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, 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 (I.R.S. Employer
Jurisdiction of Identification
Incorporation or No.)
Organization)
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, 1999, 26,462,083 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 September 30, 1999
Table of Contents
PART I. FINANCIAL INFORMATION
Page No.
Item 1.Consolidated Financial Statements:
Consolidated Balance Sheets as of
December 31, 1998 and September 30, 1999 (Unaudited) ..... 3
Consolidated Statements of Operations (Unaudited)
for the three and nine months
ended September 30, 1998 and 1999 ........................ 4
Consolidated Statements of Comprehensive Income (Unaudited)
for the three and nine months
ended September 30, 1998 and 1999 .........................5
Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 30, 1998 and 1999 .... 6
Notes to Consolidated Financial Statements ............... 7
Item 2.Management's Discussion and Analysi
of Financial Condition and Results of Operations ......... 7
PART II. OTHER INFORMATION
Item 6.Exhibits and Reports on Form 8-K........................ 11
SIGNATURES..................................................... 12
This report contains the following trademarks of the
Company, some of which are registered: VASCO, AccessKey, VACMan
Server and VACMan/CryptaPak, AuthentiCard and Digipass.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
VASCO Data Security International, Inc.
Consolidated Balance Sheets
December 31, September 30,
1998 1999
(Unaudited)
ASSETS
Current assets:
Cash $ 1,523,075 $ 4,712,263
Accounts receivable, net of allowance
for doubtful accounts of $55,000 and
$73,000 in 1998 and 1999 3,376,218 2,310,842
Inventories, net 1,272,327 807,468
Prepaid expenses 692,326 1,298,516
Deferred income taxes 83,000 83,000
Other current assets 277,322 331,152
------------ -----------
Total current assets 7,224,268 9,543,241
Property and equipment:
Furniture and fixtures 580,427 691,007
Office equipment 468,975 647,340
------------ -----------
1,049,402 1,338,347
Accumulated depreciation (691,806) (835,997)
------------ -----------
357,596 502,350
Goodwill, net of accumulated
amortization of $327,000 and $424,000
in 1998 and 1999 575,211 478,526
Other assets 943,821 2,414,986
------------ -----------
Total assets $ 9,100,896 $12,939,103
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 6,528,867 $ 396,944
Accounts payable 1,144,506 1,341,192
Customer deposits 519,585 135,601
Other accrued expenses 2,117,599 2,019,627
------------ -----------
Total current liabilities 10,310,557 3,893,364
Long-term debt, including stockholder
note of $5,000,000 in 1998 and 1999 8,435,903 8,432,808
Stockholders' equity (deficit):
Common stock, $.001 par value -
75,000,000 shares authorized;
20,805,697 shares issued and
outstanding in 1998; 24,650,005
shares issued and outstanding in 1999 20,806 24,650
Additional paid-in capital 9,797,068 21,360,132
Accumulated deficit (19,550,419) (21,057,225)
Accumulated other comprehensive
income-cumulative translation adj. 86,981 285,374
------------ -----------
Total stockholders' equity (deficit) (9,645,564) 612,931
------------ -----------
Total liabilities and stockholders'
equity (deficit) $ 9,100,896 $12,939,103
============ ===========
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,
1998 1999 1998 1999
Net revenues $ 4,025,326 $ 4,652,793 $10,431,673 $13,412,035
Cost of goods sold 1,877,796 1,870,978 5,023,831 5,420,400
------------ ------------ ------------ ------------
Gross profit 2,147,530 2,781,815 5,407,842 7,991,635
Operating costs:
Sales and marketing 1,117,710 1,098,201 3,046,850 3,744,438
Research and development 420,815 598,124 1,248,781 1,771,355
General and administrative 765,939 625,414 1,759,879 2,239,407
------------ ------------ ------------ ------------
Total operating costs 2,304,464 2,321,739 6,055,510 7,755,200
------------ ------------ ------------ ------------
Operating income (loss) (156,934) 460,076 (647,668) 236,435
Interest expense (223,341) (229,670) (1,102,926) (645,126)
Other income (expense), net (88,480) 39,019 (189,636) (370,968)
------------ ------------ ------------ ------------
Income (loss) before
income taxes (468,755) 269,425 (1,940,230) (779,659)
Provision for income taxes 248,407 383,337 379,750 744,381
------------ ------------ ------------ ------------
Net loss $ (717,162) $ (113,912) $(2,319,980) $(1,524,040)
============ ============ ============ ============
Basic and diluted net loss $ (0.04) $ 0.00 $ (0.11) $ (0.07)
per common share ============ ============ ============ ============
Weighted average common
shares outstanding 20,331,057 24,648,570 20,352,197 23,249,650
============ ============ ============ ============
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,
1998 1999 1998 1999
Comprehensive income: ---- ---- ---- ----
Net loss $ (717,162) $ (113,912) $(2,319,980) $(1,524,040)
Other comprehensive
income-cumulative
translation adj 85,788 98,698 190,740 198,393
------------ ------------ ------------ ------------
Comprehensive loss $ (631,374) $ (15,214) $(2,129,240) $(1,325,647)
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
VASCO Data Security International, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
1998 1999
Cash flows from operating activities: ---- ----
Net loss $ (2,319,980) $ (1,524,040)
Adjustments to reconcile net income to
net cash provided by
(used in) operating activities:
Depreciation and amortization 743,770 846,765
Interest paid in shares of common stock - 78,750
Loss on disposition of fixed assets 5,113 -
Gain on sale of fixed assets - (16,096)
Changes in assets and liabilities:
Accounts receivable, net (822,065) 1,065,376
Inventories, net (728,590) 464,859
Other current assets (500,013) (660,120)
Accounts payable (215,270) 196,686
Customer deposits 55,462 (383,984)
Other accrued expenses 337,643 (97,972)
Other assets - (1,100,000)
------------ ------------
Net cash used in operating activities (3,443,930) (1,129,776)
------------ ------------
Cash flows from investing activities:
Acquisition of SecureWare/DMIC - (287,023)
Additions to property and equipment (205,640) (288,945)
------------ ------------
Net cash used in investing activities (205,640) (575,968)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,000 94,225
Net proceeds from sales of common stock 115,347 10,737,332
Proceeds from issuance of debt 2,545,837 -
Repayment of debt - (6,135,018)
------------ ------------
Net cash provided by financing activities 2,662,184 4,696,539
------------ ------------
Effect of exchange rate changes on cash 190,740 198,393
------------ ------------
Net increase (decrease) in cash (796,646) 3,189,188
Cash, beginning of period 1,897,666 1,523,075
------------ ------------
Cash, end of period $ 1,101,020 $ 4,712,263
============ ============
Supplemental disclosure of cash flow
information:
Interest paid $ 693,668 $ 719,514
Income taxes paid $ 227,852 $ 398,655
Supplemental disclosure of non-cash
investing activity: $ - $ 698,300
Stock issued for acquisition
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.
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 and nine months ended September
30, 1999 as compared to VASCO Corp.'s consolidated results of
operations for the three and nine months ended September 30, 1998.
See Note 2 "Exchange Offer." References to the "Company" or "VDSI
Inc." represent the consolidated entity. References to "VASCO NA"
represent the North American operations, including VDSI, Inc., VASCO
Corp., and VDS. References to "VASCO Europe" mean the operations of
Lintel Security, VASCO Data Security nv/sa and VASCO Data Security
Europe.
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, 1998 and
September 30, 1999
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, 1998 and 1999.
Revenues
Revenues for the three months ended September 30, 1999 were
$4,653,000, an increase of $627,000, or 16%, as compared to the three
months ended September 30, 1998. This increase can be attributed to
new customers and add-on orders for the Company's flagship products,
Digipass 300 and Digipass 500, as well as the newly introduced
Digipass 100, 600 and 700.
For the nine months ended September 30, 1999, revenues increased
29% to $13,412,000 from $10,432,000 for the same period in 1998.
Again, the Company continues to enter new markets and develops new
applications for its products, as well as enjoys a loyalty from its
current customers in the form of additional orders.
Cost of Goods Sold
Cost of goods sold for the three months ended September 30, 1999
was $1,871,000, a decrease of $7,000, or .4%, as compared to the
three months ended September 30, 1998. As a percentage of sales,
cost of goods sold decreased to 40% from 47% for the year earlier
period as a result of manufacturing efficiencies and increased volume
discounts.
For the nine months ended September 30, 1999, cost of goods sold
increased 8% to $5,420,000 from $5,024,000 in 1998. Cost of goods
sold for the nine month period ended September 30, 1999 decreased to
40% of sales from 48% for the year earlier period. This is
consistent with the decrease experienced for the three month period
ended September 30, 1999.
Gross Profit
The Company's gross profit for the three months ended September
30, 1999 was $2,782,000, an increase of $634,000, or 30%, as compared
to the three months ended September 30, 1998. This represents a
gross margin of 60%, 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.
For the nine months ended September 30, 1999, gross profit was
$7,992,000, an increase of $2,584,000, or 48%, as compared to 1998.
This represents a gross margin of 60% as compared to 52% for the same
period in 1998.
Sales and Marketing Expenses
Sales and marketing expenses for the three months ended
September 30, 1999 were $1,098,000, a decrease of $20,000, or 2%,
over the three months ended September 30, 1998. Selling and
marketing expenses increased 23% in the first nine months of 1999 to
$3,744,000 from $3,047,000 in the first nine months of 1998. The
increase is 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. Additionally, the Company continues to invest in its
customer support infrastructure, which becomes more and more
important as our client base continues to expand.
Research and Development
Research and development costs for the three months ended
September 30, 1999 were $598,000, an increase of $177,000, or 42%, as
compared to the three months ended September 30, 1998. Research and
development costs increased 42% in the first nine months of 1999 to
$1,771,000 from $1,249,000 in the first nine months of 1998. The
increase is due to the addition of R&D personnel, mainly in France,
due to the acquisition of Secureware in May 1999.
General and Administrative Expenses
General and administrative expenses for the three months ended
September 30, 1999 were $625,000, a decrease of $141,000, or 18%,
compared to the three months ended September 30, 1998. General and
administrative expenses increased 27% in the first nine months of
1999 to $2,239,000 from $1,760,000 in the first nine months of 1998.
This increase is due to the addition of administrative support staff
and legal fees associated with a lawsuit that was settled earlier in
1999.
Interest Expense
Interest expense for the three months ended September 30, 1999
was $230,000, compared to $223,000, an increase of 3% over the same
period of 1998. Interest expense decreased 42% in the first nine
months of 1999 to $645,000 from $1,103,000 in the first nine months
of 1998. This decrease is due to a reduction in the debt base,
facilitated by the private placement of common stock that occurred in
April 1999.
Operating Income (Loss)
The Company's operating income for the three months ended
September 30, 1999 was $460,000, compared to an operating loss of
$157,000 for the three months ended September 30, 1998. The Company
had operating income of $236,000 for the first nine months of 1999,
as compared to an operating loss of $648,000 for the first nine
months of 1998.
Income Taxes
Income tax expense for the three months ended September 30, 1999
was $383,000, compared to $248,000 for the three months ended
September 30, 1998. For the nine months ended September 30, 1999,
income tax expense totaled $744,000, compared to expense of $380,000
for the same period in 1998. Income 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 Chairman of the
Board, and one of the stockholders of the Company's original
corporate predecessor.
The Company's cash and cash equivalents were $4,712,000 at
September 30, 1999, which is an increase of approximately $3,189,000
from $1,523,000 at December 31, 1998. As of September 30, 1999, the
Company had working capital of $5,650,000. During the third quarter
of 1999, the Company used the cash provided by operations principally
for working capital needs.
Capital expenditures during the first nine months of 1999 were
$289,000 and consisted primarily of computer equipment and office
furniture and fixtures. The Company acquired a French company,
SecureWare, in May 1999 for $1,500,000. Payment was made in both
stock and cash, with payments being spread over 1 year.
In April 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. The Company
believes that its current cash balances and anticipated cash
generated from operations will be sufficient to meet its anticipated
cash needs through 2000. Continuance of the Company's operations
beyond 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. 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 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. 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 it 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 remedied 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities. None.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Approximately 80% of the Company's business is conducted outside
the United States in Europe and Asia/Pacific. The majority of
business operations are transacted in foreign currencies. As a
result, the Company has exposure to foreign exchange fluctuations.
The Company is affected by both foreign currency translation and
transaction adjustments. The Company does not hold any financial
instruments for trading purposes. Translation adjustments result
from the conversion of the foreign subsidiaries' balance sheets and
income statements to U.S. dollars at year-end exchange rates and
weighted average exchange rates, respectively. Translation
adjustments resulting from this process are recorded directly into
stockholders' equity. Transaction adjustments result from currency
exchange movements when a foreign subsidiary transacts business in a
currency that differs from its local currency. These transactions are
recorded as gains or losses in the Company's statement of operations.
The Company's foreign exchange exposure was minimized in 1999 as
the majority of the Company's foreign subsidiaries' business
transactions were spread across approximately 40 different countries
and currencies. This geographic diversity reduces the risk to the
Company's operating results. Company has not entered into foreign
currency exchange forward contracts or other derivative arrangements
to manage risks associated with foreign exchange rate fluctuations.
Also, the Company performs periodic reviews of outstanding balances
and settles intercompany accounts to minimize foreign exchange
transaction gains and losses.
The Company has minimal interest rate risk. The Company's $8
million debt is made up of fixed rate notes, ranging from 9.0% to
9.5%, which are not subject to market fluctuations. The maturities of
these notes range from 2001 to 2002.
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 Registrant during
the quarter ended September 30, 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 November 13, 1999.
VASCO Data Security International, Inc.
/s/ Mario R. Houthooft
Mario R. Houthooft
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.
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,712,263
<SECURITIES> 0
<RECEIVABLES> 2,383,842
<ALLOWANCES> 73,000
<INVENTORY> 807,468
<CURRENT-ASSETS> 9,543,241
<PP&E> 1,338,347
<DEPRECIATION> 835,997
<TOTAL-ASSETS> 12,939,103
<CURRENT-LIABILITIES> 3,893,364
<BONDS> 0
0
0
<COMMON> 24,650
<OTHER-SE> 588,281
<TOTAL-LIABILITY-AND-EQUITY> 12,939,103
<SALES> 13,412,035
<TOTAL-REVENUES> 13,412,035
<CGS> 5,420,400
<TOTAL-COSTS> 7,755,200
<OTHER-EXPENSES> 370,968
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 645,126
<INCOME-PRETAX> (779,659)
<INCOME-TAX> 744,381
<INCOME-CONTINUING> (1,524,040)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
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