prior to his promotion). Mr. Colatosti, who joined
Viisage on December 30, 1996 (and served as Chief Operating Officer
immediately prior to his promotion), became President and Chief Executive
Officer on November 3, 1998, upon Mr. Hughes' resignation as President and
Chief Executive Officer. Mr. Wieder joined Viisage on July 1, 1996 and
continued through December 31, 1998. Compensation listed for 1996 includes
amounts for the period we were the Viisage Technology Division of Lau
Technologies. Mr. Marshall resigned as Vice President, Chief Financial
Officer and Treasurer effective as of September 17, 1999.
(2) We currently maintain an Executive Incentive Compensation Plan for our
executive officers and other key employees of to motivate members of our
executive team. Each participant in the Executive Incentive Compensation
Plan may receive a percentage of his or her base salary based upon
Viisage's and each participant's individual performance, as determined by
success in meeting established goals approved by the Chief Executive
Officer, for individual goals, or the board of directors, for our goals.
The compensation committee administers the plan.
(3) Amounts include 1998 401(k) plan match of $4,800 per listed person, $8,400
auto allowance, and various insurance benefit payments. Amounts also
include relocation expenses of $66,000 for Mr. Marshall in 1996; and, for
Mr. Wieder, $95,000 of consulting fees and $61,000 of commissions earned by
Mr. Wieder for the 1996 period prior to his employment. We participate in
Lau's 401(k) plan and pay our proportionate share of plan expenses based on
the number of participants. The plan permits pre-tax contributions by
participants of up to 15% of base compensation or the statutory limit. We
may make discretionary contributions to the plan, subject to certain
limits. Participants are fully vested in their contributions and vest 20%
per year in employer contributions.
<PAGE>
Employment Agreement
We have an agreement with Mr. Colatosti that provides, among other terms,
that we will pay Mr. Colatosti six months of current salary if we terminate his
employment, except for cause or if an affiliate offers him commensurate
employment. Mr. Colatosti is also subject to non-competition and non-
solicitation provisions that, in general, survive one year beyond Mr.
Colatosti's termination.
401(k) Plan
We participate in Lau's 401(k) plan and pay our proportionate share of plan
expenses based on the number of participants. The plan permits participants'
pretax contributions of up to 15% of their base compensation. We 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. Our 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, and $37,000 for the six months ended June 27, 1999.
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, the board grants incentive stock options at
fair value, and the options are subject to the requirements of Section 422 of
the Internal Revenue Code of 1986, as amended. The board grants nonqualified
options at exercise prices which it determines. 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 criteria are based on each $1 million increase in our value
up to approximately $500 million, as adjusted. All options granted under the
Plans expire ten years from the date of grant.
At June 27, 1999, we had reserved 2,082,000 shares of common stock for
issuance under the management plan, of which 365,000 shares are available for
future grants. We had also reserved 202,000 shares of common stock under the
director plan, all of which the board has granted.
In connection with such options, we recognize compensation expense of
approximately $420,000 over the estimated vesting period. The amount of
compensation is calculated as the difference between the exercise price and the
fair value of our business on the grant dates based on an independent third-
party appraisal. The amount of compensation expense has been adjusted to give
effect to the options canceled in 1998 and 1999. No stock compensation expense
was recorded in 1997, 1998 or 1999 and $238,000 was recorded in 1996. During
1998, we adjusted
<PAGE>
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.
Employee Stock Purchase Plan
In 1997, we adopted the 1997 Employee Stock Purchase Plan and have reserved
140,000 shares of common stock for issuance under such plan. The purchase price
is equal to the lesser of 85% of the closing price on the first or last day of
periods defined in the plan. As of June 27, 1999, we had issued 31,304 shares,
and options to purchase 23,493 shares of common stock at $1.01 per share were
vested under the plan. We issued these shares in 1999.
Security Ownership
The following table sets forth, as of September 30, 1999, the beneficial
ownership of common stock by all directors, named executive officers, all
directors and executive officers of Viisage as a group, and each person who is
known to us to own 5% or more of our common stock.
<TABLE>
<CAPTION>
====================================================================================================
Name and Address/(1)/ Shares Beneficially Percentage
Owned/(2)/
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Joanna T. Lau/(3)/ 7,428,891 87%
- ----------------------------------------------------------------------------------------------------
Denis K. Berube/(4)/ 7,428,891 87%
- ----------------------------------------------------------------------------------------------------
Lau Technologies/(5)/ 7,380,550 86%
- ----------------------------------------------------------------------------------------------------
Thomas J. Colatosti/(6)(7)/ 90,104 1%
- ----------------------------------------------------------------------------------------------------
Iftikhar A. Ahmad/(6)(8)/ 4,435 *
- ----------------------------------------------------------------------------------------------------
Robert C. Hughes/(6)(9)/ 233,370 2.7%
- ----------------------------------------------------------------------------------------------------
William A. Marshall/(6)(10)/ 113,983 1.3%
- ----------------------------------------------------------------------------------------------------
Yona Wieder/(6)(11)/ 123,826 1.4%
- ----------------------------------------------------------------------------------------------------
Charles J. Johnson/(6)(12)/ 41,341 *
- ----------------------------------------------------------------------------------------------------
Harriet Mouchly-Weiss/(6)(13)/ 41,541 *
- ----------------------------------------------------------------------------------------------------
Peter Nessen/(6)(14)/ 47,341 *
- ----------------------------------------------------------------------------------------------------
Thomas J. Reilly/(6)(15)/ 41,341 *
- ----------------------------------------------------------------------------------------------------
Charles E. Levine/(6)(16)/ 36,981 *
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
All directors and executive 8,203,154 95.5%
officers as a group
(11 persons)(17)
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Less than one percent of the 8,585,745 shares issued and outstanding as of
September 30, 1999.
(1) The address of all persons who are directors or executive officers is in
care of Viisage at 30 Porter Road, Littleton, Massachusetts 01460. The address
of Ms. Lau and Lau is in care of Lau Technologies, 30 Porter Road, Littleton,
Massachusetts 01460.
(2) Unless otherwise noted, each person identified possesses sole voting and
investment power over the shares owned.
(3) Consists of 7,380,550 shares held as described below by Lau, of which Ms.
Lau owns approximately 56% of the outstanding capital stock, 1,000 shares owned
directly by Ms. Lau, 16,330 shares issuable to Denis K. Berube, the spouse of
Ms. Lau, pursuant to stock options, and 31,011 shares owned by Mr. Berube. Ms.
Lau disclaims beneficial ownership of the 16,330 issuable shares and the 31,011
shares Mr. Berube owns.
(4) Consists of 7,380,550 shares described below Lau holds, of which Mr.
Berube's spouse owns approximately 56% of the outstanding capital stock, 1,000
shares owned directly by Ms. Lau, 16,330 shares issuable to Mr. Berube pursuant
to stock options, and 31,011 shares owned by Mr. Berube. Mr. Berube disclaims
beneficial ownership of the shares of common stock Lau holds and the 1,000
shares Ms. Lau owns.
(5) Consists of 5,478,000 shares Lau holds, which includes shares subject to
Lau's lenders options to acquire an aggregate of 49,700 shares under certain
conditions including reaching certain lending benchmarks; 1,333,459 shares
issuable pursuant to subordinated convertible notes; and 569,091 shares pursuant
to two option agreements.
(6) Represents shares of common stock issuable pursuant to stock options. The
total number of shares issuable under total vested and unvested stock options
granted to Messrs. Colatosti, Ahmad, Hughes, Marshall, Wieder, each director
(except Mr. Levine), Mr. Levine, and all directors and executive officers as a
group are 502,323, 77,100, 233,270, 111,751, 284,000, 35,496, 24,136, and
1,400,060, respectively.
(7) Consists of 89,904 shares issuable to Mr. Colatosti pursuant to stock
options and 200 shares Mr. Colatosti's children hold. Mr. Colatosti disclaims
beneficial ownership of his children's shares.
(8) Consists of 1,465 shares issuable pursuant to stock options and 2,970
shares that Mr. Ahmad directly owns.
<PAGE>
(9) Consists of 233,270 shares issuable to Mr. Hughes pursuant to stock
options and 100 shares owned by Mr. Hughes' son of majority age. Mr. Hughes
disclaims beneficial ownership of his son's 100 shares.
(10) Consists of 111,751 shares issuable pursuant to stock options and 2,232
shares that Mr. Marshall directly owns.
(11) Consists of 117,126 shares issuable pursuant to stock options and 6,700
shares that Mr. Wieder directly owns.
(12) Consists of 16,330 shares issuable pursuant to stock options and 25,011
shares that Mr. Johnson directly owns.
(13) Consists of 16,330 shares issuable pursuant to stock options and 25,211
shares that Ms. Mouchly-Weiss directly owns.
(14) Consists of 16,330 shares issuable pursuant to stock options and 31,011
shares that Mr. Nessen directly owns.
(15) Consists of 16,330 shares issuable pursuant to stock options and 25,011
shares that Mr. Reilly directly owns.
(16) Consists of 4,970 shares issuable pursuant to stock options and 32,011
shares that Mr. Levine directly owns.
(17) Represents shares described in Notes 4 and 7-16.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of reports provided to us for 1998 pursuant to
Section 16 of the Securities Exchange Act of 1934, and written representations
that no reports were required, we believe that all of the reports required to be
filed under Section 16 were timely filed.
Stock Options Granted During 1998
The following table sets forth information concerning individual grants of
stock options made during 1998 to our executive officers. It has not been our
policy in the past to grant stock appreciation rights, and we granted no such
rights in 1998.
<PAGE>
<TABLE>
<CAPTION>
Name Number of % of Total Exercise Expiration Potential Realizable
Securities Options Price Date Value at Assumed
Underlying Granted to ($/share) Annual Rates of Stock
Options Employees Price Appreciation for
Granted/1/ in Year Option Term/(2)/
5% 10%
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Thomas J.
Colatosti 596,837 67% $0.9375 November 3, $655,700 $1,375,500
2008 0
- -----------------------------------------------------------------------------------------------------------
Robert C. 183,270 21% $ 2.96 February 1, ----- ------
Hughes 50,000 6% $0.9375 2006
November 3, $ 54,900 $ 115,200
2008
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) We granted options under the 1996 Management Stock Option Plan, as amended.
Total of options granted does not include Employee Stock Purchase Plan options.
One half of Mr. Colatosti's shares vest over 36 months, and one half vest in
seven years, subject to accelerated vesting based upon increases in market
capitalization over pre-determined benchmarks. Mr. Hughes' options have vested,
50,000 of which are subject to his remaining an employee through May 6, 1999.
The compensation committee administers the Option Plan. Options under the Option
Plan may be either (a) "incentive options" under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or (b) options that do not
qualify under Section 422 of the Code ("nonqualified options"). Our officers and
key employees, but not directors, are eligible to receive options under the
Option Plan. The exercise price of incentive options under the Option Plan may
not be less than the fair market value of the underlying shares on the date of
grant, except in the case of incentive options granted to holders of 10% or more
of the total combined voting power of Viisage. In that case, the exercise price
may not be less than 110% of such fair market value. The compensation committee
determines the exercise price of nonqualified options at the time of option
issuance. The compensation committee will determine the vesting schedule with
respect to any grant of options. All options are subject to adjustment in
certain events. Shares reserved for issuance under an option that is canceled or
terminated, and shares that are used in payment of option exercise prices, may
be restored and made available for reissuance of additional options under the
Option Plan, subject to certain anti-dilution terms. The existing options
contain reload option features.
(2) The assumed rates are compounded annually for the full term of the options.
<PAGE>
Stock Options Exercised During 1998
The following table sets forth information concerning stock option
exercises during 1998 and outstanding stock options held at the end of 1998 by
our executive officers. No stock appreciation rights were exercised or
outstanding during 1998.
<TABLE>
<CAPTION>
Name Shares Acquired on Value Realized Number of Securities Value of Unexercised
Exercise Underlying In-the-Money Options
Unexercised Options at 12/31/98 ($)
at 12/31/98 Exercisable/
Exercisable/ Unexercisable(1)
Unexercisable
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas J. Colatosti ----- ----- 15,303/702,534 $2,595/183,917
- -------------------------------------------------------------------------------------------------------
Robert C. Hughes ----- ----- 233,270/---- $ 15,625/-----
- ------------------------------------------------------------------------------------------------------
William A. Marshall 1,884(2) $582 101,751/111,249 -----/-----
- ------------------------------------------------------------------------------------------------------
Iftikhar A. Ahmad 1,623(2) $547 1,465/40,635 -----/-----
- ------------------------------------------------------------------------------------------------------
Yona Wieder ----- ----- 117,126/166,874 -----/-----
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the $1.25 closing price of our common stock on December 31, 1998
on the Nasdaq National Market System minus the respective option exercise
price.
(2) Acquired pursuant to the 1997 Employee Stock Purchase Plan.
Ten Year Option Repricing
The following table sets forth information concerning stock option
repricing during 1998 for one of our executive officers. No stock appreciation
rights existed or were repriced during 1998.
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================================
Name Date Number of Market Exercise New Length of Original
Securities Price of Price at Exercise Option Term Remaining
Underlying Stock at Time of Price ($) at Date of Repricing
Options Time of Repricing
Repriced (#) Repricing ($)
($)/1/
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. July 22, 100,000 $2.25 $ 13 $2.25 Expires July 21, 2007,
Colatosti 1998 Subject to earlier
termination
--------------------------------------------------------------------------------------------
July 22, 21,000 $2.25 $6.25 $2.25 Expires December 8,
1998 2007, Subject to
earlier termination
===============================================================================================================
</TABLE>
(1) Based on the closing price of our common stock on July 21, 1998 on the
Nasdaq National Market System.
DESCRIPTION OF CAPITAL STOCK
Viisage's authorized capital stock consists of 20,000,000 shares of common
stock, $.001 par value per share, 3,000 shares of series A convertible preferred
stock, par value $.001 per share, and 1,997,000 shares of undesignated preferred
stock, par value $.001 per share.
As of September 30, 1999 there were 8,585,745 shares of common stock and
1,500 shares of series A convertible preferred stock issued and outstanding. All
outstanding securities have been duly authorized and validly issued and are
fully paid and nonassessable, and free of any preemptive or similar rights
contained in our certificate of incorporation, as amended, or our bylaws, or in
any other agreement to which we are a party.
Common Stock
As of September 22, 1999, there were approximately 38 record holders of our
issued and outstanding common stock. Holders of common stock are entitled to one
vote per share on all matters to be voted upon by the stockholders. Subject to
the rights of holders of outstanding preferred stock, if any, the holders of
common stock are entitled to receive such dividends, if any, as our board of
directors may declare. In the event that we liquidate, dissolve, or wind up our
affairs, holders of common stock have the right to a ratable portion of our
assets remaining after payment of liabilities. Holders of common stock do not
have cumulative voting, preemptive, redemption, or conversion rights. All
outstanding shares of common stock are fully paid and non-assessable.
<PAGE>
Preferred Stock
Our board of directors is authorized to:
. issue preferred stock in one or more series
. establish the number of shares to be included in each series
. fix the designations, powers, preferences and rights of the shares of
each series, and
. fix any qualifications, limitations or restrictions of each series.
Because the board of directors has the power to establish the preferences
and rights of the shares of any series of preferred stock, it may afford the
holders of any series of preferred stock preferences, powers and rights,
including voting rights, that are senior to the rights of the holders of common
stock.
On June 30, 1999, we issued 1,500 shares of series A convertible preferred
stock to a private equity fund for $1.5 million. These shares accrue dividends
at 7% per annum, payable in cash or stock at our option. One half of the shares
are convertible after December 31, 1999 and the remaining shares are convertible
after March 31, 2000. The private equity fund may convert $1.5 million in series
A convertible preferred stock, plus accrued dividends, into our common stock at
the lesser of:
. $3.00 per share
. 85% of the market price if the conversion occurs on or before April 30,
2000, and
. 77% of the market price if conversion occurs on or after May 1, 2000.
Subject to certain volume limitations, the preferred stock is required to be
converted into our common stock on June 30, 2002. We can redeem the series A
preferred stock at any time.
Limitation of Liability and Indemnification Matters
Our bylaws provide that, subject to limited exceptions, we will indemnify
our directors and officers and may indemnify our other employees and other
agents to the fullest extent permitted by Delaware law.
In addition, our certificate of incorporation provides that, to the fullest
extent permitted by Delaware law, our directors will not be liable for monetary
damages for breach of the directors' fiduciary duty of care to Viisage and its
stockholders. This provision does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as an injunction or other
forms of non-monetary relief, would remain available under Delaware law. Each
director will continue to be liable for:
. breach of the director's duty of loyalty to us
. for acts or omissions not in good faith or involving intentional
misconduct or knowing
<PAGE>
violations of law
. for acts or omissions that the director believes to be contrary to the
best interests of Viisage or its stockholders
. for any transaction from which the director derived an improper personal
benefit
. for acts or omissions involving a reckless disregard for the director's
duty to us or our stockholders when the director was aware or should
have been aware of a risk of serious injury to us or our stockholders
. for acts or omissions that constitute an unexcused pattern of
inattention amounting to abdication of the director's duty to us or our
stockholders, and
. for improper transactions between the director and us and for improper
distributions to stockholders and loans to directors and officers.
This provision also does not affect a director's responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws.
Certain Provisions of our Charter and Bylaws
Our certificate of incorporation and bylaws contain several features that
could create difficulty for a third party attempting to acquire a controlling
interest in Viisage. The certificate of incorporation grants the board of
directors authority, without stockholder approval, to issue in one or more
series up to 2,000,000 shares of preferred stock. Each series will have the
number of shares, designations, preferences, voting powers, relative rights or
privileges that the board determines. The rights of holders of common stock will
be subject to the rights of holders of any preferred stock we issue. Our
issuance of preferred stock may provide us with flexibility in connection with
possible acquisitions and other purposes. However, a third party may face more
difficulty acquiring a controlling interest in Viisage.
The certificate of incorporation provides for the division of the board of
directors into three classes with staggered three-year terms. See "Management"
on page 37. The affirmative vote of the holders of two-thirds of the shares of
our voting stock may remove directors only for cause. Only a majority of the
directors then in office may fill any vacancy on the board, including a vacancy
resulting from an enlargement of the board. Third parties attempting to acquire
control of Viisage may also face difficulty due to the classification of the
board, and due to the bylaws' limitations regarding removal of directors and
filling of vacancies.
The certificate of incorporation also provides that our stockholders may
only take any required or permitted action if it is ''properly brought'' before
an annual or special stockholders' meeting. Stockholder also may not take such
action by written consent in lieu of a meeting unless the board has expressly
approved the action and taking of action by consent in advance.
<PAGE>
Our charter further provides that only the board, the chairman of the board or
the chief executive officer may call special meetings of the stockholders. Under
our bylaws, in order for any matter to be considered ''properly brought'' before
a meeting, a stockholder must comply with rigorous requirements regarding
advance notice to us. These corporate governance provisions could delay
consideration of actions which stockholders may desire until the next
stockholders meeting, unless the board overrides the action-by-consent
prohibition. These provisions may also discourage tender offers for our common
stock, including tender offers at above market prices, because an offeror could
only take stockholder action (such as electing new directors or approving a
merger) at a duly called stockholders meeting, even if it acquired a majority of
the voting securities.
Finally, our charter and bylaws require the affirmative vote of the holders
of at least two-thirds of the voting stock to amend or repeal any of the
protective governance provisions described above.
Section 203 of the Delaware General Corporation Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. That section provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or affiliate, or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder, unless:
. the board of directors approves the transaction resulting in a person
becoming an interested stockholder, or the business combination, before
the person becomes an interested stockholder;
. the interested stockholder acquires 85% or more of the outstanding
voting stock of the corporation in the same transaction that makes it an
interested stockholder (excluding shares owned by persons who are both
officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or
. the board of directors and the holders of at least 66/2/3% of the
corporation's outstanding voting stock on or after the date the person
becomes an interested stockholder, approve the business combination at
an annual or special meeting, excluding shares owned by the interested
stockholder.
An "interested stockholder'' is defined as any person that is:
. the owner of 15% or more of the outstanding voting stock of the
corporation, or
. an affiliate or associate of the corporation and owns 15% or more of the
outstanding voting stock of the corporation at any time within the
three-year period immediately prior
<PAGE>
to the date on which it is to be determined whether such person is an
interested stockholder.
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
Selling Stockholders
The selling stockholders whose shares of common stock are being registered
hereby are The Shaar Fund Ltd. ("Shaar"), Lau Technologies ("Lau"), J.P. Turner
& Company, L.L.C ("JP Turner"), FSC Corp. ("FSC"), SSB Investments, Inc.
("SSB"), and William A. Marshall. No selling stockholder has any affiliation
with Viisage or its officers, directors, promoters or principal shareholders,
except for Lau, which currently owns 65% of Viisage and is our technology
partner. Mr. Marshall is our former Chief Financial Officer and Treasurer. See
also "Relationship and Certain Transactions with Lau Technologies" on page 35.
We have agreed to file a registration statement under the Securities Act of
1933 to cover the sale of shares of our common stock that may be issued to the
selling stockholders and to keep such registration statement effective for a
period of one year from the date of this prospectus. We have also agreed to pay
all expenses in connection therewith other than the brokerage commissions and
discounts in connection with the sale of the common stock and the expenses of
counsel.
The following table sets forth the name of the selling stockholders, the
number of shares of common stock owned beneficially by each of the selling
stockholders as of September 30, 1999, the number of shares which may be offered
for resale pursuant to this prospectus and the amount and percentage of shares
of common stock owned beneficially by each of the selling stockholders after the
offering.
The information included below is based upon information provided by the
selling stockholders. Because the selling stockholders may offer all, some or
none of their common stock, no definitive estimate as to the number of shares
thereof that will be held by the selling stockholder after such offering can be
provided. The following table has been prepared on the assumption that all
shares of common stock offered under this prospectus will be sold.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Name of Selling Shares of Common Shares of Common Number of Shares of Percentage of
Stockholder Stock Beneficially Stock Being Offered Common Stock Shares of Common
Owned Prior to Beneficially Owned Stock Beneficially
Offering (1) After Offering(2) Owned After
Offering(3)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JP Turner 75,000 75,000(4) 0 0%
- -------------------------------------------------------------------------------------------------------------
Shaar 1,185,390 1,185,390(5) 0 0%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lau 7,380,550 526,582(6) 6,853,968 80%
- -------------------------------------------------------------------------------------------------------------
FSC 20,000 20,000(7) 0 0%
- -------------------------------------------------------------------------------------------------------------
SSB 30,000 30,000(7) 0 0%
- -------------------------------------------------------------------------------------------------------------
William A. 113,983 10,000(8) 103,983(9) 1.2%
Marshall
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Each of the parties listed has sole voting and investment power with
respect to all shares of common stock indicated.
(2) Assumes the sale of all the shares offered hereby.
(3) Based upon 8,585,745 shares of common stock issued and outstanding as of
September 30, 1999.
(4) Consists of shares of our common stock which may be acquired by JP Turner
upon the exercise of stock options at an exercise price of $1.79 per share.
(5) Consists of shares of common stock being registered on behalf of Shaar
which may be issued upon (a) the conversion of the series A convertible
preferred stock currently held by Shaar assuming an exercise price of $1.54
(77% of current market price) and (b) the exercise of stock options at an
exercise price of $1.58 per share. Subject to certain volume limitations,
the preferred stock is required to be converted into our common stock on
June 30, 2002.
(6) Consists of shares of our common stock which my be acquired by Lau upon the
conversion of a promissory note and accrued interest in the amount of
$832,000 at a price of $1.58 per share.
(7) Consists of shares of our common stock underlying outstanding stock options
exerciseable at a price of $4.00 per share.
(8) Consists of shares of our common stock which may be acquired by Mr.
Marshall upon the exercise of stock options at an exercise price of $1.44
per share.
(9) Consists of 101,751 shares issuable pursuant to stock options which expire
after December 17, 1999.
Plan of Distribution
The distribution of the shares of common stock by a selling stockholder may
be affected from time to time in one or more transactions on the Nasdaq National
Market System (or any exchange on which the common stock may then be listed) in
negotiated transactions, through private placements, or a combination of such
methods of sale, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. A selling
stockholder may affect such transactions by selling shares to or through broker-
dealers, and such broker-dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from a selling stockholder
and/or purchasers of shares for whom they may act as agent (which compensation
may be in excess of customary commissions). A selling stockholder may also
pledge shares as collateral for margin accounts and such shares could be resold
pursuant to the terms of such accounts.
In order to comply with certain state securities laws, if applicable, the
common stock will
<PAGE>
not be sold in a particular state unless such securities have been registered or
qualified for sale in such state or any exemption from registration or
qualification is available and complied with.
Viisage will not receive any of the proceeds from the sale of shares of
common stock by the selling stockholders.
TRANSFER AGENT AND REGISTRAR
We have appointed Boston EquiServe Limited Partnership, an affiliate of
BankBoston, as transfer agent and registrar of the Common Stock.
LEGAL MATTERS
Finnegan, Hickey, Dinsmoor & Johnson, P.C., Boston, Massachusetts will
opine on our behalf as to certain legal matters in connection with the shares
being registered hereby. Charles J. Johnson, one of our directors, is a member
of the firm of Finnegan, Hickey, Dinsmoor & Johnson, P.C. See "Management" on
page 37.
EXPERTS
The financial statements for the three years ended December 31, 1998
included in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
We filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement under the Securities Act with respect to the
shares of our common stock (the "Registration Statement"). This prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and in the schedules and
exhibits thereto. For further information about us and the securities offered
hereby, reference is hereby made to the Registration Statement and to the
exhibits and schedules thereto, which may be inspected without charge at the
principal office of the Securities and Exchange Commission in Washington, D.C.
Copies of all or any part of the Registration Statement and exhibits and
schedules thereto may be obtained from the Securities and Exchange Commission
upon payment of the prescribed fees. Statements made in this prospectus as to
the contents of any contract or other document are not necessarily complete and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
We are subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended, and we file
reports, proxy and information
<PAGE>
statements, and other information with the Securities and Exchange Commission.
You may inspect and copy such reports, proxy and information statements and
other information which we file at the Public Reference Section of the
Securities and Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may
obtain copies of such material from the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. In addition, we are required to file electronic
versions of these documents with the Securities and Exchange Commission through
the Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR)
system. The Commission maintains a World Wide Web site at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission.
We intend to furnish our stockholders annual reports containing financial
statements audited by independent public accountants.
<PAGE>
VIISAGE TECHNOLOGY, INC.
INDEX
Page
----
Annual Financial Statements:
- ---------------------------
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
Interim Financial Statements:
- ----------------------------
Condensed Balance Sheets as of June 27, 1999 and
December 31, 1998....................................................... F-24
Condensed Statements of Operations for the three months
and six months ended June 27, 1999 and June 28, 1998.................... F-25
Condensed Statements of Cash Flows for the six months ended
June 27, 1999 and June 28, 1998......................................... F-26
Notes to Condensed Financial Statements.................................. F-27
<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.
/s/ 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 September 30, 1999, $9 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)% 34.0 %
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 and 1997 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
REMAINING EXERCISE EXERCISE
RANGE OF NUMBER CONTRACTUAL PRICE PER NUMBER PRICE PER
EXERCISE PRICES 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>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
VIISAGE TECHNOLOGY, INC.
Condensed Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 27, December 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 312 $ 166
Accounts receivable 4,430 4,285
Costs and estimated earnings in excess of billings 22,961 21,723
Other current assets 1,059 683
-------------- --------------
Total current assets 28,762 26,857
Property and equipment, net 16,352 18,513
Other assets 893 1,074
-------------- --------------
$ 46,007 $ 46,444
============== ==============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 9,769 $ 9,090
Accrued and deferred income taxes 20 27
Convertible subordinated debt 800 800
Current portion of long-term debt 2,724 2,054
Obligations under capital leases 3,709 3,797
-------------- --------------
Total current liabilities 17,022 15,768
Long-term debt 6,500 6,500
Convertible subordinated debt 1,000 -
Obligations under capital leases 9,841 11,558
-------------- --------------
34,363 33,826
-------------- --------------
Shareholders' equity 11,644 12,618
-------------- --------------
$ 46,007 $ 46,444
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
VIISAGE TECHNOLOGY, INC.
Condensed Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 4,714 $ 2,965 $ 9,145 $ 7,594
Project costs 3,870 2,622 7,578 6,618
-------------- -------------- -------------- --------------
Project margin 844 343 1,567 976
-------------- -------------- -------------- --------------
Operating expenses:
Sales and marketing 170 857 430 1,448
Research and development 69 102 167 119
General and administrative 485 537 995 1,035
-------------- -------------- -------------- --------------
Total operating expenses 724 1,496 1,592 2,602
-------------- -------------- -------------- --------------
Operating income (loss) 120 (1,153) (25) (1,626)
Interest expense, net 553 415 1,073 768
-------------- -------------- -------------- --------------
Loss before cummalative effect of
change in accounting principle (433) (1,568) (1,098) (2,394)
Cumulative effect of change in
accounting principle - - - (1,038)
-------------- -------------- -------------- --------------
Net loss $ (433) $ (1,568) $ (1,098) $ (3,432)
============== ============== ============== ==============
Basic net loss per share per share before
cumulative effect of change in accounting
principle $ (0.05) $ (0.19) $ (0.13) $ (0.30)
Basic net loss per share per share $ (0.05) $ (0.19) $ (0.13) $ (0.43)
============== ============== ============== ==============
Weighted average common shares 8,458 8,067 8,440 8,067
============== ============== ============== ==============
Diluted net loss per share before cumulative
effect of change in accounting principle $ (0.05) $ (0.19) $ (0.13) $ (0.30)
Diluted net loss per share $ (0.05) $ (0.19) $ (0.13) $ (0.43)
============== ============== ============== ==============
Weighted average common shares 8,458 8,067 8,440 8,067
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
VIISAGE TECHNOLOGY, INC.
Condensed Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------------------
June 27, June 28,
1999 1998
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (1,098) $ (3,432)
Adjustments to reconcile net income (loss) to net cash
(used) provided by operating activities:
Depreciation and amortization 2,202 1,700
Directors fees paid in common stock 72 -
Changes in operating assets and liabilities:
Accounts receivable (145) (1,695)
Costs and estimated earnings in excess of billings (1,238) 510
Other current assets (295) (106)
Accounts payable and accrued expenses 679 (1,827)
Accrued and deferred taxes (7) (16)
-------------- --------------
Net cash provided (used) for operating activities 170 (4,866)
-------------- --------------
Cash Flows from Investing Activities:
Purchase of contract equipment converted to capital leases - (2,070)
Additions to property and equipment - (32)
Decrease in other assets 94 10
-------------- --------------
Net cash provided (used) for investing activities 94 (2,092)
-------------- --------------
Cash Flows from Financing Activities:
Net revolving credit borrowings 670 4,936
Proceeds from sale/leaseback of equipment - 2,070
Principal payments on long-term borrowings - (275)
Principal payments on obligations under capital leases (1,805) (1,395)
Proceeds from issuance of convertible subordinated debt 1,000 -
Net proceeds from issuance of common stock 17 11
-------------- --------------
Net cash provided (used) by financing activities (118) 5,347
-------------- --------------
Increase (decrease) in cash and cash equilvalents 146 (1,611)
Cash and cash equivalents, beginning of period 166 1,611
-------------- --------------
Cash and cash equivalents, end of period $ 312 $ -
============== ==============
Supplemental cash flow information:
Cash paid during the period for interest $ 885 $ 594
============== ==============
Non cash activities:
Issuance of stock options $ 35 $ -
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
VIISAGE TECHNOLOGY, INC.
Notes To Condensed Financial Statements
(UNAUDITED)
Note 1. Basis of Presentation
The financial information included herein is unaudited, however, the
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods presented. These financial statements should be read in
conjunction with the financial statements and notes thereto and management's
discussion and analysis of financial condition and results of operations
included in the Company's 1998 Form 10-K.
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.
The results of operations for the period ended June 27, 1999 are not
necessarily indicative of the operating results to be expected for the full
year.
The condensed balance sheet as of December 31, 1998 has been derived from
the audited financial statements for that date. Certain amounts for 1998 have
been reclassified to conform to the presentation for 1999.
Note 2. Income Taxes
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.
Note 3. Related Party Transactions and Shareholders' Equity
During the first quarter, the Company issued Lau options to purchase
60,000 shares of the Company's common stock in exchange for Lau's guarantee of
an indemnification obligation of the Company. The options are exercisable
through February 2002 at $1.90 per share. The fair value of the options have
been credited to shareholders' equity and included in deferred financing cost, a
component of other assets. The value of these options will be amortized over the
indemnification period and charged to interest expense.
In May 1999, the Company received a commitment from Lau to lend to the
Company up to $2,000,000 in exchange for a 4% convertible subordinated note
through February 2000. Amounts drawn under the note with Lau's consent and
related accrued interest are convertible at Lau's option into shares of the
Company's common stock at any time prior to December 31, 2000 at $1.26 per
share. In May 1999, the Company borrowed $1,000,000 under this commitment.
In July 1999, the Company completed a $1.5 million private placement of
Series A Convertible Preferred Stock (the "preferred stock") and warrants with a
private equity fund. The preferred stock accrues dividends at 7% per annum,
payable in cash or stock at the Company's option upon conversion. Subject to
certain limits on the number of shares the holder can convert at any one time,
the holder can convert up to 50% of the preferred stock into shares of the
Company's common stock beginning six months after closing and the
F-27
<PAGE>
balance beginning nine months after closing. Shares can be converted at the
lesser of $3.00 per share or 85% of the market price prior to conversion of the
Company's common stock for conversions within ten months from the closing date
or 77% of the market price prior to conversion for conversions after ten months
from the closing date. Subject to certain volume limitations, the preferred
stock is required to be converted into our common stock on June 30, 2002. The
Company has the right at any time to redeem the preferred shares. The Company
has agreed to register for resale the common stock underlying the preferred
shares, related dividends and warrants.
This transaction was an exempt transaction under Section 4(2) of the
Securities Act of 1933, as amended.
In connection with this transaction, the Company paid an investment banking
fee of $112,500 and warrants to purchase 75,000 shares of the Company's common
stock, exercisable for three years, at an exercise price of $1.79 per share
which was 130% of the then current closing price of the Company's common stock.
The Company also issued warrants to purchase 75,000 shares of the Company's
common stock, exercisable for three years, at an exercise price of $1.58 per
share to the investor.
The Company has two non exclusive license agreements with Lau, whereby Lau
acts as a distributor of the Company's "Facial Recognition" Technology for
certain European Markets, U.S. Airports and other end users that are Government
Agencies. Lau will pay the Company royalties on profits, as defined, under these
agreements.
Note 4. Net Loss per Share
Basic and dilutive net loss per share are computed based on the weighted
average number of common shares outstanding during the period. The diluted per
share amounts do not reflect the impact of options outstanding for approximately
2,510,000 shares in 1999 and 1,509,000 shares in 1998 or the conversion of
convertible subordinated debt because their effect is antidilutive. Except for
convertible subordinated debt and options referred to above, the Company does
not have any other potential common stock at June 27, 1999.
Note 5. Business Segments
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. Management evaluates segment performance based on operating
income.
Substantially all of the Company's revenues are currently derived by its
systems integration and identification card division from public sector
customers and contractors to such customers. The Company believes for the
foreseeable future that it will continue to derive a significant portion of its
revenues from a limited number of large public sector contracts. For the six
months ended June 27, 1999, three customers each accounted for more than 10% of
the Company's revenues and an aggregate of approximately 50% of revenues for the
period.
F-28
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
Business Segment Information 1999 1998 1999 1998
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues:
Systems integration divison $ 4,714 $ 2,965 $ 9,145 $ 7,594
Biometrics division - - - -
----------- ----------- ---------- -----------
$ 4,714 $ 2,965 $ 9,145 $ 7,594
=========== =========== ========== ===========
Operating Income (Loss):
Systems integration divison $ 541 $ (1,153) $ 928 $ (1,626)
Biometrics division (421) - (953) -
=========== =========== ========== ===========
$ 120 $ (1,153) $ (25) $ (1,626)
=========== =========== ========== ===========
</TABLE>
F-29
<PAGE>
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses in connection with
the securities being registered. All amounts shown are estimates, except the
Securities and Exchange Commission registration fee.
Item Amount
SEC Registration Fee ................................... $ 1,027
Accounting Fees and Expenses ........................... $25,000
Legal Fees and Expenses ................................ $25,000
Miscellaneous .......................................... $ 1,000
Total ............................................... $52,027
Viisage will bear all expenses shown above, and the selling stockholders
will not bear any portion of these expenses.
Item 14. Indemnification of Directors and Officers.
Viisage's bylaws provide that the Company, subject to limited exceptions,
will indemnify its directors and officers, and may indemnify its other employees
and other agents to the fullest extent permitted by Delaware law.
In addition, the Company's certificate of incorporation provides that, to
the fullest extent permitted by Delaware law, the Company's directors will not
be liable for monetary damages for breach of the directors' fiduciary duty of
care to the Company and its shareholders. The certificate of incorporation does
not eliminate the directors' duty of care and, in appropriate circumstances,
equitable remedies such as an injunction or other forms of non-monetary relief
would remain available under Delaware law. Each director will continue to be
subject to liability for:
. breach of the director's duty of loyalty to the Company
. for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law
. for acts or omissions that the director believes to be contrary to the
best interests of the Company or its shareholders
. for any transaction from which the director derived an improper
personal benefit
. for acts or omissions involving a reckless disregard for the
director's duty to the Company or its shareholders when the director
was aware or should have been aware of
II-1
<PAGE>
a risk of serious injury to the Company or its shareholders
. for acts or omissions that constitute an unexcused pattern of
inattention that amounts to the abdication of the director's duty to
the Company or its shareholders
. for improper transactions between the director and the Company, and
. for improper distributions to shareholders and loans to directors and
officers.
This provision also does not affect a director's responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws.
Item 15. Recent Sales of Unregistered Securities.
The following information is furnished with regard to all securities sold
by Viisage within the past three years which were not registered under the
Securities Act of 1933.
(a) Since the Company's adoption of the 1996 Management Stock Option
Plan and the 1996 Director Stock Option Plan in 1996 until September
30, 1999, the Company has issued options to purchase 2,838,173
shares of its common stock, of which 630,286 options were vested at
exercise prices between $0.93 and $12.50 per share.
(b) From October 1, 1997 through June 30, 1999, the Company issued
54,797 shares of its common stock under the 1997 Employee Stock
Purchase Plan at purchase prices between $0.90 and $4.94 per share.
(c) On August 25, 1998, the Company granted to Lau Technologies ("Lau")
options to purchase 509,091 shares of the Company's common stock,
exercisable for three years, at an exercise price of $2.75 per
share.
(d) On August 25, 1998, the Company issued to Lau 300,000 shares of its
common stock at a purchase price of $2.00 per share.
(e) On November 3, 1998, the Company granted to Robert C. Hughes, its
retiring Chief Executive Officer, options to purchase 50,000 shares
of the Company's common stock at an exercise price of $0.9375 per
share.
(f) On December 7, 1998, the Company issued to SSB Investments, Inc., in
connection with a financing arrangement, options to purchase 30,000
shares of the Company's common stock at an exercise price of $4.00
per share.
(g) On December 7, 1998, the Company issued to FSC Corp., in connection
with a financing arrangement, options to purchase 20,000 shares of
the Company's common stock at an exercise price of $4.00 per share.
II-2
<PAGE>
(h) In February 1999, the Company granted to Lau, in connection with a
financing arrangement, options to purchase 60,000 shares of the
Company's common stock, exercisable for three years, at an exercise
price of $1.90 per share.
(i) On April 8, 1999 and October 1, 1999, the Company issued 150,066
shares of common stock to its directors in lieu of cash compensation
for 1999 Board service.
(j) On May 3, 1999, the Company issued to Lau, in consideration for
Lau's commitment to lend the Company up to $2,000,000, a convertible
subordinated promissory note. The outstanding principal and interest
under the note may be converted at Lau's option into shares of the
Company's common stock at any time prior to December 31, 2000 at an
exercise price of $1.26 per share. In May 1999, the Company borrowed
$1,000,000 under the note.
(k) On May 6, 1999, the Company issued to Lau, in consideration for
Lau's commitment to lend the Company up to $800,000, a convertible
subordinated promissory note. The $800,000 loan amount and accrued
interest are convertible at Lau's option into shares of the
Company's common stock at any time prior to October 14, 1999 at an
exercise price of $1.58 per share.
(l) On June 30, 1999, the Company completed a $1.5 million private
placement of 1,500 series A convertible preferred stock with The
Shaar Fund Ltd. ("Shaar"), a private equity fund. The preferred
stock accrues dividends at 7% per annum, payable in cash or stock at
the Company's option. One half of the shares are convertible after
December 31, 1999, and the remaining shares are convertible after
March 31, 2000. Shaar may convert the preferred stock, plus
dividends, into the Company's common stock at the lesser of (i)
$3.00 per share, (ii) 85% of the market price if conversion occurs
on or before April 30, 2000, and (iii) 77% of the market price if
the conversion occurs on or after May 1, 2000. Subject to certain
volume limitations, the preferred stock is generally required to be
converted into our common stock on June 30, 2002. The Company may
redeem the series A preferred stock at any time.
(m) On June 30, 1999, the Company issued warrants to purchase 75,000
shares of the Company's common stock to Shaar, exercisable for three
years, at an exercise price of $1.58 per share.
(n) On June 30, 1999, the Company issued to J.P. Turner & Company,
L.L.C. warrants to purchase 75,000 shares of the Company's common
stock, exercisable for three years, at an exercise price of $1.79
per share.
(o) On September 17, 1999, the Company issued to William A. Marshall,
its former Chief Financial Officer and Treasurer, in consideration
of certain consulting
II-3
<PAGE>
services, a stock option to purchase 10,000 shares of the Company's
common stock, exerciseable for 3 years, at an exercise price of $1.44
per share.
All of the above shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
as transactions by an issuer not involving a public offering.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
The Exhibits required to be filed as part of this Registration Statement are
listed in the attached index to Exhibits.
(b) Financial Statement Schedules
Financial statement schedules have been omitted because the information
required to be set forth therein is not applicable or is shown in the Financial
Statements or notes thereto.
Item 17. Undertakings.
(a) The Company hereby undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment of this registration statement (i) to include
any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement; provided however, that paragraphs
(a)(1)(i) and (a)(1)(ii) of this section do not apply if the registration
statement is on Form S-3, Form S-8 or Form F-3, and the information required to
be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Commission by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the registration statement;
(2) for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE>
(b) The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Company's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this registration statement to be signed on its behalf by the
undersigned, hereunto duly, authorized in Littleton in the Commonwealth of
Massachusetts on October 1, 1999.
VIISAGE TECHNOLOGY, INC.
By: /s/ Thomas J. Colatosti
-----------------------
Thomas J. Colatosti, President and
Chief Executive Officer
II-6
<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.
3.1* Restated Certificate of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
3.3***** Certificate of Designation of series A convertible preferred
stock.
4.1* Specimen certificates for shares of the Registrant's common
stock.
5 Opinion of Finnegan, Hickey, Dinsmoor & Johnson, P.C. as to the
legality of the shares being registered.
10.1* Amended and Restated License Agreement, dated as of August 20,
1996, between the Registrant and Lau.
10.2* Form of Administration and Services Agreement between the
Registrant and Lau.
10.3* Form of Use and Occupancy Agreement between the Registrant and
Lau.
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.
<PAGE>
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 and 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.
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.
23.2 Consent of Finnegan, Hickey, Dinsmoor & Johnson, P.C. (See
Exhibit 5 above).
24.1 Power of Attorney.
* 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 26, 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.
***** Filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 27, 1999 (File No. 000-21559).
****** Amendment filed as an exhibit to the Registrant's Report on Form
10-K for the year ended December 31, 1998.
<PAGE>
EXHIBIT 5.1
October 5, 1999
Viisage Technology, Inc.
30 Porter Road
Littleton, Massachusetts 01460
RE: Viisage Technology, Inc.
Registration Statement on Form S-1
File No.
--------------------------
Ladies and Gentlemen:
At your request, we are rendering this opinion in connection with the
proposed sale by certain stockholders (the "Selling Stockholders") of Viisage
Technology, Inc., a Delaware corporation (the "Company") of up to 1,846,972
shares of Common Stock of the Company (the "Shares").
We have examined instruments, documents and records which we deemed
relevant and necessary for the basis of our opinion hereinafter expressed. In
such examination, we have assumed the following: (a) the authenticity of
original documents and the genuineness of all signatures; (b) the conformity to
the originals of all documents submitted to us as copies; and (c) the truth,
accuracy and completeness of the information, representations and warranties
contained in the records, documents, instruments and certificates we have
reviewed.
Based on such examination, we are of the opinion that the Shares to be
issued and sold by the Selling Stockholders are validly authorized, legally
issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the above-
referenced Registration Statement and to the use of our name wherever it appears
in said Registration Statement, including the Prospectus constituting a part
thereof, as originally filed or as subsequently amended or supplemented. In
giving such consent, we do not consider that we are "experts" within the meaning
of such terms as used in the Securities Act of 1933, as amended, or the rules
and regulations of the Securities and Exchange Commission issued thereunder,
with respect to any part of the Registration Statement, including this opinion
as an exhibit or otherwise.
Very truly yours,
FINNEGAN, HICKEY, DINSMOOR & JOHNSON, P.C.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made part of this
Registration Statement.
/s/ Arthur Andersen LLP
Boston, Massachusetts
September 30, 1999
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
We, the undersigned officers and directors of Viisage Technology, Inc.,
hereby jointly and severally constitute and appoint Thomas J. Colatosti and
Charles J. Johnson, and each of them singly, our true and lawful attorneys with
full power to them, and each of them singly, to sign for us and in our names in
the capacities indicated below, the Registration Statement on Form S-1 filed
herewith and any and all amendments to said Registration Statement and generally
to do all such things in our names and on our behalf in our capacities as
officers and directors to enable Viisage Technology, Inc. to comply with the
Securities Act of 1933, as amended, and all requirements of the Securities and
Exchange Commission, hereby ratifying and confirming all signatures as they may
be signed by our said attorneys, or any of them, to said Registration Statement
and all amendments thereto.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
By: /s/ Denis K. Berube Chairman of the Board of Directors
-------------------
Denis K. Berube
By: /s/ Thomas J. Colatosti President and Chief Executive Officer
----------------------- (Principal Executive Officer and Principal
Thomas J. Colatosti and Accounting Officer)
By: /s/ Charles J. Johnson Secretary and Director
----------------------
Charles J. Johnson
By: /s/ Harriet Mouchly-Weiss Director
-------------------------
Harriet Mouchly-Weiss
By: /s/ Peter Nessen Director
----------------
Peter Nessen
By: /s/ Thomas J. Reilly Director
--------------------
Thomas J. Reilly
By: /s/ Charles E. Levine Director
---------------------
Charles E. Levine
</TABLE>
