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 27, 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.
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 October 31, 1998
- ----------------------------- -------------------------------
Common stock, $.001 par value 8,376,840
VIISAGE TECHNOLOGY, INC.
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Balance Sheets as of September 27, 1998 and
December 31, 1997............................................. 1
Condensed Statements of Operations for the three months and
nine months ended September 27, 1998 and September 28, 1997... 2
Condensed Statements of Cash Flows for the nine months
ended September 27, 1998 and September 28, 1997............... 3
Notes to Condensed Financial Statements....................... 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 8
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K.............................. 14
SIGNATURES.............................................................. 15
i
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
VIISAGE TECHNOLOGY, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
September 27, December 31,
1998 1997
------------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ - $ 1,611
Accounts receivable 3,679 3,171
Costs and estimated earnings in excess of billings 26,036 25,483
Other current assets 545 423
------------- ------------
Total current assets 30,260 30,688
Property and equipment, net 15,524 16,046
Other assets 684 729
------------- ------------
$ 46,468 $ 47,463
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 9,786 $ 12,253
Accrued and deferred income taxes - 16
Current portion of long-term debt 549 549
Obligations under capital leases 3,238 2,609
------------- ------------
Total current liabilities 13,573 15,427
Long-term debt 9,026 3,505
Obligations under capital leases 9,217 9,795
------------- ------------
31,816 28,727
------------- ------------
Shareholders' Equity 14,652 18,736
------------- ------------
$ 46,468 $ 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 Nine Months Ended
-------------------------------- --------------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Revenues $ 4,241 $ 6,026 $ 11,836 $ 21,758
Project costs 4,056 4,418 10,676 15,647
------------- ------------- ------------- -------------
Project Margin 185 1,608 1,160 6,111
------------- ------------- ------------- -------------
Operating expenses:
Sales and marketing 395 726 1,843 1,977
Research and development 143 55 262 106
General and administrative 510 539 1,545 1,603
------------- ------------- ------------- -------------
Total operating expenses 1,048 1,320 3,650 3,686
------------- ------------- ------------- -------------
Operating income (loss) (863) 288 (2,490) 2,425
Interest expense, net 424 110 1,191 152
------------- ------------- ------------- -------------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle (1,287) 178 (3,681) 2,273
Income taxes - 71 - 907
------------- ------------- ------------- -------------
Income (loss) before cumulative effect
of change in accounting principle (1,287) 107 (3,681) 1,366
Cumulative effect of change in accounting principle - - (1,038) -
------------- ------------- ------------- -------------
Net income (loss) $ (1,287) $ 107 $ (4,719) $ 1,366
============= ============= ============= =============
Basic net income (loss) per share before cumulative
effect of change in accounting principle $ (0.16) $ 0.01 $ (0.45) $ 0.17
Basic net income (loss) per share $ (0.16) $ 0.01 $ (0.58) $ 0.17
============= ============= ============= =============
Weighted average common shares 8,170 8,055 8,100 8,055
============= ============= ============= =============
Diluted net income (loss) per share before cumulative
effect of change in accounting principle $ (0.16) $ 0.01 $ (0.45) $ 0.16
Diluted net income (loss) per share $ (0.16) $ 0.01 $ (0.58) $ 0.16
============= ============= ============= ============
Weighted average common shares 8,170 8,719 8,100 8,685
============= ============= ============= ============
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 27, September 28,
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,719) $ 1,366
Adjustments to reconcile net income (loss) to net cash
(used) provided by operating activities:
Depreciation and amortization 2,630 1,349
Cumulative effect of change in accounting principle 1,038 -
Changes in operating assets and liabilities:
Accounts receivable (508) (1,157)
Costs and estimated earnings in excess of billings (1,591) (13,966)
Other current assets (122) (186)
Accounts payable and accrued expenses (2,467) 2,829
Accrued and deferred taxes (16) 717
------------- -------------
Net cash used for operating activities (5,755) (9,048)
------------- -------------
CASH FLOWS fROM INVESTING ACTIVITIES:
Purchase of contract equipment converted to capital leases (2,070) (4,195)
Additions to property and equipment (38) (391)
Decrease in other assets 45 138
------------- -------------
Net cash used for investing activities (2,063) (4,448)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net revolving credit borrowings 5,952 -
Proceeds from sale/leaseback of equipment 2,070 4,195
Principal payments on long-term borrowings (431) -
Principal payments on obligations under capital leases (2,019) (856)
Net proceeds from issuance of common stock 635 79
------------- -------------
Net cash provided by financing activities 6,207 3,418
------------- -------------
Decrease in cash and cash equivalents (1,611) (10,078)
Cash and cash equivalents, beginning of period 1,611 11,073
------------- -------------
Cash and cash equivalents, end of period $ - $ 995
============= ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest $ 967 $ 329
============= ==============
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 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 periods ended September 27, 1998 are
not 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
During the quarter, the Company issued 300,000 shares of common stock to
Lau Technologies (Lau), its majority shareholder, for $2.00 per share or
$600,000. The Company also issued 509,091 options to Lau during the quarter in
connection with restructuring its financing facilities. Such options are
exercisable through August 2001 at $2.75 per share. On November 3, 1998, the
Company's Board of Directors appointed Thomas J. Colatosti, formerly the
Company's Chief Operating Officer, President and Chief Executive Officer. In
connection with such appointment, the Board granted Mr. Colatosti, subject to
certain vesting requirements, options to purchase approximately 597,000 shares
of the Company's common stock at an exercise price of $0.94 per share. In
November 1998, the Company issued an $800,000, 4% convertible subordinated note
to Lau. The note and related accrued interest are convertible into shares of the
Company's common stock at any time prior to October 15, 1999 at $1.58 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.
4
For 1998, the diluted per share amounts do not reflect the impact of
options outstanding at September 27, 1998 for approximately 2,133,000 shares
because their effect is antidilutive. For 1997, diluted net income per share
reflects the dilutive effect (664,000 shares for the three months and 630,000
shares for the nine months ended September 28, 1997) of all common stock options
outstanding during 1997 using the treasury stock method. Except for options and
the convertible note referred to above, the Company does not have any other
potential common stock.
Note 4. Restructuring Costs and Reorganization
During the first quarter of 1998, the Company recorded non-recurring
charges of approximately $230,000 related to a restructuring 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.
Effective June 1, 1998, the Company reorganized operations to create a
separate biometrics division to respond to the growing market interest in
biometric solutions. Under the direction of the Company's Chief Executive
Officer, the biometrics division will concentrate on product, market and channel
development activities for Viisage's facial recognition and other biometric
technologies. The Company's systems integration and identification card
business will be operated as a separate division and profit center and also
serve as a market channel to the public sector for Viisage's biometric products.
Note 5. Change in Accounting for Start-Up Costs
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. The Company adopted SOP 98-5 during the
third quarter of 1998. SOP 98-5 requires that costs of start-up activities and
organization costs be expensed as incurred. The Company previously capitalized
certain start-up costs as pre-contract costs in accordance with SOP 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts, and charged such costs to related contracts upon award. As required,
the adoption of SOP 98-5 has been made effective as of the beginning of the
year. The cumulative effect of the change in accounting principle as of
January 1, 1998 was recorded as a one-time charge of $1,038,000 to the
Company's year-to-date results. Year-to-date project costs also include start-up
costs of $283,000 which were incurred in the first quarter of 1998. The effect
of the change on the nine months ended September 27, 1998 was to increase the
loss before change in accounting principle by $283,000, or $0.03 per basic and
diluted share, and to increase net loss by $1,321,000, or $0.16 per basic and
diluted share.
5
The effect of the change in accounting principle on the first and second
quarters of 1998 is as follows (in thousands):
Three Months Ended
------------------------------
March 29, June 28,
1998 1998
------------ ------------
Net loss as previously reported $ (543) $ (1,568)
Adjustment for the effect of change in accounting principle
applied retroactively (283) -
------------ ------------
Loss before cumulative effect of change in accounting
principle as adjusted (826) (1,568)
Cumulative effect of change in accounting principle (1,038) -
------------ ------------
Net loss as adjusted $ (1,864) $ (1,568)
============ ============
Basic and diluted per share amounts:
Net loss as previously reported $ (0.07) $ (0.19)
Adjustment for the effect of change in accounting
principle applied retroactively (0.03) -
------------ ------------
Loss before cumulative effect of change in accounting
principle as adjusted (0.10) (0.19)
Cumulative effect of change in accounting principle (0.13) -
------------ ------------
Net loss as adjusted $ (0.23) $ (0.19)
============ ============
Note 6. Long-term Debt
At June 28, 1998, the Company was not in compliance with certain covenants
included in its revolving credit and term loan facility. In August 1998, the
Company received a commitment letter from the bank to provide a new revolving
credit facility to the Company through June 2000 and is currently working with
the bank to finalize documentation related to such facility. Outstanding term
and revolving credit borrowings will be repaid with funds from the new facility
at closing. The new facility provides for revolving credit borrowings of up to
$11 million through December 1998 and $10 million thereafter at the prime rate
plus 1/2% or other LIBOR-based options. Borrowings over $9.5 million in 1998
and $8 million thereafter require prior bank consent. The new facility is
secured by substantially all of the Company's assets and requires the Company to
maintain certain financial ratios and minimum levels of earnings and tangible
capital funds, as defined. The new facility also requires the Company to raise
funds, as needed, from other sources to cover biometrics division expenses.
These sources are expected to include a combination of biometrics division
revenues, subordinated debt and equity capital.
The Company has a system project lease financing arrangement with a
commercial leasing organization under which the lessor purchases certain of the
Company's digital identification systems and leases them back to the Company for
deployment with identified and contracted customers approved by the lessor. The
current arrangement provides for project financing of up to $15.0 million which
has been reduced from $25.0 million to reflect the Company's current operations.
6
The Company believes that it will continue to meet its debt covenants.
However, this expectation is dependent in part on achieving new business
forecasts and raising funds to cover biometrics division expenses. If the
Company does not meet such covenants, the bank and the lessor could require
immediate repayment of amounts outstanding.
Note 7. Accounting Pronouncements
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 will adopt SFAS No. 131 in the fourth quarter and will provide the
required financial disclosures for the systems integration and identification
card and biometrics divisions referred to in Note 4.
7
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 approximately 1,000 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 and
large database identification and verification of individuals.
During 1997 and 1998, the Company's revenue growth has slowed
significantly due primarily to lengthening procurement cycles in its principal
markets and a strong competitive market place. 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.
Effective June 1, 1998, the Company reorganized operations to create a
separate biometrics division to respond to the growing market interest in
biometric solutions. Under the direction of the Company's Chief Executive
Officer, the biometrics division will concentrate on product, market and channel
development activities for Viisage's facial recognition and other biometric
technologies. The Company's systems integration and identification card
business will be operated as a separate division and profit center and also
serve as a market channel to the public sector for Viisage's biometric products.
On November 3, 1998, the Company's Board of Directors appointed Thomas J.
Colatosti, formerly the Company's Chief Operating Officer, President and Chief
Executive Officer.
The Company's systems integration and identification card division
("SI Division") 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
by its systems integration an d
8
identification card division 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 public sector contracts. For the nine months ended September 27, 1998,
three customers each accounted for more than 10% of the Company's revenues and
an aggregate of 40% 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, the Company believes its systems integration and
identification card business is subject to cyclical procurement delays that may
be related to statewide election cycles and other political considerations.
Results of Operations
- ---------------------
Non-recurring Charges and Accounting Change. During the first quarter of 1998,
the Company recorded non-recurring charges of approximately $230,000 related to
a restructuring 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
in general and administrative expenses in the statement of operations.
The Company elected early adoption of Statement of Position No. 98-5 (SOP
98-5), Reporting on the Costs of Start-Up Activities, which requires start-up
costs to be expensed as incurred rather than capitalized. The Company
previously capitalized certain start-up costs as pre-contract costs under SOP
81-1, Accounting for Performance of Construction-Type and Certain Production-
Type Contracts, and charged such costs to contracts upon award. As required,
the adoption of SOP 98-5 has been made effective as of the beginning of the
year. The cumulative effect of the change in accounting principle of $1,038,000
was recorded as a one-time charge in the Company's results for the nine months
ended September 27, 1998. Year-to-date project costs also include start-up
costs of $283,000 which were incurred in the first quarter of 1998.
Revenues. Systems integration and identification card division (SI division)
revenues are derived principally from systems implementation, card production
and related services under multi-year contracts. Revenues decreased 30% to $4.2
million for the quarter ended September 27, 1998 from $6.0 million for the
comparable period in 1997. For the nine months ended September 27, 1998,
revenues decreased 46% to $11.8 million from $21.8 million for the same period
in 1997. These decreases reflect the slowdown in new business awards during
1997 and 1998. Biometrics division revenues for the periods were not material.
9
Project Costs and Margin. SI division 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 increased to 96% and 90%
for the quarter and nine months ended September 27, 1998, respectively, from 73%
and 72% for the comparable periods in 1997. These increases reflect the impact
of lower margin contracts in the overall revenue mix. Increases also reflect
revisions to cost to complete estimates due in part to enhancements to central
production operations and technology and transitioning to an in-house
maintenance organization, overhead variances resulting from lower than
anticipated 1998 revenues and, for the year-to-date period, the early adoption
of SOP 98-5 and first quarter restructuring costs. These costs and adjustments
increased project costs by approximately 12.9% and 10.1% of revenues for the
quarter and year-to-date periods, respectively. Project margin decreased 88% to
$185,000 (4% of revenues) for the quarter ended September 27, 1998 from $1.6
million (27% of revenues) for the comparable period in 1997. For the nine
months ended September 27, 1998, project margin decreased 81% to $1.2 million
(10% of revenues) from $6.1 million (28% of revenues) for the same period in
1997. These decreases reflect lower revenues in 1998 and the increases in
project costs discussed above. Biometrics division project costs for the
periods were not material.
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation and professional service fees for marketing, bid and proposal and
customer support activities. SI division sales and marketing expenses for the
quarter ended September 27, 1998 decreased 66% to $244,000 from $726,000 for the
comparable period in 1997. For the nine months ended September 27, 1998, SI
division sales and marketing expenses, excluding non-recurring charges,
decreased 25% to $1,485,000 from $1,977,000 in 1997. These changes reflect the
allocation of certain SI division resources to sales and marketing as part of
the reorganization discussed above and the reduction in headcount in connection
with the first quarter restructuring mentioned above. Including non-recurring
charges, SI division sales and marketing expenses decreased 16% to $1,655,000
for the nine months ended September 27, 1998. As a percentage of revenues, SI
division sales and marketing expenses, excluding non-recurring charges,
decreased to 6% for the quarter ended September 27, 1998 from 12% for the
comparable period in 1997 and increased to 13% for the nine month period ended
September 27, 1998 from 9% for the comparable period in 1997, due to the
decrease in 1998 revenues discussed above. Including non-recurring charges, SI
division sales and marketing expenses for 1998 increased to 14% for the year-to-
date period. Sales and marketing expenses since the reorganization for the
biometrics division were $188,000.
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.
There were no SI division research and development expenses for the quarter
compared to $16,000 for the comparable period in 1997. Year-to-date SI division
research and development expenses were $15,000 compared to $51,000 for the
comparable period in 1997. Biometrics division research and development
expenses since the reorganization were $143,000 and $247,000 for the quarter and
nine months ended September 27, 1998, respectively. 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 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.
10
General and Administrative. General and administrative expenses consist
principally of compensation for executive management, finance and administrative
personnel and outside professional fees and are shared by the Company's two
divisions. General and administrative expenses decreased 5% to $510,000 for the
quarter ended September 27, 1998 from $539,000 for the comparable period in
1997. For the nine months ended September 27, 1998, general and administrative
expenses decreased 4% to $1.5 million from $1.6 million for the same period in
1997. These decreases reflect cost savings from the restructuring discussed
above. As a percentage of revenues, general and administrative expenses
increased to 12% and 13% for the quarter and nine month period ended September
27, 1998, respectively, from 9% and 7% for the comparable periods in 1997 due
primarily to lower revenues in 1998.
Interest Expense. The increases in net interest expense to $424,000 and
$1,191,000 for the quarter and nine months ended September 27, 1998,
respectively, from net interest expense of $110,000 and $152,000 for the
comparable periods in 1997 reflect increased borrowings during 1998 and a
reduction in interest earned on cash equivalents in 1998.
Income Taxes. The Company did not record any tax benefit for the 1998 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 September 27, 1998, working capital was $16.7 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, net of
the decrease in accounts payable and accrued expenses.
For the nine months ended September 27, 1998, operations and investing
activities utilized cash of approximately $5.8 million and $2.1 million,
respectively, principally to fund increases in project assets and changes in
working capital. Financing was provided primarily by long-term borrowings and
the project lease financing arrangement referred to below.
At June 28, 1998, the Company was not in compliance with certain covenants
included in its revolving credit and term loan facility. In August 1998, the
Company received a commitment letter from the bank to provide a new revolving
credit facility to the Company through June 2000 and is currently working with
the bank to finalize documentation related to such facility. Outstanding term
and revolving credit borrowings will be repaid with funds from the new facility
at closing. The new facility provides for revolving credit borrowings of up to
$11 million through December 1998 and $10 million thereafter at the prime rate
plus 1/2% or other LIBOR-based options. Borrowings over $9.5 million in 1998
and $8 million thereafter require prior bank consent. The new facility is
secured by substantially all of the Company's assets and requires the Company to
maintain certain financial ratios and minimum levels of earnings and tangible
capital funds, as defined. The new facility also requires the Company to raise
funds, as needed, from other sources to cover biometrics division expenses.
These sources are expected to include a combination of biometrics division
revenues, subordinated debt and equity capital.
11
The Company also has a system project lease financing arrangement with a
commercial leasing organization. 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. The current arrangement provides for
project financing of up to $15.0 million which has been reduced from $25.0
million to reflect the Company's current operations. At September 27, 1998, the
Company had approximately $3 million available under the lease financing
arrangement, and is currently negotiating additional project financing
arrangements.
The Company believes that it will continue to meet its debt covenants.
However, this expectation is dependent in part on achieving new business
forecasts and raising funds to cover biometrics division expenses. If the
Company does not meet such covenants, the bank and the lessor could require
immediate repayment of amounts outstanding.
During the quarter, the Company issued 300,000 shares of Common Stock to
Lau Technologies (Lau), its majority shareholder, for $2.00 per share or
$600,000. In November 1998, the Company also issued an $800,000, 4% convertible
subordinated note to Lau. The note and related accrued interest are convertible
into the Company's common stock at any time prior to October 15, 1999 at $1.58
per share.
The Company plans to raise capital, as needed, to fund biometrics division
expenses and believes that cash flows from available borrowings, project
leasing, operations and capital raising 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 capital will be available on
favorable terms or at all. If the Company is unable to obtain additional
capital, as 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 Pronouncements
- -------------------------
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 will adopt SFAS No. 131 in the fourth quarter and will provide the
required financial disclosures for the systems integration and identification
card and biometrics divisions.
12
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 or can be made Year 2000 compliant with minor
modifications. 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 is not aware of any Year 2000 issues encountered
or expected to be encountered by its suppliers, customers or financial
institutions and is planning to conduct a survey before yearend to identify
potential issues. If problems related to any of these matters arise, such
problems could have a material impact on the Company's operating results.
Certain Factors That May Affect Future Results
- ----------------------------------------------
The Company operates in an environment that involves a number of risks,
some of which are beyond the Company's control. Forward-looking statements in
this document and those made from time to time by the Company through its senior
management are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements concerning
future plans or results are necessarily only estimates and actual results could
differ materially from expectations. Certain factors that could cause or
contribute to such differences include, among other things, potential
fluctuations in quarterly results, the size and timing of award and performance
on contracts, dependence on large contracts and a limited number of customers,
lengthy sales and implementation cycles, changes in management estimates
incident to accounting for contracts, availability and cost of key components,
market acceptance of new or enhanced products and services, proprietary
technology and changing technology, competitive conditions, system performance,
management of growth, dependence on key personnel and general economic and
political conditions and other factors affecting spending by customers.
13
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
14
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 12, 1998 By: /s/ Thomas J. Colatosti
-------------------------
Thomas J. Colatosti
President and Chief Executive Officer
By: /s/ William A. Marshall
-------------------------
William A. Marshall
Chief Financial Officer
15