UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 29, 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.)
531 Main Street, Acton MA 01720
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508)-263-3560
-------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[_] Yes [x] No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 13, 1996
- --------------------------------- --------------------------------
(Common stock, $.001 per value) 8,055,000
VIISAGE TECHNOLOGY, INC.
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Balance Sheets as of September 29, 1996 and December 31, 1995.. 1
Condensed Statements of Operations for the three months and nine months
ended September 29, 1996 and October 1, 1995............................. 2
Condensed Statements of Cash Flows for the nine months
ended September 29, 1996 and October 1, 1995............................. 3
Notes to Condensed Financial Statements.................................. 4
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 6
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings................................................. 9
Item 6 - Exhibits and Reports on FORM 8-K................................... 9
SIGNATURES.................................................................... 10
i
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
VIISAGE TECHNOLOGY, INC.
Condensed Balance Sheets
(In thousands)
Pro Forma
September 29, September December 31,
1996 1996 1995
------------ ---------- ----------
(Unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents $ -- $13,555 $ --
Accounts receivable 863 863 378
Costs and estimated earnings in excess of billings 13,246 13,246 8,678
Other current assets 20 20 --
--------- -------- --------
Total current assets 14,129 27,684 9,056
Property and equipment, net 4,110 4,110 2,229
Other assets 130 -- --
--------- -------- --------
$ 18,369 $31,794 $11,285
========= ======== ========
Liabilities, Net Assets and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 4,947 $ 4,817 $ 1,153
Obligations under capital leases 823 823 490
--------- -------- --------
Total current liabilities 5,770 5,640 1,643
Long-term debt 8,800 -- 6,656
Obligations under capital leases 3,099 3,099 1,663
Deferred income taxes -- 100 --
--------- -------- --------
17,669 8,839 9,962
Net assets / Stockholders' equity 700 22,955 1,323
--------- -------- --------
$ 18,369 $31,794 $11,285
========= ======== ========
The accompanying notes are an integral part of these financial statements.
1
VIISAGE TECHNOLOGY, INC.
Condensed Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
September 29, October 1, September 29, October 1,
1996 1995 1996 1995
------------ --------- ------------ ----------
Revenues $ 6,258 $ 2,711 $ 18,128 $ 8,106
Project Costs 4,716 2,488 14,369 7,460
--------- -------- --------- --------
Project margin 1,542 223 3,759 646
--------- -------- --------- --------
Operating expenses:
Sales and marketing 500 285 1,235 716
Research and development 72 198 200 795
General and administrative 463 300 1,353 813
--------- -------- --------- --------
Total operating expenses 1,035 783 2,788 2,324
--------- -------- --------- --------
Operating income (loss) 507 (560) 971 (1,678)
Interest expense 211 188 598 321
--------- -------- --------- --------
Income (loss) before income taxes 296 (748) 373 (1,999)
Income taxes 11 -- 14 --
--------- -------- --------- --------
Net income (loss) $ 285 $ (748) $ 359 $(1,999)
========= ======== ========= ========
Net income (loss) per share $ 0.05 $ (0.12) $ 0.06 $(0.32)
========= ======== ========= ========
Weighted average number of common shares 6,225 6,225 6,225 6,225
========= ======== ========= ========
The accompanying notes are an integral part of these financial statements.
2
VIISAGE TECHNOLOGY, INC.
Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
-----------------
September 29, October 1,
1996 1995
------------ ----------
Cash flows from operating activities:
Net Income (loss) $ 359 $ (1,999)
Adjustment to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 385 15
Stock compensation expense 147 --
Changes in operating assets and liabilities:
Accounts receivable (485) (2,165)
Costs and estimated earnings in excess of billings (4,568) (7,496)
Other current assets (20) --
Accounts payable and accrued expenses 3,794 418
-------- --------
Net cash (used) by operating activities (388) (11,227)
-------- --------
Cash flows from investing activities:
Purchase of contract equipment converted to capital leases (2,140) --
Additions to property and equipment (126) (101)
Other assets (130) --
-------- --------
Net cash (used) by investing activities (2,396) (101)
-------- --------
Cash flows from financing activities:
Net revolving credit borrowings 2,144 6,052
Proceeds from long-term borrowings -- 1,862
Proceeds from sale/leaseback of equipment 2,140 --
Principal payments on long-term borrowings -- (254)
Principal payments on obligations under capital leases (371) --
Net transactions with parent (1,129) 3,668
-------- --------
Net cash provided by financing activities 2,784 11,328
-------- --------
Increase (decrease) in cash and cash equivalents -- --
Cash and cash equivalents, beginning of period -- --
-------- --------
Cash and cash equivalents, end of period $ -- $ --
======== ========
Supplemental cash flow information:
Cash paid during the period for interest $ 632 $ 315
======== ========
The accompanying notes are an integral part of these financial statements.
3
VIISAGE TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The financial information included herein is unaudited, however, the
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods presented. These financial statements should be read in
conjunction with the financial statements and notes thereto and management's
discussion and analysis of financial condition and results of operations
included in the Company's Registration Statement on Form S-1 dated November 8,
1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The results of operations for the periods ended September 29, 1996 are
not necessarily indicative of the operating results to be expected for the full
year.
The condensed balance sheet as of December 31, 1995 has been derived
from the audited financial statements at that date.
Note 2. Income Taxes
The Company's operations prior to the transfer discussed in Note 4,
were included in the income tax returns of Lau Acquisition Corp. d/b/a 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.
Note 3. Net Income (Loss) Per Share
Net income (loss) per share is computed based on the weighted average
number of 6,225,000 common and common equivalent shares outstanding during the
period. This number is comprised of 5,680,000 shares of common stock issued in
connection with the transfer discussed in Note 4 and 545,000 shares related to
common equivalents. 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) have been included in the calculation of weighted average shares for all
periods presented.
4
VIISAGE TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Note 4. Subsequent Events
On November 22, 1996, the Company entered into a revolving credit
agreement with a commercial bank. The agreement provides for unsecured
borrowings of up to $10.0 million through June 1998 at prime rate or other
LIBOR-based options and requires the Company to maintain certain financial
ratios and minimum levels of earnings and tangible net worth.
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. After the completion of the initial public offering
discussed below, the Company is a 64% owned subsidiary of Lau Technologies.
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
the selling stockholder. The offering price was $10.50 per share and the net
proceeds to the Company were approximately $22,355,000, net of underwriting
discounts and other estimated offering expenses. The Company used approximately
$8,800,000 of the proceeds to repay long-term borrowings. The remainder of the
net proceeds are expected to be used for working capital and other general
corporate purposes.
Note 5. Pro Forma Condensed Balance Sheet
The pro forma condensed balance sheet as of September 29, 1996 reflects
(i) the transfer, initial public offering and repayment of long-term borrowings
discussed in Note 4 and (ii) the estimated net deferred income tax liability
that will be recorded by the Company in connection with the aforementioned
transfer and change in tax status.
5
VIISAGE TECHNOLOGY, INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto and risk factors contained in the
Company's Form S-1 Registration Statement dated November 8, 1996.
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those discussed herein. Factors that might cause or contribute to such
differences are discussed in the section entitled "Certain Factors that may
Affect Future Results" below.
Overview
- --------
The Company designs, sells and implements turnkey digital identification
systems intended to deter fraud and to reduce customers' identification program
costs. These systems capture facial images, demographic information and other
biological identifiers, produce identification cards, and create relational
databases containing this information. Using its systems integration and
software design capabilities, the Company is able to combine its proprietary
software and hardware products with commercially available components and
customers' existing systems, creating a complete customized solution. In
addition, the Company is developing proprietary facial recognition software
designed to identify individuals in a large database of faces on a real-time
basis.
Viisage 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 nine months ended September 29, 1996,
three customers each accounted for more than 10% of the Company's revenues and
an aggregate of 65% of revenues for the period.
The Company's results of operations are significantly affected by, among
other things, the timing of award and performance on contracts. As a result, the
Company's revenues and income may fluctuate from quarter to quarter, and
comparisons over longer periods of time may be more meaningful. The Company's
results of operations are not seasonal since contracts are awarded and performed
throughout the year.
Results of Operations
- ---------------------
Revenues. Revenues are derived principally from systems implementation, card
production and related services under multi-year contracts. Revenues increased
131% to $6.3 million for the quarter ended September 29, 1996 from $2.7 million
for the comparable period in 1995. For the nine months ended September 29, 1996
revenues increased 124% to $18.1 million from $8.1 million for the same period
in 1995. These increases were due to an increase in the number of contracts
being performed during the 1996 periods.
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 75% and 79% for the quarter
and nine months ended September 29, 1996, respectively, from 92% for the
comparable periods in 1995. These decreases reflect 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 592% to $1.5 million (25% of revenues) for the quarter ended
6
September 29, 1996 from $223,000 (8% of revenues) for the comparable period in
1995. For the nine months ended September 29, 1996 project margin increased 482%
to $3.8 million (21% of revenues) from $646,000 (8% of revenues) for the same
period in 1995. These increases reflect the increases 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.
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 75% to
$500,000 for the quarter ended September 29, 1996 from $285,000 for the
comparable period in 1995. For the nine months ended September 29, 1996 sales
and marketing expenses increased 72% to $1.2 million from $716,000 for the same
period in 1995. These increases principally reflect an increase in proposal
activity and the addition of marketing personnel during 1996. As a percentage of
revenues, sales and marketing expenses decreased to 8% and 7% for the 1996
periods from 11% and 9% for the 1995 periods due to revenues increasing at a
greater rate than such expenses during the 1996 periods. 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 64% to $72,000 for the quarter ended
September 29, 1996 from $198,000 for the comparable period in 1995, and
decreased as a percentage of revenues to 1% for 1996 from 7% for 1995. For the
nine months ended September 29, 1996 research and development expenses decreased
75% to $200,000 from $795,000 for the same period 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 increases in revenues in the 1996 periods. The Company
believes that these software and hardware products will support its card-based
identification 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 and the Massachusetts Institute of Technology for
projects that are not related to Viisage.
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 54% to $463,000 for the quarter ended September 29, 1996 from $300,000
for the comparable period in 1995. For the nine months ended September 29, 1996
general and administrative expenses increased 66% to $1.4 million from $813,000
for the same period in 1995. These increases are 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 7% for
the 1996 periods from 11% and 10% for the 1995 periods due to revenues
increasing at a greater rate than such expenses in the 1996 periods.
Interest Expense. The increases in interest expense to $211,000 for the quarter
ended September 29, 1996 from $188,000 for the comparable period in 1995 and to
$598,000 for the nine months ended September 29, 1996 from $321,000 for the 1995
period principally reflect the increase in the level of borrowings during the
1996 periods.
Income Taxes. The Company's operations prior to the transfer discussed in Note 4
of Notes to Condensed Financial Statements were included in the income tax
returns of Lau Technologies, an S corporation. After the transfer, the Company
will be subject to federal and state income taxation at the corporate level and
will be required to file its own separate tax returns. The Company anticipates
that it will recognize a non-recurring charge relating to a net deferred tax
liability of approximately $100,000 arising from the change in its tax status in
the fourth quarter when the transfer occurred.
7
Liquidity and Capital Resources
- -------------------------------
At September 29, 1996, working capital was $8.4 million compared to $7.4
million at December 31, 1995. The increase in working capital was due primarily
to increases in accounts receivable and costs and estimated earnings in excess
of billings, net of increases in accounts payable and accrued expenses.
For the nine months ended September 29, 1996, operations and investing
activities utilized cash of approximately $388,000 and $2.4 million,
respectively, principally to fund the working capital increases discussed above
and the increase in project assets. Financing was provided by borrowings under
line of credit and project lease financing facilities and parent company
advances.
As discussed more fully in Note 4 of Notes to Condensed Financial
Statements, in November 1996 the Company completed an initial public offering of
its common stock and received net proceeds of approximately $22,355,000. The
Company used $8.8 million of the proceeds to repay long-term borrowings. On a
pro forma basis, at September 29, 1996 working capital was $22.0 million,
including cash and cash equivalents of $13.6 million.
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
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 will purchase certain of
the Company's digital identification systems and lease them back to Viisage for
deployment with identified and contracted customers approved by the lessor. The
lessor will retain title to systems and will have 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 will bear the credit risk associated with payments by Viisage's
customers, but Viisage will bear performance and appropriation risk and will
generally be 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.
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 at least the next 12 months. 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.
Certain Factors That May Affect Future Results
- ----------------------------------------------
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those discussed herein. 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. Please also refer to the factors
set forth in the Company's Registration Statement on Form S-1 dated November 8,
1996 under the caption "Risk Factors" which are incorporated herein by
reference.
8
VIISAGE TECHNOLOGY, INC.
PART II - OTHER INFORMATION
Item 1 - 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 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Revolving Credit Agreement dated November 22, 1996
27 Financial Data Schedule
99.1* Pages 6 through 14 of the Company's Registration Statement on
Form S-1 dated November 8, 1996 (File No. 333-10649)
re. "Risk Factors" regarding forward looking statements.
(b) Reports on Form 8-K
None
* Incorporated by reference.
9
VIISAGE TECHNOLOGY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIISAGE TECHNOLOGY, INC.
Date: December 19, 1996 By: /s/ Robert C. Hughes
-------------------------------------
Robert C. Hughes
President and Chief Executive Officer
By: /s/ William A. Marshall
-------------------------------------
William A. Marshall
Chief Financial Officer
10