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 28, 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.
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(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
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(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 October 31, 1997
- ------------------------------------- -------------------------------
(Common stock, $.001 par value) 8,065,732
VIISAGE TECHNOLOGY, INC.
INDEX
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Balance Sheets as of September 28, 1997 and December 31, 1996.............1
Condensed Statements of Operations for the three months and nine months
ended September 28, 1997 and September 29, 1996.....................................2
Condensed Statements of Cash Flows for the nine months
ended September 28, 1997 and September 29, 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 4 - Submission of Matters to a Vote of Security Holders.................................10
Item 6 - Exhibits and Reports on Form 8-K....................................................10
SIGNATURES.......................................................................................11
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
VIISAGE TECHNOLOGY, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 28, DECEMBER 31,
1997 1996
------------ -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 995 $11,073
Accounts receivable 2,656 1,499
Costs and estimated earnings in
excess of billings 30,411 16,445
Other current assets 524 338
--------- --------
Total current assets 34,586 29,355
Property and equipment, net 9,094 5,857
Other assets 769 907
--------- --------
$44,449 $36,119
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,887 $ 7,288
Accrued and deferred income taxes 907 190
Obligations under capital leases 2,168 1,201
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Total current liabilities 12,962 8,679
Obligations under capital leases 7,022 4,420
--------- --------
19,984 13,099
Shareholders' equity 24,465 23,020
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$44,449 $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 NINE MONTHS ENDED
------------------ ------------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenues $ 6,026 $ 6,258 $ 21,758 $ 18,128
Project Costs 4,418 4,716 15,647 14,369
------------ ------------ ------------ ------------
Project Margin 1,608 1,542 6,111 3,759
------------ ------------ ------------ ------------
Operating expenses:
Sales & marketing 726 500 1,977 1,235
Research & development 55 72 106 200
General & administrative 539 463 1,603 1,353
------------ ------------ ------------ ------------
Total operating expenses 1,320 1,035 3,686 2,788
------------ ------------ ------------ ------------
Operating income 288 507 2,425 971
Interest expense, net 110 211 152 598
------------ ------------ ------------ ------------
Income before income taxes 178 296 2,273 373
Income taxes 71 11 907 14
------------ ------------ ------------ ------------
Net income $ 107 $ 285 $ 1,366 $ 359
============ ============ ============ ============
Net income per share $ 0.01 $ 0.05 $ 0.16 $ 0.06
============ ============ ============ ============
Weighted average common and equivalent shares 8,719 6,225 8,685 6,225
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
VIISAGE TECHNOLOGY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
-----------------
SEPTEMBER 28, SEPTEMBER 29,
1997 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,366 $ 359
Adjustments to reconcile net income to net cash
(used) by operating activities:
Depreciation and amortization 1,349 385
Stock compensation expense - 147
Changes in operating assets and liabilities
Accounts receivable (1,157) (485)
Costs and estimated earnings in
excess of billings (13,966) (4,568)
Other current assets (186) (20)
Accounts payable and accrued expenses 2,829 3,794
Accrued and deferred taxes 717 -
------------- ------------
Net cash (used) by operating activities (9,048) (388)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract equipment converted to capital leases (4,195) (2,140)
Additions to property and equipment (391) (126)
Other assets 138 (130)
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Net cash (used) by investing activities (4,448) (2,396)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net revolving credit borrowings - 2,144
Proceeds from sale/leaseback of equipment 4,195 2,140
Principal payments on obligations under capital leases (856) (371)
Issuance of common stock 79 -
Net transactions with parent - (1,129)
------------- ------------
Net cash provided by financing activities 3,418 2,784
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Decrease in cash and cash equilvalents (10,078) -
Cash and cash equivalents, beginning of period 11,073 -
------------- ------------
Cash and cash equivalents, end of period $ 995 $ -
============= ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest $ 329 $ 632
Cash paid during the period for income taxes $ 143 $ -
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 September 28, 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 has been derived
from the audited financial statements for that date.
Approximately $230,000 of accrued capital lease interest has been
transferred from accounts payable and accrued expenses to obligations under
capital leases during 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 September 28, 1997, this number is comprised of 8,066,000
shares of common stock and 653,000 shares related to common equivalents. For the
nine months ended September 28, 1997, this number is comprised of 8,059,000
shares of common stock and 626,000 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.
Effective in July 1997, Viisage increased the number of shares
available under the 1996 Management Stock Option Plan from 1,356,100 shares to
2,057,100 shares. During the third quarter of 1997 options for an additional
266,000 shares were issued at the market price on the date of grant ($13 per
share) and options for 10,732 shares were exercised at $2.96 per share. The
Company also established the Viisage
4
Note 3. Net Income Per Share (continued)
Technology, Inc. 1997 Employee Stock Purchase Plan and reserved 70,000 shares of
common stock for issuance under such plan.
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 $0.01 and $0.17 per share for the three and nine month periods ended
September 28, 1997, respectively, and diluted net income per share would have
been the same as the reported amounts.
Note 4. Transaction with Unisys Corporation
On October 8, 1997, Viisage completed a System Sale, License, and
Subcontract Agreement (the "Agreement") with Unisys Corporation ("Unisys").
Under the Agreement, Viisage purchased and licensed certain assets from Unisys
and agreed to perform certain services as Unisys' subcontractor relating to a
digital imaging system for the Florida Department of Highway Safety and Motor
Vehicles ("DHSMV"). The Agreement also provides for Unisys to support Viisage's
efforts in pursuing other opportunities for biometric applications, including
Viisage's facial recognition products, for DHSMV and other Florida state
agencies, for Viisage to act as Unisys' primary business partner for such
projects and procurements for Florida state agencies, and for Unisys to provide
marketing and lobbying support in Florida. The parties also agreed to work
together to develop opportunities for biometric applications in the public
sector marketplace throughout the United States and Canada.
In consideration of the above-described transaction, Viisage agreed to
pay $4 million, consisting of $3.7 million paid on September 30, 1997 and three
payments of $100,000 each, to be made on December 16, 1997, December 16, 1998,
and October 1, 2000. In addition, Viisage agreed to contingent additional
payments of up to $754,000 depending largely on Viisage's revenues from Florida
state agencies. The purchase price was based upon Viisage's determination of the
value of the assets, license, subcontract, teaming and non-competition
provisions, and other business opportunities and will be recorded using the
purchase method of accounting. The terms of the Agreement were determined by
arms' length negotiation between the parties.
The funds for this transaction were initially drawn from Viisage's
line of credit facility and converted to a seven year term facility on October
31, 1997. The term facility for $3.8 million is unsecured and requires monthly
payments with interest at 8.1% through October 2004.
Note 5. Amended and Restated Credit Agreement
The Company executed an amended and restated credit agreement with a
commercial bank as of October 31, 1997. The principal changes to the Company's
existing agreement were to extend the maturity of the revolving credit agreement
to June 1999, provide the $3.8 million term facility discussed above and provide
an additional four year term facility of up to $2 million, available through
June 1998, to fund various projects.
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 nine months ended September 28, 1997,
four customers each accounted for more than 10% of the Company's revenues and an
aggregate of 72% 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 decreased
4% to $6.0 million for the quarter ended September 28, 1997 from $6.2 million
for the comparable period in 1996. This decrease was primarily due to delays in
the procurement process for certain projects that often accompany large public
sector capital expenditures. For the nine months ended September 28, 1997,
revenues increased 20% to $21.8 million from $18.1 million for the same period
in 1996. This increase is 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 73% and 72% for the quarter
and nine months ended September 28, 1997, respectively, from 75% and 79% for the
comparable periods in 1996. These decreases reflect cost savings on design,
development and
6
implementation activities resulting from the Company's increased experience with
and resources for digital identification solutions. Project margin increased 4%
to $1.6 million (27% of revenues) for the quarter ended September 28, 1997 from
$1.5 million (25% of revenues) for the comparable period in 1996. For the nine
months ended September 28, 1997, project margin increased 63% to $6.1 million
(28% of revenues) from $3.8 million (21% 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 45% to
$726,000 for the quarter ended September 28, 1997 from $500,000 for the
comparable period in 1996. For the nine months ended September 28, 1997, sales
and marketing expenses increased 60% to $2.0 million from $1.2 million for the
same period in 1996. These increases principally reflect 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 12% and 9% for the
quarter and nine months ended September 28, 1997, respectively, from 8% and 7%
for the comparable 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 24% to $55,000 for the quarter ended
September 28, 1997 from $72,000 for the comparable period in 1996. For the nine
months ended September 28, 1997, research and development expenses decreased 47%
to $106,000 from $200,000 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 $539,000 for the quarter
ended September 28, 1997 from $463,000 for the comparable period in 1996. For
the nine months ended September 28, 1997, general and administrative expenses
increased 18% to $1.6 million from $1.4 million 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 increased to 9% for
the quarter ended September 28, 1997 from 7% for the comparable period in 1996
and remained constant at 7% for the nine month periods due to such expenses
increasing at a greater rate than revenues during 1997.
Interest Expense, Net. The decreases in net interest expense to $110,000 for the
quarter ended September 28, 1997 from $211,000 for the comparable period in
1996 and to $152,000 for the nine months ended September 28, 1997 from $598,000
for the 1996 period principally reflect the reduced level of borrowings during
the 1997 periods as well as interest earned on cash equivalents 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 September 28, 1997, working capital was $21.6 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.
7
For the nine months ended September 28, 1997, operating and investing
activities utilized cash of approximately $9.0 million and $4.4 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.
As discussed in notes 4 and 5 of notes to condensed financial
statements, the Company executed an amended and restated credit agreement that
extended the maturity of the revolving credit agreement to June 1999, provided a
$3.8 million term facility to finance the transaction with Unisys and an
additional term facility of up to $2 million to fund various projects.
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 1999 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 the date of this report, the Company had $10.0 million
available under the revolving line of credit, approximately $16.8 million
available under the project lease financing arrangement and $2 million available
under a term facility.
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 $0.01 and $0.17 per share for the quarter and nine months ended
September 28, 1997, respectively, compared to the reported amounts of $0.01 and
$0.16 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
8
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.
9
VIISAGE TECHNOLOGY, INC.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
As permitted by the Security and Exchange Commission's rules and
regulations and following distribution of a Schedule 14c Information Statement
to all shareholders, Lau Technologies, the Company's majority shareholder
(approximately 64%), provided a written consent to approve an increase in the
number of shares available under the Company's 1996 Management Stock Option Plan
from 1,356,100 to 2,057,100 and the establishment of the Viisage Technology,
Inc. 1997 Employee Stock Purchase Plan. As permitted by the Security and
Exchange Commission's rules and regulations, such written consent was in lieu of
a vote of the shareholders as Lau Technologies owns 5,180,000 shares of the
8,065,732 shares outstanding or approximately 64%.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
10.12 Amended and Restated Credit Agreement
27 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K filed October 22, 1997 to report the System Sale,
License and Subcontract Agreement with Unisys Corporation.
10
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: November 7, 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
11