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 26, 1999.
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 November 1, 1999
- ------------------------------ -------------------------------
Common stock, $.001 par value 9,099,189
VIISAGE TECHNOLOGY, INC.
FORM 10 - Q FOR THE QUARTER ENDED SEPTEMBER 26, 1999
INDEX
Page
----
Facing
Sheet.........................................................................................1
Index.........................................................................................2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Balance Sheets as of September 26, 1999 and December 31, 1998............3
Condensed Statements of Operations for the three months and nine months ended
September 26, 1999 and September 27, 1998..........................................4
Condensed Statements of Comprehensive Income for the three months and nine months
ended September 26, 1999 and September 27, 1998....................................5
Condensed Statements of Cash Flows for the nine months ended September 26, 1999
and September 27, 1998.............................................................6
Notes to Condensed Financial Statements............................................7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................10
PART II - OTHER INFORMATION
Item 2 - Changes in Securities.............................................................15
Item 4 - Submission of Matters to a Vote of Security Holders...............................15
Item 6 - Exhibits and Reports on Form 8-K..................................................15
SIGNATURES...................................................................................16
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VIISAGE TECHNOLOGY, INC.
Condensed Balance Sheets
(in thousands)
Sept. 26, December 31,
1999 1998
--------------------- ----------------------
Unaudited
Assets
Current Assets:
Cash and cash equivalents $ 1,262 $ 166
Accounts receivable 4,770 4,285
Costs and estimated earnings in excess of billings 20,682 21,723
Other current assets 846 764
--------------------- ----------------------
Total current assets 27,560 26,938
Property and equipment, net 18,011 18,513
Other assets 818 993
--------------------- ----------------------
$ 46,389 $ 46,444
===================== ======================
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 8,481 $ 9,090
Accrued and deferred income taxes 16 27
Convertible subordinated debt 800 800
Current portion of long-term debt 7,845 2,054
Obligations under capital leases 3,610 3,797
--------------------- ----------------------
Total current liabilities 20,752 15,768
Long-term debt - 6,500
Convertible subordinated debt 1,000 -
Obligations under capital leases 8,930 11,558
Obligations under related party capital leases 2,740 -
--------------------- ----------------------
33,422 33,826
Shareholders' equity 12,967 12,618
--------------------- ----------------------
$ 46,389 $ 46,444
===================== ======================
The accompanying notes are an integral part of these financial statements.
3
Viisage Technology, Inc.
Condensed Statements of Operations
(in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
---------------------------------------- ----------------------------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
Revenues $ 5,209 $ 4,241 $ 14,354 $ 11,836
Project costs 4,136 4,056 11,714 10,676
----------------- ----------------- ----------------- -----------------
Project margin 1,073 185 2,640 1,160
----------------- ----------------- ----------------- -----------------
Operating Expenses:
Sales and marketing 134 395 563 1,843
Research and development 86 143 252 262
General and administrative 447 510 1,442 1,545
----------------- ----------------- ----------------- -----------------
Total operating expenses 667 1,048 2,257 3,650
----------------- ----------------- ----------------- -----------------
Operating income (loss) 406 (863) 383 (2,490)
Interest expense 474 424 1,548 1,191
----------------- ----------------- ----------------- -----------------
Income (loss) before income taxes
and cumulative effect of change in
accounting principle (68) (1,287) (1,165) (3,681)
Provision for income taxes - - - -
----------------- ----------------- ----------------- -----------------
Income (loss) before cumulative effect
of change in accounting principle (68) (1,287) (1,165) (3,681)
Cumulative effect of change in accounting
principle - - - 1,038
----------------- ----------------- ----------------- -----------------
Net income (loss) (68) (1,287) (1,165) (4,719)
Preferred stock dividend / accretion 214 - 214 -
----------------- ----------------- ----------------- -----------------
Net income (loss) applicable to common
Shareholders $ (282) $ (1,287) $ (1,379) $ (4,719)
================= ================= ================= =================
Basic net income (loss) per share before
change in accounting principle $ (0.03) $ (0.16) $ (0.16) $ (0.45)
Basic net income (loss) per share $ (0.03) $ (0.16) $ (0.16) $ (0.58)
================= ================= ================= =================
Weighted average common shares 8,565 8,170 8,482 8,100
================= ================= ================= =================
Diluted net income (loss) per share before
change in accounting principle $ (0.03) $ (0.16) $ (0.16) $ (0.45)
Diluted net income (loss) per share $ (0.03) $ (0.16) $ (0.16) $ (0.58)
================= ================= ================= =================
Weighted average common and
equivalent shares 8,565 8,170 8,482 8,100
================= ================= ================= =================
The accompanying notes are an integral part of these financial statements.
4
Viisage Technology, Inc.
Condensed Statements of Comprehensive Income
(in thousands)
(Unaudited)
Three Months Ended Nine Months Ended
---------------------------------------- ----------------------------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
Net income (loss) $ (68) $ (1,287) $ (1,165) $ (4,719)
----------------- ----------------- ----------------- -----------------
Other comprehensive income net of tax:
- - - -
----------------- ----------------- ----------------- -----------------
Other comprehensive income - - - -
----------------- ----------------- ----------------- -----------------
Comprehensive income $ (68) $ (1,287) $ (1,165) $ (4,719)
================= ================= ================= =================
The accompanying notes are an integral part of these financial statements
5
VIISAGE TECHNOLOGY, INC.
Condensed Statements of Cash Flows
(in thousands)
(Unaudited)
Nine Months Ended
-----------------------------------------------------------
Sept. 26, Sept.27,
1999 1998
----------------------- -----------------------
Cash Flows from Operating Activities: $ (1,165) $ (4,719)
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
Provided (used) by operating activities
Depreciation and amortization 3,282 2,631
Cumulative effect of change in accounting principle - 1,038
Directors fees paid in common stock 108 -
Change in operating assets and liabilities:
Accounts receivable (485) (508)
Costs and estimated earnings in excess of billings 1,040 (1,592)
Other current assets (81) (122)
Accounts payable and accrued expenses (609) (2,466)
Accrued and deferred taxes (11) (16)
----------------------- -----------------------
Net cash provided by (used for) operating activities 2,079 (5,754)
----------------------- -----------------------
Cash Flows from Investing Activities:
Purchase of contract equipment converted to capital leases (2,740) (2,070)
Purchase of system assets - (38)
Decrease in other assets 169 45
----------------------- -----------------------
Net cash provided by (used for) investing activities (2,571) (2,063)
----------------------- -----------------------
Cash Flows from Financing Activities:
Net revolving credit borrowings - 5,952
Proceeds from sale/leaseback of equipment 2,740 2,070
Principal payments on long-term borrowings (709) (431)
Principal payments on obligations under capital leases (2,815) (2,019)
Proceeds from issuance of convertible subordinated debt 1,000 -
Net proceeds from issuance of common stock 24 634
Proceeds from issuance of preferred stock, warrants and
conversion rights 1,348 -
----------------------- -----------------------
Net cash provided by (used for) financing activities 1,588 6,206
----------------------- -----------------------
Net increase (decrease) in cash and cash equivalents 1,096 (1,611)
Cash and cash equivalents, beginning of period 166 1,611
----------------------- -----------------------
Cash and cash equivalents, end of period $ 1,262 $ -
======================= =======================
Supplemental Cash Flow Information:
Cash paid during the period for interest $ 1,160 $ 967
======================= =======================
The accompanying notes are an integral part of these financial statements.
6
VIISAGE TECHNOLOGY, INC.
Notes To Condensed Financial Statements
1. DESCRIPTION OF BUSINESS
Viisage is a leader in the emerging field of biometrics technology and in
providing digital identification systems and solutions. The Company focuses on
identification solutions that improve personal convenience and security, deter
fraud and reduce identification program costs. Viisage combines its systems
integration and software design capabilities with its proprietary software and
hardware products and other industry standard products to create complete
customized solutions. These turnkey solutions integrate image and data capture,
create relational databases, incorporate multiple biometrics and improve
customers' ability to move and manage information. Applications can include
driver's licenses, voter registration, national ID's, law enforcement, social
services, access control and PC network and internet access security. To date,
Viisage's primary customers have been government agencies with particular
emphasis on U.S. drivers licensing agencies.
The Company is engaged in one business, the development and implementation of
digital identification systems and solutions. Effective June 1, 1998, the
Company reorganized its operations to create a separate biometrics division to
respond to the growing market interest in biometric solutions. The biometrics
division is focused on product, market and channel development activities in
three principal areas: facility access control; PC network and internet access
security; and real-time large database identification and verification of
individuals. The systems integration and identification card division (SI
division) focuses on Viisage's public sector markets and serves as a channel to
existing customers and the public sector for the Company's biometric
technologies. Since June 1, 1998, the Company has operated in two segments.
Amounts for the biometrics division prior to the reorganization are not
material.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial data as of September 26, 1999 and December 31, 1998,
and for the three and nine month periods ended September 26, 1999 and September
27, 1998, have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The December 31,
1998 condensed financial statements were derived from audited financial
statements, but do not include all disclosures required by generally accepted
accounting principles. Certain amounts for 1998 have been reclassified to
conform to the presentation for 1999. However, the Company believes that the
disclosures are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations, and cash flows as of September 26, 1999 and for the three
and nine month periods ended September 26, 1999 and September 27, 1998, have
been made. The results of operations for the period ended September 26, 1999
are not necessarily indicative of the operating results for the full year.
Use of Estimates
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.
7
Computation of Net Loss per Share
Basic and dilutive net loss per share is computed based on the weighted average
number of common shares outstanding during the period. The diluted per share
amounts do not reflect the impact of options outstanding for approximately
2,510,000 shares in 1999 and 1,509,000 shares in 1998, the conversion of
convertible subordinated debt, the conversion of convertible preferred stock, or
stock warrants because their effect is antidilutive. Except for convertible
subordinated debt, convertible preferred stock, warrants and options referred to
above, the Company does not have any other potential common stock at September
26, 1999.
Recent Accounting Pronouncements
None.
3. 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.
4. RELATED PARTY TRANSACTIONS AND SHAREHOLDERS' EQUITY
The Company is currently an approximately 67% owned subsidiary of Lau
Technologies (Lau). Readers are referred to the "Notes to Financial Statements"
section of the Company's 1998 Annual Report to Shareholders for further
discussion.
During the first quarter, the Company issued Lau options to purchase 60,000
shares of the Company's common stock in exchange for Lau's guarantee of an
indemnification obligation of the Company. The options are exercisable through
February 2002 at $1.90 per share. The fair value of the options have been
credited to shareholders' equity and included in deferred financing cost, a
component of other assets. The value of these options will be amortized over the
indemnification period and charged to interest expense.
The Company has two non exclusive license agreements with Lau, whereby Lau acts
as a distributor of the Company's "Facial Recognition" Technology for certain
European Markets, U.S. Airports and other end users that are Federal Agencies.
Lau will pay the Company royalties on profits, as defined, under these
agreements. Through September 26, 1999, no royalties have been earned.
In May 1999, the Company received a commitment from Lau to lend to the Company
up to $2,000,000 in exchange for a 4% convertible subordinated note through
February 2000. Amounts drawn under the note, with Lau's consent, and related
accrued interest are convertible at Lau's option into shares of the Company's
common stock at any time prior to December 31, 2000 at $1.26 per share. In May
1999, the Company borrowed $1,000,000 under this commitment.
In July 1999, the Company completed a $1.5 million private placement of Series A
Convertible Preferred Stock (the "preferred stock") and warrants with a private
equity fund. The preferred stock accrues dividends at 7% per annum, payable in
cash or stock at the Company's option upon conversion. Subject to certain
limits on the number of shares the holder can convert at any one time, the
holder can convert up to 50% of the preferred stock into shares of the Company's
common stock beginning six months after closing and the balance beginning nine
months after closing. Shares can be converted at the lesser of $3.00 per share
or 85% of the market price prior to conversion of the Company's common stock for
conversions within ten months from the closing date or 77% of the market price
prior to conversion for conversions after ten months from the closing date. The
Company has the right at any time to redeem the preferred shares. Subject to
certain volume limitations, the preferred stock is required to be converted into
the
8
Company's common stock on June 30, 2002. Within ten (10) business days after the
Mandatory Conversion Date, the Company may either (i) redeem the outstanding
shares of Series A Preferred Stock, together with all accrued and unpaid
dividends thereon, in cash, to the date of redemption or (ii) extend the
Mandatory Conversion Date for a period of one year. The Company has agreed to
register for resale the common stock underlying the preferred shares, related
dividends and warrants. This transaction was an exempt transaction under Section
4(2) of the Securities Act of 1933, as amended. In connection with this
transaction, the Company paid an investment banking fee of $112,500 and warrants
to purchase 75,000 shares of the Company's common stock, exercisable for three
years, at an exercise price of $1.79 per share which was 130% of the then
current closing price of the Company's common stock. The Company also issued
warrants to purchase 75,000 shares of the Company's common stock, exercisable
for three years, at an exercise price of $1.58 per share to the investor.
The Company has a project lease financing arrangement with Lau that provides for
up to $3.1 million of capital lease financing in 1999 with $2.7 million
outstanding at September 26, 1999. Readers are referred to the "Notes to
Financial Statements" section of the Company's 1998 Annual Report to
Shareholders for further discussion.
On October 14, 1999, subsequent to the balance sheet date, Lau Technologies
exercised an option to convert $800,000, 4%, subordinated convertible debt, plus
accrued interest of $32,000, into 526,582 shares of the Company's common stock
at the conversion price of $1.98 per share.
5. BUSINESS SEGMENTS
The Company is engaged in one business, the development and implementation of
digital identification systems and solutions. Effective June 1, 1998, the
Company reorganized its operations to create two separate divisions, a
biometrics division and a systems integration and identification card division.
Since June 1, 1998, the Company has operated in two segments. Amounts for the
biometrics division prior to the reorganization are not material. The costs of
shared facilities and certain administrative services have been allocated to
each business based on actual usage or other methods that approximate actual
usage. All other costs and expenses have been allocated to each business based
on actual usage. Management evaluates segment performance based on operating
income.
Substantially all of the Company's revenues are currently derived by its systems
integration and identification card division from public sector customers and
contracts 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 26, 1999, three customers each accounted for more than 10% of the
Company's revenues and an aggregate of approximately 44% of revenues for the
period.
Business Segment Information
(in thousands)
Three Months Ended Nine Months Ended
---------------------------------------- ----------------------------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
Revenues:
Systems integration division $ 5,075 $ 4,143 $ 14,220 $ 11,738
Biometrics division 134 98 134 98
----------------- ----------------- ----------------- -----------------
$ 5,209 $ 4,241 $ 14,354 $ 11,836
================= ================= ================= =================
Operating Income (Loss)
Systems integration division $ 797 $ (297) $ 1,727 $ (1,924)
Biometrics division (391) (566) (1,344) (566)
----------------- ----------------- ----------------- -----------------
$ 406 $ (863) $ 383 $ (2,490)
================= ================= ================= =================
9
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 accompanying notes contained in the Company's 1998
Annual Report and 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.
RESULTS OF OPERATIONS
Revenue are derived principally from multi-year contracts for systems
implementation, card production and related services. Revenue grew to $5,209
thousand in the third quarter of 1999 from $4,241 thousand in the third quarter
of 1998. Revenue for the first nine months of 1999 was $14,354 thousand,
compared to $11,836 thousand in the first nine months of 1998. The 22.8%
increase in revenue between the two three-month periods and the 21.3% increase
in revenue between the two nine month periods was primarily a result of contract
extensions with the State of Ohio and The Commonwealth of Massachusetts and new
contracts with the States of Maryland and South Carolina and the Wisconsin
Department of Corrections.
Gross margins increased to 20.6% in the third quarter of 1999 from 4.4% in the
third quarter of 1998. Gross margins for the first nine months of 1999 were
18.4%, compared to 9.8% for the same period in 1998. The increase in gross
margins between the two three-month periods and the two nine-month periods is
due principally to the positive impact of higher margin new business on the
overall revenue mix in 1999 and the negative impact of start-up and
restructuring costs in 1998.
Sales and marketing expenses decreased $261 thousand in the third quarter of
1999 from the third quarter of 1998, and decreased $1,280 thousand in the first
nine months of 1999 from the first nine months of 1998. This represents a
decrease to 2.6% from 9.3% of revenue for the quarter to quarter period and to
3.9% from 15.6% for the first nine months of each fiscal year. The decrease is
due principally to restructuring and related reductions in headcount, more
focused marketing efforts, and our ongoing cost reduction efforts.
Research and development expenses decreased $57 thousand in the third quarter of
1999 from the third quarter of 1998, and decreased $10 thousand in the first
nine months of 1999 from the first nine months of 1998. This represents a
decrease to 1.7% from 3.4% of revenue for the quarter to quarter period and to
1.8% from 2.2% for the first nine months of each fiscal year. The decrease is
due principally to restructuring and related reductions in headcount, more
focused marketing efforts, and our ongoing cost reduction efforts. Research and
development costs do not include amounts for specific projects that are
allocated to project costs and do not reflect the benefits to Viisage 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 us.
10
General and administrative expenses fell $63 thousand in the third quarter of
1999 from the third quarter of 1998, a decrease to 8.6% from 12.0 % of revenue.
These expenses decreased $103 thousand in the first nine months of 1999 from the
first nine months of 1998, representing a decrease to 10.0% from 13.1% of
revenue. The savings is due principally to restructuring and related reductions
in headcount and our ongoing cost reduction efforts.
Interest expense rose $50 thousand in the third quarter of 1999 over the third
quarter of 1998, and increased $357 thousand in the first nine months of 1999
over the first nine months of 1998. This represents a decrease to 9.1% from
10.0% of revenue for the quarter to quarter period and an increase to 10.8% from
10.1% for the first nine months of each fiscal year. The dollar growth reflects
increased borrowings and rates during 1999.
The Company did not record any tax benefit for the 1999 and 1998 losses due to
the uncertainty of when such benefit will be realized.
RECENT ACCOUNTING PRONOUNCEMENTS
None.
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents were $1,262 thousand at September 26, 1999, an increase of
$1,096 thousand from December 31, 1998. The increase is primarily the result of
cash generated by operating and financing activities. These cash inflows were
partially offset by cash outflows from investing activities.
Accounts receivable increased 11.3% from December 31, 1998 to September 26,
1999. Day's sales outstanding in receivables improved to 89 days at September
26, 1999 from 96 days at December 31, 1998.
Costs and estimated earnings in excess of billings decreased 4.8% from December
31, 1998 to September 26, 1999, which reflects billing out costs during the
period.
Historically, the Company has not made substantial capital expenditures for
facilities, office and computer equipment and has satisfied its needs in these
areas principally through leasing.
The Company has a revolving credit facility with a commercial bank that provides
for borrowings of up to $10 million through September 30, 1999, $9 million
through December 31, 1999, and $6.5 million through June 30, 2000 at the prime
rate plus 1%. The revolving credit 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 revolving credit 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. Although a continuance is expected, as of
September 26, 1999, the Company does not have a commitment to continue the
revolving credit facility past June 30, 2000. Accordingly, the entire revolving
credit facility has been reclassified to current liabilities. The Company
expects that it will be able to negotiate adequate financing to support its
current business plans, but there is no assurance these plans will be
successful.
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 our digital identification systems and leases them back to
the Company for deployment with identified and contracted customers approved by
the lessor. The lessor retains title to systems and has an assignment of the
Company'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 the
Company's customers, but the Company 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. The Company is also
required to maintain certain financial ratios and minimum levels of tangible
capital funds, as defined. These project lease arrangements are accounted for
as capital leases. The current arrangement provides for project financing of up
to $15.0 million. At September 26, 1999, the Company had approximately $12.5
million outstanding under the lease financing arrangement. The Company has a
similar project lease financing arrangement with Lau that provides for up to
$3.1 million of capital lease financing in 1999 with $2.7 million outstanding at
September 26, 1999.
The Company believes that it will meet its debt covenants. However, this
expectation is dependent in part on achieving 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
outstanding amounts.
In May 1999, the Company received a commitment from Lau to lend to us up to
$2,000,000 in exchange for a 4% convertible subordinated note through February
2000. Amounts drawn under the note, with Lau's consent, and related accrued
interest are convertible at Lau's option into shares of the Company's common
stock at any time prior to December 31, 2000 at $1.26 per share. In May 1999,
the Company borrowed $1,000,000 under this commitment. The Company plans to
raise additional funding, as needed, from other sources.
In July 1999, the Company completed a $1.5 million private placement of Series A
Convertible Preferred Stock (the "preferred stock") and warrants with a private
equity fund. The preferred stock accrues dividends at 7% per annum, payable in
cash or stock, at the Company's option, upon conversion. Subject to certain
limits on the number of shares the holder can convert at any one time, the
holder can convert up to 50% of the preferred stock into shares of the Company's
common stock beginning six months after closing and the balance beginning nine
months after closing. Shares can be converted at the lesser of $3.00 per share
or 85% of the market price prior to conversion of the Company's common stock for
conversions within ten months from the closing date or 77% of the market price
prior to conversion for conversions after ten months from the closing date. The
Company has the right at any time to redeem the preferred shares. Subject to
certain volume limitations, the preferred stock is required to be converted into
the Company's common stock on June 30, 2002. Within ten (10) business days
after the Mandatory Conversion Date, the Company may either (i) redeem the
outstanding shares of Series A Preferred Stock, together with all accrued and
unpaid dividends thereon, in cash, to the date of redemption or (ii) extend the
Mandatory Conversion Date for a period of one year. The Company has agreed to
register for resale the common stock underlying the preferred shares, related
dividends and warrants. This transaction was an exempt transaction under Section
4(2) of the Securities Act of 1933, as amended. In connection with this
transaction, the Company paid an investment banking fee of $112,500 and warrants
to purchase 75,000 shares of the Company's common stock, exercisable for three
years, at an exercise price of $1.79 per share which was 130% of the then
current closing price of the Company's common stock. The Company also issued
warrants to purchase 75,000 shares of our common stock, exercisable for three
years, at an exercise price of $1.58 per share to the investor.
The Company believes that if it meets its business forecast for 1999, cash flows
from available borrowings, project leasing, operations and capital raising will
be sufficient to meet our 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. Failure to obtain additional capital could
also result in violation of debt and project lease financing covenants.
12
MARKET RISK
Except for the Company's revolving credit facility, which has a variable
interest rate, the Company has no material exposure to market risk that could
affect its future results of operations and financial condition.
IMPACT OF YEAR 2000 ISSUE
The Company continues to assess the potential impact of the year 2000 on the
Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include:
[_] test and upgrade internal business systems and facilities;
[_] test and develop necessary upgrades for the Company's current products and
certain discontinued products;
[_] contact key suppliers, vendors, and customers to determine their year 2000
compliance status; and
[_] develop contingency plans.
The Company's accounting and information systems provider, Lau, has advised the
Company that its internal business systems are year 2000 compliant. The Company
expects that its facilities will be year 2000 compliant by the end of 1999 and
the owners of such facilities will remedy any problems encountered,.
The Company believes that all of the material products that it currently sells
are year 2000 compliant or can be made compliant with minor modifications.
However, as many of the Company's products are complex, interact with third-
party products, and operate on computer systems that are not under the Company's
control, there can be no assurance that the Company has identified all of the
year 2000 issues with its current products. The Company is continuing to test
and evaluate such products and may offer upgrades to alternative products where
reasonably practicable.
The Company has identified and contacted suppliers, vendors, and customers that
are believed to be significant to the Company's business operations in order to
assess their year 2000 readiness. As part of this effort, the Company used
questionnaires relating to year 2000 compliance that were distributed to its
significant suppliers, vendors, and customers. The Company has followed-up and
continues to monitor the year 2000 compliant progress of significant suppliers,
vendors, and customers that indicate that they are not year 2000 compliant or
that do not respond to the Company's questionnaires. The Company has developed
a contingency plan that will allow its primary business operations to continue
despite disruptions due to year 2000 issues. These plans include identifying
and securing other suppliers, increasing inventories, and modifying production
facilities and schedules. As the Company continues to evaluate the year 2000
readiness of its products and significant suppliers, vendors, and customers, it
will modify and adjust its contingency plan as may be required.
To date, costs incurred in connection with the year 2000 issue have not been
material. The Company does not expect total year 2000 remediation costs to be
material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. If any of the
Company's material suppliers, vendors, or customers experience business
disruptions due to year 2000 issues, the Company might also be materially
adversely affected. While the Company is attempting to minimize any negative
consequences arising from the year 2000 issue, there can be no assurance that
year 2000 issues will not have a material adverse impact on the Company's
business, operations, or financial condition.
13
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 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;
[_] risks associated with year 2000 issues; and
[_] general economic and political conditions and other factors affecting
spending by customers.
Any of these factors could have a material adverse impact on the Company's
operations and financial results.
14
VIISAGE TECHNOLOGY, INC.
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES
In July 1999, the Company completed a $1.5 million private placement of Series A
Convertible Preferred Stock (the "preferred stock") and warrants with a private
equity fund. The preferred stock accrues dividends at 7% per annum, payable in
cash or stock at the Company's option upon conversion. Subject to certain
limits on the number of shares the holder can convert at any one time, the
holder can convert up to 50% of the preferred stock into shares of the Company's
common stock beginning six months after closing and the balance beginning nine
months after closing. Shares can be converted at the lesser of $3.00 per share
or 85% of the market price prior to conversion of the Company's common stock for
conversions within ten months from the closing date or 77% of the market price
prior to conversion for conversions after ten months from the closing date. The
Company has the right at any time to redeem the preferred shares. Subject to
certain volume limitations, the preferred stock is required to be converted into
the Company's common stock on June 30, 2002. Within ten (10) business after the
Mandatory Conversion Date, the Company may either (i) redeem the outstanding
shares of Series A Preferred Stock, together with all accrued and unpaid
dividends thereon, in cash, to the date of redemption or (ii) extend the
Mandatory Conversion Date for a period of one year. The Company has agreed to
register for resale the common stock underlying the preferred shares, related
dividends and warrants. This transaction was an exempt transaction under Section
4(2) of the Securities Act of 1933, as amended. In connection with this
transaction, the Company paid an investment banking fee of $112,500 and warrants
to purchase 75,000 shares of the Company's common stock, exercisable for three
years, at an exercise price of $1.79 per share which was 130% of the then
current closing price of the Company's common stock. The Company also issued
warrants to purchase 75,000 shares of the Company's common stock, exercisable
for three years, at an exercise price of $1.58 per share to the investor.
On October 14, 1999, subsequent to the balance sheet date, Lau Technologies
exercised an option to convert $800,000, 4%, subordinated convertible debt, plus
accrued interest of $32,000, into 526,582 shares of the Company's common stock
at the conversion price of $1.98 per share.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K dated November 3, 1999 was filed with the
Commission on November 8, 1999. The report includes information under
Item 4 concerning the dismissal of the Company's independent public
accountants and the engagement of new independent public accountants.
15
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 10, 1999 By: /s/ Thomas J. Colatosti
------------------------------
Thomas J. Colatosti
President and Chief Executive Officer
By: /s/ Thomas J. Colatosti
----------------------------
Thomas J. Colatosti
Chief Financial Officer (acting)
16