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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, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________.
Commission File Number 000-21559
VIISAGE TECHNOLOGY, INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3320515
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Porter Road, Littleton, MA 01460
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (978)-952-2200
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Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of exchange on which registered
- ------------------- ------------------------------------
Common Stock $.001 par value NASDAQ National Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference into Part III of this Form 10-K or any amendment to
this Form 10-K. |_|
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 1, 2001, was approximately $37 million.
As of March 1, 2001, the registrant had 16,119,657 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 8, 2001, and Form S-3 filed on April 28, 2000.
1
PART I
Item 1. Business
--------
(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. Viisage's primary customers have
been government agencies with particular penetration in Departments of Motor
Vehicles. 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 1,200 locations in 13 states. The Company
has also provided services under subcontracts for projects in Jamaica, the
Philippines and for the U.S. Immigration and Naturalization Service. Originally
developed at MIT, face-recognition technology is widely recognized as the most
convenient, non-intrusive and cost-effective biometric available. Viisage's
patented face-recognition technology is focused on five major product
application areas.
FaceEXPLORER(TM), Viisage's technology for image retrieval and analysis, is
recognized for its leadership technology performance in real-time and
large-database applications. FaceEXPLORER is deployed in the world's largest
face-recognition application with a database of more than 7 million enrolled
images and growing by 15,000 new images per day. The product family of
face-recognition applications also includes: FaceNET(TM) for Internet and
e-commerce security; FacePIN(TM) for point-of-sale transactions verification;
FacePASS(TM) used for physical access control and keyless entry FaceFINDER(TM)
for surveillance and identification.
(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 an integrated
business model identification solutions through system integration systems and
through biometric software. Previously the Company reported two business
segmens, however the Company's current mission is to design, develop and deliver
integrated indentification solutions. Virtually all of the Company's direct
revenue has been derived within the United States.
(c) Description of Business
-----------------------
(i) Principal Products and Services
-------------------------------
Industry Background
The need for proper identification affects 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 fraudulent
2
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 using 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.
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 Identification'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 systems integration business develops and implements digital
identification systems and solutions. The Company'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 Company offers two types of
identification systems. The first is an instant issue system that produces
identification cards on location in minutes. The second is a central
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production system that receives the information electronically from the point of
capture, and produces cards from a secure off-site processing location which are
later mailed to recipients in several days. The facial images captured by the
card systems can provide the content (face bases) for identification and
verification applications.
In a Viisage card system, the facial images and other information are captured
in digital format at a PC-based Image Capture Workstation, which usually
incorporates the Company's proprietary SensorMast(TM) unit. 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
and an integrated card delivery unit prepares the cards for mailing. When
central production is selected, such systems incorporate the Company's
proprietary Visual Inspection System for quality control of all cards produced.
Every system delivers top quality, tamper-resistant identification cards
customized to meet the customer's information, delivery and security needs. A
wide range of optional features are available, including bar codes, holographic
overlays, ghost imaging, ultraviolet or micro preprinting, smart cards and a
number of other features.
Systems Integration and Software Design Capabilities
In addition to the Company'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 Company's software design and systems integration
capabilities enable it to accommodate most computing environments and customers
with special requirements.
Proprietary Products
The Company's proprietary products and related software are described below:
o 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.
o The Visual Inspection System automatically evaluates cards produced
by the Company's central production systems to determine whether the
image and data on a person's identification card correspond to the
information about that person in the system database. If the
information does not match, the Visual Inspection System rejects the
printed card and identifies the defect for immediate corrective
action. This system, which incorporates robotics, high-speed cameras
and sophisticated
4
software, automates an activity, which is otherwise performed
manually and is a potential source of cost savings for customers.
o 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, the size of 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 face recognition
technologies in cooperation with its principal shareholder and technology
partner Lau Technology. The Company has focused on the face image as the 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 little special training. Viisage is concentrating on
five principal areas: physical keyless entry and access control; PC network and
Internet access security; real-time large database applications; point-of-sale
applications, such as ATM's; and surveillance applications. The Company has
several on-going facial recognition identification projects, including projects
with the Massachusetts Department of Transitional Assistance, the Illinois
Secretary of State, Illinois State Police, CMS, HarvardNet, Global Cash
Access/Infonox and a number of other installations with distribution partners
like, Biometrica, who has more than 80 surveillance applications in casinos.
Viisage has advanced the face recognition technology initially developed by
Professor Alex Pentland of the Massachusetts Institute of Technology (MIT) and
have developed products for access control, point-of-sale, Internet access,
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 six years, is
integral to making these technologies more robust and commercially viable.
Viisage's patented facial recognition software offers organizations the ability
to create unique identification solutions and enhances both 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 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.
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Proprietary Products
The Biometric division's proprietary products and related software are described
below:
o The Facefinder(TM) products meet the demands for a modern
surveillance identification solution. Facial Recognition provides
the non-intrusive and discreet capability for surveillance
applications. Viisage's patented real-time video technology scans
crowds of people and matches individuals to selected faces
previously stored in an image database. Customers, such as casinos,
domestic and international airports, military bases and government
buildings have a crucial need to identify suspects either from long
distance or large crowds. Viisage provides these security conscious
customers with the tools to identify potential threats before
trouble occurs.
o The FaceExplorer(TM)products meet the challenges for large image
database research. As the world's leader in the development and
delivery of Facial Recognition systems, Viisage continues to push
the technical envelope to manage large image databases. Facial
Recognition provides the ability to reduce fraud and crime by
identifying duplicate images in large databases, such as licensed
drivers, benefit recipients, missing children and immigration.
Additionally, law enforcement can now match images and computer
composites against image databases to identify suspects and known
criminals. Enterprise customers are now equipped with the capability
to verify identities and reduce fraud by effectively retrieving,
managing and analyzing their image databases. Viisage has deployed
the world's largest face recognition system with the Illinois
Secretary of State and State Police. This system provides both
duplicate identity fraud reduction and identity investigation
capabilities. When fully deployed, the system will contain up to 20
million images with the ability to retrieve images within seconds.
o The FacePass(TM)keyless entry system is used for convenient and
authorized physical access to office buildings, factories,
dormitories, etc. Physical access control currently has a ubiquitous
set of escort devices, such as magnetic cards, PIN numbers and
electronic keys to access office buildings, dormitories and homes.
The security problem with all these devices is their propensity to
be lost or accessed by unauthorized individuals. Face replaces PINs
and intrusive biometrics with an affordable, reliable and sanitary
solution. No longer is it necessary to carry something that can be
lost, remember something that can be forgotten or touch something
handled by an entire community.
o FacePIN(TM)provides both security and convenience for consumers and
merchants. Consumers are currently accustomed to being recognized by
their face at retail locations by providing merchants with a
driver's license or other form of photo ID verification. In sharp
contrast to today's widely used signature verification process,
which is highly unreliable and cannot be accurately determined by
unskilled and untrained clerks, Facial Recognition makes
verification reliable, automatic and fast. In banking,
FacePIN(TM)uses ATM cameras to recognize and verify customer
identities so the financial transaction can be quickly and
effortlessly conducted. Face Recognition technology has the
potential to obviate the need for consumers to remember their
personal identification numbers (PINs) and other such password
mechanisms.
o FaceNet(TM)can eliminate the burden of trying to remember a myriad
of Internet passwords and user names may be a thing of the past. The
growth of e-commerce across the Internet has accelerated the need
for better security solutions. Both business-to-consumer (B2C) and
business-to-business (B2B) financial transactions require secure
authenticity between parties. Currently, solutions include a
combination of public/private key encryption and digital
identification certificates. These
6
solutions include encryption technology, such as 128-bit SSL and the
reliance on trusted certification authorities. These are necessary
elements, but they do not provide a comprehensive solution. Face
Recognition provides a convenient, easy to use security solution.
FaceNet(TM)can be used across numerous communication devices,
including PCs, laptops, personal digital assistants (PDAs), cell
phones and other new network appliance. Face biometrics is the most
cost-effective, convenient, non-intrusive method available for
protection against Internet fraud and risks of lost or stolen
Internet access devices.
Sales and Marketing
The Company markets its products directly through its internal sales force, and
continues to develop strategic partnerships and distribution channels with
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 includes traveling with sales
representatives to help explain the systems, defining solutions for customers,
designing systems for proposal activity, supporting the implementation process
and providing post-implementation support. The Company also uses its program
management group to identify opportunities with existing customers and
coordinate related selling efforts.
The Company's systems and solutions 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 (RFP) is
issued, a comprehensive proposal is developed and usually followed by an on-site
customer demonstration. The process from the issuance of an RFP to the ultimate
award can take up to six months. Following the bid award a six-to-twelve month
implementation and installation process usually ensues. The Company believes
that long sales cycles in its public sector markets is endemic to the market and
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 applications are primarily made of software content. The
marketing effort 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.
(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
7
expects to continue to benefit from on going research and development conducted
by Lau. The Company also benefits from research and development activities
conducted by the manufacturers of the components integrated into the Company's
systems such as cameras, database software, computers, etc.
For the years ended December 31, 2000, 1999 and 1998, research and development
expense was $688,000, $253,000 and $358,000, respectively. Such amounts do not
include amounts for specific projects that are reported as project costs, and
are material expenditures, or the benefits from the other research and
development activities referred to above.
(iii) Manufacturing and Sources of Supply
-----------------------------------
Proprietary subsystems and assemblies are made to the Company's specifications
by contract manufacturers, including Lau Technologies. Other non-proprietary
system components, such as certain software, cameras, personal computers,
printers and related components, which are purchased from third-party vendors.
The Company does purchase some of the 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 may from time to time experienced delays due to a lack 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 Lau to use Viisage's
proprietary technology to distribute FaceFinder products for certain European
markets and for United States airports and federal agencies. Lau owns an U.S.
patent, which expires in 2014 on a card production system used by the Company.
The Company has a number of U.S. patent applications in process for facial
recognition technologies, has filed a copyright application for the SensorMast
software 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. This
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 payment on a per machine
8
copy basis incorporating the licensed technology. Until June 1, 2001, a minimum
annual royalty applies of, generally, $21,000 for the U.S. rights and an amount
ranging from $21,000 to $42,000 for the non-U.S. rights.
The Company has also obtained from Lau, an exclusive (except for limited fields
reserved by Lau), perpetual, worldwide license to use the U.S. Patent No.
5,432,864 purchased by Lau from Daozeng Lu and Simon Lu, and all improvements
thereto. This 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. No royalty amount has been incurred to date and
therefore the royalty commencement date has not been established.
The Company has applied to register 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 operations are not seasonal since contracts are awarded and
performed throughout the year. However, the Company believes its public sector
business could be subject to cyclical procurement delays that may be related to
state election cycles.
(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 may raise capital,
as needed, to fund working capital needs or growth activities.
(vii) Customers and End Users
-----------------------
The following lists and categorizes the Company's customers and end users as of
December 31, 2000:
State Departments of Motor Vehicles, Other State and Local Agencies
Arizona Department of Transportation
Arkansas Department of Human Services
Arkansas Office of Driver Services
Connecticut Department of Social Services
Florida Department of Highway Safety and Motor Vehicles*
Illinois Secretary of State
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Illinois State Police
Maryland Department of Transportation and Motor Vehicle Administration*
Massachusetts Department of Transitional Assistance
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
Pennsylvania Department of Transportation
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*
Electoral Commission of Jamaica *
Electoral Commission of Uganda
COMMERCIAL CUSTOMERS AND DISTRIBUTION PARTNERS
Biometrica
Control Monitor Systems
Global Cash Access/Infonox
HarvardNet
Logicon
* By subcontract.
For 2000, four customers (Ohio Bureau of Motor Vehicles, Unisys Corporation
(Florida Department of Safety and Motor Vehicles), Pennsylvania Department of
Transportation, and Maryland Department of Transportation) each accounted for
over 10% of Company revenues and an aggregate of 58% 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. For 1998, three
customers (Arkansas Office of Driver Services, Florida Department of Highway
Safety and Motor Vehicles and Illinois Secretary of State) each accounted for
over 10% of Company revenues and an aggregate of 40% of revenues for the year.
The loss of any such customers could have a material adverse impact on the
Company's business, operating results and financial condition. Biometric
revenues approached 10% of total revenues in 2000.
(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 only somewhat indicative of future
revenue because contracts may be changed positively or negatively. Backlog could
be cancelled at any time for lack of performance, without penalty, however,
cancellations not caused by the Company's lack of performance will be subject to
recovery of all actual committed costs and profit on work performed through the
date of cancellation.
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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. Further, backlog typically
represents a limited portion of the Company's annual plan. Therefore, the
Company believes that backlog cannot be considered a meaningful indicator of
future financial performance.
At December 31, 2000, the Company's backlog was approximately $69 million,
compared to approximately $58 million at December 31, 1999.
(ix) Government Contacts
-------------------
Government contracts are generally subject to termination for convenience or
lack of appropriation at the determination of the subject agency. While
termination is a significant financial risk, the Company has never incurred a
contract termination.
(x) Competition
-----------
The market for the Company's products and services is extremely competitive and
management expects this competition to intensify the Company's continues to be
successful.
The Company faces competition in the identification systems market larger
companies, including Polaroid Corporation and Unisys Corporation, which, in some
cases, have 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: service, support,
technical excellence, price credibility, flexibility in terms of accommodating
customer technical and business needs, and responsiveness. The relative
importance of each of these and other factors depends upon the specific customer
and situation involved. Substantially all of the Company's sales to new
customers have been the result of competitive bidding for contracts pursuant to
public sector procurement rules. The Company believes that its competitive
strength is its systems integration and software design capabilities, system
performance and architecture technologies, operating flexibility, price, and
robust service and project management.
In the field of biometric identification technology, the Company competes with
several small face recognition providers, none of whom have any market
dominance, as well as providers of other biometric solutions. Fingerprint
recognition solutions have a long history of use, particularly in law
enforcement applications. The Company expects that as the market for biometric
solutions develops new companies and companies with significant resources and
capabilities may enter the market and competition will intensify.
(xi) Research and Development
------------------------
See Product Development Section (ii) above
(xii) Environmental Protection Regulations
------------------------------------
11
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, 2000, the Company has 65 employees. The Company significantly
supplements its employee resources with independent contractors. None of the
Company's employees is represented by a labor union, and the Company considers
its relationship with its employees and contractors to be very 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, 53, 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. He joined the
Company in 1997 as Vice President of Operations. 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 senior
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, 49, 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.
Stanley Duci, 48, 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.
Gretchen Lewis, 47, was elected as an officer in February of 2001 with the title
of Vice President of Partner Marketing of the Company. From June of 1997, Ms.
Lewis served as the Director of Marketing. Prior to joining Viisage, Gretchen
was Secretary of Health and Human Resources under Governor Gaston Caperton of
West Virginia. In that position, she was responsible for social services
administration, child support enforcement, child protective services, public
health and Medicaid. She had been a practicing lawyer in Williamson and
Charleston, West Virginia. Previously, she served under West Virginia Governor
Jay Rockefeller as his Budget Planning Director and Commissioner of Workers'
Compensation.
Sean F. Mack, 38, 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 &
12
Associates in Cambridge, Massachusetts for two years, and as a financial program
analyst for Raytheon Company in Marlboro, Massachusetts from 1985 to 1987.
Mike Mazzu, 33, was elected as an officer in February 2001 with the title of
Vice President of Biometric Engineering of the Company. From July 1998, Mr.
Mazzu served as Director of Biometrics engineering. Previously, Mr. Mazzu served
in various capacities at Lau. He has managed and contributed to the research,
development and implementation of face-recognition technology. His contribution
ranges from image workstation development, card production systems and
face/fingerprint systems. System implementations of face recognition include
access control, surveillance and large scale database mining. He has also lead
technical teams in the development and implementation of several domestic and
international ID projects. He has over ten years of experience in the fields of
image processing, software development, systems integration and biometrics.
Prior to joining Lau, Mike worked on the development of IR missile launch
detection technology for a GE and Lockheed Martin joint venture. He was also a
supervisor and graduate from GE's Edison Engineering and Advanced Courses
Program in Syracuse, NY.
(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 1, 2001, the closing price of the common stock was $2.31
per share and there were approximately 70 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 2000 and 1999 were as follows:
2000 1999
---- ----
Quarter High Low High Low
------- ---- --- ---- ---
First Quarter 14-1/4 6-1/2 1-13/16 1-1/16
Second Quarter 7-3/8 2-9/16 1-5/8 3/4
Third Quarter 5-3/16 3 2-1/2 1-3/16
Fourth Quarter 2-13/16 13/16 8-1/16 1-3/4
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,
- ------------------------
2000 1999 1998 (1) 1997 (2) 1996
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
Statement of Operations Data:
Revenues ....................................... $ 27,539 $ 19,297 $ 16,259 $ 29,388 $ 24,971
Project costs .................................. 21,136 15,131 15,957 26,122 19,484
-------- -------- -------- -------- --------
Project margin ................................. 6,403 4,166 302 3,266 5,487
-------- -------- -------- -------- --------
Operating expenses:
Sales and marketing .......................... 787 739 2,195 4,930 1,852
Research and development ..................... 688 253 358 152 235
General and administrative ................... 2,489 1,939 2,247 2,105 1,880
-------- -------- -------- -------- --------
Total operating expenses ................... 3,964 2,931 4,800 7,187 3,967
-------- -------- -------- -------- --------
Operating income (loss) ........................ 2,439 1,235 (4,498) (3,921) 1,520
Interest expense ............................... 1,637 2,230 1,667 441 714
-------- -------- -------- -------- --------
Income (loss) before income taxes and
cumulative effect of change in accounting
principle .................................... 802 (995) (6,165) (4,362) 806
Provision for Income taxes ..................... -- -- -- -- 205
-------- -------- -------- -------- --------
Income (loss) before cumulative effect of
Change in accounting principle ............... 802 (995) (6,165) (4,362) 601
Cumulative effect of change in accounting
Principle .................................... -- -- (1,038) -- --
-------- -------- -------- -------- --------
Net Income (loss) .............................. 802 (995) (7,203) (4,362) 601
Preferred stock dividends ...................... (327) (1,003) -- -- --
-------- -------- -------- -------- --------
Income (loss) applicable to common
shareholders before cumulative effect ........ 475 (1,998) (7,203) (4,362) 601
Cumulative effect of implementing EITF 00-27 ... (277) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) applicable to common
shareholders ................................. $ 198 $ (1,998) $ (7,203) $ (4,362) $ 601
======== ======== ======== ======== ========
Basic income (loss) per share before
cumulative effect .............................. $ 0.05 $ (0.23) $ (0.75) $ (0.54) $ 0.10
======== ======== ======== ======== ========
Basic net income (loss) per share
applicable to common shareholders (3) ........ $ 0.02 $ (0.23) $ (0.88) $ (0.54) $ 0.10
======== ======== ======== ======== ========
Weighted average basic common shares
outstanding .................................. 10,460 8,610 8,175 8,060 6,022
======== ======== ======== ======== ========
Diluted income (loss) per share before
cumulative effect .............................. $ 0.03 $ (0.23) $ (0.75) $ (0.54) $ 0.09
======== ========= ========= ========= ========
Diluted net income (loss) per share
applicable to common shareholders (3) ........ $ 0.01 $ (0.23) $ (0.88) $ (0.54) $ 0.09
======== ======== ======== ======== ========
Weighted average diluted common shares
outstanding .................................... 14,504 8,610 8,175 8,060 6,537
======== ======== ======== ======== ========
15
December 31,
- ------------
2000 1999 1998 (1) 1997 (2) 1996
------- ------- -------- -------- -------
Balance Sheet Data:
Working Capital .............. $15,224 $13,549 $11,089 $15,261 $20,676
Total assets ................. 45,273 44,680 46,444 47,463 36,119
Long-term obligations ........ 9,526 15,721 18,058 13,300 4,420
Shareholders' equity ......... 20,728 15,790 12,618 18,736 23,020
(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.
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 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. Viisage's primary customers have
been government agencies with particular penetration in Departments of Motor
Vehicles 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 1,200 locations in 13 states. The Company
has also provided services under subcontracts for projects in Jamaica, the
Philippines and for the U.S. Immigration and Naturalization Service. Originally
developed at MIT, face-recognition technology is widely recognized as the most
convenient, non-intrusive and cost-effective biometric available. Viisage's
patented face-recognition technology is focused on five major product
application areas.
FaceEXPLORER(TM), Viisage's technology for image retrieval and analysis, is
recognized for its leadership technology performance in real-time and
large-database applications. FaceEXPLORER is deployed in the
16
world's largest face-recognition application with a database of more than 7
million enrolled images and growing by 15,000 new images per day. The product
family of face-recognition applications also includes: FaceNET(TM) for Internet
and e-commerce security; FacePIN(TM) for point-of-sale transactions
verification; FacePASS(TM) used for physical access control and keyless entry
FaceFINDER(TM) for surveillance and identification.
The Company is engaged in one business, the development and implementation of
digital identification systems and solutions. The Company has an integrated
business model: identification solutions through systems integration systems or
through biometric software.
The Company 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.
Biometric revenues approached 10% of total revenues in 2000, the balance of the
Company's revenues are primarily derived from the public sector customers and
contractors to such customers. The Company believes for the near 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 31st, Customers who
accounted for more than 10% of the company's revenue in a given year are as
follows:
o For 2000, four customers accounted for an aggregate of 58%
o For 1999, four customers accounted for an aggregate of 52%
o For 1998, three customers accounted for an aggregate of 40%
The Company's results of operations are significantly affected by, among other
things, the timing of awards and performance on contracts. As a result, the
Company's revenues and income may fluctuate from quarter to quarter, and
comparisons over longer periods 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 election cycles.
RESULTS OF OPERATIONS
Year ended December 31, 2000 and 1999
- -------------------------------------
Revenues are derived principally from multi-year contracts for system
implementation, card production and related services. Revenue grew to $27.5
million in 2000 from $19.3 million in 1999. The 42.7% increase in revenue
between the two years was primarily the result of a new contract with the State
of Pennsylvania and contract extensions with our existing customers.
Gross margins increased to 23.3% in 2000 from 21.6% in 1999. The increase in
gross margins between the two periods is due principally to the positive impact
of new higher margin business and the positive effect of contract extensions on
the overall revenue mix in 2000.
Sales and marketing expenses remained relatively unchanged between 2000 and
1999. Sales and marketing expense decreased, as a percentage of revenue, to 2.9%
from 3.8% for the year-to-year period. The decrease is
17
due principally to the Company's continuing efforts in marketing its patented
biometric solutions. The company continues to increase its distribution and
marketing capabilities for its facial recognition solutions by adding and
certifying new system integrators and reseller partners. This allows the Company
to control its costs while increasing its marketing capabilities.
Research and development expenses increased $0.4 million in 2000 from 1999. This
represents an increase to 2.5% from 1.3% of revenue. The increase is due
principally to the Company's continued investment in the biometrics division.
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
Technologies and the Massachusetts Institute of Technology for projects that are
not directly related to the Company.
General and administrative expenses increased $0.6 million in 2000 from 1999, a
decrease to 9.0% from 10.0% of revenue. The reduction, as a percentage of
revenue, is due principally to stringent cost management and the increase in the
business volume.
Interest expense decreased $0.6 million in 2000 from 1999. This represents a
decrease to 5.9% from 11.6% of revenue. This decrease reflects a reduction in
borrowings during 2000.
The Company did not record any tax for the fiscal year 2000 due to the
availability of tax loss carryforwards.
Charges and Accounting Change. During the fourth quarter of 2000, the Financial
Accounting Standards Board issued Emerging Issues Task Force (EITF) 00-27
"Application of EITF issue No. 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingency Adjustable Conversion Ratios, to
Certain Convertible Instruments". EITF No. 00-27 requires the remeasurement of
the original issue discount on preferred stock with characteristics similar to
the convertible preferred stock issued by the Company during fiscal year 1999.
This accounting change required the value of the warrants issued with the
preferred stock to be included in calculating the beneficial conversion value.
This resulted in a cumulative charge of $277,000 to income applicable to common
shareholders in the fourth quarter of fiscal 2000.
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 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. The decrease is due
principally to restructuring and the related reductions in employee 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. The decrease is due
principally to restructuring and related reductions in headcount, more focused
research and development efforts, and the Company's ongoing cost reduction
efforts.
18
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 decreased $0.3 million in 1999 from 1998, a
decrease to 10.0% from 13.8% of revenue. The decrease was due principally to
restructuring and related reductions in employment and the Company's ongoing
cost reduction efforts.
Interest expense increased $0.6 million in 1999 from 1998. This represented an
increase to 11.6% from 10.3% of revenue. These additional costs were due
principally to the increased borrowings and leasing activity to support new
customer contracts.
The Company did not record any tax benefit for the 1999 or 1998 net loss due
to the uncertainty of when such benefits will be realized.
LIQUIDITY AND CAPITAL RESOURCES
In June 2000, the Company refinanced its operating line of credit. The new
revolver, which provides for available borrowings up to $4.0 million is a sweep
account, which is set-up to maintain the lowest possible balance on the revolver
by maintaining a zero balance of cash at all times. The line of credit contains
various financial covenants and is collaterized by substantially all of the
Company's assets. As of December 31, 2000, $2.5 million of the $4.0 million line
of credit had been utilized. In comparison, the Company utilized $6.1 million of
the $6.5 million line as of December 31, 1999.
Accounts receivable increased approximately 1.3% from December 31, 1999 to
December 31, 2000.
Costs and estimated earnings in excess of billings increased approximately 18.6%
from December 31,1999 to December 31, 2000, which reflects the unbilled
accumulation of costs for new contract awards.
Historically, the Company has not made substantial capital expenditures for
facilities, office and computer equipment. Capital expenditure to support
customer contracts however, are quite substantial and are reported within the
contract costs.
The Company also has system project lease financing arrangements with commercial
leasing organizations. Pursuant to these arrangements, the lessor purchases
certain of the Company's 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 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. These project lease arrangements are accounted for as capital
leases. At December 31, 2000, the Company had approximately $8.0 million
outstanding under these lease-financing arrangements. The Company has a similar
project lease financing arrangement with Lau that provides for up to $5.0
million of capital leases financing with $2.7 million outstanding at December
31, 2000, of which $.4 million is included in the current portion of capital
lease obligations.
19
In February 2001, the Company obtained an additional $4.0 million in project
financing from a commercial bank.
The Company has met all of it debt covenant requirements and believes that it
will continue to meet all debt covenants. However, this expectation is dependent
on achieving the Company's business plan. If the Company does not meet such
covenants, the bank and the lessor could require immediate repayment of
outstanding amounts.
In April 1999, the Company received a commitment from Lau to lend 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 through
the expiration date of January 1, 2001 at $1.26 per share. As of December 31,
2000, the Company has borrowed $1,000,000 under this commitment. The Company
does not intend to draw upon the remaining $1,000,000 commitment.
In January 2001, Lau converted the $1,000,000 subordinated note and accrued
interest into 847,354 shares of common stock.
On March 10, 2000, for an initial investment of $4,000,000 (of which $1,500,000
was funded in May 15, 2000, following the effectiveness of the registration
statement on Form S-3), the Company agreed to issue to Strong River Investments,
Inc. ("SRI") 391,917 shares of common stock, a closing warrant to purchase
97,979 shares of the Company's common stock, exercisable for five years at
$11.77 per share, and an adjustable warrant, exercisable at nominal
consideration during three 25 trading day periods beginning four months
following closing (which was delayed to July 10, 2000). On March 10, 2000, the
Company issued 244,948 of these shares of common stock to SRI, and in May 2000,
the company issued the remaining 146,969 to SRI. The adjustable warrant
terminates 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
warrant 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 SRI between 150 and 170 days
after the initial investment and between 120 and 140 days thereafter on similar
terms. The Company does not intend to draw upon the remaining $6,000,000
commitment. The purchase price of the common stock for each additional
investment will be equal to 115% of the average per share market value for the
ten trading days prior to the applicable closing date and the number of shares
of common stock underlying the closing warrant will be equal to 25% of the
common stock sold pursuant to 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 subsequent adjustable warrant will terminate when the market
value of the common stock on the applicable closing date exceeds 140% for any 20
consecutive trading days prior to the adjustment period. If not terminated, the
number of shares that may be acquired under the adjustable warrant will be
determined by a formula that is based on 108% of the market value of the
Company's common stock. In connection with this transaction, the Company paid an
investment banking fee of $160,000 to Cardinal Securities, L.L.C. ("Cardinal"),
and issued warrants to purchase 75,000 shares of the Company's common stock to
Cardinal exercisable for five years, of which 46,875 shares have an exercise
price of $12.35 per share, and 28,125 shares have an exercise price of $6.175
per share.
In January and February of 2001, Strong River Investments Inc. received
1,106,203 shares of common stock from the December 2000 cashless exercise of
the second adjustable warrant.
In February 2001, Strong River Investments Inc. exercised the third and final
adjustable warrant for 1,586,305 shares and has received 1,481,305 shares of
common stock from the company. This was a cashless exercise.
20
In January 2001, 370 shares of the series A preferred stock and accrued
dividends were converted into 655,565 shares of common stock.
In January 2001, 650 shares of the series B preferred stock and accrued
dividends were converted into 796,593 shares of common stock.
The Company believes that if it meets its business forecast for 2001, cash flows
from available borrowings, project leasing, operations and capital raising will
be sufficient to meet its working capital and capital expenditure needs for the
foreseeable future.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires companies to recognize all derivative contracts at their fair values,
as either assets or liabilities on the balance sheet. If certain conditions are
met, a derivative may be specifically designated as a hedge, the objective of
which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (1) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk, or (2) the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133, as amended by SFAS No. 137, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivative contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard to affect its financial statements.
In March 2000, the FASB issued interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of APB
Opinion No. 25." FIN 44 clarifies the application of APB No. 25 for (a) the
definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 became effective July 1, 2000 but
certain conclusions cover specific events that occur after either December 15,
1998 or January 12, 2000. The Company has adopted FIN 44 in fiscal 2000 and it
did not have a material effect on the Company's financial statements.
During the fourth quarter of 2000, the Financial Accounting Standards Board
issued Emerging Issues Task Force (EITF) 00-27 "Application of EITF issue No.
98-5, Accounting for Convertible Securities with Beneficial Conversion Features
or Contingency Adjustable Conversion Ratios, to Certain Convertible
Instruments". EITF No. 00-27 requires the remeasurement of the original issue
discount on preferred stock with characteristics similar to the convertible
preferred stock issued by the Company during fiscal year 1999. This accounting
change required the value of the warrants issued with the preferred stock to be
included in calculating the beneficial conversion value. This resulted in a
cumulative charge of $277,000 to income applicable to common shareholders in the
fourth quarter of fiscal 2000.
21
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.
22
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
INDEX
Page
----
Reports of Independent Public Accountants 24-25
Balance Sheets as of December 31, 2000 and 1999 26
Statements of Operations for the years ended December 31, 2000,
1999 and 1998 27
Statements of Changes in Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998 28-29
Statements of Cash Flows for years ended December 31, 2000,
1999 and 1998 30
Notes to Financial Statements 31-45
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Viisage Technology, Inc.:
We have audited the accompanying balance sheets of Viisage Technology, Inc. as
of December 31, 2000 and 1999, and the related statements of operations, changes
in shareholders' equity and cash flows for the years 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Viisage Technology, Inc. as of
December 31, 2000, and 1999, and the results of its operations and its cash
flows for the years then ended, in conformity accounting principles generally
accepted in the United States.
BDO SEIDMAN, LLP
Boston, Massachusetts
February 16, 2001
24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Report of Independent Public Accountants
To Viisage Technology, Inc:
We have audited the accompanying statements of operations, changes in
shareholders' equity and cash flows of Viisage Technology, Inc. (a Delaware
Corporation) for the year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the statements of operations,
changes in shareholders' equity, and cash flows are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements of operations, changes in
shareholders' equity, and cash flows. 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 statements of operations, changes in shareholders' equity,
and cash flows referred to above presents fairly, in all material respects, the
results of operations and cash flows of Viisage Technology, Inc. for the year
ended December 31, 1998, in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 19, 1999
25
VIISAGE TECHNOLOGY, INC.
Balance Sheets
(in thousands, except share information)
December 31,
2000 1999
-------- --------
Assets
Current Assets:
Cash and cash equivalents $ -- $ 441
Accounts receivable, net of allowance for doubtful
accounts of $0 for 2000 and $100 for 1999 3,305 3,264
Costs and estimated earnings in excess of billings 26,338 22,216
Other current assets 601 797
-------- --------
Total current assets 30,244 26,718
Property and equipment, net 14,605 17,237
Other assets 424 725
-------- --------
$ 45,273 $ 44,680
======== ========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 10,331 $ 6,621
Accrued and deferred income taxes -- --
Convertible subordinated debt 1,000 --
Current portion of long-term debt -- 2,500
Obligations under capital leases 3,688 4,048
-------- --------
Total current liabilities 15,019 13,169
Long-term debt 2,515 4,000
Convertible subordinated debt -- 1,000
Obligations under capital leases 4,749 7,964
Obligations under related party capital leases 2,262 2,757
-------- --------
Total liabilities 24,545 28,890
-------- --------
Commitments and Contingencies
Shareholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares
authorized; 1,020 and 3,000 shares issued and
outstanding at December 31, 2000 and 1999,
respectively 1,020 2,782
Common stock, $0.001 par value; 20,000,000
shares authorized; 11,203,131 and 9,275,940
shares issued and outstanding at December 31,
2000 and 1999, respectively 11 9
Additional paid-in capital 33,045 26,545
Accumulated deficit (13,348) (13,546)
-------- --------
Total shareholders' equity 20,728 15,790
-------- --------
$ 45,273 $ 44,680
======== ========
The accompanying notes are an integral part of these financial statements.
26
VIISAGE TECHNOLOGY, INC.
Statements of Operations
(in thousands, except per share data)
For the Year Ended December 31,
2000 1999 1998
-------- -------- --------
Revenues $ 27,539 $ 19,297 $ 16,259
Project costs 21,136 15,131 15,957
-------- -------- --------
Project margin 6,403 4,166 302
-------- -------- --------
Operating Expenses:
Sales and marketing 787 739 2,195
Research and development 688 253 358
General and administrative 2,489 1,939 2,247
-------- -------- --------
Total operating expenses 3,964 2,931 4,800
-------- -------- --------
Operating income (loss) 2,439 1,235 (4,498)
Interest expense 1,637 2,230 1,667
-------- -------- --------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 802 (995) (6,165)
Provision for income taxes -- -- --
-------- -------- --------
Income (loss) before cumulative effect of change
in accounting principle 802 (995) (6,165)
Cumulative effect of change in accounting principles -- -- (1,038)
-------- -------- --------
Net income (loss) 802 (995) (7,203)
Preferred stock dividends (327) (1,003) --
-------- -------- --------
Income (loss) applicable to common shareholders
before cumulative effect 475 (1,998) (7,203)
Cumulative effect of implementing EITF 00-27 277 -- --
-------- -------- --------
Net income (loss) applicable to common shareholders $ 198 $ (1,998) $ (7,203)
======== ======== ========
Basic income (loss) per share before cumulative effect $ 0.05 $ (0.23) $ (0.75)
======== ======== ========
Basic income (loss) per share applicable to common
shareholders $ 0.02 $ (0.23) $ (0.88)
======== ======== ========
Weighted average basic common shares outstanding 10,460 8,610 8,175
======== ======== ========
Diluted Income (loss) per share before cumulative
effect $ 0.03 $ (0.23) $ (0.75)
======== ======== ========
Diluted income (loss) per share applicable to common
shareholders $ 0.01 $ (0.23) $ (0.88)
======== ======== ========
Weighted average dilutive common shares outstanding 14,504 8,610 8,175
======== ======== ========
The accompanying notes are an integral part of these financial statements.
27
VIISAGE TECHNOLOGY, INC.
Statements of Changes in Shareholders' Equity
(in thousands)
Additional
Common Preferred Paid-in Accumulated
Stock Stock Capital Deficit Total
-------- --------- ---------- ----------- --------
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
28
Additional
Common Preferred Paid-in Accumulated
Stock Stock Capital Deficit Total
-------- --------- ---------- ----------- --------
Balance, December 31, 1999 $ 9 $ 2,782 $ 26,545 $(13,546) $ 15,790
Exercise of employee stock
options -- -- 193 -- 193
Common stock issued for
services -- -- 85 -- 85
Common stock issued under
employee stock purchase
plan -- -- 57 -- 57
Exercise of warrants -- -- 115 -- 115
Private placement of common
stock, net of expenses 1 -- 3,686 -- 3,687
Amortization of beneficial
conversion feature of
preferred stock -- 218 -- (218) --
Conversion of preferred stock
and dividends 1 (1,980) 2,087 -- 108
Cumulative effect of change in
accounting principle -- -- 277 (277) --
Preferred stock dividends -- -- -- (109) (109)
Net income -- -- -- 802 802
-------- -------- -------- -------- --------
Balance, December 31, 2000 $ 11 $ 1,020 $ 33,045 $(13,348) $ 20,728
======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements
29
VIISAGE TECHNOLOGY, INC.
Statements of Cash Flows
(in thousands)
December 31,
2000 1999 1998
------- ------- -------
Cash Flows from Operating Activities:
Net income (loss) $ 802 $ (995) $(7,203)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities
Depreciation and amortization 2,794 4,422 3,022
Expenses paid in common stock 85 212 --
Cumulative effect of change in accounting principle -- -- 1,038
Change in operating assets and liabilities:
Accounts receivable (41) 1,021 (1,114)
Costs and estimated earnings in excess of billings (4,122) (494) 2,722
Other current assets 196 (113) (260)
Accounts payable and accrued expenses 3,710 (2,516) (2,005)
Accrued and deferred taxes -- (28) 11
------- ------- -------
Net cash provided (used) by operating activities 3,424 1,509 (3,789)
------- ------- -------
Cash Flows from Investing Activities:
Purchase of equipment converted to capital leases -- (3,125) (5,244)
Purchase of system assets (100) -- (100)
Additions to property and equipment (62) (21) (145)
Decrease in other assets 301 349 99
------- ------- -------
Net cash provided (used) by investing activities 139 (2,797) (5,390)
------- ------- -------
Cash Flows from Financing Activities:
Net revolving credit (repayments) borrowings (3,985) (2,054) 8,554
Proceeds from long-term borrowings -- 1,000 --
Proceeds from sale/leaseback of equipment -- 3,125 5,244
Principal payments on long-term borrowings -- -- (4,054)
Principal payments on obligations under capital leases (4,070) (3,711) (2,651)
Net proceeds from issuance of common stock 4,051 474 641
Net proceeds from issuance of preferred stock -- 2,729 --
------- ------- -------
Net cash provided (used) by financing activities (4,004) 1,563 7,734
------- ------- -------
Net increase (decrease) in cash and cash equivalents (441) 275 (1,445)
Cash and cash equivalents, beginning of year 441 166 1,611
------- ------- -------
Cash and cash equivalents, end of year $ -- $ 441 $ 166
======= ======= =======
Supplemental Cash Flow Information:
Cash paid during the year for interest $ 1,529 $ 1,788 $ 1,416
Cash paid during the year for income taxes $ -- $ -- $ 68
Non-cash Transactions:
Conversion of subordinated debt to common stock $ -- $ 800 $ --
Conversion of preferred stock to common stock $ 2,087 $ -- $ --
Issuance of stock options (note 3) $ -- $ -- $ 444
Issuance of subordinated debt in exchange for
reduction of accounts payable $ -- $ -- $ 800
The accompanying notes are an integral part of these financial statements.
30
VIISAGE TECHNOLOGY, INC.
Notes To Condensed Financial Statements
1. DESCRIPTION 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. Viisage's primary customers have
been government agencies with particular pentration in Departments of Motor
Vehicles. Viisage's patented face-recognition technology is focused on five
major product application areas.
FaceEXPLORER(TM), Viisage's technology for image retrieval and analysis, is
recognized for its leadership technology performance in real-time and
large-database applications. FaceEXPLORER is deployed in the world's largest
face-recognition application with a database of more than 7 million enrolled
images and growing by 15,000 new images per day. The product family of
face-recognition applications also includes: FaceNET(TM) for Internet and
e-commerce security; FacePIN(TM) for point-of-sale transactions verification;
FacePASS(TM) used for physical access control and keyless entry FaceFINDER(TM)
for surveillance and identification.
As of December 31, 2000, the Company was a 52% 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.
Computation of Net Income (Loss) per Share
The Company follows SFAS No. 128 "Earnings Per Share" where basic earnings per
share is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding. The computation of diluted
earnings per share is similar to the basic earnings per share computation except
the denominator is increased to include the number of additional shares that
would have been outstanding if the dilutive potential common shares had been
issued. In addition, the numerator is adjusted for any changes in income or loss
that would result from the assumed conversions of those potential shares.
31
Basic and diluted earnings per share calculations are as follows (in thousands):
Year Ended December 31, 2000 1999 1998
------- ------- -------
Net income (loss) available to
common shareholders used in
basic and diluted EPS $ 198 $(1,998) $(7,203)
------- ------- -------
Average number of common
shares used in basic EPS 10,460 8,610 8,175
Effect of dilutive securities:
Convertible preferred stock -- -- --
Warrants 2,694 -- --
Options 1,350 -- --
Convertible debt -- -- --
------- ------- -------
Average number of common shares
and dilutive potential common
stock used in diluted EPS 14,504 8,610 8,175
======= ======= =======
The diluted per share amounts do not reflect the impact of options outstanding,
the conversion of convertible subordinated debt, the conversion of convertible
preferred stock, or stock warrants, for approximately 2,707,000 shares in 2000,
2,472,139 shares in 1999, and 2,784,531 shares in 1998, because the effect of
each is antidilutive.
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 $9.0
million expected to be billed and collected after December 31, 2001.
Charges and Accounting Changes
During the fourth quarter of 2000, the Financial Accounting Standards Board
issued Emerging Issues Task Force (EITF) 00-27 "Application of EITF issue No.
98-5, Accounting for Convertible Securities with Beneficial Conversion Features
or Contingency Adjustable Conversion Ratios, to Certain Convertible
Instruments". EITF No. 00-27 requires the remeasurement of the original issue
discount on preferred stock with characteristics similar to the convertible
preferred stock issued by the Company during fiscal year 1999. This accounting
change required the value of the warrants issued with the preferred stock to be
included in
32
calculating the beneficial conversion value. This resulted in a cumulative
charge of $277,000 to income applicable to common shareholders in the fourth
quarter of fiscal 2000.
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.
Project costs for 1998 included start-up costs of $283,000, which were incurred
in the first quarter of 1998.
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 and Concentrations of Credit Risk
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. As of
December 31, 2000 no allowance was necessary.
For 2000, four customers (Ohio Bureau of Motor Vehicles, Unisys Corporation
(Florida Department of Safety and Motor Vehicles), Pennsylvania Department of
Transportation, and Maryland Department of Transportation) each accounted for
over 10% of Company revenues and an aggregate of 58% 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. 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.
33
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.
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.
34
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires companies to recognize all derivative contracts at their fair values,
as either assets or liabilities on the balance sheet. If certain conditions are
met, a derivative may be specifically designated as a hedge, the objective of
which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (1) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk, or (2) the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133, as amended by SFAS No. 137, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivative contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard to affect its financial statements.
In March 2000, the FASB issued interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of APB
Opinion No. 25." FIN 44 clarifies the application of APB No. 25 for (a) the
definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 became effective July 1, 2000 but
certain conclusions cover specific events that occur after either December 15,
1998 or January 12, 2000. The Company has adopted FIN 44 in fiscal 2000 and it
did not have a material effect on the Company's financial statements.
During the fourth quarter of 2000, the Financial Accounting Standards Board
issued Emerging Issues Task Force (EITF) 00-27 "Application of EITF issue No.
98-5, Accounting for Convertible Securities with Beneficial Conversion Features
or Contingency Adjustable Conversion Ratios, to Certain Convertible
Instruments". EITF No. 00-27 requires the remeasurement of the original issue
discount on preferred stock with characteristics similar to the convertible
preferred stock issued by the Company, during fiscal year 1999. This accounting
change required the value of the warrants issued with the preferred stock to be
included in calculating the beneficial conversion value. This resulted in a
cumulative charge of $277,000 to income applicable to common shareholders in the
fourth quarter of fiscal 2000.
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, has been credited to shareholders' equity and included in
deferred financing cost, a component of other assets. The value of these options
is being amortized over the indemnification period and charged to interest
expense.
In April 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
35
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, 2000.
On January 1, 2001 Lau converted this subordinated note and accrued interest
into 847,354 shares of common stock.
The Company has a project lease financing arrangement with Lau that provides for
up to $5.0 million capital lease financing with $2.7 million outstanding at
December 31, 2000. This financing arrangement has a maturity date of August 2005
with interest calculated at approximately 11.3%.
On October 14, 1999, Lau Technologies exercised an option to convert an
$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, 2000, 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. No royalty amount has been incurred to date and
therefore the royalty commencement date has not been established.
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 2000, 1999 and 1998 reflect a continued
reduction in services. The amounts for such services were approximately $355,000
in 2000, $418,000 in 1999 and $636,000 in 1998.
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 2000, $217,000 in
1999 and $550,000 in 1998, 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.
36
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
$200,000 in 2000, $500,000 in 1999 and $1,000,000 in 1998. During 2000, 1999,
and 1998, the Company provided software development services as a subcontractor
to Lau amounting to $345,000, $120,000, and $500,000 respectively.
At December 31, 2000 and 1999, the Company had approximately $14,000 and $35,000
of accounts receivable due from Lau, respectively, and approximately $95,000 and
$119,000 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,
2000 and 1999, approximately $234,000 and $214,000 of the note was included in
other current assets, respectively, and the remaining balance of approximately
$42,000 and $258,000 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.
4. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
December 31,
2000 1999
System assets held under capital lease $22,351 $22,351
System assets 4,100 4,000
Computer equipment 1,056 994
------- -------
27,507 27,345
Less--Accumulated depreciation 12,902 10,108
------- -------
$14,605 $17,237
======= =======
During 2000, the Company had no additions to capital leases. The net book value
of system assets under capital leases was $11,757 and $14,140 for December 31,
2000 and 1999, respectively. In 1999, the Company sold and leased back under
capital leases approximately $3.1 million 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 made
37
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,
2000 1999
Accounts payable $ 3,127 $ 2,139
Accrued accounts payable 522 515
Accrued earned & unbilled costs 6,165 3,397
Accrued payroll and related taxes -- 95
Accrued vacation 216 189
Other accrued expenses 301 286
------- -------
$10,331 $ 6,621
======= =======
6. LONG TERM DEBT AND PROJECT LEASE ARRANGEMENTS
In June 2000, the Company refinanced its operating line of credit. The new
revolver, which provides for available borrowings up to $4.0 million is a sweep
account, which is set-up to maintain the lowest possible balance on the revolver
by maintaining a zero balance of cash at all times. The line of credit contains
various financial covenants and is collaterized by substantially all of the
Company's assets. As of December 31, 2000, $2.5 million of the $4.0 million line
of credit had been utilized. In comparison the Company utilized $6.1 million of
the $6.5 million line as of December 31, 1999.
The Company also has system project lease financing arrangements with commercial
leasing organizations. Pursuant to these arrangements, the lessor purchases
certain of the Company's 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 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. At December 31, 2000, the Company was in compliance with all
lease covenants. These project lease arrangements are accounted for as capital
leases. At December 31, 2000, the Company had approximately $8.0 million
outstanding under the lease financing arrangement. The Company has a similar
project lease financing arrangement with Lau that provides for up to $5.0
million of capital leases financing with $2.7 million outstanding at December
31, 2000, of which $0.4 million is included in the current portion of capital
lease obligations.
In February 2001, the Company obtained an additional $4.0 million in project
financing from a commercial bank.
38
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 2000, $131,000 in 1999 and $212,000 in 1998.
At December 31, 2000, approximate future minimum rentals under the lease for
shared facilities and capital leases are as follows (in thousands):
Capital Leases Operating Lease
Year Ending:
2001 $ 7,470 $ 131
2002 3,133 12
2003 2,697 --
2004 1,564 --
2005 503 --
------- -------
Total minimum lease payments 12,367 $ 143
=======
Less--Interest portion 1,668
-------
Present value of net
minimum lease payments 10,699
Less--Current portion 3,688
-------
$ 7,011
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 $91,000, $79,000 and $67,000 for the years ended December 31,
2000, 1999 and 1998, respectively.
The Company does not offer any postretirement benefits.
9. INCOME TAXES
There was no provision for income taxes for the years ended December 31, 2000,
1999 and 1998.
39
A reconciliation of the federal statutory rate to the Company's effective tax
rate for the years ended December 31, 2000, 1999 and 1998 is as follows:
2000 1999 1998
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, 2000, and 1999 are as follows (in thousands):
2000 1999
Deferred tax assets (liabilities):
Net operating loss carryforwards for tax purposes $ 7,249 $ 7,040
Bases differences related to contract assets (4,536) (3,940)
Property, plant and equipment (8) (14)
Accruals and other reserves (123) (72)
------- -------
Net deferred tax asset before valuation allowance 2,582 3,014
Valuation allowance (2,582) (3,014)
------- -------
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, 2000, the Company had available estimated net operating loss
carryforwards for federal tax purposes of approximately $18.1 million to reduce,
subject to certain limitations, future income taxes. These carryforwards expire
from 2011 through 2020 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 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, 2000, the Company has reserved 2,807,100 shares of common stock
for issuance under the management plan of which 972,445 shares are available for
future grants. The Company has reserved 326,616 shares of common stock for
issuance under the directors' plan of which 35,000 are available for future
grants.
40
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, 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 0.9375-12.50 2.38
Granted 336,000 3.1875-12.25 10.11
Exercised (75,332) .9375-2.96 2.64
Cancelled (13,500) 5.9219-12.25 10.58
---------- -------------- ------
Options outstanding, December 31, 2000 1,936,991 $0.9375-$12.50 $ 3.65
========== ============== ======
The following table summarizes information about outstanding options as of
December 31, 2000:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted
Average Average
Weighted Average Exercise Exercise
Range of Exercise Remaining Price per Number Price per
Prices Number Outstanding Contractual Life Share Exercisable Share
$0.94 - $1.51 794,001 7.9 years $1.02 432,868 $1.02
2.25 - 3.19 730,520 6.1 years 2.74 342,011 2.92
4.44 - 5.92 109,970 9.0 years 4.90 9,970 4.44
8.75 - 12.50 302,500 8.4 years 12.31 25,000 12.50
--------- ----- ------- -----
1,936,991 $3.65 809,849 $2.22
========= ===== ======= =====
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:
2000 1999 1998
Risk free interest rate 5.0 - 6.0 % 4.95 - 5.7 % 4.63 - 5.7%
Expected dividend yield - - -
Expected lives 3 - 10 years 3 - 10 years 8 - 10 years
Expected volatility 80% 71 - 78% 74 - 75%
Fair value of options granted $8.55 $1.06 $1.00
41
The total value of options granted under the Company's plans was computed as
approximately $2.9 million for 2000, $0.2 million for 1999, and $1.1 million for
1998, respectively. Of these amounts, approximately $1.2 million, $0.7 million,
and $1.4 million would have been charged to operations for the years ended
December 31, 2000, 1999 and 1998, respectively, for currently vested options.
The remaining amounts of $3.9 million, $5.8 million and $5.8 million for the
years ended December 31, 2000, 1999 and 1998, respectively, will be amortized
over the related vesting periods.
The pro forma effect of SFAS No. 123 is as follows:
2000 1999 1998
Net income (loss), as reported $ 802,000 $ (995,000) $(7,203,000)
Pro forma net income (loss) (381,000) (1,711,000) (8,566,000)
Basic net income (loss) per share, as reported .02 (0.23) (0.88)
Diluted net income (loss) per share, as reported .01 (0.23) (0.88)
Pro forma basic net income (loss) per share (0.09) (0.32) (1.05)
Pro forma diluted net income (loss) per share (0.09) (0.32) (1.05)
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, 2000, 83,925 shares
have been issued and options to purchase 25,506 shares of common stock at $.7475
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 "Series A 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 registered
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, which have been exercised,
at the exercise price of $1.58 per share to the investor.
42
In December 1999, the Company completed a $1.5 million private placement of
Series B Convertible Preferred Stock (the "Series B 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 registered
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
25,000 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.
In January 2001, 370 shares of the series A preferred stock and accrued
dividends were converted into 655,565 shares of common stock.
In January 2001, 650 shares of the series B preferred stock and accrued
dividends were converted into 796,593 shares of common stock.
Common Stock
On March 10, 2000, for an initial investment of $4,000,000 (of which $1,500,000
was funded following the registration of the offered securities with the
Commission), the Company agreed to issue to Strong River Investments, Inc.
("SRI") 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 was
delayed to July 10, 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 there after on similar terms. The
Company does not intend to draw upon the remaining $6,000,000 commitment. 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.
43
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. In connection with this
transaction, the Company paid an investment banking fee of $160,000 to Cardinal
Securities, L.L.C. ("Cardinal"), and issued warrants to purchase 75,000 shares
of the Company's common stock to Cardinal exercisable for five years, of which
46,875 shares have an exercise price of $12.35 per share, and 28,125 shares have
an exercise price of $6.175 per share.
In January and February of 2001, Strong River Investments, Inc. received
1,106,203 shares of common stock from the December 2000 cashless exercise of
the second adjustable warrant.
In February 2001, Strong River Investments, Inc. exercised the third and final
adjustable warrant for 1,586,305 shares and has received 1,481,305 shares of
common stock from the company. This was a cashless exercise.
In January 2001, Lau converted the Subordinated Convertible Note and accrued
interest, into 847,354 shares of common stock.
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. The Company has an integrated
business model: identification solutions through system integration systems or
biometric software.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth selected quarterly financial data for 2000 and
1999 (in thousands, except per share amounts):
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
2000
Revenues $5,336 $6,150 $8,280 $7,773
Operating income 665 628 588 558
Net income 187 194 205 216
Net income (loss) applicable to
common shareholders 95 109 173 (179)
Basic net income (loss) per share 0.02 0.02 0.02 0.02
Diluted net income (loss) per share 0.02 0.01 0.02 0.01
Basic net income (loss) per share
applicable to common shareholders 0.01 0.01 0.02 (0.01)
Diluted net income (loss) per share
applicable to common shareholders 0.01 0.01 0.01 (0.01)
44
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
1999
Revenues $4,431 $4,714 $5,209 $4,943
Operating income (loss) (145) 120 407 853
Net income (loss) (665) (433) (68) 171
Net loss applicable to common
Shareholders (665) (433) (282) (618)
Basic net income (loss) per share (0.08) (0.05) (0.01) 0.02
before cumulative effect
Diluted net income (loss) per share (0.08) (0.05) (0.01) 0.01
before cumulative effect
Basic net income (loss) per share
applicable to common shareholders (0.08) (0.05) (0.03) (0.07)
Diluted net income (loss) per share
applicable to common shareholders (0.08) (0.05) (0.03) (0.07)
The net income (loss) applicable to shareholders reflects the impact of the
preferred stock dividends, the beneficial conversion feature of the preferred
stock and the recent accounting changes.
During the fourth quarter of 2000, the Financial Accounting Standards Board
issued Emerging Issues Task Force (EITF) 00-27 "Application of EITF issue No.
98-5, Accounting for Convertible Securities with Beneficial Conversion Features
or Contingency Adjustable Conversion Ratios, to Certain Convertible
Instruments". EITF No. 00-27 requires the remeasurement of the original issue
discount on preferred stock with characteristics similar to the convertible
preferred stock issued by the Company during fiscal year 1999. This accounting
change required the value of the warrants issued with the preferred stock to be
included in calculating the beneficial conversion value. This resulted in a
cumulative charge of $277,000 to income applicable to common shareholders in the
fourth quarter of fiscal 2000.
45
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 then 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.
46
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.
47
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 23.
All schedules are omitted because they are not applicable or not required, or
because the required information is shown either in the financial statements or
in the notes thereto.
(b) Reports on Form 8-K
-------------------
None
(c) Exhibits
--------
See Exhibit Index on pages 49 through 51.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 26th day of March,
2001.
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 26th day of March, 2001:
Signature Title
--------- -----
*
By:
---------------------------------
Denis K. Berube Chairman of the Board of Directors
*
By:
--------------------------------- President and Chief Executive Officer
Thomas J. Colatosti (Principal Executive Officer)
*
By: Vice President, Corporate Controller and
--------------------------------- Treasurer (Principal Financial and
Sean F. Mack Accounting Officer)
*
By:
---------------------------------
Charles J. Johnson Secretary and Director
*
By:
---------------------------------
Charles E. Levine Director
*
By:
---------------------------------
Harriet Mouchly-Weiss Director
*
By:
---------------------------------
Peter Nessen Director
*
By:
---------------------------------
Thomas J. Reilly Director
*
* By: /s/ Thomas J. Colatosti
-------------------------------
Thomas J. Colatosti
Attorney-in-fact
EXHIBIT INDEX
Exhibit
No. Note Description
- --- ---- -----------
2 (a) Amended and Restated Asset Transfer Agreement, dated as of
August 20, 1996, between the Registrant and Lau
Technologies.
3.1 (a) Restated Certificate of Incorporation of the Registrant.
3.2 (a) By-Laws of the Registrant.
3.3 (b) Certificate of Designation of series A convertible preferred
stock.
3.4 (h) Certificate of Designation of series B convertible preferred
stock.
4 (a) Specimen certificates for shares of the Registrant's Common
Stock.
10.1 (a) Amended and Restated License Agreement, dated as of August
20, 1996, between the Registrant and Lau Technologies.
10.2 (a) Form of Administration and Services Agreement between the
Registrant and Lau Technologies.
10.3 (a) Form of Use and Occupancy Agreement between the Registrant
and Lau Technologies.
10.4 (a) License Agreement, dated as of August 20, 1996, between the
Registrant and Facia Reco Associates, Limited Partnership.
10.5 (h) 1996 Management Stock Option Plan, as amended.
10.6 (a) Form of Option Agreement for the 1996 Management Stock
Option Plan.
10.7 (h) 1996 Director Stock Option Plan, as amended.
10.8 (a) Form of Option Agreement for the 1996 Director Stock Option
Plan.
10.9 (a) 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 (a) Subcontract between the Registrant and Information Spectrum,
Inc. (relating to the U.S. Immigration & Naturalization
Service), dated as of October 19, 1995.
10.11 (a) Contract between the Registrant and the North Carolina
Department of Transportation, dated as of April 26, 1996.
10.12 (c) Contract between the Registrant and the Illinois Secretary
of State, dated June 2, 1997, as amended.
10.13 (d) 1997 Employee Stock Purchase Plan.
10.14 (e) Employment Agreement, dated as of November 3, 1998, between
the Registrant and Thomas J. Colatosti.
10.15 (f) Purchase Agreement (Project Finance Facility) between the
Registrant and Sanwa Business Credit Corporation, dated as
of November 20, 1998, as amended.
10.16 (g) Amended and Restated Credit Agreement between the Registrant
and State Street Bank and Trust Company, dated December 7,
1998.
EXHIBIT INDEX
Exhibit
No. Note Description
- --- ---- -----------
10.17 (h) $2,000,000 Convertible Subordinated Note between the
Registrant and Lau Acquisition Corporation, dated May 3,
1999.
10.18 (h) Securities Purchase Agreement, dated June 30, 1999 between
the Registrant and Shaar Fund Ltd.
10.19 (h) Registration Rights Agreement, dated June 30, 1999 between
the Registrant and Shaar Fund Ltd.
10.20 (h) Common Stock Purchase Warrants, dated June 30, 1999 between
the Registrant and Shaar Fund Ltd.
10.21 (h) Subcontract Agreement, dated December 6, 1999 between the
Registrant and Compaq Computer Corporation.
10.22 (h) Securities Purchase Agreement, dated December 30, 1999
between the Registrant and Shaar Fund Ltd.
10.23 (h) Registration Rights Agreement, dated December 30, 1999
between the Registrant and Shaar Fund Ltd.
10.24 (h) Common Stock Purchase Warrants, dated December 30, 1999
between the Registrant and Shaar Fund Ltd.
10.25 (h) Securities Purchase Agreement, dated March 10, 2000 between
the Registrant and Strong River Investments, Inc.
10.26 (h) Registration Rights Agreement, dated March 10, 2000 between
the Registrant and Strong River Investments, Inc.
10.27 (h) Common Stock Purchase Warrant, dated March 10, 2000 between
the Registrant and Strong River Investments, Inc.
10.28 (h) Adjustable Common Stock Purchase Warrant, dated March 10,
2000 between the Registrant and Strong River Investments,
Inc.
10.29 (h) Letter Agreement, dated March 10, 2000 between the
Registrant and Strong River Investments, Inc.
10.30 (i) Security Agreement, dated June 15, 2000, between the
Registrant and Commerce Bank & Trust Co.
10.31 (i) Collateral Assignment of "Unencumbered" Customer Contracts
dated June 15, 2000, between the Registrant and Commerce
Bank & Trust Co.
10.32 (i) Loan Agreement, dated June 15, 2000, between the Registrant
and Commerce Bank & Trust Co.
10.33 (i) Security Agreement, dated June 15, 2000, between the
Registrant and Commerce Bank & Trust Co.
10.34 (i) Revolving Credit Note, dated June 15, 2000, by the
Registrant in favor of Commerce Bank & Trust Co.
10.35 (j) Pennsylvania Department of Transportation Contract, dated
June 19, 2000.
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Arthur Andersen LLP.
24 Power of Attorney.
EXHIBIT INDEX
Exhibit
No. Note Description
- --- ---- -----------
(a) Filed as an exhibit to the Registrant's Form S-1
Registration Statement dated November 4, 1996 (File No.
333-10649).
(b) 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).
(c) 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).
(d) Filed as appendix to October 10, 1997 Schedule 14C
Information Statement.
(e) 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).
(f) Original agreement filed as an exhibit to the Registrant's
Form S-1 Registration Statement dated November 4, 1996 (File
No. 333-10649).
(g) 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).
(h) Filed as an exhibit to the Registrant's Report on Form 10-K
for the year ended December 31, 1999. (File No. 000-21559).
(i) Filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended July 2, 2000 (File No.
000-21559).
(j) Filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 29, 2000 (File
No. 000-21529).