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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 30, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________.
Commission File Number 000-21559
VIISAGE TECHNOLOGY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3320515
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Porter Road, Littleton, MA 01460
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508)-952-2200
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1997
- ------------------------------- -----------------------------
(Common stock, $.001 par value) 8,055,000
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VIISAGE TECHNOLOGY, INC.
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Balance Sheets as of March 30, 1997 and December 31, 1996.. 1
Condensed Statements of Operations for the three months
ended March 30, 1997 and March 31, 1996.............................. 2
Condensed Statements of Cash Flows for the three months
ended March 30, 1997 and March 31, 1996.............................. 3
Notes to Condensed Financial Statements.............................. 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 5
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................. 8
Item 6 - Exhibits and Reports on Form 8-K.............................. 8
SIGNATURES................................................................ 9
i
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PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
VIISAGE TECHNOLOGY, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,476 $ 11,073
Accounts receivable 1,693 1,499
Costs and estimated earnings in excess
of billings 22,132 16,445
Other current assets 402 338
----------- ------------
Total current assets 30,703 29,355
Property and equipment, net 5,926 5,857
Other assets 903 907
----------- ------------
$ 37,532 $ 36,119
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 7,557 $ 7,288
Accrued and deferred income taxes 492 190
Obligations under capital leases 1,421 1,201
----------- ------------
Total current liabilities 9,470 8,679
Obligations under capital leases 4,473 4,420
----------- ------------
13,943 13,099
Shareholders' equity 23,589 23,020
----------- ------------
$ 37,532 $ 36,119
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
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VIISAGE TECHNOLOGY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MARCH 30, MARCH 31,
1997 1996
--------- ---------
<S> <C> <C>
Revenues $7,178 $5,737
Project Costs 5,149 4,711
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Project margin 2,029 1,026
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Operating expenses:
Sales and marketing 572 356
Research and development 35 85
General and administrative 484 392
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Total operating expenses 1,091 833
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Operating income 938 193
Interest income (expense), net 6 (187)
--------- ---------
Income before income taxes 944 6
Income taxes 375 --
--------- ---------
Net income $ 569 $ 6
========= =========
Net income per share $ 0.07 $ Nil
========= =========
Weighted average common and equivalent
shares 8,666 6,225
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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VIISAGE TECHNOLOGY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MARCH 30, MARCH 31,
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 569 $ 6
Adjustments to reconcile net income to net cash
(used) by operating activities:
Depreciation and amortization 344 8
Stock compensation expense --- 37
Changes in operating assets and liabilities:
Accounts receivable (194) (1,901)
Costs and estimated earnings in excess
of billings (5,687) (327)
Other current assets (64) (9)
Accounts payable and accrued expenses 441 806
Accrued and deferred taxes 302 ---
--------- ---------
Net cash (used) by operating activities (4,289) (1,380)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract equipment converted to capital leases (300) ---
Additions to property and equipment (113) (19)
Other assets 4 ---
--------- ---------
Net cash (used) by investing activities (409) (19)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net revolving credit borrowings --- 1,740
Proceeds from sale/leaseback of equipment 300 ---
Principal payments on obligations under capital leases (199) (128)
Net transactions with parent --- (213)
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Net cash provided by financing activities 101 1,399
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Decrease in cash and cash equivalents (4,597) ---
Cash and cash equivalents, beginning of period 11,073 ---
--------- ---------
Cash and cash equivalents, end of period $ 6,476 $ ---
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest $ 71 $ 187
========= =========
Cash paid during the period for income taxes $ 73 $ ---
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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VIISAGE TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The financial information included herein is unaudited, however, the
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods presented. These financial statements should be read in
conjunction with the financial statements and notes thereto and management's
discussion and analysis of financial condition and results of operations
included in the Company's 1996 Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The results of operations for the period ended March 30, 1997 are not
necessarily indicative of the operating results to be expected for the full
year.
The condensed balance sheet as of December 31, 1996 has been derived from
the audited financial statements at that date.
Approximately $172,000 of accrued capital lease interest was transferred
from accounts payable and accrued expenses to obligations under capital leases
during the first quarter of 1997.
Note 2. Income Taxes
The Company's operations prior to November 6, 1996 were included in the
income tax returns of Lau Acquisition Corp. d/b/a Lau Technologies, an S
corporation. Income tax allocations for periods prior to November 6, 1996 have
been calculated as if the Company were filing separate income tax returns taking
into consideration that operating losses and tax credits have been utilized by
the shareholders of Lau Technologies.
Note 3. Net Income Per Share
Net income per share is computed based on the weighted average number of
common and common equivalent shares outstanding during the period. For 1997,
this number is comprised of 8,055,000 shares of common stock and 611,000 shares
related to common equivalents. For 1996, this number is comprised of 5,680,000
shares of common stock and 545,000 shares related to common equivalents.
Pursuant to certain requirements of the Securities and Exchange Commission,
common and common equivalent shares issued during the 12 months prior to the
initial public offering on November 8, 1996 (using the treasury stock method)
have been included in the calculation of weighted average shares for 1996.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, which
establishes standards for computing and presenting earnings per share for
entities with publicly held common stock or potential common stock. SFAS No.
128 is effective for periods ending after December 15, 1997 and early adoption
is not permitted. Under the new pronouncement, net income per share would not
be materially different from the amounts presented.
4
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VIISAGE TECHNOLOGY, INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto and risk factors contained in the
Company's 1996 Form 10-K.
The following discussion and analysis contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in the
section below entitled "Certain Factors That May Affect Future Results." The
cautionary statements made herein should be read as being applicable to all
related forward-looking statements in this Form 10-Q.
Overview
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Viisage develops and implements turnkey digital identification systems and
solutions intended to deter fraud, reduce customers' identification program
costs and improve security. The Company combines its systems integration and
software design capabilities with its proprietary software and hardware products
and other best-in-class products to create complete customized solutions.
Viisage's products are currently operating at over 450 locations. Applications
can include systems and cards for national ID's, driver's licenses, social
services, voter registration, law enforcement, corrections, healthcare,
financial services, retail and access control Viisage is also commercializing
patented facial recognition technology for the real-time identification and
verification of individuals.
Viisage provides systems and services principally under contracts that
have five-year terms and provide for several annual renewals after the initial
contract term. Contracts generally provide for a fixed price for the system
and/or for each card produced. Contract prices vary depending on, among other
things, design and integration complexities, the nature and number of
workstations and sites, the projected number of cards to be produced, the level
of post-installation support and the competitive environment. Substantially all
of the Company's revenues are currently derived from public sector customers and
contractors to such customers. The Company believes for the foreseeable future
that it will continue to derive a significant portion of its revenues from a
limited number of large contracts. For the three months ended March 30, 1997,
three customers each accounted for more than 10% of the Company's revenues and
an aggregate of 55% of revenues for the period.
The Company's results of operations are significantly affected by, among
other things, the timing of award and performance on contracts. As a result, the
Company's revenues and income may fluctuate from quarter to quarter, and
comparisons over longer periods of time may be more meaningful. The Company's
results of operations are not seasonal since contracts are awarded and performed
throughout the year.
Results of Operations
- ---------------------
Revenues. Revenues are derived principally from systems implementation, card
production and related services under multi-year contracts. Revenues increased
25% to $7.2 million for the quarter ended March 30, 1997 from $5.7 million for
the comparable period in 1996. This increase was due to an increase in the
number of contracts being performed during the 1997 period.
Project Costs and Margin. Project costs consist primarily of hardware,
consumables (printer ribbons, cards, holographic overlays, etc.), system design,
software development and implementation labor, maintenance and overhead. As a
percentage of revenues, project costs decreased to 72% for the quarter ended
March 30, 1997 from 82% for the comparable period in 1996. This decrease
reflects cost savings on design, development and implementation activities
resulting from the Company's increased experience with and resources for digital
identification solutions. Project margin increased 98% to $2.0 million (28% of
revenues) for the quarter ended March 30, 1997 from $1.0 million (18% of
revenues) for the comparable period in 1996. This increase reflects the
increases in revenues and cost savings
5
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discussed above. The Company believes it could experience further improvements
in project margin from project cost savings and improved pricing. However, there
can be no assurance that such improvements will be achieved.
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation and professional service fees for marketing, bid and proposal and
customer support activities. Sales and marketing expenses increased 61% to
$572,000 for the quarter ended March 30, 1997 from $356,000 for the comparable
period in 1996. This increase principally reflects an increase in proposal
activity and the addition of marketing personnel during the second half of 1996
and early 1997. As a percentage of revenues, sales and marketing expenses
increased to 8% for 1997 from 6% for 1996 due to such expenses increasing at a
greater rate than revenues during 1997. The Company anticipates that it will
continue to make significant expenditures for sales and marketing as it adds
resources and initiates operations in additional markets.
Research and Development. Research and development expenses consist principally
of compensation, outside services and materials utilized for product and
software development activities that are not related to specific projects.
Research and development expenses decreased 59% to $35,000 for the quarter ended
March 30, 1997 from $85,000 for the comparable period in 1996. Expenditures for
1997 and 1996 relate primarily to the Company's facial recognition products and
do not reflect the benefits to the Company under license arrangements from the
research and development efforts of Lau Technologies and the Massachusetts
Institute of Technology for projects that are not directly related to Viisage.
General and Administrative. General and administrative expenses consist
principally of compensation for executive management, finance and administrative
personnel and outside professional fees. General and administrative expenses
increased 23% to $484,000 for the quarter ended March 30, 1997 from $392,000 for
the comparable period in 1996. This increase was due primarily to the growth in
the Company's business and increased administrative costs associated with being
a public company. As a percentage of revenues, general and administrative
expenses remained constant at 7%.
Interest Income (Expense), Net. The increase in net interest income to $6,000
for the quarter ended March 30, 1997 from net interest expense of $187,000 for
the comparable period in 1996 principally reflects interest earned on cash
equivalents during the first quarter of 1997 as well as the reduced level of
borrowings during the 1997 period.
Income Taxes. The provision for income taxes for the first quarter of 1997
reflects the Company's anticipated 1997 tax rate of approximately 40%. The
Company's operations for the 1996 period were included in the income tax returns
of Lau Technologies, an S corporation, and taxed at the lower S corporation
rate.
Liquidity and Capital Resources
- -------------------------------
At March 30, 1997, working capital was $21.2 million compared to $20.7
million at December 31, 1996. The increase in working capital was due primarily
to increases in accounts receivable and costs and estimated earnings in excess
of billings, net of the decrease in cash and cash equivalents and the increase
in accounts payable and accrued expenses.
For the three months ended March 30, 1997, operating and investing
activities utilized cash of approximately $4.3 million and $409,000,
respectively, principally to fund the working capital increases discussed above
and the increase in project assets. Financing was primarily provided by
available cash.
The Company has a revolving line of credit with a commercial bank that
provides for unsecured borrowings of up to $10.0 million through June 1998 at
prime rate or other LIBOR-based options. This agreement requires the Company to
maintain certain financial ratios and minimum levels of earnings and tangible
net worth. The Company also has a system project lease financing arrangement
with a commercial leasing organization providing for project financing of up to
$15.0 million. Pursuant to this arrangement, the lessor purchases certain of the
Company's digital identification systems and leases
6
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them back to Viisage for deployment with identified and contracted customers
approved by the lessor. The lessor retains title to the systems and has an
assignment of Viisage's rights under the related customer contracts, including
rights to use the software and technology underlying the related systems. Under
this arrangement, the lessor bears the credit risk associated with payments by
Viisage's customers, but Viisage bears performance and appropriation risk and is
generally required to repurchase a system in the event of a termination by a
customer for any reason except credit default. These project lease arrangements
are accounted for as capital leases. At March 30, 1997, the Company had $10.0
million available under the revolving line of credit and approximately $10.7
million available under the project lease financing arrangement.
The Company believes that cash flow from operations, available borrowings
and project leasing, will be sufficient to meet the Company's working capital
and capital expenditure needs for at least the next 12 months. There can be no
assurance, however, that additional financing, if needed, will be available on
favorable terms or at all. If the Company is unable to obtain additional
capital, if needed, on acceptable terms the Company may be unable to take full
advantage of future opportunities or respond to competitive pressures, which
could adversely affect the Company's business, financial condition and results
of operations.
Accounting Pronouncement
- ------------------------
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, which
establishes standards for computing and presenting earnings per share for
entities with publicly held common stock or potential common stock. SFAS No.
128 is effective for periods ending after December 15, 1997 and early adoption
is not permitted. Under the new pronouncement, net income per share would not
be materially different from the amounts presented.
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.
7
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VIISAGE TECHNOLOGY, INC.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On September 23, 1996, three minority shareholders of Lau Technologies
filed suit against Lau Technologies, the Company and others in Superior Court in
Berkshire County, Massachusetts, alleging that certain defendants breached the
fiduciary duty owed the plaintiffs as shareholders of Lau Technologies. In April
1997, the plaintiffs agreed to dismiss all of their claims against the
defendants. The Company incurred no liability to the plaintiffs in connection
with this matter and all the defendants' litigation expenses have been or will
be paid for by Lau Technologies.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
8
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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, 1997 By: /s/ Robert C. Hughes
--------------------------
Robert C. Hughes
President and Chief Executive Officer
By: /s/ William A. Marshall
----------------------------
William A. Marshall
Chief Financial Officer
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR PERIOD ENDED MARCH 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-30-1997
<CASH> 6,476
<SECURITIES> 0
<RECEIVABLES> 1,693
<ALLOWANCES> 0
<INVENTORY> 22,132<F1>
<CURRENT-ASSETS> 30,703
<PP&E> 5,926
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,532
<CURRENT-LIABILITIES> 9,470
<BONDS> 4,473<F2>
0
0
<COMMON> 8
<OTHER-SE> 23,581
<TOTAL-LIABILITY-AND-EQUITY> 37,532
<SALES> 7,178
<TOTAL-REVENUES> 7,178
<CGS> 5,149
<TOTAL-COSTS> 6,240<F3>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (6)<F4>
<INCOME-PRETAX> 944
<INCOME-TAX> 375
<INCOME-CONTINUING> 569
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 569
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
<FN>
<F1>REPRESENTS COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS.
<F2>REPRESENTS OBLIGATIONS UNDER CAPITAL LEASES.
<F3>INCLUDES PROJECT COSTS AND OPERATING EXPENSES.
<F4>INCLUDES INTEREST EXPENSE AND INTEREST INCOME.
</FN>
</TABLE>
