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, 2002 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 September 30, 2002, 28,389,484 shares of the Company's Common Stock, $.001 par value per share ("Common Stock"), were outstanding.
VASCO DATA SECURITY INTERNATIONAL, INC. FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2001 and September 30, 2002 (Unaudited) ........ 3 Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2001 and 2002...................................................... 4 Consolidated Statements of Comprehensive Loss (Unaudited) for the three and nine months ended September 30, 2001 and 2002...................................................... 5 Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2001 and 2002......... 6 Notes to Consolidated Financial Statements.................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 12 Item 4. Disclosure Controls and Procedures............................ 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings ............................................ 12 Item 4. Submission of Matters To a Vote of Securityholders............ 13 Item 6. Exhibits and Reports on Form 8-K.............................. 13 SIGNATURES............................................................. 13 CERTIFICATIONS......................................................... 14 - ----------------------- This report contains the following trademarks of the Company, some of which are registered: VASCO, AccessKey, VACMan Server and VACMan/CryptaPak, AuthentiCard and Digipass. -2-
PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS VASCO DATA SECURITY INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, SEPTEMBER 30, 2001 2002 ------------ ------------- (AUDITED) (UNAUDITED) ASSETS CURRENT ASSETS: Cash $ 6,342,440 $ 2,737,958 Accounts receivable, net of allowance for doubtful accounts of $206,913 and $199,626 in 2001 and 2002 3,791,916 4,613,350 Inventories,net 2,012,567 1,015,292 Prepaid expenses 405,815 398,656 Deferred income taxes 83,000 - Other current assets 661,597 329,388 ------------ ------------ Total current assets 13,297,335 9,094,644 Property and equipment Furniture and fixtures 1,733,349 1,435,569 Office equipment 2,070,090 2,461,385 ------------ ------------ 3,803,439 3,896,954 Accumulated depreciation (2,088,939) (2,504,670) ------------ ------------ 1,714,500 1,392,284 Intangible assets, net of accumulated amortization of $4,621,160 in 2001 and $4,374,500 in 2002 2,411,888 2,304,007 Other assets 27,273 73,292 ------------ ------------ Total assets $ 17,450,996 $ 12,864,227 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 158,990 $ 231,114 Accounts payable 3,326,652 2,052,209 Deferred revenue 869,893 408,371 Other accrued expenses 2,280,491 1,790,519 ------------ ------------ Total current liabilities 6,636,026 4,482,213 Long-term debt, less current maturities 3,667,882 3,441,305 STOCKHOLDERS' EQUITY : Series C Convertible Preferred Stock, $.01 par value - 500,000 shares authorized; 150,000 shares issued and outstanding in 2001 and 2002 7,944,082 8,817,070 Common stock, $.001 par value - 75,000,000 shares authorized; 28,263,058 shares issued and outstanding in 2001 and 28,263 28,389 28,389,484 issued and outstanding in 2002 Additional paid-in capital 37,693,098 37,071,721 Accumulated deficit (38,069,082) (40,708,586) Accumulated other comprehensive income (loss) - cumulative translation adjustment (449,273) (267,885) ------------ ------------ Total stockholders' equity 7,147,088 4,940,709 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,450,996 $ 12,864,227 ============ ============ See accompanying notes to consolidated financial statements. -3-
VASCO DATA SECURITY INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 2001 2002 2001 2002 ---- ---- ---- ---- Net revenues $ 4,788,409 $ 5,127,401 $ 20,696,011 $ 15,310,082 Cost of goods sold 2,348,403 2,067,273 8,047,306 5,942,293 ------------ ------------ ------------ ------------ Gross profit 2,440,006 3,060,128 12,648,705 9,367,789 Operating costs: Sales and marketing (exclusive of $(57,471)and $(38,854) for the three and nine months ended September 30, 2001, respectively, and $(16,310) and $(7,694) for the three and nine months ended September 30, 2002, respectively, reported below as non-cash compensation, (recovery)) 3,651,467 1,834,729 10,580,742 6,039,813 Research and development 1,453,677 749,344 4,448,836 2,327,670 General and administrative (exclusive of $(131,580) and $(88,956) for the three and nine months ended September 30, 2001, respectively, and $(53,076) and $(25,028) for the three and nine months ended September 30, 2002, respectively, reported below as non-cash compensation, (recovery)) 1,547,798 1,238,282 4,419,552 3,178,221 Non-cash compensation (recovery) (189,051) (69,386) (127,810) (32,722) ------------ ------------ ------------ ------------ Total operating costs 6,463,891 3,752,969 19,321,320 11,512,982 Operating income (loss) (4,023,885) (692,841) (6,672,615) (2,145,193) Interest income (expense), net 558,002 (45,109) 765,964 (238,441) Other income (expense), net 61,982 (70,932) 134,532 (115,598) ------------ ------------ ------------ ------------ Income (loss) before income taxes (3,403,901) (808,882) (5,772,119) (2,499,232) Provision for income taxes 175,633 - 369,163 140,272 ------------ ------------ ------------ ------------ Net loss (3,579,534) (808,882) (6,141,282) (2,639,504) Preferred stock accretion (290,996) (290,996) (872,988) (872,988) ------------ ------------ ------------ ------------ Net loss available to common shareholders $ (3,870,530) $ (1,099,878) $ (7,014,270) $ (3,512,492) ============ ============ ============ ============ Basic and diluted net loss per common share $ (0.14) $ (0.04) $ (0.25) $ (0.12) ============ ============ ============ ============ Weighted average common shares outstanding 28,260,558 28,389,484 28,137,691 28,333,449 ============ ============ ============ ============ See accompanying notes to consolidated financial statements. -4-
VASCO DATA SECURITY INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- ----------------------------- 2001 2002 2001 2002 ---- ---- ---- ---- Net loss $ (3,579,534) $(808,882) $ (6,141,282) $ (2,639,504) Other comprehensive income (loss) - cumulative translation adjustment 255,044 85,310 (156,935) 181,388 ------------ --------- ------------ ------------ Comprehensive income (loss) $ (3,324,490) $(723,572) $ (6,298,217) $ (2,458,116) ============ ========= ============ ============ See accompanying notes to consolidated financial statements. -5-
VASCO DATA SECURITY INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2001 2002 ---- ---- Cash flows from operating activities: Net loss $ (6,141,282) $ (2,639,504) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,114,260 1,035,629 Non-cash compensation expense (recovery) (127,810) (32,722) Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable, net 2,529,151 (821,434) Inventories, net (1,112,919) 997,275 Prepaid expenses 69,070 (16,203) Deferred income taxes - 83,000 Other current assets (270,700) 332,209 Accounts payable (389,026) (1,274,443) Deferred revenue (466,384) (461,522) Accrued expenses (1,060,350) (499,867) ------------- ------------- Net cash provided by (used in) operations (4,855,990) (3,297,582) ------------- ------------- Cash flows from investing activities: Acquisition of Identikey, Ltd. 141,156 (23,362) Other assets (95,427) (2,867) Disposition of assets - 107,765 Additions to property and equipment (817,519) (415,371) ------------- ------------- Net cash provided by (used in) investing activities (771,790) (333,835) ------------- ------------- Cash flows from financing activities: Repayment of debt (249,096) (154,453) Proceeds from exercise of stock options/warrants 32,857 - ------------- ------------- Net cash provided by (used in) financing activities (216,239) (154,453) Effect of exchange rate changes on cash (152,267) 181,388 ------------- ------------- Net increase (decrease) in cash (5,996,286) (3,604,482) Cash, beginning of period 13,832,645 6,342,440 ------------- ------------- Cash, end of period $ 7,836,359 $ 2,737,958 ============= ============= Supplemental disclosure of cash flow information: Interest paid $ 211,856 $ 113,215 Income taxes paid $ 120,535 $ - Common stock issued in connection with acquisition $ 1,903,366 $ 284,459 See accompanying notes to consolidated financial statements. -6-
VASCO DATA SECURITY INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of VASCO Data Security International, Inc. and its subsidiaries (collectively, the "Company" or "VASCO") and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. In the opinion of management, the accompanying unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of the interim periods presented. All significant intercompany accounts and transactions have been eliminated. The operating results for the interim periods presented are not necessarily indicative of the results expected for a full year. NOTE 2- GOODWILL AND OTHER INTANGIBLE ASSETS During the first quarter of 2002, VASCO implemented SFAS No. 142, "Goodwill and Other Intangible Assets", which replaced the requirements to amortize intangible assets with indefinite lives and goodwill with a requirement for an impairment test. SFAS 142 also established requirements for identifiable intangible assets. As a result, during the first quarter VASCO reclassified $1,222,898 of intangible assets into goodwill. Operating income for the first nine months of 2001 includes $137,468 of amortization of goodwill and other intangible assets that are not included in 2002 results, because of the implementation of SFAS No. 142. Intangible asset data as of September 30, 2002 is as follows: Gross Carrying Accumulated Amount Amortization ------ ------------ Amortized intangible assets - Current technology $ 5,455,609 $ 3,401,569 Unamortized intangible assets - Goodwill $ 1,222,898 $ 972,931 Aggregate amortization expense - For the nine months ended September 30, 2002 $ 405,807 Estimated amortization expense for the year ended: December 31, 2002 $ 548,637 December 31, 2003 532,355 December 31, 2004 319,186 December 31, 2005 319,186 Net loss would have been $137,468 lower and basic and diluted loss per share would have decreased $.01 for the nine months ended September 30, 2001, if SFAS 142 had been implemented at the beginning of that period. For the three months ended September 30, 2001, net loss would have been $45,823 lower and diluted loss per share would not have changed, if SFAS 142 had been implemented at the beginning of that period. -7-
NOTE 3 - ACQUISITION On March 29, 2001, VASCO acquired approximately 90% of the outstanding capital stock of Identikey, Ltd. in exchange for 366,913 shares of Company common stock. In May 2002, VASCO acquired approximately 9.7% of the outstanding stock of Identikey, Ltd. in exchange for 126,426 shares of Company common stock and approximately $23,000 in cash. The value of the stock and cash exchanged for these shares in May 2002 was approximately $308,000. The Company intends to acquire the remaining shares outstanding during the fourth quarter of 2002. NOTE 4 - 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 are comprised of the following: December 31, September 30, 2001 2002 ------------ ------------- Component parts $ 412,921 $ 315,494 Work-in-process and finished goods 1,599,646 699,798 ------------ ------------- Total $ 2,012,567 $ 1,015,292 ============ ============= NOTE 5 - IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations." SFAS 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and for the associated asset retirement costs. SFAS 143 must be applied starting with fiscal years beginning after June 15, 2002. Management is currently evaluating the impact that the adoption of SFAS 143 will have on the consolidated financial statements. In June 2002, the FSAB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The Company will adopt the provisions of SFAS 146 for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 will not have an impact on the Company's historical consolidated financial statements. 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 -8-
use of such terms and phrases as "expected," "expects," "believe," "believes," "will," "anticipated," "emerging," "intends," "plans," "could," "may," "estimates," "should," "objective," and "goals" and (ii) are subject to risks and uncertainties and represent the Company's present expectations or beliefs concerning future events. The Company cautions that the forward-looking statements are qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including (a) risks of general market conditions, including demand for the Company's products and services, competition and price levels and the Company's historical dependence on relatively few products, certain suppliers and certain key customers, and (b) risks inherent to the computer and network security industry, including rapidly changing technology, evolving industry standards, increasing numbers of patent infringement claims, changes in customer requirements, price competitive bidding, changing government regulations and potential competition from more established firms and others. Therefore, results actually achieved may differ materially from expected results included in, or implied by these statements. COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001 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, 2002 and 2001. Revenues Revenues for the three months ended September 30, 2002 were $5,127,000, an increase of $339,000, or 7%, as compared to the three months ended September 30, 2001. The increase is primarily due to increased sales to the Corporate Network Access market through VASCO's reseller channel. Geographically, 15% of revenues in the third quarter of 2002 were from the U.S. with 85% from outside the U.S., primarily Europe and Asia Pacific. In the third quarter of 2001, 12% of revenues were from the U.S. with 88% from outside the U.S., primarily Europe. For the nine months ended September 30, 2002, revenues were $15,310,000, a decrease of $5,386,000, or 26%, as compared to the same period last year. The decline is primarily a result of the challenging sales environment in the Company's banking segment and the reduction in new sales of VACMAN Enterprise partially offset by increased sales to the Corporate Network Access market. Customers in the Company's banking segment continue to delay purchase decisions. The decline in new sales of the VACMAN Enterprise (also known as SnareWorks and which provides security for large enterprises using mainframe and client-server applications) is a direct result of the decreased investment in sales and marketing expenses targeted to this customer segment. Even though sales in the Corporate Network Access market are higher than the prior year, sales into this market has been affected by the overall reduction in spending on technology. Geographically, 15% of revenues for the nine months ended September 30, 2002 were from the U.S. with 85% from outside the U.S. For the nine months ended September 30, 2001, 25% of revenues were from the U.S. with 75% from outside the U.S. Cost of Goods Sold Cost of goods sold for the three months ended September 30, 2002 was $2,067,000, a decrease of $281,000, or 12%, as compared to the three months ended September 30, 2001. The improvement reflected lower costs in the Digipass product line. For the nine months ended September 30, 2002, cost of goods sold was $5,942,000, a decrease of $2,105,000 or 26%, as compared to the same period last year. The decline in cost of goods sold was directly related to the reduction in revenues. Gross Profit The Company's gross profit for the three months ended September 30, 2002 was $3,060,000 an increase of $620,000 or 25%, as compared to the three months ended September 30, 2001. Gross profit as a percentage of net revenue was 60% for the quarter ended September 30, 2002, as compared to 51% for the same period of 2001. The increase in gross profit in absolute dollars and as a percentage of revenue reflected the increase in sales to the Corporate Network Access market, which has a higher margin percentage than sales to the banking market, and the overall reduction in Digipass costs. -9-
Gross profit for the nine months ended September 30, 2002, was $9,368,000, a decrease of $3,281,000 or 26% compared to the same period last year. The decline in gross profit is directly related to the reduction in net revenue. As a percentage of net revenue, gross profit was approximately 61% in both years. Gross profit as a percentage of net revenue remained constant as gross profit from VACMAN Enterprise revenues has been offset by the increase in Corporate Network Access as a percentage of total revenue, the increase in VACMAN Server revenues and the lower cost of Digipass product. Sales and Marketing Expenses Sales and marketing expenses for the three months ended September 30, 2002 were $1,835,000, a decrease of $1,817,000, or 50%, over the three months ended September 30, 2001. The reduction of expense reflects the reduction in sales and marketing headcount from 82 at September 30, 2001 to 49 at September 30, 2002. The reduction in headcount is primarily related to the elimination of sales and marketing activities related to the VACMAN Enterprise product line. Additionally, reductions in advertising, public relations, and trade shows contributed to this decline. For the nine months ended September 30, 2002, sales and marketing expenses were $6,040,000, a decrease of $4,541,000, or 43% compared to 2001, for the same reasons as outlined above. Research and Development Research and development costs for the three months ended September 30, 2002 were $749,000, a decrease of $704,000, or 48%, as compared to the three months ended September 30, 2001. The Company has consolidated its research and development centers, reducing headcount from 45 to 19. For the nine months ended September 30, 2002, research and development expenses totaled $2,328,000, a decrease of $2,121,000, or 48%, as compared to the same period last year. General and Administrative Expenses General and administrative expenses for the three months ended September 30, 2002 were $1,238,000, a decrease of $310,000, or 20%, compared to the three months ended September 30, 2001. This decrease was principally due to headcount reduction from 26 to 11. Also contributing to this decrease were reduced depreciation and amortization expenses related to the assets written off at the end of last year, and reduced costs to support a smaller world-wide infrastructure. For the nine months ended September 30, 2002, general and administrative expenses were $3,178,000, a decrease of $1,242,000, or 28% compared to the same period last year primarily due to the aforementioned headcount reduction. Interest Expense, Net Net interest expense for the three months ended September 30, 2002 was $45,000, compared to net interest income of $558,000 for the same period in 2001. This change was due to a reduction of invested cash balances. For the nine months ended September 30, 2002, net interest expense was $238,000, compared to net interest income of $766,000 for the same period last year. This change was due primarily to a reduction of invested cash balances. -10-
Other Expense, Net Other expense, net for the three months ended September 30, 2002 was $71,000 compared to other income of $62,000 for the same period in 2001. The change was due primarily to changes in exchange rates. For the nine months ended September 30, 2002, other expense, net was $116,000, compared to other income, net of $135,000 for the same period last year. The change was due primarily to changes in exchange rates. Income Taxes No income tax expense or benefit was recorded for the three months ended September 30, 2002. No benefit was recorded to offset the pretax loss as realization of the benefit from the additional loss is not assured. Income tax expense of $140,000 for the nine months ended September 30, 2002 is composed of $57,000 related to foreign operations and $83,000 related to the write-off of a deferred tax asset in the United States. Income tax expense of $176,000 and $369,000 for the three and nine months ended September 30, 2001, respectively, relate to foreign operations. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents were $2,738,000 at September 30, 2002, which is a decrease of approximately $3,604,000 from $6,342,000 at December 31, 2001. As of September 30, 2002, the Company had working capital of $4,612,000 compared with $6,661,000 at December 31, 2001. The Company has an overdraft agreement with a European bank pursuant to which the bank will provide funding in a maximum amount equal to 80% of VASCO's Belgium subsidiary's defined receivables. As of September 30, 2002, approximately $1,960,000 was available under that agreement. The agreement does not have a fixed term and can be terminated by the bank without cause with 30 days notice. Should the Company continue to operate at a loss, the bank could terminate the agreement and, as a result, the Company would need to obtain additional financing. There is no assurance that such financing would be available. Additionally, the Company continues to evaluate its options to reduce expenses by consolidating operations where efficiencies can be gained and eliminating expenses related to non-essential activities. The Company's term loan of $3.4 million due September 30, 2003, will be classified as a current liability in the fourth quarter of 2002. Capital expenditures during the first nine months of 2002 were $415,000 and consisted primarily of computer equipment and office furniture and fixtures. For the three months ended September 30, 2002, the Company recorded an operating loss before non-cash recovery for stock options granted to certain officers of the Company of $762,000 and a net loss before these option grants of $878,000. The Company had a loss before non-cash recovery, interest, taxes depreciation and amortization of $514,000. For the nine months ended September 30, 2002, the Company recorded an operating loss before non-cash recovery for stock options granted to certain officers of the Company of $2,178,000 and a net loss before these option grants of $2,672,000. The Company has a loss before non-cash recovery, interest, taxes, depreciation and amortization of $1,258,000. The Company may seek acquisitions of businesses, products and technologies that are complementary or additive to those of the Company. While from time to time the Company engages in discussions with respect to potential acquisitions, there can be no assurance that any such acquisitions will be made. -11-
In July 2002, the Company was notified that effective November 1, 2002, The Nasdaq Stock Market, Inc. would be implementing its new minimum stockholders' equity requirement of $10,000,000 for continued listing on the Nasdaq National Market. The notification further stated that the Company's current shareholders' balance was not adequate to meet the new standard and indicated that the Company would receive a formal written notification of a deficiency if public filings after November 1, 2002 did not reflect the new minimum standard. At the present time, the Company's stockholders' equity balance does not meet the new standard and the Company expects to receive a notice of deficiency from The Nasdaq Stock Market, Inc. Once the notice is received, the Company expects that it will make application for a transfer of the listing to the Nasdaq SmallCap Market. 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, 2002. For additional information, refer to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures The Company maintains a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed by the Company in this Form 10-Q, and in other reports required to be filed under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the rules and forms for such filings. Management of the Company, under the direction of the Company's Chief Executive Officer and Chief Financial Officer, reviewed and performed an evaluation of the effectiveness of the Company's disclosure controls and procedures within 90 days prior to filing this quarterly report (the "Evaluation Date"). Based on that review and evaluation, the Chief Executive Officer and Chief Financial Officer, along with other key management of the Company, have determined that the disclosure controls and procedures were and are effective as designed to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them on a timely basis. Changes in Internal Controls There were no significant changes in the Company's internal controls or other factors that could significantly affect these controls subsequent to the Evaluation Date. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On March 13, 2002, a suit was filed by ActivCard, S.A., against the Company in the United States District Court, District of Delaware, claiming patent infringement, false designation or origin and trade dress infringement. The case is currently being evaluated by the Company and its legal counsel. The Company believes the suit is without merit. As the suit is in its early stages, management is unable to estimate the effect of this suit on the Company at this time. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. -12-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS. On July 16, 2002 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 20,694,351): - ------------------------------------------------------------------------------ Name For Against Abstain - ------------------------------------------------------------------------------ T. Kendall Hunt 20,143,604 - 550,747 Mario Houthooft 20,142,804 - 551,547 Michael Cullinane 20,149,554 - 544,797 Michael Mulshine 20,133,716 - 560,635 Christian Dumolin 20,149,554 - 544,797 Chris LeBeer 20,149,654 - 544,697 There were 4,475,159 broker non-votes for the matter. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. EXHIBITS: EXHIBIT 99.1 STATEMENT UNDER OATH OF PRINCIPAL EXECUTIVE OFFICER DATED NOVEMBER 14, 2002. EXHIBIT 99.2 STATEMENT UNDER OATH OF PRINCIPAL FINANCIAL OFFICER DATED NOVEMBER 14, 2002. REPORTS ON FORM 8-K: None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 14, 2002. VASCO Data Security International, Inc. /s/ MARIO R. HOUTHOOFT ---------------------------------------- Mario R. Houthooft Chief Executive Officer and President /s/ CLIFFORD K. BOWN ---------------------------------------- Clifford K. Bown Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer -13-
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 AND SECURITIES AND EXCHANGE COMMISSION RELEASE 34-46427 I, Mario R. Houthooft, the principal executive officer of VASCO Data Security International, Inc., certify that: 1. I have reviewed this quarterly report on Form 10Q of VASCO Data Security International, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and we have: (a) Designed such disclosure controls and procedures 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 quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (b) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons fulfilling the equivalent function): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 14, 2002 /s/ MARIO R. HOUTHOOFT ---------------------------------- Mario R. Houthooft Chief Executive Officer and President and Director (Principal Executive Officer) -14-
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 AND SECURITIES AND EXCHANGE COMMISSION RELEASE 34-46427 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 10Q of VASCO Data Security International, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and have: (a) Designed such disclosure controls and procedures 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 quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons fulfilling the equivalent function): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in The registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ CLIFFORD K. BOWN November 14, 2002 ------------------------------------ Clifford K. Bown Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) -15-
Exhibit 99.1 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 September 30, 2002 (the "Report"), I, Mario R. Houthooft, Chief Executive Officer, President and Director 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/ MARIO R. HOUTHOOFT - ----------------------------------------------- Mario R. Houthooft Chief Executive Officer, President and Director November 14, 2002
Exhibit 99.2 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 September 30, 2002 (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: (3) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (4) 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 November 14, 2002