-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PD1+9l6U2Uyd2Qe7ekXQ3ErazSR5vu7fz0PndoXXYS/GVTATY7ehEv5TnYwdd4Ya Uuf0sYQfC1NNiSQtVJ3FEg== 0000927016-97-000922.txt : 19970401 0000927016-97-000922.hdr.sgml : 19970401 ACCESSION NUMBER: 0000927016-97-000922 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIISAGE TECHNOLOGY INC CENTRAL INDEX KEY: 0001018332 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 043320515 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-21559 FILM NUMBER: 97568580 BUSINESS ADDRESS: STREET 1: VIISAGE TECHNOLOGY INC STREET 2: 30 PORTER ROAD CITY: LITTLETON STATE: MA ZIP: 01460 BUSINESS PHONE: 5082638365 MAIL ADDRESS: STREET 1: VIISAGE TECHNOLOGY INC STREET 2: 30 PORTER ROAD CITY: LITTLETON STATE: MA ZIP: 01460 10-K405 1 FORM 10-K405 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, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from __________ to __________. Commission File Number 000-21559 VIISAGE TECHNOLOGY, INC. -------------------------------- (Exact name of registrant as specified in its charter) Delaware 04-3320515 - ---------------------------------------- -------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 30 Porter Road, Littleton, MA 01460 - ---------------------------------------- -------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (508)-952-2200 ----------------- Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of exchange on which registered ------------------- ------------------------------------ Common Stock $.001 par value NASDAQ National Market Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 6, 1997,was approximately $34,080,000. As of March 6, 1997, the registrant had 8,055,000 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Shareholders for the year ended December 31, 1996, are incorporated by reference into Parts I and II. Portions of the registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 21, 1997, are incorporated by reference into Part III. 1 PART 1 Item 1. Business -------- (a) General Development of Business ------------------------------- Viisage Technology, Inc. (Viisage or the Company) develops and implements turnkey digital identification systems and solutions intended to deter fraud, reduce customers' identification program costs and improve security. The Company combines its systems integration and software design capabilities with its proprietary software and hardware products to create complete customized solutions. Viisage's products are currently operating at over 450 locations. Applications can include systems and cards for national IDs, driver's licenses, social services, voter registration, law enforcement, corrections, healthcare, financial services, retail and access control. Viisage is also commercializing patented facial recognition technology for the real-time identification and verification of individuals. The Company began operations in 1993 as a division of Lau Technologies, a provider of systems integration services and products for sophisticated electronic systems. On November 6, 1996, Lau transferred substantially all of the assets, liabilities and operations of the division to the Company in exchange for 5,680,000 shares of the Company's common stock and the Company completed its initial public offering in November 1996. The Company is currently a 64% owned subsidiary of Lau Technologies. All references to "Viisage" or "the Company" for the periods prior to the transfer, refer to the Viisage Technology Division of Lau Technologies. Viisage has experienced significant revenue growth since 1993. The Company believes that the increasing acceptance of and demand for digital identification technology in recent years, its commitment to providing customized solutions for its customers needs, its expertise in facial imaging and its proprietary software and hardware products have contributed to its growth. The Company provides systems and services principally under contracts that have five-year terms and provide for several annual renewals after the initial contract term. Contracts generally provide for a fixed price for the system and/or for each card produced. Contract prices vary depending on, among other things, design and integration complexities, the nature and number of workstations and sites, the projected number of cards to be produced, the level of post-installation support and the competitive environment. Substantially all of the Company's revenues are currently derived from public sector customers and contractors to such customers. The Company believes for the foreseeable future that it will continue to derive a significant portion of its revenues from a limited number of large contracts. (b) Financial Information about Industry Segments ---------------------------------------------- The Company is engaged in one business segment; the design and implementation of digital identification systems and solutions intended to deter fraud, reduce identification program costs and improve security. 2 (c) Description of Business ----------------------- (i) Principal Products and Services -------------------------------- Industry Background Properly identifying individuals entitled to special rights and benefits has presented problems for both the public and private sectors. Today, various forms of personal identification cards, often bearing a picture of the proper owner together with other demographic information, serve as the primary means of personal identification, providing the owner with the ability to exercise special rights, obtain benefits and process transactions. As a result of their importance, identification cards are often the target of fraud and tampering. The use of false identification cards can have significant financial and societal implications. A person may use a number of false cards to create multiple identities or use a single fake card as a basis for fraudulently obtaining other credentials. For example, a fake driver's license can enable a person to improperly open or access bank accounts, forge checks, obtain welfare or other benefits, or buy alcohol while underage. In addition to the direct costs and effects of improper identification, the indirect costs associated with the investigation, prosecution and incarceration of offenders are substantial. Public concern about security has also increased the demand for identification systems for controlling access to computer systems and networks and secure and public facilities. 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. Further, records of these cards consist primarily of retained copies, which often require significant amounts of space and are inefficient to maintain and access. Advances in and the growing acceptance of digital technology has led to an increasing demand for digital identification systems to replace existing systems. Digital systems enable information and images to be captured and imbedded within the fabric of the card through the use of dye-sublimation techniques, making digital cards more resistant to tampering than laminated pouches. Information can be stored in and later accessed from the card itself through the use of bar codes, magnetic stripes and ''smart'' cards (cards which contain computer chips). Digital systems also facilitate the storage of information in computer databases, thereby reducing the need for manual record-keeping, file cabinets, and cumbersome indexing systems. Finally, digital systems can be networked to enable up-to-date information to be shared and distributed across geographic and organizational boundaries. As an additional means of 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 3 others, with fingerprints enjoying wide usage in law enforcement. However, unlike a fingerprint, a facial image can be easily verified visually and can be captured in an unobtrusive manner via a single photograph, making it a practical means of identification. When two or more biometric identifiers are used together, the statistical probability of properly identifying an individual increases. Applications for digital identification systems 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 focusing on the value of sharing databases to avoid redundant data gathering efforts, distribute information in a timely manner, increase efficiency and deter fraud. In the private sector, the Company envisions that applications for digital identification systems will extend to ATMs, retail point-of-sale transaction processing, the administration of health care benefits and access to telecommunications services, personal computer networks and facilities. The emergence of digital identification systems also presents significant challenges for integrating these systems with customers' existing software, hardware and computing environments. Consequently, customers are seeking complete, integrated solutions to overcome these integration issues. Products and Services The Company develops and implements turnkey digital identification systems which provide complete integrated solutions for capturing images and data, producing and delivering tamper-resistant identification cards, and creating and managing relational databases containing the captured information. These systems can utilize unique biological identifiers such as facial images, fingerprints, voice data and others to help deter fraud, reduce costs and improve security. The Company's systems integration and software design capabilities enable it to provide complete solutions to customer-specified needs. The Company provides customized systems integration software and services which link the Company's proprietary software and hardware products with a wide variety of commercially available computers, printers, and networks, as well as the customer's existing systems. The Company believes that its ability to support all current industry standard platforms, operating systems, databases, and networks provides it with a significant competitive advantage. While cards generated by the Company's systems can store and display a variety of biometrics, the Company has found that the image of a human face is a biological identifier that is prominent and easy to capture. The Company is developing patented facial recognition software that enables databases of facial images to be searched quickly and accurately for use in a variety of fraud deterrence and security applications. 4 Digital Identification Systems Depending on the customer's needs, the Company offers ''instant issue'' systems which produce identification cards on location that can be delivered to recipients in minutes, and central processing systems which receive the information to appear on the cards electronically from the point of capture and produce cards from a secure off-site processing location which are later mailed to recipients. The facial images captured by the Company's systems can provide the content (face bases) for the identification and verification applications of the Company's facial recognition technologies. For both instant issue and central processing systems, Viisage's digital identification systems utilize an image capture workstation which incorporates the Company's proprietary SensorMast. The image capture workstation captures, inputs, and retrieves images and biometric and demographic information. With an instant issue system, a commercially available dye-sublimation printer produces single-piece, tamper-resistant identification cards on site in minutes. Alternatively, with a central production system, images are electronically transmitted to a secure processing location where a high speed manufacturing unit produces the cards, and an integrated card delivery unit prepares the cards for mailing. The Company's proprietary Visual Inspection System applies quality control to all of the cards produced in central processing systems. Under either process, the systems produce cards with holographic overlays and digitized images and other biometric and demographic information. Finally, all such digitized images and biometric and demographic information are stored in a central database for easy and efficient access, retrieval and management. System Integration and Software Design Capabilities. In addition to the Company's systems integration capabilities, an important aspect of its services and ability to deliver solutions for its customers involves the design of customized software. Viisage's proprietary software and services integrate the various components of its own SensorMast and Visual Inspection System as well as integrate the Company's products with the variety of third party components and technologies used by its customers. The Company has designed software to support all current industry standard operating systems (e.g., Unix, Windows NT, Windows 95 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 Company Products. All of the Company's systems incorporate the Company's proprietary SensorMast product within the image capture workstations. Central production systems also typically include the Company's proprietary Visual Inspection System for quality assurance. These proprietary products and related software are described below: . SensorMast. The SensorMast is a fully-integrated, secure tower unit developed by the Company which incorporates computer-controlled image capture equipment. This equipment includes commercially available digital cameras, adjustable lighting, frame 5 grabbers, step motors, fingerprint and signature capture devices and barcode readers. These are integrated into the SensorMast, which in turn is incorporated by the Company into a specially configured operator's workstation. This integrated workstation provides operators with a durable and transportable apparatus with which to capture images and data and initiate the card production process. The Company's proprietary software controls and integrates the elements within the SensorMast and links the SensorMast with the rest of the system. . Visual Inspection System. 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 and high-definition inspection cameras, automates an activity which is otherwise performed manually and is a potential source of cost savings for customers. The Company's proprietary software controls and integrates the various elements of the Visual Inspection System and audits the central production manufacturing and delivery systems. Customer Service and Support. Following the installation of its digital identification systems, the Company offers extensive customer training and help desk telephone support as well as ongoing maintenance services. The Company's service and support teams, which vary depending on the customer and contract, are able to draw extensively upon the expertise of the Company's software and hardware engineers. For some contracts, particularly when there are a large number of installations, the Company has contracted with third party service organizations for maintenance support, a practice the Company intends to continue. Facial Recognition Technologies The Company is working to improve the technology used in security and fraud control through the development of facial recognition technologies. The Company has focused on the facial image as a key biometric because the human face is a unique and prominent feature that can be easily captured (in image) by a digital camera and verified visually. The Company's technologies enable facial databases to be searched quickly and accurately for identification and verification purposes. The Company's facial recognition software is based on technology developed by Professor Alex Pentland of the Massachusetts Institute of Technology. The Company licenses that technology through Facia Reco Associates Limited Partnership (Facia Reco), an entity formed by Dr. Pentland. While Dr. Pentland's software forms the basis of the Company's facial recognition technologies, the Company believes that the proprietary software it has developed is integral to making these technologies commercially viable. The Company's facial recognition technologies are based on the premise that certain facial features tend to be associated with each other. For example, the combination of a thin nose 6 and high forehead could constitute a face type. As a person is added to the database, his or her face types--known as ''eigenfaces''--are measured against the eigenfaces of the ''average'' face created by the software through its compilation of all the faces in the database. This average face appears as an androgynous image. The difference between the eigenfaces of the person being enrolled and the eigenfaces of the average face is depicted numerically and becomes a unique identifier. The Company's software calculates that numeric depiction, indexes the data and stores it in a computer database and allows for searches using the numeric identifier rather than facial images or other depictions. This numeric depiction requires less database space and a smaller amount of bandwidth for electronic communication than a visual image. The Company believes that these features significantly increase the speed and cost effectiveness of its products as compared to competing facial recognition technologies based on neural networks. The Company's facial recognition technologies are designed to compare one face to many faces stored in a database (identification) or to compare one face to a particular face stored in a database (verification). Verification is less complex than identification because only a single comparison is necessary, while identification requires many more comparisons. For identification searches, the computer constructs the numeric depiction of the person being enrolled and searches for the closest measurement of a face already in the database. The software performs a numeric table look-up and completes the search within seconds. The system then displays images of the persons in the database which most closely resemble the enrollee's image. The Company's software can also determine whether a face appears in the database more than once. This can be used to determine, for example, whether a person is applying for multiple driver's licenses or welfare benefits. This approach could also be used to identify an unknown person by comparing his or her photo image to those of individuals stored in databases. For verification searches, the software compares the target face to a particular facial image stored in the database to determine whether there is a match. Since eigenface measurements can be included in a smart card or on a barcode, a comparison of the facial data stored on an identification card with the actual face of the card holder can be used for verification purposes. This can be used to control access to both secure and public facilities, ATMs and networks and databases. Verification can also have applications for identity confirmation at the point of sale or service. Facial Recognition Products and Services. The Company has three facial recognition products which it is testing in pilot programs that have been generally available since the first quarter of 1997. . Viisage Quality Advisor. This software product enables the analysis of the quality of digital images in a database. Image quality can be measured against pass/fail criteria set by the customer to identify both substandard images and more systemic problems or patterns (e.g., that a large percentage of the images captured at a particular branch are defective). 7 . Viisage Registry. This software product can be used to enable database search capabilities by enrolling faces in a database and searching the database to determine whether a face appears more than once. This search is used for one-to-many identifications. . Viisage Gallery. This software product is designed to perform one-to- one face verification at a point-of-sale or transaction device, such as an ATM. The Company has entered into a letter of intent with a major international bank for the use of the Viisage Gallery, as well as Viisage's Quality Advisor and Registry products, in one of its branches. The Company offers its facial recognition software products as enhancements to its digital identification systems. The Company also plans to offer its facial recognition software to customers using other providers' identification systems and to the users of such third party databases. Sales and Marketing The Company markets its products directly through its internal sales force, which consisted of seven individuals as of December 31, 1996. As it continues to increase its bid activity, the Company anticipates that it will increase the number of its sales and marketing personnel. In addition, the Company intends to ally strategically with prominent vendors, systems integrators and service organizations, particularly in international markets, in order to gain access to such organizations' existing relationships, marketing resources and credibility in new markets. The Company's engineering department supports the direct sales staff by providing pre- and post-sale technical support. This support entails traveling with sales representatives to help explain the systems, defining solutions for customers, designing systems for proposal activity, supporting the implementation process and providing post-implementation support. The Company's systems are generally provided to public sector customers through a formal bidding process. The Company's 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 proposals is issued, a six-to-twelve month proposal and award process ensues, followed by (if the bid is successful) a six-to-twelve month implementation and installation phase. In the aggregate, the time needed for agencies to secure funding for systems, the request for proposal and bid process, the execution of actual contracts and the installation of a system can extend over several years. 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. 8 (ii) and (xi) Product Development -------------------- The Company has made research and development an important part of its operating discipline. In response to customer needs during 1993, 1994 an 1995, the Company developed proprietary software that supports all current industry standard operating systems and networking environments, and proprietary image capture and inspection products. 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 believes that the software and hardware products developed in prior periods will support its card-based identification system offerings for the foreseeable future. The Company's current development activities are focused on its facial recognition products and the further commercialization of its facial recognition technology. The Company continues its development activities in the area of platform engineering and, among other projects, is developing enhancements to the SensorMast as well as point-of-sale device prototypes. In addition to its own development efforts, the Company has benefited and expects to continue to benefit from research and development conducted by Lau Technologies for projects that are not related to Viisage and, through its license with Facia Reco, from certain research activities at the Massachusetts Institute of Technology. The Company also benefits from research and development activities conducted by the manufacturers of the components integrated into the Company's systems such as PC's, printers, etc. During the fiscal years ended December 31, 1994, 1995 and 1996 the Company spent $201,000, $1.1 million and $235,000, respectively, on research and development. Such amounts do not include amounts for specific projects that are allocated to project costs or the benefits from the other research and development activities referred to above. (iii) Manufacturing and Sources of Supply ----------------------------------- Substantially all proprietary subsystems and assemblies are made to the Company's specifications by contract manufacturers, including Lau Technologies. Other non-proprietary system components, such as personal computers, printers and related components, are purchased from third-party vendors. The Company's manufacturing operations consist solely of integration and testing. Systems go through several levels of testing, including configuration to customer specifications, prior to installation. The Company generally purchases major contracted assemblies from single vendors to help ensure high quality, prompt delivery and low cost. The Company does, however, qualify second sources for most components, contracted assemblies and purchased subsystems, or at least identifies alternative sources of supply. The Company believes that the open architecture of its systems facilitates substitution of components or software when this becomes necessary or desirable. The Company has from time to time experienced delays as a result of the availability of component parts and assemblies, although the Company has never failed to meet a contractual 9 requirement as a result of such delays. There can be no assurance that the Company will not experience such problems in the future. (iv) Patents, Trademarks and Licences -------------------------------- The Company's business is substantially dependent on intellectual property which it licenses from Lau Technologies under an exclusive, perpetual, irrevocable, paid-up, royalty-free, worldwide license to use all of the technology relating to the Viisage Technology 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 is also dependent on technology it licenses from Facia Reco. This license is exclusive in the field that relates to de-duplicating or querying databases created, controlled and/or managed by the Company or its sublicensees and/or utilizing, directly or indirectly, personal identification cards but does not extend to federal access control. This license includes rights in that same field to Facia Reco's exclusive license of patented technology from the Massachusetts Institute of Technology (except for certain rights granted to sponsors of the Massachusetts Institute of Technology Media Lab and certain research rights). The Company's license agreement with Facia Reco terminates upon the expiration of the final patent covered under or through the license, and provides for a royalty of $350 per machine copy incorporating the licensed technology. Until the year 2002, a minimum annual royalty applies of, generally, $21,000 for the U.S. rights and a figure ranging from $21,000 to $42,000 for the non-U.S. rights. The Company protects its intellectual property as trade secrets and, where appropriate, uses trademarks or registers its products. In addition, Lau currently has several U.S. patent applications outstanding and has made copyright filings which relate to the Company's SensorMast, Visual Inspection System and proprietary software. Lau has filed foreign patent applications which correspond to three of these domestic applications. The Company's license agreement with Facia Reco includes the right to use and sublicense certain U.S. patents and registered copyrights for facial recognition systems which Facia Reco, licenses from the Massachusetts Institute of Technology and Intelligent Vision Systems, Inc. The Massachusetts Institute of Technology has applied to extend its patent rights to certain jurisdictions in Europe and in Singapore. At Lau's request and expense, MIT obtained a broadening patent which is licensed through Facia Reco. There can be no assurance that any of the U.S. or foreign patents applied for by Lau or the foreign patents applied for by the Massachusetts Institute of Technology will be issued or that, if issued, they will provide protection against competitive technologies or will be held valid and enforceable if challenged. Moreover, 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 patents and copyrights. 10 Although there are no pending lawsuits against the Company regarding infringement of any existing patents or other intellectual property rights, the Company has in the past received a letter from an attorney on behalf of the holder of a patent on a system for scanning and encoding images from a personal identification card. The Company believes, based on the advice of its patent counsel, that none of its products infringe such patent. However, there can be no assurance that such patent holder will not initiate litigation with respect to this patent or allege additional claims. (v) Seasonality ----------- The Company's operations are not seasonal since contracts are awarded and performed throughout the year. (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. (vii) Customers and End Users ----------------------- The following lists and categorizes the Company's customers and end users as of December 31, 1996:
STATE DEPARTMENTS OF MOTOR VEHICLES OTHER STATE AND LOCAL AGENCIES Arizona Department of Transportation Auburn (Massachusetts) Police Department Massachusetts Registry of Motor Vehicles Connecticut Department of Public Safety New Mexico Department of Taxation and Connecticut Department of Social Services Revenue Massachusetts Department of Transitional North Carolina Department of Transportation Assistance Ohio Bureau of Motor Vehicles New York Department of Social Services * Wisconsin Department of Transportation Ohio Department of Public Safety FEDERAL AGENCIES FOREIGN CONTRACTS U.S. Immigration and Naturalization Service * Electoral Office of Jamaica* First National Bank of Southern Africa, Limited
* By subcontract. 11 Revenues from three customers (Ohio Bureau of Motor Vehicles, Arizona Department of Transportation and the Massachusetts Registry of Motor Vehicles) each accounted for over 10% and an aggregate of 85% of revenues of revenues in 1995. For 1996, two customers (New York Department of Social Services and North Carolina Department of Transportation) each accounted for over 10% of Company revenues and an aggregate of 50% of revenues for the year. The loss of any such customers could have a material adverse impact on the Company's business, operating results and financial condition. (viii) Backlog -------- The Company measures backlog based on signed contracts, subcontracts and customer commitments for which revenue has not yet been recognized. However, backlog is not necessarily indicative of future revenue. A substantial amount of the Company's backlog can be canceled at any time without penalty, except, in some cases, for the recovery of the Company's actual committed costs and profit on work performed through the date of cancellation. Any failure of the Company to meet an agreed-upon schedule could lead to the cancellation of the related order. The timing of award and performance on contracts as well as variations in size, complexity and requirements of the customer and modifications to contract awards may result in substantial fluctuations in backlog from period to period. Accordingly, the Company believes that backlog cannot be considered a meaningful indicator of future financial performance. The Company recognizes revenue on a percentage-of-completion basis. Revenue recognition may be delayed by the delivery of components, special software requirements of the customer, or by delays in integration with the customer's systems. At December 31, 1996, the Company's backlog was approximately $34 million, compared to approximately $30 million at December 31, 1995. Approximately 33% of the Company's backlog as of December 31, 1996, is expected to be earned during the current fiscal year. (ix) Government Contacts ------------------- Government contracts are generally subject to termination for convenience or lack of appropriation at the election of the subject agency. At December 31, 1996, amounts subject to future negotiation are not material. (x) Competition ----------- The market for the Company's products and services is extremely competitive and management expects this competition to intensify as the markets in which the Company's products and services are sold continue to develop. The Company faces competition in the identification systems market (for both digital and conventional systems) from technologically sophisticated companies, including Polaroid Corporation, Unisys Corporation, DataCard Corporation, and NBS Imaging Systems, Inc., all 12 of which have substantially greater technical, financial, and marketing resources than the Company. In some cases, the Company may be competing with an entity which has a pre-existing relationship with a potential customer which could put the Company at a significant competitive disadvantage. As the digital identification market expands, additional competitors may seek to enter the market. The Company believes that competition in the digital identification systems market is based primarily upon the following factors: systems and product performance; price; flexibility in terms of accommodating customer needs, architectures, platforms, systems and networks; and service support. The relative importance of each of these and other factors depends upon the specific customer and situation involved. Substantially all of the Company's sales to new customers have been the result of competitive bidding for contracts pursuant to public sector procurement rules, which generally increases the importance of price as a competitive factor. The Company believes that its competitive strength lies primarily in its systems integration and software design capabilities, with additional strengths including system performance and proprietary technologies, system configuration flexibility, price, and relative ease of use. In the field of biometric identification technology, the Company competes with other facial recognition providers as well as other providers of biometric solutions. Fingerprint recognition solutions have a long history of use, particularly in law enforcement applications. Other current suppliers of facial recognition solutions are software development firms. The Company expects that as the market for biometric solutions develops, companies with significant resources and capabilities may enter the market and competition will intensify. (xi) Research and Development ------------------------ See Product Development Section (xii) Environmental Protection Regulations ------------------------------------ The Company believes that compliance by the Company with federal, state and local environmental regulations will not have a material adverse effect on its financial position or results of operations. (xiii) Employees --------- As of December 31, 1996, the Company had 47 employees. The Company from time-to-time supplements its employee forces with independent contractors. As of December 31, 1996, the Company had 28 such contractors. None of the Company's employees is represented by a labor union, and the Company considers its relationship with its employees to be good. (d) Financial Information about Foreign and Domestic Operations and Export ---------------------------------------------------------------------- Sales ------ The Company's foreign operations and export sales are currently not material. 13 Item 2. Properties ---------- In February 1997, the Company moved to facilities located in Littleton, Massachusetts. The Company occupies approximately 23,000 square feet of space and has access to common areas under the terms of a Use and Occupancy Agreement with Lau Technologies through February 2002. The Company believes that its facilities are in good condition and are suitable and adequate for its present operations and that suitable space is available if such lease is not extended. Item 3. Legal Proceedings ------------------ On September 23, 1996, three minority shareholders of Lau Technologies filed suit against Lau Technologies, the Company and others in Superior Court in Berkshire County, Massachusetts, alleging that certain defendants breached the fiduciary duty owed the plaintiffs as shareholders of Lau Technologies. The plaintiffs requested, among other things, an injunction to delay the Company's public offering in an effort to obtain a direct, rather than an indirect, ownership interest in the Company. On October 4, 1996, the Superior Court denied plaintiffs' request for such relief, although plaintiffs' claims for unspecified money damages remain pending. Lau Technologies has agreed to indemnify and hold the Company harmless for any liabilities incurred by the Company as a result of judgments, settlements or litigation expenses arising out of this suit. Accordingly, the Company does not believe that the resolution of this matter 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 --------------------------------------------------- Not applicable. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ---------------------------------------------------------------------- Information concerning the market and market price for the registrant's stock, $.001 par value, and dividend policy is included under the sections labeled "Common Stock Information" and "Dividend Policy" in the registrant's 1996 Annual Report to Shareholders and is incorporated herein by reference. Item 6. Selected Financial Data ----------------------- The information required under this item is included under the section labeled "Selected Financial Information" in the registrant's 1996 Annual Report to Shareholders and is incorporated herein by reference. 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- The information required under this item is included under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the registrant's 1996 Annual Report to Shareholders and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data ------------------------------------------- The financial statements required under this item are included in the registrant's 1996 Annual Report to Shareholders and are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure --------------------- Not applicable. 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 Director" in the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. The information concerning delinquent filers pursuant to Item 405 of Regulation S-K is incorporated herein by reference from the material contained under the heading "Compliance with Section 16(a)" in the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 11. Executive Compensation ---------------------- The information required under this item is incorporated herein by reference from the material contained under the caption "Executive Compensation" in the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 12. Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- The information required under this item is incorporated herein by reference from the material contained under the caption "Security Ownership" in the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. 15 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. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ---------------------------------------------------------------- (a), (d) Financial Statements and Schedules ---------------------------------- (1) The financial statements set forth in the list below are filed as part of this Report. (2) There are no financial statement schedules filed as part of this Report. (3) Exhibits filed herewith or incorporated herein by reference are set forth in Item 14(c) below. List of Financial Statements and Schedules Referenced in this -------------------------------------------------------------- Item 14 ------- Information incorporated by reference from Exhibit 13 filed herewith: Balance Sheets Statements of Operations Statements of Changes in Stockholders' Equity/Net Assets Statements of Cash Flows Notes to Financial Statements Report of Independent Public Accountants Financial Statement Schedules 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 ------------------- During the quarter ended December 31, 1996, the Company was not required to file, and did not file, any Current Report on Form 8-K. (c) Exhibits -------- See Exhibit Index on page 18. 16 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 28th day of March, 1997. Viisage Technology, Inc. By: /s/ Robert C. Hughes ---------------------------------- Robert C. Hughes 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 28th day of March, 1997:
Signature Title --------- ----- * By:________________________________ Chairman of the Board of Directors Denis K. Berube * By:________________________________ President and Chief Executive Officer Robert C. Hughes (Principal Executive Officer) * By:________________________________ Vice President, Chief Financial Officer and Treasurer William A. Marshall (Principal Financial and Accounting Officer) * By:________________________________ Secretary and Director Charles J. Johnson * By:________________________________ Director Harriet Mouchly-Weiss * By:________________________________ Director Peter Nessen * By:_______________________________ Director Thomas J. Reilly * *By: /s/ Robert C. Hughes ______________________________ Robert C. Hughes Attorney-in-fact
17 EXHIBIT INDEX EXHIBIT PAGE - ------- ---- NO. DESCRIPTION NO --- ----------- -- 2.1* Amended and Restated Asset Transfer Agreement, dated as of August 20, 1996, between the Registrant and Lau Technologies. 3.1* Restated Certificate of Incorporation of the Registrant. 3.2* By-Laws of the Registrant. 4.1* Specimen certificates for shares of the Registrant's Common Stock. 10.1* Amended and Restated License Agreement, dated as of August 20, 1996, between the Registrant and Lau Technologies. 10.2* Form of Administration and Services Agreement between the Registrant and Lau Technologies. 10.3* Form of Use and Occupancy Agreement between the Registrant and Lau Technologies. 10.4* License Agreement, dated as of August 20, 1996, between the Registrant and Facia Reco Associates, Limited Partnership. 10.5* Employment Agreement, dated as of February 1, 1996, between the Registrant and Robert C. Hughes. 10.6* Employment Agreement, dated as of February 1, 1996, between the Registrant and William A. Marshall. 10.7* Employment Agreement, dated as of July 1, 1996, between the Registrant and Yona Wieder. 10.8* 1996 Management Stock Option Plan. 10.9* 1996 Director Stock Option Plan. 10.10* Form of Option Agreement for the 1996 Management Stock Option Plan. 10.11* Form of Option Agreement for the 1996 Director Stock Option Plan. 10.12** Revolving Credit Facility between the Registrant and State Street Bank and Trust Company, dated November 22, 1996. 10.13* Contract between the Registrant and the North Carolina Department of Transportation, dated as of April 26, 1996. 10.14* Purchase Agreement (Project Finance Facility) between the Registrant and Sanwa Business Credit Corporation, dated as of September 12, 1996. 18 EXHIBIT INDEX EXHIBIT PAGE - ------- ---- NO. DESCRIPTION NO --- ----------- -- 13 Annual Report to Shareholders for the year ended December 31, 1996 (only those portions incorporated herein by reference). 23 Consent of Arthur Andersen LLP. 24.1 Power of Attorney. 27.1 Financial Data Schedule. * Filed as an exhibit to the registrant's Form S-1 Registration Statement dated November 8, 1996 (File No. 333-10649) ** Filed as an exhibit to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 29, 1996 (File No. 000-21559) 19 EX-13 2 1996 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 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 Annual Report.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 1996 1995 1994 1993 ------------- --------------- --------------- ------------- (in thousands, except per share amounts) STATEMENT OF OPERATIONS DATA: Revenues............................... $24,971 $11,221 $ 1,257 $ 505 Project costs.......................... 19,484 10,361 1,140 456 ------------- --------------- --------------- ------------- Project margin......................... 5,487 860 117 49 ------------- --------------- --------------- ------------- Operating expenses: Sales and marketing.................. 1,852 999 1,596 1,185 Research and development............. 235 1,089 201 47 General and administrative........... 1,880 1,204 681 289 ------------- --------------- --------------- ------------- Total operating expenses......... 3,967 3,292 2,478 1,521 ------------- --------------- --------------- ------------- Operating income (loss)................ 1,520 (2,432) (2,361) (1,472) Interest expense, net.................. 714 515 40 - ------------- --------------- --------------- ------------- Income (loss) before income taxes...... 806 (2,947) (2,401) (1,472) Income taxes........................... 205 - - - ------------- --------------- --------------- ------------- Net income (loss)...................... $ 601 $(2,947) $(2,401) $(1,472) ============= =============== =============== ============= Net income (loss) per share(1)......... $ 0.09 $ (0.47) $ (0.39) $(0.24) ============= =============== =============== ============= Weighted average common and equivalent shares.............................. 6,587 6,225 6,225 6,225 ============= =============== =============== =============
DECEMBER 31, -------------------------------------------------------------- 1996 1995 1994 1993 ------------- --------------- --------------- ------------- BALANCE SHEET DATA: Working Capital........................ $20,676 $ 7,413 $ 2,509 $ 368 Total assets........................... 36,119 11,285 3,999 914 Long-term obligations.................. 4,420 8,319 955 - Stockholders' equity................... 23,020 - - - Net assets(2).......................... - 1,323 1,554 368
(1) See note 2 of Notes to Financial Statements for information concerning the computation of net income (loss) per share. (2) Net assets represent divisional investment during the time the Company operated as a division of Lau Technologies. 13-1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section below entitled "Certain Factors that may Affect Future Results." The cautionary statements made herein should be read as being applicable to all related forward-looking statements in this Annual Report. OVERVIEW Viisage develops and implements turnkey digital identification systems and solutions intended to deter fraud, reduce customers' identification program costs and improve security. The Company combines its systems integration and software design capabilities with its proprietary software and hardware products to create complete customized solutions. Viisage's products are currently operating at over 450 locations. Applications can include systems and cards for national ID's, driver's licenses, social services, voter registration, law enforcement, corrections, healthcare, financial services, retail and access control. Viisage is also commercializing patented facial recognition technology for the real-time identification and verification of individuals. The Company began operations in 1993 as a division of Lau Technologies, a provider of systems integration services and products for sophisticated electronic systems. On November 6, 1996, Lau transferred substantially all of the assets, liabilities and operations of the division to the Company in exchange for 5,680,000 shares of the Company's common stock and the Company completed its initial public offering in November 1996. The Company is currently a 64% owned subsidiary of Lau Technologies. Viisage has experienced significant revenue growth since 1993. The Company believes that the increasing acceptance of and demand for digital identification technology in recent years, its commitment to providing customized solutions for its customers' needs, its expertise in facial imaging and its proprietary software and hardware products have contributed to its growth and will be important to its future success. The Company provides systems and services principally under contracts that have five-year terms and provide for several annual renewals after the initial contract term. Contracts generally provide for a fixed price for the system and/or for each card produced. Contract prices vary depending on, among other things, design and integration complexities, the nature and number of workstations and sites, the projected number of cards to be produced, the level of post-installation support and the competitive environment. Substantially all of the Company's revenues are currently derived from public sector customers and contractors to such customers. The Company believes for the foreseeable future that it will continue to derive a significant portion of its revenues from a limited number of large contracts. For the years ended December 31, 1995 and 1996, three customers and two customers, respectively, each accounted for more than 10% of 13-2 the Company's revenues and an aggregate of 85% and 50% of revenues for the years, respectively. The Company's results of operations are significantly affected by, among other things, the timing of award and performance on contracts. As a result, the Company's revenues and income may fluctuate from quarter to quarter, and comparisons over longer periods of time may be more meaningful. The Company's results of operations are not seasonal since contracts are awarded and performed throughout the year. RESULTS OF OPERATIONS The following table sets forth certain financial information as a percentage of revenues for the periods indicated.
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 1994 ----- ----- ------ Revenues........................... 100% 100% 100% Project costs..................... 78 92 91 ---- ---- ----- Project margin..................... 22 8 9 Operating expenses: Sales and marketing............ 7 9 127 Research and development....... 1 10 16 General and administrative..... 8 11 54 ---- ---- ----- Total operating expenses. 16 30 197 ---- ---- ----- Operating income(loss)............. 6 (22) (188) Interest expense, net.............. 3 4 3 ---- ---- ----- Income (loss) before income taxes.. 3 (26) (191) Income taxes....................... 1 - - ---- ---- ----- Net income (loss).................. 2 % (26)% (191)% ==== ==== =====
Years ended December 31, 1996 and 1995 Revenues. Revenues are derived principally from systems implementation, card production and related services under multi-year contracts. Revenues increased 123% to $25.0 million in 1996 from $11.2 million in 1995. This increase was due to an increase in the number of contracts being performed during 1996. Project Costs and Margin. Project costs consist primarily of hardware, consumables (printer ribbons, cards, holographic overlays, etc.), system design, software development and implementation labor, maintenance and overhead. As a percentage of revenues, project costs decreased to 78% for 1996 from 92% for 1995. This decrease reflects cost savings on design, development and implementation activities resulting from the Company's increased experience with and resources for digital identification solutions. Project margin increased 538% to $5.5 million (22% of revenues) for 1996 from $860,000 (8% of revenues) for 1995, reflecting the increase in revenues and cost savings discussed above. The Company believes it could experience further improvements in project margin from project cost savings and improved pricing. However, there can be no assurance that such improvements will be achieved. 13-3 Sales and Marketing. Sales and marketing expenses consist primarily of compensation and professional service fees for marketing, bid and proposal and customer support activities. Sales and marketing expenses increased 85% to $1.9 million in 1996 from $1.0 million in 1995. This increase principally reflects an increase in proposal activity and the addition of marketing personnel during 1996. As a percentage of revenues, sales and marketing expenses decreased to 7% for 1996 from 9% for 1995 due to revenues increasing at a greater rate than such expenses during 1996. The Company anticipates that it will continue to make significant expenditures for sales and marketing as it adds resources and initiates operations in additional markets. Research and Development. Research and development expenses consist principally of compensation, outside services and materials utilized for product and software development activities that are not related to specific projects. Research and development expenses decreased 78% to $235,000 in 1996 from $1.1 million in 1995, and decreased as a percentage of revenues to 1% for 1996 from 10% for 1995. These decreases reflect the completion in 1995 of proprietary software to support all industry standard computing environments and proprietary hardware products for the Company's card-based systems and the increase in revenues in 1996. The Company believes that the software and hardware products developed in prior periods will support its card-based systems offerings for the foreseeable future. Expenditures for 1996 relate primarily to the Company's facial recognition products and do not reflect the benefits to the Company under license arrangements from the research and development efforts of Lau Technologies and the Massachusetts Institute of Technology for projects that are not directly related to the Company. General and Administrative. General and administrative expenses consist principally of compensation for executive management, finance and administrative personnel and outside professional fees. General and administrative expenses increased 56% to $1.9 million in 1996 from $1.2 million in 1995. The increase in expenses was due primarily to the addition of management personnel during the fourth quarter of 1995 and increased management activities related to the growth in the Company's business. As a percentage of revenues, general and administrative expenses decreased to 8% for 1996 from 11% for 1995 due to revenues increasing at a greater rate than such expenses in 1996. Interest Expense. The increase in net interest expense to $714,000 in 1996 from $515,000 in 1995 principally reflects the increase in the level of borrowings during 1996. This increase was partially offset by interest earned on the net proceeds from the Company's initial public offering. Income Taxes. The Company's operations prior to the transfer discussed above were included in the income tax returns of Lau Technologies, an S corporation. Income tax expense for 1996 relates principally to corporate taxes for the period following the transfer and a deferred tax charge of $110,000 relating to the cumulative differences between the financial reporting and income tax bases of certain assets and liabilities as of the transfer date. 13-4 Years Ended December 31, 1995 and 1994. Revenues. Revenues increased 793% to $11.2 million in 1995 from $1.3 million in 1994. This increase was due primarily to performance on several contracts awarded during the fourth quarter of 1994 and the first quarter of 1995. The Company began operations in 1993 and its first contract was awarded late that year. Revenues for 1994 were derived solely from this contract. Project Costs and Margin. As a percentage of revenues, project costs increased to 92% in 1995 from 91% in 1994. These percentages reflect additional development costs incurred to design, develop, and integrate system components and industry standard software for the first time. Project margin increased 635% to $860,000 (8% of revenues) in 1995 from $117,000 (9% of revenues) in 1994 reflecting the increases in revenues and development costs discussed above. Sales and Marketing. Sales and marketing expenses decreased 37% to $1.0 million in 1995 from $1.6 million in 1994. This decrease reflects improved controls over bid and proposal costs and the Company's decision not to pursue certain opportunities due to funding constraints. As a percentage of revenues, sales and marketing expenses decreased to 9% in 1995 from 127% in 1994 due primarily to revenues increasing at a greater rate than such expenses during 1995. Research and Development. Research and development expenses increased 442% to $1.1. million in 1995 from $201,000 in 1994. The significant increase in expenses during 1995 reflects the completion of certain proprietary software to support all industry standard computing environments and the development of proprietary hardware products for the Company's card-based systems. As a percentage of revenues, these expenses decreased to 10% in 1995 from 16% in 1994 due to the increase in revenues at a greater rate than such expenses in 1995. General and Administrative. General and administrative expenses increased 77% to $1.2 million in 1995 from $681,000 in 1994. This increase reflects the increased level of management activity due to the growth in the Company's business and the addition of certain management personnel during the fourth quarter of 1995. As a percentage of revenues, general and administrative expenses decreased to 11% in 1995 from 54% in 1994 due primarily to revenues increasing at a greater rate than such expenses during 1995. Interest Expense. Interest expense increased to $515,000 in 1995 from $40,000 in 1994 due principally to the increase in borrowings to fund operations. LIQUIDITY AND CAPITAL RESOURCES In November 1996, the Company completed an initial public offering of its common stock and received net proceeds of approximately $22.2 million. The Company used approximately $8.8 million of the proceeds to repay long-term borrowings assumed in connection with the transfer discussed above. 13-5 At December 31, 1996, working capital was $20.7 million compared to $7.4 million at December 31, 1995. The increase in working capital was due primarily to the proceeds from the initial public offering in November and increases in accounts receivable and costs and estimated earnings in excess of billings, net of increases in accounts payable and accrued expenses. For the year ended December 31, 1996, operations and investing activities utilized cash of approximately $1.5 million and $5.1 million, respectively, principally to fund the working capital increases discussed above and increases in project assets and other assets. Financing was provided by the initial public offering and the project lease financing arrangement referred to below. The Company has a revolving line of credit with a commercial bank that provides for unsecured borrowings of up to $10.0 million through June 1998 at the prime rate or other LIBOR-based options. This agreement requires the Company to maintain certain financial ratios and minimum levels of earnings and tangible net worth. The Company also has a system project lease financing arrangement with a commercial leasing organization providing for project financing of up to $15.0 million. Pursuant to this arrangement, the lessor purchases certain of the Company's digital identification systems and leases them back to Viisage for deployment with identified and contracted customers approved by the lessor. The lessor retains title to systems and has an assignment of Viisage's rights under the related customer contracts, including rights to use the software and technology underlying the related systems. Under this arrangement, the lessor bears the credit risk associated with payments by Viisage's customers, but Viisage bears performance and appropriation risk and is generally required to repurchase a system in the event of a termination by a customer for any reason except credit default. These project lease arrangements are accounted for as capital leases. At December 31, 1996, the Company had $10 million available under the revolving line of credit and approximately $11 million available under the lease financing arrangement. The Company has historically not made substantial capital expenditures for facilities, office and computer equipment and has satisfied its needs in these areas principally through leasing. The Company believes that the net proceeds from its initial public offering, together with cash flow from operations, available borrowings and project leasing will be sufficient to meet the Company's working capital and capital expenditure needs for the foreseeable future. There can be no assurance, however, that additional financing, if needed, will be available on favorable terms or at all. If the Company is unable to obtain additional capital, if needed, on acceptable terms the Company may be unable to take full advantage of future opportunities or respond to competitive pressures, which could adversely affect the Company's business, financial condition and results of operations. 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. 13-6 ACCOUNTING PRONOUNCEMENT In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, which establishes standards for computing and presenting earnings per share for entities with publicly held common stock or potential common stock. SFAS No. 128 is effective for periods ending after December 15, 1997 and early adoption is not permitted. Under the new pronouncement, earnings (loss) per share would not be materially different from the amounts presented. 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. 13-7 Viisage Technology, Inc. Balance Sheets (in thousands, except per share amounts)
December 31, 1996 1995 - -------------------------------------------------------------------------------- Assets Current Assets: Cash and cash equivalents (note 2) $11,073 $ - Accounts receivable 1,499 378 Costs and estimated earnings in excess of billings 16,445 8,678 Other current assets (note 3) 338 - - -------------------------------------------------------------------------------- Total current assets 29,355 9,056 Property and equipment, net (note 4) 5,857 2,229 Other assets (note 3) 907 - - -------------------------------------------------------------------------------- $36,119 $11,285 ================================================================================ Liabilities and Stockholders' Equity/Net Assets Current Liabilities: Accounts payable and accrued expenses (note 5) $ 7,288 $ 1,153 Accrued and deferred income taxes (notes 2 and 9) 190 - Obligations under capital leases (notes 6 and 7) 1,201 490 - -------------------------------------------------------------------------------- Total current liabilities 8,679 1,643 Long-term debt (note 6) - 6,656 Obligations under capital leases (notes 6 and 7) 4,420 1,663 - -------------------------------------------------------------------------------- 13,099 9,962 - -------------------------------------------------------------------------------- Commitments and contingencies (note 7) Stockholders' Equity/Net Assets (notes 1 and 10): Preferred stock, $.001 par value; 2,000,000 shares authorized; none issued - - Common stock, $.001 par value; 20,000,000 shares authorized; 8,055,000 shares issued and outstanding 8 - Additional paid-in capital 22,994 - Retained earnings 18 - Net assets - 1,323 - -------------------------------------------------------------------------------- Total stockholders' equity/net assets 23,020 1,323 - -------------------------------------------------------------------------------- $36,119 $11,285 ================================================================================
The accompanying notes are an integral part of these financial statements. 13-8 Viisage Technology, Inc. Statements of Operations (in thousands, except per share amounts)
Year Ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Revenues $24,971 $11,221 $ 1,257 Project costs 19,484 10,361 1,140 - -------------------------------------------------------------------------------- Project margin 5,487 860 117 - -------------------------------------------------------------------------------- Operating Expenses: Sales and marketing 1,852 999 1,596 Research and development 235 1,089 201 General and administrative 1,880 1,204 681 - -------------------------------------------------------------------------------- Total operating expenses 3,967 3,292 2,478 - -------------------------------------------------------------------------------- Operating income (loss) 1,520 (2,432) (2,361) Interest expense, net 714 515 40 - -------------------------------------------------------------------------------- Income (loss) before income taxes 806 (2,947) (2,401) Income taxes (notes 2 and 9) 205 - - - -------------------------------------------------------------------------------- Net income (loss) $ 601 $ (2,947) $(2,401) - -------------------------------------------------------------------------------- Net income (loss) per share (note 2) $ 0.09 $ (0.47) $ (0.39) - -------------------------------------------------------------------------------- Weighted average common and equivalent shares (note 2) 6,587 6,225 6,225 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 13-9 Viisage Technology, Inc. Statements of Changes in Stockholders' Equity/Net Assets (in thousands)
Additional Preferred Common Paid-in Retained Stock Stock Capital Earnings Net Assets Total - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1993 $ - $ - $ - $ - $ 368 $ 368 Net loss - - - - (2,401) (2,401) Net transactions with parent - - - - 3,587 3,587 - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 - - - - 1,554 1,554 Net loss - - - - (2,947) (2,947) Net transactions with parent - - - - 2,716 2,716 - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 - - - - 1,323 1,323 Net income - - - - 583 583 Stock compensation expense - - - - 166 166 Net transactions with parent - - - - (1,372) (1,372) - --------------------------------------------------------------------------------------------------------------------------- Balance, November 6, 1996 (note 1) - - - - 700 700 Issuance of common stock in exchange for net assets (note 1) - 6 694 - (700) - Issuance of common stock in initial public offering (notes 1 and 10) - 2 22,228 - - 22,230 Net income - - - 18 - 18 Stock compensation expense - - 72 - - 72 - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $ - $ 8 $ 22,994 $ 18 $ - $ 23,020 ===========================================================================================================================
The accompanying notes are an integral part of these financial statements. 13-10 Viisage Technology, Inc. Statements Of Cash Flows (in thousands)
Year Ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income (loss) $ 601 $(2,947) $(2,401) Adjustments to reconcile net income (loss) to net cash (used) by operating activities: Depreciation and amortization 612 88 - Stock compensation expense 238 - - Changes in operating assets and liabilities: Accounts receivable (1,121) (378) 1,115 Costs and estimated earnings in excess of billings (7,767) (4,679) (4,244) Other current assets (338) - 44 Accounts payable and accrued expenses 6,135 (25) 632 Accrued and deferred income taxes 190 - - - ----------------------------------------------------------------------------------------------------------------------------- Net cash (used) by operating activities (1,450) (7,941) (4,854) - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Purchase of contract equipment converted to capital leases (3,965) (2,216) - Additions to property and equipment (275) (101) - Increase in other assets (907) - - - ----------------------------------------------------------------------------------------------------------------------------- Net cash (used) by investing activities (5,147) (2,317) - - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net revolving credit (repayments) borrowings (6,656) 6,610 46 Proceeds from long-term borrowings - 1,862 1,580 Proceeds from sale/leaseback of equipment 3,965 2,216 - Principal payments on long-term borrowings - (3,083) (359) Principal payments on obligations under capital leases (497) (63) - Net proceeds from initial public offering 22,230 - - Net transactions with parent (1,372) 2,716 3,587 - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 17,670 10,258 4,854 - ----------------------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 11,073 - - Cash and cash equivalents, beginning of year - - - Cash and cash equivalents, end of year $ 11,073 $ - $ - - ----------------------------------------------------------------------------------------------------------------------------- Supplemental Cash Flow Information: Cash paid during the year for interest $ 781 $ 465 $ 34 - -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 13-11 Viisage Technology, Inc. Notes to Financial Statements (1) Business and Basis of Presentation Viisage Technology, Inc. (Viisage or the Company) develops and implements turnkey digital identification systems and solutions intended to deter fraud, reduce customers' identification program costs and improve security. The Company combines its systems integration and software design capabilities with its proprietary software and hardware products to create complete customized solutions. Viisage's products are currently operating at over 450 locations. Applications can include systems and cards for national ID's, driver's licenses, social services, voter registration, law enforcement, corrections, healthcare, financial services, retail and access control. In addition, Viisage is commercializing patented facial recognition technology for the real-time identification and verification of individuals. Viisage was incorporated in Delaware on May 23, 1996 as part of a planned reorganization of Lau Acquisition Corp. (Lau Technologies or Lau). On November 6, 1996, Lau Technologies completed the transfer of substantially all of the assets, liabilities and operations of its Viisage Technology Division to the Company in exchange for 5,680,000 shares of the Company's common stock (the Transfer), and as discussed more fully in note 10, the Company completed its initial public offering in November 1996. The Company is currently an approximately 64% owned subsidiary of Lau Technologies. These transactions were between entities under common control and were accounted for using historical amounts in a manner similar to a pooling of interests. The financial statements for all periods presented prior to the Transfer reflect the financial position, results of operations and cash flows of the Viisage Technology Division business that comprise the Company. All changes in the Company's equity prior to the Transfer are reflected in net assets which represent the net investment of Lau Technologies in the Company. The statements of operations for all periods presented reflect allocations for the costs of shared facilities and certain administrative services. Such costs and expenses have been allocated to the Company based on actual usage or other methods that approximate actual usage. Management believes that the allocation methods are reasonable and that allocated costs and expenses approximate what such amounts would be if the Company had operated on a stand-alone basis. As discussed more fully in note 3, the Company entered into agreements with Lau Technologies covering certain facilities, equipment and administrative services after the Transfer. Although the Company has not filed separate income tax returns for periods prior to the Transfer, income taxes presented in the financial statements are computed on a separate return basis taking into consideration the tax-sharing arrangement with Lau Technologies described in note 2. The financial information included herein may not necessarily reflect the financial position, results of operations and cash flows of the Company in the future or what the financial position, results of operations and cash flows would have been had it been a separate, stand-alone company throughout the periods covered. (2) Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Contract Revenue and Cost Recognition The Company provides services principally under contracts that provide for a fixed price for the system and/or for each card produced. Revenue is recognized using the percentage of completion method based on labor costs incurred and/or cards produced. Contract losses, if any, are recognized in the period in which they become determinable. Costs and estimated earnings in excess of billings are recorded as a current asset. Billings in excess of costs and estimated earnings and accrued contract costs are recorded as current liabilities. Generally, contracts provide for billing when contract milestones are met and/or cards are produced. Retainages and amounts subject to future negotiation are not material. Costs and estimated earnings in excess of billings includes approximately $6.5 million expected to be billed and collected after December 31, 1997. Fair Value of Financial Instruments The carrying amounts of the Company's financial instruments, including cash and cash equivalents, accounts receivable and payable and short-and long-term borrowings, approximate fair values. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 1996, cash equivalents consisted of short-term Eurodollar investments with a commercial bank. These investments are carried at cost which approximates market value. 13-12 Viisage Technology, Inc. Notes to Financial Statements (Continued) Accounts Receivable Accounts receivable are due principally from government agencies and contractors to government agencies. Management periodically reviews accounts receivable for possible uncollectible amounts. In the event management determines a specific need for an allowance, a provision for doubtful accounts is provided. Based on management's review, no allowance for doubtful accounts has been recorded for the periods presented. All of the Company's revenues related to one customer in 1994. For 1996 and 1995, two customers and three customers, respectively, each accounted for more than 10% of revenues, and approximately 50% and 85% in the aggregate of the Company's revenues, respectively. At December 31, 1996, 54% of accounts receivable and costs and estimated earnings in excess of billings related to three customers. Property and Equipment Property and equipment are recorded at cost or the lesser of fair value or the present value of minimum lease payments for items acquired under capital leases. Depreciation and amortization are calculated using the straight-line or usage- based methods over the estimated useful lives of the related assets that approximate five years or the lease term, whichever is shorter. Research and Development Research and development costs are charged to expense as incurred. Software Development The Company reviews software development costs incurred in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 86 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 internally developed software are expensed as incurred. Externally purchased software costs are capitalized and depreciated over their remaining useful lives not to exceed five years. Income Taxes The Company's operations prior to the Transfer discussed in note 1, were included in the income tax returns of Lau Technologies, an S corporation. Income tax allocations for such periods have been calculated as if the Company were filing separate income tax returns taking into consideration that operating losses and tax credits have been utilized by the shareholders of Lau Technologies. Subsequent to the Transfer, the Company will file separate tax returns. Any tax liability or refund that may arise for periods when the Company was a division of Lau Technologies is covered by a tax indemnification arrangement contained in the Asset Transfer Agreement executed in connection with the Transfer. The indemnification provides for Lau Technologies to pay or receive reimbursement from the Company for any tax adjustment relating to the Viisage Technology Division for all periods prior to the effective date of the Transfer if such adjustments will result in tax expense or tax benefit, as the case may be, to the Company. The Company accounts for income taxes under SFAS No. 109. 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 enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Net Income (Loss) Per Share Net income (loss) per share is computed based on the weighted average number of common and common equivalent shares outstanding during the period. Pursuant to certain requirements of the Securities and Exchange Commission, common and common equivalent shares issued during the 12 months prior to the initial public offering date (using the treasury stock method and the initial public offering price of $10.50 per share) have been included in the calculation of weighted average common and common equivalent shares for periods prior to the offering. For 1996, weighted average shares is comprised of 6,022,000 shares of common stock and 565,000 shares related to common equivalents. For 1995 and 1994, weighted average shares are comprised of 5,680,000 shares of common stock and 545,000 shares related to common equivalents. In March 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings Per Share, which establishes standards for computing and presenting earnings per share for entities with publicly held common stock or potential common stock. SFAS No. 128 is effective for periods ending after December 15, 1997 and early adoption is not permitted. Under the new pronouncement, earnings (loss) per share would not be materially different from the amounts presented. Long-Lived Assets In 1995, the Financial Accounting Standards Board adopted SFAS No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of, which is effective for 1996. Adoption of SFAS No. 121 did not have a material impact on the Company's financial position or results of operations. 13-13 Viisage Technology, Inc. Notes to Financial Statements (Continued) 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. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation, which is effective for 1996. SFAS No. 123 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. (3) Other Related Party Transactions In connection with the Transfer discussed in note 1, the Company and Lau Technologies entered into an Administration and Services Agreement, a Use and Occupancy Agreement and a License Agreement. Under the Administration and Services Agreement, Lau Technologies provides general accounting, data processing, payroll, 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 approximately $660,000 and will be revised if the level of services is changed. The Company utilized the same allocation methods for prior periods. Amounts for 1995 and 1994 reflect the use of additional services that were provided by Company personnel in 1996. The amounts for such services were approximately $660,000 in 1996, $1.1 million in 1995, and $710,000 in 1994. The Use and Occupancy Agreement requires the Company to pay its proportionate share of the cost of shared facilities and office services including rent, insurance, property taxes, utilities and other operating expenses, based on square footage or equipment utilized. In February 1997, the Company and Lau Technologies moved to larger facilities and extended the Agreement through February 2002. The annual fee for facilities and services is approximately $500,000 and will be revised for changes in operating expenses. The amounts for facilities and services were approximately $220,000 in 1996, $140,000 in 1995 and $90,000 in 1994. See note 7 for lease information. Company employees participate in various Lau Technologies employee benefit plans. The Company pays its proportionate share of the costs of such plans based on the number of participating employees. Management believes the methods for allocating expenses and those costs related to shared facilities and equipment are reasonable and approximate what these costs would be on a stand-alone basis. The License Agreement grants the Company an exclusive, worldwide, royalty-free, paid-up, perpetual, irrevocable license to use proprietary technology used by the Viisage Technology Division at the time of the Transfer and improvements thereto. The license excludes the use of such technology for federal access control as defined in the License Agreement. The Company purchases certain system components and the services of technical personnel from Lau Technologies. The amounts for such components and services were approximately $1.7 million in 1996, $2.8 million in 1995 and $1.4 million 1994. At December 31, 1996, the Company had approximately $180,000 of accounts receivable due from Lau Technologies and approximately $100,000 of accounts payable due to Lau Technologies. The Company also has a $1 million 9% note receivable from Lau Technologies due in monthly installments of principal and interest of approximately $21,000 through February 2002. At December 31, 1996, approximately $150,000 of the note was included in other current assets and the remaining amount was included in other assets in the accompanying balance sheet. The Company has employment and noncompetition agreements with certain officers. Such agreements provide for employment and related compensation for initial terms of five years, renewal options for two years, 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, 1996 1995 - ------------------------------------------------------------------- Assets held under capital leases $6,181 $2,216 Computer equipment 376 101 - ------------------------------------------------------------------- 6,557 2,317 Less-Accumulated depreciation 700 88 - ------------------------------------------------------------------- $5,857 $2,229 ===================================================================
During 1996 and 1995, the Company sold and leased back under capital leases approximately $4.0 million and $2.2 million, respectively, of system equipment used to produce identification cards for certain contracts. 13-14 Viisage Technology, Inc. Notes to Financial Statements (Continued) (5) Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of the following (in thousands):
December 31, 1996 1995 - ------------------------------------------------------------------ Accounts payable $2,072 $ 835 Accrued contract costs 4,353 - Accrued payroll and related taxes 445 90 Accrued vacation 224 136 Other accrued expenses 194 92 - ------------------------------------------------------------------ $7,288 $1,153 ==================================================================
(6) Revolving Credit and Project Lease Arrangements The Company has a revolving credit agreement with a commercial bank that provides for unsecured borrowings of up to $10 million through June 1998 at the prime rate or other LIBOR-based options. The agreement requires the Company to maintain certain financial ratios and minimum levels of earnings and tangible net worth. The Company was in compliance with such covenants at December 31, 1996 and there were no borrowings outstanding. Prior to the Transfer discussed in note 1, long-term debt consisted of borrowings under a revolving line of credit agreement between Lau Technologies and a commercial bank. Such borrowings related solely to the Company's operations and, accordingly, were assumed in connection with the Transfer and repaid in November 1996. The Company has a system project lease arrangement with a commercial leasing organization providing for system project leases of up to $15 million. Pursuant to the facility, the lessor purchases certain of the Company's digital identification systems and leases them back to Viisage for deployment with identified and contracted customers approved by the lessor. The lessor retains title to the systems and has an assignment of Viisage's rights under the related customer contracts, including rights to use the software and technology underlying the related systems. Under the facility, the lessor bears the credit risk associated with payments by Viisage's customers, but Viisage bears performance and appropriation risk and is generally required to repurchase a system in the event of a termination by a customer for any reason except credit default. At December 31, 1996, the Company had approximately $11 million available under this arrangement. (7) Commitments and Contingencies Leases The Company leases certain equipment used in its operations and the shared facilities discussed in note 3. Rental expense for operating leases was approximately $130,000 in 1996, $100,000 in 1995 and $55,000 in 1994. At December 31, 1996, approximate future minimum rentals under the lease for shared facilities and capital leases are as follows (in thousands):
Capital Operating Leases Lease - ----------------------------------------------------------- Year ending: 1997 $1,628 $ 198 1998 1,823 212 1999 1,723 212 2000 1,163 212 2001 582 212 Thereafter - 34 - ----------------------------------------------------------- Total minimum lease payments 6,919 $1,080 =========================================================== Less-Interest portion 1,298 Present value of net minimum lease payments 5,621 Less-Current portion 1,201 - ------------------------------------------ $4,420 ==========================================
Litigation On September 23, 1996, three minority shareholders of Lau Technologies filed suit against Lau Technologies, the Company and others in Superior Court in Berkshire County, Massachusetts, alleging that certain defendants breached the fiduciary duty owed the plaintiffs as shareholders of Lau Technologies. The plaintiffs requested, among other things, an injunction to delay the Company's public offering in an effort to obtain a direct, rather than an indirect, ownership interest in the Company. On October 4, 1996, the Superior Court denied plaintiffs' request for such relief, although plaintiffs' claims for unspecified money damages remain pending. Lau Technologies has agreed to indemnify and hold the Company harmless for any liabilities incurred by the Company as a result of judgments, settlements or litigation expenses arising out of this suit. Accordingly, the Company does not believe that the resolution of this matter would have a material adverse effect on its business, financial condition or results of operations. 13-15 Viisage Technology, Inc. Notes to Financial Statements (Continued) (8) Retirement Plans The Company participates in the Lau Technologies 401(k) plan and pays its proportionate share of plan expenses based on the number of participants. The plan permits pretax contributions by participants of up to 15% of base compensation. The Company may make discretionary matching contributions of up to 3% of base compensation. Participants are fully vested in their contributions and vest 20% per year in employer contributions. The Company's allocation of costs for this plan amounted to approximately $70,000 for the year ended December 31, 1996. Amounts for the other years were not material. The Company does not offer any postretirement benefits. (9) Income Taxes As discussed in notes 1 and 2, the Company was treated as an S corporation prior to the Transfer and operating losses and tax credits for prior periods have been utilized by the shareholders of Lau Technologies. In connection with the Transfer, the Company changed its tax status and recorded a deferred tax provision of $110,000 relating to the cumulative differences between the financial reporting and income tax bases of certain assets and liabilities as of the Transfer date. The provision for income taxes for the year ended December 31, 1996 consists of the following (in thousands):
Current Deferred Total - ----------------------------------------------------------- Federal $ 7 $132 $139 State 25 41 66 - ----------------------------------------------------------- $32 $173 $205 ===========================================================
A reconciliation of the federal statutory rate to the Company's effective tax rate for the year ended December 31, 1996 is as follows: Federal statutory rate 34.0% State taxes, net of federal benefit 6.0 Subchapter S earnings not taxed (28.0) Deferred taxes related to Transfer 14.0 Other, net (1.0) - ----------------------------------------------------------- 25.0% - -----------------------------------------------------------
The components and approximate tax effects of the Company's deferred tax assets and liabilities as of December 31, 1996 are as follows (in thousands): Deferred tax assets: Accruals and other reserves $325 Other 30 - ------------------------------------------------------------------------ Total gross deferred tax assets 355 - ------------------------------------------------------------------------ Deferred tax liabilities: Bases differences related to contract assets 517 Other 11 - ------------------------------------------------------------------------ Total gross deferred tax liabilities 528 - ------------------------------------------------------------------------ Net deferred tax liability $173 - ------------------------------------------------------------------------
The net deferred tax liability is included in accrued and deferred income taxes in the accompanying 1996 balance sheet. (10) Stockholders' Equity Initial Public Offering In November 1996, the Company completed an initial public offering of 2,875,000 shares of its common stock, of which 2,375,000 shares (including the over- allotment option) were sold by the Company and 500,000 shares were sold by Lau Technologies, the selling stockholder. The offering price was $10.50 per share and the net proceeds to the Company were approximately $22,230,000, net of underwriting discounts and other offering expenses. Stock Option Plans Lau Technologies granted 1,167,950 nonqualified options for the Company's common stock on February 1, 1996 to management and 81,650 nonqualified options to directors. The exercise price for such options is $2.96 per share. Lau Technologies granted an additional 177,500 nonqualified options to management on April 15, 1996 at $4.86 per share, the estimated fair value of such shares at the grant date. Director options become exercisable over three years and management options become exercisable in seven years or earlier if certain performance measures are met. The performance measures are based on each $1 million increase in Company value up to $500 million. In connection with such options, the Company is recognizing compensation expense of approximately $700,000 over the estimated vesting period. The amount of compensation is calculated as the difference between the exercise price and the fair value of the Company's business on the grant dates based on an independent third-party appraisal. Stock compensation expense recorded for the year ended December 31, 1996 was $238,000. The Company has reserved 1,437,750 shares of common stock for issuance under the plans of which 10,650 are available for grant. At 13-16 Viisage Technology, Inc. Notes to Financial Statements (Continued) December 31, 1996, 488,062 options were exercisable at a weighted average exercise price per share of $3.20 over a weighted average remaining contractual life of approximately nine years. No options have been exercised or canceled under the plans. The options expire ten years from the date of grant. On June 17, 1996, the Board of Directors of the Company ratified the foregoing option grants in connection with the adoption of the Stock Option Plans (the Plans) under which incentive and nonqualified stock options may be granted to employees and officers and nonqualified stock options may be granted 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 vest over periods of up to seven years and vesting may be accelerated based on performance criteria set by the Board of Directors. The Company has computed the pro forma disclosures required under SFAS No. 123 for options granted in 1996 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The weighted average assumptions used for 1996 are: Risk free interest rate 6% Expected dividend yield -- Expected lives 10 years Expected volatility 66%
The total value of options granted during 1996 was computed as approximately $4.2 million. Of this amount, $1.4 million would be charged to operations for the year ended December 31, 1996 for currently vested options and the remaining amount, $2.8 million, would be amortized over the related vesting periods. The pro forma effect of SFAS No. 123 for the year ended December 31, 1996 is as follows:
As Reported Pro Forma - ---------------------------------------------------------- Net income (loss) $601,000 $(225,000) Net income (loss) per share 0.09 (0.03)
(11) Quarterly Financial Data (Unaudited) The following table sets forth selected quarterly financial data for 1996 and 1995 (in thousands, except per share amounts):
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter - ------------------------------------------------------------------- 1996 Revenues $5,737 $6,133 $6,258 $6,843 Project margin 1,026 1,191 1,542 1,728 Net income 6 68 285 242 Net income per share -- 0.01 0.05 0.03 1995 Revenues $2,549 $2,846 $2,711 $3,115 Project margin 236 187 223 214 Net loss (580) (671) (748) (948) Net loss per share (0.09) (0.11) (0.12) (0.15)
13-17 Report of Independent Public Accountants To Viisage Technology, Inc.: We have audited the accompanying balance sheets of Viisage Technology, Inc. as of December 31, 1996 and 1995, and the related statements of operations, changes in stockholders' equity/net assets and cash flows for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Viisage Technology, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts February 7, 1997 13-18 Directors and Officers Directors Denis K. Berube, Chairman /(3)/ Thomas J. Reilly /(1,2)/ Executive Vice President - Retired Partner Chief Operating Officer, Lau Technologies Arthur Andersen LLP Charles J. Johnson /(3,4)/ Harriet Mouchly-Weiss /(2,4)/ Principal, Finnegan, Hickey, Managing Partner, Dinsmoor & Johnson, P.C. Strategy XXI Group Peter Nessen /(1,2)/ /(1)/ Audit Committee Chairman of the Board /(2)/ Compensation Committee NCN Financial Corporation /(3)/ Executive Committee /(4)/ Marketing Committee Officers Robert C. Hughes Robert J. Schmitt, Jr. President and Chief Executive Officer Vice President, Marketing and Sales Worldwide Private Sector Thomas J. Colatosti Yona Wieder Vice President, Operations Vice President, Marketing and Sales Worldwide Public Sector William A. Marshall Vice President, Chief Financial Officer and Treasurer 13-19 Corporate and Investor Information Corporate Offices Viisage Technology, Inc. 30 Porter Road Littleton, MA 01460 508-952-2200 Common Stock Information The Company's common stock is traded on the NASDAQ National Market under the symbol VISG. At March 6, 1997, the closing sale price of the common stock was $12.00 per share and there were approximately 13 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 1996 were as follows: Quarter Ended High Low - --------------------------------------------------------- March 31 $ -- $ -- June 30 -- -- September 29 -- -- December 31* 15-1/2 12-1/16
*Public trading commenced on November 8, 1996. Dividend Policy The Company presently intends to retain earnings for use in the operation and expansion of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. Shareholder Contact and Form 10-K Shareholders and prospective investors are welcome to call or write to Viisage with questions or requests for additional information. Copies of Viisage's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1996 are also available. Inquires should be directed to: William A. Marshall, Vice President, Chief Financial Officer and Treasurer, at Viisage's corporate offices. Transfer Agent For information or assistance regarding individual stock records, transactions or stock certificates contact: Boston EquiServe Limited Partnership 150 Royall Street Canton, MA 02021 617-575-2000 Independent Public Accountants Arthur Andersen LLP 225 Franklin Street Boston, MA 02110 Legal Counsel Finnegan, Hickey, Dinsmoor & Johnson, P.C. 20 Beacon Street Boston, MA 02108 13-20 EX-23 3 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23 Viisage Technology, Inc. Consent of Independent Public Accountants ----------------------------------------- As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated February 7, 1997. Arthur Andersen LLP Boston, Massachusetts March 28, 1997 EX-24.1 4 POWER OF ATTORNEY Exhibit 24.1 POWER OF ATTORNEY We, the undersigned officers and directors of Viisage Technology, Inc., hereby severally constitute and appoint Denis K. Berube, Robert C. Hughes and William A. Marshall, and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, all Annual Reports on Form 10-K required to be filed by Viisage Technology, Inc., hereby ratifying and confirming all signatures as they may be signed by our said attorneys, or any of them, to said Forms 10-K.
Signature Title - --------- ----- By: /s/ Denis K. Berube Chairman of the Board of Directors --------------------------- Denis K. Berube By: /s/ Robert C. Hughes President and Chief Executive Officer --------------------------- (Principal Executive Officer) Robert C. Hughes By: /s/ William A. Marshall Treasurer and Chief Financial Officer --------------------------- (Principal Financial and Accounting William A. Marshall Officer) By: /s/ Charles J. Johnson Secretary and Director --------------------------- Charles J. Johnson By: /s/ Harriet Mouchly-Weiss Director --------------------------- Harriet Mouchly-Weiss By: /s/ Peter Nessen Director --------------------------- Peter Nessen By: /s/ Thomas J. Reilly Director --------------------------- Thomas J. Reilly
EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 11,073 0 1,499 0 16,445 29,355 5,857 0 36,119 8,679 4,420 0 0 8 23,012 36,119 24,971 24,971 19,484 23,451 0 0 714 806 205 601 0 0 0 601 0.09 0.09 Represents costs and estimated earnings in excess of billings. Represents obligations under capital leases. Includes project costs and operating expenses.
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