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 MARCH 31, 2004
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 X No
--- ---
As of May 12, 2004, 31,756,804 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 MARCH 31, 2004
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of
March 31, 2004 (Unaudited) and December 31, 2003.....................3
Consolidated Statements of Operations (Unaudited)
for the three months ended March 31, 2004 and 2003...................4
Consolidated Statements of Comprehensive Income (Unaudited)
for the three months ended March 31, 2004 and 2003...................5
Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 2004 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..........16
Item 4. Controls and Procedures.............................................16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................17
SIGNATURES...................................................................17
CERTIFICATIONS...............................................................18
- ----------
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
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 3,801,893 $ 4,817,114
Restricted cash 365,190 --
Accounts receivable, net of allowance for doubtful accounts 4,393,882 2,522,670
Inventories, net 1,185,408 1,074,647
Prepaid expenses 403,546 476,353
Deferred income taxes 69,881 69,881
Foreign sales tax receivable 557,892 362,372
Other current assets 373,334 334,621
------------ ------------
Total current assets 11,151,026 9,657,658
Property and equipment
Furniture and fixtures 1,903,318 1,940,399
Office equipment 2,191,331 2,221,220
------------ ------------
4,094,649 4,161,619
Accumulated depreciation (3,295,968) (3,279,527)
------------ ------------
Property and equipment, net 798,681 882,092
Intangible assets, net of accumulated amortization 1,296,784 1,378,362
Goodwill 249,967 249,967
Note receivable and investment in SSI 1,020,623 1,132,499
Other assets 83,454 82,602
------------ ------------
TOTAL ASSETS $ 14,600,535 $ 13,383,180
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,445,736 $ 1,697,950
Deferred revenue 1,169,205 386,446
Accrued wages and payroll taxes 1,398,700 1,514,729
Income taxes payable 219,152 (197,360)
Other accrued expenses 905,656 1,037,840
------------ ------------
Total current liabilities 5,138,449 4,439,605
STOCKHOLDERS' EQUITY :
Series D Convertible Preferred Stock, $10,000 par value - 500,000 shares authorized
559 shares issued and outstanding in 2004, 800 shares issued and outstanding in 2003 4,042,559 5,785,829
Common stock, $.001 par value - 75,000,000 shares authorized; 31,720,204 shares
issued and outstanding in 2004, 30,425,284 shares issued and outstanding in 2003 31,720 30,425
Additional paid-in capital 49,066,207 47,167,362
Accumulated deficit (43,191,668) (43,693,494)
Accumulated other comprehensive income (loss) -
cumulative translation adjustment (486,732) (346,547)
------------ ------------
Total stockholders' equity 9,462,086 8,943,575
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,600,535 $ 13,383,180
============ ============
See accompanying notes to consolidated financial statements.
-3-
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2004 2003
------------ ------------
Net revenues $ 6,021,247 $ 5,118,467
Cost of goods sold 1,575,389 2,159,221
------------ ------------
Gross profit 4,445,858 2,959,246
Operating costs:
Sales and marketing (exclusive of $(63) and $2,503 for
the three months ended March 31, 2004 and 2003,
respectively, reported below as non-cash
compensation (recovery)) 2,093,044 1,676,935
Research and development 707,715 523,317
General and administrative 745,978 739,507
Non-cash compensation (recovery) (63) 2,503
------------ ------------
Total operating costs 3,546,674 2,942,262
------------ ------------
Operating income from continuing operations 899,184 16,984
Interest income (expense), net 28,769 (49,237)
Other income, net 76,645 200,370
------------ ------------
Income before income taxes 1,004,598 168,117
Provision for income 421,931 --
------------ ------------
Net income from continuing operations 582,667 168,117
Discontinued operations:
Income from discontinued operations, net of tax -- 313,234
------------ ------------
Net income 582,667 481,351
Preferred stock accretion and dividends (80,840) (290,996)
------------ ------------
Net income available to common shareholders $ 501,827 $ 190,355
============ ============
Basic and diluted net income per common share:
Income from continuing operations $ 0.02 $ --
Income from discontinued operations -- 0.01
------------ ------------
$ 0.02 $ 0.01
============ ============
Weighted average common shares outstanding:
Basic 31,167,558 28,389,484
============ ============
Dilutive 31,897,800 28,431,763
============ ============
See accompanying notes to consolidated financial statements.
-4-
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
--------- ---------
Net income $ 582,667 $ 481,351
Other comprehensive income (loss) -
cumulative translation adjustment (140,185) (58,718)
--------- ---------
Comprehensive income $ 442,482 $ 422,633
========= =========
See accompanying notes to consolidated financial statements.
-5-
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net income from continuing operations $ 582,667 $ 168,117
Adjustments to reconcile net income from continuing operations
to net cash provided by (used in) operating activities:
Depreciation and amortization 166,927 273,046
Non-cash compensation expense (recovery) (63) 2,503
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable, net (1,989,363) (896,030)
Inventories, net (146,560) 318,490
Prepaid expenses 66,194 44,665
Foreign sales tax receivable (212,681) (287,731)
Other current assets 503 (13,508)
Other assets (1,417) --
Accounts payable (214,775) 726,877
Deferred revenue 813,405 1,035,654
Accrued wages and payroll taxes (76,201) (139,979)
Income taxes payable 423,334 (67,344)
Accrued expenses (72,479) 161,852
Net cash provided by discontinued operations -- 118,060
----------- -----------
Net cash provided by (used in) operations (660,509) 1,444,672
----------- -----------
Cash flows from investing activities:
Acquisition of Identikey, Ltd. -- (7,341)
Additions to property and equipment, net (13,796) (12,362)
Increase in restricted cash (365,190) --
Payments received on note receivable 72,660 --
----------- -----------
Net cash used in investing activities (306,326) (19,703)
----------- -----------
Cash flows from financing activities:
Repayment of debt -- (62,009)
Proceeds from exercise of stock options 27,677 --
Dividends paid on preferred stock (2,042) --
----------- -----------
Net cash provided by (used in) financing activities 25,635 (62,009)
----------- -----------
Effect of exchange rate changes on cash (74,021) (86,401)
----------- -----------
Net increase (decrease) in cash (1,015,221) 1,276,559
Cash, beginning of period 4,817,114 2,615,935
----------- -----------
Cash, end of period $ 3,801,893 $ 3,892,494
=========== ===========
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, 2003.
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.
RESTRICTED CASH
The restricted cash of $365,190 supports a bank guarantee issued in
favor of a customer relating to a contract prepayment. Under the terms of the
contract, the customer has the right to put a claim on the guarantee if the
Company does not perform. The guarantee automatically ceases on January 31,
2012, but can be cancelled earlier upon mutual agreement of both parties. It is
the Company's intention to fulfill the contract during 2004 and cancel the
guarantee.
RECLASSIFICATION
Certain amounts in the first-quarter 2003 consolidated financial
statements have been reclassified to conform to the full-year 2003 and 2004
presentation.
Effective July 1, 2003 the Company sold its VACMAN Enterprise ("VME")
business unit, originally known as Intellisoft and/or Snareworks, to SecureD
Services, Inc. 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 VME have been disaggregated from the
operational assets and liabilities of the Company and the results of operations
of the Company for the three-month period ended March 31, 2003, have been
restated to present separately the results of operations of VME as the results
of discontinued operations.
Additionally, certain operating expenses incurred by the Company's
Australian subsidiary for the three-month period ended March 31, 2003 have been
reclassified from Research and Development to Sales and Marketing to conform the
first quarter 2003 presentation to the full year 2003 and 2004 presentation and
to reflect the Australian subsidiary's increased focus on sales and marketing.
STOCK-BASED COMPENSATION
At March 31, 2004, 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
-7-
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
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 March 31,
----------------------------
2004 2003
--------- ---------
Net income available to common shareholders, as reported .. $ 501,827 $ 190,355
Deduct: Total stock-based employee compensation determined
under fair value-based methods for all awards, net of tax 266,843 252,132
--------- ---------
Pro forma net income (loss) ............................... $ 234,984 $ (61,777)
========= =========
Net income per common share-basic and diluted:
As reported ............................................. $ 0.02 $ 0.01
Pro forma ............................................... $ 0.01 $ --
NOTE 2 - ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable represents sales made to customers on credit. An
allowance for doubtful accounts is maintained based upon estimated losses
resulting from the inability of customers to make payment for goods and
services. Accounts receivable, net of the allowance for doubtful accounts, as of
March 31, 2004 and December 31, 2003, are as follows:
March 31, December 31,
2004 2003
----------- -----------
Accounts receivable ........... $ 4,780,071 $ 2,993,141
Allowance for doubtful accounts (386,189) (470,471)
----------- -----------
Accounts receivable, net .... $ 4,393,882 $ 2,522,670
=========== ===========
-8-
NOTE 3- 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 $256,643 and $252,354 at
March 31, 2004 and December 31, 2003, respectively, are comprised of the
following:
March 31, December 31,
2004 2003
---------- ----------
Component parts .................. $ 377,326 $ 277,065
Work-in-process and finished goods 808,082 797,582
---------- ----------
Total ................. $1,185,408 $1,074,647
========== ==========
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
At March 31, 2004 and December 31, 2003, the ending balances of
goodwill and capitalized technology are as follows:
March 31, December 31,
2004 2003
----------- -----------
Goodwill .................... $ 249,967 $ 249,967
=========== ===========
Capitalized technology ...... $ 5,462,949 $ 5,462,949
Accumulated amortization .... (4,166,165) (4,084,587)
----------- -----------
Capitalized technology, net $ 1,296,784 $ 1,378,362
=========== ===========
NOTE 5 - OTHER ACCRUED EXPENSES
Accrued expenses are comprised of the following:
March 31, December 31,
2004 2003
---------- ----------
Restructuring reserve $ 99,666 $ 134,368
Other accrued expenses 805,990 903,472
---------- ----------
$ 905,656 $1,037,840
========== ==========
The decrease in the restructuring reserve from December 31, 2003 to
March 31, 2004 is due to the reduction in the lease liability related to excess
capacity.
-9-
NOTE 6 - STOCKHOLDERS' EQUITY
During the first quarter of 2004, the Company issued 32,500 shares of
Common Stock as a result of the exercise of options under the Company's stock
option plan generating total proceeds of $27,677. In addition, 241 shares of the
Company's Series D 5% Cumulative Convertible Voting Preferred Stock were
converted resulting in the issuance of 1,205,000 shares of the Company's Common
Stock.
NOTE 7 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Three months ended March 31,
2004 2003
---------- ----------
Supplemental disclosure of cash flow information:
Interest paid ....................................................... $ 3,330 $ 1,753
Income taxes paid ................................................... -- 63,764
Supplemental disclosure of non-cash financing activities:
Common stock issued to Series D preferred stock shareholders
upon conversion of 241 shares of preferred stock (1,205,000 shares) $1,743,270 --
Common stock issued to Series D preferred stock shareholders
as a dividend payment (57,420 shares) ............................. $ 126,256 --
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is based upon the Company's consolidated
results of operations for the three months ended March 31, 2004 and 2003
(percentages in the discussion are rounded to the closest full percentage point)
and should be read in conjunction with our consolidated financial statements
included elsewhere in this Form 10-Q. Results of prior periods have been
restated to report the results from the VACMAN Enterprise business as a
discontinued operation.
We design, develop, market and support identity authentication products
that reduce the risk of loss from unauthorized transactions by validating a
person's identity using a one-time password and obtaining a legally- enforceable
digital signature, if needed, for financial transactions. Our products are used
currently in a wide variety of applications including, but not limited to,
Internet banking, Internet brokerage, e-commerce applications dealing with web
or mobile access and various corporate network access applications. As evidenced
by our current customer base, our products are purchased by companies and,
depending on the business application, are distributed to either its employees
or its customers. Those customers may be other businesses or as an example in
the case of Internet banking, the banks' retail customers.
Our target market is any business process that uses some form of
electronic interface where the owner of that process is at risk if unauthorized
users can gain access to its process and either obtain proprietary information
or execute transactions that are not authorized. Our products can not only
increase the security associated with accessing the business process, thereby
reducing the losses from unauthorized access, but also, in many cases, can
reduce the cost of the process itself by automating activities that were
previously performed manually.
-10-
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 RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003.
Economic Conditions: The Company's revenues may vary significantly with
changes in the economic conditions in the countries in which it sells products
currently. With the Company's current concentration of revenues in Europe and
specifically in the banking/finance vertical market, significant changes in the
economic outlook for the European banking market may have a significant effect
on the revenues of the Company. During difficult economic periods, our customers
often delay the rollout of existing applications and defer purchase decisions
related to the implementation of our product in new applications.
Currency Fluctuations. In the first quarter of 2004 and 2003,
approximately 90% and 95%, respectively, of the Company's revenue were generated
outside the United States. In addition, approximately 79% of its operating
expenses in both periods were incurred outside of the United States. As a
result, changes in currency, especially the Euro to U.S. Dollar, can have a
significant impact on revenue and expenses. To minimize the net impact of
currency, the Company attempts to denominate its billings in a currency such
that it would provide a hedge against the operating expenses being incurred in
that currency. In addition, the Company denominates the majority of our supply
contracts in U.S. dollars.
The Euro strengthened approximately 17% and the Australian Dollar
strengthened approximately 30% against the U.S. Dollar in the first quarter of
2004 as compared to the first quarter of 2003. The Company estimates that the
strengthening of the two currencies in 2004 compared to 2003 resulted in an
increase in revenues of approximately $400,000 and an increase in operating
expenses of approximately $420,000.
The financial position and results of operations of the Company's
foreign subsidiaries are measured using the local currency as the functional
currency. Accordingly, assets and liabilities are translated into U.S. dollars
using current exchange rates as of the balance sheet date. Revenues and expenses
are translated at average exchange rates prevailing during the period.
Translation adjustments arising from differences in exchange rates are included
as a separate component of stockholders' equity. Gains and losses resulting from
foreign currency transactions are included in the consolidated statements of
operations. Foreign exchange transaction gains aggregating $70,000 in the first
quarter of 2004 and $199,000 in the first quarter of 2003 are included in other
non-operating income (expense).
-11-
REVENUE
Revenues by Geographic Regions: We sell the majority of our products in
European countries with significant sales in the United States and other
countries, primarily Australia, Asia/Pacific and South America. The breakdown of
revenue in each of our major geographic areas was as follows:
First Quarter Europe United States Other Countries Total
- ----------------- ---------- ------------- --------------- ----------
Total Revenue:
2004 $4,924,000 $ 624,000 $ 473,000 $6,021,000
2003 4,553,000 249,000 316,000 5,118,000
Percent of Total:
2004 82% 10% 8% 100%
2003 89% 5% 6% 100%
Total revenues in the first quarter of 2004 increased $903,000 or 18%
over 2003. Revenue generated in Europe was $371,000, or 8% higher than 2003. The
increase was primarily attributable to the benefit from changes in the currency
rate. Revenue generated in United States was $375,000 or 150% higher than 2003
and was primarily attributable to new customers in 2004. Revenue generated from
other countries was $157,000 or 50% higher and also primarily reflects revenues
from new customers in 2004.
Revenues by Target Market: Revenues are generated currently from two
primary markets, banking/finance ("Banking") and corporate network access
("CNA") through the use of both direct and indirect sales channels. The
breakdown of revenue between the two primary markets is as follows:
First Quarter Banking CNA Total
- ------------------- ----------- ----------- -----------
Total Revenue:
2004 $ 4,527,000 $ 1,494,000 $ 6,021,000
2003 3,926,000 1,192,000 5,118,000
Percent of Total:
2004 75% 25% 100%
2003 77% 23% 100%
Revenues from the Banking market increased $601,000 or 15% in the first
quarter of 2004 over 2003 and revenues from the CNA market increased $302,000 or
25% in the same period. The increase in revenues in both markets is
attributable, in part, to the development of the indirect sales channel, which
includes distributors, resellers, and solution partners. The indirect sales
channel supplements the Company's direct sales force in the Banking market and
is the primary source of revenues in the CNA market.
The amounts shown above for CNA currently include revenues generated in
the e-commerce market. We expect that the e-commerce market will be an important
source of future revenue for the Company as our products will not only provide a
higher level of security for purchases made over the Internet, they can also
help protect our customers' revenue stream by making it more difficult for
subscribers to our customers' Internet services to share passwords.
-12-
GROSS PROFIT AND OPERATING EXPENSES
The following table sets forth, for the periods indicated, certain
consolidated financial data as a percentage of revenues for the quarters ended
March 31, 2004 and 2003.
Percentage of Revenue
Quarter Ended March 31,
-----------------------
2004 2003
----- -----
Revenues ..................................... 100.0% 100.0%
Cost of goods sold ........................... 26.2 42.2
----- -----
Gross profit ................................. 73.8 57.8
Operating costs:
Sales and marketing .................... 34.7 32.8
Research and development ............... 11.8 10.2
General and administrative ............. 12.4 14.5
Non-cash compensation (recovery) ....... -- --
----- -----
Total operating costs .......... 58.9 57.4
----- -----
Operating income from continuing operations .. 14.9 0.3
Interest income (expense) .................... 0.5 (0.9)
Other income, net ............................ 1.3 3.9
----- -----
Income before income taxes ................... 16.7 3.3
Provision for income taxes ................... 7.0 --
----- -----
Net income from continuing operations ........ 9.7 3.3
===== =====
Gross Profit
Consolidated gross profit for the quarter March 31, 2004 was
$4,446,000, an increase of $1,487,000, or 50%, from the quarter ended March 31,
2003. Gross profit as a percentage of revenue was 74% in the first quarter of
2004, as compared to 58% in the first quarter of 2003. The increase in the gross
profit as a percentage of revenue was primarily related to four factors; the
change of mix of sales within our Banking market, the increase in revenues from
Corporate Network Access market as a percentage of total revenues, the lower
cost of product produced, and the stronger Euro. Sales to new customers, both in
Banking and Corporate Network Access markets, are generally for smaller
quantities and, therefore, have higher margins than sales to our larger
customers in the Banking market.
Gross profit as a percentage of revenue improved as a result of a
change in mix of sales within the Banking market. In 2004, orders from the
Company's larger strategic Banking customers were a smaller percentage of total
revenue. The larger strategic Banking customers generally benefit from volume
purchase discounts and, as a result, have a lower average selling price and a
lower gross margin as a percentage of revenue. As a result of the larger
customers being a smaller percentage of Banking revenues, the margin within the
Banking market in 2004 was higher than in 2003.
Consolidated gross profits, as a percentage of revenue, benefited in
2004 as revenues from the CNA market increased from 23% to 25% of total revenue.
The average gross profit as a percentage of revenue on sales made to the CNA
market is substantially higher than the average gross profit percentage on sales
made to the Banking market. The difference in the margin percentages between the
two markets reflects the fact that orders from Banking market are substantially
larger than orders from the CNA market and that the Company provides volume
purchase discounts.
The average cost per unit sold declined approximately 25% in the first
quarter of 2004 compared to the first quarter of 2003. The decline in cost is
primarily attributable to a change in the mix of units sold and a
-13-
reduction in the per-unit cost of each model.
As previously noted, the Company's purchases of inventory are
denominated in U.S. dollars. Also, as previously noted, the Company denominates
a portion of its sales in Euros in order to offset the affects of currency on
operating expenses. As the Euro and Australian dollars strengthened during the
year, revenues from sales made in Euros and Australian Dollars increased, as
measured in U.S. Dollars, without the corresponding increase in cost of goods
sold. The benefit from changes in currency rates as noted above was
approximately $400,000 and represents an improvement in the gross profit rate of
approximately 1.8 percentage points.
Sales and Marketing Expenses
Consolidated sales and marketing expenses for the quarter ended March
31, 2004 were $2,093,000, an increase of $416,000, or 25%, from the first
quarter of 2003. This increase was primarily due to increased strength of the
Euro and Australian Dollar to the U.S. Dollar and to increases in
compensation-related expenses, including the cost of agents in countries where
the Company does not have a direct sales presence. The average full-time sales
and marketing employee headcount was 46 in the first quarters of both 2004 and
2003.
Research and Development Expenses
Consolidated research and development costs for the quarter ended March
31, 2004 were $708,000, an increase of $184,000, or 35%, from the first quarter
of 2003. This increase was primarily due to increased strength of the Euro and
Australian Dollar to the U.S. Dollar and to increased costs related to the
introduction of new products. Average full-time research and development
employee headcount for continuing operations was 17 in both 2004 and 2003.
General and Administrative Expenses
Consolidated general and administrative expenses for the quarter ended
March 31, 2004 were $746,000, an increase of $6,000, or 1%, from the first
quarter of 2003. This increase was primarily due to increased strength of the
Euro and Australian Dollar to the U.S. Dollar partially offset by reductions in
expenses related to professional services and collections of accounts receivable
that had previously been included in reserves for doubtful accounts. Average
full-time general and administrative employee headcount in 2004 was 11 compared
to 10 in 2003.
Because our operating expenses are based on anticipated revenue levels
and a high percentage of our expenses are fixed, a small variation in the timing
of recognition of revenue could cause significant variations in operating
results from quarter to quarter.
Interest Income (Expense), Net
Consolidated net interest income (expense) was income of $29,000 in
2004 compared to expense of $49,000 in 2003. This change in expense was
primarily due to the repayment of all debt in 2003 and the collection of amounts
due under the installment note from SecureD Services, Inc. The Company invested
its cash balances in savings accounts earning nominal rates of interest.
Other Income (Expense)
Other income (expense) primarily includes exchange gains (losses) on
transactions that are denominated in currencies other than the subsidiaries'
functional currency. The decrease in other income of $124,000 in 2004 from 2003
primarily reflects the decrease in U.S. Dollar denominated liabilities as a
result of the repayment of the term loan in the third quarter of 2003.
-14-
Income Taxes
Income tax expense in the first quarter of 2004 was $422,000 and
compares to no expense in 2003. The expense relates primarily to the Belgian
operating subsidiary, whose tax loss carryforwards were fully utilized in 2003.
The rate in 2004 reflects the Company's current estimate of its tax rate for the
full year, but may vary in future periods as earnings are realized in different
countries with different tax attributes.
At December 31, 2003, the Company has United States net operating loss
carryforwards approximating $27,650,000 and foreign net operating loss
carryforwards approximating $4,070,000. Such losses are available to offset
future taxable income in the respective jurisdictions and expire in varying
amounts beginning in 2004 and continuing through 2023. In addition, if certain
substantial changes in the Company's ownership are deemed to have occurred,
there would be an annual limitation on the amount of the U.S. carryforwards that
could be utilized.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash was $3,802,000 at March 31, 2004, which is a
decrease of approximately $1,015,000 or 21% from $4,817,000 at December 31,
2003. The decrease in cash was primarily related to an increase in days sales
outstanding in accounts receivable partially offset by positive earnings before
interest, taxes, depreciation and amortization (EBITDA).
In addition, the Company has restricted cash of $365,190 at March 31,
2004. The Company expects that the restrictions on the cash will be removed as
product is shipped throughout the next twelve months.
Days sales outstanding in net accounts receivable increased from 37
days at December 31, 2003 to 66 days at March 31, 2004. Days sales outstanding
in receivables increased in the first quarter as a higher percentage of the
revenue in the quarter was realized in the final month of the quarter. In
addition, days sales outstanding in the fourth quarter of 2003 benefited from
prepayments for orders that were shipped in the quarter.
EBITDA from continuing operations for the quarter ended March 31, 2004
and 2003 were $1,143,000 and $490,000, respectively. A reconciliation of EBITDA
to net income (loss) from continuing operations for the three-month periods
ended March 31, 2004 and 2003 follows:
Three Months Ended
March 31,
------------------------------
2004 2003
----------- -----------
(unaudited)
EBITDA from continuing operations $ 1,143,000 $ 490,000
Interest (income) expense, net (29,000) 49,000
Tax provision 422,000 --
Depreciaton and amortization 167,000 273,000
----------- -----------
Net income (loss) from continuing operations $ 583,000 $ 168,000
=========== ===========
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 should be
-15-
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.
At March 31, 2004, 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
March 31, 2004, the full amount of the overdraft agreement was available to the
Company. There were no borrowings outstanding under the overdraft agreement at
March 31, 2004.
As of March 31, 2004, the Company had working capital of $6,013,000, an
increase of $795,000, or 15%, compared with $5,218,000 at December 31, 2003.
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.
For additional information related to risks, refer to Certain Factors
noted in Management's Discussion and Analysis included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk during
the three-month period ended March 31, 2004. For additional information, refer
to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2003.
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 (as defined pursuant to Rule 13a-15(e) under the Securities Exchange
Act of 1934) are effective to ensure that the 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 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.
-16-
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, May 13,
2004.
Exhibit 31.2 Statement Under Oath of Principal Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May
13, 2004.
Exhibit 32.1 Statement Under Oath of Principal Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May
13, 2004.
Exhibit 32.2 Statement Under Oath of Principal Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May
13, 2004.
(b) REPORTS ON FORM 8-K:
(i) A Form 8-K was furnished on February 13, 2004 in connection with a
press release and broadly accessible conference call to discuss
the Company's fourth quarter earnings and results of operations
for the fiscal year ended 2003.
(ii) On April 23, 2004, we furnished a Current Report on Form 8-K
reporting financial results for the first quarter ended March 31,
2004.
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 May 13, 2004.
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)
-17-
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, T. Kendall Hunt, the principal executive officer of VASCO Data Security
International, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of VASCO Data Security
International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary in order to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by the report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons fulfilling the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: May 13, 2004 /s/ T. Kendall Hunt
-------------------------------------------
T. Kendall Hunt
Chief Executive Officer and Chairman of the
Board of Directors
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Clifford K. Bown, the principal financial officer of VASCO Data Security
International, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of VASCO Data Security
International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary in order to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by the report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons fulfilling the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: May 13, 2004 /s/ Clifford K. Bown
------------------------------------------
Clifford K. Bown
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing with the Securities and Exchange Commission of the
Quarterly Report of VASCO Data Security International, Inc. (the "Company") on
Form 10-Q for the period ending March 31, 2004 (the "Report"), I, T. Kendall
Hunt, Chief Executive Officer and Chairman of the Board of Directors of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ T. Kendall Hunt
- --------------------------------------------------------------
T. Kendall Hunt
Chief Executive Officer and Chairman of the Board of Directors
May 13, 2004
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing with the Securities and Exchange Commission of the
Quarterly Report of VASCO Data Security International, Inc. (the "Company") on
Form 10-Q for the period ending March 31, 2004 (the "Report"), I, Clifford K.
Bown, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Clifford K. Bown
- -----------------------
Clifford K. Bown
Chief Financial Officer
May 13, 2004