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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, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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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 June 30, 2002, 28,389,484 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 JUNE 30, 2002
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of
December 31, 2001 and June 30, 2002 (Unaudited) ............... 3
Consolidated Statements of Operations (Unaudited)
for the three and six months ended June 30, 2001 and 2002....... 4
Consolidated Statements of Comprehensive Loss (Unaudited)
for the three and six months ended June 30, 2001 and 2002....... 5
Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 2001 and 2002................. 6
Notes to Consolidated Financial Statements...................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 12
SIGNATURES............................................................... 12
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This report contains the following trademarks of the Company, some of
which are registered: VASCO, AccessKey, VACMan Server and VACMan/CryptaPak,
AuthentiCard and Digipass.
-2-
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
2001 2002
---- ----
(AUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 6,342,440 $ 3,059,148
Accounts receivable, net of allowance
for doubtful accounts of $206,913
and $222,390 in 2001 and 2002 3,791,916 4,471,363
Inventories, net 2,012,567 1,491,089
Prepaid expenses 405,815 291,401
Deferred income taxes 83,000 --
Other current assets 661,597 448,207
------------ ------------
Total current assets 13,297,335 9,761,208
Property and equipment
Furniture and fixtures 1,733,349 1,785,649
Office equipment 2,070,090 2,457,982
------------ ------------
3,803,439 4,243,631
Accumulated depreciation (2,088,939) (2,506,225)
------------ ------------
1,714,500 1,737,406
Intangible assets, net of accumulated
amortization of $4,621,160 in 2001
and $4,237,558 in 2002 2,411,888 2,423,471
Other assets 27,273 98,201
------------ ------------
Total assets $ 17,450,996 $ 14,020,286
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 158,990 $ 319,069
Accounts payable 3,326,652 2,403,025
Deferred revenue 869,893 367,532
Other accrued expenses 2,280,491 1,754,143
------------ ------------
Total current liabilities 6,636,026 4,843,769
Long-term debt, less current maturities 3,667,882 3,442,849
STOCKHOLDERS' EQUITY:
Series C Convertible Preferred Stock,
$.01 par value - 500,000 shares
authorized; 150,000 shares issued and
outstanding in 2001 and 2002 7,944,082 8,526,074
Common stock, $.001 par value -
75,000,000 shares authorized;
28,263,058 shares issued and
outstanding in 2001 and 28,263 28,389
28,389,484 issued and outstanding
in 2002
Additional paid-in capital 37,693,098 37,432,104
Accumulated deficit (38,069,082) (39,899,704)
Accumulated other comprehensive
income (loss) - cumulative
translation adjustment (449,273) (353,195)
------------ ------------
Total stockholders' equity 7,147,088 5,733,668
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,450,996 $ 14,020,286
============ ============
See accompanying notes to consolidated financial statements.
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VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2001 2002 2001 2002
---- ---- ---- ----
Net revenues $ 8,034,877 $ 4,150,253 15,907,602 10,182,681
Cost of goods sold 2,906,178 1,646,160 5,698,903 3,875,020
------------ ------------ ------------ ------------
Gross profit 5,128,699 2,504,093 10,208,699 6,307,661
Operating costs:
Sales and marketing (exclusive of
$(27,387) and $18,617 for the three
and six months ended June 30, 2001,
respectively, and $(21,274) and $8,617
for the three and six months ended
June 30, 2002, respectively , reported
below as non-cash compensation) 3,589,002 2,047,154 6,929,275 4,205,083
Research and development 1,614,538 919,475 2,995,159 1,578,326
General and administrative (exclusive of
$(62,703) and $42,624 for the three and six
months ended June 30, 2001, respectively,
and $(69,227) and $28,048 for the three and
six months ended June 30, 2002, respectively,
as reported below as non-cash compensation) 1,541,036 911,405 2,871,754 1,939,939
Non-cash compensation (recovery) (90,090) (90,501) 61,241 36,665
------------ ------------ ------------ ------------
Total operating costs 6,654,486 3,787,533 12,857,429 7,760,013
Operating income (loss) (1,525,787) (1,283,440) (2,648,730) (1,452,352)
Interest income (expense), net 77,990 (152,214) 207,962 (193,332)
Other income (expense), net (55,623) (94,462) 72,550 (44,666)
------------ ------------ ------------ ------------
Income (loss) before income taxes (1,503,420) (1,530,116) (2,368,218) (1,690,350)
Provision (benefit) for income taxes 19,753 140,313 193,530 140,272
------------ ------------ ------------ ------------
Net loss $ (1,523,173) $ (1,670,429) $ (2,561,748) $ (1,830,622)
Preferred stock accretion (290,996) (290,996) (581,992) (581,992)
------------ ------------ ------------ ------------
Net loss available to common shareholders $ (1,814,169) $ (1,961,425) $ (3,143,740) $ (2,412,614)
============ ============ ============ ============
Basic and diluted net loss per common
share $ (0.06) $ (0.07) $ (0.11) $ (0.09)
============ ============ ============ ============
Weighted average common shares
outstanding 28,259,387 28,346,416 28,076,257 28,304,967
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
-4-
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2001 2002 2001 2002
---- ---- ---- ----
Net loss (1,523,173) (1,670,429) (2,561,748) (1,830,622)
Other comprehensive income (loss) -
cumulative translation adjustment (158,481) 281,501 (411,979) 96,078
----------- ----------- ----------- -----------
Comprehensive income (loss) $(1,681,654) $(1,388,928) $(2,973,727) $(1,734,544)
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
-5-
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------------
2001 2002
---- ----
Cash flows from operating activities:
Net loss $ (2,561,748) $ (1,830,622)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,269,318 716,111
Loss (gain) on sale of fixed assets (15,256) --
Non-cash compensation expense 61,241 36,665
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable, net 1,867,172 (679,447)
Inventories, net (603,166) 521,478
Prepaid expenses 99,300 114,414
Deferred income taxes -- 83,000
Other current assets 183,015 213,390
Accounts payable (579,484) (923,627)
Deferred revenue (741,157) (502,361)
Accrued expenses (161,785) (526,348)
------------ ------------
Net cash provided by (used in) operations (1,182,550) (2,777,347)
------------ ------------
Cash flows from investing activities:
Acquisition of Identikey, Ltd. 141,156 284,459
Other Assets -- (70,928)
Additions to intangibles -- (274,625)
Additions to property and equipment, net (177,643) (475,975)
------------ ------------
Net cash provided by (used in) investing activities (36,487) (537,069)
------------ ------------
Cash flows from financing activities:
Repayment of debt (159,994) (64,954)
Proceeds from exercise of stock options/warrants 32,857 --
------------ ------------
Net cash provided by (used in) financing activities (127,137) (64,954)
Effect of exchange rate changes on cash (407,311) 96,078
------------ ------------
Net increase (decrease) in cash (1,753,485) (3,283,292)
Cash, beginning of period 13,832,645 6,342,440
------------ ------------
Cash, end of period $ 12,079,160 $ 3,059,148
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 97,026 $ 12,868
Income taxes paid $ 120,535 $ --
Common stock issued in connection with acquisition $ 1,903,366 $ --
See accompanying notes to consolidated financial statements.
-6-
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" or "VASCO") 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, 2001.
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. All significant intercompany accounts
and transactions have been eliminated. The operating results for the interim
periods presented are not necessarily indicative of the results expected for a
full year.
Note 2- New Accounting Pronouncements Including Intangible Asset Data
During the first quarter of 2002, VASCO implemented SFAS No. 142,
"Goodwill and Other Intangible Assets", which replaces the requirements to
amortize intangible assets with indefinite lives and goodwill with a requirement
for an impairment test. SFAS 142 also establishes requirements for identifiable
intangible assets. As a result, during the first quarter VASCO reclassified
$1,222,898 of intangible assets into goodwill. Operating income for the first
six months of 2001 includes $83,862 of amortization of goodwill and other
intangible assets that are not included in 2002 results, because of the
implementation of SFAS No. 142.
Intangible asset data as of June 30, 2002 are as follows:
Gross Carrying Accumulated
Amount Amortization
Amortized intangible assets -
Current technology $5,438,130 $3,264,628
Unamortized intangible assets - Goodwill $1,222,898 $ 972,931
Aggregate amortization expense -
For the six months ended June 30, 2002 $ 262,983
Estimated amortization expense for the year ended:
December 31, 2002 $ 525,963
December 31, 2003 484,176
December 31, 2004 271,008
December 31, 2005 271,008
Net income would have been $41,931 higher for the second quarter and
$83,862 higher for the first six months of 2001, and basic and diluted earnings
per share would not have changed for the second quarter or the first six months
of 2001, if SFAS 142 had been implemented at the beginning of 2001.
-7-
In June 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations". SFAS 143 addresses financial accounting and reporting
obligations associated with the retirement of tangible long-lived assets and for
the associated asset retirement costs. SFAS 143 must be applied starting with
fiscal years beginning after June 15, 2002. Management is currently evaluating
the impact that the adoption of SFAS 143 will have on the consolidated financial
statements.
Note 3- Acquisition
On March 29, 2001, VASCO acquired approximately 90% percent of the outstanding
capital stock of Identikey, Ltd. in exchange for 366,913 shares of Company
common stock. In May of 2002, VASCO acquired approximately 9.7% of the
outstanding capital stock of Identikey, Ltd. in exchange for 126,426 shares of
Company common stock and approximately $40,000 in cash. The value of the stock
and cash exchanged for these shares in May 2002 was approximately $324,000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
VASCO designs, develops, markets and supports open standards-based
hardware and software security systems which manage and secure access to data.
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, 2002 and June 30, 2001
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, 2002 and 2001.
Revenues
Revenues for the three months ended June 30, 2002 were $4,150,000, a
decrease of $3,885,000, or 48%, as compared to the three months ended June 30,
2001. Revenues from the Digipass product line represented about 86% of our sales
while revenues from the VACMAN product line represented about 14% of our sales.
This compares with 77% of revenues from Digipass products versus 23% from VACMAN
products in the prior year second quarter. The change in composition of sales is
due to the decision to cease active sales and marketing activities for VACMAN
Enterprise software. Geographically, 17% of revenues in the second quarter of
2002 were from the U.S. and 83%
-8-
from outside the U.S., primarily Europe. In the second quarter of 2001, 23% of
revenues were from the U.S. and 77% from outside the U.S., primarily Europe.
This change is also due to the reduction in sales from VACMAN Enterprise
products.
For the six months ended June 30, 2002, revenues were $10,183,000, a
decrease of $5,725,000, or 36%, as compared to the same period last year.
Cost of Goods Sold
Cost of goods sold for the three months ended June 30, 2002 was
$1,646,000, a decrease of $1,260,000, or 43%, as compared to the three months
ended June 30, 2001. The decrease was due to the decline in sales as previously
described.
For the six months ended June 30, 2002, cost of goods sold was
$3,875,000, a decrease of $1,824,000, or 32%, as compared to the same period
last year.
Gross Profit
The Company's gross profit for the three months ended June 30, 2002 was
$2,504,000, a decrease of $2,625,000 or 51%, as compared to the three months
ended June 30, 2001. The decrease in gross profit is due to lower revenues for
the period. This represents a gross margin of 60%, as compared to 64% for the
same period of 2001. The decline in margin is related to the product sales mix,
as there were less sales from VACMAN Enterprise products in 2002, which
typically have higher gross profit margins.
Sales and Marketing Expenses
Sales and marketing expenses for the three months ended June 30, 2002
were $2,047,000, a decrease of $1,542,000, or 43%, over the three months ended
June 30, 2001. The reduction of expense is as a result of headcount reductions
from 66 at June 30, 2001 to 51 at June 30, 2002, as sales and marketing
activities related to the VACMAN Enterprise product line were eliminated.
Additionally, reductions in advertising, public relations, and trade shows
contributed to this decline.
For the six months ended June 30, 2002, sales and marketing expenses
were $4,205,000, a decrease of $2,724,000, or 39% compared to 2001, for the same
reasons as outlined above.
Research and Development
Research and development costs for the three months ended June 30, 2002
were $919,000, a decrease of $695,000, or 43%, as compared to the three months
ended June 30, 2001. The Company has consolidated its research and development
centers, reducing headcount from 56 to 21.
For the six months ended June 30, 2002, research and development
expenses totaled $1,578,000, a decrease of $1,417,000, or 47%, as compared to
the same period last year.
General and Administrative Expenses
General and administrative expenses for the three months ended June 30,
2002 were $911,000, a decrease of $630,000, or 41%, compared to the three months
ended June 30, 2001. This decrease was principally due to headcount reduction
from 29 to 13. Also contributing to this decrease were reduced depreciation and
amortization expenses related to the assets written off at the end of last year,
and reduced costs to support a smaller world-wide infrastructure.
-9-
For the six months ended June 30, 2002, general and administrative
expenses were $1,940,000, a decrease of $932,000, or 32% compared to the same
period last year.
Interest Expense, Net
Net interest expense for the three months ended June 30, 2002 was
$152,000, compared to net interest income of $78,000 for the same period in
2001. This change was due to a reduction of invested cash balances.
For the six months ended June 30, 2002, net interest expense was
$193,000, compared to net interest income of $208,000 for the same period last
year.
Income Taxes
Income tax expense of $140,000 for the three and six months ended June
30, 2002 is composed of $57,000 related to foreign operations and $83,000
related to the write-off of a deferred tax asset in the United States. Income
tax expense of $20,000 and $194,000 for the three and six months ended June 30,
2001, respectively, relate to foreign operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $3,059,000 at June 30,
2002, which is a decrease of approximately $3,283,000 from $6,342,000 at
December 31, 2001. As of June 30, 2002, the Company had working capital of
$4,917,000 compared with $6,661,000 at December 31, 2001. If the Company's
operating results for the second half of the year do not improve as compared
with the first half of 2002, the Company could have a cash deficit by the end of
2002. Although the Company has credit lines that could be used to finance a cash
deficit, there is no assurance that these credit lines would continue to be
available, as these credit lines are cancelable by the issuer at any time.
Continuing operating losses could result in a need for additional financing, and
there is no assurance that such financing would be available.
At June 30, 2002, the Company had lines of credit from European banks
totaling approximately $2,000,000, of which approximately $1,800,000 was
available for use.
Capital expenditures during the first six months of 2002 were $476,000
and consisted primarily of computer equipment and office furniture and fixtures.
For the three months ended June 30, 2002, the Company recorded an
operating loss before non-cash recovery for stock options to certain officers of
the Company of $1,374,000 and a net loss before these options of $1,761,000. The
Company had a loss before non-cash recovery, interest, taxes depreciation and
amortization of $1,096,000.
For the six months ended June 30, 2002, the Company recorded an
operating loss before non-cash compensation for stock options to certain
officers of the Company of $1,416,000 and a net loss before these options of
$1,794,000. The Company had a loss before non-cash compensation, interest,
taxes, depreciation and amortization of $744,000.
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, there can be no assurance that any such acquisitions will be made.
Effective November 1, 2002 minimum capitalization requirements for
continued listing on the NASDAQ National Market is $10,000,000 of total equity.
As of June 30, 2002, the Company did not meet this standard. The Company may be
subject to de-listing from the NASDAQ National Market if it does not meet the
requirement by November of 2002.
-10-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk during
the six month period ended June 30, 2002. For additional information, refer to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2001.
-11-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On March 13, 2002, a suit was filed against the Company
claiming patent infringement, false designation or origin and
tradedress infringement. The case is currently being evaluated by the
Company and its legal counsel. The Company believes the suit is without
merit. As the suit is in its early stages, management is unable to
estimate the effect of this suit at this time.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
On July 16, 2002 the Shareholders of the Company, at its Annual Meeting, elected
the following individuals as Directors of the Company:
T. Kendall Hunt
Mario Houthooft
Michael Cullinane
Michael Mulshine
Christian Dumolin
Chris LeBeer
F. David Laidley
ITEM 5. OTHER INFORMATION. NONE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. None.
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 14, 2002.
VASCO Data Security International, Inc.
/s/ Mario R. Houthooft
----------------------------------------
Mario R. Houthooft
Chief Executive Officer and President
/s/ Dennis D. Wilson
----------------------------------------
Dennis D. Wilson
Executive Vice President and Chief
Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
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