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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, 2003
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 July 31, 2003, 30,389,484 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 SIX MONTHS ENDED JUNE 30, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of
December 31, 2002 and June 30, 2003 (Unaudited) ........................................... 3
Consolidated Statements of Operations (Unaudited)
for the three and six months ended June 30, 2002 and 2003................................... 4
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
for the three and six months ended June 30, 2002 and 2003................................... 5
Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 2002 and 2003............................................. 6
Notes to Consolidated Financial Statements.................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 13
Item 4. Controls and Procedures..................................................................... 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................ 14
SIGNATURES .............................................................................................. 15
CERTIFICATIONS........................................................................................... 16
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2002 2003
------------ ------------
(Audited) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 2,615,935 $ 3,983,028
Accounts receivable, net of allowance for doubtful accounts
of $461,129 and $315,464 in 2002 and 2003 2,870,533 3,864,131
Inventories, net 1,579,125 1,653,007
Prepaid expenses 394,867 331,411
Assets of discontinued operations 155,661 434,183
Other current assets 119,687 356,037
------------ ------------
Total current assets 7,735,808 10,621,797
Property and equipment:
Furniture and fixtures 1,485,140 1,847,747
Office equipment 1,926,553 1,813,618
------------ ------------
Total property and equipment 3,411,693 3,661,365
Accumulated depreciation (2,255,693) (2,725,517)
------------ ------------
Net property and equipment 1,156,000 935,848
Intangible assets, net of accumulated amortization of $3,545,104 in 2002
and $3,830,977 in 2003 1,910,504 1,631,973
Goodwill, net of accumulated amortization of $972,931 in 2002 and 2003 249,967 249,967
Other assets 81,161 82,428
------------ ------------
TOTAL ASSETS $ 11,133,440 $ 13,522,013
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,589,645 $ 3,472,059
Accounts payable 1,849,572 2,512,470
Liabilities related to assets of discontinued operations 107,643 157,204
Deferred revenue 644,330 1,193,332
Other accrued expenses 2,099,166 2,267,186
------------ ------------
Total current liabilities 8,290,356 9,602,251
Long-term debt, less current maturities 32,006 37,798
STOCKHOLDERS' EQUITY:
Series C Convertible Preferred Stock, $.01 par value - 500,000 shares
authorized; 150,000 shares issued and outstanding in 2002 and 2003 9,108,066 9,690,058
Common stock, $.001 par value - 75,000,000 shares authorized;
28,389,484 shares issued and outstanding in 2002 and 2003 28,389 28,389
Additional paid-in capital 36,763,330 36,189,681
Accumulated deficit (42,608,077) (41,405,905)
Accumulated other comprehensive income (loss) -
cumulative translation adjustment (480,630) (620,259)
------------ ------------
Total stockholders' equity 2,811,078 3,881,964
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,133,440 $ 13,522,013
============ ============
See accompanying notes to consolidated financial statements.
-3-
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------- ----------------------------
2002 2003 2002 2003
------------ ------------ ------------ ------------
Net revenues $ 3,761,084 $ 5,952,649 $ 9,239,624 $ 11,071,117
Cost of goods sold 1,646,160 2,422,199 3,875,020 4,581,419
------------ ------------ ------------ ------------
Gross profit 2,114,924 3,530,450 5,364,604 6,489,698
Operating costs:
Sales and marketing (exclusive of $(21,274) and $8,617
for the three and six months ended June 30, 2002,
respectively, and $5,840 and $8,343 for the three and
six months ended June 30, 2003, respectively, reported
below as non-cash compensation (recovery) 1,970,156 1,418,939 3,885,373 3,010,468
Research and development 722,000 708,016 1,392,291 1,316,740
General and administrative (exclusive of $(69,227) and
$28,048 for the three and six months ended June 30, 2002,
respectively, reported below as non-cash compensation
(recovery) 988,750 715,112 2,035,983 1,454,620
Non-cash compensation (recovery) (90,501) 5,840 36,665 8,343
------------ ------------ ------------ ------------
Total operating costs 3,590,405 2,847,907 7,350,312 5,790,171
Operating income (loss) from continuing operations (1,475,481) 682,543 (1,985,708) 699,527
Interest expense, net (152,214) (47,832) (193,332) (97,069)
Other income (expense), net (94,462) 180,347 (44,666) 380,717
------------ ------------ ------------ ------------
Income (loss) from continuing operations before income taxes (1,722,157) 815,058 (2,223,706) 983,175
Provision for income taxes 140,313 264,462 140,272 264,462
------------ ------------ ------------ ------------
Income (loss) from continuing operations (1,862,470) 550,596 (2,363,978) 718,713
Discontinued operations (Note 3):
Income from discontinued operations 192,041 170,225 533,356 483,459
------------ ------------ ------------ ------------
Net income (loss) (1,670,429) 720,821 (1,830,622) 1,202,172
Preferred stock accretion (290,996) (290,996) (581,992) (581,992)
------------ ------------ ------------ ------------
Net income (loss) available to common shareholders $ (1,961,425) $ 429,825 $ (2,412,614) $ 620,180
============ ============ ============ ============
Basic and diluted income (loss) per common share:
Income (loss) from continuing operations $ (0.08) $ 0.01 $ (0.11) $ -
Income (loss) from discontinued operations 0.01 - 0.02 0.02
============ ============ ============ ============
Net income (loss) $ (0.07) $ 0.01 $ (0.09) $ 0.02
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 28,346,416 28,389,484 28,304,967 28,389,484
============ ============ ============ ============
Diluted 28,346,416 28,436,854 28,304,967 28,419,508
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
-4-
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------------- ----------------------------
2002 2003 2002 2003
----------- ------------ ----------- -----------
Net income (loss) $(1,670,429) $ 720,821 $(1,830,622) $ 1,202,172
Other comprehensive income (loss) -
cumulative translation adjustment 281,501 (80,911) 96,078 (139,629)
----------- ----------- ----------- -----------
Comprehensive income (loss) $(1,388,928) $ 639,910 $(1,734,544) $ 1,062,543
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
-5-
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30,
----------------------------
2002 2003
----------- -----------
Cash flows from operating activities:
Net income (loss) $(1,830,622) $ 1,202,172
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 649,484 550,103
Non-cash compensation expense 36,665 8,343
Changes in assets and liabilities, net of effects of acquisitions and
discontinued operations:
Accounts receivable, net (187,597) (709,826)
Inventories, net 521,478 57,930
Prepaid expenses 107,824 88,937
Deferred income taxes 83,000 -
Other current assets 213,390 (207,179)
Accounts payable (923,627) 470,161
Deferred revenue (367,625) 459,359
Accrued expenses (516,514) 43,582
Net cash used in discontinued operations (553,369) (145,614)
----------- -----------
Net cash provided by (used in) operating activities (2,767,513) 1,817,968
----------- -----------
Cash flows from investing activities:
Acquisition of Identikey, Ltd. - (7,341)
Other assets (70,928) -
Additions to property and equipment, net (475,975) (11,843)
----------- -----------
Net cash used in investing activities (546,903) (19,184)
----------- -----------
Cash flows from financing activities - repayment of debt (64,954) (124,048)
Effect of exchange rate changes on cash 96,078 (307,643)
----------- -----------
Net increase (decrease) in cash (3,283,292) 1,367,093
Cash, beginning of period 6,342,440 2,615,935
----------- -----------
Cash, end of period $ 3,059,148 $ 3,983,028
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 12,868 $ 1,753
Supplemental disclosure of non-cash investing activities:
Common stock issued in connection with acquisition $ 284,458 $ -
See accompanying notes to consolidated financial statements.
-6-
VASCO DATA SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 2002.
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.
STOCK-BASED COMPENSATION
At June 30, 2003, the Company had a stock-based employee compensation
plan. The Company accounts for the plan using the intrinsic method under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees", and related Interpretations. No stock-based
compensation is reflected in net income, as all options granted under the plan
had an exercise price equal to the market value of the underlying Common Stock
on the date of grant. The following table illustrates the effect on net income
(loss) and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation.
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
2002 2003 2002 2003
------------ ------------ ------------ ------------
Net income (loss) available to common
shareholders as reported $ (1,961,425) $ 429,825 $ (2,412,614) $ 620,180
Deduct: Total stock-based employee
compensation determined under fair
value based method for all awards net of tax 249,092 260,185 497,670 512,038
------------ ------------ ------------ ------------
Pro forma net income (loss) $ (2,210,517) $ 169,640 $ (2,910,284) $ 108,142
============ ============ ============ ============
Net income (loss) per common share-basic and diluted:
As reported $ (0.07) $ 0.01 $ (0.09) $ 0.02
Pro forma $ (0.08) $ - $ (0.10) $ -
-7-
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements have been
reclassified to conform to the 2003 presentation.
Overhead allocations ceased in the third quarter of fiscal year 2002
because their basis for allocation was no longer appropriate nor was it
representative of the operational activities of the departments affected. For
the quarter ended June 30, 2002, net overhead allocations from the Company's
General and Administrative and the Research and Development cost centers have
been reclassified from Sales and Marketing to their original cost centers.
NOTE 2- INVENTORIES
Inventories, consisting principally of hardware and component parts,
are stated at the lower of cost or market. Cost is determined using the
first-in-first-out (FIFO) method.
Inventories, net of valuation allowance of $111,566 and $262,251 at
December 31, 2002 and June 30, 2003, respectively, are comprised of the
following:
December 31, June 30,
2002 2003
---------- ----------
Component parts $ 772,523 $ 403,204
Work-in-process and finished goods 806,602 1,249,803
---------- ----------
Total $1,579,125 $1,653,007
========== ==========
NOTE 3 - DISCONTINUED OPERATIONS
During the second quarter of 2003, VASCO entered into negotiations to
sell its VACMAN Enterprise (VME) business, originally known as Intellisoft
and/or Snareworks. The sale was consummated on July 8, 2003, effective July 1,
2003, see Note 4 - Subsequent Events. In accordance with Statement of Financial
Accounting Standard (SFAS) No. 144 " Accounting for the Impairment or Disposal
of Long-Lived Assets", the assets and liabilities of this business unit have
been disaggregated from the operational assets and liabilities of the Company
and are being treated as long-lived assets to be disposed of. The results of the
operations of VME for the three and six month periods ended June 30, 2003 have
been reported as results of discontinued operations. Prior periods have been
restated to conform to this presentation.
Assets of and liabilities related to discontinued operations included
in the consolidated balance sheet are as follows:
December 31, June 30,
2002 2003
----------- --------
Accounts receivable $ 10,724 $363,535
Prepaid expenses 12,612 4,950
Property and equipment, net 132,325 65,698
-------- --------
$155,661 $434,183
======== ========
Accounts payable $ 852 $ 319
Deferred revenue 75,721 104,546
Other accrued expenses 31,070 52,339
-------- --------
$107,643 $157,204
======== ========
-8-
Income from discontinued operations is as follows:
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2002 2003 2002 2003
-------- -------- -------- --------
Net revenues $389,169 $496,616 $943,057 $989,183
Cost of goods sold - 78,583 - 81,904
-------- -------- -------- --------
Gross profit 389,169 418,033 943,057 907,279
Operational costs 197,128 247,807 409,701 423,821
-------- -------- -------- --------
Income from discontinued operations $192,041 $170,226 $533,356 $483,458
======== ======== ======== ========
Included in operational costs are $120,000 of costs incurred during the three
and six months ended June 30, 2003 related to the sale of the business unit.
NOTE 4 - SUBSEQUENT EVENTS
On July 8, 2003, effective as of July 1, 2003, VASCO sold its VACMAN
Enterprise business, originally known as Intellisoft and/or Snareworks, to
SecureD Services, Inc. (SSI). Under the terms of the agreement, VASCO received a
senior secured promissory note of approximately $1.1 million and $2 million of
Convertible Preferred Stock from SSI in exchange for the VACMAN Enterprise
assets. The promissory note bears a 6% interest rate and is payable in 36 equal
and consecutive monthly payments. The Preferred Stock includes a 6% cumulative
stock dividend, payable quarterly, and can be converted into SSI's common stock
at defined intervals beginning July 1, 2005.
On July 15, 2003, VASCO reached an agreement with Ubizen N.V. (Ubizen)
whereby VASCO would purchase and redeem all of the VASCO Series C Convertible
Preferred Stock and Common Stock Purchase Warrants owned by Ubizen. Under the
terms of the Purchase Agreement, VASCO paid $3 million to Ubizen and issued 2
million shares of VASCO Common Stock on July 25, 2003. An additional $1 million
will be paid to Ubizen on or before November 14, 2003. The Common Stock issued
by VASCO is subject to a lock-up period wherein the lock-up will expire in
increments of 500,000 shares each on October 15, 2003, January 15, 2004, April
15, 2004 and July 15, 2004. Once the lock-up expires, the shares will be subject
to volume trading restrictions through January 1, 2005.
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,"
-9-
"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 RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND
JUNE 30, 2002
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, 2003 and 2002. Results of prior periods have been restated
to report the results from the VACMAN Enterprise business as a discontinued
operation.
Revenues
Revenues for the three months ended June 30, 2003 were $5,953,000, an
increase of $2,192,000, or 58%, as compared to the three months ended June 30,
2002. Revenues for the six months ended June 30, 2003 were $11,071,000, an
increase of $1,831,000, or 20%, as compared to the six months ended June 30,
2002. The increase in revenues for both the three and six months periods were
attributable to growth in both the Banking and Corporate Network Access markets.
For the six months ended June 30, 2003, revenues by target market were
79% from Banking, 19% from Corporate Network Access and 2% from Maintenance.
This compares with 82% of revenues from Banking, 17% from Corporate Network
Access and 1% from Maintenance in the first six months of the prior year.
Geographically, 81% of revenues for the six months ended June 30, 2003
were from Europe, 9% from the U.S. and 10% from other countries, primarily in
the Asia/Pacific region. For the six months ended June 30, 2002, 86% of the
revenues were from Europe, 6% from the U.S. and 8% from other countries,
primarily in the Asia/Pacific region.
Cost of Goods Sold
Cost of goods sold for the three and six months ended June 30, 2003
were $2,422,000 and $4,581,000, respectively, an increase of $776,000, or 47%
compared to the three months ended June 30, 2002 and an increase of $706,000 or
18% compared to the six months ended June 30, 2003. The increase in both periods
was due to the increase in sales as described previously.
Gross Profit
The Company's gross profit for the three months ended June 30, 2003 was
$3,530,000, an increase of $1,416,000, or 67%, as compared to the three months
ended June 30, 2002. This represents a gross margin of 59%, as compared to 56%
for the same period of 2002. The increase in gross profit is due to increased
revenues for the period as well as an improvement in the gross profit as a
percentage of revenue in the quarter. The increase in gross profit as a
percentage of revenue primarily reflects an increase in maintenance revenue as a
percentage of total revenue compared to the prior period.
The Company's gross profit for the six months ended June 30, 2003 was
$6,490,000, an increase of
-10-
$1,125,000, or 21%, as compared to the six months ended June 30, 2002. This
represents a gross margin of 59%, as compared to 58% for the same period of
2002. The increase in gross profit is due to increased revenues for the period
as well as an improvement in the gross profit as a percentage of revenue in the
quarter. The increase in gross profit as a percentage of revenue primarily
reflects an increase in both Corporate Network Access and maintenance revenue,
which provide higher gross margins, as a percentage of total revenue compared to
the prior period.
Sales and Marketing Expenses
Sales and Marketing expenses for the three months ended June 30, 2003
were $1,419,000, a decrease of $551,000, or 28% compared to the three months
ended June 30, 2002. The reduction in expense reflects reductions in expenses
related to personnel and spending in most discretionary areas, including but not
limited to trade shows, publicity, recruiting, and travel, partially offset by
the unfavorable impact of changes in currency. Average headcount dedicated to
sales and marketing declined from 56 to 46 from the second quarter of 2002 to
the second quarter of 2003.
Sales and Marketing expenses for the six months ended June 30, 2003
were $3,010,000, a decrease of $875,000, or 23% compared to the six months ended
June 30, 2002. The reduction in expense for the six-month period compared to the
same period in the prior year reflects the same factors as noted above for the
second quarter.
Research and Development
Research and Development (R&D) costs for the three months ended June
30, 2003 were $708,000, a decrease of $14,000, or 2%, as compared to the three
months ended June 30, 2002. The reduction in expense reflects reductions in
expenses as a result of our consolidation of research activities into our
Belgian and Australian locations and a reduction in the use of third-party
suppliers of R&D resources, partially offset by the unfavorable impact of
changes in currency. Total headcount dedicated to R&D was unchanged.
R&D costs for the six months ended June 30, 2003 were $1,317,000, a
decrease of $76,000, or 5%, as compared to the six months ended June 30, 2002.
The reduction in expense for the six-month period compared to the same period in
prior year reflects the same factors as noted above for the second quarter.
General and Administrative Expenses
General and Administrative expenses for the three months ended June 30,
2003 were $715,000, a decrease of $274,000, or 28%, compared to the three months
ended June 30, 2002. The reduction in expense reflects reductions in expenses
related to personnel and spending in most discretionary areas, including but not
limited to contract services, travel, rent, and telephone, partially offset by
the unfavorable impact of changes in currency. Average administrative headcount
was reduced from 13 in the second quarter of 2002 to 10 at the end of the second
quarter of 2003.
General and Administrative expenses for the six months ended June 30, 2003 were
$1,455,000, a decrease of $581,000, or 29%, compared to the six months ended
June 30, 2002. The reduction in expense for the six-month period compared to the
same period in the prior year reflects the same factors as noted above for the
second quarter.
Interest Expense, Net
Net interest expense for the three months ended June 30, 2003 was
$48,000, compared to $152,000 for the same period in 2002. This change was due,
in part, to an improvement in average net cash balances.
-11-
Net interest expense for the six months ended June 30, 2003 was
$97,000, compared to $193,000 for the same period in
2002.
Other Income, Net
Net other income for the three months ended June 30, 2003 was $180,000,
compared to net expense of $94,000 for the same period in 2002. For the six
months ended June 30, 2003, net other income was $381,000 compared to net
expense of $45,000 for the same period in 2002. These changes are primarily due
to transaction gains reported by our foreign operations as a result of the U.S.
dollar weakening against the Euro.
Income Tax Expense
Income tax expense for the three and six months ended June 30, 2003 was
$264,000 compared to $140,000 for the same period in 2002. The increase in
expense reflects the increase in taxable income of our Belgian operating entity
in the second quarter of 2003.
Discontinued Operations
Income from discontinued operations, the VACMAN Enterprise business
unit, was $170,000 and $483,000 for the three and six months ended June 30,
2003, respectively. Income from VACMAN Enterprise was $192,000 and $533,000 for
the three and six months ended June 30, 2002, respectively. The decline in
income is primarily attributed to increased expenses related to the sale of the
business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $3,983,000 at June 30,
2003, which is an increase of approximately $1,367,000 or 52% from $2,616,000 at
December 31, 2002. The increase in cash was a result of a positive operating
cash flow, deposits received on orders to be delivered in fiscal year 2003 and a
reduction in days sales outstanding in net accounts receivable. Earnings,
including earnings from discontinued operations, before interest, taxes,
depreciation and amortization (EBITDA) were $1,343,000 and $2,181,000 for the
three and six-month periods ended June 30, 2003, respectively. A reconciliation
of EBITDA to net income (loss) for the three and six-month periods ended June
30, 2002 and 2003 follows:
Three Months Ended (unaudited), Six Months Ended (unaudited),
------------------------------- ------------------------------
June 30, 2002 June 30, 2003 June 30, 2002 June 30, 2003
------------- ------------- ------------- -------------
EBITDA $(1,006,000) $ 1,343,000 $ (781,000) $ 2,181,000
Interest expense, net 152,000 48,000 193,000 97,000
Tax provision 140,000 264,000 140,000 264,000
Depreciation and amortization 372,000 310,000 716,000 618,000
----------- ----------- ----------- -----------
Net income (loss) $(1,670,000) $ 721,000 $(1,830,000) $ 1,202,000
=========== =========== =========== ===========
EBITDA is used by management for comparisons to other companies within
our industry as an alternative to GAAP measures and is used by investors and
analysts in evaluating performance. EBITDA, including earnings from discontinued
operations, is computed by adding back net interest expense, taxes, depreciation
and amortization to net income (loss) as reported. EBITDA should be considered
in addition to, but not as a substitute for, other measures of financial
performance reported in accordance with accounting principles generally accepted
in the United States. EBITDA, as defined above, may not be comparable to
similarly titled measures reported by other companies.
Net deposits received, defined as total deposits received less product
shipped, were $549,000 during the first six months of 2003 and days sales
outstanding in net accounts receivable declined from 74 days at December 31,
2002 to 60 days at June 30, 2003.
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At June 30, 2003, the Company had lines of credit from European banks,
secured by the Company's trade accounts receivable totaling approximately
2,000,000 Euros, none of which were used.
As of June 30, 2003, the Company had working capital of $1,020,000
compared with a deficit of $554,000 at December 31, 2002. Working capital at
both June 30, 2003 and December 31, 2002 included the $3,400,000 term loan due
to Dexia Bank on September 30, 2003 as a current liability.
On July 15, 2003, VASCO reached an agreement with Ubizen N.V. (Ubizen)
whereby VASCO would purchase and redeem all of the VASCO Series C Convertible
Preferred Stock and Common Stock Purchase Warrants owned by Ubizen. Under the
terms of this purchase agreement, VASCO paid $3 million to Ubizen and issued 2
million shares of VASCO Common Stock on July 25, 2003. An additional $1 million
will be paid to Ubizen on or before November 14, 2003.
After the closing of the repurchase of the Series C Preferred Stock,
the Company had cash and cash equivalents of approximately $0.9 million. In
addition, the line of credit secured by trade accounts receivable continued to
be available and unused. The Company is currently reviewing financing
alternatives, including the sale of additional securities and the renegotiation
of lines of credit.
The Company believes that its current cash balances, credit available
under our existing overdraft agreement, the anticipated cash generated from
operations, including the realization of deferred revenue recorded as a current
liability, deposits that will be received in future quarters on orders of our
Digipass product and the impact of either (a) obtaining additional equity
financing, (b) entering into a separate agreement to replace or repay the loan
to Dexia, or (c) having Mr. T. Kendall Hunt, the Company's CEO, surrender his
shares of Common Stock, which are pledged to Dexia as collateral for the loan,
will be sufficient to meet our anticipated cash needs over the next twelve
months.
There is substantial risk, however, that the Company may not be able to
either obtain additional financing or the growth in its revenue and cash
receipts will not be sufficient to generate the funds needed to repay the debt
to Dexia within the terms of the existing agreement. If it is unable to meet its
revenue and cash goals and is also unable to either renegotiate the terms of the
agreement with Dexia or reach a mutually acceptable agreement with Mr. Hunt as
an indemnity for his loss as a result of his surrender of shares of VASCO Common
Stock to Dexia, it will need to significantly reduce its workforce, sell certain
of its assets, enter into strategic relationships or business combinations,
discontinue some or all of its operations, or take other similar restructuring
actions. While the Company expects that these actions would result in a
reduction of recurring costs, they also may result in a reduction of recurring
revenues and cash receipts. It is also likely that the Company would incur
substantial non-recurring costs to implement one or more of these restructuring
actions.
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, 2003. For additional information, refer to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2002.
ITEM 4. CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer of the
Company (its principal executive officer and principal financial officer,
respectively) have concluded, based on their evaluation as of the end of the
period covered by this Report, that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports filed or submitted by it under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods required by the SEC's rules and forms, and
include controls and procedures designed to ensure that information required to
be disclosed by the Company in such reports is accumulated and
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communicated to the Company's management, including the Chairman and Chief
Executive Officer and the Chief Financial Officer of the Company, as appropriate
to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
Exhibit 31.1 Statement Under Oath of Principal Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
August 14, 2003
Exhibit 31.2 Statement Under Oath of Principal Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
August 14, 2003
Exhibit 32.1 Statement Under Oath of Principal Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated
August 14, 2003
Exhibit 32.2 Statement Under Oath of Principal Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated
August 14, 2003
(b) REPORTS ON FORM 8-K:
(i) On July 14, 2003, we furnished a Current Report on Form 8-K
reporting financial results for the second quarter ended
June 30, 2003.
(ii) On July 23, 2003, we filed a Current Report on form 8-K
reporting on the sale of VASCO's VACMAN Enterprise business
to SecureD Services, Inc.
(iii) On July 28, 2003, we furnished a Current Report on Form 8-K
updating previously released financial results for the second
quarter ended June 30, 2003 and the text of the script for
the July 24, 2003 Earnings Conference Call.
(iv) On August 12, 2003, we filed a Current Report on Form 8-K
reporting on the purchase from Ubizen N.V. of all VASCO
Series C Convertible Preferred Stock and Common Stock
Purchase Warrants owned by Ubizen N.V.
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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, 2003.
VASCO Data Security International, Inc.
/s/ T. Kendall Hunt
-----------------------------------------
T. Kendall Hunt
Chief Executive Officer and Chairman
of the Board of Directors (Principal
Executive Officer)
/s/ Clifford K. Bown
-----------------------------------------
Clifford K. Bown
Executive Vice President and Chief
Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
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