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 MARCH 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
__________TO __________
Commission file number 000-24389
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 May 14, 1999, 24,647,005 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 Months Ended March 31, 1999
Table of Contents
PART I. FINANCIAL INFORMATION
This report contains the following trademarks of the Company, some of
which are registered: VASCO, VACMan Server and VACMan/CryptaPak and
Digipass.
Page No.
--------
Item 1.Consolidated Financial Statements:
Consolidated Balance Sheets as of
December 31, 1998 and March 31, 1999 (Unaudited) ......... 3
Consolidated Statements of Operations (Unaudited)
for the three months ended March 31, 1998 and 1999 ....... 4
Consolidated Statements of Comprehensive Income (Unaudited)
for the three months ended March 31, 1998 and 1999 ........5
Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 1998 and 1999 ....... 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 6.Exhibits and Reports on Form 8-K........................ 11
SIGNATURES..................................................... 12
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
VASCO Data Security International, Inc.
Consolidated Balance Sheets
December 31, March 31,
1998 1999
---- ----
(Unaudited)
ASSETS
Current assets:
Cash $ 1,523,075 $ 1,346,217
Accounts receivable, net of allowance
for doubtful accounts
of $55,000 and $62,000 in 1998 and 1999 3,376,218 2,751,483
Inventories, net 1,272,327 1,341,837
Prepaid expenses 692,326 711,391
Deferred income taxes 83,000 83,000
Other current assets 277,322 255,099
---------- ----------
Total current assets 7,224,268 6,489,027
Property and equipment
Furniture and fixtures 580,427 582,076
Office equipment 468,975 501,226
---------- ----------
1,049,402 1,083,302
Accumulated depreciation (691,806) (727,252)
---------- ----------
357,596 356,050
Goodwill, net of accumulated amortization
of $327,000 and $359,000 in 1998 and 1999 575,211 542,983
Other assets 943,821 1,227,301
---------- ----------
Total assets $ 9,100,896 $ 8,615,361
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 6,528,867 $ 6,327,435
Accounts payable 1,144,506 1,821,234
Customer deposits 519,585 270,148
Other accrued expenses 2,117,599 2,374,946
---------- ----------
Total current liabilities 10,310,557 10,793,763
Long-term debt, including stockholder
note of $5,000,000 in 1998 and 1999 8,435,903 8,433,132
Stockholders' equity (deficit):
Common stock, $.001 par value -
75,000,000 shares authorized;
20,805,697 shares issued and
outstanding in 1998; 21,186,716
shares issued and outstanding in 1999 20,806 21,187
Additional paid-in capital 9,797,068 9,969,062
Accumulated deficit (19,550,419) (20,554,525)
Accumulated other comprehensive income-
cumulative translation adjustment 86,981 (47,258)
---------- ----------
Total stockholders' equity (deficit) (9,645,564) (10,611,534)
---------- ----------
Total liabilities and stockholders'
equity (deficit) $ 9,100,896 $ 8,615,361
========== ==========
See accompanying notes to consolidated financial statements.
VASCO Data Security International, Inc.
Consolidated Statements of Operations
(Unaudited)
For the Quarter Ended March 31,
1998 1999
---- ----
Net revenues $ 2,612,967 $ 4,308,543
Cost of goods sold 1,221,823 1,835,858
--------- ---------
Gross profit 1,391,144 2,472,685
--------- ---------
Operating costs:
Sales and marketing 882,613 1,325,719
Research and development 437,434 703,749
General and administrative 575,789 859,015
--------- ---------
Total operating costs 1,895,836 2,888,483
--------- ---------
Operating loss (504,692) (415,798)
Interest expense (209,570) (223,448)
Other expense, net (14,462) (60,679)
--------- ---------
Loss before income taxes (728,724) (699,925)
Provision for income taxes 9,374 304,181
--------- ---------
Net loss available to common
stockholders $ (738,098) $ (1,004,106)
========= =========
Basic and diluted net loss per
common share $ (0.04) $ (0.05)
========= =========
Weighted average common shares
outstanding 20,510,308 21,010,633
========== ==========
See accompanying notes to consolidated financial statements.
VASCO Data Security International, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
For the Quarter ended March 31,
1998 1999
---- ----
Comprehensive income:
Net loss $ (738,098) $ (1,004,106)
Other comprehensive loss -
cumulative translation adjustment (170,243) (134,239)
--------- ---------
Comprehensive loss $ (908,341) $ (1,138,345)
========= =========
See accompanying notes to consolidated financial statements.
VASCO Data Security International, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the Quarter Ended
March 31,
1998 1999
---- ----
Cash flows from operating activities:
Net loss $ (738,098) $ (1,004,106)
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 251,486 249,056
Interest paid in shares of common stock - 78,750
Gain on sale of fixed assets - (14,862)
Changes in current assets and
current liabilities:
Accounts receivable, net 417,434 624,735
Inventories, net (200,166) (69,510)
Other current assets (16,942) 3,058
Accounts payable 789,406 676,728
Customer deposits (27,397) (249,437)
Other accrued expenses 23,732 257,347
-------- --------
Net cash provided by operations 499,455 551,759
-------- --------
Cash flows from investing activities:
Additions to property and equipment (125,922) (33,800)
-------- --------
Net cash used in investing activities (125,922) (33,800)
-------- --------
Cash flows from financing activities:
Prepayment of royalties - (450,000)
Proceeds from exercise of stock options 115,347 63,625
Repayment of debt (20,386) (204,203)
-------- --------
Net cash provided by (used in) financing
activities 94,961 (560,578)
-------- --------
Effect of exchange rate changes on cash (170,243) (134,239)
-------- --------
Net increase (decrease) in cash 298,251 (176,858)
Cash, beginning of period 1,897,666 1,523,075
-------- --------
Cash, end of period $ 2,195,917 $ 1,346,217
========= =========
Supplemental disclosure of cash flow
information:
Interest paid $ 20,764 55,230
Income taxes paid $ - 3,945
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, 1998.
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. On October 28, 1998, VASCO
Corp. was merged with and into the Company and VASCO Corp. ceased to
exist.
Note 3 - Subsequent Events
On April 14, 1999, the Company completed a private placement of
Common Stock in the amount of $11.5 million. The transaction
represented a sale of the Company's Common Stock to European
institutional investors at a price of $3.50 per share. A total of
3,285,714 shares of Common Stock were issued as a part of this
transaction.
On May 3, 1999, the Company announced that it has acquired the
global assets of SecureWare, a prominent French security software
firm. SecureWare's focus is on developing security solutions for
every leading operating system - including Windows NT, UNIX, IBM's
S/390 and AS/400, Tandem, Digital, Stratus, Hewlett-Packard, and Sun
Solaris, among others. The purchase price of $1.5 million was paid in
a combination of cash and common stock.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
VDSI Inc. 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 VDSI Inc.'s consolidated
results of operations for the three months ended March 31, 1999 as
compared to VASCO Corp.'s consolidated results of operations for the
three months ended March 31, 1998. See Note 2 - Exchange Offer.
References to the Company or VDSI Inc. represent the consolidated
entity.
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 Months Ended March 31, 1998 and March 31, 1999
The following discussion and analysis should be read in
conjunction with the Company's Consolidated Financial Statements for
the three months ended March 31, 1998 and 1999.
Revenues
The Company's consolidated revenues for the three months ended
March 31, 1999 were $4,309,000, an increase of $1,696,000, or 65%, as
compared to the three months ended March 31, 1998. This increase can
be attributed to continued strong performance from international
operations as well as increased demand for the Company's
authentication products, including the introduction of two new
authentication products, the Digipass 600 and Digipass 700.
Cost of Goods Sold
The Company's consolidated cost of goods sold for the three
months ended March 31, 1999 was $1,836,000, an increase of $614,000,
or 50%, as compared to the three months ended March 31, 1998. This
increase is consistent with the increase in revenues for the period.
The Company continues to benefit from efficiencies in the
manufacturing process, as well as the increasing demand for products
with a more favorable cost structure.
Gross Profit
The Company's consolidated gross profit for the three months
ended March 31, 1999 was $2,473,000, an increase of $1,082,000, or
78%, as compared to the three months ended March 31, 1998. This
represents a consolidated gross margin of 57%, as compared to 53% for
the same period of 1998. This increase can be attributed to
efficiencies in the design of the products, which resulted in reduced
third-party manufacturing costs, as well as favorable variances as a
result of increased volumes.
Sales and Marketing Expenses
Consolidated sales and marketing expenses for the three months
ended March 31, 1999 were $1,326,000, an increase of $443,000, or
50%, over the three months ended March 31, 1998. The increase is
attributed to the continued expansion the Company's worldwide sales
force and network of distributors, and an increase in marketing
activities to existing as well as new vertical and geographic
markets.
Research and Development
Consolidated R&D costs for the three months ended March 31, 1999
were $704,000, an increase of $266,000, or 61%, as compared to the
three months ended March 31, 1998. The increase is due to the
addition of R&D personnel, in both the U.S. and Europe, as well as
the development and launch of two enhanced versions of its VACMan
access control server, and two new authentication devices - the
Digipass 600 and Digipass 700.
General and Administrative Expenses
Consolidated general and administrative expenses for the three
months ended March 31, 1999 were $859,000, an increase of $283,000,
or 49%, compared to the three months ended March 31, 1998. This
increase is due to legal fees incurred in connection with two
lawsuits, both of which were settled during the first quarter.
Interest Expense
Consolidated interest expense for the three months ended March
31, 1999 was $223,000, compared to $210,000, an increase of 7% over
the same period of 1998. This increase can be attributed to an
increased borrowing base during 1999. As reported previously, the
Company completed a private placement of common stock during April
1999, a portion of the proceeds of which were used to decrease the
debt of the Company.
Operating Loss
The Company's consolidated operating loss for the three months
ended March 31, 1999 was $1,004,000, compared to the consolidated
operating loss of $738,000 for the three months ended March 31, 1998.
This increase, in part, is due to legal fees incurred in connection
with two lawsuits, both of which were settled during the first
quarter, as well as the increased efforts and activities in both
sales and marketing as well as R&D.
Liquidity and Capital Resources
The Company's cash and cash equivalents were $1,346,000 at March
31, 1999, which is a decrease of approximately $177,000 from
$1,523,000 at December 31, 1998. As of March 31, 1999, the Company
had negative working capital of $4,305,000. During the first quarter
of 1999, the Company used the cash provided by operations principally
for working capital needs.
Capital expenditures during the first three months of 1999 were
$34,000 and consisted primarily of computer equipment.
In April 1999, the Company completed a private placement on
Common Stock in the amount of $11.5 million. The transaction
represented a sale of the Company's Common Stock to European
institutional investors at a price of $3.50 per share. A total of
3,285,714 shares of Common Stock were issued as a part of this
transaction. The Company believes that its current cash balances and
anticipated cash generated from operations will be sufficient to meet
its anticipated cash needs through June 2000. Continuance of the
Company's operations beyond June 2000, however, will depend on the
Company's ability to obtain adequate financing. The Company has
entered into engagement letters with Artesia Bank and Bank Degroof
for a possible future public offering.
The Company intends to seek acquisitions of businesses, products
and technologies that are complementary or additive to those of the
Company. On May 3, 1999, the Company announced that it has acquired
the global assets of SecureWare, a prominent French security software
firm. SecureWare's focus is on developing security solutions for
every leading operating system - including Windows NT, UNIX, IBM's
S/390 and AS/400, Tandem, Digital, Stratus, Hewlett-Packard, and Sun
Solaris, among others. There can be no assurance, however, that any
additional acquisitions will be made.
Year 2000 Considerations
Many existing computer systems and software products are coded
to accept only two digit entries in the date code field with respect
to year. With the year 2000 less than one year away, the date code
field in these systems and products must be adjusted to allow for a
four digit year of otherwise modified so that they recognize "00" to
indicate the year 2000 rather that the year 1900. Based upon its
current assessments, which are based in part on certain
representations of third party service and product providers, the
Company does not expect that is will experience a significant
disruption of its operations as a result of the Year 2000.
The Company plans to continue to identify, assess and to resolve
all material Year 2000 issues by the end of 1999. The Company is
developing contingency plans to address significant internal and
external Year 2000 issues as they are identified. These contingency
plans are expected to be complete by the end of 1999. Even with the
effort to address the Year 2000 issue made by the Company to date,
there can be no assurance that the systems of other entities on which
the Company relies, including the Company's internal systems and
proprietary software, will be remediated in a timely fashion, or that
a failure to remediate by another entity and/or the Company, would
not have a material effect on the Company's results of operations.
The Company has incurred approximately $150,000 to date in
addressing Year 2000 issues, and believes that no additional material
expenses will be incurred related to the Year 2000 issue. The
Company has completed its assessment of products and mission critical
systems for Year 2000 readiness and believes no material expenses
will be incurred in the future.
Additionally, the Company believes that the purchasing patterns
of customers and potential customers may be affected by the 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.
Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Company's market risk
during the three-month period ended March 31, 1999. For additional
information refer to Item 7A in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On April 6, 1999, Security Dynamics Technologies, Inc., RSA Data
Security, Inc., the Company and VASCO Data Security, Inc. announced
settlement on confidential terms of the claims that each of the
companies had raised in litigation filed last year.
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. None.
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 Company during the
quarter ended March 31, 1999.
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 May 14, 1999.
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.