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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended June 27, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from____________to____________.
Commission File Number 000-21559
VIISAGE TECHNOLOGY, INC.
_____________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 04-3320515
________________________________________ ___________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Porter Road, Littleton, MA 01460
________________________________________ ___________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (978)-952-2200
___________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [_] No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 6, 1999
_________________________________ ______________________________
Common stock, $.001 par value 8,480,838
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VIISAGE TECHNOLOGY, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Balance Sheets as of June 27, 1999 and December 31, 1998..........1
Condensed Statements of Operations for the three months and six months
ended June 27, 1999 and June 28, 1998.......................................2
Condensed Statements of Cash Flows for the six months
ended June 27, 1999 and June 28, 1998.......................................3
Notes to Condensed Financial Statements.....................................4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................6
PART II - OTHER INFORMATION
Item 2 - Changes in Securities......................................................12
Item 4 - Submission of Matters to a Vote of Security Holders........................12
Item 6 - Exhibits and Reports on Form 8-K...........................................12
SIGNATURES.............................................................................13
</TABLE>
i
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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 1,059 764
-------------- --------------
Total current assets 28,762 26,938
Property and equipment, net 16,352 18,513
Other assets 893 993
-------------- --------------
$ 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.
1
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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.
2
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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.
3
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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
4
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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. 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.
5
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<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>
VIISAGE TECHNOLOGY, INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto contained in the Company's 1998 Form
10-K.
The following discussion and analysis contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in the
section below entitled "Certain Factors That May Affect Future Results." The
cautionary statements made herein should be read as being applicable to all
related forward-looking statements in this Form 10-Q.
Overview
- --------
Viisage is a leader in the emerging field of biometrics technology and in
providing digital identification systems and solutions. The Company focuses on
identification solutions that improve personal convenience and security, deter
fraud and reduce identification program costs. Viisage combines its systems
integration and software design capabilities with its proprietary software and
hardware products and other industry standard products to create complete
customized solutions. These turnkey solutions integrate image and data capture,
create relational databases, incorporate multiple biometrics and improve
customers' ability to move and manage information. Applications can include
driver's licenses, voter registration, national ID's, law enforcement, social
services, access control and PC network and internet access security. To date,
Viisage's primary customers have been government agencies with particular
emphasis on U.S. drivers licensing agencies. Since its inception in 1993, the
Company has captured approximately 30% of the domestic driver's license market.
Viisage products annually produce more than 20 million identification documents
at more than 1,000 locations in 12 states. The Company has also provided
services under subcontracts for projects in Jamaica, the Philippines and for the
U.S. Immigration and Naturalization Service.
6
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During 1998 and 1999, the Company's revenue growth slowed significantly
due primarily to lengthening procurement delays in its principal markets and a
strong competitive market place. The Company believes that the acceptance of
digital identification technology in recent years, its commitment to providing
customized solutions for its customers needs, its expertise in facial imaging
and biometric solutions and its proprietary software and hardware products will
continue to contribute to its growth.
Effective June 1, 1998, the Company reorganized its operations to create a
separate biometrics division to respond to the growing market interest in
biometric solutions. The biometrics division is focused on product, market and
channel development activities in three principal areas: facility access
control; PC network and internet access security; and real-time large database
identification and verification of individuals. The systems integration and
identification card division (SI division) focuses on Viisage's public sector
markets and serves as a channel to existing customers and the public sector for
the Company's biometric technologies.
The Company is engaged in one business, the development and implementation
of digital identification systems and solutions. As discussed above, since June
1, 1998, the Company has operated in two segments. Amounts for the biometrics
division prior to the reorganization are not material or meaningful.
The SI division provides systems and services principally under contracts
that have five-year terms and provide for several annual renewals after the
initial contract term. Contracts generally provide for a fixed price for the
system and/or for each card produced. Contract prices vary depending on, among
other things, design and integration complexities, the nature and number of
workstations and sites, the projected number of cards to be produced, the size
of the database, the level of post-installation support and the competitive
environment. Substantially all of the Company's revenues are currently derived
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.
The Company's results of operations are significantly affected by, among
other things, the timing of award and performance on contracts. As a result,
the Company's revenues and income may fluctuate from quarter to quarter, and
comparisons over longer periods of time may be more meaningful. The Company's
results of operations are not seasonal since contracts are awarded and performed
throughout the year. However, the Company believes its SI division business is
subject to cyclical procurement delays that may be related to state-wide
election cycles. Biometrics division revenues have not been material to date
and operations are not expected to be seasonal.
Results of Operations
- ---------------------
Revenues. SI division revenues are derived principally from systems
implementation, card production and related services under multi-year contracts.
Revenues increased 57% to $4.7 million for the quarter ended June 27, 1999
compared to $3.0 million for the same period in 1998. For the six months ended
June 27,1999 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 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
7
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labor, maintenance and overhead. As a percentage of revenues, project costs
decreased to 82% and 83% for the quarter and six months ended June 27, 1999,
respectively, from 88% and 87% for the comparable periods in 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 the six month period ended June 28, 1998
include approximately $283,000 of start-up costs and $50,000 of restructuring
costs, respectively. Project costs for 1998 do not reflect the impact of margin
adjustments made at the end of 1998. Project margin increased 146% to $844,000
(18% of revenues) for the quarter ended June 27, 1999 from $343,000 (12% of
revenues) for the comparable period in 1998. For the six months ended June 27,
1999, 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 for the periods were not material.
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation and professional service fees for marketing, bid and proposal and
customer support activities. SI division sales and marketing expenses for the
quarter ended June 27, 1999 decreased 90% to $85,000 from $857,000 for the
comparable period in 1998. For the six months ended June 27, 1999, SI division
sales and marketing expenses, excluding non-recurring changes, decreased 86% to
$185,000 from $1,278,000 for the comparable period in 1998. Total sales and
marketing expenses for the six month period in 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 the Company's on-
going cost reduction efforts. As a percentage of revenues, SI division sales
and marketing expenses were 2% for the quarter ended June 27, 1999 compared to
29% for the same period in 1998 due to the factors discussed above. For the six
months ended June 27, 1999, SI division sales and marketing expenses, excluding
non-recurring charges, were 2% of sales in compared to 17% for the same period
in 1998. Biometrics division sales and marketing expenses for the quarter and
six months ended June 27, 1999 were $85,000 and $245,000 respectively.
Research and Development. Research and development expenses consist principally
of compensation, outside services and materials utilized for product and
software development activities that are not related to specific projects.
There were no SI division research and development expenses for 1999 or 1998 in
either period. Biometrics division research and development expenses were
$69,000 for the quarter ended June 27, 1999 compared to $102,000 for the same
period in 1998. For the six months ended June 27, 1999, 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 to the Company under
license arrangements from the research and development efforts of Lau
Technologies and the Massachusetts Institute of Technology for projects that are
not directly related to the Company.
General and Administrative. General and administrative expenses consist
principally of compensation for executive management, finance and administrative
personnel and outside professional fees and are shared by the Company's two
divisions. General and administrative expenses decreased 10% to $485,000 for
the quarter ended June 27, 1999 from $537,000 for the same period in 1998. For
the six month period ended June 27, 1999, 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 10% for the
quarter ended June 27, 1999, compared to 18% for the same period in 1998. For
the six month period ended June 27, 1999, general and administrative expenses
were 11% of revenues compared to 14% for the same period in 1998.
8
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Interest Expense. The increase in net interest expense to $553,000 for the
quarter ended June 27, 1999 from $415,000 for the comparable period in 1998
reflects increased borrowings and rates during 1999. For the six month period
ended June 27, 1999 net interest expense was $1,073,000 compared to $768,000 for
the same period in 1998.
Income Taxes. The Company did not record any tax benefit for the 1999 and 1998
losses due to the uncertainty of when such benefit will be realized.
Liquidity and Capital Resources
- -------------------------------
At June 27, 1999, working capital was $11.7 million compared to $11.2
million at December 31, 1998.
For the six months ended June 27, 1999, operations and investing
activities provided cash of approximately $170,000 and $94,000, respectively,
which was used to repay capital lease obligations.
The Company has 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%. The revolving credit facility is secured by
substantially all of the Company's assets and requires the Company to maintain
certain financial ratios and minimum levels of earnings and tangible capital
funds, as defined. The revolving credit facility also requires the Company to
raise funds, as needed, from other sources to cover biometrics division
expenses. These sources are expected to include a combination of biometrics
division revenues, subordinated debt and equity capital.
The Company also has a system project lease financing arrangement with a
commercial leasing organization. Pursuant to this arrangement, the lessor
purchases certain of the Company's digital identification systems and leases
them back to Viisage for deployment with identified and contracted customers
approved by the lessor. The lessor retains title to systems and has an
assignment of Viisage's rights under the related customer contracts, including
rights to use the software and technology underlying the related systems. Under
this arrangement, the lessor bears the credit risk associated with payments by
Viisage's customers, but Viisage bears performance and appropriation risk and is
generally required to repurchase a system in the event of a termination by a
customer for any reason except credit default. The Company is also required to
maintain certain financial ratios and minimum levels of tangible capital funds,
as defined. 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, the Company had approximately $13.6 million
outstanding under the lease financing arrangement. The Company has a similar
project lease financing arrangement with Lau that provides for up to
$3.1 million of capital lease financing in 1999.
The Company believes that it will 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.
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. The
Company plans to raise additional funding, as needed, from other sources.
9
<PAGE>
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 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. 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 historically not made substantial capital expenditures for
facilities, office and computer equipment and has satisfied its needs in these
areas principally through leasing.
The Company believes that if it meets its business forecast for 1999, cash
flows from available borrowings, project leasing, operations and capital raising
will be sufficient to meet the Company's working capital and capital expenditure
needs for the foreseeable future. There can be no assurance, however, that
additional capital will be available on favorable terms or at all. If the
Company is unable to obtain additional capital, as needed, on acceptable terms
the Company may be unable to take full advantage of future opportunities or
respond to competitive pressures, which could adversely affect the Company's
business, financial condition and results of operations. Failure to obtain
additional capital could also result in violation of debt and project lease
financing covenants.
Market Risk
- -----------
Except for the Company's revolving credit facility, which has a variable
interest rate, the Company has no material exposure to market risk that could
affect its future results of operations and financial condition.
Impact of Year 2000 Issue
- -------------------------
The Company continues to assess the potential impact of the year 2000 on
the Company's internal business systems, products, and operations. The
Company's year 2000 initiatives include (i) testing and upgrading internal
business systems and facilities; (ii) testing and developing necessary upgrades
for the Company's current products and certain discontinued products; (iii)
contacting key suppliers, vendors, and customers to determine their year 2000
compliance status; and (iv) developing contingency plans.
10
<PAGE>
The Company's accounting and information systems provider, Lau, has
advised the Company that its internal business systems are year 2000 compliant.
The Company expects that its facilities will be year 2000 compliant by the end
of 1999 and problems encountered, if any, will be remedied by the owners of such
facilities.
The Company believes that all of the material products that it currently
sells are year 2000 compliant or can be made compliant with minor modifications.
However, as many of the Company's products are complex, interact with third-
party products, and operate on computer systems that are not under the Company's
control, there can be no assurance that the Company has identified all of the
year 2000 issues with its current products. The Company is continuing to test
and evaluate such products and may offer upgrades to alternative products where
reasonably practicable.
The Company is in the process of identifying and contacting suppliers,
vendors, and customers that are believed to be significant to the Company's
business operations in order to assess their year 2000 readiness. As part of
this effort, the Company is developing questionnaires relating to year 2000
compliance for distribution to its significant suppliers, vendors, and
customers. The Company intends to follow-up and monitor the year 2000 compliant
progress of significant suppliers, vendors, and customers that indicate that
they are not year 2000 compliant or that do not respond to the Company's
questionnaires. The Company intends to develop a contingency plan that will
allow its primary business operations to continue despite disruptions due to
year 2000 issues. These plans may include identifying and securing other
suppliers, increasing inventories, and modifying production facilities and
schedules. As the Company continues to evaluate the year 2000 readiness of its
products and significant suppliers, vendors, and customers, it will modify and
adjust its contingency plan as may be required.
To date, costs incurred in connection with the year 2000 issue have not
been material. The Company does not expect total year 2000 remediation costs to
be material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. If any of the
Company's material suppliers, vendors, or customers experience business
disruptions due to year 2000 issues, the Company might also be materially
adversely affected. While the Company is attempting to minimize any negative
consequences arising from the year 2000 issue, there can be no assurance that
year 2000 issues will not have a material adverse impact on the Company's
business, operations, or financial condition.
Certain Factors That May Affect Future Results
- ----------------------------------------------
The Company operates in an environment that involves a number of risks,
some of which are beyond the Company's control. Forward-looking statements in
this document and those made from time to time by the Company through its senior
management are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements concerning
future plans or results are necessarily only estimates and actual results could
differ materially from expectations. Certain factors that could cause or
contribute to such differences include, among other things, potential
fluctuations in quarterly results, the size and timing of award and performance
on contracts, dependence on large contracts and a limited number of customers,
lengthy sales and implementation cycles, changes in management estimates
incident to accounting for contracts, availability and cost of key components,
market acceptance of new or enhanced products and services, proprietary
technology and changing technology, competitive conditions, system performance,
management of growth, dependence on key personnel, risks of year 2000 issues,
and general economic and political conditions and other factors affecting
spending by customers.
11
<PAGE>
VIISAGE TECHNOLOGY, INC.
PART II - OTHER INFORMATION
Item 2 - Changes in Securities
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 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. 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.
Item 4 - Submission of Matters to a Vote of Security Holders
Board of Directors members, Peter Nessen and Thomas J. Reilly were elected
to three-year terms and the Company's selection of independent public
accountants was ratified at a Special Meeting in Lieu of the 1999 Annual Meeting
of Shareholders held on May 28, 1999. The terms of Board of Directors members,
Denis K. Berube, Charles J. Johnson, Charles E. Levine and Harriet Mouchly-Weiss
continued after the meeting. A total of 6,155,806 shares out of the total
outstanding shares of 8,420,968 voted at the meeting. The vote for the directors
was 6,142,398 for and 13,408 withheld and the vote to ratify the Company's
selection of independent public accountants was 6,145,956 for, 7,750 against and
2,100 abstained.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
3(i) Certificate of Designation of Series A Convertible Preferred
Stock
(b) Reports on Form 8-K
None
12
<PAGE>
VIISAGE TECHNOLOGY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIISAGE TECHNOLOGY, INC.
Date: August 11, 1999 By: /s/ Thomas J. Colatosti
----------------------------
Thomas J. Colatosti
President and Chief Executive Officer
By: /s/ William A. Marshall
----------------------------
William A. Marshall
Chief Financial Officer
13
<PAGE>
CERTIFICATE OF DESIGNATION
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
VIISAGE TECHNOLOGY, INC.
---------------------------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
---------------------------------------------
Viisage Technology, Inc., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation," or the
-----------
"Company"), hereby certifies that the following resolutions were adopted by the
-------
Board of Directors of the Corporation on June 30, 1999 pursuant to authority of
the Board of Directors as required by Section 151 of the General Corporation Law
of the State of Delaware:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "Board of Directors" or the "Board")
------------------ -----
in accordance with the provisions of its Certificate of Incorporation, the Board
of Directors hereby authorizes a series of the Corporation's previously
authorized Preferred Stock, par value $0.001 per share (the "Preferred Stock"),
---------------
and hereby states the designation and number of shares, and fixes the relative
rights, preferences, privileges, powers and restrictions thereof as follows:
Series A 7% Convertible Preferred Stock:
ARTICLE 1
DEFINITIONS
SECTION 1.1 Definitions. The terms defined in this Article whenever used
-----------
in this Certificate of Designation have the following respective meanings:
(1) "ADDITIONAL CAPITAL SHARES" has the meaning set forth in Section
6.1(e).
(2) "AFFILIATE" has the meaning ascribed to such term in Rule 12b-2
under the Securities Exchange Act of 1934, as amended.
(3) "BUSINESS DAY" means a day other than Saturday, Sunday or any day
on which banks located in the State of New York are authorized or obligated to
close.
(4) "CAPITAL SHARES" means the Common Shares and any other shares of
any other class or series of common stock, whether now or hereafter authorized
and however
-1-
<PAGE>
designated, which have the right to participate in the distribution of earnings
and assets (upon dissolution, liquidation or winding-up) of the Corporation.
(5) "CLOSING DATE" means June 30, 1999.
(6) "COMMON SHARES" or "COMMON STOCK" means shares of common stock,
$.001 par value, of the Corporation.
(7) "COMMON STOCK ISSUED AT CONVERSION" when used with reference to
the securities issuable upon conversion of the Series A Preferred Stock, means
all Common Shares now or hereafter Outstanding and securities of any other class
or series into which the Series A Preferred Stock hereafter shall have been
changed or substituted, whether now or hereafter created and however designated.
(8) "CONVERSION DATE" means any day on which all or any portion of
shares of the Series A Preferred Stock is converted in accordance with the
provisions hereof.
(9) "CONVERSION NOTICE" has the meaning set forth in Section 6.2.
(10) "CONVERSION PRICE" means on any date of determination the
applicable price for the conversion of shares of Series A Preferred Stock into
Common Shares on such day as set forth in Section 6.1.
(11) "CONVERSION RATIO" means on any date of determination the
applicable percentage of the Market Price for conversion of shares of Series A
Preferred Stock into Common Shares on such day as set forth in Section 6.1.
(12) "CORPORATION" means Viisage Technology, Inc., a Delaware
corporation, and any successor or resulting corporation by way of merger,
consolidation, sale or exchange of all or substantially all of the Corporation's
assets, or otherwise.
(13) "CURRENT MARKET PRICE" means on any date of determination the
closing bid price of a Common Share on such day as reported on the Nasdaq
("NASDAQ").
------
(14) "DIVIDEND PAYMENT DUE DATE" has the meaning set forth in Section
4(a)(ii).
(15) "HOLDER" means The Shaar Fund Ltd., any successor thereto, or any
Person to whom the Series A Preferred Stock is subsequently transferred in
accordance with the provisions hereof.
(16) "LIQUIDATION PREFERENCE" has the meaning set forth in Section
5(c).
(17) "MARKET DISRUPTION EVENT" means any event that results in a
material suspension or limitation of trading of Common Shares on NASDAQ.
-2-
<PAGE>
(18) "MARKET PRICE" per Common Share means the average of any three
(3) consecutive closing bid prices of the Common Shares as reported on NASDAQ
for the Valuation Period.
(19) "OUTSTANDING" when used with reference to Common Shares or
Capital Shares (collectively, "Shares"), means, on any date of determination,
all issued and outstanding Shares, and includes all such Shares issuable in
respect of outstanding scrip or any certificates representing fractional
interests in such Shares; provided, however, that any such Shares directly or
-------- -------
indirectly owned or held by or for the account of the Corporation or any
Subsidiary of the Corporation shall not be deemed "Outstanding" for purposes
hereof.
(20) "PERSON" means an individual, a corporation, partnership, an
association, a limited liability company, unincorporated business organization,
a trust or other entity or organization, and any government or political
subdivision or any agency or instrumentality thereof.
(21) "REGISTRATION RIGHTS AGREEMENT" means that certain Registration
Rights Agreement dated a date even herewith between the Corporation and The
Shaar Fund Ltd.
(22) "SEC" means the United States Securities and Exchange Commission.
(23) "SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations of the SEC thereunder, all as in effect at the
time.
(24) "SECURITIES PURCHASE AGREEMENT" means that certain Securities
Purchase Agreement dated a date even herewith between the Corporation and The
Shaar Fund Ltd.
(25) "SERIES A PREFERRED STOCK" means the Series A 7% Convertible
Preferred Stock of the Corporation or such other convertible Preferred Stock
exchanged therefor as provided in Section 2.1.
(26) "STATED VALUE" has the meaning set forth in Article 2.
(27) "SUBSIDIARY" means any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are owned
directly or indirectly by the Corporation.
(28) "TRADING DAY" means any day on which purchases and sales of
securities authorized for quotation on NASDAQ are reported thereon and on which
no Market Disruption Event has occurred.
(29) "VALUATION EVENT" has the meaning set forth in Section 6.1.
(30) "VALUATION PERIOD" means the ten Trading Day period immediately
preceding the Conversion Date.
-3-
<PAGE>
All references to "cash" or "$" herein means currency of the United
States of America.
ARTICLE 2
DESIGNATION AND AMOUNT
SECTION 2.1
The designation of this series, which consists of 3,000 shares of
Preferred Stock, is Series A 7% Convertible Preferred Stock (the "Series A
--------
Preferred Stock") and the stated value shall be One Thousand Dollars ($1,000)
- ---------------
per share (the "Stated Value").
------------
ARTICLE 3
RANK
SECTION 3.1
The Series A Preferred Stock shall rank (i) prior to the Common Stock;
(ii) prior to any class or series of capital stock of the Corporation hereafter
created other than "Pari Passu Securities" (collectively, with the Common Stock,
---------------------
"Junior Securities"); and (iv) pari passu with any class or series of capital
-----------------
stock of the Corporation hereafter created specifically ranking on parity with
the Series A Preferred Stock ("Pari Passu Securities").
---------------------
ARTICLE 4
DIVIDENDS
SECTION 4.1
(1) (1) The Holder shall be entitled to receive, and the Board of
Directors shall be required to declare, out of funds legally available for the
payment of dividends, dividends at the rate of 7% per annum (computed on the
basis of a 360-day year) (the "Dividend Rate") on the Stated Value of each share
-------------
of Series A Preferred Stock on and as of the Dividend Payment Due Date.
Dividends on the Series A Preferred Stock shall be cumulative from the date of
issue, whether or not declared for any reason, including if such declaration is
prohibited under any outstanding indebtedness or borrowings of the Corporation
or any of its Subsidiaries, or any other contractual provision binding on the
Corporation or any of its Subsidiaries, and whether or not there shall be funds
legally available for the payment thereof.
(2) Each dividend shall be payable at the Corporation's option,
in common stock or cash on a pro rata basis, upon conversion of the Preferred
Shares the "Dividend Payment Due Date"). Accrued and unpaid dividends for any
-------------------------
past Dividend Period may be declared and paid at any time, without reference to
any Dividend Payment Due Date, to holders of record on such date, not more than
15 days preceding the payment date thereof, as may be fixed by the Board of
Directors.
(3) At the option of the Corporation, the dividend shall be paid
in cash or through the issuance of duly and validly authorized and issued, fully
paid and nonassessable,
-4-
<PAGE>
freely tradeable shares of the Common Stock valued at the Market Price. The
Common Stock to be issued in lieu of cash payments shall be registered for
resale in the Registration Statement (as defined in the Registration Rights
Agreement) to be filed by the Corporation to register the Common Stock issuable
upon conversion of the shares of Series A Preferred Stock and exercise of the
Warrants as set forth in the Registration Rights Agreement. Notwithstanding the
foregoing, until such Registration Statement (as defined in the Registration
Rights Agreement) has been declared effective under the Securities Act by the
SEC, payment of dividends on the Series A Preferred Stock shall be in cash.
(2) The Holder shall not be entitled to any dividends in excess of the
cumulative dividends, as herein provided, on the Series A Preferred Stock.
Except as provided in this Article 4, no interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments on the
Series A Preferred Stock that may be in arrears.
(3) So long as any shares of the Series A Preferred Stock are
outstanding, no dividends, except as described in the next succeeding sentence,
shall be declared or paid or set apart for payment on Pari Passu Securities for
any period unless full cumulative dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for such payment on the Series A Preferred Stock for all Dividend Periods
terminating on or prior to the date of payment of the dividend on such class or
series of Pari Passu Securities. When dividends are not paid in full or a sum
sufficient for such payment is not set apart, as aforesaid, all dividends
declared upon shares of the Series A Preferred Stock and all dividends declared
upon any other class or series of Pari Passu Securities shall be declared
ratably in proportion to the respective amounts of dividends accumulated and
unpaid on the Series A Preferred Stock and accumulated and unpaid on such Pari
Passu Securities.
(4) So long as any shares of the Series A Preferred Stock are
outstanding, no dividends shall be declared or paid or set apart for payment or
other distribution declared or made upon Junior Securities, nor shall any Junior
Securities be redeemed, purchased or otherwise acquired (other than a
redemption, purchase or other acquisition of shares of Common Stock made for
purposes of an employee incentive or benefit plan (including a stock option
plan) of the Corporation or any subsidiary, (all such dividends, distributions,
redemptions or purchases being hereinafter referred to as a "Junior Securities
-----------------
Distribution") for any consideration (or any moneys be paid to or made available
- ------------
for a sinking fund for the redemption of any shares of any such stock) by the
Corporation, directly or indirectly, unless in each case the full cumulative
dividends required to be paid on all outstanding shares of the Series A
Preferred Stock and any other Pari Passu Securities shall have been paid or set
apart for payment with respect to the Series A Preferred Stock such Pari Passu
Securities.
-5-
<PAGE>
ARTICLE 5
LIQUIDATION PREFERENCE
SECTION 5.1
(1) If the Corporation shall commence a voluntary case under the
Federal bankruptcy laws or any other applicable Federal or State bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make an assignment
for the benefit of its creditors, or admit in writing its inability to pay its
debts generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the Federal bankruptcy laws or any
other applicable Federal or state bankruptcy, insolvency or similar law
resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of thirty (30) consecutive days and, on account of any such event, the
Corporation shall liquidate, dissolve or wind up, or if the Corporation shall
otherwise liquidate, dissolve or wind up (each such event being considered a
"Liquidation Event"), no distribution shall be made to the holders of any shares
-----------------
of capital stock of the Corporation upon liquidation, dissolution or winding up
unless prior thereto, the holders of shares of Series A Preferred Stock, subject
to Article 5, shall have received the Liquidation Preference with respect to
each share. If upon the occurrence of a Liquidation Event, the assets and funds
available for distribution among the holders of the Series A Preferred Stock and
holders of Pari Passu Securities shall be insufficient to permit the payment to
such holders of the preferential amounts payable thereon, then the entire assets
and funds of the Corporation legally available for distribution to the Series A
Preferred Stock and the Pari Passu Securities shall be distributed ratably among
such shares in proportion to the ratio that the Liquidation Preference payable
on each such share bears to the aggregate Liquidation Preference payable on all
such shares.
(2) At the option of each Holder, the sale, conveyance of disposition
of all or substantially all of the assets of the Corporation, the effectuation
by the Corporation of a transaction or series of related transactions (or
excluding circumstances pursuant to the Securities Purchase Agreement or
transfers to a subsidiary controlled by the Corporation) in which more than 50%
of the voting power of the Corporation is disposed of, or the consolidation,
merger or other business combination of the Corporation with or into any other
Person or Persons when the Corporation is not the survivor shall either: (i) be
deemed to be a liquidation, dissolution or winding up of the Corporation
pursuant to which the Corporation shall be required to distribute, upon
consummation of and as a condition to, such transaction an amount equal to one
hundred percent (100%) of the Liquidation Preference with respect to each
outstanding share of Series A Preferred Stock in accordance with and subject to
the terms of this Article 5 or (ii) be treated pursuant to Article 5(c)(iii)
hereof; provided, that all holders of Series A Preferred Stock shall be deemed
--------
to elect the option set forth in clause (i) hereof if at least a majority in
interest of such holders elect such option.
-6-
<PAGE>
(3) For purposes hereof, the "Liquidation Preference" with respect to
----------------------
a share of the Series A Preferred Stock shall mean an amount equal to the sum of
(i) the Stated Value thereof, plus (ii) the aggregate of all accrued and unpaid
dividends on such share of Series A Preferred Stock until the Dividend Payment
Due Date; provided that, in the event of an actual liquidation, dissolution or
--------
winding up of the Corporation, the amount referred to in clause (iii) above
shall be calculated by including accrued and unpaid dividends to the actual date
of such liquidation, dissolution or winding up, rather than the Dividend Payment
Due Date referred to above.
ARTICLE 6
CONVERSION OF PREFERRED STOCK
SECTION 6.1 Conversion; Conversion Price. At the option of the Holder, the
----------------------------
shares of Preferred Stock may be converted, either in whole or in part, into
Common Shares (calculated as to each such conversion to the nearest 1/100th of a
share), at any time, and from time to time following the date of issuance of the
Series A Preferred Stock (the "Issue Date") at a Conversion Price per share of
----------
Common Stock equal to the lesser of: (i) $3.00 per share, (ii) (A) 85% of the
Market Price for conversions consummated on or before April 30, 2000, and (B)
77% of Market Price for conversions consummated on or after May 1, 2000;
provided that if the Corporation's Common Stock is delisted on NASDAQ, for any
- --------
reason, then any remaining unconverted Series A Preferred Stock may be
converted, at the sole option of the Holder, at a Conversion Price per share of
Common Stock equal to 60% of the Market Price; provided, however, that:
-------- -------
(1) notwithstanding anything herein to the contrary, the Holder shall
not have the right, and the Company shall not have the obligation, to convert
all or any portion of the Series A Preferred Stock (and the Company shall not
have the right to pay dividends on the Series A Preferred Stock in shares of
common stock) if and to the extent that the issuance to the Holder of shares of
common stock upon such conversion (or payment of dividends) would result in the
Holder being deemed the "beneficial owner" of 5% or more of the then outstanding
shares of Common Stock within the meaning of Section 13(d) of the Securities
Exchange Act of 1934, as amended, and the rules promulgated thereunder; and
(2) unless the Corporation shall have obtained the approval of its
voting stockholders to such issuance in accordance with the rules of the NASDAQ
or such other stock market with which the Corporation shall be required to
comply, the Corporation shall not issue shares of Common Stock (i) upon
conversion of any shares of Series A Preferred Stock or (ii) as a dividend on
the Series A Preferred Stock, if such issuance of Common Stock, when added to
the number of shares of Common Stock previously issued by the Corporation (i)
upon conversion of shares of the Series A Preferred Stock, (ii) upon exercise of
the Warrants issued pursuant to the terms of the Securities Purchase Agreement
and (iii) in payment of dividends on the Series A Preferred Stock, would be in
excess of 19.99% of the number of shares of the Corporation's Common Stock which
were issued and outstanding on the Closing Date (the "Maximum Issuance Amount").
-----------------------
In the event that a properly executed Conversion Notice is received by the
Corporation which would require the Corporation to issue shares of Common Stock
equal to or in excess of the Maximum Issuance Amount, the Corporation shall
honor such conversion request by (i) converting the number of shares of Series A
Preferred Stock stated in the Conversion Notice not in excess of the Maximum
Issuance Amount and (ii) at the Company's
-7-
<PAGE>
option (A) redeeming the number of shares of Series A Preferred Stock stated in
the Conversion Notice equal to or in excess of the Maximum Issuance Amount in
cash at a price equal to one hundred and twenty-five percent (125%) of the
Stated Value of the shares of Series A Preferred Stock to be so redeemed,
together with the fair market value of all accrued and unpaid dividends thereon,
or (B) obtaining such stockholder approval within 45 days of the relevant
Conversion Notice. If such stockholder approval is not so obtained within such
45 day period, the Company shall redeem the number of shares named in the
relevant Conversion Notice in excess of the Maximum Issuance Amount as described
in clause (ii)(A) above. In the event that the Corporation shall elect to pay a
dividend in shares of Common Stock which would require the Corporation to issue
shares of Common Stock equal to or in excess of the Maximum Issuance Amount, the
Corporation shall pay (i) a dividend in shares of Common Stock equal to one less
than an amount which would result in the Corporation issuing shares equal to the
Maximum Issuance Amount and (ii) the balance of the dividend in cash.
The Holder of the Series A Preferred Stock may exercise its right of
conversion of such shares as follows: (i) 50% of the aggregate number of Series
A Preferred Shares issued to the Holder from and after the 180th day after the
Closing Date; and (ii) from and after the 270th day after the Closing date, 100%
of the aggregate number of Series A Preferred Shares issued to the Holder.
The number of shares of Common Stock due upon conversion of Series A
Preferred Stock shall be (i) the number of shares of Series A Preferred Stock to
be converted, multiplied by (ii) the Stated Value and divided by (iii) the
applicable Conversion Price.
Within two (2) Business Days of the occurrence of a Valuation Event,
the Corporation shall send notice (the "Valuation Event Notice") of such
----------------------
occurrence to the Holder. Notwithstanding anything to the contrary contained
herein, if a Valuation Event occurs during any Valuation Period, a new Valuation
Period shall begin on the Trading Day immediately following the occurrence of
such Valuation Event and end on the Conversion Date; provided that, if a
--------
Valuation Event occurs on the fifth day of any Valuation Period, then the
Conversion Price shall be the Current Market Price of the Common Shares on such
day; and provided, further, that the Holder may, in its discretion, postpone
-------- -------
such Conversion Date to a Trading Day which is no more than five (5) Trading
Days after the occurrence of the latest Valuation Event by delivering a
notification to the Corporation within two (2) Business Days of the receipt of
the Valuation Event Notice. In the event that the Holder deems the Valuation
Period to be other than the five (5) Trading Days immediately prior to the
Conversion Date, the Holder shall give written notice of such fact to the
Corporation in the related Conversion Notice at the time of conversion.
For purposes of this Section 6.1, a "Valuation Event" shall mean an event in
---------------
which the Corporation at any time during a Valuation Period takes any of the
following actions:
(3) subdivides or combines its Capital Shares;
(4) makes any distribution of its Capital Shares;
(5) issues any additional Capital Shares (the "Additional Capital
------------------
Shares"), otherwise than as provided in the foregoing Sections 6.1(a) and 6.1(b)
- ------
above, at a price per share
-8-
<PAGE>
less, or for other consideration lower, than the Current Market Price in effect
immediately prior to such issuances, or without consideration, except for
issuances under employee benefit plans consistent with those presently in effect
and issuances under presently outstanding warrants, options or convertible
securities;
(6) Issues any warrants, options or other rights to subscribe for or
purchase any Additional Capital Shares and the price per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to
such warrants, options or other rights shall be less than the Current Market
Price in effect immediately prior to such issuance;
(7) issues any securities convertible into or exchangeable or
exercisable for Capital Shares and the consideration per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to the
terms of such convertible, exchangeable or exercisable securities shall be less
than the Current Market Price in effect immediately prior to such issuance;
(8) makes a distribution of its assets or evidences of indebtedness to
the holders of its Capital Shares as a dividend in liquidation or by way of
return of capital or other than as a dividend payable out of earnings or surplus
legally available for the payment of dividends under applicable law or any
distribution to such holders made in respect of the sale of all or substantially
all of the Corporation's assets (other than under the circumstances provided for
in the foregoing Sections 6.1(a) through 6.1(e)); or
(9) takes any action affecting the number of Outstanding Capital
Shares, other than an action described in any of the foregoing Sections 6.1(a)
through 6.1(f) hereof, inclusive, which in the opinion of the Corporation's
Board of Directors, determined in good faith, would have a material adverse
effect upon the rights of the Holder at the time of a conversion of the
Preferred Stock.
SECTION 6.2 Exercise of Conversion Privilege. (1) Conversion of the
--------------------------------
Series A Preferred Stock may be exercised, in whole or in part, by the Holder by
telecopying an executed and completed notice of conversion in the form annexed
hereto as Annex I (the "Conversion Notice") to the Corporation. Each date on
-----------------
which a Conversion Notice is telecopied to and received by the Corporation in
accordance with the provisions of this Section 6.2 shall constitute a Conversion
Date. The Corporation shall convert the Series A Preferred Stock and issue the
Common Stock Issued at Conversion effective as of the Conversion Date. The
Conversion Notice also shall state the name or names (with addresses) of the
persons who are to become the holders of the Common Stock issued at Conversion
in connection with such conversion. The Holder shall deliver the shares of
Series A Preferred Stock to the Corporation by express courier within 30 days
following the date on which the telecopied Conversion Notice has been
transmitted to the Corporation. Upon surrender for conversion, the Series A
Preferred Stock shall be accompanied by a proper assignment thereof to the
Corporation or be endorsed in blank. As promptly as practicable after the
receipt of the Conversion Notice as aforesaid, but in any event not more than
five Business Days after the Corporation's receipt of such Conversion Notice,
the Corporation shall (i) issue the Common Stock issued at Conversion in
accordance with the provisions of this Article 6, and (ii) cause to be mailed
for delivery by overnight courier to the Holder (X) a certificate or
certificate(s) representing the number of Common Shares to which the Holder is
entitled by virtue of such conversion, (Y) cash, as provided in Section 6.3, in
respect of
-9-
<PAGE>
any fraction of a Share issuable upon such conversion and (Z) cash or shares in
the amount of accrued and unpaid related dividends as of the Conversion Date.
Such conversion shall be deemed to have been effected at the time at which the
Conversion Notice indicates so long as the Series A Preferred Stock shall have
been surrendered as aforesaid at such time, and at such time the rights of the
Holder of the Series A Preferred Stock, as such, shall cease and the Person and
Persons in whose name or names the Common Stock Issued at Conversion shall be
issuable shall be deemed to have become the holder or holders of record of the
Common Shares represented thereby. The Conversion Notice shall constitute a
contract between the Holder and the Corporation, whereby the Holder shall be
deemed to subscribe for the number of Common Shares which it will be entitled to
receive upon such conversion and, in payment and satisfaction of such
subscription (and for any cash adjustment to which it is entitled pursuant to
Section 6.4), to surrender the Series A Preferred Stock and to release the
Corporation from all liability thereon. No cash payment aggregating less than
$1.00 shall be required to be given unless specifically requested by the Holder.
(2) Subject to Sections 6.1(a) and (b) if, at any time (i) the
Corporation challenges, disputes or denies the right of the Holder hereof to
effect the conversion of the Preferred Stock into Common Shares or otherwise
dishonors or rejects any Conversion Notice delivered in accordance with this
Section 6.2 or (ii) any third party who is not and has never been an Affiliate
of the Holder commences any lawsuit or proceeding or otherwise asserts any claim
before any court or public or governmental authority which seeks to challenge,
deny, enjoin, limit, modify, delay or dispute the right of the Holder hereof to
effect the conversion of the Preferred Stock into Common Shares, then the Holder
shall have the right, by written notice to the Corporation, to require the
Corporation to promptly redeem the Series A Preferred Stock for cash at a
redemption price equal to one hundred twenty percent (120%) of the Stated Value
thereof together with all accrued and unpaid dividends thereon (the "Mandatory
---------
Purchase Amount"). Under any of the circumstances set forth above, the
- ---------------
Corporation shall be responsible for the payment of all reasonable costs and
expenses of the Holder, including reasonable legal fees and expenses, as and
when incurred in disputing any such action or pursuing its rights hereunder (in
addition to any other rights of the Holder).
SECTION 6.3 Fractional Shares. No fractional Common Shares or scrip
-----------------
representing fractional Common Shares shall be issued upon conversion of the
Series A Preferred Stock. Instead of any fractional Common Shares which
otherwise would be issuable upon conversion of the Series A Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction. No cash payment of less than $1.00 shall be required
to be given unless specifically requested by the Holder.
SECTION 6.4 Reclassification, Consolidation, Merger or Mandatory Share
----------------------------------------------------------
Exchange. At any time while the Series A Preferred Stock remains outstanding and
- --------
any shares thereof have not been converted, in case of any reclassification or
change of Outstanding Common Shares issuable upon conversion of the Series A
Preferred Stock (other than a change in par value, or from par value to no par
value per share, or from no par value per share to par value or as a result of a
subdivision or combination of outstanding securities issuable upon conversion of
the Series A Preferred Stock) or in case of any consolidation, merger or
mandatory share exchange of the Corporation with or into another corporation
(other than a merger or mandatory share exchange with another corporation in
which the Corporation is a continuing corporation and which does
-10-
<PAGE>
not result in any reclassification or change, other than a change in par value,
or from par value to no par value per share, or from no par value per share to
par value, or as a result of a subdivision or combination of Outstanding Common
Shares upon conversion of the Series A Preferred Stock), or in the case of any
sale or transfer to another corporation of the property of the Corporation as an
entirety or substantially as an entirety, the Corporation, or such successor,
resulting or purchasing corporation, as the case may be, shall, without payment
of any additional consideration therefor, execute a new Series A Preferred Stock
providing that the Holder shall have the right to convert such new Series A
Preferred Stock (upon terms and conditions not less favorable to the Holder than
those in effect pursuant to the Series A Preferred Stock) and to receive upon
such exercise, in lieu of each Common Share theretofore issuable upon conversion
of the Series A Preferred Stock, the kind and amount of shares of stock, other
securities, money or property receivable upon such reclassification, change,
consolidation, merger, mandatory share exchange, sale or transfer by the holder
of one Common Share issuable upon conversion of the Series A Preferred Stock had
the Series A Preferred Stock been converted immediately prior to such
reclassification, change, consolidation, merger, mandatory share exchange or
sale or transfer. The provisions of this Section 6.4 shall similarly apply to
successive reclassifications, changes, consolidations, mergers, mandatory share
exchanges and sales and transfers.
SECTION 6.5 Adjustments to Conversion Ratio. For so long as any shares of
-------------------------------
the Series A Preferred Stock are outstanding, if the Corporation (i) issues and
sells pursuant to an exemption from registration under the Securities Act (A)
Common Shares at a purchase price on the date of issuance thereof that is lower
than the Conversion Price, (B) warrants or options with an exercise price
representing a percentage of the Current Market Price with an exercise price on
the date of issuance of the warrants or options that is lower than the agreed
upon exercise price for the Holder, except for employee stock option agreements
or stock incentive agreements of the Corporation, or (C) convertible,
exchangeable or exercisable securities with a right to exchange at lower than
the Current Market Price on the date of issuance or conversion, as applicable,
of such convertible, exchangeable or exercisable securities, except for stock
option agreements or stock incentive agreements; and (ii) grants the right to
the purchaser(s) thereof to demand that the Corporation register under the
Securities Act such Common Shares issued or the Common Shares for which such
warrants or options may be exercised or such convertible, exchangeable or
exercisable securities may be converted, exercised or exchanged, then the
Conversion Ratio shall be reduced to equal the lowest of any such lower rates.
SECTION 6.6 Optional Redemption Under Certain Circumstances. At anytime
-----------------------------------------------
after the date of issuance of the Series A Preferred Stock until the Mandatory
Conversion Date (as defined below), the Corporation, upon notice delivered to
the Holder as provided in Section 6.7, may redeem in whole or in part from time
to time, in cash, the Series A Preferred Stock (but only with respect to such
shares as to which the Holder has not theretofore furnished a Conversion Notice
prior to receiving the Corporation's notice of redemption in compliance with
Section 6.2), at one hundred twenty-five percent (125%) of the Stated Value
thereof (the "Optional Redemption Price"), together with all accrued and unpaid
-------------------------
dividends thereon to the date of redemption (the "Redemption Date"). Except as
---------------
set forth in this Section 6.6, the Corporation shall not have the right to
prepay or redeem the Series A Preferred Stock.
SECTION 6.7 Notice of Redemption. Notice of redemption pursuant to Section
--------------------
6.6 shall be provided by the Corporation to the Holder in writing (by registered
mail or overnight courier
-11-
<PAGE>
at the Holder's last address appearing in the Corporation's security registry)
not less than ten (10) nor more than fifteen (15) days prior to the Redemption
Date, which notice shall specify the Redemption Date and refer to Section 6.6
(including, a statement of the Market Price per Common Share) and this Section
6.7.
SECTION 6.8 Surrender of Preferred Stock. Upon any redemption of the
----------------------------
Series A Preferred Stock pursuant to Sections 6.6 or 6.7, the Holder shall
either deliver the Series A Preferred Stock by hand to the Corporation at its
principal executive offices or surrender the same to the Corporation at such
address by express courier. Payment of the Optional Redemption Price specified
in Section 6.6 shall be made by the Corporation to the Holder against receipt of
the Series A Preferred Stock (as provided in this Section 6.8) by wire transfer
of immediately available funds to such account(s) as the Holder shall specify to
the Corporation. If payment of such redemption price is not made in full by the
Redemption Date, then the Holder shall again have the right to convert the
Series A Preferred Stock as provided in Article 6 hereof.
SECTION 6.9 Mandatory Conversion. On the third anniversary of the filing
--------------------
of this Certificate of Designation (the "Mandatory Conversion Date"), the
-------------------------
Corporation shall convert all Series A Preferred Stock outstanding at the
Conversion Price. Notwithstanding the previous sentence, in no event shall the
Corporation convert that portion of the Series A Preferred Stock to the extent
that the issuance of Common Shares upon conversion of such Series A Preferred
Stock, when combined with shares of Common Shares received upon other
conversions of Series A Preferred Stock by such Holder and any other holders of
Series A Preferred Stock and Warrants, would exceed 19.99% of the Common Stock
outstanding on the Mandatory Conversion Date, unless the Corporation's
shareholders approve the issuance of an amount of the Corporation's Common Stock
in excess of the 19.99% threshold. Within ten (10) Business Days after the
Mandatory Conversion Date, the Corporation may either (i) redeem those
outstanding shares of Series A Preferred Stock in excess of the 19.99% threshold
at one hundred and twenty-five percent (125%) of the Stated Value thereof,
together with all accrued and unpaid dividends thereon, in cash, to the date of
redemption or (ii) extend the Mandatory Conversion Date for a period of one
year.
ARTICLE 7
VOTING RIGHTS
The holders of the Series A Preferred Stock have no voting power,
except as otherwise provided by the General Corporation Law of the State of
Delaware ("DGCL"), in this Article 7, and in Article 8 below.
----
Notwithstanding the above, the Corporation shall provide each holder
of Series A Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a notice to each
holder, at least thirty (30) days prior to the consummation of the transaction
or event,
-12-
<PAGE>
whichever is earlier), of the date on which any such acting is to be taken for
the purpose of such dividend, distribution, right or other event, and a brief
statement regarding the amount and character of such dividend, distribution,
right or other event to the extent known at such time.
To the extent that under the DGCL the vote of the holders of the
Series A Preferred Stock, voting separately as a class or series as applicable,
is required to authorize a given action of the Corporation, the affirmative vote
or consent of the holders of at least a majority of the shares of the Series A
Preferred Stock represented at a duly held meeting at which a quorum is present
or by written consent of a majority of the shares of Series A Preferred Stock
(except as otherwise may be required under the DGCL) shall constitute the
approval of such action by the class. To the extent that under the DGCL holders
of the Series A Preferred Stock are entitled to vote on a matter with holders of
Common Stock, voting together as one class, each share of Series A Preferred
Stock shall be entitled to a number of votes equal to the number of shares of
Common Stock into which it is then convertible using the record date for the
taking of such vote of shareholders as the date as of which the Conversion Price
is calculated. Holders of the Series A Preferred Stock shall be entitled to
notice of all shareholder meetings or written consents (and copies of proxy
materials and other information sent to shareholders) with respect to which they
would be entitled tonight, which notice would be provided pursuant to the
Corporation's bylaws and the DGCL.
ARTICLE 8
PROTECTIVE PROVISIONS
So long as shares of Series A Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the DGCL) of the holders of at least a majority of the
then outstanding shares of Series A Preferred Stock:
(1) alter or change the rights, preferences or privileges of the
Series A Preferred Stock;
(2) create any new class or series of capital stock having a
preference over the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation ("Senior Securities")
or alter or change the rights, preferences or privileges of any Senior
Securities so as to affect adversely the Series A Preferred Stock;
(3) increase the authorized number of shares of Series A Preferred
Stock; or
(4) do any act or thing not authorized or contemplated by this
Certificate of Designation which would result in taxation of the holders of
shares of the Series A Preferred Stock under Section 305 of the Internal Revenue
Code of 1986, as amended (or any comparable provision of the Internal Revenue
Code as hereafter from time to time amended).
In the event holders of at least a majority of the then outstanding
shares of Series A Preferred Stock agree to allow the Corporation to alter or
change the rights, preferences or privileges of the shares of Series A Preferred
Stock, pursuant to subsection (a) above, so as to affect the Series A Preferred
Stock, then the Corporation will deliver notice of such approved
-13-
<PAGE>
change to the holders of the Series A Preferred Stock that did not agree to such
alteration or change (the "Dissenting Holders") and Dissenting Holders shall
------------------
have the right for a period of thirty (30) days to convert pursuant to the terms
of this Certificate of Designation as they exist prior to such alteration or
change or continue to hold their shares of Series A Preferred Stock.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1 Loss, Theft, Destruction of Preferred Stock. Upon receipt of
-------------------------------------------
evidence satisfactory to the Corporation of the loss, theft, destruction or
mutilation of shares of Series A Preferred Stock and, in the case of any such
loss, theft or destruction, upon receipt of indemnity or security reasonably
satisfactory to the Corporation, or, in the case of any such mutilation, upon
surrender and cancellation of the Series A Preferred Stock, the Corporation
shall make, issue and deliver, in lieu of such lost, stolen, destroyed or
mutilated shares of Series A Preferred Stock, new shares of Series A Preferred
Stock of like tenor. The Series A Preferred Stock shall be held and owned upon
the express condition that the provisions of this Section 9.1 are exclusive with
respect to the replacement of mutilated, destroyed, lost or stolen shares of
Series A Preferred Stock and shall preclude any and all other rights and
remedies notwithstanding any law or statute existing or hereafter enacted to the
contrary with respect to the replacement of negotiable instruments or other
securities without the surrender thereof.
SECTION 9.2 Who Deemed Absolute Owner. The Corporation may deem the Person
-------------------------
in whose name the Series A Preferred Stock shall be registered upon the registry
books of the Corporation to be, and may treat it as, the absolute owner of the
Series A Preferred Stock for the purpose of receiving payment of dividends on
the Series A Preferred Stock, for the conversion of the Series A Preferred Stock
and for all other purposes, and the Corporation shall not be affected by any
notice to the contrary. All such payments and such conversion shall be valid and
effectual to satisfy and discharge the liability upon the Series A Preferred
Stock to the extent of the sum or sums so paid or the conversion so made.
SECTION 9.3 Notice of Certain Events. In the case of the occurrence of any
------------------------
event described in Sections 6.1, 6.6 or 6.7 of this Certificate of Designation,
the Corporation shall cause to be mailed to the Holder of the Series A Preferred
Stock at its last address as it appears in the Corporation's security registry,
at least twenty (20) days prior to the applicable record, effective or
expiration date hereinafter specified (or, if such twenty (20) days notice is
not possible, at the earliest possible date prior to any such record, effective
or expiration date), a notice stating (x) the date on which a record is to be
taken for the purpose of such dividend, distribution, issuance or granting of
rights, options or warrants, or if a record is not to be taken, the date as of
which the holders of record of Series A Preferred Stock to be entitled to such
dividend, distribution, issuance or granting of rights, options or warrants are
to be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding-up is expected to
become effective, and the date as of which it is expected that holders of record
of Series A Preferred Stock will be entitled to exchange their shares for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale transfer, dissolution, liquidation or winding-up.
-14-
<PAGE>
SECTION 9.4 Register. The Corporation shall keep at its principal office a
--------
register in which the Corporation shall provide for the registration of the
Series A Preferred Stock. Upon any transfer of the Series A Preferred Stock in
accordance with the provisions hereof, the Corporation shall register such
transfer on the Series A Preferred Stock register.
The Corporation may deem the person in whose name the Series A Preferred
Stock shall be registered upon the registry books of the Corporation to be, and
may treat it as, the absolute owner of the Series A Preferred Stock for the
purpose of receiving payment of dividends on the Series A Preferred Stock, for
the conversion of the Series A Preferred Stock and for all other purposes, and
the Corporation shall not be affected by any notice to the contrary. All such
payments and such conversions shall be valid and effective to satisfy and
discharge the liability upon the Series A Preferred Stock to the extent of the
sum or sums so paid or the conversion or conversions so made.
SECTION 9.5 Withholding. To the extent required by applicable law, the
-----------
Corporation may withhold amounts for or on account of any taxes imposed or
levied by or on behalf of any taxing authority in the United States having
jurisdiction over the Corporation from any payments made pursuant to the Series
A Preferred Stock.
SECTION 9.6 Headings. The headings of the Articles and Sections of this
--------
Certificate of Designation are inserted for convenience only and do not
constitute a part of this Certificate of Designation.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
-15-
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be signed by its duly authorized officers on this 30th day of
June 1999.
VIISAGE TECHNOLOGY, INC.
By:
_____________________________________
Name: William Marshall
Title: Chief Financial Officer
-16-
<PAGE>
ANNEX I
FORM OF CONVERSION NOTICE
TO:
________________________________________
________________________________________
________________________________________
The undersigned owner of this Series A 7% Convertible Preferred Stock
(the "Series A Preferred Stock") issued by Viisage Technology, Inc. (the
------------------------
"Corporation") hereby irrevocably exercises its option to convert shares of the
-----------
Series A Preferred Stock into _______ shares of the common stock, $.001 par
value, of the Corporation ("Common Stock"), in accordance with the terms of the
------------
Certificate of Designation. The undersigned hereby instructs the Corporation to
convert the number of shares of the Series A Preferred Stock specified above
into Shares of Common Stock Issued at Conversion in accordance with the
provisions of Article 6 of the Certificate of Designation. The undersigned
directs that the Common Stock issuable and certificates therefor deliverable
upon conversion, the Series A Preferred Stock recertificated, if any, not being
surrendered for conversion hereby, together with any check in payment for
fractional Common Stock, be issued in the name of and delivered to the
undersigned unless a different name has been indicated below. All capitalized
terms used and not defined herein have the respective meanings assigned to them
in the Certificate of Designation.
Dated:
_____________________________________
_____________________________________________
Signature
Fill in for registration of Series A Preferred Stock:
Please print name and address (including zip code number):
________________________________________________________________________________
________________________________________________________________________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q FOR THE
SIX MONTHS ENDED JUNE 27, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-27-1999
<CASH> 312
<SECURITIES> 0
<RECEIVABLES> 4,430
<ALLOWANCES> 0
<INVENTORY> 22,961<F1>
<CURRENT-ASSETS> 28,762
<PP&E> 16,352
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,007
<CURRENT-LIABILITIES> 17,002
<BONDS> 17,341<F2>
0
0
<COMMON> 0
<OTHER-SE> 11,644
<TOTAL-LIABILITY-AND-EQUITY> 46,007
<SALES> 4,714
<TOTAL-REVENUES> 4,714
<CGS> 3,870
<TOTAL-COSTS> 4,594<F3>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 553
<INCOME-PRETAX> (433)
<INCOME-TAX> 0
<INCOME-CONTINUING> (433)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (433)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
<FN>
<F1>REPRESENTS COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS.
<F2>REPRESENTS OBLIGATIONS UNDER CAPITAL LEASES, CONVERTIBLE SUBORDINATED AND LONG
TERM DEBT.
<F3>INCLUDES PROJECT COSTS AND OPERATING EXPENSES.
</FN>
</TABLE>
