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 June 30, 2002.
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
--------------------
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 August 8, 2002
----------------------------- -----------------------------
Common stock, $.001 par value 20,055,274
1
VIISAGE TECHNOLOGY, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002
INDEX
Page
Facing Sheet ........................................................................ 1
Index ............................................................................... 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance Sheets as of June 30, 2002 and December 31, 2001 ............ 3
Statements of Operations for the three months and six months
ended June 30, 2002 and July 1, 2001 ................................ 4
Statements of Cash Flows for the six months
ended June 30, 2002 and July 1, 2001 ................................ 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 Market Risk ............. 12
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings ..................................................... 13
Item 2 - Changes in Securities ................................................. 13
Item 3 - Defaults by the Company on its Senior Securities ...................... 13
Item 4 - Submission of Matters to a Vote of Security Holders ................... 13
Item 5 - Other Information ..................................................... 13
Item 6 - Exhibits and Reports on Form 8-K ...................................... 13
SIGNATURES .......................................................................... 15
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VIISAGE TECHNOLOGY, INC.
Condensed Balance Sheets
(in thousands)
*December 31,
June 30, 2002 2001
-------------------- ---------------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 11,958 $ 20,662
Accounts receivable 6,410 4,821
Costs and estimated earnings in excess of billings 26,047 23,331
Other current assets 1,076 302
-------------------- ---------------------
Total current assets 45,491 49,116
Property and equipment, net 16,120 18,178
Other assets 4,073 369
-------------------- ---------------------
$ 65,684 $ 67,663
==================== =====================
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 7,920 $ 6,724
Current portion of project financing 4,342 4,277
-------------------- ---------------------
Total current liabilities 12,262 11,001
Project financing 8,156 10,368
-------------------- ---------------------
Total liabilities 20,418 21,369
Shareholders' equity 45,266 46,294
-------------------- ---------------------
$ 65,684 $ 67,663
==================== =====================
* Derived from audited financial statements.
The accompanying notes are an integral part of these financial statements.
3
Statements of Operations
(in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
-------------------------------- ----------------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
--------------- ------------- ------------- ---------------
Revenues $ 9,038 $ 6,871 $ 15,437 $ 13,239
Project costs 7,468 5,248 12,553 9,969
--------------- ------------- ------------- ---------------
Project margin 1,570 1,623 2,884 3,270
--------------- ------------- ------------- ---------------
Operating Expenses:
Sales and marketing 1,700 67 2,562 220
Research and development 1,315 416 1,821 865
General and administrative 1,136 635 1,734 1,156
--------------- ------------- ------------- ---------------
Total operating expenses 4,151 1,118 6,117 2,241
--------------- ------------- ------------- ---------------
Operating income (loss) (2,581) 505 (3,233) 1,029
Interest expense 224 285 429 592
--------------- ------------- ------------- ---------------
Income (loss) before income taxes (2,805) 220 (3,662) 437
Provision for income taxes - - - -
--------------- ------------- ------------- ---------------
Net income (loss) (2,805) 220 (3,662) 437
Preferred stock dividends - - - 5
--------------- ------------- ------------- ---------------
Net income (loss) applicable to common
shareholders $ (2,805) $ 220 $ (3,662) $ 432
=============== ============= ============= ===============
Basic net income (loss) per share $ (0.14) $ 0.01 $ (0.18) $ 0.03
=============== ============= ============= ===============
Basic shares 19,960 16,446 19,891 15,970
=============== ============= ============= ===============
Diluted net income (loss) per share $ (0.14) $ 0.01 $ (0.18) $ 0.03
=============== ============= ============= ===============
Diluted shares 19,960 16,863 19,891 16,337
=============== ============= ============= ===============
The accompanying notes are an integral part of these financial statements.
4
VIISAGE TECHNOLOGY, INC.
Statements of Cash Flows
(in thousands)
(Unaudited)
Six Months Ended
-------------------------------------------------------
June 30, July 1,
2002 2001
---------------------- ----------------------
Cash Flows from Operating Activities:
Net income (loss) $ (3,662) $ 437
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities, net of effects
of acquisitions:
Depreciation and amortization 2,855 2,851
Directors fees paid in common stock 170 135
Change in operating assets and liabilities:
Accounts receivable (1,006) (950)
Costs and estimated earnings in excess of billings (2,393) (2,601)
Other current assets (564) 99
Accounts payable and accrued expenses 1,309 372
---------------------- ----------------------
Net cash provided by (used for) operating activities (3,291) 343
---------------------- ----------------------
Cash Flows from Investing Activities:
Additions to property and equipment (913) (36)
Cash paid for an acquisition (2,747) -
Increase in other assets (208) 83
---------------------- ----------------------
Net cash provided by (used for) investing activities (3,868) 47
---------------------- ----------------------
Cash Flows from Financing Activities:
Proceeds from sale/leaseback of equipment - 1,890
Principal payments on long-term borrowings - (241)
Principal payments on project financing (2,148) (2,081)
Net proceeds from issuance of common stock 603 42
---------------------- ----------------------
Net cash used for financing activities (1,545) (390)
---------------------- ----------------------
Net decrease in cash and cash equivalent (8,704) -
Cash and cash equivalents, beginning of period 20,662 -
---------------------- ----------------------
Cash and cash equivalents, end of period $ 11,958 $ -
====================== ======================
Supplemental Cash Flow Information:
Cash paid during the period for interest $ 431 $ 569
====================== ======================
Non Cash Activities:
Directors fees paid in common stock $ 170 $ 270
====================== ======================
Services paid in common stock $ 320 $ -
====================== ======================
Conversion of convertible debt to common stock $ - $ 65
====================== ======================
Net assets acquired from Lau Technologies $ 1,384 $ -
====================== ======================
Conversion of preferred stock to common stock $ - $ 1,068
====================== ======================
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 31% of the
domestic driver's license market. Viisage products annually produce more than 25
million identification documents at more than 1,200 locations in 15 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 10.3 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 and
FaceFINDER(TM) for surveillance and identification.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial data as of June 30, 2002 and December 31, 2001, and
for the three and six month periods ended June 30, 2002 and July 1, 2001, 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, 2001 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,
2001.
The financial statements as of and for the three and six months ended June 30,
2002 include the assets and liabilities of Biometrica Systems, Inc.
("Biometrica") as of June 30, 2002 and the results of its operations and its
cash flows from March 18, 2002 (date of acquisition) to June 30, 2002. All
intercompany accounts and transactions have been eliminated in consolidation
(see Note 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 June 30, 2002 and for the three and
six month
6
periods ended June 30, 2002 and July 1, 2001, have been made. The results of
operations for the period ended June 30, 2002 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 estimates and 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 (Loss) per Share
The basic net income (loss) per share calculation is computed based on the
weighted average number of shares of common stock outstanding during the period.
The impact of approximately 2,643,000 shares of common stock consisting of
certain outstanding options and stock warrants were not reflected in the June
30, 2002 dilutive net loss per share calculation. The impact of approximately
878,000 shares of common stock consisting of certain outstanding options and
stock warrants were included in the July 1, 2001 dilutive net income per share
calculation. The impact of certain options outstanding for approximately
2,058,000 shares of common stock, the conversion of convertible subordinated
debt, the conversion of convertible preferred stock, and stock warrants were not
reflected in the July 1, 2001 dilutive net income per share calculation.
Potentially dilutive securities are excluded from the calculation of diluted
earnings per share if their effect is anti-dilutive.
3. INCOME TAXES
No provision for income taxes has been made in the three-month and six-month
periods in fiscal 2002 and 2001 due to the net loss in 2002 and the available
net operating loss carry-forwards in 2001.
4. RELATED PARTY TRANSACTIONS AND SHAREHOLDERS' EQUITY
Currently, Lau Technologies ("Lau") owns approximately 32% of the Company's
common stock. Readers are referred to the "Notes to Financial Statements"
section of the Company's 2001 Annual Report on Form 10-K for further discussion
(see Note 6).
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. 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.
Substantially all of the Company's revenues are currently derived by its systems
integration and identification card division from contracts with public sector
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 three months ended June 30, 2002 and July 1,
2001, two customers each accounted for more than 10% of the Company's revenues
and an aggregate of approximately 35% and 23%, respectively, of revenues for the
period.
6. ACQUISITIONS
On January 10, 2002, Viisage acquired the assets of Lau Security Systems, a
division of Lau Technologies, including all of its intellectual property,
contracts and distribution channels. The intellectual property acquired from Lau
included, among other things, thirty-one U.S. or foreign patent grants or
applications for inventions relating to facial recognition
7
technologies or the production of identification cards, the patent acquired by
Lau from Daozeng Lu and Simon Lu for verifying the identity of an individual
using identification parameters carried on an escort memory, and numerous
invention disclosures that are being considered for patent application. The
transaction also included an exclusive license of Lau's rights to use the
patented facial recognition technology it licensed from MIT for use in the
federal access control field. As a result of this transaction, certain
obligations on the part of Viisage to license intellectual property to Lau were
terminated. The Company agreed to pay Lau a royalty of 3.1% of the facial
recognition revenues over the next twelve and a half years, up to a maximum of
$27.5 million and assume certain liabilities related to the acquired business.
The assets have been recorded based on a historical cost basis. The estimated
excess of the assets acquired over liabilities assumed has been recorded as
additional paid in capital. A final evaluation of the assets has not been
completed.
On March 18, 2002, Viisage acquired the capital stock of Biometrica
Systems, Inc. ("Biometrica"), a former licensee and distributor of Viisage's
facial recognition technologies in the casino market for approximately $2.4
million in cash. Biometrica's assets included, among other things, intellectual
property relating to the BiometriCam, a compact camera with built-in facial
recognition software. The acquisition was accounted for as a purchase, and
accordingly, the operations of Biometrica are included in the financial
statements since the effective date, the close of business on March 18, 2002.
The purchase price has been allocated to net assets acquired based on their
estimated fair values. The Company has performed an internal review of the
acquired assets and performed a preliminary allocation of the purchase price.
The Company has recorded approximately $ 80,000 in amortization related to the
acquired intangible assets from the date of the acquisition through June 30,
2002. A final appraisal of the assets acquired has not been completed. Pending
the results of the independent appraisal the allocation of the purchase price
will change. However it is not expected that any change would have a material
effect on the financial position or results of operations of the Company.
Results of operations of Biometrica for the period March 19, 2002 to June 30,
2002 were not material.
On June 3, 2002, Viisage acquired all of the intellectual property and related
assets of the Miros division of eTrue.com, a major face recognition firm with
customer installations across the globe, for approximately $275 thousand in
cash. In addition to acquiring patented technology, including Miros' TrueFace(R)
software, Viisage also gained access to an established customer base and new
distribution channels.
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 2001
Annual Report on Form 10-K and in this Form 10-Q.
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.
Critical Accounting Policies
The Company considers the following accounting policies critical to its results
of operations and financial condition:
- Contract Revenue and Cost Recognition
The Company provides services principally under contracts that provide
for a fixed price for each system and/or for each identification card
produced. Revenue is recognized using the percentage of completion
method based on labor costs incurred and/or cards produced. Contract
losses, if any, are recognized in the period in which they become
determinable. Costs and estimated earnings in excess of billings are
recorded as a current asset. Billings in excess of costs and estimated
earnings and accrued contract costs are recorded as current
liabilities. Generally, contracts provide for billing when contract
milestones are met and/or cards are produced. These contracts are
typically long term contracts, typically five years or longer. The
values of these contracts are based on estimates of volume for
identification cards to be produced. Any significant reductions in
volume will have a negative impact on the Company's financial
condition. Volumes can be impacted by legislative changes to the life
of the identification credentials; lack of government funding;
termination of contract for lack of performance. Management reviews the
historical trends of card productions quarterly to estimate the volumes
that are to be used to calculate contract values.
- Cost estimating and Contract Accounting
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 Company, on a quarterly basis, estimates the
cost to complete on each contract by reviewing the performance against
budgets that are established during the quoting process. Adjustments
are made to reflect the current information that is available such as:
card volumes; per card consumable costs; ongoing maintenance costs and
site inventory levels. The financial performance of the Company could
be impacted by any negative change in management's estimates and
assumptions that are inherent in contract accounting.
RESULTS OF OPERATIONS
Revenues are derived principally from multi-year contracts for systems
implementation, card production and related services. Revenues for the Second
quarter of 2002 were approximately $9,038,000 compared to approximately
$6,871,000 for the Second quarter of 2001. Revenues for the first six months of
2002 were approximately
9
$15,437,000 compared to approximately $13,239,000 for the same period in 2001.
The primary component of the increase over the two quarters was in the secure
identification arena, with more drivers' license and other contracts under
implementation. Facial recognition revenues for the second quarter of 2002 also
increased dramatically, both on a year over year and sequential basis, and were
approximately 20% of total revenues.
Gross margins decreased to 17.4% in the second quarter of 2002 from 23.6% in the
second quarter of 2001. Gross margins decreased to 18.7% for the first six
months of 2002 compared to 24.7% for the same period in 2001. The decline in
gross margins between the two three and six month periods is due principally to
the impact of consolidating the Company's acquisitions and the delays of
anticipated contract awards in 2002 compared to the prior years first six
months. The decline in gross margin also reflects the Company's accounting for
adjustments to management's estimates for the driver's license contracts, as
well as the timing of various contract implementations.
Sales and marketing expenses increased approximately $1,633,000 in the second
quarter of 2002 from the second quarter of 2001 and increased approximately
$2,342,000 for the first six months of 2002 from the first six months of 2001.
This represents an increase to 18.8% from 1.0% of revenue for the quarter to
quarter period and an increase to 16.6% from 1.7% for the first six months of
each fiscal year. This increase reflects the Company's continued decision to
invest ahead of market opportunities, specifically in marketing its patented
biometric solutions. In addition the Company continues to evaluate and support
its system integrators and reseller partners. This allows the Company to market
its facial recognition to a broader market than the Company's own internal
resources could support.
Research and development expenses increased approximately $899,000 in the second
quarter of 2002 from the second quarter of 2001 and increased approximately
$956,000 for the first six months of 2002 from the first six months of 2001.
This represents an increase to 14.6% from 6.1% of revenue for the quarter to
quarter period and an increase to 11.8% from 6.5% of revenue for the first six
months of each fiscal year. The increase is due principally to the Company's
continued investment in biometric technologies and new product development. This
included enhancing existing products with the intellectual property that was
acquired through the recently announced acquisitions.
General and administrative expenses increased by approximately $501,000 in the
second quarter of 2002 from the second quarter of 2001 and increased
approximately $578,000 for the first six months of 2002 from the first six
months of 2001. This represents an increase to 12.6% from 9.3 % of revenue for
the quarter to quarter periods and an increase to 11.2% from 8.7% of revenue for
the first six months of each fiscal year. The increase in expenses is due
principally to the Company's increased investment in infrastructure, personnel
and rental costs associated with additional space required to accommodate the
headcount increases from the acquisitions and internal growth.
Interest expense decreased approximately $61,000 in the second quarter of 2002
over the second quarter of 2001 and decreased approximately $163,000 for the
first six months of 2002 from the first six months of 2001. This represents a
decrease to 2.5% from 4.1% of revenue for the quarter to quarter period and 2.8%
from 4.5% for the first six months of each fiscal year. This decrease reflects
the impact of the Company's continuing efforts to reduce its overall debt and
related interest expense, as well as the ability to retire a substantial portion
of its debt with the proceeds of the $25 million private placement of common
stock in December 2001.
No provision for income taxes has been made in the three month and six month
periods in fiscal 2002 and 2001. In 2002 no provision has been necessary due to
the net loss. No provision was required in the 2001 period due to the
availability of tax loss carry-forwards. The Company did not record a tax
benefit for the remaining net operating loss carry-forwards due to the
uncertainty of whether such benefit will be realized.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were approximately $12.0 million at June 30, 2002,
which consisted entirely of cash. The cash or cash equivalents at December 31,
2001 were approximately $20.7 million.
10
Accounts receivable increased approximately 33% from December 31, 2001 to June
30, 2002 primarily due to the increase in revenue over the six month period.
Costs and estimated earnings in excess of billings increased approximately 12%
from December 31, 2001 to June 30, 2002, and reflect the unbilled accumulation
of costs on contracts in progress.
The Company has a $4.0 million operating line of credit. This revolver 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. As of June 30, 2002, there was no outstanding balance.
In February 2001, the revolving credit agreement was amended to provide for a
term note in the amount of $4.0 million related to project financing. The term
note bears interest at 8.00% and is payable in monthly installments of
approximately $83,600, including principal and interest, and matures in March
2006. As of June 30, 2002, the outstanding balance was approximately $3.4
million.
In September 2001, the revolving credit agreement was amended to provide for a
term note in the amount of $3.2 million related to project financing. The term
note bears interest at 6.25% and is payable in monthly installments of
approximately $71,700, including principal and interest, and matures in March
2006. As of June 30, 2002, the outstanding balance was $2.9 million.
The term notes are subject to the same financial covenants as the revolving line
of credit. Upon notice by the lender, the entire principal and accrued interest
can become immediately due and payable following the termination of the revolver
in June 2003. This would result in the acceleration of the then principal
balance of $4.7 million to be due June 2003. The equipment for the specific
project collateralizes the term notes.
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. However, in the first two quarters of 2002,
the Company invested approximately $1.0 million to furnish and equip additional
space needed to support the Company's projected growth.
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. These project lease arrangements are accounted for as capital
leases. At June 30, 2002, the Company had approximately $6.3 million outstanding
under the lease financing arrangements.
For the fiscal year ended December 31, 2001 the existing financial covenants
under the revolving line of credit and two of the project financing arrangements
were amended. Effective for fiscal year ended December 31, 2001 all financial
covenants for these arrangements were eliminated as long as the Company
maintains a cash balance greater than the total of the long-term debt and
project financing. The financial covenants of the remaining financing
arrangements were not amended as of December 31, 2001 and the Company was in
violation of the positive net income covenant for the year ended December 31,
2001. Subsequent to December 31, 2001, the Company received waivers for these
covenant violations. For the period ended June 30,2002 the Company was in
violation of certain financial covenants for each of its financial institutions
and received waivers of the covenant violations from all. The Company is in
negotiations to amend these financial covenants. The Company believes that it
will be in compliance with these amended financial covenants, if approved.
However, this expectation is dependent on achieving the Company's business plan.
If the Company does not meet such covenants, the bank and the lessors could
require immediate repayment of outstanding amounts.
For the fiscal year ended December 31, 2001 the existing financial covenants
under the revolving line of credit and two of the project financing arrangements
were amended. Effective for fiscal year ended December 31, 2001 all financial
covenants for these arrangements were eliminated as long as the Company
maintains a cash balance greater than the total of the long-term debt and
project financing. Subsequent to December 31, 2001, the Company received waivers
for these covenant violations. The financial covenants of the remaining
financing arrangements were not amended as of December 31, 2001 and the Company
was in violation of the positive net income covenant for the year ended December
31, 2001. For the period ended June 30, 2002 the Company was in violation of
certain financial covenants for each of its financial institutions and received
waivers from all. The Company is in negotiations to amend these financial
covenants. The Company believes that it will be in compliance with these amended
financial covenants if approved. However, this expectation is dependent on
achieving the Company's business plan. If the Company does not meet such
covenants, the bank and the lessors could require immediate repayment of
outstanding amounts.
11
The Company believes that if it meets its business forecast for 2002, cash flows
from available borrowings, project leasing, operations and capital raised will
be sufficient to meet its working capital and capital expenditure needs for the
foreseeable future.
ITEM 3 - QUANTITATIVE 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:
|_| The dependence of our business on large public sector contracts, which can
involve delays.
|_| Fluctuations in our quarterly results, which could cause volatility in our
stock price, due to the size and timing of contract awards, the timing of
our contract performance, variations in the mix of our products and
services, and contract losses and changes in management estimates inherent
in accounting for contracts.
|_| The loss of any significant customer could cause our revenue to decline.
|_| Our history of operating losses.
|_| Volatility in the market for our common stock, due to technological
innovation by our competitors or us, general market conditions or market
conditions specific to particular industries, changes in earnings estimates
by analysts, and other factors.
|_| Our leverage, which creates financial and operating risk that could limit
the growth of our business.
|_| Our potential inability to obtain additional capital required for funding
our operations and financing our growth.
|_| Our reliance on sole and single-source suppliers, which could cause delays
or increases in project costs.
|_| Our ability to successfully expand our direct sales and services
organizations, so that we may increase our sales and
support our customers.
|_| The loss of any key personnel, or the failure to attract and retain
additional personnel, without whom we may be unable to continue expanding
our business and product line.
|_| Customer acceptance of our biometric technologies, without which our growth
may be restricted.
|_| Our ability to keep pace with changing technologies, so that we may win new
customers.
|_| System failures, which could seriously damage our business.
|_| Competition from new entrants and bigger, more established competitors with
greater financial resources, which could diminish our business
opportunities and limit our growth.
|_| Misappropriation of our intellectual property, which could harm our
reputation, adversely affects our competitive position and cost us money.
|_| Claims that we infringe on third party intellectual property rights, which
could result in substantial costs, diversion of resources and management
attention, and harm to our reputation.
|_| Possible dilution of our stockholders from the exercise of outstanding
stock purchase warrants and stock options.
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.
12
VIISAGE TECHNOLOGY, INC.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 2 - CHANGES IN SECURITIES
The following transactions occurred prior to the filing of this Form 10-Q with
respect to the Company's capital stock. Each transaction was exempt from the
registration requirements of the Securities Act of 1933 under Section 4(2) or
section 3(a)(9) of the Securities Act.
In April 2002, 61,686 shares were issued to the Viisage board of directors as
compensation for their 2002 board participation. The fair value of the common
stock on the grant date was approximately $380,000, which will be expensed
during the year ending December 31, 2002. As of June 30, 2002, $170,000 has been
expensed.
ITEM 3 - DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following actions were voted on and approved at the Company's 2001 Annual
Meeting of Shareholders held on May 14, 2002:
1.) The decision to fix the number of directors at seven and the number of
Class III Directors at three was ratified. The vote was 18,469,675
for, 81,839 against, and 50,705 abstained.
2.) John C. Gannon, Peter Nessen, and Thomas J. Reilly were elected as
Class III Directors to serve three year terms. The vote was
18,509,035, 18,518,020 and 18,480,895 respectively for, and 93,184,
84,199 and 121,324 withheld.
3.) The selection of BDO Seidman, LLP as independent public accountants
for the Company for the year ending December 31, 2002, was ratified.
The vote was 18,518,564 for, 48,116 against, 35,539 abstained.
ITEM 5 - OTHER INFORMATION
Bernard Bailey was appointed Chief Executive Officer effective on or about
August 15, 2002.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10. Form of Option Agreement for the Company's 1996 Management Stock
Option Plan (amended as of April 24, 2002).
(b) Reports on Form 8-K
13
The Company filed a Current Report on Form 8-K on January 25, 2002, to
report its acquisition of the assets of Lau Security Systems, a division of Lau
Technologies, in consideration of which the Company agreed to pay Lau a royalty
of 3.1% of its facial recognition revenues over the next twelve and a half
years, up to a maximum of $27.5 million, and to assume certain liabilities
related to the acquired business.
Other Exhibits
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
14
VIISAGE TECHNOLOGY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIISAGE TECHNOLOGY, INC.
Date: August 13, 2002 By: /s/ Denis K. Berube
------------------------
Denis K. Berube
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
By: /s/ Milton A. Alpern
-------------------------
Milton A. Alpern
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Sean F. Mack
--------------------------
Sean F. Mack
Vice President, Controller and Treasurer
(Chief Accounting Officer)
15