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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 SEPTEMBER 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
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
As of October 31, 2003, 30,425,284 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 NINE MONTHS ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets (Unaudited) as of
December 31, 2002 and September 30, 2003 ....................... 3
Consolidated Statements of Operations (Unaudited)
for the three and nine months ended September 30,
2002 and 2003 .................................................. 4
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited) for the three and nine months ended September 30,
2002 and 2003 .................................................. 5
Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 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 ...................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..... 14
Item 4. Controls and Procedures ........................................ 14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ............ 15
Item 6. Exhibits and Reports on Form 8-K ............................... 15
SIGNATURES ................................................................ 16
CERTIFICATIONS ............................................................ 17
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, 2002 September 30, 2003
----------------- ------------------
ASSETS
CURRENT ASSETS:
Cash $ 2,615,935 $ 5,523,655
Accounts receivable, net of allowance for doubtful accounts
of $461,129 and $318,798 in 2002 and 2003 2,870,533 2,724,610
Inventories, net 1,579,125 1,654,366
Prepaid expenses 394,867 245,828
Assets of discontinued 155,661 --
Other current assets 119,687 712,052
---------------- ----------------
Total current assets 7,735,808 10,860,511
Property and equipment
Furniture and fixtures 1,485,140 1,870,294
Office equipment 1,926,553 1,971,706
---------------- ----------------
Total property and equipment 3,411,693 3,842,000
Accumulated depreciation (2,255,693) (2,994,430)
---------------- ----------------
Net property and equipment 1,156,000 847,570
Intangible assets, net of accumulated amortization of $3,545,104 in 2002
and $3,958,627 in 2003 1,910,504 1,504,323
Goodwill 249,967 249,967
Note receivable and investment in SSI -- 1,211,966
Other assets 81,161 86,844
---------------- ----------------
TOTAL ASSETS $ 11,133,440 $ 14,761,181
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,589,645 $ --
Accounts payable 1,849,572 1,818,859
Liabilities related to assets of discontinued operations 107,643 42,775
Deferred revenue 644,330 678,708
Payable to Ubizen related to stock purchase -- 1,000,000
Other accrued expenses 2,131,172 2,667,002
---------------- ----------------
Total current liabilities 8,322,362 6,207,344
STOCKHOLDERS' EQUITY :
Series C Convertible Preferred Stock, $.01 par value - 500,000 shares
authorized; 150,000 shares issued and outstanding in 2002 9,108,066 --
Series D Convertible Preferred Stock, $10,000 par value - 500,000 shares
authorized; 800 shares issued and outstanding in 2003 5,830,787
Common stock, $.001 par value - 75,000,000 shares authorized; 28,389,484
and 30,415,159 shares issued and outstanding in 2002 and 2003,
respectively 28,389 30,415
Additional paid-in capital 36,763,330 47,162,596
Accumulated deficit (42,608,077) (43,858,067)
Accumulated other comprehensive income (loss) -
cumulative translation adjustment (480,630) (611,894)
---------------- ----------------
Total stockholders' equity 2,811,078 8,553,837
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,133,440 $ 14,761,181
================ ================
See accompanying notes to consolidated financial statements.
-3-
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMB000R 30 SEPTEMBER 30
------------------------- ----------------------------
2002 2003 2002 2003
----------- ----------- ------------ ------------
Net revenues $ 4,739,854 $ 5,598,872 $ 13,979,478 $ 16,669,989
Cost of goods sold 2,060,751 2,146,119 5,935,771 6,727,538
----------- ----------- ------------ ------------
Gross profit 2,679,103 3,452,753 8,043,707 9,942,451
Operating costs:
Sales and marketing (exclusive of $(16,310) and $(7,694)
for the three and nine months ended September 30, 2002,
respectively, and $31,666 and $40,009 for the three and
nine months ended September 30, 2003, respectively, reported
below as non-cash compensation expense (recovery)) 1,825,605 1,578,804 5,740,869 4,589,272
Research and development 650,864 746,944 2,043,155 2,063,684
General and administrative (exclusive of $(53,076) and
$(25,028) for the three and nine months ended
September 30, 2002, respectively, reported below as
non-cash compensation expense (recovery)) 1,177,345 1,037,001 3,183,437 2,491,621
Non-cash compensation expense (recovery) (69,386) 31,666 (32,722) 40,009
----------- ----------- ------------ ------------
Total operating costs 3,584,428 3,394,415 10,934,739 9,184,586
Operating income (loss) from continuing operations (905,325) 58,338 (2,891,032) 757,865
Interest expense, net (45,109) (22,480) (238,441) (119,549)
Other income (expense), net (70,932) (4,959) (115,598) 375,758
----------- ----------- ------------ ------------
Income (loss) from continuing operations before income taxes (1,021,366) 30,899 (3,245,071) 1,014,074
Provision for income taxes -- 224,650 140,272 489,112
----------- ----------- ------------ ------------
Income (loss) from continuing operations (1,021,366) (193,751) (3,385,343) 524,962
Discontinued operations (Note 3):
Income (loss) from discontinued operations, net of tax 212,484 (6,771) 745,840 596,916
Gain on sale of discontinued operations, net of tax -- 1,488,360 -- 1,368,132
----------- ----------- ------------ ------------
Net income (loss) (808,882) 1,287,838 (2,639,503) 2,490,010
Preferred stock accretion and dividends (290,996) (67,445) (872,988) (649,347)
----------- ----------- ------------ ------------
Net income (loss) available to common shareholders $(1,099,878) $ 1,220,393 $ (3,512,491) $ 1,840,663
=========== =========== ============ ============
Basic and diluted income (loss) per common share:
Income (loss) from continuing operations $ (0.05) $ (0.01) $ (0.15) $ --
Income (loss) from discontinued operations $ 0.01 0.05 0.03 0.06
=========== =========== ============ ============
Net income (loss) $ (0.04) $ 0.04 $ (0.12) $ 0.06
=========== =========== ============ ============
Weighted average common shares outstanding:
Basic 28,389,484 30,391,827 28,333,449 29,211,293
=========== =========== ============ ============
Diluted 28,389,484 31,222,297 28,333,449 29,510,033
=========== =========== ============ ============
See accompanying notes to consolidated financial statements.
-4-
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------------- -----------------------------------
2002 2003 2002 2003
--------------- ---------------- --------------- ----------------
Net income (loss) $ (808,882) $ 1,287,838 $ (2,639,504) $ 2,490,010
Other comprehensive income (loss) -
cumulative translation adjustment 85,310 8,365 181,388 (131,264)
--------------- ---------------- --------------- ----------------
Comprehensive income (loss) $ (723,572) $ 1,296,203 $ (2,458,116) $ 2,358,746
=============== ================ =============== ================
See accompanying notes to consolidated financial statements.
-5-
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended September 30,
-------------------------------------
2002 2003
---------------- ----------------
Cash flows from operating activities:
Net income (loss) from continuing operations $ (3,385,343) $ 524,962
Adjustments to reconcile net income (loss) from continuing operations
to net cash provided by (used in) operating activities:
Depreciation and amortization 912,880 817,363
Non-cash compensation expense (recovery) (32,722) 40,009
Changes in assets and liabilities, net of effects of acquisition
and discontinued operations:
Accounts receivable, net (663,126) 333,667
Inventories, net 997,275 79,332
Prepaid expenses (22,791) 171,093
Other current assets 332,209 (262,324)
Deferred income taxes 83,000 --
Accounts payable (1,274,443) (180,121)
Deferred revenue (410,613) (13,617)
Accrued expenses (499,865) 387,565
Net cash provided by discontinued operations 665,959 437,144
---------------- ----------------
Net cash provided by (used in) operating activities (3,297,580) 2,335,073
---------------- ----------------
Cash flows from investing activities:
Acquisition of Identikey, Ltd. (23,362) (7,341)
Other assets (2,869) (4,034)
Proceeds from the disposition of assets 107,765 132,324
Payments received on note receivable -- 45,859
Additions to property and equipment, net (415,371) (48,761)
---------------- ----------------
Net cash used in investing activities (333,837) 118,047
---------------- ----------------
Cash flows from financing activities:
Repayment of debt (154,453) (3,589,645)
Purchase and retirement of Series C preferred stock and warrants -- (3,000,000)
Net proceeds from sale of Series D preferred stock and warrants -- 7,315,922
Proceeds from the exercise of common stock options -- 48,082
---------------- ----------------
Net cash provied by (used in) financing activities (154,453) 774,359
---------------- ----------------
Effect of exchange rate changes on cash 181,388 (319,759)
---------------- ----------------
Net increase (decrease) in cash (3,604,482) 2,907,720
Cash, beginning of period 6,342,440 2,615,935
---------------- ----------------
Cash, end of period $ 2,737,958 $ 5,523,655
================ ================
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 September 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 to
employees 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 Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
2002 2003 2002 2003
---------------- -------------- ---------------- ---------------
Net income (loss) available to common
shareholders as reported............................ $(1,099,878) $1,220,393 $ (3,512,491) $ 1,840,663
Deduct: Total stock-based employee
compensation determined under fair
value based method for all awards 253,891 251,854 751,561 763,892
-------------- ------------- --------------- --------------
Pro forma net income (loss)....................... $(1,353,769) $ 968,539 $ (4,264,052) $ 1,076,771
============== ============= =============== ==============
Net income (loss) per common share-basic and diluted:
As reported......................................... $ (0.04) $ 0.04 $ (0.12) $ 0.06
Pro forma........................................... $ (0.05) $ 0.03 $ (0.15) $ 0.04
Weighted average shares outstanding
Basic................................................ 28,389,484 30,391,827 28,333,449 29,211,293
Diluted.............................................. 28,389,484 31,222,297 28,333,449 29,510,033
-7-
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 September 30, 2003, respectively, are comprised of the
following:
December 31, September 30,
2002 2003
------------------ -----------------
Component parts...................................... $ 772,523 $ 242,831
Work-in-process and finished goods................... 806,602 1,411,535
------------------ -----------------
Total.................................... $ 1,579,125 $ 1,654,366
================== =================
NOTE 3 - DISCONTINUED OPERATIONS
On July 8, 2003, effective as of July 1, 2003, VASCO sold its VACMAN
Enterprise ("VME") 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 with a face value of approximately
$1.1 million, valued at $1.0 million by an independent valuation firm, and $2
million of Convertible Preferred Stock from SSI, valued at $0.6 million by an
independent valuation firm, 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. 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. The results of the operations of VME for the three- and nine- month
periods ended September 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, September 30,
2002 2003
-------------- ---------------
Accounts receivable $ 10,724 $ --
Prepaid expenses 12,612 --
Property and equipment, net 132,325 --
-------------- ---------------
$ 155,661 $ --
============== ===============
Accounts payable $ 852 $ --
Deferred revenue 75,721 --
Other accrued expenses 31,070 42,775
-------------- ---------------
$ 107,643 $ 42,775
============== ===============
-8-
Income from discontinued operations is as follows:
Three months ended Nine months ended
September 30 September 30
------------------------------ --------------------------------
2002 2003 2002 2003
------------- ------------- --------------- -------------
Net revenues $ 387,547 $ -- $ 1,330,604 $ 989,183
Cost of good sold 6,522 -- 6,522 81,904
------------- ------------- --------------- -------------
Gross profit 381,025 -- 1,324,082 907,279
Operational costs 168,541 6,771 578,242 310,363
------------- ------------- --------------- -------------
Operating income (loss) $ 212,484 $ (6,771) $ 745,840 $ 596,916
============= ============= =============== =============
Included in the gain on sale of discontinued operations are $29,000 and $149,000
of costs incurred during the three and nine months ended September 30, 2003,
respectively, related to the sale of the business unit.
NOTE 4 - STOCKHOLDERS' EQUITY
On July 15, 2003, the Company reached an agreement with Ubizen N.V.
("Ubizen") whereby VASCO purchased and redeemed all of the VASCO Series C
Convertible Preferred Stock (the "Series C Preferred Stock") and Common Stock
Purchase Warrants owned by Ubizen. Under the terms of the Purchase Agreement,
the Company paid $3 million to Ubizen and issued 2 million shares of the
Company's Common Stock on July 25, 2003. Using the closing price of the
Company's Common Stock on July 25, 2003, the value of the stock issued was
$4,000,000. An additional $1 million will be paid to Ubizen on or before
November 14, 2003. The Common Stock issued by the Company 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.
On September 11, 2003, the Company sold 800 shares of its Series D 5%
Cumulative Convertible Voting Preferred Stock (the "Series D Preferred Stock")
and 600,000 warrants to purchase Common Stock. The Series D Preferred Stock
carries a 5% dividend, is convertible into 4 million shares of Common Stock at a
fixed price of $2.00 per share and will vote with the Common Stock as a class on
matters presented to the stockholders. The implied value of the Series D
Preferred Stock was $5,714,000, calculated based upon the annual dividend rate
divided by a required rate of return. The warrants are exercisable, over a
five-year period, at $3.47 per share and were valued at $1,455,000 using the
Black-Scholes pricing model. Of the net proceeds from the sale, $5,831,000 was
allocated to the Series D Preferred Stock and $1,485,000 was allocated to the
warrants based upon their relative fair values. In addition, a beneficial
conversion value was calculated for the Series D Preferred Stock as the
difference between the price of the Company's Common Stock at the transaction
date and the conversion price of the Series D Preferred Stock. The amount of the
beneficial conversion, $3,720,000, is analogous to a dividend and was recorded
to retained earnings.
During the third quarter of 2003, the Company issued 25,625 shares of
Common Stock as a result of the exercise of options under the Company's stock
option plan generating total proceeds of $48,082.
-9-
NOTE 5 - SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION
Nine months ended September 30,
---------------------------------------
2002 2003
----------------- -----------------
Supplemental disclosure of cash flow information:
Interest paid $ 12,868 $ 205,753
Supplemental disclosure of non-cash investing activities:
Common stock issued in connection with acquisition $ 284,458 $ --
Note receivable and preferred stock received from sale
of business unit $ -- $ 1,553,000
Supplemental disclosure of non-cash financing activities:
Payable to Ubizen for purchase and retirement of Series C preferred
stock and warrants $ -- $ 1,000,000
Reduction in preferred stock and additional paid-in capital
as a result of the redemption of Series C preferred stock and warrants $ -- $ (11,000,000)
Common stock issued to redeem Series C preferred stock and warrants $ -- $ 11,000,000
Increase in additional paid-in capital related to benefical conversion
of Series D preferred stock $ -- $ 3,720,000
Deemed dividend on preferred stock $ -- $ (3,720,000)
Dividends accrued on preferred stock $ -- $ (20,000)
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.
-10-
COMPARISON OF RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND
SEPTEMBER 30, 2002
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, 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 September 30, 2003 were $5,599,000,
an increase of $859,000, or 18%, as compared to the three months ended September
30, 2002. Revenues for the nine months ended September 30, 2003 were
$16,670,000, an increase of $2,691,000, or 19%, as compared to the nine months
ended September 30, 2002. The increase in revenues for both the three and nine
months periods were attributable to growth in both the Banking and Corporate
Network Access markets.
For the nine months ended September 30, 2003, revenues by target market
were 75% from Banking and 25% from Corporate Network Access. This compares with
83% of revenues from Banking and 17% from Corporate Network Access in the first
nine months of the prior year.
Geographically, 85% of revenues for the nine months ended September 30,
2003 were from Europe, 7% from the U.S. and 8% from other countries, primarily
in the Asia/Pacific region. For the nine months ended September 30, 2002, 84% of
the revenues were from Europe, 7% from the U.S. and 9% from other countries,
primarily in the Asia/Pacific region.
Cost of Goods Sold
Cost of goods sold for the three and nine months ended September 30,
2003 were $2,146,000 and $6,728,000, respectively, an increase of $85,000, or 4%
compared to the three months ended September 30, 2002 and an increase of
$792,000 or 13% compared to the nine months ended September 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 September 30,
2003 was $3,453,000, an increase of $774,000, or 29%, as compared to the three
months ended September 30, 2002. This represents a gross margin of 62%, as
compared to 57% 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 revenue from the
Corporate Network Access market segment as a percentage of total revenue
compared to the prior period. Gross profit as a percentage of revenue is higher
in the Corporate Network Access market segment than in the Banking market
segment.
The Company's gross profit for the nine months ended September 30, 2003
was $9,942,000, an increase of $1,899,000, or 24%, as compared to the nine
months ended September 30, 2002. This represents a gross margin of 60%, 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 the Corporate
Network Access market segment as a percentage of total revenue compared to the
prior period.
Sales and Marketing Expenses
Sales and Marketing expenses for the three months ended September 30,
2003 were $1,579,000, a decrease of $247,000, or 14% compared to the three
months ended September 30, 2002. The reduction in
-11-
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 50 to
46 from the third quarter of 2002 to the third quarter of 2003.
Sales and Marketing expenses for the nine months ended September 30,
2003 were $4,589,000, a decrease of $1,152,000, or 20% compared to the nine
months ended September 30, 2002. The reduction in expense for the nine-month
period compared to the same period in the prior year reflects the same factors
as noted above for the third quarter.
Research and Development
Research and Development (R&D) costs for the three months ended
September 30, 2003 were $747,000, an increase of $96,000, or 15%, as compared to
the three months ended September 30, 2002. The increase in expense reflects an
increase in the headcount dedicated to R&D activities and the unfavorable impact
of changes in currency partially offset by lower spending on third party
contractors. Total headcount dedicated to R&D increased from 15 at September 30,
2002 to 19 at September 30, 2003.
R&D costs for the nine months ended September 30, 2003 were $2,064,000,
an increase of $21,000, or 1%, as compared to the nine months ended September
30, 2002. The increase in expense for the nine-month period compared to the same
period in prior year reflects the same factors as noted above for the third
quarter.
General and Administrative Expenses
General and Administrative expenses for the three months ended
September 30, 2003 were $1,037,000, a decrease of $140,000, or 12%, compared to
the three months ended September 30, 2002. The reduction in expense reflects
reductions in expenses related to 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.
There were 10 persons dedicated to administration at the end of the third
quarter in both 2002 and 2003.
General and Administrative expenses for the nine months ended September 30, 2003
were $2,492,000, a decrease of $692,000, or 22%, compared to the nine months
ended September 30, 2002. The reduction in expense for the nine-month period
compared to the same period in the prior year reflects the same factors as noted
above for the third quarter.
Interest Expense, Net
Net interest expense for the three months ended September 30, 2003 was
$22,000, compared to $45,000 for the same period in 2002. This change was due,
in part, to an improvement in average net cash balances.
Net interest expense for the nine months ended September 30, 2003 was
$120,000, compared to $238,000 for the same period in 2002. Interest expense for
2002 included interest on the settlement of Value Added Tax returns filed in
Belgium for prior years.
Other Income, Net
Net other expense for the three months ended September 30, 2003 was
$5,000 compared to net other expense of $70,000 for the same period in 2002. For
the nine months ended September 30, 2003, net other income was $376,000 compared
to net other expense of $116,000 for the same period in 2002. These
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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 months ended September 30, 2003 was
$225,000 compared to no income tax expense for the same period in 2002. Income
tax expense for the nine months ended September 30, 2003 was $489,000 compared
to $140,000 of income tax expense for the same period in 2002. The increase in
both the three- and nine-month periods reflects the increase in taxable income
of our Belgian operating entity in the first nine months of 2003.
Discontinued Operations
Operating loss from discontinued operations, the VACMAN Enterprise
business unit ("VME"), for the three months ended September 30, 2003 was $7,000
as compared to operating income of $212,000 for the same period in 2002. This
reduction in operating income reflects the sale of operations of VME effective
July 1, 2003. Operating income from VME was $597,000 and $746,000 for the nine
months ended September 30, 2003 and 2002, respectively. The decline in operating
income is primarily attributed to a decline in revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $5,524,000 at September
30, 2003, which is an increase of approximately $2,908,000 or 111% from
$2,616,000 at December 31, 2002. The increase in cash was a result of a positive
operating cash flow, a reduction in days sales outstanding in net accounts
receivable and the sale of Series D Preferred Stock and warrants. The sale of
the Series D Preferred Stock resulted in net proceeds of approximately
$7,316,000, of which $3,604,000 was used to repay the Dexia Loan, including
accrued interest of $204,000.
Earnings, before interest, taxes, depreciation and amortization
(EBITDA) from continuing operations were $320,000 and $1,951,000 for the three
and nine-month periods ended September 30, 2003, respectively. A reconciliation
of EBITDA to net income (loss) from continuing operations for the three and
nine-month periods ended September 30, 2002 and 2003 follows:
Three Months Ended Nine Months Ended
September 30, (unaudited) September 30, (unaudited)
----------------------------- -----------------------------
2002 2003 2002 2003
------------- ----------- ------------- ------------
EBITDA from continuing operations $ (698,000) $ 320,000 $(2,094,000) $1,951,000
Interest expense, net 45,000 22,000 238,000 120,000
Tax provision -- 225,000 140,000 489,000
Depreciaton and amortization 278,000 267,000 913,000 817,000
------------- ----------- ------------- ------------
Net income (loss) from continuing operations $(1,021,000) $(194,000) $(3,385,000) $ 525,000
============= =========== ============= ============
EBITDA is used by management for comparisons to other companies within
our industry as an alternative to generally accepted accounting principles
measures and is used by investors and analysts in evaluating performance. EBITDA
from continuing operations is computed by adding back net interest, taxes,
depreciation and amortization to net income (loss) from continuing operations as
reported. EBITDA
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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.
Days sales outstanding in net accounts receivable declined from 74 days
at December 31, 2002 to 45 days at September 30, 2003.
At September 30, 2003, the Company had an overdraft agreement in place
with Fortis Bank, secured by the Company's trade accounts receivable, wherein
the Company could borrow up to 2,000,000 Euros. Based on receivable balances as
of September 30, 2003, borrowing under the overdraft agreement was limited to
1,520,000 Euros. There were no borrowings outstanding under the overdraft
agreement at September 30, 2003.
As of September 30, 2003, the Company had working capital of $4,653,000
compared with a deficit of $586,000 at December 31, 2002. Working capital at
December 31, 2002 included the $3,400,000 term loan due to Dexia Bank, which was
repaid on September 30, 2003, as a current liability.
On July 15, 2003, VASCO reached an agreement with Ubizen whereby VASCO
purchased and redeemed all of its Series C 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 $1,000,000 will be paid to Ubizen on or
before November 14, 2003.
On September 11, 2003, the Company sold $8,000,000 of its Series D
Preferred Stock and warrants to purchase Common Stock. The net proceeds were
approximately $7,316,000. The proceeds were used to repay the debt to Dexia,
including accrued interest, and replenish working capital used to repurchase the
Series C Preferred Stock from Ubizen.
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, and deposits that will be received in future quarters on orders of
our Digipass product 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
achieve its revenue and cash goals. If the Company does not achieve those goals,
it may 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 nine-month period ended September 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
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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 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 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
On July 9, 2003 the Shareholders of the Company entitled to vote thereon elected
the following individuals as Directors of the Company (total shares eligible to
vote were 28,389,484; total shares voted were 21,222,287):
Name For Against Abstain
T. Kendall Hunt 21,009,783 - 212,504
Michale Cullinane 21,180,275 - 42,012
Forrest D. Laidley 20,997,099 - 225,188
Michael A. Mulshine 21,039,775 - 182,512
John R. Walter 21,183,375 - 38,912
There were 2,761,855 broker non-votes for the matter.
On October 15, 2003, the holders of the requisite percentage of shares of the
Series D Preferred Stock consented in writing to an amendment of the voting
terms of the Series D Preferred Stock to decrease the number of votes to which
each such stockholder is entitled prior to conversion of their Series D
Preferred Stock. As a result of the amendment, instead of each share of Series D
Preferred Stock voting as 5,000 shares of Common Stock (based on the $2.00
conversion rate), each will vote as 3,413 shares (based on the $2.93 closing
market price on September 11, 2003) on all matters submitted to the stockholders
for approval. No change was made to the conversion price or other terms of the
Series D Preferred Stock.
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
November 13, 2003
Exhibit 31.2 Statement Under Oath of Principal Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
November 13, 2003.
Exhibit 32.1 Statement Under Oath of Principal Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated
November 13, 2003.
Exhibit 32.2 Statement Under Oath of Principal Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated
November 13, 2003.
(B) REPORTS ON FORM 8-K:
(i) On September 15, 2003, we filed a Current Report on Form 8-K
reporting the sale of $8 million of Series D Preferred Stock
and warrants to purchase Common Stock.
(ii) On October 24, 2003, we furnished a Current Report on Form 8-K
reporting financial results for the third quarter ended
September 30, 2003
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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 November 13, 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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