UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended June 29, 1997.
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
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [_]No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1997
--------------------------------- ----------------------------
(Common stock, $.001 par 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 June 29, 1997 and December 31, 1996............1
Condensed Statements of Operations for the three months and six months
ended June 29, 1997 and June 30, 1996.........................................2
Condensed Statements of Cash Flows for the six months
ended June 29, 1997 and June 30, 1996 ........................................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 4 - Submission of Matters to a Vote of Security Holders ..........................9
Item 6 - Exhibits and Reports on Form 8-K .............................................9
SIGNATURES ..............................................................................10
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
VIISAGE TECHNOLOGY, INC.
Condensed Balance Sheets
(in thousands)
June 29, December 31,
1997 1996
----------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2,487 $ 11,073
Accounts receivable 2,671 1,499
Costs and estimated earnings in excess of billings 27,164 16,445
Other current assets 443 338
----------- ----------
Total current assets 32,765 29,355
Property and equipment, net 7,315 5,857
Other assets 829 907
----------- ----------
$ 40,909 $ 36,119
=========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 8,539 $ 7,288
Accrued and deferred income taxes 906 190
Obligations under capital leases 1,638 1,201
----------- ----------
Total current liabilities 11,083 8,679
Obligations under capital leases 5,547 4,420
----------- ----------
16,630 13,099
Shareholders' equity 24,279 23,020
----------- ----------
$ 40,909 $ 36,119
=========== ==========
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 Six Months Ended
------------------ ----------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
Revenues $ 8,554 $ 6,133 $ 15,732 $ 11,870
Project Costs 6,080 4,942 11,229 9,653
---------- ---------- ---------- ----------
Project Margin 2,474 1,191 4,503 2,217
---------- ---------- ---------- ----------
Operating expenses:
Sales & marketing 679 379 1,251 735
Research & development 16 43 51 128
General & administrative 580 498 1,064 890
---------- ---------- ---------- ----------
Total operating expenses 1,275 920 2,366 1,753
---------- ---------- ---------- ----------
Operating income 1,199 271 2,137 464
Interest expense, net 48 200 42 387
---------- ---------- ---------- ----------
Income before income taxes 1,151 71 2,095 77
Income taxes 461 3 836 3
---------- ---------- ---------- ----------
Net income $ 690 $ 68 $ 1,259 $ 74
========== ========== ========== ==========
Net income per share $ 0.08 $ 0.01 $ 0.15 $ 0.01
========== ========== ========== ==========
Weighted average common and equivalent shares 8,670 6,225 8,668 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)
Six Months Ended
----------------
June 29, June 30,
1997 1996
--------- ---------
Cash flows from operating activities:
Net income $ 1,259 $ 74
Adjustments to reconcile net income to net cash
(used) by operating activities:
Depreciation and amortization 829 228
Stock compensation expense - 92
Changes in operating assets and liabilities
Accounts receivable (1,172) (1,943)
Costs and estimated earnings in excess of billings (10,719) (1,928)
Other current assets (105) (4)
Accounts payable and accrued expenses 1,423 2,189
Accrued and deferred taxes 716 -
---------- ---------
Net cash (used) by operating activities (7,769) (1,292)
---------- ---------
Cash flows from investing activities:
Purchase of contract equipment converted to capital leases (2,005) -
Additions to property and equipment (282) (27)
Other assets 78 -
---------- ---------
Net cash (used) by investing activities (2,209) (27)
---------- ---------
Cash flows from financing activities:
Net revolving credit borrowings - 2,153
Proceeds from sale/leaseback of equipment 2,005 -
Principal payments on obligations under capital leases (613) (247)
Net transactions with parent - (587)
---------- ---------
Net cash provided by financing activities 1,392 1,319
---------- ---------
Decrease in cash and cash equivalents (8,586) -
Cash and cash equivalents, beginning of period 11,073 -
---------- ---------
Cash and cash equivalents,end of period $ 2,487 $ -
========== =========
Supplemental cash flow information:
Cash paid during the period for interest $ 134 $ 387
Cash paid during the period for income taxes $ 120 $ -
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 1996 Form 10-K.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The results of operations for the periods ended June 29, 1997 are
not necessarily indicative of the operating results to be expected for the full
year.
The condensed balance sheet as of December 31, 1996 and the condensed
statements of operations and cash flows for the six months ended June 30, 1996
have been derived from the audited financial statements for those dates.
Approximately $172,000 of accrued capital lease interest was
transferred from accounts payable and accrued expenses to obligations under
capital leases during the first quarter of 1997.
Note 2. Income Taxes
The Company's operations prior to November 6, 1996 were included
in the income tax returns of Lau Acquisition Corp. d/b/a Lau Technologies, an S
corporation. Income tax allocations for periods prior to November 6, 1996 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 Per Share
Net income per share is computed based on the weighted average
number of common and common equivalent shares outstanding during the period. For
the three months ended June 29, 1997, this number is comprised of 8,055,000
shares of common stock and 615,000 shares related to common equivalents. For the
six months ended June 29, 1997, this number is comprised of 8,055,000 shares of
common stock and 613,000 shares related to common equivalents. For all 1996
periods, this number is comprised of 5,680,000 shares of common stock 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 on November 8,
1996 (using the treasury stock method) have been included in the calculation of
weighted average shares for 1996.
4
Note 3. Net Income Per Share (continued)
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, basic net income per share would
have been $0.09 and $0.16 per share for the three and six month periods ended
June 29, 1997, respectively and diluted net income per share would have been the
same as the reported amounts.
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 1996 Form 10-K.
The following discussion and analysis contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the section below entitled "Certain Factors That May Affect Future Results."
The cautionary statements made herein should be read as being applicable to all
related forward-looking statements in this Form 10-Q.
Overview
- --------
Viisage develops and implements turnkey digital identification
systems and solutions intended to deter fraud, improve security and reduce
customers' identification program costs. The Company combines its systems
integration and software design capabilities with its proprietary software and
hardware products and other best-in-class products to create complete customized
solutions. Viisage's products are currently operating at more than 700
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.
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 six months ended June 29, 1997, four
customers each accounted for more than 10% of the Company's revenues and an
aggregate of 68% 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
39% to $8.5 million for the quarter ended June 29, 1997 from $6.1 million for
the comparable period in 1996. For the six months ended June 29, 1997, revenues
increased 33% to $15.7 million from $11.9 million for the same period in 1996.
These increases are due to an increase in the number of contracts being
performed during the 1997 period.
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 71% for the quarter and six
months ended June 29, 1997 from 81% for the comparable periods in 1996. 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 108% to $2.5
million (29% of revenues) for the quarter ended June 29, 1997 from $1.2 million
(19% of
6
revenues) for the comparable period in 1996. For the six months ended
June 29, 1997, project margin increased 103% to $4.5 million (29% of revenues)
from $2.2 million (19% of revenues) for the same period in 1996. 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 79% to
$679,000 for the quarter ended June 29, 1997 from $379,000 for the comparable
period in 1996. For the six months ended June 29, 1997, sales and marketing
expenses increased 70% to $1.3 million from $735,000 for the same period in
1996. These increases principally reflect an increase in proposal activity and
the addition of marketing personnel during the second half of 1996 and in 1997.
As a percentage of revenues, sales and marketing expenses increased to 8% for
the 1997 periods from 6% for the 1996 periods due to such expenses increasing at
a greater rate than revenues during 1997. 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 63% to $16,000 for the quarter ended
June 29, 1997 from $43,000 for the comparable period in 1996. For the six months
ended June 29, 1997, research and development expenses decreased 60% to $51,000
from $128,000 for the same period in 1996. Expenditures for 1997 and 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 Viisage.
General and Administrative. General and administrative expenses consist
principally of compensation for executive management, finance and administrative
personnel, outside professional fees and, in 1997, public company expenses.
General and administrative expenses increased 16% to $580,000 for the quarter
ended June 29, 1997 from $498,000 for the comparable period in 1996. For the six
months ended June 29, 1997, general and administrative expenses increased 20% to
$1.1 million from $890,000 for the same period in 1996. These increases were due
primarily to the growth in the Company's business and increased administrative
costs associated with being a public company. As a percentage of revenues,
general and administrative expenses decreased to 7% for the quarter ended June
29, 1997 from 8% for the comparable period in 1996 and remained constant at 7%
for the six month periods.
Interest Expense, Net. The decreases in net interest expense to $48,000 for the
quarter ended June 29, 1997 from $200,000 for the comparable period in 1996 and
to $42,000 for the six months ended June 29, 1997 from $387,000 for the 1996
period principally reflect interest earned on cash equivalents during the 1997
periods as well as the reduced level of borrowings during the 1997 periods.
Income Taxes. The provision for income taxes for the 1997 periods reflects the
Company's anticipated 1997 tax rate of approximately 40%. The Company's
operations for the 1996 periods were included in the income tax returns of Lau
Technologies, an S corporation, and taxed at the lower S corporation rate.
Liquidity and Capital Resources
- -------------------------------
At June 29, 1997, working capital was $21.7 million compared to
$20.7 million at December 31, 1996. The increase in working capital was due
primarily to increases in accounts receivable and costs and estimated earnings
in excess of billings, net of the decrease in cash and cash equivalents and the
increase in accounts payable and accrued expenses.
For the six months ended June 29, 1997, operating and investing
activities utilized cash of approximately $7.8 million and $2.2 million,
respectively, principally to fund the working capital increases discussed above
and the increase in project assets. Financing was primarily provided by
available cash and funding from the project lease financing arrangement.
7
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
$25.0 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 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 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 June 29, 1997, the Company had $10.0 million available under
the revolving line of credit and approximately $19.0 million available under the
project lease financing arrangement.
The Company believes that 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.
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, basic net income per share would
have been $0.09 and $0.16 per share for the quarter and six months ended June
29, 1997, respectively, compared to the reported amounts of $0.08 and $0.15 per
share, respectively. Diluted net income per share would have been the same as
the reported amounts.
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.
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. In April 1997, the plaintiffs agreed to dismiss all of their
claims against the defendants. The Company incurred no liability to the
plaintiffs in connection with this matter and all the defendants' litigation
expenses have been or will be paid for by Lau Technologies.
Item 4 - Submission of Matters to a Vote of Security Holders
Chairman of the Board of Directors, Denis K. Berube, was elected
to a three-year term, an amendment to the 1996 Director Stock Option Plan was
approved to increase the number of shares reserved for issuance from 81,650 to
156,650 and the Company's selection of independent public accountants was
ratified at the Annual Meeting of the Shareholders held on May 21, 1997. A total
of 7,273,776 shares out of the total outstanding shares of 8,055,000 voted at
the Annual Meeting. The vote to elect Denis K. Berube was 7,273,276 for and 500
withheld, the vote to approve the amendment to the 1996 Director Stock Option
Plan was 6,818,444 for, 453,482 against and 1,850 abstained, and the vote to
ratify the Company's selection of independent public accountants was 7,273,376
for and 400 abstained.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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: August 8, 1997 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