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 April 1, 2001.
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Porter Road, Littleton, MA 01460
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (978) 952-2200
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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 May 7, 2001
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Common stock, $.001 par value 16,410,926
1
VIISAGE TECHNOLOGY, INC.
FORM 10-Q FOR THE QUARTER ENDED APRIL 1, 2001
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INDEX
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Page
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Facing Sheet........................................................................... 1
Index.................................................................................. 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance Sheets as of April 1, 2001 and December 31, 2000.................... 3
Statements of Operations for the three months ended April 1, 2001
and April 2, 2000........................................................... 4
Statements of Cash Flows for the three months ended April 1, 2001
and April 2, 2000........................................................... 5
Notes to Financial Statements............................................... 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................... 9
Item 3 - Quantitative and Qualitative Disclosure About Risk.......................... 11
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings........................................................... 12
Item 2 - Changes in Securities....................................................... 12
Item 3 - Defaults by the Company on its senior securities............................ 12
Item 4 - Submission of Matters to a Vote of Security Holders......................... 12
Item 5 - Other Information........................................................... 12
Item 6 - Exhibits and Reports on Form 8-K............................................ 12
SIGNATURES............................................................................. 13
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VIISAGE TECHNOLOGY, INC.
Balance Sheets
(in thousands)
April 1, December 31,
2001 2000
--------------- ---------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ - $ -
Accounts receivable 3,944 3,305
Costs and estimated earnings in excess of billings 28,178 26,338
Other current assets 811 601
--------------- ----------------
Total current assets 32,933 30,244
Property and equipment, net 13,183 14,605
Other assets 400 424
--------------- ----------------
$ 46,516 $ 45,273
=============== ================
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 11,354 $ 10,331
Convertible subordinated debt - 1,000
Obligations under capital leases 3,418 3,688
--------------- ----------------
Total current liabilities 14,772 15,019
Long-term debt 3,154 2,515
Obligations under capital leases 4,051 4,749
Obligations under related party capital leases 2,148 2,262
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24,125 24,545
Shareholders' equity 22,391 20,728
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$ 46,516 $ 45,273
=============== ================
The accompanying notes are an integral part of these financial
statements.
3
Viisage Technology, Inc.
Statements of Operations
(in thousands, except per share data)
(Unaudited)
Three Months Ended
---------------------------------------
April 1, April 2,
2001 2000
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Revenues $ 6,368 $ 5,336
Project costs 4,721 3,855
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Project margin 1,647 1,481
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Operating Expenses:
Sales and marketing 153 194
Research and development 449 18
General and administrative 520 604
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Total operating expenses 1,122 816
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Operating income 525 665
Interest expense 307 478
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Income before income taxes 218 187
Provision for income taxes - -
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Net income 218 187
Preferred stock dividend 5 92
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Net income applicable to common shareholders $ 213 $ 95
============== ==============
Net income per basic share $ .01 $ .01
============== ==============
Basic shares $ 15,488 $ 9,711
============== ==============
Net income per diluted share $ .01 $ .01
============== ==============
Diluted shares 15,966 12,803
============== ==============
The accompanying notes are an integral part of these financial
statements.
4
VIISAGE TECHNOLOGY, INC.
Statements of Cash Flows
(in thousands)
(Unaudited)
Three Months Ended
------------------
April 1, April 2,
2001 2000
---- ----
Cash Flows from Operating Activities:
Net income $ 218 $ 187
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,462 1,151
Directors fees paid in common stock 68 -
Change in operating assets and liabilities:
Accounts receivable (639) (604)
Costs and estimated earnings in excess of billings (1,840) (644)
Other current assets (8) 59
Accounts payable and accrued expenses 1,023 184
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Net cash provided by operating activities 284 333
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Cash Flows from Investing Activities:
Additions to property and equipment (16) 106
Decrease in other assets - 61
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Net cash provided (used for) by investing activities (16) 167
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Cash Flows from Financing Activities:
Net revolving credit borrowings 639 -
Principal payments on long-term borrowings - (2,600)
Principal payments on obligations under capital leases (1,082) (961)
Net proceeds from issuance of common stock 175 2,625
------------ -----------
Net cash used for financing activities (268) (936)
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Net decrease in cash and cash equivalents - (436)
Cash and cash equivalents, beginning of period - 441
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Cash and cash equivalents, end of period $ - $ 5
============ ===========
Supplemental Cash Flow Information:
Cash paid during the period for interest $ 296 $ 458
============ ===========
Cash paid during the period for income taxes $ - $ -
============ ===========
Non Cash Activities:
Directors fees paid in common stock $ 270 $ -
============ ===========
Conversion of convertible debt to common stock $ 1,000 $ 606
============ ===========
The accompanying notes are an integral part of these financial statements
5
VIISAGE TECHNOLOGY, INC.
Notes To Financial Statements
1. DESCRIPTION OF BUSINESS
Viisage Technology, Inc. (Viisage or the Company) 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 identification cards, law enforcement, social services,
access control and PC network and Internet access security. Viisage's primary
customers have been government agencies with particular penetration in
Departments of Motor Vehicles. The Company has captured approximately 30% of the
domestic driver's license market. Viisage products annually produce more than 20
million identification documents at more than 1,200 locations in 13 states. The
Company has also provided services under subcontracts for projects in Jamaica,
the Philippines and for the U.S. Immigration and Naturalization Service.
Originally developed at MIT, face-recognition technology is widely recognized as
the most convenient, non-intrusive and cost-effective biometric available.
Viisage's patented face-recognition technology is focused on five major product
application areas.
FaceEXPLORER(TM), Viisage's technology for image retrieval and analysis, is
recognized for its leadership technology performance in real-time and large-
database applications. FaceEXPLORER is deployed in the world's largest face-
recognition application with a database of more than 7 million enrolled images
and growing by 15,000 new images per day. The product family of face-recognition
applications also includes: FaceNET(TM) for Internet and e-commerce security;
FacePIN(TM) for point-of-sale transactions verification; FacePASS(TM) used for
physical access control and keyless entry FaceFINDER(TM) for surveillance and
identification.
The Company is engaged in one business, the development and implementation of
digital identification systems and solutions. The Company has an integrated
business model: identification solutions through system integration systems and
biometric software. Previously the Company reported two business segments,
however the Company's current mission is to design, develop and deliver
integrated identification solutions. Substantially all of the Company's revenues
have been derived within the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial data as of April 1, 2001 and December 31, 2000, and
for the three month periods ended April 1, 2001 and April 2, 2000, have been
prepared by the Company, 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, 2000 balance sheet was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. 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, 2000.
6
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 April 1, 2001 and for the three
month periods ended April 1, 2001 and April 2, 2000, have been made. The results
of operations for the period ended April 1, 2001 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.
These assumptions affect the reported amounts of assets and liabilities,
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.
Computation of Net Income per Share
The basic net income per share calculation is computed based on the weighted
average number of shares of common stock during the period. The impact of
certain options outstanding for approximately 2,445,000 shares of common stock,
the conversion of convertible subordinated debt, the conversion of convertible
preferred stock, and stock warrants are reflected in the April 1, 2001 dilutive
net income per share calculation. The impact of certain options outstanding for
approximately 1,861,000 shares of common stock, the conversion of convertible
subordinated debt, the conversion of convertible preferred stock, and stock
warrants are reflected in the April 2, 2000 dilutive net income per share
calculation.
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
Currently, Lau Technologies (Lau) owns approximately 41% of the company.
Readers are referred to the "Notes to Financial Statements" section of the
Company's 2000 Annual Report to Shareholders for further discussion.
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, as defined, under these agreements. Through
April 1, 2001, no royalties have been earned.
The Company has also obtained from Lau, an exclusive (except for limited fields
reserved by Lau), perpetual, worldwide license to use the U.S. patent 5,432,864
purchased by Lau from Daozeng Lu and Simon Lu, and all improvements thereto,
which relates to a system for automatically verifying the identity of an
individual using identification parameters that are carried on an escort memory
such as an identification or credit card. This license requires royalty
payments to Lau for each unit sold or licensed by Viisage. The agreement also
requires the issuance of 50,000 shares of Viisage common stock to Lau following
the royalty commencement date. No royalty amount has been incurred to date and
therefore the royalty commencement date has not been established.
The Company has a project lease financing arrangement with Lau that provides for
up to $5.0 million of capital lease financing with $2.6 million outstanding at
April 1, 2001, of which $0.5 million is included in the current portion of
capital lease obligations. Readers are referred to the "Notes to Financial
Statements" section of the Company's 2000 Annual Report to Shareholders for
further discussion.
7
In January 2001, Lau converted its $1,000,000 subordinated note and accrued
interest into 847,354 shares of common stock.
In January 2001, 370 shares of the series A preferred stock and accrued
dividends were converted into 655,565 shares of common stock.
In January 2001, 650 shares of the series B preferred stock and accrued
dividends were converted into 796,593 shares of common stock.
In January and February of 2001, Strong River Investments, Inc. received
1,106,203 shares of common stock from the December 2000 cashless exercise of its
second adjustable warrant.
In February 2001, Strong River Investments, Inc. exercised its third and final
adjustable warrant for 1,586,305 shares and has received 1,481,305 shares of
common stock from the company through a cashless exercise.
5. BUSINESS SEGMENTS
The Company is engaged in one business, the development and implementation of
digital identification systems and solutions. The Company has an integrated
business model: identification solutions through system integration systems and
biometric software. Previously the Company reported two business segments,
however the Company's current mission is to design, develop and deliver
integrated identification solutions. Substantially all of the Company's revenues
have been derived within the United States.
8
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 2000
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
Revenues are derived principally from multi-year contracts for systems
implementation, card production and related services. Revenues for the first
quarter of 2001 were approximately $6,368,000, compared to approximately
$5,336,000 for the first quarter of 2000. The 19.3% increase in revenue between
the two three-month periods was primarily a result of new contracts with the
state of Pennsylvania and the Republic of Uganda and extensions with our
existing customers.
Gross margins decreased to 25.9% in the first quarter of 2001 from 27.8% in the
first quarter of 2000. The decrease in gross margins between the two three-month
periods is due principally to the impact of lower margin business on the overall
revenue mix in 2001.
Sales and marketing expenses decreased approximately $41,000 in the first
quarter of 2001 from the first quarter of 2000. This represents a decrease to
2.4% from 3.6% of revenue for the quarter to quarter period. The decrease is
due principally to the Company's continuing efforts to increase its distribution
and marketing capabilities for its facial recognition solutions by adding and
certifying new system integrators and reseller partners. This allows the
company to control its costs while increasing its marketing capabilities.
Research and development expenses increased approximately $431,000 in the first
quarter of 2001 from the first quarter of 2000. This represents an increase to
7.1% from 0.3% of revenue for the quarter to quarter period. The increase is due
principally to the company's continued investment in the biometrics division.
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 Company.
General and administrative expenses decreased by approximately $84,000 in the
first quarter of 2001 from the first quarter of 2000. This represents a decrease
to 8.2% from 11.3 % of revenue for the quarter to quarter periods. The decrease
in expenses is due principally to the company's continuing efforts to control
its costs while growing the business.
Interest expense decreased approximately $171,000 in the first quarter of 2001
over the first quarter of 2000. This represents a decrease to 4.8% from 9.0% of
revenue for the quarter to quarter period. This decrease reflects the impact of
the company's continuing efforts to reduce the overall debt structure and
interest expense.
9
No provision for income taxes has been made in the current period due to the
available net operating loss carry forwards. The Company did not record a tax
benefit for the remaining net operating loss carry forwards due to the
uncertainty of when such benefit will be realized.
RECENT ACCOUNTING PRONOUNCEMENTS
None.
LIQUIDITY AND CAPITAL RESOURCES
In June 2000, the Company refinanced its operating line of credit. The new
revolver, which provides for available borrowings up to $4.0 million is a sweep
account, which is set up to maintain the lowest possible balance on the revolver
by maintaining a zero balance of cash at all times. The line of credit contains
various financial covenants and is collaterized by substantially all of the
Company's assets. At the end of the first quarter 2001, $3.2 million of the $4.0
million credit line had been utilized.
Accounts receivable increased approximately 19.3% from December 31, 2000 to
April 1, 2001 due to the increase in business volume.
Costs and estimated earnings in excess of billings increased approximately 7.0%
from December 31, 2000 to April 1, 2001, which reflects the unbilled
accumulation of costs for new contract awards.
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 also has system project lease financing arrangements with commercial
leasing organizations. Pursuant to these arrangements, 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 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 in the lease agreements. These project lease arrangements are
accounted for as capital leases. The current arrangement provides for project
financing of up to $15.0 million. At April 1, 2001, the Company had
approximately $7.0 million outstanding under the lease financing arrangement.
The Company has a similar project lease financing arrangement with Lau that
provides for up to $5.0 million of capital leases financing with $2.6 million
outstanding at April 1, 2001, of which $0.5 million is included in the current
portion of capital lease obligations.
The Company believes that it will continue to meet its debt covenants. However,
this expectation is dependent in part on achieving business forecasts. If the
Company does not meet such covenants, the bank and the lessor could require
immediate repayment of outstanding amounts.
The Company believes that if it meets its business forecast for 2001, cash flows
from available borrowings, project leasing, operations and capital raising will
be sufficient to meet its working capital and capital expenditure needs for the
foreseeable future.
10
ITEM 3 - QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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.
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 inherent in 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;
. 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. The Company cautions the reader that this list
of risk factors may not be complete. The Company undertakes no obligation to
update these forward-looking statements to reflect any future events or
circumstances.
11
VIISAGE TECHNOLOGY, INC.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None.
ITEM 2 - CHANGES IN SECURITIES
The following transactions occurred during the first quarter of 2001 with
respect to the Company's capital stock. Each of the transactions described below
involved the conversion of the Company's outstanding securities into shares of
the Company's common stock. Each transaction was exempt from the registration
requirements of the Securities Act of 1933 under Section 4(2) of the Securities
Act.
In January 2001, Lau converted its $1,000,000 subordinated note and accrued
interest into 847,354 shares of common stock.
In January 2001, 370 shares of the series A preferred stock and accrued
dividends were converted into 655,565 shares of common stock.
In January 2001, 650 shares of the series B preferred stock and accrued
dividends were converted into 796,593 shares of common stock.
In January and February of 2001, Strong River Investments, Inc. received
1,106,203 shares of common stock from the December 2000 cashless exercise of its
second adjustable warrant.
In February 2001, Strong River Investments, Inc. exercised its third and final
adjustable warrant for 1,586,305 shares and has received 1,481,305 shares of
common stock from the company through a cashless exercise.
ITEM 3 - DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
Not applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None
12
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 9, 2001 By: /s/ Thomas J. Colatosti
----------------------------
Thomas J. Colatosti
President and Chief Executive Officer
By: /s/ Sean F. Mack
--------------------------
Sean F. Mack
Vice President, Controller and
Treasurer
13