UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
__________TO __________
Commission file number 333-35563
VASCO Data Security International, Inc.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 36-4169320
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1901 South Meyers Road, Suite 210
Oakbrook Terrace, Illinois 60181
(Address of Principal Executive Offices)(Zip Code)
Registrant's telephone number, including area code: (630) 932-8844
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
As of November 13, 1998, 20,805,697 shares of the Company's
Common Stock, $.001 par value per share ("Common Stock"), were
outstanding.
VASCO Data Security International, Inc.
Form 10-Q
For The Three and Nine Months Ended September 30, 1998
Table of Contents
PART I. FINANCIAL INFORMATION Page No.
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of
December 31, 1997 and September 30, 1998 (Unaudited) ...............3
Consolidated Statements of Operations (Unaudited)
for the three and nine months ended September 30, 1997 and 1998.....4
Consolidated Statements of Comprehensive Income (Unaudited)
for the three and nine months ended September 30, 1997 and 1998.....5
Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 30, 1997 and 1998 ..............6
Notes to Consolidated Financial Statements .........................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..........................................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................12
Item 2. Changes in Securities.........................................12
Item 3. Defaults upon Senior Securities...............................12
Item 4. Submission of Matters to a Vote of Securityholders............12
Item 5. Other Information.............................................12
Item 6. Exhibits and Reports on Form 8-K..............................12
SIGNATURES............................................................12
This report contains the following trademarks of the
Company, some of which are registered: VASCO and Digipass.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
VASCO Data Security International, Inc.
Consolidated Balance Sheets
December 31, September 30,
1997 1998
(Unaudited)
ASSETS
Current assets:
Cash $1,897,666 $1,101,020
Accounts receivable, net of allowance
for doubtful accounts of $429,000
and $61,000 in 1997 and 1998 2,458,451 3,280,516
Inventories, net 1,001,294 1,729,883
Prepaid expenses 86,426 654,328
Deferred income taxes 83,000 83,000
Other current assets 221,572 153,683
--------- ---------
Total current assets 5,748,409 7,002,430
Property and equipment
Furniture and fixtures 488,338 580,598
Office equipment 322,434 426,075
--------- ---------
810,772 1,006,673
Accumulated depreciation (497,381) (633,174)
--------- ---------
313,391 373,499
Goodwill, net of accumulated
amortization of $198,000 and
$295,000 in 1997 and 1998 704,124 607,439
Other assets 1,609,901 1,103,236
--------- ---------
Total assets $8,375,825 $9,086,604
========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $3,185,400 $5,682,437
Accounts payable 1,083,965 868,695
Customer deposits 426,914 482,376
Other accrued expenses 1,606,810 1,944,453
--------- ---------
Total current liabilities 6,303,089 8,977,961
Long-term debt, including stockholder
note of $5,000,000 in 1997 and 1998 8,442,946 8,491,746
Common stock subject to redemption 494,668 -
Stockholders' equity (deficit):
Common stock, $.001 par value -
75,000,000 shares authorized;
20,132,968 shares issued and
outstanding in 1997; 20,336,057
shares issued and outstanding in 1998 20,133 20,336
Additional paid-in capital 9,186,726 9,797,538
Accumulated deficit (15,901,575) (18,221,555)
Accumulated other comprehensive income-
cummulative translation adjustment (170,162) 20,578
---------- ----------
Total stockholders' equity (deficit) (6,864,878) (8,383,103)
---------- ----------
Total liabilities and stockholders' $8,375,825 $9,086,604
equity (deficit) ========== ==========
See accompanying notes to consolidated financial statements.
VASCO Data Security International, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
---- ---- ---- ----
Net revenues $2,844,975 $4,025,326 $ 9,436,669 $10,431,673
--------- --------- --------- ----------
Total revenues 2,844,975 4,025,326 9,436,669 10,431,673
Cost of goods sold 1,468,297 1,877,796 4,759,003 5,023,831
--------- --------- --------- ----------
Gross profit 1,376,678 2,147,530 4,677,666 5,407,842
--------- --------- --------- ----------
Operating costs:
Sales and marketing 885,026 1,117,710 2,802,515 3,046,850
Research and development 668,691 420,815 986,620 1,248,781
General and administrative 1,393,369 765,939 3,100,641 1,759,879
--------- --------- --------- ---------
Total operating costs 2,947,086 2,304,464 6,889,776 6,055,510
--------- --------- --------- ---------
Operating loss (1,570,408) (156,934) (2,212,110) (647,668)
Interest expense (105,741) (223,341) (566,176) (1,102,926)
Other income (expense), net 57,949 (88,480) (14,502) (189,636)
--------- --------- --------- ---------
Loss before income taxes (1,618,200) (468,755) (2,792,788) (1,940,230)
Provision for income taxes 463,127 248,407 520,299 379,750
--------- --------- --------- ---------
Net loss (2,081,327) (717,162) (3,313,087) (2,319,980)
Preferred stock dividends (26,000) - (80,000) -
--------- --------- --------- ---------
Net loss available to
common stockholders $(2,107,327) $ (717,162) $(3,393,087) $(2,319,980)
========= ========= ========= =========
Basic and diluted loss per
common share $ (0.11) $ (0.04) $ (0.18) $ (0.11)
========= ========= ========= =========
Shares used to compute basic
and diluted loss per
common share 19,279,620 20,331,057 18,753,213 20,352,197
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
VASCO Data Security International, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
---- ---- ---- ----
Net loss $(2,081,327) $(717,162) $(3,313,087) $(2,319,980)
Other comprehensive income -
Cum. Transl. Adj. (70,845) 85,788 (157,315) 190,740
----------- -------- ----------- -----------
Comprehensive loss $(2,152,172) $(631,374) $(3,470,402) $(2,129,240)
=========== ======== =========== ===========
See accompanying notes to consolidated financial statements.
VASCO Data Security International, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
1997 1998
---- ----
Cash flows from operating activities:
Net loss $ (3,313,087) $ (2,319,980)
Adjustments to reconcile net income to
net cash provided by
(used in) operating activities:
Depreciation and amortization 810,221 743,770
Interest paid in shares of common stock 193,196 -
Loss on disposition of fixed assets - 5,113
Changes in current assets and current
liabilities:
Accounts receivable, net 1,226,255 (822,065)
Inventories, net 1,087,333 (728,590)
Prepaids and other current assets 244,004 (500,013)
Accounts payable (1,239,005) (215,270)
Customer deposits (407,941) 55,462
Other accrued expenses 577,181 337,643
---------- ----------
Net cash used in operating activities (821,843) (3,443,930)
---------- ----------
Cash flows from investing activities -
additions to PP&E (97,392) (205,640)
---------- ----------
Net cash used in investing activities (97,392) (205,640)
---------- ----------
Cash flows from financing activities:
Series B preferred stock dividends (80,000) -
Net proceeds (payments) related to sales
of common stock (56,895) 115,347
Proceeds from exercise of stock options 42,470 1,000
Redemption of common stock (247,261) -
Proceeds from issuance of debt 2,716,141 2,545,837
Repayment of debt (51,263) -
---------- ----------
Net cash provided by financing activities 2,323,192 2,662,184
Effect of exchange rate changes on cash (157,315) 190,740
---------- ----------
Net increase (decrease) in cash 1,246,642 (796,646)
Cash, beginning of period 1,813,593 1,897,666
---------- ----------
Cash, end of period $ 3,060,235 $ 1,101,020
========== ==========
Supplemental disclosure of
cash flow information:
Interest paid $ 222,720 $ 693,668
Income taxes paid - 227,852
See accompanying notes to consolidated financial statements.
VASCO Data Security International, Inc.
Notes to Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements
include the accounts of VASCO Data Security International, Inc. and
its subsidiaries (collectively, the "Company") and have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they
do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements and
should be read in conjunction with the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
In the opinion of management, the accompanying unaudited
consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements, and include
all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the results of the interim
periods presented. The operating results for the interim periods
presented are not necessarily indicative of the results expected for
a full year.
Note 2 - Exchange Offer
VASCO Data Security International, Inc. ("VDSI Inc.") was
organized in 1997 as a subsidiary of VASCO Corp., a Delaware
corporation ("VASCO Corp."). Pursuant to an exchange offer
("Exchange Offer") by VDSI Inc. for securities of VASCO Corp. that
was completed March 11, 1998, VDSI Inc. acquired 97.7% of the
outstanding common stock of VASCO Corp. Consequently, VASCO Corp.
became a subsidiary of VDSI Inc., with certain VASCO Corp.
shareholders holding the remaining 2.3% of the VASCO Corp. common
stock representing a minority interest. The impact of the minority
interest is not material to the Company's consolidated financial
statements. The December 31, 1997 financial statements have been
restated to account for the Exchange Offer as a transaction between
entities under common control in a manner similar to a pooling of
interests.
The assets and liabilities of VASCO Corp. were recorded by VDSI
Inc. at their historical carrying values.
Subsequent to September 30, 1998, the Company completed the
exchange of the remaining 2.3%.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The Company designs, develops, markets and supports open
standards-based hardware and software security systems which manage
and secure access to data.
The following discussion is based upon the Company's
consolidated results of operations for the three and nine months
ended September 30, 1998 as compared to VASCO Corp.'s consolidated
results of operations for the three and nine months ended September
30, 1997. See "Note 2 - Exchange Offer."
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995
This Quarterly Report on Form 10-Q, including the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 concerning,
among other things, the prospects, developments and business
strategies for the Company and its operations, including the
development and marketing of certain new products and the anticipated
future growth in certain markets in which the Company currently
markets and sells its products or anticipates selling and marketing
its products in the future. These forward-looking statements (i) are
identified by their use of such terms and phrases as "expected,"
"expects," "believe," "believes," "will," "anticipated," "emerging,"
"intends," "plans," "could," "may," "estimates," "should,"
"objective," and "goals" and (ii) are subject to risks and
uncertainties and represent the Company's present expectations or
beliefs concerning future events. The Company cautions that the
forward-looking statements are qualified by important factors that
could cause actual results to differ materially from those in the
forward-looking statements, including (a) risks of general market
conditions, including demand for the Company's products and services,
competition and price levels and the Company's historical dependence
on relatively few products, certain suppliers and certain key
customers, and (b) risks inherent to the computer and network
security industry, including rapidly changing technology, evolving
industry standards, increasing numbers of patent infringement claims,
changes in customer requirements, price competitive bidding, changing
government regulations and potential competition from more
established firms and others. Therefore, results actually achieved
may differ materially from expected results included in, or implied
by these statements.
Comparison of Three and Nine Months Ended September 30, 1997 and
September 30, 1998
The following discussion and analysis should be read in
conjunction with the Company's Consolidated Financial Statements for
the three and nine months ended September 30, 1997 and 1998.
Revenues
Revenues for the three months ended September 30, 1998 were
$4,025,000, an increase of $1,180,000, or 41%, as compared to the
three months ended September 30, 1997. This increase can be
attributed to increased demand related to the Company's newest
product, Digipass 300, as well as follow-on orders received from
current customers.
For the nine months ended September 30, 1998, revenues increased
11% to $10,432,000 from $9,437,000 in 1997. This increase is due to
a strong performance from international operations, as the demand for
Digipass 300 continues to grow. In addition, favorable currency
exchange rates benefited the Company.
Cost of Goods Sold
Cost of goods sold for the three months ended September 30, 1998
was $1,878,000, an increase of $409,000, or 28%, as compared to the
three months ended September 30, 1997. This increase is consistent
with the increase in revenues for the same period.
For the nine months ended September 30, 1998, cost of goods sold
increased 6% to $5,024,000 from $4,759,000 in 1997. This increase is
consistent with the increase in revenues for the same period. The
cost of goods sold for security products, however, decreased as a
percentage of revenues at a quicker pace than revenues for security
products due to efficiencies in the design of the products which
resulted in reduced third-party manufacturing costs.
Gross Profit
The Company's gross profit for the three months ended September
30, 1998 was $2,148,000, an increase of $771,000, or 56%, as compared
to the three months ended September 30, 1997. This represents a
gross margin of 53% as compared to 48% for the same period in 1997.
The increase reflects increased shipments to the Company's direct
customers during the third quarter of 1998, which results in a
slightly higher margin, as well as efficiencies in the design of the
products which resulted in reduced third-party manufacturing costs.
For the nine months ended September 30, 1998, gross profit was
$5,408,000, an increase of $730,000, or 16%, as compared to 1997.
This represents a gross margin of 52% as compared to 50% for the same
period in 1997. Margins have remained relatively steady during 1998.
With the introduction of the Digipass 300 in 1998, the Company
anticipates improved gross margins as acceptance of the Digipass 300
increases.
Sales and Marketing Expenses
Sales and marketing expenses for the three months ended
September 30, 1998 were $1,118,000, an increase of $233,000, or 26%,
over the three months ended September 30, 1997. Selling and
marketing expenses also increased 9% in the first nine months of 1998
to $3,047,000 from $2,803,000 in the first nine months of 1997. The
increases are attributed to increased sales efforts including, in
part, increased travel costs and an increase in marketing activities,
including the development of a company-wide marketing program and
other efforts.
Research and Development
Research and development costs for the three months ended
September 30, 1998 were $421,000, a decrease of $248,000, or 37%, as
compared to the three months ended September 30, 1997. Research and
development costs increased 27% in the first nine months of 1998 to
$1,249,000 from $987,000 in the first nine months of 1997. This
increase is due to the addition of R&D personnel, in both the U.S.
and Europe.
General and Administrative Expenses
General and administrative expenses for the three months ended
September 30, 1998 were $766,000, a decrease of $627,000, or 45%,
compared to the three months ended September 30, 1997. General and
administrative expenses decreased 43% in the first nine months of
1998 to $1,760,000 from $3,101,000 in the first nine months of 1997.
The decreases were due to economies of scale being realized as a
result of the combination of the operations of Lintel Security and
VASCO Data Security during 1997, as well as a favorable experience
with regard to bad debt recovery and a reduction of certain legal
fees associated with the Exchange Offer. In addition, the Company
was preparing for the Exchange Offer during 1997, thus generating
significant legal and accounting expenses.
Interest Expense
Interest expense for the three months ended September 30, 1998
was $223,000, compared to $106,000, an increase of 111% over the same
period of 1997. Interest expense increased 95% in the first nine
months of 1998 to $1,103,000 from $566,000 in the first nine months
of 1997. The increases can be attributed to an increased borrowing
base during 1998, partially offset by the reversal of contingent
interest payable that was not realized.
Operating Income (Loss)
The Company's operating loss for the three months ended
September 30, 1998 was $157,000, compared to $1,570,000 for the three
months ended September 30, 1997. The Company had an operating loss
of $648,000 for the first nine months of 1998, as compared to
$2,212,000 for the first nine months of 1997, a decrease of 71%.
Income Taxes
Income tax expense for the three months ended September 30, 1998
were $248,000, compared to $463,000 for the three months ended
September 30, 1997. For the nine months ended September 30, 1998,
income tax expense totaled $380,000, compared to expense of $520,000
for the same period in 1997. All of these taxes are attributable to
the Company's European operations.
Liquidity and Capital Resources
Since inception, the Company has financed its operations through
a combination of the issuance of equity securities, private
borrowings, short-term commercial borrowings, cash flow from
operations, and loans from Mr. T. Kendall Hunt, its Chief Executive
Officer and one of the stockholders of the Company's original
corporate predecessor.
The Company's cash and cash equivalents were $1,101,000 at
September 30, 1998, which is a decrease of approximately $797,000
from $1,898,000 at December 31, 1997. As of September 30, 1998, the
Company had negative working capital of $1,976,000.
Capital expenditures during the first nine months of 1998 were
$206,000 and consisted primarily of computer equipment and office
furniture and fixtures.
The Company intends to seek acquisitions of businesses, products
and technologies that are complementary or additive to those of the
Company. While from time to time the Company engages in discussions
with respect to potential acquisitions, the Company has no present
plans, commitments or agreements with respect to any such
acquisitions as of the date of this Form 10-Q and currently does not
have excess cash for use in making acquisitions. There can be no
assurance that any such acquisitions will or will not be made.
The Company believes that its current cash balances and
anticipated cash generated form operations will be sufficient to meet
its anticipated cash needs through March 1999. Continuance of the
Company's operations beyond March 1999, however, will depend on the
Company's ability to obtain adequate financing. In March 1998, the
Company entered into a loan agreement in the amount of $3 million
with Lernout & Hauspie Speech Products N.V. ("L&H"); the funding of
this occurred in April 1998. The loan bears interest at the prime
rate plus 1%, payable quarterly, and matures on January 4, 1999.
The Company has previously entered into engagement letters with
Artesia Bank and KBC Securities for a possible future private
offering and a possible future public offering. Further, the Company
has had preliminary discussions regarding other possible debt or
equity financing. There can be no assurance, however, that the
Company will be successful in effecting a private or public offering
or obtaining other additional financing.
In October 1998, the Company entered into a financing
arrangement with KBC Bank for a $2.9 million revolving line of
credit, which was drawn upon to repay the Generale Bank notes that
were outstanding at September 30, 1998. The line of credit
automatically renews every three months and is due and payable upon
the successful completion of a private placement or public offering
of the Company's securities.
Year 2000 Considerations
Many existing computer systems and software products are coded
to accept only two digits entries in the date code field with respect
to year. With the 21st century less than two years away, the date
code field must be adjusted to allow for a four digit year. The
Company believes that its internal systems are Year 2000 compliant,
but the Company will need to take the required steps to make its
existing products compliant. The total estimated cost of this
exercise is $150,000, with an anticipated completion date of December
31, 1998. To date, the Company has spent approximately $110,000 in
connection with its Year 2000 compliance efforts. There can be no
assurance, however, that the Company will meet its anticipated
completion date or that the total cost will not exceed $150,000. The
Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues as companies
expend significant resources to upgrade their current software
systems for Year 2000 compliance. This, in turn, could result in
reduced funds available to be spent on other technology applications,
such as those offered by the Company, which could have a material
adverse effect on the Company's business and results of operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On November 2, 1998, the Company was served with a lawsuit filed
against it by Security Dynamics Technologies, Inc. alleging patent
infringement. The Company believes that it is protected by its
patents and that this lawsuit is without merit.
Item 2. Changes in Securities. None.
Item 3. Defaults upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Securityholders. None.
Item 5. Other Information
Discretionary Proxy Voting Authority/Stockholder Proposals
On May 21, 1998, the Securities and Exchange Commission adopted an
amendment to Rule 14a-4, as promulgated under the Securities Exchange
Act of 1934. The amendment to Rule 14a-4(c)(1) governs the Company's
use of its discretionary proxy voting authority with respect to a
stockholder proposal which the stockholder has not sought to include
in the Company's proxy statement. The new amendment provides that,
if a proponent of a proposal fails to notify the Company at least 45
days prior to the month and day of mailing of the prior year's proxy
statement, then the management proxies will be allowed to use their
discretionary voting authority when the proposal is raised at the
meeting, without any discussion of the matter in the proxy statement.
With respect to the Company's 1999 Annual Meeting of Stockholders, if
the Company is not provided notice of a stockholder proposal, which
the stockholder has not previously sought to include in the Company's
proxy statement by April 3, 1999, the management proxies will be
allowed to use their discretionary authority as outlined above.
Item 6. Exhibits and Reports on Form 8-K
a) The following exhibits are filed with this Form 10-Q or
incorporated by reference as set forth below:
Exhibit
Number Description
27 Financial Data Schedule.
___________________________
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Registrant during
the quarter ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on November 13, 1998.
VASCO Data Security International, Inc.
/s/ T. Kendall Hunt
T. Kendall Hunt
Chairman of the Board, Chief Executive
Officer and President
/s/ Gregory T. Apple
Gregory T. Apple
Vice President and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Description
27 Financial Data Schedule.
5
9-MOS
DEC-31-1998
SEP-30-1998
1,101,020
0
3,341,516
61,000
1,729,883
7,002,430
1,006,673
633,174
9,086,604
8,977,961
0
0
0
20,336
(8,403,439)
9,086,604
10,431,673
10,431,673
5,023,831
6,055,510
189,636
0
1,102,926
(1,940,230)
379,750
(2,319,980)
0
0
0
(2,319,980)
(0.11)
(0.11)
