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 JUNE 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 August 7, 1998, 20,331,057 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 Six Months Ended June 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 June 30, 1998 (Unaudited) ..................3
Consolidated Statements of Operations (Unaudited)
for the three and six months ended June 30, 1997 and 1998.........4
Consolidated Statements of Comprehensive Income (Unaudited)
for the three and six months ended June 30, 1997 and 1998.........5
Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 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...........................................7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................10
SIGNATURES...............................................................13
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
VASCO Data Security International, Inc.
Consolidated Balance Sheets
December 31, June 30,
1997 1998
(Unaudited)
------------ ------------
ASSETS
Current assets:
Cash $ 1,897,666 $ 2,245,602
Accounts receivable, net of allowance for
doubtful accounts of $429,000 and
$69,000 in 1997 and 1998 2,458,451 2,185,590
Inventories, net 1,001,294 1,554,531
Prepaid expenses 86,426 660,160
Deferred income taxes 83,000 83,000
Other current assets 221,572 341,084
--------- ---------
Total current assets 5,748,409 7,069,967
--------- ---------
Property and equipment:
Furniture and fixtures 488,338 554,383
Office equipment 322,434 414,800
--------- ---------
810,772 969,183
Accumulated depreciation (497,381) (586,145)
--------- ---------
313,391 383,038
Goodwill, net of accumulated amortization
of $198,000 and $263,000 in 1997 and 1998 704,124 639,667
Other assets 1,609,901 1,269,756
--------- ---------
Total assets $ 8,375,825 $ 9,362,428
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 3,185,400 $ 2,633,163
Accounts payable 1,083,965 716,408
Customer deposits 426,914 429,356
Other accrued expenses 1,606,810 1,865,707
--------- ---------
Total current liabilities 6,303,089 5,644,634
Long-term debt, including stockholder note
of $5,000,000 in 1997 and 1998 8,442,946 11,470,524
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; 20,331,057 shares
issued and outstanding in 1998 20,133 20,331
Additional paid-in capital 9,186,726 9,796,543
Accumulated deficit (15,901,575) (17,504,394)
Accumulated other comprehensive income-
cumulative translation adjustment (170,162) (65,210)
---------- ----------
Total stockholders' equity (deficit) (6,864,878) (7,752,730)
---------- ----------
Total liabilities and
stockholders' equity (deficit) $ 8,375,825 $ 9,362,428
========= =========
See accompanying notes to consolidated financial statements.
VASCO Data Security International, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
---- ---- ---- ----
Revenues -
data security products $ 3,043,485 $ 3,524,762 $ 6,591,694 $ 6,137,729
Cost of goods sold 1,373,676 1,655,593 3,296,091 2,877,416
---------- ---------- ---------- ----------
Gross profit 1,669,809 1,869,169 3,295,603 3,260,313
---------- ---------- ---------- ----------
Operating costs:
Sales and marketing 871,554 1,046,527 1,603,009 1,929,140
Research and development 265,414 390,532 537,338 827,966
General and administrative 963,068 418,153 1,802,343 993,942
---------- ---------- ---------- ----------
Total operating costs 2,100,036 1,855,212 3,942,690 3,751,048
---------- ---------- ---------- ----------
Operating income (loss) (430,227) 13,957 (647,087) (490,735)
Interest expense (282,052) (670,015) (460,137) (879,585)
Other expense, net (29,714) (86,693) (72,750) (101,155)
---------- ---------- ---------- ----------
Loss before income taxes (741,993) (742,751) (1,179,974) (1,471,475)
Provision for income taxes 57,136 121,969 57,171 131,343
---------- ---------- ---------- ----------
Net loss (799,129) (864,720) (1,237,145) (1,602,818)
Preferred stock dividends (27,000) - (54,000) -
---------- ---------- ---------- ----------
Net loss available to
common stockholders $ (826,129) $ (864,720) $ (1,291,145) $ (1,602,818)
========== ========== =========== ===========
Basic loss per common share $ (0.04) $ (0.04) $ (0.07) $ (0.08)
========== ========== =========== ===========
Shares used to compute
basic loss per common share 18,526,938 20,322,151 18,495,858 20,363,002
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
VASCO Data Security International, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
---- ---- ---- ----
Comprehensive income:
Net loss $(799,129) $(864,720) $(1,237,145) $(1,602,818)
Other comprehensive
income-cumulative
translation adj. (146,952) 275,195 (86,470) 104,952
---------- ---------- ------------ ------------
Comprehensive loss $(946,081) $(589,525) $(1,323,615) $(1,497,866)
========== ========== ============ ============
See accompanying notes to consolidated financial statements.
VASCO Data Security International, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
1997 1998
---- ----
Cash flows from operating activities:
Net loss $ (1,237,145) $ (1,602,818)
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 528,939 494,719
Interest paid in shares of
common stock 193,196 -
Changes in current assets and
current liabilities:
Accounts receivable, net 470,472 272,861
Inventories, net 305,836 (553,237)
Other current assets 85,422 (693,246)
Accounts payable (1,084,972) (367,557)
Customer deposits (564,158) 2,442
Other accrued expenses 123,050 258,897
----------- -----------
Net cash used in operations (1,179,360) (2,187,939)
----------- -----------
Cash flows from investing activities -
additions to property and equipment (39,870) (159,765)
----------- -----------
Net cash used in investing activities (39,870) (159,765)
----------- -----------
Cash flows from financing activities:
Series B preferred stock dividends (54,000) -
Net proceeds from sales of common stock (56,895) 115,347
Proceeds from exercise of stock options 28,938 -
Redemption of common stock (247,261) -
Proceeds from issuance of debt 2,716,141 3,027,578
Repayment of debt (32,126) (552,237)
----------- -----------
Net cash provided by financing activities 2,354,797 2,590,688
----------- -----------
Effect of exchange rate changes on cash (86,470) 104,952
----------- -----------
Net increase in cash 1,049,097 347,936
Cash, beginning of period 1,813,593 1,897,666
----------- -----------
Cash, end of period $ 2,862,690 $ 2,245,602
=========== ===========
Supplemental disclosure of cash
flow information:
Interest paid $ 106,411 $ 175,901
=========== ===========
Income taxes paid $ - $ 133,014
=========== ===========
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.
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 six months ended
June 30, 1998 as compared to VASCO Corp.'s consolidated results of
operations for the three and six months ended June 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 Six Months Ended June 30, 1997 and June 30,
1998
The following discussion and analysis should be read in
conjunction with the Company's Consolidated Financial Statements for
the three and six months ended June 30, 1997 and 1998.
Revenues
Revenues for the three months ended June 30, 1998 were
$3,525,000, an increase of $481,000, or 16%, as compared to the three
months ended June 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 six months ended June 30, 1998, revenues decreased 7% to
$6,138,000 from $6,592,000 in 1997. This decrease can be attributed,
in part, to the introduction of the Digipass 300 during the first
quarter of 1998. Due to the anticipated release of this product,
management believes that many customers held off ordering existing
products, thus curtailing revenue until the shipment of Digipass 300,
which began mid-way through the first quarter of 1998. In addition,
this decrease was due to a reduction in shipments to Concord-Eracom
Nederland BV, the Company's largest customer, during the three months
ended March 31, 1998. However, during 1998, Concord-Eracom Nederland
BV has placed additional orders of approximately $3,750,000. These
orders are expected to be shipped during the second half of 1998 and
1999.
Cost of Goods Sold
Cost of goods sold for the three months ended June 30, 1998 was
$1,656,000, an increase of $282,000, or 21%, as compared to the three
months ended June 30, 1997. This increase is consistent with the
increase in revenues for the same period.
For the six months ended June 30, 1998, cost of goods sold
decreased 13% to $2,877,000 from $3,296,000 in 1997. This decrease
is consistent with the decrease 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 realized in the manufacture of the
products.
Gross Profit
The Company's gross profit for the three months ended June 30,
1998 was $1,869,000, an increase of $199,000, or 12%, as compared to
the three months ended June 30, 1997. This represents a gross margin
of 53% as compared to 55% for the same period in 1997. The decrease
reflects the increased involvement of the Company's indirect channel
during the second quarter of 1998, which results in a slightly lower
margin.
For the six months ended June 30, 1998, gross profit was
$3,260,000, a decrease of $35,000, or 1%, as compared to 1997. This
represents a gross margin of 53% as compared to 50% for the same
period in 1997. Margins have remained steady during 1998. With the
introduction of the Digipass 300 during the first quarter of 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 June 30,
1998 were $1,047,000, an increase of $175,000, or 20%, over the three
months ended June 30, 1997. Selling and marketing expenses also
increased 20% in the first six months of 1998 to $1,929,000 from
$1,603,000 in the first six 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 June
30, 1998 were $391,000, an increase of $125,000, or 47%, as compared
to the three months ended June 30, 1997. Research and development
costs increased 54% in the first six months of 1998 to $828,000 from
$537,000 in the first six months of 1997. The increases are 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
June 30, 1998 were $418,000, a decrease of $545,000, or 57%, compared
to the three months ended June 30, 1997. General and administrative
expenses decreased 45% in the first six months of 1998 to $994,000
from $1,802,000 in the first six 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 VDS during 1997,
as well as a favorable experience with regard to bad debt recovery
and the recovery of 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 June 30, 1998 was
$670,000, compared to $282,000, an increase of 138% over the same
period of 1997. Interest expense increased 91% in the first six
months of 1998 to $880,000 from $460,000 in the first six months of
1997. The increases can be attributed to an increased borrowing base
during 1998.
Operating Income (Loss)
The Company's operating income for the three months ended June
30, 1998 was $14,000, compared to an operating loss of $430,000 for
the three months ended June 30, 1997. The Company had an operating
loss of $491,000 for the first six months of 1998, as compared to
$647,000 for the first six months of 1997, a decrease of 24%.
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 $2,246,000 at June
30, 1998, which is an increase of approximately $348,000 from
$1,898,000 at December 31, 1997. As of June 30, 1998, the Company
had working capital of $1,425,000.
Capital expenditures during the first six months of 1998 were
$160,000 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 December 31, 1998. Continuance of
the Company's operations beyond December 31, 1998, 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
Banque Paribas S.A. and Generale Bank dated June 20, 1997 and June
26, 1997, respectively, for 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 public
offering or obtaining other additional financing.
PART II. OTHER INFORMATION
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 June 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 August 7, 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
6-MOS
DEC-31-1998
JUN-30-1998
2,245,602
0
2,254,590
69,000
1,554,531
7,069,967
969,183
586,145
9,362,428
5,644,634
0
0
0
20,331
(7,642,641)
9,362,428
6,137,729
6,137,729
2,877,416
3,751,048
101,155
0
879,585
(1,471,475)
131,343
(1,602,818)
0
0
0
(1,602,818)
(0.08)
(0.07)
