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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 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
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(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
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of exchange on which registered
------------------- ------------------------------------
Common Stock $.001 par value NASDAQ National Market
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference into Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 1, 2000, was approximately $35 million.
As of March 1, 2000, the registrant had 9,687,753 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 9, 2000, and Form S-1 filed on November 12,
1999 are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
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(a) General Development of Business
-------------------------------
Viisage Technology, Inc. (Viisage or the Company), is a leader in the emerging
field of biometrics technology and in providing digital identification systems
and solutions. The Company focuses on identification solutions that improve
personal convenience and security, deter fraud and reduce identification program
costs. Viisage combines its systems integration and software design capabilities
with its proprietary software and hardware products and other industry standard
products to create complete customized solutions. These turnkey solutions
integrate image and data capture, create relational databases, incorporate
multiple biometrics and improve customers' ability to move and manage
information. Applications can include driver's licenses, voter registration,
national ID's, law enforcement, social services, access control and PC network
and internet access security. To date, Viisage's primary customers have been
government agencies with particular emphasis on U.S. drivers licensing agencies.
Since its inception in 1993, the Company has captured approximately 30% of the
domestic driver's license market. Viisage products annually produce more than 20
million identification documents at more than 1,000 locations in 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.
The Company began operations in 1993 as a division of Lau Technologies (Lau), a
provider of systems integration services and products for sophisticated
electronic systems. In November 1996, Lau transferred substantially all of the
assets, liabilities and operations of the division to the Company and the
Company completed its initial public offering. As of December 31, 1999 the
Company is a 64% owned subsidiary of Lau.
Effective June 1, 1998, the Company reorganized its operations to create a
separate biometrics division to respond to the growing market interest in
biometric solutions. The biometrics division is focused on product, market and
channel development activities in three principal areas: facility access
control; PC network and internet access security; and real-time large database
identification and verification of individuals. The systems integration and
identification card division (SI division) focuses on Viisage's public sector
markets and serves as a channel to existing customers and the public sector for
the Company's biometric technologies. The Company believes that it is in the
early stages of an emerging and high growth market for biometric identification
solutions, particularly facial recognition solutions in the government and
commercial markets.
The SI division provides systems and services principally under contracts that
generally have five to seven year terms and provide for several annual renewals
after the initial contract term. Contracts generally provide for a fixed price
for the system and/or for each card produced. Contract prices vary depending on,
among other things, design and integration complexities, the nature and number
of workstations and sites, the projected number of cards to be produced, the
size of the database, the level of post-installation support and the competitive
environment. Substantially all of the Company's revenues are currently derived
from SI division public sector customers and contractors to such customers. The
Company believes for the foreseeable future that it will continue to derive a
significant portion of its revenues from a limited number of large contracts.
2
(b) Financial Information about Industry Segments
---------------------------------------------
The Company is engaged in one business, the development and implementation of
digital identification systems and solutions. The Company has two reportable
business segments represented by its SI division and biometrics division
discussed in item (a). For financial information about industry segments see
Note 12 of Notes to Financial Statements.
(c) Description of Business
-----------------------
(i) Principal Products and Services
-------------------------------
Industry Background
The need for proper identification impacts most people every day. The desire for
personal convenience, the significant and increasing costs of fraud and the
growing concern over declining personal security have become driving forces
behind the global need for effective identification solutions. Starting with
only a fake driver's license, an individual is able to create multiple
identities, commit fraud, evade law enforcement and engage in other criminal
activities that have significant financial and societal implications. Password
security and identity card systems can also be compromised if someone obtains a
password or identity card and uses this information to gain unauthorized access
to facilities, networks or information.
In an effort to combat fraud and tampering, photographic identification cards
encapsulated within laminated pouches were developed. However, photographic
identification cards can be replicated using widely available advanced color
copiers and printers, and laminated pouches have proven easy to delaminate.
Advances in and the acceptance of digital technology have led to an increasing
demand for digital identification systems to replace existing systems. Digital
systems enable information and images to be captured and imbedded within the
fabric of the card through the use of dye-sublimation techniques, making digital
cards more resistant to tampering than laminated pouches. Information can be
stored in and later accessed from the card itself through the use of bar codes,
magnetic stripes and "smart" cards (cards which contain computer chips). Digital
systems also facilitate the storage of information in computer databases,
thereby reducing the need for manual record keeping, file cabinets, and
cumbersome indexing systems. Finally, digital systems can be networked to enable
up-to-date information to be shared and distributed across geographic and
organizational boundaries. This ability to move and manage information helps to
increase personal convenience for system users.
As an additional means of improving personal convenience and security and
deterring fraud, identification systems have increasingly used biometrics
(unique biological characteristics) to verify personal identities. Biometric
identifiers include facial images, fingerprints, iris scans, retinal scans,
voice data, hand geometry and others, with fingerprints enjoying wide usage in
law enforcement. However, unlike other biometrics, a facial image can be easily
verified visually and can be captured in an unobtrusive manner via a photograph,
making it a practical means of identification. When two or more biometric
identifiers are used together, the statistical probability of properly
identifying an individual increases. The Company generally advocates the use of
multiple biometrics and can incorporate these technologies into its solutions.
3
Applications for digital identification systems and biometrics are increasing as
they become more sophisticated and easier to use. For example, the typical U.S.
state has multiple licensing or other agencies, including its department of
motor vehicles, which require the verification of personal identity. The public
sector is also focusing on the value of sharing databases to avoid redundant
data gathering efforts, distribute information in a timely manner, increase
efficiency and deter fraud. The Company believes that public and commercial
sector applications for digital identification systems and biometrics will
include national ID's, driver's licenses, law enforcement, voter registration,
social services, access control, PC network and internet access security, ATMs,
retail point-of-sale transaction processing and administration of health care
benefits.
The emergence of digital identification systems and biometrics present
significant challenges for integrating these systems with customers' existing
software, hardware and computing environments. Consequently, customers are
seeking complete, integrated solutions to overcome these issues.
Products and Services
Digital Identification Systems
The Company's SI division develops and implements digital identification systems
and solutions and serves as a channel to the public sector for the biometrics
division. The SI division's systems can produce identification cards that are
virtually tamper proof and utilize facial recognition and other biometrics with
or without cards for the real-time identification (one-to-many) and verification
(one-to-one) of individuals.
Depending on the customer's needs, the SI division offers "instant issue"
systems which produce identification cards on location in minutes, and central
production systems which receive the information electronically from the point
of capture and produce cards from a secure off-site processing location which
are later mailed to recipients in several days. The facial images captured by
the SI division's card systems can provide the content (face bases) for
identification and verification applications.
In a Viisage card system the facial image and other information are captured in
digital format at the SI division's PC-based Image Capture Workstation which
usually incorporates the SI division's proprietary SensorMast. Compact and
self-contained, Viisage workstations can easily be linked to a central image
storage device, central card production unit and other remote devices using an
existing network, custom designed data communications or the World Wide Web.
This flexibility makes the Image Capture Workstation ideal for instant issue,
central production, mobile use and multiple site systems. The Viisage Quality
Advisor can be used to assess image quality at the point of capture. With an
instant issue system, a commercially available dye-sublimation printer produces
single-piece, tamper-resistant identification cards. Alternatively, with a
central production system, a high speed manufacturing unit produces the cards,
and an integrated card delivery unit prepares the cards for mailing. When
central production is selected, such systems incorporate the SI division's
proprietary Visual Inspection System for quality control of all cards produced.
Every system delivers top quality, tamper-resistant identification cards
customized to meet the customer's information, delivery and security needs. A
wide range of optional features are available including bar codes, holographic
overlays, ghost imaging, ultraviolet or micro preprinting, smart cards and a
number of other features.
4
Systems Integration and Software Design Capabilities. In addition to the SI
division's systems integration capabilities, an important aspect of its services
and ability to deliver turnkey solutions for its customers involves the design
of customized software. Viisage's proprietary software controls the system and
integrates the system components, including the SensorMast and Visual Inspection
System and a variety of third party components and technologies used by its
customers. The SI division has designed software to support all current industry
standard operating systems (e.g., Windows NT, Windows 95, Unix and OS/2),
network protocols (e.g., Novell Netware, TCP/IP and SNA), database products
(e.g., Sybase or Oracle) and client/server architectures. The SI division's
software design and systems integration capabilities enable it to accommodate
most computing environments and customers with special requirements.
Proprietary Products. The SI division's proprietary products and related
software are described below:
. The SensorMast is a fully-integrated, secure tower unit that
incorporates computer-controlled image capture equipment. This
equipment includes commercially available digital cameras, adjustable
lighting, frame grabbers, step motors, fingerprint and signature
capture devices and barcode readers. An integrated version of the
SensorMast also includes the computer in the SensorMast.
. The Visual Inspection System automatically evaluates cards produced by
the SI division's central production systems to determine whether the
image and data on a person's identification card correspond to the
information about that person in the system database. If the
information does not match, the Visual Inspection System rejects the
printed card and identifies the defect for immediate corrective
action. This system, which incorporates robotics, high-speed cameras
and sophisticated software, automates an activity, which is otherwise
performed manually and is a potential source of cost savings for
customers.
. The Viisage Quality Advisor can be used by customers to ensure proper
image quality. This software product instantly and precisely assesses
image quality against desired standards. Images that fail to meet such
standards are immediately rejected.
Customer Service and Support. Following the installation of its digital
identification systems, the SI division offers extensive customer training and
help desk telephone support as well as ongoing maintenance services. The SI
division's service and support teams, which vary depending on the customer and
contract, are able to draw extensively upon the expertise of the Company's
software and hardware engineers. For some contracts, the SI division has
contracted with third party service organizations for maintenance support.
Facial Recognition Systems
The Company's biometrics division is developing the Company's biometric
technologies in cooperation with its principal shareholder and technology
partner Lau, with a particular emphasis on facial recognition. The group has
focused on the facial image as a key biometric because the human face is a
unique and prominent feature that can be easily captured (in image) by a digital
camera and verified visually in most cases by an individual with no special
training. The biometrics division is concentrating on three principal areas:
facility access control; PC network and internet access
5
security; and real-time large database products. The Company has several
on-going facial recognition identification projects, including projects with the
Massachusetts Department of Transitional Assistance and the Illinois Secretary
of State.
Over the last six years, Viisage and Lau have enhanced technology initially
developed by Professor Alex Pentland of the Massachusetts Institute of
Technology (MIT) and have developed products for access control, surveillance,
and real-time large database identification and verification of individuals.
Viisage and Lau each license the underlying MIT technology for their respective
markets through Facia Reco Associates Limited Partnership (Facia Reco), an
entity formed by Dr. Pentland. While Dr. Pentland's software forms the basis of
the Company's facial recognition technologies, the Company believes that its
proprietary software, developed over the last five years, is integral to making
these technologies commercially viable.
Viisage's patented facial recognition software offers organizations the ability
to create unique identification solutions and both enhances existing
identification solutions and offers opportunities for new applications. Using a
sophisticated algorithm, the software translates the characteristics of a face
into a unique number or eigenface. The eigenface is used by the system for
identification, a one-to-many search of a database, and verification, a one-to-
one match to a specific stored image. The Company's facial recognition products
are unique because they are scalable to databases of millions of faces. Viisage
generally advocates the use of multiple biometrics and can integrate other
biometrics such as iris, voice, signature and fingerprint technology into its
solutions.
Viisage offers several facial recognition software systems that can be utilized
in virtually any solution requiring identification or verification of an
individual. The Company's identification software instantly calculates an
individual's eigenface identifier and can search an existing database of
millions of records in less than 10 seconds for images similar to the image
being searched. Viisage's Face in the Crowd technology can find and identify
specific individuals in a crowd. The system searches real-time for a match
between individuals in the field and images in a database. When a match is
located, the system tracks the individual and reports to the user. Early
adopters are using the software for access control, fraud reduction,
surveillance and law enforcement applications. The software can also be utilized
with other biometrics, PIN's and identification cards or on a stand- alone basis
for a variety of applications such as PC network and internet access security,
ATMs, retail point-of-use and administration of health care benefits. The
Company envisions a day when society could be free from cards, keys, PIN's and
signatures. One's face will be the private, secure and convenient password of
choice.
Sales and Marketing
The SI division markets its products directly through its internal sales force,
and continues to ally strategically with prominent vendors, systems integrators
and service organizations, particularly in international markets, in order to
gain access to such organizations' existing relationships, marketing resources
and credibility in new markets. The Company's engineering department supports
the direct sales staff by providing pre- and post-sale technical support. This
support entails traveling with sales representatives to help explain the
systems, defining solutions for customers, designing systems for proposal
activity, supporting the implementation process and providing post-
implementation support. The SI division also uses its program management group
to identify opportunities with existing customers and coordinate related selling
efforts.
6
The SI division's systems are generally provided to public sector customers
through a formal bidding process. The sales and marketing personnel regularly
conduct visits and attend industry trade shows to identify bid opportunities and
particular customer preferences and to establish and cultivate relationships in
advance of any bid. Once a request for proposal is issued, a six-to-twelve month
proposal and award process usually ensues, followed by (if the bid is
successful) a six-to-twelve month implementation and installation phase. In the
aggregate, the time needed for agencies to secure funding for systems, the
request for proposal and bid process, the execution of actual contracts and the
installation of a system can extend over several years. The Company believes
that long sales cycles in its public sector markets will continue. Further,
customers may seek to modify the system either during or after the
implementation of the system. While this long sales and implementation cycle
requires the commitment of marketing resources and investments of working
capital, the Company believes that it also serves as a barrier to entry for
smaller companies and as an early indicator of potential competitors for
particular projects. For existing customers, a considerably shorter sales and
implementation cycle may be involved.
The biometrics division is a software content provider. Its sales force and
business development activities are focused on establishing OEM and other
distribution arrangements with vendors, systems integrators and service
organizations serving its principal market areas. The SI division and Lau are
also serving as channels for the division's products. The division's engineering
department provides technical support for the division's selling and channel
development activities.
(ii) and (xi) Product Development
-------------------
In prior years, the Company developed proprietary software that supports all
current industry standard operating systems and networking environments, and
proprietary image capture and inspection products for its card-based
identification systems. The Company believes that these products will support
its card-based identification system offerings for the foreseeable future.
Development costs that benefited specific projects were recorded as project
costs and costs that did not benefit specific projects were recorded as research
and development expenses. The Company has not capitalized any software
development costs because costs incurred subsequent to achieving technological
feasibility have not been material. The Company's current development activities
are focused on its facial recognition products and the further commercialization
of its facial recognition technology. In addition to its own development
efforts, the Company has benefited and expects to continue to benefit from on-
going research and development conducted by Lau and, through its license with
Facia Reco, from certain research activities at MIT. The Company also benefits
from research and development activities conducted by the manufacturers of the
components integrated into the Company's systems such as PC's, printers, etc.
For the years ended December 31, 1999, 1998 and 1997, research and development
expense was $253,000, $358,000 and $152,000, respectively. Such amounts do not
include amounts for specific projects that are allocated to project costs or the
benefits from the other research and development activities referred to above.
7
(iii) Manufacturing and Sources of Supply
-----------------------------------
Proprietary subsystems and assemblies are made to the Company's specifications
by contract manufacturers, including Lau Technologies. Other non-proprietary
system components, such as personal computers, printers and related components,
are purchased from third-party vendors. The Company generally purchases major
contracted assemblies from single vendors to help ensure high quality, prompt
delivery and low cost. The Company does, however, qualify second sources for
most components, contracted assemblies and purchased subsystems, or at least
identifies alternative sources of supply. The Company believes that the open
architecture of its systems facilitates substitution of components or software
when this becomes necessary or desirable. The Company has from time to time
experienced delays as a result of the availability of component parts and
assemblies.
(iv) Patents, Trademarks and Licenses
--------------------------------
In addition to customized technology developed by the Company to meet customer
requirements, the Company utilizes certain patented technology and trade secrets
developed by its principal shareholder and technology partner, Lau. The Company
has an exclusive, perpetual, irrevocable, paid-up royalty-free, worldwide
license to use all of the technology owned or controlled by Lau relating to the
Company's business except for controlling human entry through doorways, gates,
turnstiles, or similar thresholds in and to buildings or facilities located on
properties owned or controlled by the United States federal government, or any
other national government, using apparatus at the entry point (federal access
control). The Company has also entered into nonexclusive, nontransferable,
royalty-generating license agreements with Lau to allow to allow Lau to use
Viisage's proprietary technology to distribute Face-in-the-Crowd products for
certain European markets and for United States airports and federal agencies.
Lau has a U.S. patent which runs to 2014 on a card production system used by the
Company, has a number of U.S. patent applications in process for facial
recognition technologies, has copyrighted the SensorMast and has made a
copyright filing for the Company's Visual Inspection System and related
proprietary software. Lau has also filed foreign patent applications, which
correspond to three of these domestic patent applications.
The Company also makes use of patented technology and trade secrets owned or
controlled by Facia Reco in the field that relates to de-duplicating or querying
databases created, controlled and/or managed by the Company or its sublicensees
and/or utilizing, directly or indirectly, personal identification cards but does
not extend to federal access control. This license extends until the expiration
of the final patent included in the license and includes Facia Reco's rights to
use patented facial recognition technology of MIT, which rights are exclusive
through June 1, 2001, except for certain rights granted to sponsors of the MIT
Media Lab and certain research rights. Thereafter, Facia Reco's patent license
with MIT extends to 2010 on a non-exclusive basis. MIT has applied to extend its
patent rights to certain jurisdictions in Europe and in Singapore. Further, at
Lau's request and expense, broadened claims for the MIT patent have been allowed
by the U.S. Patent and Trademark Office. The Company's license agreement with
Facia Reco provides for a royalty of $350 per machine copy incorporating the
licensed technology. Until June 1, 2001, a minimum annual royalty applies of,
generally, $21,000 for the U.S. rights and an amount ranging from $21,000 to
$42,000 for the non-U.S. rights.
8
The Company has also obtained from Lau an exclusive (except for limited fields
reserved by Lau), perpetual, worldwide license to use the U.S. patent 5,432,864
purchased by Lau from Daozeng Lu and Simon Lu, and all improvements thereto,
which relates to a system for automatically verifying the identity of an
individual using identification parameters that are carried on an escort memory
such as an identification or credit card. This license requires royalty payments
to Lau for each unit sold or licensed by Viisage. The agreement also requires
the issuance of 50,000 shares of Viisage common stock to Lau following the
royalty commencement date.
The Company has registered its "Viisage" trademark with the U.S. Patent and
Trademark Office.
There can be no assurance that the Company's efforts to prevent the
misappropriation of the intellectual property used in its business will be
successful. Further, there can be no assurance that any of the additional U.S.
or foreign patents applied for by Lau or the foreign patents applied for by MIT
will be issued or that, if issued, they will provide protection against
competitive technologies or will be held valid and enforceable if challenged.
Finally, there can be no assurance that the Company's competitors would not be
able to design around any such proprietary right or obtain rights that the
Company would need to license or circumvent in order to practice under these
patent and copyrights.
(v) Seasonality
-----------
The Company's SI division operations are not seasonal since contracts are
awarded and performed throughout the year. However, the Company believes its
public sector business is subject to cyclical procurement delays that may be
related to state-wide election cycles. Biometric division revenues have not been
material to date and operations are not expected to be seasonal.
(vi) Working Capital Requirements
----------------------------
The Company is generally required to fund the development and implementation of
large digital identification system projects for public sector customers.
Historically, the Company has utilized bank borrowings and project lease
financing to meet these needs. There are no special requirements or customer
terms that are expected to have a material adverse effect on the Company's
working capital. As discussed more fully in Management's Discussion and Analysis
of Financial Condition and Results of Operations, the Company plans to raise
capital, as needed, to fund biometric division activities.
9
(vii) Customers and End Users
-----------------------
The following lists and categorizes the Company's customers and end users as of
December 31, 1999:
STATE DEPARTMENTS OF MOTOR VEHICLES, OTHER STATE AND LOCAL AGENCIES
Arizona Department of Transportation
Arkansas Office of Driver Services
Connecticut Department of Social Services
Florida Department of Highway Safety and Motor Vehicles*
Illinois Secretary of State
Maryland Department of Transportation and Motor Vehicle Administration*
Massachusetts Department of Transitional Assistance
Massachusetts Registry of Motor Vehicles
New Mexico Department of Taxation and Revenue
New York Department of Social Services*
North Carolina Department of Transportation
Ohio Bureau of Motor Vehicles
Ohio Department of Public Safety
South Carolina Department of Public Safety*
Wisconsin Department of Corrections
Wisconsin Department of Transportation
FEDERAL AGENCIES FOREIGN CONTRACTS
U.S. Immigration and Naturalization Service *
Commission on Elections of the Republic of the Philippines*
* By subcontract.
For 1997, one customer (Illinois Secretary of State) accounted for an aggregate
of 46% of revenues. For 1998, three customers (Arkansas Office of Driver
Services, Florida Department of Highway Safety and Motor Vehicles and Illinois
Secretary of State) each accounted for over 10% of Company revenues and an
aggregate of 40% of revenues for the year. For 1999, four customers (Ohio Bureau
of Motor Vehicles, Unisys Corporation (Florida Department of Safety and Motor
Vehicles), Arkansas Department of Revenue, and Illinois Secretary of State) each
accounted for over 10% of Company revenues and an aggregate of 52% of revenues
for the year. The loss of any such customers could have a material adverse
impact on the Company's business, operating results and financial condition.
Since inception in June 1998, revenues for the biometrics division related
solely to a subcontract with Lau and were not material. However, the SI division
has on-going facial recognition projects (Massachusetts Department of
Transitional Assistance, Illinois Secretary of State and Wisconsin Department of
Corrections).
10
(viii) Backlog
-------
The Company measures backlog based on signed contracts, subcontracts and
customer commitments for which revenue has not yet been recognized. Backlog does
not include amounts for phase-outs or other extension opportunities included in
such contracts. Accordingly, backlog is not necessarily indicative of future
revenue. Backlog amounts relate solely to SI division contracts. A substantial
amount of the such backlog can be cancelled at any time without penalty, except,
in some cases, for the recovery of the Company's actual committed costs and
profit on work performed through the date of cancellation. Any failure of the
Company to meet an agreed-upon schedule could lead to the cancellation of the
related order. The timing of award and performance on contracts as well as
variations in size, complexity and requirements of the customer and
modifications to contract awards may result in substantial fluctuations in
backlog from period to period. Therefore, the Company believes that backlog
cannot be considered a meaningful indicator of future financial performance.
At December 31, 1999, the Company's backlog was approximately $58 million,
compared to approximately $59 million at December 31, 1998.
(ix) Government Contacts
-------------------
Government contracts are generally subject to termination for convenience or
lack of appropriation at the election of the subject agency. At December 31,
1999, amounts subject to future negotiation are not material.
(x) Competition
-----------
The market for the Company's products and services is extremely competitive and
management expects this competition to intensify as the markets in which the
Company's products and services are sold continue to develop.
The SI division faces competition in the identification systems market (for both
digital and conventional systems) from technologically sophisticated companies,
including Polaroid Corporation and De La Rue, which, in some cases, have greater
technical, financial, and marketing resources than the Company. In some cases,
the Company may be competing with an entity, which has a pre-existing
relationship with a potential customer, which could put the Company at a
significant competitive disadvantage. As the digital identification market
expands, additional competitors may seek to enter the market.
The Company believes that competition in the digital identification systems
market is based primarily upon the following factors: systems and product
performance; price; flexibility in terms of accommodating customer needs,
architectures, platforms, systems and networks; and service support. The
relative importance of each of these and other factors depends upon the specific
customer and situation involved. Substantially all of the SI division's sales to
new customers have been the result of competitive bidding for contracts pursuant
to public sector procurement rules, which generally increases the importance of
price as a competitive factor. The Company believes that its competitive
strength lies primarily in its systems integration and software design
capabilities, with additional strengths including system performance and
proprietary technologies, system configuration flexibility, price, and relative
ease of use.
11
In the field of biometric identification technology, the Company competes with
other facial recognition providers as well as other providers of biometric
solutions. Fingerprint recognition solutions have a long history of use,
particularly in law enforcement applications. Other current suppliers of facial
recognition solutions are software development firms. The Company expects that
as the market for biometric solutions develops, companies with significant
resources and capabilities may enter the market and competition will intensify.
(xi) Research and Development
------------------------
See Product Development Section
(xii) Environmental Protection Regulations
------------------------------------
The Company believes that compliance by the Company with federal, state and
local environmental regulations will not have a material adverse effect on its
financial position or results of operations.
(xiii) Employees
---------
As of December 31, 1999, the Company had 61 employees. The Company from time-to-
time supplements its employee forces with independent contractors. As of
December 31, 1999, the Company had 6 such contractors. None of the Company's
employees is represented by a labor union, and the Company considers its
relationship with its employees to be good.
(xiv) Officers
--------
Executive officers of the Company are elected by the Board of Directors annually
and serve until their successors have been duly elected and qualified.
Thomas J. Colatosti, 52, became President and Chief Executive Officer of the
Company on November 3, 1998. From July 8, 1998 until November 3, 1998, Mr.
Colatosti served as Chief Operating Officer of the Company. Prior to that, he
served as Vice President, Operations of the Company, which he joined on December
30, 1996. From April 1995 through December 1996, Mr. Colatosti was President and
Chief Executive Officer of CIS, a software and systems integration company. Mr.
Colatosti held various finance, sales, and operations positions with Digital
Equipment Corporation from 1973 to March 1995, serving as Vice President of the
Northeast Region from 1993 through 1994 and Vice President of the Federal
Systems Division from 1991 to 1993.
Iftikhar A. Ahmad, 48, was elected as an officer in March 1999 with the title of
Vice President of Engineering and Program Management of the Company. From
November 1996 until March 1999, Mr. Ahmad served as a Director in the Company's
Software Engineering Department. From January 1995 to November 1996, he was a
senior consultant in Lau's Systems Engineering Department, and prior to that, he
held various senior engineering positions at Digital Equipment Corporation.
12
Stanley Duci, 47, was elected as an officer in January of 2000 with the title of
Vice President of Customer Service of the Company. In February, 1999, Mr. Duci
was Vice President of Customer Service. From November, 1995 to February, 1999,
Mr. Duci served as Customer Service Manager. Prior to joining Viisage, Mr. Duci
was employed by Data General Corporation, where he was responsible for directing
worldwide customer service engineering, technology, reliability and performance
management systems.
Sean F. Mack, 37, was elected as an officer in January of 2000 with the title of
Vice President, Treasurer and Controller of the Company. From July, 1999, Mr.
Mack served as the Corporate Controller. Previously, Mr. Mack served in various
capacities at Lau. From October, 1994 to July, 1999, Mr. Mack served as
Controller and Treasurer of Lau Defense Systems, and he served as Cost Manager
of Lau Technology from May, 1989 to October, 1994. Prior to joining Lau, Mr.
Mack worked as a senior cost accountant at Benjamin Thompson & Associates in
Cambridge, Massachusetts for two years, and as a financial program analyst for
Raytheon Company in Marlboro, Massachusetts from 1985 to 1987.
(d) Financial Information about Foreign and Domestic Operations and Export Sales
----------------------------------------------------------------------------
The Company's foreign operations and export sales are currently not material.
ITEM 2. PROPERTIES
----------
The Company currently uses approximately 15,000 square feet of space in
facilities located in Littleton, Massachusetts and has access to common areas
under the terms of a Use and Occupancy Agreement with Lau through February 2002.
The Company believes that its facilities are in good condition and are suitable
and adequate for its present operations and that suitable space is available if
such lease is not extended.
ITEM 3. LEGAL PROCEEDINGS
------------------
The Company does not believe that there are any legal matters that would have a
material adverse effect on its business, financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Company's common stock is traded on the NASDAQ National Market under the
symbol VISG. On March 13, 2000, the closing price of the common stock was $8.75
per share and there were approximately 43 holders of record of the Company's
common stock. The quarterly high and low closing prices, as reported by NASDAQ,
of Viisage's common stock in 1999 and 1998 were as follows:
1999 1998
---- ----
Quarter HIGH Low HIGH LOW
- ------- ---- --- ---- ---
First Quarter 1-13/16 1-1/16 7-3/8 4-7/8
Second Quarter 1-5/8 3/4 5-3/8 1-15/16
Third Quarter 2-1/2 1-3/16 3-1/2 1-1/4
Fourth Quarter 8-1/16 1-3/4 2-1/4 5/8
DIVIDEND POLICY
The Company presently intends to retain its cash for use in the operation and
expansion of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future.
14
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The financial data set forth below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Financial Statements of the Company and related notes thereto
included elsewhere in this Form 10-K.
Years Ended December 31,
------------------------
1999 1998 (1) 1997 (2) 1996 1995
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Revenues ................................ $ 19,297 $ 16,259 $ 29,388 $ 24,971 $ 11,221
Project costs ........................... 15,131 15,957 26,122 19,484 10,361
-------- -------- -------- -------- --------
Project margin .......................... 4,166 302 3,266 5,487 860
-------- -------- -------- -------- --------
Operating expenses:
Sales and marketing ..................... 739 2,195 4,930 1,852 999
Research and development ................ 253 358 152 235 1,089
General and administrative .............. 1,939 2,247 2,105 1,880 1,204
-------- -------- -------- -------- --------
Total operating expenses ................ 2,931 4,800 7,187 3,967 3,292
-------- -------- -------- -------- --------
Operating income (loss) ................. 1,235 (4,498) (3,921) 1,520 (2,432)
Interest expense, net ................... 2,230 1,667 441 714 515
-------- -------- -------- -------- --------
Income (loss) before income taxes and
cumulative effect of accounting change .. (995) (6,165) (4,362) 806 (2,947)
Income taxes ............................ -- -- -- 205 --
-------- -------- -------- -------- --------
Income (loss) before cumulative effect of
accounting change ....................... (995) (6,165) (4,362) 601 (2,947)
Cumulative effect of accounting change .. -- 1,038 -- -- --
-------- -------- -------- -------- --------
Net income (loss) ....................... (995) (7,203) (4,362) 601 (2,947)
Preferred stock dividends ............... 1,003 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) applicable to common
Shareholders ............................ $ (1,998) $ (7,203) $ (4,362) $ 601 $ (2,947)
======== ======== ======== ======== ========
Basic income (loss) per share applicable
to common shareholders before
cumulative effect of accounting change.. $ (0.23) $ (0.75) $ (0.54) $ 0.10 $ (0.52)
Basic net income (loss) per share
applicable to common shareholders(3).... $ (0.23) $ (0.88) $ (0.54) $ 0.10 $ (0.52)
======== ======== ======== ======== ========
Weighted average basic common shares
outstanding............................. 8,610 8,175 8,060 6,022 5,680
======== ======== ======== ======== ========
Diluted income (loss) per share applicable
to common shareholders before cumulative
effect of accounting change............. $ (0.23) $ (0.75) $ (0.54) $ 0.09 $ (0.52)
Diluted net income (loss) per share
applicable to common shareholders(3).... $ (0.23) $ (0.88) $ (0.54) $ 0.09 $ (0.52)
======== ======== ======== ======== ========
Weighted average diluted common shares
outstanding............................. 8,610 8,175 8,060 6,537 5,680
======== ======== ======== ======== ========
15
December 31,
------------
1999 1998 (1) 1997 (2) 1996 1995
---- -------- -------- ---- ----
Balance Sheet Data:
Working Capital....................... $13,549 $ 11,089 $ 15,261 $20,676 $ 7,413
Total 44,680 46,444 47,463 36,119 11,285
assets................................
Long-term obligations................. 15,721 18,058 13,300 4,420 8,319
Shareholders' equity.................. 15,790 12,618 18,736 23,020 -
Net assets(4)......................... - - - - 1,323
(1) 1998 amounts reflect the impact of charges of $230 for restructuring,
$1,321 for the early adoption of SOP 98-5, Reporting on the Costs of
Start-Up Activities, and $2,322 to revise project margins and contract
cost-to-complete estimates.
(2) 1997 amounts reflect the impact of charges of $7.6 million for investments
in technology, services and markets.
(3) See note 2 of Notes to Financial Statements for information concerning the
computation of basic and diluted net income (loss) per share.
(4) Net assets represents divisional investment during the time the Company
operated as a division of Lau Technologies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
The following discussion and analysis contains forward-looking statements and
information that are based on the beliefs of management as well as assumptions
made by and information currently available to the Company. Such statements
reflect the current views of the Company with respect to future events and are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in the section below entitled "Certain Factors that
May Affect Future Results." The cautionary statements made herein should be read
as being applicable to all related forward-looking statements in this Form 10-K.
OVERVIEW
Viisage is a leader in the emerging field of biometrics technology and in
providing digital identification systems and solutions. The Company focuses on
identification solutions that improve personal convenience and security, deter
fraud and reduce identification program costs. Viisage combines its systems
integration and software design capabilities with its proprietary software and
hardware products and other industry standard products to create complete
customized solutions. These turnkey solutions integrate image and data capture,
create relational databases, incorporate multiple biometrics and improve
customers' ability to move and manage information. Applications can include
driver's licenses, voter registration, national ID's, law enforcement, social
services, access control and PC network and internet access security. To date,
Viisage's primary customers have been government agencies with particular
emphasis on U.S. drivers licensing agencies. Since its inception in 1993, the
Company has captured approximately 30% of the domestic driver's license market.
Viisage products annually produce more than 20 million identification documents
at more than 1,000 locations in 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.
16
The Company began operations in 1993 as a division of Lau Technologies (Lau), a
provider of systems integration services and products for sophisticated
electronic systems. In November 1996, Lau transferred substantially all of the
assets, liabilities and operations of the division to the Company and the
Company completed its initial public offering. The Company is currently a 64%
owned subsidiary of Lau.
Effective June 1, 1998, the Company reorganized its operations to create a
separate biometrics division to respond to the growing market interest in
biometric solutions. The biometrics division is focused on product, market and
channel development activities in three principal areas: facility access
control; PC network and internet access security; and real-time large database
identification and verification of individuals. The systems integration and
identification card division (SI division) focuses on Viisage's public sector
markets and serves as a channel to existing customers and the public sector for
the Company's biometric technologies. The Company believes that it is in the
early stages of an emerging and high growth market for biometric identification
solutions, particularly facial recognition solutions in the government and
commercial markets.
The Company is engaged in one business, the development and implementation of
digital identification systems and solutions. As discussed above, since June 1,
1998, the Company has operated in two segments. Amounts for the biometrics
division prior to the reorganization are not material or meaningful.
The SI division provides systems and services principally under contracts that
have five to seven year terms and provide for several annual renewals after the
initial contract term. Contracts generally provide for a fixed price for the
system and/or for each card produced. Contract prices vary depending on, among
other things, design and integration complexities, the nature and number of
workstations and sites, the projected number of cards to be produced, the size
of the database, the level of post-installation support and the competitive
environment. Substantially all of the Company's revenues are currently derived
from the SI division's public sector customers and contractors to such
customers. The Company believes for the foreseeable future that it will continue
to derive a significant portion of its revenues from a limited number of large
contracts. For the years ended December 31, 1999, 1998 and 1997, four customers,
three customers and one customer, respectively, each accounted for more than 10%
of the Company's revenues and an aggregate of 52%, 40% and 46% of revenues for
each of the years, respectively.
The Company's results of operations are significantly affected by, among other
things, the timing of award and performance on contracts. As a result, the
Company's revenues and income may fluctuate from quarter to quarter, and
comparisons over longer periods of time may be more meaningful. The Company's
results of operations are not seasonal since contracts are awarded and performed
throughout the year. However, the Company believes its public sector business is
subject to cyclical procurement delays that may be related to state-wide
election cycles. Biometric division revenues have not been material to date and
operations are not expected to be seasonal.
17
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 AND 1998
- -------------------------------------
Revenues are derived principally from multi-year contracts for system
implementation, card production and related services. Revenue grew to $19.3
million in 1999 from $16.3 million in 1998. The 18.7% increase between the two
years was primarily the result of contract extensions with the State of Ohio and
the Commonwealth of Massachusetts along with new contracts with the States of
Maryland, South Carolina and Wisconsin Department of Corrections.
Gross margins increased to 21.6% in 1999 from 1.9% in 1998. The increase in
gross margins between the two periods is due principally to the positive impact
of new higher margin new business on the overall revenue mix in 1999 and the
negative impact of start-up and restructuring costs in 1998.
Sales and marketing expenses decreased $1.5 million in 1999 from 1998. This
represents a decrease to 3.8% from 13.5% of revenue for the year to year period.
The decrease is due principally to restructuring and the related reductions in
headcount, more focused marketing efforts, and the Company's ongoing cost
reduction efforts.
Research and development expenses decreased $0.1 million in 1999 from 1998. This
represents a decrease to 1.3% from 2.2% of revenue for the year to year period.
The decrease is due principally to restructuring and related reductions in
headcount, more focused R & D efforts, and the Company's ongoing cost reduction
efforts. Research and development costs do not include amounts for specific
projects that are allocated to project costs and do not reflect the benefits to
Viisage under license arrangements from the research and development efforts of
Lau and the Massachusetts Institute of Technology for projects that are not
directly related to the Company.
General and administrative expenses fell $0.3 million in 1999 from 1998, a
decrease to 10.0% from 13.8% of revenue. The saving is due principally to
restructuring and related reductions in headcount and the Company's ongoing cost
reduction efforts.
Interest expense rose $0.6 million in 1999 from 1998. This represents an
increase to 11.6% from 10.3% of revenue. The additional cost is due principally
to increased borrowing and leasing activity due to new business.
The Company did not record any tax benefit for the 1999 loss due to the
uncertainty of when such benefits will be realized.
YEAR ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------
Charges and Accounting Change. During the first quarter of 1998, the Company
recorded charges of approximately $230,000 related to a restructuring to reduce
expenses in line with the Company's revised plan for 1998. Approximately $50,000
of such charges are included in project costs, $170,000 are included in sales
and marketing expenses and $10,000 are included in general and administrative
expenses in the statement of operations. During the third and fourth quarters of
1998, the Company recorded charges of $472,000 and $1,850,000, respectively, to
revise project margins
18
and contract cost-to-complete estimates. Approximately $2,222,000 of such
charges are included in project costs and $100,000 are included in general and
administrative expenses in the statement of operations.
The Company elected early adoption of Statement of Position No. 98-5 (SOP 98-5),
Reporting on the Costs of Start-Up Activities, which requires start-up costs to
be expensed as incurred rather than capitalized. The Company previously
capitalized certain start-up costs as pre-contract costs under SOP 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts, and charged such costs to contracts upon award. As required, the
adoption of SOP 98-5 has been made effective as of the beginning of the year.
The cumulative effect of the change in accounting principle of $1,038,000 was
recorded as a one-time charge in the Company's results for the year. Project
costs also include start-up costs of $283,000, which were incurred in the first
quarter of 1998.
Revenues. SI division revenues are derived principally from systems
implementation, card production and related services under multi-year contracts.
Biometrics division revenues are derived principally from software development
services. Revenues decreased 45% to $16.3 million for 1998 from $29.4 million in
1997. This decrease reflects the slowdown in new business awards during 1997 and
1998. Biometrics division revenues for the period were approximately $500,000,
all of which were earned under a subcontract from Lau.
Project Costs and Margin. SI division project costs consist primarily of
hardware, consumables (printer ribbons, cards, holographic overlays, etc.),
system design, software development and implementation labor, maintenance and
overhead. Biometrics division project costs consist primarily of labor and
related overhead. As a percentage of revenues, project costs, excluding charges
and accounting change, increased to 82% for 1998 from 71% for 1997. This
increase reflects the impact of lower margin contracts in the overall revenue
mix and overhead variances resulting from lower than anticipated 1998 revenues.
Including charges and accounting change, project costs increased to 98% for 1998
compared to 89% for 1997. This increase reflects the charges discussed above
which are due in part to enhancements to central production operations and
technology and transitioning to an in-house maintenance organization during
1998. Project margin, excluding charges and accounting change, decreased 66% to
$2.9 million (18% of revenues) for 1998 from $8.5 million (29% of revenues) for
1997. This decrease reflects lower revenues in 1998 and the increases in project
costs discussed above. Including charges and accounting change, project margin
decreased 91% to $302,000 (2% of revenues) compared to $3.3 million (11% of
revenues) for 1997. Biometrics division project costs for 1998 were $516,000,
including a portion of the overhead variances discussed above.
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation and professional service fees for marketing, bid and proposal and
customer support activities. Sales and marketing expenses, excluding charges,
decreased 23% to $2.0 million from $2.6 million for 1997. This decrease reflects
the reduction in headcount and related expenses in connection with the
restructuring mentioned above. Including charges, sales and marketing expenses
decreased 55% to $2.2 million for 1998 compared to $4.9 million for 1997. As a
percentage of revenues, sales and marketing expenses, excluding charges,
increased to 12% for 1998 from 9% for 1997 due to the decrease in 1998 revenues
discussed above. Including charges, sales and marketing expenses were 14% for
1998 compared to 17% for 1997. Sales and marketing expenses since the
reorganization for the biometrics division were $380,000.
19
Research and Development. Research and development expenses consist principally
of compensation, outside services and materials utilized for product and
software development activities that are not related to specific projects.
Research and development expenses increased 135% to $358,000 for 1998 from
$152,000 for 1997. Expenditures for 1998 and 1997 relate primarily to the
Company's facial recognition products. Such amounts do not include amounts for
specific projects that are allocated to project costs and do not reflect the
benefits to the Company under license arrangements from the research and
development efforts of Lau Technologies and the Massachusetts Institute of
Technology for projects that are not directly related to the Company.
General and Administrative. General and administrative expenses consist
principally of compensation for executive management, finance and administrative
personnel and outside professional fees and are shared by the Company's two
divisions. General and administrative expenses, excluding charges, remained
constant at approximately $2.1 million for 1998 and 1997. Amounts for 1998
reflect the restructuring and reorganization charges discussed above and the
related transfer of certain management expenses to general and administrative
expenses. Including charges, general and administrative costs increased 7% to
$2.3 million. As a percentage of revenues, general and administrative expenses,
excluding charges, increased to 13% for 1998 compared to 7% for 1997 due
primarily to lower revenues in 1998. Including charges, general and
administrative costs were 14% of revenues.
Interest Expense. The increase in net interest expense to $1.7 million for 1998
from $441,000 for 1997 reflects increased borrowings during 1998 and a reduction
in interest earned on cash equivalents in 1998.
Income Taxes. The Company did not record any tax benefit for the 1998 or 1997
losses due to the uncertainty of whether such benefit will be realized.
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents were $0.4 million at December 31, 1999, an increase of $0.3
million from December 31, 1998. The increase is primarily the result of cash
generated by operating and financing activities. These cash inflows were largely
offset by cash outflows for investing activities.
Accounts receivable decreased 23.8% from December 31, 1998 to December 31, 1999.
Day's sales outstanding in receivables improved to 62 days at December 31, 1999
from 96 days at December 31, 1998.
Costs and estimated earnings in excess of billings increased 2.3% from December
31, 1998 to December 31, 1999, which reflects the impact of additional business
volume that will be billable in the future.
Historically, the Company has not made substantial capital expenditures for
facilities, office and computer equipment, instead, satisfying its needs in
these areas principally through leasing.
20
The Company has a revolving credit facility with a commercial bank that provides
for borrowings of up to $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. At December 31, 1999, the Company was in compliance
with all loan covenants. 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.
In March 2000, the Company received a two year commitment letter from a
commercial bank to provide a new revolving credit facility to the Company
through April 2002 In connection with the bank's commitment, the revolving
credit facility is amended to provide for borrowings of up to $4 million at the
prime rate plus 1 1/4%. The facility is secured by substantially all of the
Company's assets and requires the Company to maintain certain financial ratios
and minimum levels of earnings and tangible capital funds, as defined. The
accompanying financial statements reflect this commitment as of December, 31
1999.
The Company also has a system project lease financing arrangement with a
commercial leasing organization. Pursuant to this arrangement, the lessor
purchases certain of our digital identification systems and leases them back to
the Company for deployment with identified and contracted customers approved by
the lessor. The lessor retains title to the systems and has an assignment of the
Company'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 the
Company's customers, but the Company bears performance and appropriation risk
and is generally required to repurchase a system in the event of a termination
by a customer for any reason except credit default. The Company is also required
to maintain certain financial ratios and minimum levels of tangible capital
funds, as defined. As of December 31, 1999, the Company was in compliance with
all lease covenants. These project lease arrangements are accounted for as
capital leases. The current arrangement provides for project financing of up to
$15.0 million. At December 31, 1999, the Company had approximately $11.6 million
outstanding under the lease financing arrangement. The Company has a similar
lease financing arrangement with Lau that provides for up to $3.1 million of
capital lease financing in 1999 with $3.1 million outstanding at December 31,
1999.
The Company believes that it will continue to meet its debt covenants. However,
this expectation is dependent in part on achieving business forecasts and
raising funds to cover biometrics division expenses. If the Company does not
meet such covenants, the bank and the lessor could require immediate repayment
of amounts outstanding.
In May 1999, the Company received a commitment from Lau to lend up to $2 million
in exchange for a 4% convertible subordinated note. 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 January 1,
2001 at $1.26 per share. In May 1999, the Company borrowed $1 million under this
commitment. The Company plans to raise additional funding, as needed, from other
sources.
21
In June 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. Subject to
certain volume limitations, the preferred stock is required to be converted into
the Company's common stock on June 30, 2002. Within ten (10) business days after
that date, the Company may either (i) redeem the outstanding shares of Series A
Preferred Stock, 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. 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.
In December 1999, the Company completed a $1.5 million private placement of
Series B 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
$7.00 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. Subject to certain volume limitations, the preferred stock is required
to be converted into the Company's common stock on October 30, 2002. Within ten
(10) business days after that date, the Company may either (i) redeem the
outstanding shares of Series B Preferred Stock, 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. 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 $60,000 and warrants
to purchase 20,000 shares of the Company's common stock, exercisable for three
years, at an exercise price of $8.94 per share which was 130% of the then
current closing price of the Company's common stock. The Company also issued
warrants to purchase 50,000 shares of the Company's common stock, exercisable
for three years, at an exercise price of $8.94 per share to the investor.
On December 9, 1999, warrants issued through the placement of the series A
preferred stock were exercised at $1.79 for the purchase of 75,000 shares of
common stock.
22
In January 2000, 750 shares of series A preferred stock were converted into
259,356 shares of common stock.
On March 10, 2000, for an initial investment of $4,000,000 (of which $1,500,000
is to be funded following the registration of the offered securities with the
Commission), the Company agreed to issue to a private equity investor 391,917
shares of common stock, closing warrants to purchase 97,979 shares of the
Company's common stock, exercisable for five years at $11.77 per share, and
adjustable warrants, exercisable at nominal consideration during three 25
trading day periods beginning four months following closing (which may be
delayed to December 31, 2000). The adjustable warrants terminate if the market
value of the Company common stock exceeds $14.28 for any 20 consecutive trading
days prior to the adjustment periods. If not terminated, the number of shares
that may be acquired under the adjustable warrants is determined by a formula
that is dependent on the extent to which the market value of the Company's
common stock is less than $11.09 per share during the adjustment periods.
Subject to certain closing conditions, two additional investments of $3,000,000
each may be invested by the same investor between 150 and 170 days after the
initial investment and between 120 and 140 days thereafter on similar terms. The
purchase price of the common stock for each additional investment will be equal
115% of the average per share market value for the ten trading days prior to the
applicable closing date and the closing warrants will equal to 25% of each
investment at an exercise price equal to 125% of the average per share market
price for the five trading days prior to such closing date. The termination
amount for the subsequent adjustable warrants will be 140% of the market value
of the common stock on the applicable closing date and the formula amount will
be set at 108% of such market value.
The Company believes that if it meets its business forecast for 2000, 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.
INFLATION
Although certain of the Company's expenses increase with general inflation in
the economy, inflation has not had a material impact on the Company's financial
results to date.
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities," which requires companies to recognize all
derivative contracts at their fair values as either assets or liabilities on the
balance sheet.
Historically, the Company has not entered into derivative contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect the adoption of the new standard to affect its financial statements.
23
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.
Certain Factors That May Affect Future Results
The Company operates in an environment that involves a number of risks, some of
which are beyond the Company's control. Forward-looking statements in this
document and those made from time to time by the Company through its senior
management are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements concerning
future plans or results are necessarily only estimates and actual results could
differ materially from expectations. Certain factors that could cause or
contribute to such differences include, among other things, potential
fluctuations in quarterly results, the size and timing of award and performance
on contracts, dependence on large contracts and a limited number of customers,
lengthy sales and implementation cycles, changes in management estimates
incident to accounting for contracts, availability and cost of key components,
market acceptance of new or enhanced products and services, proprietary
technology and changing technology, competitive conditions, system performance,
management of growth, dependence on key personnel, and general economic and
political conditions and other factors affecting spending by customers.
24
Item 8. Financial Statements and Supplementary Data
INDEX
Page
----
Reports of Independent Public Accountants 26-27
Balance Sheets as of December 31, 1999 and 1998 28
Statements of Operations for the years ended December 31, 1999, 1998 and 1997 29
Statements of Changes in Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997 30
Statements of Cash Flows for years ended December 31, 1999, 1998 and 1997 31
Notes to Financial Statements 32-47
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Viisage Technology, Inc.:
We have audited the accompanying balance sheet of Viisage Technology, Inc. as of
December 31, 1999, and the related statements of operations, changes in
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Viisage Technology, Inc. as of
December 31, 1999, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Boston, Massachusetts
February 4, 2000 (except for note 6
for which the date is March
30, 2000)
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Viisage Technology, Inc.:
We have audited the accompanying balance sheet of Viisage Technology, Inc. as of
December 31, 1998, and the related statements of operations, changes in
shareholders' equity and cash flows for each of the two years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Viisage Technology, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 19, 1999 (except for note 6 for which
the date is April 26, 1999)
27
VIISAGE TECHNOLOGY, INC.
Balance Sheets
(in thousands)
December 31,
1999 1998
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 441 $ 166
Accounts receivable, net of allowance for
doubtful accounts of $100 3,264 4,285
Costs and estimated earnings in excess of billings 22,216 21,723
Other current assets 797 683
-------- --------
Total current assets 26,718 26,857
-------- --------
Property and equipment, net 17,237 18,513
Other assets 725 1,074
-------- --------
$ 44,680 $ 46,444
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 6,621 $ 9,090
Accrued and deferred income taxes -- 27
Convertible subordinated debt -- 800
Current portion of long-term debt 2,500 2,054
Obligations under capital leases 4,048 3,797
-------- --------
Total current liabilities 13,169 15,768
Long-term debt 4,000 6,500
Convertible subordinated debt 1,000 --
Obligations under capital leases 7,964 11,558
Obligations under related party capital leases 2,757 --
-------- --------
Total liabilities 28,890 33,826
Shareholders' equity
Preferred stock, $0.001 par value; 2,000,000
shares authorized; 3,000 shares issued and
outstanding at December 31, 1999 2,782 --
Common stock, $0.001 par value; 20,000,000
shares authorized; 9,275,940 and 8,382,700
shares issued and outstanding at December 31,
1999 and 1998, respectively
9 8
Additional paid-in capital 26,545 24,157
Accumulated deficit (13,546) (11,547)
-------- --------
Total shareholders' equity 15,790 12,618
-------- --------
$ 44,680 $ 46,444
======== ========
The accompanying notes are an integral part of these financial statements.
28
VIISAGE TECHNOLOGY, INC.
Statements of Operations
(in thousands, except per share data)
December 31,
1999 1998 1997
-------- -------- --------
Revenues $ 19,297 $ 16,259 $ 29,388
Project costs 15,131 15,957 26,122
-------- -------- --------
Project margin 4,166 302 3,266
-------- -------- --------
Operating Expenses:
Sales and marketing 739 2,195 4,930
Research and development 253 358 152
General and administrative 1,939 2,247 2,105
-------- -------- --------
Total operating expenses 2,931 4,800 7,187
-------- -------- --------
Operating income (loss) 1,235 (4,498) (3,921)
Interest expense 2,230 1,667 441
-------- -------- --------
Loss before income taxes and cumulative
effect of change in accounting principle (995) (6,165) (4,362)
Provision for income taxes -- -- --
-------- -------- --------
Loss before cumulative effect of change
in accounting principle (995) (6,165) (4,362)
Cumulative effect of change in accounting principle -- (1,038) --
-------- -------- --------
Net loss (995) (7,203) (4,362)
Preferred stock dividends 1,003 -- --
-------- -------- --------
Net loss applicable to common shareholders $ (1,998) $ (7,203) $ (4,362)
======== ======== ========
Basic and diluted loss per share applicable to
common shareholders before change in
accounting principle $ (0.23) $ (0.75) $ (0.54)
Basic and diluted net loss per share applicable
to common shareholders $ (0.23) $ (0.88) $ (0.54)
======== ======== ========
Weighted average basic and diluted common
shares outstanding 8,610 8,175 8,060
======== ======== ========
The accompanying notes are an integral part of these financial statements.
29
VIISAGE TECHNOLOGY, INC.
Statements of Changes in Shareholders' Equity
(in thousands)
Additional Retained
Common Preferred Paid-in Earnings
Stock Stock Capital (Deficit) Total
-------- -------- -------- ----------- --------
Balance, December 31, 1996 $ 8 $ $ 22,994 $ 18 $ 23,020
Exercise of stock options -- -- 78 -- 78
Net loss -- -- -- (4,362) (4,362)
-------- -------- -------- -------- --------
Balance, December 31, 1997 8 -- 23,072 (4,344) 18,736
-------- -------- -------- -------- --------
Issuance of stock options -- -- 444 -- 444
Issuance of common stock -- -- 600 -- 600
Exercise of stock options -- -- 41 -- 41
Net loss -- -- -- (7,203) (7,203)
-------- -------- -------- -------- --------
Balance, December 31, 1998 8 -- 24,157 (11,547) 12,618
-------- -------- -------- -------- --------
Exercise of employee stock
options -- -- 301 -- 301
Common stock issued for
services -- -- 144 -- 144
Common stock issued under
employee stock purchase
plan -- -- 39 -- 39
Exercise of private placement
warrants -- -- 134 -- 134
Conversion of Lau debt 1 -- 832 -- 833
Issuance of preferred stock
with beneficial conversion
feature of $896 -- 2,104 896 -- 3,000
Issuance costs of preferred
stock -- -- (271) -- (271)
Amortization of beneficial
conversion feature of
preferred stock -- 678 -- (678) --
Accrued dividends on
preferred stock -- -- -- (49) (49)
Issuance of warrants to
preferred stock investors -- -- 277 (277) --
Issuance of options for
services -- -- 36 -- 36
Net loss -- -- -- (995) (995)
-------- -------- -------- -------- --------
Balance, December 31, 1999 $ 9 $ 2,782 $ 26,545 $(13,546) $ 15,790
======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements
30
VIISAGE TECHNOLOGY, INC.
Statements of Cash Flows
(in thousands)
December 31,
1999 1998 1997
-------- -------- --------
Cash Flows from Operating Activities:
Net loss $ (995) $ (7,203) $ (4,362)
Adjustments to reconcile net loss to net cash
Provided (used) by operating activities
Depreciation and amortization 4,422 3,022 1,964
Cumulative effect of change in accounting principle -- 1,038 --
Expenses paid in common stock 212 -- --
Change in operating assets and liabilities:
Accounts receivable 1,021 (1,114) (1,672)
Costs and estimated earnings in excess of (494) 2,722 (9,038)
billings
Other current assets (113) (260) (85)
Accounts payable and accrued expenses (2,516) (2,005) 5,259
Accrued and deferred taxes
(28) 11 (174)
-------- -------- --------
Net cash provided (used) by operating activities 1,509 (3,789) (8,108)
-------- -------- --------
Cash Flows from Investing Activities:
Purchase of equipment converted to capital leases (3,125) (5,244) (7,800)
Purchase of system assets -- (100) (3,900)
Additions to property and equipment (21) (145) (453)
Decrease in other assets 349 99 178
-------- -------- --------
Net cash provided (used) by investing activities (2,797) (5,390) (11,975)
-------- -------- --------
Cash Flows from Financing Activities:
Net revolving credit (repayments) borrowings (2,054) 8,554 --
Proceeds from long-term borrowings 1,000 -- 4,100
Proceeds from sale/leaseback of equipment 3,125 5,244 7,800
Principal payments on long-term borrowings -- (4,054) (46)
Principal payments on obligations under capital leases (3,711) (2,651) (1,311)
Net proceeds from issuance of common stock 474 641 78
Net proceeds from issuance of preferred stock 2,729 -- --
-------- -------- --------
Net cash provided (used) by financing activities 1,563 7,734 10,621
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 275 (1,445) (9,462)
Cash and cash equivalents, beginning of year 166 1,611 11,073
-------- -------- --------
Cash and cash equivalents, end of year $ 441 $ 166 $ 1,611
======== ======== ========
Supplemental Cash Flow Information:
Cash paid during the year for interest $ 1,788 $ 1,416 $ 832
Cash paid during the year for income taxes $ -- $ 68 $ 122
Non-cash Transactions:
Conversion of subordinated debt to common stock $ 800 $ -- $ --
The accompanying notes are an integral part of these financial statements.
31
VIISAGE TECHNOLOGY, INC.
Notes To Condensed Financial Statements
1. DESCRIPTION OF BUSINESS
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.
The Company is engaged in one business, the development and implementation of
digital identification systems and solutions. Effective June 1, 1998, the
Company reorganized its operations to create a separate biometrics division to
respond to the growing market interest in biometric solutions. The biometrics
division is focused on product, market, and channel development activities in
three principal areas: facility access control, PC network and internet access
security, and real-time large database identification and verification of
individuals. The systems integration and identification card division (SI
division) focuses on Viisage's public sector markets and serves as a channel to
existing customers and the public sector for the Company's biometric
technologies. Since June 1, 1998, the Company has operated in two segments.
Amounts for the biometrics division prior to the reorganization are not
material.
As of December 31, 1999, the Company was a 64% owned subsidiary of Lau
Technologies (Lau).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
32
Computation of Net Loss per Share
Basic and dilutive net loss per share is 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
2,472,139 shares in 1999, 2,784,531 shares in 1998, and 1,770,550 shares in
1997, the conversion of convertible subordinated debt, the conversion of
convertible preferred stock, or stock warrants because their effect is
antidilutive. Except for the convertible subordinated debt, convertible
preferred stock, warrants and options referred to above, the Company does not
have any other potential common stock at December 31, 1999.
Contract Revenue and Cost Recognition
The Company provides services principally under contracts that provide for a
fixed price for each system and/or for each card produced. Revenue is recognized
using the percentage of completion method based on labor costs incurred and/or
cards produced. Contract losses, if any, are recognized in the period in which
they become determinable. Costs and estimated earnings in excess of billings are
recorded as a current asset. Billings in excess of costs and estimated earnings
and accrued contract costs are recorded as current liabilities. Generally,
contracts provide for billing when contract milestones are met and/or cards are
produced. Retainages and amounts subject to future negotiation are not material.
Costs and estimated earnings in excess of billings include approximately $7
million expected to be billed and collected after December 31, 2000.
Charges and Accounting Change
During the first quarter of 1998, the Company recorded charges of approximately
$230,000 related to a restructuring to reduce expenses in line with the
Company's revised plan for 1998. Approximately $50,000 of such charges are
included in project costs, $170,000 are included in sales and marketing expenses
and $10,000 are included in general and administrative expenses in the statement
of operations. During the third and fourth quarters of 1998, the Company
recorded charges of $472,000 and $1,850,000, respectively, to revise project
margins and contract cost-to-complete estimates. Approximately $2,222,000 of
such charges are included in project costs and $100,000 are included in general
and administrative expenses in the statement of operations.
During 1998, the Company elected early adoption of Statement of Position No.
98-5 (SOP 98-5), Reporting on the Costs of Start-Up Activities, which requires
start-up costs to be expensed as incurred rather than capitalized. The Company
previously capitalized certain start-up costs as pre-contract costs under SOP
81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, and charged such costs to contracts upon award. As
required, the adoption of SOP 98-5 has been made effective as of the beginning
of 1998. The cumulative effect of the change in accounting principle of
$1,038,000 was recorded as a one-time charge in the Company's results for 1998.
33
During the fourth quarter of 1997, the Company recorded non-recurring charges of
approximately $7.6 million related to investments in technology, services and
markets. These investments relate principally to upgrades and enhancements to
older systems, enhancements to central production and data management
capabilities and enhancements to certain systems to facilitate the future use of
facial recognition technologies. Approximately $5.3 million of such charges are
included in project costs and $2.3 million are included in sales and marketing
expenses in the statement of operations.
Cash and Cash Equivalents
The company considers all highly liquid instruments, with a maturity of three
months or less when acquired, to be cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash and
cash equivalents, accounts receivable and payable and short- and long-term
borrowings, approximate fair values.
Accounts Receivable
Accounts receivable are due principally from government agencies and contractors
to government agencies. Management periodically reviews accounts receivable for
possible uncollectible amounts. In the event management determines a specific
need for an allowance, a provision for doubtful accounts is provided. Based on
management's review, a $100,000 allowance for doubtful accounts has been
established at December 31, 1999 and 1998.
For 1999, 1998 and 1997, four customers, three customers, and one customer,
respectively, each accounted for more than 10% of revenues individually, and
approximately 52%, 40% and 46% in the aggregate of the Company's revenues,
respectively. At December 31, 1999, 75% of accounts receivable are due from five
customers.
Property and Equipment
Property and equipment are recorded at cost or the lesser of fair value or the
present value of minimum lease payments for items acquired under capital leases.
Depreciation and amortization are calculated using the straight-line or
usage-based methods over the estimated useful lives of the related assets or the
lease term, whichever is shorter.
Research and Development
Research and development costs are charged to expense as incurred.
34
Software Development
The Company reviews software development costs incurred in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed, which requires that certain costs incurred in the development of
computer software to be sold or leased be capitalized once technological
feasibility is reached. The Company has not capitalized any software development
costs because development costs incurred subsequent to the establishment of
technological feasibility have not been material.
Costs related to software developed for internal use are expensed as incurred,
except for externally purchased software, which is capitalized and depreciated
over its estimated useful life not to exceed five years.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred income tax assets and liabilities are measured
using currently enacted tax rates. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. 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.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. SFAS
No. 123, Accounting for Stock-Based Compensation, establishes a fair value based
method of accounting for stock-based compensation plans. The Company has adopted
the disclosure only alternative under SFAS No. 123, which requires disclosure of
the pro forma effects on earnings and earnings per share as if SFAS No. 123 had
been adopted as well as certain other information. See note 10 for required
disclosures.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities," which requires companies to recognize all
derivative contracts at their fair values as either assets or liabilities on the
balance sheet.
Historically, the Company has not entered into derivative contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect the adoption of the new standard to affect its financial statements.
35
3. RELATED PARTY TRANSACTIONS
Debt
During the first quarter of 1999, 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,
amounting to $36,000, 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. 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 January 1, 2001 at $1.26 per share. In May 1999, the Company
borrowed $1,000,000 under this commitment, which is outstanding as of December
31, 1999.
The Company has a project lease financing arrangement with Lau that provides for
up to $3.1 million of capital lease financing in 1999 with $3.1 million
outstanding at December 31, 1999
On October 14, 1999, Lau Technologies exercised an option to convert $800,000,
4%, subordinated convertible debt, borrowed prior to 1999, plus accrued interest
of $33,000, into 526,582 shares of the Company's common stock at the conversion
price of $1.58 per share.
Licenses
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 Federal Agencies.
Lau will pay the Company royalties, as defined, under these agreements. Through
December 31, 1999, no royalties have been earned.
The Company has also obtained from Lau an exclusive (except for limited fields
reserved by Lau), perpetual, worldwide license to use the U.S. patent 5,432,864
purchased by Lau from Daozeng Lu and Simon Lu, and all improvements thereto,
which relates to a system for automatically verifying the identity of an
individual using identification parameters that are carried on an escort memory
such as an identification or credit card. This license requires royalty payments
to Lau for each unit sold or licensed by Viisage. The agreement also requires
the issuance of 50,000 shares of Viisage common stock to Lau following the
royalty commencement date.
36
Other
Under an Administration and Services Agreement, Lau provides general accounting,
data processing, payroll, certain human resources, employee benefits
administration and certain executive services to the Company. The agreement
requires the Company to pay a monthly fee based on the estimated actual cost of
such services and permits the Company to terminate selected services upon 30
days written notice. The annual fee for services is revised if the level of
services is changed. Amounts for 1999 and 1998 reflect a continued reduction in
services. The amounts for such services were approximately $418,000 in 1999,
$636,000 in 1998 and $864,000 in 1997.
A Use and Occupancy Agreement requires the Company to pay its proportionate
share of the cost of shared facilities and office services including rent,
insurance, property taxes, utilities and other operating expenses, based on
square footage or equipment utilized. The annual fee for facilities and services
is revised for changes in space utilized and in operating expenses. The amounts
for facilities and services were approximately $217,000 in 1999, $550,000 in
1998 and $512,000 in 1997, respectively. See note 7 for lease information.
Company employees participate in various Lau employee benefit plans. The Company
pays its proportionate share of the costs of such plans based on the number of
participating employees.
Management believes the methods for allocating expenses and those costs related
to shared facilities and equipment are reasonable and approximate what these
costs would be on a stand-alone basis.
The Company purchases certain system components and technical personnel services
from Lau. The amounts for such components and services were approximately $0.5
million in 1999, $1.0 million in 1998 and $1.9 million in 1997. During 1999 and
1998, the Company provided software development services as a subcontractor to
Lau amounting to $120,000 and $500,000, respectively.
At December 31, 1999 and 1998, the Company had approximately $35,000 and
$596,000 of accounts receivable due from Lau, respectively, and approximately
$119,000 and $906,000 of accounts payable due to Lau, respectively. The Company
also has a 9% note receivable from Lau Technologies due in monthly installments
of principal and interest of approximately $21,000 through February 28, 2002. At
December 31, 1999 and 1998, approximately $214,000 and $197,000 of the note was
included in other current assets, respectively, and the remaining balance of
approximately $258,000 and $472,000 was included in other assets, respectively,
in the accompanying balance sheet.
The Company has employment and noncompetition agreements with certain officers.
Such agreements provide for employment and related compensation, and restrict
the individuals from competing, as defined, with the Company during the terms of
their respective agreements and for up to two years thereafter. The agreements
also provide for stock options under the Company's stock option plan and for
severance payments upon termination under circumstances defined in such
agreements.
37
4. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
December 31,
1999 1998
Assets held under capital lease $ 22,351 $ 19,225
System assets 4,000 4,000
Computer equipment 994 974
--------- --------
27,345 24,199
Less--Accumulated depreciation 10,108 5,686
--------- --------
$ 17,237 $ 18,513
========= ========
During 1999 and 1998, the Company sold and leased back under capital leases
approximately $3.1 million and $5.2 million, respectively, of system equipment
used to produce identification cards for certain contracts.
In October 1997, Viisage completed a System Sale, License and Subcontract
Agreement (the Agreement) with Unisys Corporation (Unisys). Under the Agreement,
Viisage purchased and licensed certain assets from Unisys and agreed to perform
certain services as Unisys' subcontractor relating to a digital imaging system
for the Florida Department of Highway Safety and Motor Vehicles. The purchase
price was $4 million, consisting of $3.8 million paid in 1997 and two payments
of $100,000 each, one made in December 1998 and the other to be made on October
1, 2000. In addition, Viisage agreed to additional contingent payments of up to
$754,000 depending largely on Unisys' support of Viisage's efforts to generate
incremental revenues from Florida state agencies. The purchase, including
approximately $100,000 of transaction costs, was recorded using the purchase
method of accounting and has been allocated to system assets which are being
amortized over the estimated remaining useful life of the system.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in thousands):
December 31,
1999 1998
Accounts payable $ 2,139 $ 3,112
Accrued contract costs 3,912 5,235
Accrued payroll and related taxes 95 138
Accrued vacation 189 219
Other accrued expenses 286 386
---------- ----------
$ 6,621 $ 9,090
========== ==========
38
6. LONG TERM DEBT AND PROJECT LEASE ARRANGEMENTS
In December 1998, the Company executed an amended and restated agreement with a
commercial bank to provide a new revolving credit facility to the Company
through June 2000. Outstanding term and revolving credit borrowings were repaid
with funds from the new agreement at closing. In connection with the bank's
commitment, the revolving credit facility was amended to provide for borrowings
of up to $9 million through December 31, 1999 and $6.5 million through June 30,
2000 at the prime rate plus 1%. The facility is secured by substantially all of
the Company's assets and requires the Company to maintain certain financial
ratios and minimum levels of earnings and tangible capital funds, as defined. At
December 31, 1999, the Company was in compliance with all loan covenants. 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.
In March 2000, the Company received a two-year commitment letter from a
commercial bank to provide a new revolving credit facility to the Company
through April 2002. In connection with the bank's commitment, the revolving
credit facility is amended to provide for borrowings of up to $4 million at the
prime rate plus 1 1/4%. The facility is secured by substantially all of the
Company's assets and requires the Company to maintain certain financial ratios
and minimum levels of earnings and tangible capital funds, as defined. The
accompanying financial statements reflect this commitment as of December 31,
1999.
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. At December 31, 1999, the Company was in compliance with all lease
covenants. These project lease arrangements are accounted for as capital leases.
The current arrangement provides for project financing of up to $15.0 million.
At December 31, 1999, the Company had approximately $11.6 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 with $3.1 million outstanding at December 31, 1999.
The Company believes that it will continue to meet its debt covenants. However,
this expectation is dependent in part on achieving business forecasts and
raising funds to cover biometrics division expenses. If the Company does not
meet such covenants, the bank and the lessor could require immediate repayment
of amounts outstanding.
39
7. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain equipment and facilities used in its operations and
the shared facilities discussed in note 3. Rental expense for operating leases
was approximately $131,000 in 1999, $212,000 in 1998 and $212,000 in 1997.
At December 31, 1999, approximate future minimum rentals under the lease for
shared facilities and capital leases are as follows (in thousands):
Capital Operating
Leases Lease
Year Ending:
2000 $ 5,117 $ 131
2001 4,446 131
2002 3,110 12
2003 2,674 -
2004 1,541 -
Thereafter 670 -
-------- -------
Total minimum lease payments 17,558 $ 274
=======
Less--Interest portion 2,789
--------
Present value of net
minimum lease payments 14,769
Less--Current portion 4,048
--------
$ 10,721
========
Litigation
The Company does not believe that there are any legal matters that would have a
material adverse effect on its business, financial condition or results of
operations.
8. RETIREMENT BENEFITS
The Company participates in the Lau 401(k) plan and pays its proportionate share
of plan expenses based on the number of participants. The plan permits pretax
contributions by participants of up to 15% of base compensation. The Company may
make discretionary contributions to the plan, subject to certain limitations.
Participants are fully vested in their contributions and vest 20% per year in
employer contributions. The Company's costs for this plan amounted to
approximately $79,000, $67,000 and $95,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
The Company does not offer any postretirement benefits.
40
9. INCOME TAXES
There was no provision for income taxes for the years ended December 31, 1999,
1998 and 1997.
A reconciliation of the federal statutory rate to the Company's effective tax
rate for the years ended December 31, 1999, 1998 and 1997 is as follows:
1999 1998 1997
Federal statutory rate (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit (6.0) (6.0) (6.0)
Valuation allowance recorded 40.0 40.0 40.0
----- ----- -----
-% -% -%
===== ===== =====
The components and approximate tax effects of the Company's deferred tax assets
and liabilities as of December 31, 1999, and 1998 are as follows (in thousands):
1999 1998
Deferred tax assets (liabilities):
Net operating loss carryforwards for tax purposes $ 4,902 $ 4,363
Bases differences related to contract assets (620) (859)
Property, plant and equipment (14) (19)
Accruals and other reserves (72) 242
------- --------
Net deferred tax asset before valuation allowance 4,196 3,727
Valuation allowance (4,196) (3,727)
------- --------
Net deferred tax asset $ - $ -
======= ========
Due to the uncertainty surrounding the realization of the Company's net deferred
tax asset, the Company has provided a full valuation allowance against this
amount.
At December 31, 1999, the Company had available estimated net operating loss
carryforwards for federal tax purposes of approximately $11.6 million to reduce,
subject to certain limitations, future income taxes. These carryforwards expire
from 2011 to 2019 and are subject to review and possible adjustment by the
Internal Revenue Service.
10. SHAREHOLDERS' EQUITY
Stock Option Plans
Under the 1996 Management Stock Option Plan and the 1996 Director Stock Option
Plan (the Plans), the Board of Directors may grant incentive and nonqualified
stock options to employees and officers and nonqualified stock options to
directors. Generally, incentive stock options are granted at fair value and are
subject to the requirements of Section 422 of the Internal Revenue Code of 1986,
as amended. Nonqualified options are granted at exercise prices determined by
the Board of Directors. Options granted to date to directors vest over three
years from the date of grant. Options granted to management and employees vest
at various rates over periods ranging from three to seven
41
years or, in some cases, earlier if certain performance measures are met. The
performance measures are based on each $1 million increase in Company value up
to approximately $500 million, as adjusted. All options granted under the Plans
expire ten years from the date of grant.
At December 31, 1999, the Company has reserved 2,057,100 shares of common stock
for issuance under the management plan of which 454,945 shares are available for
future grants, and 201,616 shares of common stock under the director plan which
have all been granted.
During 1998, the Company adjusted the exercise price from $13.00 to $2.25 on
177,000 employee options and from $6.25 to $2.25 on 21,000 options granted to
certain management personnel. These options were treated as cancelled and
reissued in the table that follows.
A summary of stock option activity under the Plans is as follows:
Exercise Price Weighted Average
Shares Per Share Exercise Price
Options outstanding, December 31, 1996 1,427,100 $ 2.96-$4.86 $ 3.20
Granted 362,000 6.25-13.00 12.50
Exercised (10,732) 2.96 2.96
Cancelled (7,818) 2.96 2.96
---------- -------------- --------
Options outstanding, December 31, 1997 1,770,550 2.96-13.00 5.07
Granted 1,109,077 0.625-4.4375 1.63
Exercised (1,465) 2.96 2.96
Cancelled (1,125,335) 2.96-13.00 5.68
---------- -------------- --------
Options outstanding, December 31, 1998 1,752,827 0.625-12.50 2.53
Granted 167,996 1.1875-1.51 1.36
Exercised (101,751) 2.96 2.96
Cancelled (129,249) 0.625-2.96 2.68
---------- -------------- --------
Options outstanding, December 31, 1999 1,689,823 $ 0.625-$12.50 $ 2.38
========== ============== ========
Options exercisable, December 31, 1999 692,003 $0.9375-$12.50 $ 2.43
========== ============== ========
Options available for grant 454,945
==========
The following table summarizes information about outstanding options as of
December 31, 1999:
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of Number Contractual Price per Number Price per
Exercise Prices Outstanding Life Share Exercisable Share
$0.9375 - $1.51 806,833 8.6 years $1.02 187,771 $1.03
2.00 - 2.96 788,020 6.6 years 2.75 499,262 2.94
4.4375 19,970 8.4 years 4.44 4,970 4.44
12.50 75,000 7.4 years 12.50 - 12.50
--------- -------
1,689,823 692,003
========= =======
42
The Company has computed the pro forma disclosures required under SFAS No. 123
for options granted using the Black-Scholes option pricing model prescribed by
SFAS No. 123. The weighted average assumptions used are:
1999 1998 1997
Risk free interest rate 4.95 - 5.7 % 4.63-5.7% 6%
Expected dividend yield - - -
Expected lives 3 - 10 years 8-10 years 10 years
Expected volatility 71 - 78% 74 % 76 %
The total value of options granted under the Company's plans was computed as
approximately $0.2 million for 1999, $1.1 million for 1998, and $3.7 million for
1997, respectively. Of these amounts, approximately $0.7 million, $0.8 million,
and $0.4 million would have been charged to operations for the years ended
December 31, 1999, 1998 and 1997, respectively, for currently vested options.
The remaining amounts of $5.8 million, $6.4 million and $6.1 million for the
years ended December 31, 1999, 1998 and 1997, respectively, should be amortized
over the related vesting periods. The pro forma effect of SFAS No. 123 is as
follows:
1999 1998 1997
Net loss, as reported $ (1,998,000) $ (7,203,000) $ (4,362,000)
Pro forma net loss (2,714,000) (7,985,000) (4,796,000)
Basic and diluted net loss per share, as reported (0.23) (0.88) (0.54)
Pro forma basic and diluted net loss per share (0.32) (0.98) (0.60)
Employee Stock Purchase Plan
In 1997, the Company adopted the 1997 Employee Stock Purchase Plan and reserved
70,000 shares of common stock for issuance under such plan. In January 2000, an
additional 70,000 were reserved for issuance under the plan. The purchase price
is determined by taking the lower of 85% of the closing price on the first or
last day of periods defined in the plan. As of December 31, 1999, 39,844 shares
have been issued and options to purchase 2,515 shares of common stock at $1.09
per share were vested under the plan.
Preferred Stock
In June 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
43
Company has the right at any time to redeem the preferred shares. Subject to
certain volume limitations, the preferred stock is required to be converted into
the Company's common stock on June 30, 2002. Within ten (10) business days after
that date, the Company may either (i) redeem the outstanding shares of Series A
Preferred Stock, 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. 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.
In December 1999, the Company completed a $1.5 million private placement of
Series B 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
$7.00 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. Subject to certain volume limitations, the preferred stock is required
to be converted into the Company's common stock on October 30, 2002. Within ten
(10) business days after that date, the Company may either (i) redeem the
outstanding shares of Series B Preferred Stock, 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. 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 $60,000 and warrants
to purchase 20,000 shares of the Company's common stock, exercisable for three
years, at an exercise price of $8.94 per share which was 130% of the then
current closing price of the Company's common stock. The Company also issued
warrants to purchase 50,000 shares of the Company's common stock, exercisable
for three years, at an exercise price of $8.94 per share to the investor.
In the event of liquidation of the company, the preferred shareholders would
have a liquidating preference equal to the issuance price of the stock plus all
accrued and unpaid dividends.
On December 9, 1999, warrants issued through the placement of the series A
preferred stock were exercised at $1.79 for the purchase of 75,000 shares of
common stock.
In January 2000, 750 shares of series A preferred stock were converted into
259,356 shares of common stock.
44
Common Stock
On March 10, 2000, for an initial investment of $4,000,000 (of which $1,500,000
is to be funded following the registration of the offered securities with the
Commission), the Company agreed to issue to a private equity investor 391,917
shares of common stock, closing warrants to purchase 97,979 shares of the
Company's common stock, exercisable for five years at $11.77 per share, and
adjustable warrants, exercisable at nominal consideration during three 25
trading day periods beginning four months following closing (which may be
delayed to December 31, 2000). The adjustable warrants terminate if the market
value of the Company common stock exceeds $14.28 for any 20 consecutive trading
days prior to the adjustment periods. If not terminated, the number of shares
that may be acquired under the adjustable warrants is determined by a formula
that is dependent on the extent to which the market value of the Company's
common stock is less than $11.09 per share during the adjustment periods.
Subject to certain closing conditions, two additional investments of $3,000,000
each may be invested by the same investor between 150 and 170 days after the
initial investment and between 120 and 140 days thereafter on similar terms. The
purchase price of the common stock for each additional investment will equal
115% of the average per share market value for the ten trading days prior to the
applicable closing date and the closing warrants will equal to 25% of each
investment at an exercise price equal to 125% of the average per share market
price for the five trading days prior to such closing date. The termination
amount for the subsequent adjustable warrants will be 140% of the market value
of the common stock on the applicable closing date and the formula amount will
be set at 108% of such market value.
11. BUSINESS SEGMENTS, GEOGRAPHICAL INFORMATION, AND CONCENTRATIONS OF RISK
The Company is engaged in one business, the development and implementation of
digital identification systems and solutions. Effective June 1, 1998, the
Company reorganized its operations to create two separate divisions, a
biometrics division and a systems integration and identification card division
(SI). 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 division based on actual usage or other methods that approximate actual
usage. All other costs and expenses have been allocated to each business based
on actual usage. The Company's accounting policies for its segments are the same
as disclosed in Note 2. Management evaluates segment performance based on
operating income.
45
Substantially all of the Company's revenues are currently derived from the SI
division's public sector customers and contractors to such customers. The
Company believes that for the foreseeable future it will continue to derive a
significant portion of its revenues from a limited number of large contracts.
For the years ended December 31, 1999, 1998 and 1997, four customers, three
customers and one customer, respectively, each accounted for more than 10% of
the Company's revenues and an aggregate of 52%, 40% and 46% of revenues for each
of the years, respectively.
1999 1998 1997
BUSINESS SEGMENT INFORMATION
Revenues:
Systems integration division $ 19,177 $15,759 $29,388
Biometrics division 120 500 --
-----------------------------
$ 19,297 $ 6,259 $29,388
=============================
Operating Income (Loss):
Systems integration division $ 2,860 $(3,141) $(3,921)
Biometrics division (1,625) (1,357) --
-----------------------------
$ 1,235 $(4,498) $(3,921)
=============================
Total Assets:
Systems integration division $ 44,587 $45,881 $47,463
Biometrics division 93 563 --
-----------------------------
$ 44,680 $46,444 $47,463
=============================
Depreciation and Amortization:
Systems integration division $ 4,422 $ 2,996 $ 1,964
Biometrics division -- 26 --
-----------------------------
$ 4,422 $ 3,022 $ 1,964
=============================
Capital Expenditures:
Systems integration division $ 3,146 $ 5,480 $12,153
Biometrics division -- 9 --
-----------------------------
$ 3,146 $ 5,489 $12,153
=============================
GEOGRAPHIC INFORMATION:
Revenues:
United States $ 19,297 $15,644 $28,149
International -- 615 1,239
-----------------------------
$ 19,297 $16,259 $29,388
=============================
46
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth selected quarterly financial data for 1999 and
1998 (in thousands, except per share amounts):
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
1999
Revenues $ 4,431 $ 4,714 $ 5,209 $ 4,943
Project margin (loss) (145) 120 407 853
Net income (loss) (665) (433) (68) 171
Loss applicable to common
shareholders (665) (433) (282) (618)
Basic net loss per share (0.08) (0.05) (0.03) (0.07)
Diluted net loss per share (0.08) (0.05) (0.03) (0.07)
1998
Revenues $ 4,629 $ 2,965 $ 4,242 $ 4,423
Project margin (loss) 633 343 185 (859)
Net loss (1,864) (1,568) (1,286) (2,485)
Loss applicable to common
shareholders (1,864) (1,568) (1,286) (2,485)
Basic and diluted net loss per share (0.23) (0.19) (0.16) (0.30)
Net loss per share amounts for the first quarter of 1998 have been restated to
reflect the Company's early adoption of SOP 98-5.
The 1998 results reflect the impact of charges and the accounting change
discussed in note 2.
The 3rd and 4th quarter results for 1999 include preferred stock dividends of
$214 and $789, respectively, in arriving at the loss attributable to common
shareholders.
47
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On November 3, 1999, the Company's audit committee approved the engagement of
BDO Seidman, LLP to replace Arthur Andersen LLP as the Company's independent
public accountants. The Company's change in independent public accountants was
made at the request of its majority shareholder, Lau Technologies. Lau
Technologies has engaged BDO Seidman, LLP to act as its independent public
accountants and desires that the same firm audits the financial statements of
its 64%-owned subsidiary. There were neither disagreements with Arthur Andersen
LLP on any matter of accounting principles or practice, financial statement
disclosure, auditing scope or procedure nor any "reportable events" as that term
is used in Item 304(a) of Regulation S-K.
48
PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning directors required under this item is
incorporated herein by reference from the material contained under the caption
"Election of Directors" in the registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A,
not later than 120 days after the close of the fiscal year. The information
concerning executive officers required under this item is contained herein under
the caption "Officers," Part I(c)(xiv).
Item 11. Executive Compensation
The information required under this item is incorporated herein by reference
from the material contained under the caption "Executive Compensation" in the
registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item is incorporated herein by reference
from the material contained under the caption "Security Ownership" in the
registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required under this item is incorporated herein by reference
from the material contained under the caption "Certain Relationships and Related
Transactions" in the registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A, not later
than 120 days after the close of the fiscal year.
49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a), (d) Financial Statements and Schedules
For a list of financial statements included herein see Index on page 25.
All schedules are omitted because they are not applicable or not required, or
because the required information is shown either in the financial statements or
in the notes thereto.
(b) Reports on Form 8-K
Changes in Registrant's certifying accountants filed on November 3, 1999.
(c) Exhibits
See Exhibit Index on pages 51 through 53.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 29th day of March,
2000.
VIISAGE TECHNOLOGY, INC.
By: /s/ Thomas J. Colatosti
----------------------------
Thomas J. Colatosti
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities indicated on the 29th day of March, 2000:
Signature Title
--------- -----
By:________________________________
Denis K. Berube Chairman of the Board of Directors
*
By:________________________________
Thomas J. Colatosti President and Chief Executive Officer (Principal Executive Officer)
*
By:________________________________ Vice President, Corporate Controller and Treasurer (Principal Financial and
Accounting Officer)
Sean F. Mack
* Secretary and Director
By:________________________________
Charles J. Johnson
* Director
By:________________________________
Charles E. Levine
* Director
By:________________________________
Harriet Mouchly-Weiss
* Director
By:________________________________
Peter Nessen
* Director
By:________________________________
Thomas J. Reilly
*
* By: /s/ Thomas J. Colatosti
______________________________
Thomas J. Colatosti
Attorney-in-fact
EXHIBIT INDEX
Exhibit
- -------
No. Description
-- -----------
2* Amended and Restated Asset Transfer Agreement, dated as of August 20,
1996, between the Registrant and Lau Technologies.
3.1* Restated Certificate of Incorporation of the Registrant.
3.2* By-Laws of the Registrant.
3.3** Certificate of Designation of series A convertible preferred stock.
3.4 Certificate of Designation of series B convertible preferred stock.
4* Specimen certificates for shares of the Registrant's Common Stock.
10.1* Amended and Restated License Agreement, dated as of August 20, 1996,
between the Registrant and Lau Technologies.
10.2* Form of Administration and Services Agreement between the Registrant and
Lau Technologies.
10.3* Form of Use and Occupancy Agreement between the Registrant and Lau
Technologies.
10.4* License Agreement, dated as of August 20, 1996, between the Registrant
and Facia Reco Associates, Limited Partnership.
10.5 1996 Management Stock Option Plan, as amended.
10.6* Form of Option Agreement for the 1996 Management Stock Option Plan.
10.7 1996 Director Stock Option Plan, as amended.
10.8* Form of Option Agreement for the 1996 Director Stock Option Plan.
10.9* Contract between the Registrant and Transactive, Inc. (relating to the
New York Department of Social Services), dated as of December 8, 1994, as
amended.
10.10* Subcontract between the Registrant and Information Spectrum, Inc.
(relating to the U.S. Immigration & Naturalization Service), dated as of
October 19, 1995.
10.11* Contract between the Registrant and the North Carolina Department of
Transportation, dated as of April 26, 1996.
10.12*** Contract between the Registrant and the Illinois Secretary of State,
dated June 2, 1997, as amended.
10.13**** 1997 Employee Stock Purchase Plan.
10.14***** Employment Agreement, dated as of November 3, 1998, between the
Registrant and Thomas J. Colatosti.
10.15******Purchase Agreement (Project Finance Facility) between the Registrant
and Sanwa Business Credit Corporation, dated as of November 20, 1998,
as amended.
10.16******* Amended and Restated Credit Agreement between the Registrant and
State Street Bank and Trust Company, dated December 7, 1998.
EXHIBIT INDEX
Exhibit
- -------
No. Description
-- -----------
10.17 $2,000,000 Convertible Subordinated Note between the Registrant and Lau
Acquisition Corporation, dated May 3, 1999.
10.18 Securities Purchase Agreement, dated June 30, 1999 between the Registrant
and Shaar Fund Ltd.
10.19 Registration Rights Agreement, dated June 30, 1999 between the Registrant
and Shaar Fund Ltd.
10.20 Common Stock Purchase Warrants, dated June 30, 1999 between the
Registrant and Shaar Fund Ltd.
10.21 Subcontract Agreement, dated December 6, 1999 between the Registrant and
Compaq Computer Corporation.
10.22 Securities Purchase Agreement, dated December 30, 1999 between the
Registrant and Shaar Fund Ltd.
10.23 Registration Rights Agreement, dated December 30, 1999 between the
Registrant and Shaar Fund Ltd.
10.24 Common Stock Purchase Warrants, dated December 30, 1999 between the
Registrant and Shaar Fund Ltd.
10.25 Securities Purchase Agreement, dated March 10, 2000 between the
Registrant and Strong River Investments, Inc.
10.26 Registration Rights Agreement, dated March 10, 2000 between the
Registrant and Strong River Investments, Inc.
10.27 Common Stock Purchase Warrant, dated March 10, 2000 between the
Registrant and Strong River Investments, Inc.
10.28 Adjustable Common Stock Purchase Warrant, dated March 10, 2000 between
the Registrant and Strong River Investments, Inc.
10.29 Letter Agreement, dated March 10, 2000 between the Registrant and Strong
River Investments, Inc.
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Arthur Andersen LLP.
24 Power of Attorney.
27 Financial Data Schedule.
* Filed as an exhibit to the Registrant's Form S-1 Registration Statement
dated November 4, 1996 (File No. 333-10649).
2
EXHIBIT INDEX
Exhibit
- -------
No. Description
-- -----------
** Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 27, 1999 (File No. 000-21559).
*** Amendment filed as an exhibit to the Registrant's Report on Form 10-K for
the year ended December 31, 1997 (File No. 000-21559).
**** Filed as appendix to October 10, 1997 Schedule 14C Information Statement.
***** Amendment filed as an exhibit to the Registrant's Report on Form 10-K for
the year ended December 31, 1998 (File No. 000-21559).
****** Original agreement filed as an exhibit to the Registrant's Form S-1
Registration Statement dated November 4, 1996 (File No. 333-10649).
Amendment filed as an exhibit to the Registrant's Report on Form 10-K for
the year ended December 31, 1997 (File No. 000-21559).
*******Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 29, 1996 (File No. 000-21559).
3