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 March 29, 1998.
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 (978)-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 April 30, 1998
- ----------------------------- -----------------------------
Common stock, $.001 par value 8,069,648
VIISAGE TECHNOLOGY, INC.
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Balance Sheets as of March 29, 1998 and December 31, 1997............................. 1
Condensed Statements of Operations for the three months ended March 29, 1998
and March 30, 1997.............................................................................. 2
Condensed Statements of Cash Flows for the three months
ended March 29, 1998 and March 30, 1997......................................................... 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 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)
MARCH 29, DECEMBER 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash and Cash equivalents $ 11 $ 1,611
Accounts receivable 3,401 3,171
Costs and estimated earnings in excess of billings 27,102 25,483
Other current assets 636 423
------------ ------------
Total current assets 31,150 30,688
Property and equipment, net 16,066 16,046
Other assets 717 729
------------ ------------
$ 47,933 $ 47,463
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 10,825 $ 12,253
Accrued and deferred income taxes -- 16
Current portion of long-term debt 549 549
Obligations under capital leases 2,865 2,609
------------ ------------
Total current liabilities 14,239 15,427
Long-term debt 5,888 3,505
Obligations under capital leases 9,602 9,795
------------ ------------
29,729 28,727
Shareholders' equity 18,204 18,736
------------ ------------
$ 47,933 $ 47,463
============ ============
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
----------------------------
MARCH 29, MARCH 30,
1998 1997
------------ ------------
Revenues $ 4,629 $ 7,178
Project costs 3,713 5,149
------------ ------------
Project Margin 916 2,029
------------ ------------
Operating expenses:
Sales and marketing 591 572
Research and development 17 35
General and administrative 498 484
------------ ------------
Total operating expenses 1,106 1,091
------------ ------------
Operating income (loss) (190) 938
Interest income (expense), net (353) 6
------------ ------------
Income (loss) before income taxes (543) 944
Income taxes -- 375
------------ ------------
Net income (loss) $ (543) $ 569
============ ============
Basic net income (loss) per share $(0.07) $ 0.07
============ ============
Weighted average common shares 8,066 8,055
============ ============
Diluted net income (loss) per share $(0.07) $ 0.07
============ ============
Weighted average common shares 8,066 8,666
============ ============
The accompanying notes are an integral part of these financial statements.
2
VIISAGE TECHNOLOGY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
----------------------------
MARCH 29, MARCH 30,
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (543) $ 569
Adjustments to reconcile net income (loss) to net cash
(used) provided by operating activities:
Depreciation and amortization 845 344
Changes in operating assets and liabilities:
Accounts receivable (230) (194)
Costs and estimated earnings in excess of billings (1,619) (5,687)
Other current assets (213) (64)
Accounts payable and accrued expenses (1,428) 441
Accrued and deferred taxes (16) 302
------------ ------------
Net cash used for operating activities (3,204) (4,289)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract equipment converted to capital leases (850) (300)
Additions to property and equipment (15) (113)
Decrease in other assets 12 4
------------ ------------
Net cash used for investing activities (853) (409)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net revolving credit borrowings 2,521 --
Proceeds from sale/leaseback of equipment 850 300
Principal payments on long-term borrowings (138) --
Principal payments on obligations under capital leases (787) (199)
Net proceeds from issuance of common stock 11 --
------------ ------------
Net cash provided by financing activities 2,457 101
------------ ------------
Decrease in cash and cash equivalents (1,600) (4,597)
Cash and cash equivalents, beginning of period 1,611 11,073
------------ ------------
Cash and cash equivalents, end of period $ 11 $ 6,476
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest $ 310 $ 71
============ ============
Cash paid during the period for income taxes $ 39 $ 73
============ ============
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 1997 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 period ended March 29, 1998 are not
necessarily indicative of the operating results to be expected for the full
year.
The condensed balance sheet as of December 31, 1997 has been derived from
the audited financial statements for that date.
Note 2. Income Taxes
Due to the uncertainty surrounding the realization of the Company's net
deferred tax asset the Company has provided a full valuation allowance against
this amount. Income tax expense for 1997 was provided at the Company's
estimated effective income tax rate.
Note 3. Net Income (Loss) Per Share
Basic net income (loss) per share is computed based on the weighted
average number of common shares outstanding during the period. Diluted net
income (loss) per share includes the dilutive impact of potential common stock.
For 1998, the diluted per share amounts do not reflect the impact of
options outstanding for 1,596,975 shares because their effect is antidilutive.
For 1997, diluted net income per share reflects the 611,000 share dilutive
effect of all common stock options outstanding during 1997 using the treasury
stock method. Except for options, the Company does not have any other potential
common stock
4
Note 4. Reorganization Costs
During the first quarter of 1998, the Company recorded non-recurring
charges of approximately $230,000 related to a reorganization to reduce expenses
in line with the Company's revised plan. Approximately $50,000 of such charges
are included in project costs, $170,000 are included in sales and marketing
expense and $10,000 are included in general and administrative expense in the
statement of operations.
Note 5. Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 129, Disclosure of
Information about Capital Structure, which establishes standards for disclosing
information about an entity's capital structure. In June 1997, the FASB issued
SFAS No. 130, Reporting Comprehensive Income, which establishes standards for
reporting and disclosure of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. In June 1997, the FASB issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, which establishes standards
for reporting and disclosure of information about operating segments as well as
disclosures about products and services, geographic areas and major customers.
As required, the Company has adopted SFAS Nos. 129 and 130 and, as required,
will adopt SFAS No. 131 in the fourth quarter. Adoption of these statements has
not had and is not expected to have a material impact on the Company's required
disclosures.
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position No. 98-5 (SOP 98-5), Reporting on the Costs of Start-Up
Activities, which is effective for fiscal years beginning after December 15,
1998. Early adoption is encouraged. SOP 98-5 requires that costs of start-up
activities and organization costs be expensed as incurred. The impact of
adopting SOP 98-5 will be accounted for as the cumulative effect of a change in
accounting principle as described in Accounting Principles Board Opinion 20,
Accounting Changes. The Company is studying the new SOP and considering when it
will adopt the SOP and what effect it will have on certain deferred precontract
costs that are included in costs and estimated earnings in excess of billings in
the accompanying balance sheets. Adoption of the new SOP could result in
technical violations of certain financial covenants in the Company's debt
agreement for which the Company would seek waivers.
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 contained in the Company's 1997 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 improve personal convenience and security, deter fraud and
reduce customers' identification program costs. 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 800 locations. Applications
can include systems and cards for national ID's, driver's licenses, law
enforcement, voter registration, social services, access control and
information, healthcare, financial services and retail. In addition, Viisage is
commercializing patented facial recognition technology for the real-time
identification and verification of individuals.
During 1997 and 1998, the Company's revenue growth has slowed
significantly due primarily to procurement delays in its principal markets. The
Company attributes these delays to an increase in political considerations
affecting these procurement decisions, such as statewide elections, and
increasing legislative interest in biometric solutions and inter-agency sharing
of resources and information. The Company believes that election schedules
could cause its public sector business to be more cyclical and legislative
involvement could continue to lengthen procurement cycles until an appropriate
model for inter-agency cooperation evolves. However, the Company believes that
these developments should ultimately have a positive impact on growth because
contracts involving multiple agencies could be larger and are more likely to
incorporate biometrics like the Company's facial recognition technology. The
Company believes that the acceptance of digital identification technology in
recent years, its commitment to providing customized solutions for its customers
needs, its expertise in facial imaging and biometric solutions and its
proprietary software and hardware products will continue to contribute to its
growth. The Company also believes that it is in the early stages of the product
life cycle for solutions that incorporate facial recognition and multiple
biometrics and is well positioned to meet customer needs as they develop.
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 size
of the database, 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
6
the three months ended March 29, 1998, three customers each accounted for
more than 10% of the Company's revenues and an aggregate of 49% 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. However, as discussed more fully above, the Company
believes its public sector business is subject to cyclical procurement delays
that may be related to statewide election cycles.
Results of Operations
- ---------------------
Non-recurring Charge. During the first quarter of 1998, the Company recorded
non-recurring charges of approximately $230,000 related to a reorganization to
reduce expenses in line with the Company's revised plan for 1998. Approximately
$50,000 of such charges are included in project costs, $170,000 are included in
sales and marketing expenses and $10,000 are included general and administrative
expenses in the statement of operations.
Revenues. Revenues are derived principally from systems implementation, card
production and related services under multi-year contracts. Revenues decreased
36% to $4.6 million in 1998 from $7.2 million in 1997. This decrease reflects
the slowdown in new business awards during 1997 and 1998.
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, excluding non-recurring charges,
increased to 79% for 1998 from 72% for 1997. This increase reflects the impact
of older lower margin contracts in the overall revenue mix. Including non-
recurring charges, project costs increased to 80% for 1997. Project margin,
excluding non-recurring charges, decreased 52% to $966,000 (21% of revenues)
from $2.0 million (28% of revenues) for 1997, reflecting lower revenues in 1998
and the impact of older lower margin contracts in the overall revenue mix for
1998. Including non-recurring charges, project margin decreased 55% to $916,000
(20% of revenues).
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, excluding non-
recurring charges, decreased 26% to $421,000 from $572,000 in 1997. This
decrease principally reflects a reduction in marketing personnel during 1998
related to the reorganization discussed above. Including non-recurring charges,
sales and marketing expenses increased 3% to $591,000 in 1998. As a percentage
of revenues, sales and marketing expenses, excluding non-recurring charges,
increased to 9% from 8% for 1997 due to the decrease in revenues for 1998
discussed above. Including non-recurring charges, sales and marketing expenses
increased to 13% of revenues for 1998.
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 51% to $17,000 in 1998 from $35,000
in 1997, and remained constant as a percentage of revenues at less than 1% each
year. Expenditures for 1998 and 1997 relate primarily to the Company's facial
recognition products. Such amounts do not include amounts for specific projects
that are allocated to project costs and do not reflect the benefits to the
7
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,
excluding non-recurring charges, were approximately the same as for 1997.
Including non-recurring charges, general and administrative expenses increased
3% to $498,000 in 1998. As a percentage of revenues, general and administrative
expenses, excluding non-recurring charges increased to 11% in 1998 from 7% in
1997 due to lower revenues in 1998. Including non-recurring charges, general and
administrative expenses were also 11% of revenues for 1998.
Interest Expense. The increase in net interest expense to $353,000 in 1998 from
net interest income of $6,000 in 1997 principally reflects increased borrowings
during 1998 and a reduction in interest earned on cash equivalents in 1998.
Income Taxes. Due to the loss for 1998, no provision for income taxes was
recorded. The Company did not record any tax benefit for the loss due to the
uncertainty of when such benefit will be realized. Income tax expense for 1997
was provided at the Company's estimated effective tax rate.
Liquidity and Capital Resources
- -------------------------------
At March 29, 1998, working capital was $16.9 million compared to $15.3
million at December 31, 1997. The increase in working capital is due primarily
to the increase in costs and estimated earnings in excess of billings.
For the three months ended March 29, 1998, operations and investing
activities utilized cash of approximately $3.2 million and $853,000,
respectively, principally to fund increases in project assets and decreases in
accounts payable. Financing was provided primarily by long-term borrowings and
the project lease financing arrangement referred to below.
The Company has a revolving credit agreement with a commercial bank that
provides for unsecured borrowings of up to $10 million through June 1999 at the
prime rate or other LIBOR-based options. At March 29, 1998, approximately $2.5
million was outstanding under the agreement. This agreement requires the
Company to maintain certain financial ratios and minimum levels of earnings and
tangible net worth. The Company believes that it will continue to meet its debt
covenants in 1998, however, this expectation is dependent on achieving new
business forecasts. If the Company does not meet such covenants, the bank could
require immediate repayment of amounts outstanding.
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 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 March 29, 1998, the Company had approximately $13 million
available under the lease financing arrangement.
8
The Company believes that cash flows from available borrowings
and project leasing, as well as cash flows from operations if new business
forecasts are achieved, 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.
Impact of Year 2000 Issue
- -------------------------
The Year 2000 issue results from computer programs that do not
differentiate between the year 1900 and the year 2000 because they are written
using two digits rather than four to define the applicable year. If not
corrected, many computer applications could fail or create erroneous results by
or at the year 2000. The Company's accounting and information systems service
provider has implemented a Year 2000 compliance program to ensure that the
Company's accounting and information systems will function properly beyond 1999.
Also, the Company believes that software sold by the Company to its customers
either on a standalone basis or as part of a larger system integration project
is Year 2000 compliant. Accordingly, the Company does not expect the costs
related to these matters to be material to its financial position or results of
operations in any given year. The Company does not believe that Year 2000
issues, if any, encountered by its suppliers, customers or financial
institutions with have a material adverse impact on the Company. However, if
problems related to any of these matters arise, such problems could have a
material impact on the Company's operating results.
Accounting Pronouncements
- -------------------------
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position No. 98-5 (SOP 98-5), Reporting on the Costs of Start-Up
Activities, which is effective for fiscal years beginning after December 15,
1998. Early adoption is encouraged. SOP 98-5 requires that costs of start-up
activities and organization costs be expensed as incurred. The impact of
adopting SOP 98-5 will be accounted for as the cumulative effect of a change in
accounting principle as described in Accounting Principles Board Opinion 20,
Accounting Changes. The Company is studying the new SOP and considering when it
will adopt the SOP and what effect it will have on certain deferred precontract
costs that are included in costs and estimated earnings in excess of billings in
the accompanying balance sheets. Adoption of the new SOP could result in
technical violations of certain financial covenants in the Company's debt
agreement for which the Company would seek waivers.
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.
9
VIISAGE TECHNOLOGY, INC.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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: May 8, 1998 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