<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
FILED PURSUANT TO RULE 424A
REGISTRATION #333-30262
SUBJECT TO COMPLETION, DATED MARCH 24, 2000
PROSPECTUS
3,000,000 SHARES
[LOGO]
COMMON STOCK
------------------
We are selling 3,000,000 shares of our common stock in a public offering in
Belgium and the United States and in offerings to institutional investors in
other European countries. The selling stockholders have granted the underwriters
the right to purchase up to 450,000 additional shares of our common stock to
cover over-allotments.
Our common stock is currently traded on the NASD Electronic Bulletin Board
under the symbol "VDSI." On March 23, 2000, the last sale price quoted on the
NASD Electronic Bulletin Board was $19.25. We have applied to have the common
stock included for quotation on the Nasdaq National Market under the symbol
"VDSI." We have also applied to have the common stock admitted for trading on
the European Association of Securities Dealers' Automated Quotation, referred to
as EASDAQ, under the "VDSI" symbol. Prior to this offering there has been no
public market for our common stock in Europe.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to VASCO......................... $ $
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The underwriters expect to deliver the shares to purchasers on or about
, 2000.
------------------------
FORTIS BANK
FIRST ANALYSIS SECURITIES CORPORATION H.C. WAINWRIGHT & CO., INC.
ARTESIA BANK N.V. BANK DEGROOF
, 2000.
<PAGE>
[Graphic illustration of company description and product strategy]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 7
Price Range of Common Stock................................. 15
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Consolidated Financial Data........................ 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 20
Business.................................................... 28
Management.................................................. 43
Certain Transactions........................................ 49
Principal and Selling Stockholders.......................... 50
Description of Capital Stock................................ 52
Shares Eligible for Future Sale............................. 55
United States Tax Consequences to Non-United States
Holders..................................................... 56
Underwriting................................................ 59
Legal Matters............................................... 62
Experts..................................................... 62
Where You Can Find Additional Information................... 62
Forward Looking Statements.................................. 63
Index to Consolidated Financial Statements.................. F-1
Annex A..................................................... A-1
</TABLE>
------------------------
You should rely only on the information contained in this prospectus. VASCO
and the underwriters have not authorized anyone to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. We are not, and the underwriters are not, making an
offer of these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information provided by this prospectus is
accurate only as of the date on the front cover of this prospectus. Our
business, financial condition, results of operations and prospects may have
changed since that date.
3
<PAGE>
PROSPECTUS SUMMARY
THIS IS ONLY A SUMMARY. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE
"RISK FACTORS" SECTION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES
THERETO, BEFORE DECIDING TO INVEST IN OUR COMMON STOCK. UNLESS OTHERWISE
INDICATED, THE INFORMATION IN THIS PROSPECTUS DOES NOT GIVE EFFECT TO THE
EXERCISE OF THE UNDERWRITER'S OVER-ALLOTMENT OPTION.
OUR COMPANY
We design, develop, market and support security products and services which
manage and protect against unauthorized access to computer systems of corporate
and government customers. Additionally, we enable secure financial transactions
made over private enterprise networks and public networks, such as the Internet.
We believe that our software and hardware products provide organizations with
strong, flexible and effective Internet and enterprise security solutions and
they compete favorably against those of our competitors. According to
Datamonitor, the global market for security products was $2.3 billion in 1998
and is expected to grow to over $8.0 billion in 2003, a compound annual growth
rate of 28%.
Our IdentiSoft division primarily designs and markets products under the
Digipass brand. Our Digipass product line provides greater flexibility and a
more affordable means than competing products of authenticating users to any
network, including the Internet. The Digipass Client provides a comprehensive
set of signature and authentication functions which can be implemented on
various devices, such as personal computers, smart cards, personal digital
assistants and mobile phones. The Digipass family of user authentication
devices, all of which incorporate an electronic digital signature capability to
guarantee the integrity of electronic transactions and data transmissions, are
commonly referred to as security tokens. Over 3,500,000 of our tokens have been
sold to over 450 customers to eliminate the weakest link in most computer
security schemes, the isolated use of a static password.
Our IntelliSoft division includes our SnareWorks and VACMAN software product
lines. SnareWorks is uniquely positioned to provide the security bridge between
the existing software infrastructure of legacy mainframe and client-server
applications that are powering large enterprises, and the world of the Web,
including e-commerce and business-to-business on the Internet. The critical
differentiating benefit of SnareWorks is that it fits into existing computing
environments transparently because little, if any, new application programming
is required. We believe that our competitors' products generally require
extensive customization and integration which requires a complex and time-
consuming deployment effort. As a result of its unique design, the SnareWorks
product line is the only one in the industry that spans all three network
architectures (Web, client-server and mainframe) and enables rapid, low-cost,
widespread deployment of true, end-to-end security.
We believe we have one of the most complete lines of security products and
services available in the market today and we intend to become a leading
worldwide provider of these products and services. A key element of our growth
strategy is to demonstrate to an increasing number of distributors, resellers
and systems integrators that by incorporating our security products into their
own products they can more effectively differentiate themselves in their
marketplaces and increase the value of their products. Following this aggressive
marketing and promotion effort, we work with these resellers and integrators to
support their sales of solutions which include our products. In addition, we
plan to expand our direct sales marketing program to new and existing blue chip
customers.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by VASCO............................... 3,000,000 shares
Common stock offered by selling stockholders (if the
over-allotment option is exercised)......................... 450,000 shares
Common stock outstanding after this offering................ 29,865,964 shares
Use of proceeds............................................. Based on an assumed offering price of
$19.25 per share, we estimate that our
net proceeds from this offering will be
approximately $53,355,487. We intend to
use these proceeds to:
- commence our worldwide marketing
campaign;
- expand our sales force;
- fund additional research and
development activities;
- expand into new geographic regions;
and
- fund future strategic and tactical
acquisitions which we have not yet
identified.
We will not receive any proceeds from
the sale of shares by the selling
stockholders.
NASD Electronic Bulletin Board Symbol....................... VDSI
Proposed Nasdaq National Market Symbol...................... VDSI
Proposed EASDAQ Symbol...................................... VDSI
</TABLE>
This information is based on our shares of common stock outstanding as of
March 8, 2000. This information excludes 2,110,350 shares subject to options
outstanding as of March 8, 2000 with a weighted average exercise price of $4.10.
------------------------
VASCO and VACMAN are registered trademarks in the United States. In addition
we have applied for registration of the Digipass trademark in the United States
and VACMAN Optimum in the Benelux countries.
------------------------
VASCO Data Security International, Inc. was incorporated in Delaware in 1997
and is the successor to VASCO Corp., a Delaware corporation. Our principal
executive offices are located at 1901 South Meyers Road, Suite 210, Oakbrook
Terrace, Illinois 60181 and the telephone number at that address is
(630) 932-8844. Our principal offices in Europe are located at Koningin
Astridlaan 164, B-1780 Wemmel (Belgium) and the telephone number at that address
is 32-0-2-456-98-10. We maintain a Web site at www.vasco.com. The information
contained on our Web site does not constitute part of this prospectus. Unless
otherwise noted, specifically in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations", references in
this prospectus to "VASCO," "company," "we," "our" and "us" refer to VASCO Data
Security International, Inc., its predecessor, VASCO Corp., and its
subsidiaries.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated financial data for our
business. You should read this information together with the consolidated
financial statements and the notes to those statements appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Total revenues........................... $4,190 $11,265 $13,208 $16,500 $19,397
Operating loss........................... (499) (8,523)(2) (4,168)(3) (1,327) (893)
Net loss available to common
stockholders........................... (431) (9,215)(2) (6,242)(3) (3,782) (2,212)
Basic and diluted loss per common
share.................................. $(0.03) $ (0.47)(2) $ (0.30)(3) $ (0.17) $ (0.09)
Shares used in computing per share
amounts................................ 16,817 19,533 21,106 22,431 25,559
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash..................................... $ 782 $ 1,851 $ 2,065 $ 1,662 $ 2,576
Working capital (deficit)................ 1,108 5,388 (291) (3,734) 2,473
Total assets............................. 2,493 12,898 9,004 9,557 12,318
Long term obligations, less current
portion................................ 7 9,289 8,618 8,436 8,409
Common stock subject to redemption....... 371 742 495 -- --
Stockholders' equity (deficit)........... 1,002 (843) (6,746) (9,660) (1,037)
</TABLE>
- ------------------------
(1) Prior to March 11, 1998 when an exchange offer was consummated, the
financial results were those of VASCO Corp. After March 11, 1998, the
financial results presented are ours. For a description of the exchange
offer please refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operation."
(2) Includes a pretax charge for acquired in-process research and development of
$7,351,000.
(3) Includes legal, accounting and printing costs of approximately $1,218,000
related to the exchange offer that was completed in March 1998.
6
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
BEFORE MAKING AN INVESTMENT DECISION. ANY OF THE FOLLOWING RISKS COULD ADVERSELY
AFFECT OUR BUSINESS, OUR COMPETITIVE POSITION AND FINANCIAL RESULTS. IN THAT
CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL
OR PART OF YOUR INVESTMENT.
RISKS RELATED TO THE COMPANY
WE HAVE A HISTORY OF OPERATING LOSSES AND A LARGE ACCUMULATED DEFICIT AND WE MAY
NEVER ACHIEVE OR SUSTAIN PROFITABILITY.
We may never be able to achieve or sustain profitability on an annual or
quarterly basis in the future. We have incurred operating losses of $4,167,622,
$1,326,655 and $892,957 for the years ended December 31, 1997, 1998 and 1999,
respectively, and we expect to incur operating losses for the foreseeable
future.
WE FACE SIGNIFICANT COMPETITION AND IF WE LOSE OR FAIL TO GAIN MARKET SHARE OUR
FINANCIAL RESULTS WILL SUFFER.
The market for computer and network security products is highly competitive.
Our competitors include organizations that provide computer and network security
products based upon approaches similar to and different from those which we
employ, such as AXENT Technologies, Inc., RSA Security Inc. and Netegrity, Inc.
Many of our competitors have significantly greater financial, marketing,
technical and other competitive resources than we do. As a result, they may be
able to adapt more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the promotion and sale
of their products.
TECHNOLOGICAL CHANGES OCCUR RAPIDLY IN OUR INDUSTRY AND THE CONTINUED
ENHANCEMENT OF OUR SECURITY PRODUCTS AND THE DEVELOPMENT OF NEW PRODUCTS ARE
CRITICAL TO MAINTAIN OUR REVENUES.
The introduction by our competitors of products embodying new technologies
and the emergence of new industry standards could render our existing products
obsolete and unmarketable. Our future revenue growth and operating profit will
depend in part upon our ability to enhance our current products and develop
innovative products to distinguish ourselves from the competition and to meet
customers' changing needs in the data security industry. We cannot assure you
that security-related product developments and technology innovations by others
will not adversely affect our competitive position or that we will be able to
successfully anticipate or adapt to changing technology, industry standards or
customer requirements on a timely basis.
THE SALES CYCLE FOR OUR PRODUCTS AND TECHNOLOGY IS LONG, AND WE MAY INCUR
SUBSTANTIAL EXPENSES FOR SALES THAT DO NOT OCCUR WHEN ANTICIPATED.
The sales cycle for our products, which is the period of time between the
identification of a potential customer and completion of the sale, is typically
lengthy and subject to a number of significant risks over which we have little
control. If revenue falls significantly below anticipated levels, our business
would be seriously harmed.
A typical sales cycle is often three to six months. Purchasing decisions for
our products and systems may be subject to delay due to many factors which are
not within our control, such as:
- the time required for a prospective customer to recognize the need for our
products;
- the significant expense of many data security products and network
systems;
- customers' internal budgeting processes; and
- internal procedures customers may require for the approval of large
purchases.
7
<PAGE>
WE HAVE A SIGNIFICANT DEPENDENCE ON MAJOR CUSTOMERS AND LOSING ANY OF THESE
CUSTOMERS COULD RESULT IN A SIGNIFICANT LOSS IN REVENUES.
If we don't find other customers who generate significant future revenues,
the unforeseen loss of one or more of our major customers, or the inability to
maintain reasonable profit margins on sales to any of these customers, would
have a material adverse effect on our results of operations and financial
condition. For more information about our customers, refer to the section
entitled "Customers and Markets" under the heading "Business."
OUR SUCCESS DEPENDS ON ESTABLISHING AND MAINTAINING STRATEGIC RELATIONSHIPS WITH
OTHER COMPANIES TO DEVELOP, MARKET AND DISTRIBUTE OUR TECHNOLOGY AND PRODUCTS
AND, IN SOME CASES, TO INCORPORATE OUR TECHNOLOGY INTO THEIR PRODUCTS.
Part of our business strategy is to enter into strategic alliances and other
cooperative arrangements with other companies related to our industry. We
currently are involved in cooperative efforts to incorporate our security
authentication products into the products of others, research and development
efforts, marketing campaigns and reseller arrangements. None of these
relationships are exclusive, and some of our strategic partners also have
cooperative relationships with certain of our competitors. If we are unable to
enter cooperative arrangements in the future or if we lose any of our current
strategic or cooperative relationships, our business could be harmed. We do not
control the time and resources devoted to such activities by parties with whom
we have relationships. In addition, we may not have the resources available to
satisfy our commitments, which may adversely affect these relationships. These
relationships may not continue, may not be commercially successful, or may
require our expenditure of significant financial, personnel and administrative
resources from time to time. Further, certain of our products and services
compete with the products and services of our strategic partners.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND OUR FAILURE TO OBTAIN CAPITAL
WOULD INTERFERE WITH OUR GROWTH STRATEGY.
We believe that the proceeds raised from this offering, along with our
current cash balances and anticipated cash generated from operations, will be
sufficient to meet our anticipated cash needs through January 2001. We may
require additional capital to finance our growth when the proceeds of this
offering have been fully used. However, our current plans and projections may
prove to be inaccurate or our expected cash flow may prove to be insufficient to
fund our operations because of product delays, unanticipated expenses or other
unforseen difficulties.
Our ability to obtain financing will depend on a number of factors,
including market conditions, our operating performance and investor interest.
These factors may make the timing, amount and terms and conditions of any
financing unattractive. They may also result in our incurring additional
indebtedness or accepting additional stockholder dilution. If adequate funds are
not available or are not available on acceptable terms, we may have to forego
strategic acquisitions or investments, defer our product development activities,
or delay the introduction of new products.
WE DEPEND ON THE SERVICES OF OUR KEY PERSONNEL, ESPECIALLY MARIO R. HOUTHOOFT,
OUR CHIEF EXECUTIVE OFFICER, AND THE LOSS OF HIS SERVICES WOULD INTERFERE WITH
THE EXECUTION OF OUR STRATEGY.
The execution of our strategy depends in large part on the continued
services of our key personnel, especially Mario R. Houthooft, our chief
executive officer. Failure to execute our strategy would result in a loss of
marketshare to our competition and would result in lower operating results.
8
<PAGE>
OUR FAILURE TO ATTRACT AND RETAIN HIGHLY SKILLED TECHNICAL PERSONNEL FOR OUR
RESEARCH AND DEVELOPMENT DEPARTMENT WOULD RESULT IN DELAYED INTRODUCTION OF
NEW OR MODIFIED PRODUCTS, LOSS OF CUSTOMERS AND MARKET SHARE AND DECREASE IN
REVENUES.
The market for highly skilled technicians in Europe and the United States is
highly competitive. If we fail to attract, train, assimilate and retain
qualified technical personnel for our research and development activities, we
will experience delays in introductions of new or modified products, loss of
customers and market share and a reduction in revenues.
WE ARE EXPERIENCING SIGNIFICANT GROWTH WHICH MAY PLACE A STRAIN ON OUR
RESOURCES.
We are experiencing a period of significant growth that has been placing a
significant strain on all of our resources. To manage future growth effectively,
we must enhance our financial and accounting systems and controls, further
develop our management information systems, integrate new personnel and manage
expanded operations. Our failure to manage our growth effectively could have a
material adverse effect on the quality of our products and services, our ability
to retain key personnel and our business, operating results and financial
condition.
WE FACE A NUMBER RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS, ANY OR ALL OF
WHICH COULD RESULT IN A DISRUPTION IN OUR BUSINESS AND A DECREASE IN OUR
REVENUES.
Our business is subject to a number of international risks, any or all of
which could result in a disruption in our business and a decrease in our
revenues. These include:
- inconsistent regulations and unexpected changes in regulatory
requirements;
- difficulties and costs of staffing and managing international operations;
- potentially adverse tax consequences;
- wage and price controls;
- uncertain protection for intellectual property rights;
- imposition of trade barriers;
- differing technology standards;
- uncertain demand for electronic commerce;
- linguistic and cultural differences;
- political instability; and
- social unrest.
WE ARE SUBJECT TO FOREIGN EXCHANGE RISKS, AND IMPROPER MANAGEMENT OF THAT RISK
COULD RESULT IN LARGE CASH LOSSES.
Because a significant number of our principal customers are located outside
the United States, we expect that international sales will continue to generate
a significant portion of our total revenue.
We are subject to foreign exchange risks because the majority of our costs
and expenses are denominated in U.S. dollars, whereas a significant portion of
the sales of our European operating subsidiaries are denominated in various
foreign currencies. A decrease in the value of any of these foreign currencies
relative to the U.S. dollar could affect the profitability in U.S. dollars of
our products sold in these markets. We do not hold forward exchange contracts or
other hedging instruments to exchange foreign currencies for U.S. dollars to
offset currency rate fluctuations which might affect our obligations in relation
to our repayment from operations out of income from sales
9
<PAGE>
(which are principally in foreign currency) of debt under our loan obligations
(which are principally in U.S. dollars).
WE HAVE A GREAT DEPENDENCE ON A LIMITED NUMBER OF SUPPLIERS AND THE LOSS OF
THEIR MANUFACTURING CAPABILITY COULD MATERIALLY IMPACT OUR OPERATIONS.
In the event that the supply of components or finished products is
interrupted or relations with either of our principal vendors is terminated,
there could be a considerable delay in finding suitable replacement sources to
manufacture our products at the same cost or at all. The majority of our
products are manufactured by two independent vendors headquartered in Hong Kong.
Each vendor assembles our security tokens at facilities in mainland China. The
importation of these products from China exposes us to the possibility of
product supply disruption and increased costs in the event of changes in the
policies of the Chinese government, political unrest or unstable economic
conditions in China or developments in the United States that are adverse to
trade, including enactment of protectionist legislation.
WE DEPEND SIGNIFICANTLY UPON OUR PROPRIETARY TECHNOLOGY AND INTELLECTUAL
PROPERTY AND THE FAILURE TO PROTECT OUR PROPRIETARY RIGHTS COULD REQUIRE US TO
REDESIGN OUR PRODUCTS OR REQUIRE US TO ENTER INTO ROYALTY OR LICENSING
AGREEMENTS, ANY OF WHICH COULD REDUCE REVENUE AND INCREASE OUR OPERATING
COSTS.
We currently rely on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality agreements and contractual provisions to protect
our proprietary rights. We seek to protect our software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection, and generally enter into confidentiality and nondisclosure
agreements with our employees and with key vendors and suppliers.
There has been substantial litigation in the technology industry regarding
intellectual property rights, and we may have to litigate to protect our
proprietary technology. We expect that companies in the computer and information
security market will increasingly be subject to infringement claims as the
number of products and competitors increases. Any such claims or litigation may
be time-consuming and costly, cause product shipment delays, require us to
redesign our products or require us to enter into royalty or licensing
agreements, any of which could reduce revenue and increase our operating costs.
OUR PATENTS MAY NOT PROVIDE US WITH COMPETITIVE ADVANTAGES.
We hold several patents in the United States and a corresponding patent in
some European countries, which cover multiple aspects of our technology. The
U.S. patents expire between 2003 and 2010 and the patent in those European
countries expires in 2008. There can be no assurance that we will continue to
develop proprietary products or technologies that are patentable, that any
issued patent will provide us with any competitive advantages or will not be
challenged by third parties, or that patents of others will not hinder our
competitive advantage.
WE ARE SUBJECT TO PRODUCT LIABILITY RISKS.
A malfunction of or design defect in our products which results in a breach
of a customer's data security could result in tort or warranty claims against
us. We do not presently maintain product liability insurance for these types of
claims.
10
<PAGE>
THERE IS SIGNIFICANT GOVERNMENT REGULATION OF TECHNOLOGY EXPORTS AND TO THE
EXTENT THAT WE CANNOT MEET THE REQUIREMENTS OF THESE REGULATIONS WE MAY BE
PROHIBITED FROM EXPORTING SOME OF OUR PRODUCTS WHICH COULD NEGATIVELY IMPACT
OUR REVENUES.
Our international sales and operations are subject to risks such as the
imposition of government controls, new or changed export license requirements,
restrictions on the export of critical technology, trade restrictions and
changes in tariffs. If we become unable to obtain foreign regulatory approvals
on a timely basis our business in those countries would no longer exist and our
revenues would decrease dramatically.
Certain of our products are subject to export controls under U.S. law. The
list of products and countries for which export approval is required, and the
regulatory policies with respect thereto may be revised from time to time and
our inability to obtain required approvals under these regulations could
materially adversely affect our ability to make international sales. For
example, U.S. governmental controls on the export of encryption technology
require the issuance of licenses on a case-by-case basis for exports of
non-retail products to foreign governments, and prohibit exports to a list of
countries deemed to support terrorism, their nationals and other sanctioned
entities.
WE EMPLOY CRYPTOGRAPHIC TECHNOLOGY IN OUR AUTHENTICATION PRODUCTS THAT USES
COMPLEX MATHEMATICAL FORMULATIONS TO ESTABLISH NETWORK SECURITY SYSTEMS.
Many of our products are based on cryptographic technology. With
cryptographic technology, a user is given a key which is required to encrypt and
decode messages. The security afforded by this technology depends on the
integrity of a user's key and in part on the application of algorithms, which
are advanced mathematical factoring equations. These codes may eventually be
broken or become subject to government regulation regarding their use, which
would render our technology and products less effective. The occurrence of any
one of the following could result in a decline in demand for our technology and
products:
- any significant advance in techniques for attacking cryptographic systems,
including the development of an easy factoring method or faster, more
powerful computers;
- publicity of the successful decoding of cryptographic messages or the
misappropriation of keys; or
- increased government regulation limiting the use, scope or strength of
cryptography.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION.
We may make investments in complementary companies, products or
technologies. Should we do so, our failure to successfully manage future
acquisitions could seriously harm our operating results. In the event of any
future purchases, we will face additional financial and operational risks,
including:
- difficulty in assimilating the operations, technology and personnel of
acquired companies;
- disruption in our business because of the allocation of resources to
consummate these transactions and the diversion of management's attention
from our existing business;
- difficulty in retaining key technical and managerial personnel from
acquired companies;
- dilution of our stockholders, if we issue equity to fund these
transactions;
- assumption of operating losses, increased expenses and liabilities; and
- our relationships with existing employees, customers and business partners
may be weakened or terminated as a result of these transactions.
11
<PAGE>
RISK RELATED TO THE OFFERING
WE EXPERIENCE VARIATIONS IN QUARTERLY OPERATING RESULTS AND ARE SUBJECT TO
SEASONALITY, BOTH OF WHICH MAY RESULT IN A VOLATILE STOCK PRICE.
In the future, as in the past, our quarterly operating results may vary
significantly resulting in a volatile stock price. Factors affecting our
operating results include:
- the level of competition;
- the size, timing, cancellation or rescheduling of significant orders;
- new product announcements or introductions by current competitors;
- adoption of new technologies and standards;
- changes in pricing by current competitors;
- our ability to develop, introduce and market new products and product
enhancements on a timely basis, if at all;
- component costs and availability;
- our success in expanding our sales and marketing programs;
- foreign currency exchange rates; and
- general economic trends.
A SMALL GROUP OF PERSONS WILL CONTINUE TO HAVE CONTROL AFTER THIS OFFERING AND
COULD DELAY OR PREVENT A CHANGE OF CONTROL.
After this offering, we anticipate that our board of directors and their
immediate families will own beneficially and of record approximately 48%, with
Mr. T. Kendall Hunt and his wife owning beneficially approximately 34 %, of the
outstanding shares of our common stock. As the chairman of our board of
directors and our largest shareholder, Mr. Hunt may exercise substantial control
over our future direction and operation and such concentration of control may
have the effect of discouraging, delaying or preventing a change in control and
may also have an adverse effect on the market price of our common stock.
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT
OR ABOVE THE PUBLIC OFFERING PRICE.
Prior to this offering there was only a limited market for our common stock
on the NASD Electronic Bulletin Board. The public offering price for our common
stock will be determined through negotiations between the global coordinator on
behalf of the underwriters and us. This public offering price may vary from the
market price of our common stock after the offering. If you purchase shares of
common stock, you may not be able to resell those shares at or above the public
offering price.
If an active public market for our common stock does not develop, the
liquidity of your investment may be limited, and our stock price may fluctuate
or decline below our public offering price. The market price of our common stock
may fluctuate significantly in response to factors, some of which are beyond our
control, including the following:
- actual or anticipated fluctuations in our operating results;
- changes in market valuations of other technology companies;
- announcements by us or our competitors of significant technical
innovations, contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
12
<PAGE>
- additions or departures of key personnel;
- future sales of our common stock;
- any deviations in net revenues or in losses from levels expected by
securities analysts; and
- trading volume fluctuations.
You should read the "Underwriting" section for a more complete discussion of
the factors which were considered in determining the public offering price of
our common stock.
WE MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT INCREASE OUR
PROFITS OR MARKET VALUE.
We have broad discretion in the use of the net proceeds of this offering and
could spend the net proceeds in ways that do not yield a favorable return or to
which stockholders object. Until we need to use the proceeds of this offering,
we may place them in investments that do not produce income or that lose value.
You can read more about our planned use of the net proceeds from this offering
in the section entitled "Use of Proceeds."
THE PRICE OF OUR COMMON STOCK MAY DECLINE DUE TO SALES OR THE APPEARANCE OF
SALES OF LARGE NUMBERS OF OUR SHARES.
Sales of substantial amounts of our common stock in the public market
following this offering, or the appearance that a large number of shares is or
will be available for sale, could cause the price for our common stock to
decline. The number of shares of our common stock available for sale in the
public market is limited by lock-up agreements that were entered into in
connection with this offering. Under such lock-up agreements, the holders of
approximately 59% of our outstanding shares of common stock agreed not to sell
or otherwise dispose of any of their shares for a period of 180 days after the
date of this prospectus. However, the global coordinator may, after consultation
with the market authority of EASDAQ and us, release all or any portion of the
securities subject to such lock-up agreements. Further, to the extent that the
overallotment option is not exercised, the shares subject to the overallotment
may be sold provided that their subsequent sale would not have a negative impact
on the market and the sale is made through the global coordinator. In addition
to the adverse effect a price decline could have on holders of our common stock,
that decline would likely impede our ability to raise capital through the
issuance of additional shares of common stock or other equity securities. A more
complete description can be found under the heading "Shares Eligible for Future
Sale."
WE HAVE NOT PAID AND DO NOT INTEND TO PAY DIVIDENDS.
We have not paid any dividends on our common stock, and we do not intend to
pay cash dividends in the foreseeable future.
CERTAIN PROVISIONS OF OUR CHARTER AND OF DELAWARE LAW MAKE A TAKEOVER OF OUR
COMPANY MORE DIFFICULT.
Our corporate charter and Delaware law contain provisions, such as a class
of authorized but unissued preferred stock which may be issued by our Board
without stockholder approval, that might enable our management to resist a
takeover of our company. Delaware law also limits business combinations with
interested stockholders. These provisions might discourage, delay or prevent a
change in our control or a change in our management. These provisions could also
discourage proxy contests, and make it more difficult for you and other
stockholders to elect directors and take other corporate actions. The existence
of these provisions could limit the price that investors might be willing to pay
in the future for shares of our common stock. See "Description of Capital Stock"
for more information.
13
<PAGE>
FUTURE ISSUANCES OF BLANK CHECK PREFERRED STOCK MAY REDUCE VOTING POWER OF OUR
COMMON STOCK AND MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD PREVENT A CHANGE IN
CONTROL.
Our corporate charter authorizes the issuance of 500,000 shares of preferred
stock with such designations, rights, powers and preferences as may be
determined from time to time by our board of directors. The board of directors
is empowered, without further stockholder approval, to issue up to 500,000
shares of preferred stock with such dividend, liquidation, conversion, voting or
other rights, powers and preferences as may be determined from time to time by
the board. The issuance of preferred stock could adversely affect the voting
power or other rights of the holders of our common stock. In addition, the
authorized and unissued shares of preferred stock and common stock could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control.
YOU WILL SUFFER IMMEDIATE DILUTION.
The public offering price per share in this offering is substantially higher
than the book value per share of our common stock immediately after the
offering. Accordingly, if you purchase shares in this offering you will suffer
immediate and substantial dilution of approximately $17.40 in the book value per
share of common stock from the price you pay. For additional information, refer
to the heading "Dilution."
U.S. INVESTORS MAY HAVE DIFFICULTIES IN MAKING CLAIMS FOR ANY BREACH OF THEIR
RIGHTS AS HOLDERS OF SHARES BECAUSE SOME OF OUR ASSETS AND DIRECTORS AND
EXECUTIVES ARE NOT LOCATED IN THE UNITED STATES.
Several of our directors and executives are residents of Belgium, and a
substantial portion of our assets and those of some of our directors and
executives are located in Belgium. As a result, it may not be possible for
investors to effect service of process on those persons outside of Belgium, or
to enforce judgments against some of our directors and executives based upon the
securities or other laws of jurisdictions other than Belgium. Moreover, we
believe that under Belgian law there exist certain restrictions on the
enforceability in Belgium in original actions, or in actions of enforcement of
judgments rendered against us in courts outside jurisdictions that are a party
to the Brussels Convention on Jurisdiction and Enforcement of Judgments in Civil
and Commercial Matters (as amended). Actions for enforcement of such judments
may be successful only if the Belgian court confirms the substantive correctness
of the judgment of such court, and is satisfied:
- that the judgment is not contrary to the principles of public policy in
Belgium or rules of Belgian public law;
- that the judgment did not violate the rights of the defendant;
- that the judgment is final under applicable law;
- that the court did not accept its jurisdiction solely on the basis of the
nationality of the plaintiff; and
- as to the authenticity of the text of the judgment submitted to it.
A judgment rendered in the courts of parties to the Brussels Convention on
Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters (as
amended), will be enforceable by the courts of Belgium without reexamination of
the merits of the case provided such judgment is final and otherwise satisfies
all of the conditions provided for in this Convention. If proceedings have been
brought in one country, however, new proceedings in another country may be
barred.
14
<PAGE>
PRICE RANGE OF COMMON STOCK
All of our shares of common stock have been quoted on the NASD Electronic
Bulletin Board since March 23, 1998. As of March 8, 2000 we have 26,865,964
shares of our common stock outstanding all of which are eligible for trading
subject to legal and contractual restriction, described under "Shares Eligible
for Future Sale." The following table sets forth the high and low closing bid
quotations for the common stock for the periods indicated, as well as the
average monthly trading volume during the quarters indicated.
<TABLE>
<CAPTION>
AVERAGE MONTHLY
HIGH LOW TRADING VOLUME
-------- -------- ---------------
<S> <C> <C> <C>
1998
First Quarter (from March 23, 1998)............ $ 5.50 $4.00 24,200
Second Quarter................................. 8.31 4.25 1,207,400
Third Quarter.................................. 7.00 3.50 453,733
Fourth Quarter................................. 4.00 2.50 335,800
1999
First Quarter.................................. 5.38 2.97 711,733
Second Quarter................................. 4.88 3.50 457,600
Third Quarter.................................. 3.78 2.94 346,600
Fourth Quarter................................. 8.75 2.94 1,563,833
2000
First Quarter (to March 23, 2000).............. 24.06 9.13 3,466,433
</TABLE>
On March 23, 2000 the last sale price quoted on the NASD Electronic Bulletin
Board was $19.25. The price of our stock on the NASD Electronic Bulletin Board
can be obtained from broker-dealers and from Web sites such as
www.stockquotes.com, www.cnnfn.com and www.quicken.com. The quotations on the
table above represent prices between dealers and do not include retail markups
or markdowns or commissions. They may not necessarily represent actual
transactions.
The liquidity and trading patterns of securities quoted on the NASD
Electronic Bulletin Board may be substantially different from those of
securities quoted on either the Nasdaq National Market or EASDAQ. EASDAQ is a
relatively new quotation system and, assuming that we are accepted for listing
on EASDAQ, we will be one of a relatively small number of issuers that quote its
shares on EASDAQ. As a result, historical trading prices, therefore, may not be
indicative of the prices at which our common stock will trade in the future.
On March 7, 2000, we were informed by the Frankfurt Stock Exchange that our
shares of common stock have been trading on the Regulated Unofficial Market
(Freiverkehr) on the Frankfurt Stock Exchange from February 23, 2000.
15
<PAGE>
USE OF PROCEEDS
Based on an assumed offering price of $19.25 per share, we estimate that the
net proceeds we will receive from the sale of our common stock will be
approximately $53,355,000, after deducting the estimated underwriting discount
and offering expenses of approximately $4,395,000. We will not receive any
proceeds from the sale of shares by the selling stockholders.
We intend to use the net proceeds of this offering as follows:
- $10.0 million to commence our worldwide marketing program to establish our
brand recognition, especially in the United States and other new markets;
- $5.0 million to expand our sales force for direct and indirect sales of
our security products;
- $5.0 million for additional research and development activities; and
- $5.0 million to expand our business and products into new geographic
territories, including initially Argentina and Hong Kong. We may also
expand into the U.K., Scandinavia and Germany and other unidentified
countries as opportunities arise.
In addition to the $25.0 million outlined above the remaining $28,355,000
will be used for working capital and we may seek to enter into alliances or
joint ventures with, and may acquire, complementary businesses, technologies,
services or products, some of which may be significant. We may use some of the
net proceeds for these alliances, joint ventures or acquisitions. While we are
actively pursuing these joint ventures and acquisitions, we currently do not
have commitments or agreements with respect to any such transactions.
Although we have estimated the amount of net proceeds to be used for each of
the purposes indicated, we will retain significant flexibility in applying the
net proceeds of the offering.
Until this money is used, we intend to invest the net proceeds in
short-term, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. In
the past we have paid dividends on shares of our preferred stock. However, no
preferred stock is currently issued and outstanding. We intend to retain any
future earnings to finance the operation and expansion of our business and do
not anticipate paying any cash dividends in the foreseeable future.
16
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
(1) on an actual basis; and
(2) on an as adjusted basis giving effect to:
- the sale of the 3,000,000 shares of common stock in this offering at an
assumed offering price of $19.25 per share, and after deducting the
estimated underwriting discount and offering expenses that we will pay;
and
- the assumed conversion of the $5,000,000 convertible note held by Kyoto
Securities, Ltd. into 416,667 shares of common stock upon the closing of
this offering.
<TABLE>
<CAPTION>
AS
ACTUAL ADJUSTED
------------ -----------
<S> <C> <C>
Long-term debt, including stockholder note of $5,000,000.... $ 8,408,862 $ 3,408,862
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock; $.01 par value; 500,000 shares
authorized; none issued and outstanding................. -- --
Common stock, $.001 par value; 75,000,000 shares
authorized; 26,462,083 shares issued and outstanding
actual; 29,878,750 shares issued and outstanding as
adjusted................................................ 26,462 29,879
Additional paid-in capital................................ 20,702,387 79,054,457
Accumulated deficit....................................... (21,873,340) (21,873,340)
Accumulated other comprehensive income--
cumulative translation adjustment....................... 107,631 107,631
------------ -----------
Total stockholders' equity (deficit).................. (1,036,860) 57,318,627
Total capitalization.................................. $ 7,372,002 $60,727,489
============ ===========
</TABLE>
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and the notes to those statements included elsewhere in
this prospectus.
17
<PAGE>
DILUTION
The following discussion and table assumes:
- no exercise of any stock options; and
- the conversion of the $5,000,000 convertible note held by Kyoto
Securities, Ltd. into 416,667 shares of common stock upon the closing of
this offering.
Our net tangible book value as of December 31, 1999 was $(3,026,820), or
$(.11) per share of our common stock. Net tangible book value per share is
determined by dividing the amount of our total tangible assets less total
liabilities by the number of shares of our common stock outstanding. Assuming
our sale of the 3,000,000 shares offered in this offering at an assumed public
offering price of $19.25 per share, and after deducting underwriting discounts
and estimated offering expenses, our net tangible book value as of December 31,
1999 would have been $55,328,667, or $1.85 per share of common stock. This
represents an immediate increase in net tangible book value of $1.96 per share
to existing stockholders and an immediate dilution in net tangible book value of
$17.40 per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed public offering price per share..................... $ 19.25
Net tangible book value per share at December 31, 1999...... $ (.11)
Increase in net tangible book value per share attributable
to new investors.......................................... 1.96
Net tangible book value per share after offering............ 1.85
-------
Dilution per share to new investors......................... $ 17.40
=======
</TABLE>
These tables summarize, as of December 31, 1999, the total number of shares
of common stock purchased from us, the total consideration paid to us and the
average price per share paid by existing stockholders and by new investors in
this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)................ 26,878,750 90.0% $25,728,849 30.8% $ .96
New investors............................ 3,000,000 10.0 57,750,000 69.2 19.25
---------- ----- ----------- -----
Total................................ 29,878,750 100.0% $83,478,849 100.0%
========== ===== =========== =====
</TABLE>
- ------------------------
(1) Includes 416,667 shares from the conversion of the $5,000,000 convertible
note held by Kyoto Securities, Ltd.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes to these
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in this prospectus. The selected consolidated
statement of operations data for the years ended December 31, 1995 and 1996 and
the consolidated balance sheet data as of December 31, 1995, 1996 and 1997 are
derived from our unaudited consolidated financial statements not included in
this prospectus. The selected consolidated statement of operations data for the
years ended December 31, 1997, 1998 and 1999, and the consolidated balance sheet
data as of December 31, 1998 and 1999 are derived from our audited consolidated
financial statements, and are included in this prospectus. The unaudited
consolidated financial statements have been prepared on substantially the same
basis as the audited consolidated financial statements and include all
adjustments, consisting of normal recurring adjustments, which we consider
necessary for a fair presentation of the financial position and results of
operations for those periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues............................ $ 4,190 $11,265 $13,208 $16,500 $19,397
Operating loss............................ (499) (8,523)(2) (4,168)(3) (1,327) (893)
Net loss available to common
stockholders............................ (431) (9,215)(2) (6,242)(3) (3,782) (2,212)
Basic and diluted loss per common share... $ (0.03) $ (0.47)(2) $ (0.30)(3) $ (0.17) $ (0.09)
Shares used in computing per share
amounts................................. 16,817 19,533 21,106 22,431 25,559
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
----------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash...................................... $ 782 $ 1,851 $ 2,065 $ 1,662 $ 2,576
Working capital (deficit)................. 1,108 5,388 (291) (3,734) 2,473
Total assets.............................. 2,493 12,898 9,004 9,557 12,318
Long term obligations, less current
portion................................. 7 9,289 8,618 8,436 8,409
Common stock subject to redemption........ 371 742 495 -- --
Stockholders' equity (deficit)............ 1,002 (843) (6,746) (9,660) (1,037)
</TABLE>
- ------------------------
(1) Prior to March 11, 1998 when an exchange offer was consummated, the
financial results were those of VASCO Corp. After March 11, 1998, the
financial results presented are ours. For a description of the exchange
offer please refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operation."
(2) Includes a pretax charge for acquired in-process research and development of
$7,351,000.
(3) Includes legal, accounting and printing costs of approximately $1,218,000
for a registered exchange offer that we completed in March 1998.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and the notes to those statements and other financial
information appearing elsewhere in this prospectus.
BACKGROUND
Our predecessor company, VASCO Corp., entered into the data security
business in 1991 through the acquisition of a controlling interest in ThumbScan,
Inc., which we renamed VASCO Data Security, Inc. in 1993. In 1996, we began an
expansion of our computer security business by acquiring Lintel Security NV/SA,
a Belgian corporation, including assets associated with the development of
security tokens and security technologies for personal computers and computer
networks. In addition, in 1996, we acquired the stock of Digipass NV/SA, a
Belgian corporation, which was also a developer of security tokens and security
technologies and whose name we changed to VASCO Data Security NV/SA in 1997. All
of these acquisitions were accounted for under the purchase method of
accounting.
On March 11, 1998, we completed a registered exchange offer with the holders
of the outstanding securities of VASCO Corp. In the exchange offer, holders of
the common stock and warrants, options and other rights to acquire common stock
of our predecessor company exchanged their securities for the same number and
kind of securities of our present company, and released any potential claims
that such holders might have had against our predecessor in connection with the
issuances of its securities and other corporate actions which occurred mostly
during the 1980's. In the exchange offer, almost 98% of our predecessor's
securities were tendered and accepted for exchange. In October 1998, we
completed the merger of our predecessor with and into the current company and
thereby eliminated all remaining outstanding securities of our predecessor and
our predecessor thereby ceased to exist.
Since the exchange offer, we have engaged in two acquisitions. In May 1999,
we acquired the assets of SecureWare SA, a French company for a combination of
approximately $1.4 million in our stock and cash.
Our latest acquisition occurred in October of 1999 when we acquired
Intellisoft Corp., which was subsequently merged into us, for a combination of
approximately $8 million in our stock and cash distributed to dissenting
shareholders. This acquisition was accounted for under the pooling-of-interests
method of accounting and, therefore, all of our financial information has been
restated to include the results of IntelliSoft.
As a result of all of our acquisitions, our legal structure includes five
wholly-owned subsidiaries. Shortly after our acquisition of IntelliSoft, we
organized our operations into two business divisions, IdentiSoft and
IntelliSoft.
OVERVIEW
We design, develop, market and support security products and services which
manage and protect against unauthorized access to computer systems of corporate
and governmental clients.
REVENUE AND EARNINGS. We sell the majority of our products in European
countries with significant sales in the United States, although we intend to
actively pursue additional markets outside of Europe, particularly Asia and
North and South America.
Revenues from sales from our Digipass family, specifically the Digipass 300
and 500 tokens, continue to represent the majority of our total revenues. In
excess of 80% of our sales for 1999 were comprised of security token devices.
Although we believe it is likely that sales of the Digipass family of tokens,
which can be used on various platforms, will continue to account for a majority
of our total
20
<PAGE>
revenues for the next few years, we also believe that revenues from sales of our
other hardware and software data security products, including the additional
product offerings made by our IntelliSoft division, will continue to increase in
the future.
Concord-Eracom Nederland BV accounted for 15%, 12% and 18% of our sales in
1997, 1998 and 1999, respectively. It is expected that consolidated sales to
other customers and markets will increase and, that the degree of concentration
attributable to this major customer will decrease.
RESEARCH AND DEVELOPMENT. We are devoting substantial capital and other
resources to enhancing our existing security products and developing new
products to provide enterprise-wide hardware and software security solutions.
Costs of research and development, principally the design and development of
hardware and software prior to the determination of technological feasibility,
are expensed as incurred on a project-by-project basis. Our software
capitalization policy currently defines technological feasibility as a
functioning beta test prototype with confirmed manufacturability (a working
model), within a reasonably predictable range of costs. Additional criteria
include receptive customers, or potential customers, as evidenced by interest
expressed in a beta test prototype, at some suggested selling price.
CURRENCY FLUCTUATIONS. The majority of our supply and sales transactions
are denominated in U.S. dollars, however a significant portion of those
transactions are denominated in various foreign currencies. In order to reduce
the risks associated with fluctuations in currency exchange rates, we attempt to
match the timing of delivery, amount of product and the currency denomination of
purchase orders received from vendors with sales orders to customers.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
consolidated financial data as a percentage of revenues for the years ended
December 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 49.1 43.7 37.7
----- ----- -----
Gross profit................................................ 50.9 56.3 62.3
Operating costs:
Sales and marketing....................................... 27.9 28.9 30.7
Research and development.................................. 17.5 14.9 18.5
General and administrative................................ 37.0 20.5 17.7
----- ----- -----
Total operating costs................................... 82.4 64.3 66.9
----- ----- -----
Operating loss.............................................. (31.5) (8.0) (4.6)
Interest expense............................................ (8.7) (8.8) (4.2)
Other expense, net.......................................... (1.8) (1.9) (0.9)
----- ----- -----
Loss before income taxes.................................... (42.0) (18.7) (9.7)
Provisions for income taxes................................. 4.6 4.2 1.7
----- ----- -----
Net loss.................................................... (46.6) (22.9) (11.4)
===== ===== =====
</TABLE>
The following discussion is based upon our consolidated results of
operations for the years ended December 31, 1999, 1998 and 1997 (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 prospectus.
21
<PAGE>
1998 COMPARED TO 1999
REVENUES
Our consolidated net revenues for the year ended December 31, 1999 were
$19,397,000, an increase of $2,897,000, or 18%, as compared to the year ended
December 31, 1998. This increase is due to a strong demand for Digipass 300 and
Digipass 500 as well as SnareWorks and VACMAN. In addition to the strong demand
for our products, we have had less volume discounting.
COST OF GOODS SOLD
Our consolidated cost of goods sold for the year ended December 31, 1999 was
$7,306,000, an increase of $97,000, or 1%, as compared to the year ended
December 31, 1998. Cost of goods sold has not increased at the same rate as our
revenues due to efficiencies in the manufacturing process, as well as increased
sales of products with a more favorable cost structure.
GROSS PROFIT
Our consolidated gross profit for the year ended December 31, 1999 was
$12,091,000, an increase of $2,800,000, or 30%, over the year ended
December 31, 1998. This represents a gross margin of 62%, as compared to 1998's
consolidated gross margin of 56%. The increase in gross margin is due to
efficiencies in manufacturing related to increasing volumes, an increase in the
mix of sales of higher margin products, as well as less volume discounting.
SALES AND MARKETING EXPENSES
Consolidated sales and marketing expenses for the year ended December 31,
1999 were $5,962,000, an increase of $1,189,000, or 25%, over 1998. This
increase can be attributed to increased sales efforts including, in part,
increased travel costs, headcount, and an increase in marketing activities,
including tradeshows. Additionally, the acquisition of IntelliSoft in
October 1999 resulted in additional headcount, as the sales operations were
expanded in the fourth quarter of 1999.
RESEARCH AND DEVELOPMENT EXPENSES
Consolidated research and development costs for the year ended December 31,
1999 were $3,587,000, an increase of $1,128,000, or 46%, as compared to the year
ended December 31, 1998. This increase is, in part, related to the acquisition
of SecureWare during 1999. As SecureWare is primarily a development center, the
acquisition resulted in increased research and development headcount and
expenditures. During 1999, the IntelliSoft division increased research and
development headcount and expenditures. Additionally, during 1999, we entered
into a development agreement with Intel Network Systems, Inc. related to the
further enhancement of the VACMAN product line.
GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated general and administrative expenses for the year ended
December 31, 1999 were $3,435,000, an increase of $50,000, or 1%, over 1998.
This increase can be attributed to growth in infrastructure needed to support
our growth, as well as the impact of the acquisition of SecureWare during 1999.
INTEREST EXPENSE
Consolidated interest expense in 1999 was $815,000 as compared to $1,458,000
in 1998. The decrease can be attributed to a lower borrowing base being
maintained during 1999 as compared to the prior year.
22
<PAGE>
INCOME TAXES
We recorded tax expense for the year ended December 31, 1999 of $322,000,
which relates to one of our European subsidiaries.
At December 31, 1999, we have United States net operating loss carryforwards
approximating $9,100,000 and foreign net operating loss carryforwards
approximating $1,500,000. Such losses are available to offset our future taxable
income in the respective jurisdictions and expire in varying amounts beginning
in 2002 and continuing through 2019. In addition, if certain substantial changes
in our ownership are deemed to have occurred, there would be an annual
limitation on the amount of the U.S. carryforwards which could be utilized.
1997 COMPARED TO 1998
REVENUES
Our consolidated revenues for the year ended December 31, 1998 were
$16,500,000, an increase of $3,292,000, or 25%, as compared to the year ended
December 31, 1997. The European operations contributed $12,231,000 or 74% of
total consolidated revenues, with the United States operations contributing the
remaining $4,269,000 or 26%. This increase is due to a strong performance from
international operations, as the demand for Digipass 300 and Digipass 500
continues to grow. This resulted in increased unit sales, as well as an increase
of orders with smaller quantities, resulting in fewer volume discounts. In
addition, we benefited from currency exchange rates.
COST OF GOODS SOLD
Our consolidated cost of goods sold for the year ended December 31, 1998 was
$7,209,000, an increase of $720,000, or 11%, as compared to the year ended
December 31, 1997. The European operations' cost of goods sold was $5,550,000 or
77% of total consolidated cost of goods sold and the United States operations'
cost of goods sold was $1,659,000 or 23% of total consolidated cost of goods
sold. This increase is consistent with the increase in revenues for the year. We
continue to benefit from efficiencies in the manufacturing process, as well as
the increasing demand for products with a more favorable cost structure.
GROSS PROFIT
Our consolidated gross profit for the year ended December 31, 1998 was
$9,291,000, an increase of $2,572,000, or 38%, over the year ended December 31,
1997. This represents a gross margin of 56%, as compared to 1997's consolidated
gross margin of 51%. The increase in gross margin is due to efficiencies in
manufacturing related to increasing volumes, an increase in the mix of higher
margin products, as well as increasing orders with smaller quantities, resulting
in less volume discounting.
SALES AND MARKETING EXPENSES
Consolidated sales and marketing expenses for the year ended December 31,
1998 were $4,773,000, an increase of $1,084,000, or 29%, over 1997. This
increase can be attributed to increased sales efforts including, in part,
increased travel costs, headcount, and an increase in marketing activities,
including the development of a VASCO logo, Internet Web page and other efforts.
RESEARCH AND DEVELOPMENT EXPENSES
Consolidated research and development costs for the year ended December 31,
1998 were $2,459,000, an increase of $145,000, or 6%, as compared to the year
ended December 31, 1997. This increase can be attributed to increased headcount
and expenditures related to IntelliSoft during 1998 as compared to 1997.
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GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated general and administrative expenses for the year ended
December 31, 1998 were $3,385,000, a decrease of $1,499,000, or 31%, compared to
1997. This decrease can be attributed to the fact that we were preparing for the
exchange offer during 1997, thus generating significant legal, accounting and
printing expenses; the exchange offer was completed during March 1998. In
addition, economies of scale began to be realized during 1997 as a result of the
combination of the operations of Lintel Security and VASCO Data Security. In
1998, we also recorded recoveries of bad debts and a reduction of certain legal
fees associated with the exchange offer.
INTEREST EXPENSE
Consolidated interest expense in 1998 was $1,458,000 compared to $1,148,000
in 1997. The increase can be attributed to average borrowings in 1998 being
higher than those of the previous year.
INCOME TAXES
We recorded tax expense for the year ended December 31, 1998 of $687,000,
which related to one of our European operations.
DIVIDENDS
We paid no dividends during the year ended December 31, 1998 and $82,000
during the year ended December 31, 1997, respectively. The 1997 dividend
payments were attributable to 9,000 shares of VASCO Series B Preferred Stock
issued in 1994. During 1997, all 9,000 shares of VASCO Series B Preferred Stock
were converted into our common stock.
QUARTERLY FINANCIAL DATA
The following tables set forth an unaudited summary of quarterly financial
data. This quarterly information has been prepared on the same basis as the
annual consolidated financial statements and, in management's opinion, reflects
all adjustments necessary for a fair presentation of the information for the
periods presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
1998
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues, as previously reported(1)................. $ 2,613 $ 3,525 $ 4,025 $ 4,853
Adjustments(2).......................................... 85 219 655 525
Net revenues........................................ 2,698 3,744 4,680 5,378
Operating income (loss), as previously reported(1)...... (505) 14 (157) (562)
Adjustments(2).......................................... (311) (179) 246 127
Operating income (loss)............................. (816) (165) 89 (435)
Net loss, as previously reported(1)..................... (738) (865) (717) (1,329)
Adjustments(2).......................................... (315) (183) 250 115
Net loss............................................ $(1,053) $(1,048) $ (467) $(1,214)
Net loss per share as previously reported(1)............ $ (0.04) $ (0.04) $ (0.04) $ (0.06)
Net loss per share.................................. (0.05) (0.05) (0.02) (0.05)
Shares used in computing net loss per share previously
reported(1)........................................... 20,510 20,322 20,331 22,431
Shares used in computing net loss per share......... 22,510 22,322 22,331 24,431
</TABLE>
24
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<TABLE>
<CAPTION>
1999
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues, as previously reported(1)................. $ 4,309 $ 4,451 $ 4,653 $ 4,350
Adjustments(2).......................................... 510 883 242 --
Net revenues........................................ 4,819 5,334 4,895 4,350
Operating income (loss), as previously reported(1)...... (416) 209 460 (1,319)
Adjustments(2).......................................... 26 360 (213) --
Operating income (loss)............................. (390) 569 247 (1,319)
Net loss, as previously reported(1)..................... (1,004) (389) (114) (866)
Adjustments(2).......................................... 22 356 (217) (0.03)
Net loss............................................ $ (982) $ (33) $ (331) $ (866)
Net loss per share as previously reported(1)............ $ (0.05) $ (0.02) $ (0.00) --
Net loss per share.................................. (0.04) (0.00) (0.01) (0.03)
Shares used in computing net income (loss) per share
previously reported(1)................................ 21,011 24,050 24,649 26,473
Shares used in computing net loss per share......... 23,011 26,050 26,649 26,473
</TABLE>
- ------------------------
(1) As reported under the statement of operations in our Quarterly Report on
Form 10-Q for the three months ended March 31, June 30, and September 30,
1998 and 1999, or inherent in our Annual Report on Form 10-K for the years
ended December 31, 1998 or 1999, respectively.
(2) Adjustments reflect the effect of the IntelliSoft acquisition accounted for
as a pooling of interests on the amounts previously reported in our
Quarterly Report on Form 10-Q or inherent in our Annual Report on Form 10-K
for the years ended December 31, 1998 or 1999, respectively. See note 2 of
the notes to consolidated financial statements included elsewhere herein for
a more detailed discussion of this transaction.
Our quarterly operating results have in the past varied and may in the
future vary significantly. Factors affecting operating results include:
- the level of competition;
- the size, timing, cancellation or rescheduling of significant orders;
market acceptance of new products and product enhancements;
- new product announcements or introductions by our competitors;
- adoption of new technologies and standards;
- changes in pricing by us or our competitors;
- our ability to develop, introduce and market new products and product
enhancements on a timely basis, if at all;
- component costs and availability;
- our success in expanding our sales and marketing programs;
- technological changes in the market for data security products;
- foreign currency exchange rates;
- and general economic trends and other factors.
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In addition, we have experienced, and may experience in the future, long
sales cycles due to the size of our contracts and the timing of when our
customers take delivery of our products. We also experience seasonality in our
business. While these seasonal trends have included higher revenue in the last
quarter of the calendar year and lower revenue in the next succeeding quarter,
this was not the case in 1999 as a result of our customers' year 2000 concerns
and resulting purchasing decisions. We believe that revenue has tended to be
higher in the last quarter due to the tendency of certain customers to implement
or complete changes in computer or network security prior to the end of the
calendar year. In addition, revenue has tended to be lower in the summer months,
particularly in Europe, when many businesses defer purchase decisions. 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, our aggregate consolidated long term debt including
current maturities was $9,048,000. Cash used in operating activities was
$1,612,000 for the year ended December 31, 1999. During that period we used
$1,483,000 in investing activities and financing activities provided $3,988,000.
Capital expenditures were $895,000 for the year ended December 31, 1999.
In 1996, we issued a 9% convertible note to Kyoto Securities, Ltd., a
Bahamian corporation, in the amount of $5,000,000. The note provides for
quarterly interest payments and is payable in full on May 29, 2001. The note is
convertible into shares of our common stock at a conversion price of $12.00 per
share, or 416,667 shares. On March 10, 2000, we received a notice to convert the
note and we expect to issue those shares shortly.
In 1997, we entered into a convertible loan agreement with Artesia Bank
N.V., formerly Banque Paribas Belgique NV/SA, in order to refinance the
$3,400,000 payment due December 31, 1997 in connection with our acquisition of
Digipass. The terms of the agreement provide that the $3,400,000 principal
amount is convertible, at the option of the lender, into shares of our common
stock. This loan bears interest at the rate of 3.25%, payable annually, and
matures on September 30, 2002. After January 1, 1999, the loan is convertible at
the average closing market price for shares of our common stock on the NASD
Electronic Bulletin Board system for the 20 trading days prior to the date of
the notice of conversion, less 10%. In the event a public offering is completed,
the lender may at its option (by written notice within seven days after our
receipt of the proceeds of the public offering) require the principal amount of
the loan to be repaid in cash, in which case additional special interest is
payable in the amount of $680,000, or convert the loan at the public offering
price. As part of this transaction, Mr. T. Kendall Hunt, our former Chief
Executive Officer, entered into a pledge agreement with Banque Paribas Belgique
NV/SA, pursuant to which he pledged, as collateral for the convertible note,
1,416,666 of his shares of common stock, which number of shares is subject to
adjustment based on the market value of the shares.
The net effect of 1999 activity resulted in an increase in cash of $914,000,
resulting in a cash balance of $2,576,000 at December 31, 1999, compared to
$1,662,000 at the end of 1998. Our working capital at December 31, 1999 was
$2,473,000, an increase of $6,207,000, or 166% from ($3,734,000) at
December 31, 1998. The majority of the change is attributable to a 54% decrease
in current liabilities, mainly due to the current maturities of long-term debt.
Our ratio, which represents our current assets divided by our current
liabilities, was 1.5 to 1.0 at December 31, 1999.
In April 1999, we completed a private placement of common stock in the
amount of $11.5 million. The transaction represented a sale of our common stock
to European institutional investors at a price of $3.50 per share. A total of
3,285,714 shares of common stock were issued as a part of this transaction. We
believe that the proceeds that will be raised from our proposed stock offering,
along
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with our current cash balances and anticipated cash generated from operations
will be sufficient to meet our anticipated cash needs for the foreseeable
future.
We intend to seek acquisitions of businesses, products and technologies that
are complementary or additive to ours. There can be no assurance that any such
acquisitions will be made.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133"), which is effective for all fiscal years beginning after
June 15, 2000. SFAS No. 133 establishes a comprehensive standard for the
recognition and measurement of derivative instruments and hedging activities. We
do not expect the adoption of the new standard to have a material effect on our
consolidated financial position, liquidity, or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Approximately 63% of our business is conducted outside the United States, in
Europe and Asia/ Pacific. A significant portion of our business operations are
transacted in foreign currencies. As a result, we have exposure to foreign
exchange fluctuations. We are affected by both foreign currency translation and
transaction adjustments. Translation adjustments result from the conversion of
the foreign subsidiaries' balance sheets and income statements to U.S. dollars
at year-end exchange rates and weighted average exchange rates, respectively.
Translation adjustments resulting from this process are recorded directly into
stockholders' equity. Transaction adjustments result from currency exchange
movements when a foreign subsidiary transacts business in a currency that
differs from its local currency. These transactions are recorded as gains or
losses in our statement of operations.
The majority of our foreign subsidiaries' business transactions were spread
across approximately 40 different countries and currencies. We perform periodic
reviews of outstanding balances and settle intercompany accounts in an effort to
minimize foreign exchange transaction gains and losses.
We have minimal interest rate risk. Our $8.4 million long-term debt is made
up of fixed rate notes, ranging from 3.25% to 9%, which are not subject to
market fluctuations. The maturities of these notes range from 2001 to 2002.
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<PAGE>
BUSINESS
GENERAL
We design, develop, market and support security products and services which
manage and secure access to computer systems of corporate and government
customers. Additionally, we enable secure financial transactions made over
private enterprise networks and public networks, such as the Internet. We
believe that our software and hardware products provide organizations with
strong, flexible and effective Internet and enterprise security solutions and
they compete favorably against those of our competitors. Our IdentiSoft division
primarily designs and markets products under the Digipass brand. Our Digipass
product line provides greater flexibility and a more affordable means than
competing products of authenticating to any network, including the Internet. The
Digipass family of user authentication devices, all of which incorporate an
electronic digital signature capability to guarantee the integrity of electronic
transactions and data transmissions, are commonly referred to as security
tokens. Our IntelliSoft division is responsible for open standards-based
software products, including our SnareWorks and VACMAN product lines which
provide enterprise-wide solutions to secure Internet, client/server and
mainframe applications.
Our security solutions are sold worldwide through our direct sales force, as
well as through distributors, resellers and systems integrators. We currently
have approximately 450 customers in more than 47 countries. Representative
customers of our products include:
- in Europe, ABN-AMRO Bank, Rabobank Nederland, SE-Banken, and KBC; and
- outside Europe, Liberty Mutual, Cable and Wireless, 3M, Centerlink (the
social security agency of Australia) and Duke University.
INDUSTRY BACKGROUND
The growth in electronic banking and electronic commerce, and the increasing
use and reliance upon proprietary or confidential information by businesses,
government and educational institutions that is remotely accessible by many
users, has made information security a paramount concern. We believe that
enterprises are seeking solutions which will continue to allow them to expand
access to data and financial assets while maintaining network security.
According to Datamonitor, the global market for security products is expected to
grow from $2.3 billion in 1998 to over $8 billion in 2003, a compound annual
growth rate of 28%.
INTERNET AND ENTERPRISE SECURITY. With the advent of personal computers and
distributed information systems in the form of wide area networks, intranets,
local area networks and the Internet, as well as other direct electronic links,
many organizations have implemented applications to enable their work force and
third parties, including vendors, suppliers and customers, to access and
exchange data and perform electronic transactions. As a result of the increased
number of users having direct and remote access to such enterprise applications,
data and financial assets have become increasingly vulnerable to unauthorized
access and misuse.
INDIVIDUAL USER SECURITY. In addition to the need for enterprise-wide
security, the proliferation of personal computers, personal digital assistants
and mobile telephones in both the home and office settings, combined with
widespread access to the Internet, have created significant opportunities for
electronic commerce by individual users such as electronic bill payment, home
banking and home shopping.
Fueled by recent and well-publicized incidents including misappropriation of
credit card information and denial of service attacks, there is a growing
perception among many consumers that there is a risk involved in transmitting
information via the Internet. These incidents and this perception may hamper the
development of consumer-based electronic commerce. Accordingly, we believe that
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electronic commerce will benefit from the implementation of improved security
measures that accurately identify users and reliably encrypt data transmissions
over the Internet.
COMPONENTS OF SECURITY. Data and financial asset security, and secured
access to and participation in on-line commerce, generally consist of the
following components:
- ENCRYPTION: Maintains data privacy by converting information into an
unreadable pattern and allowing only authorized parties to decrypt the
data. Encryption can also maintain data integrity by creating digital
signatures for transmitted data, enabling the recipient to check whether
the data has been changed since or during transmission.
- IDENTIFICATION AND AUTHENTICATION: Serves as the foundation for other
security mechanisms by verifying that a user is who he or she claims to
be. Identification and authentication mechanisms are often employed with
encryption tools to authenticate users, to determine the proper encryption
key for encrypting/decrypting data or to enable users to digitally "sign"
or verify the integrity of transmitted data.
- ACCESS CONTROL: Software that provides authentication, authorization and
accounting functions, controlling a user's access to only that data or the
financial assets which he or she is authorized to access, and which keep
track of a user's activities after access has been granted.
- ADMINISTRATION AND MANAGEMENT TOOLS: Software which sets, implements and
monitors security policies, the access to which is typically regulated by
access control systems. These tools are extremely important to the overall
effectiveness of a security system.
The most effective security policies employ most, if not all, of the above
components. Most companies, however, only implement a patchwork of these
components, which can result in their security systems being compromised.
THE VASCO SOLUTION
To date, most approaches to network security, including Internet security,
have been limited in scope and have failed to address all of the critical
aspects of data security. We believe that an effective enterprise-wide solution
must address and assimilate issues relating to the following:
- speed and ease of implementation, use and administration;
- reliability;
- interoperability with diverse enterprise environments, existing customer
applications and their diverse security infrastructures;
- scalability; and
- overall cost of ownership.
Accordingly, we have adopted the following approach to data security:
- In designing our products, we have sought to incorporate all
industry-accepted, open and non-proprietary protocols. This permits
interoperability between our products and the multiple platforms,
products, and applications widely in use.
- We have designed our products and services to minimize the integration
effort with, and disruption of, existing legacy applications and security
infrastructures, such as public key infrastructure, known as PKI. We
provide customers with easier implementations and a more rapid means of
implementing security across the enterprise, including the Internet. With
security being a critical enabling technology for online business
initiatives, speed and ease of security implementation has become crucial
to an organization's success.
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- We design our products and services to have a lower total cost of security
ownership than competing products and services. We have found that product
improvements and tools that lower a customer's total cost of ownership
create differentiating sales and marketing tools, and also help in the
development of a highly loyal customer base that is open to new solutions
that we offer.
As a result of this approach, we believe that we are positioned to be a
leading provider of our open standards-based software and hardware security
solutions.
VASCO'S STRATEGY
We believe we have one of the most complete lines of security products and
services available in the market today and we intend to become a leading
worldwide provider of these products and services. A key element of our growth
strategy is to demonstrate to an increasing number of distributors, resellers
and systems integrators that by incorporating our security products into their
own products they can more effectively differentiate themselves in their
marketplaces and increase the value of their products. In addition, we
demonstrate to our corporate users that our products provide mission critical
security to their internal and external security infrastructures. Following this
aggressive marketing and promotion effort, we work with these resellers and
integrators to support their sales of solutions which include our products.
Also, we plan to expand our direct sales marketing program to new and existing
blue chip customers.
For example, Novell, S-1, Brokat and Intel Network Services (formerly Shiva)
have all built support for our products. We currently market to the distribution
channels of these companies and are already recognizing increasing revenue as
these channels sell our solutions to their end customers. In addition, our
IntelliSoft division has a base of customers we market to directly, such as Duke
University. We are aggressively expanding the use of this strategy world wide.
Further, we intend to:
INCREASE SALES AND MARKETING EFFORTS WORLDWIDE. We intend to increase sales
of our security products and services in our firmly established European markets
and to aggressively increase our sales and support presence and marketing
efforts in North America, South America and Asia. We plan to:
- market new services and products to our existing customers by providing
testimonial evidence of user experiences from other customers;
- launch a worldwide marketing campaign to raise awareness of our solutions
among the decision makers in the security products industry;
- form additional strategic relationships with resellers and vendors of
complementary, innovative security products and systems; and
- develop a marketing and sales infrastructure in new markets, initially
including Hong Kong and Argentina.
CONTINUE INNOVATION. We intend to continue to enhance and broaden our line
of security products to meet the changing needs of our existing and potential
customers by:
- building on our core software and hardware security expertise, such as
expanding our technology for use on different platforms (like mobile
phones and personal digital assistants) and incorporating biometrics into
our products;
- acquiring complementary technologies or businesses; and
- developing additional applications for our products in areas which may
include securing the exchange of data in the healthcare field and
providing security for Internet gambling and lottery transactions, among
others.
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VASCO'S PRODUCTS
We operate as two worldwide divisions: IdentiSoft and IntelliSoft. Each
division has its own sales, research and development, and support structures,
while both divisions take advantage of global corporate services such as
marketing, administration, public relations and finance. However, there is
considerable and growing cross-product sales, marketing and development between
the divisions.
The IdentiSoft division is responsible for the development, sales and
support of our Digipass and Cryptech product lines. The IntelliSoft division is
responsible for the development, sales and support of our SnareWorks and VACMAN
product lines.
THE IDENTISOFT DIVISION
Our IdentiSoft division offers software and handheld hardware security
products that provide strong user authentication, thus eliminating the weakest
link in any security scheme, the isolated use of a static password. Over
3,500,000 of our tokens have been sold to over 450 customers. Our largest
customer is Rabobank, which has over 500,000 tokens in use, demonstrating the
scalability of our product. We believe this is the largest token-based
installation of its kind.
IDENTISOFT'S DIGIPASS PRODUCT LINE
Our Digipass product line, which exists as a family of authentication
devices as well as extensive software libraries, provides a flexible and
affordable means of authenticating users to any network, including the Internet.
Security can be broken into three factors:
- What you have (the Digipass device itself);
- What you know (the PIN code to activate the Digipass); and
- Who you are (biometrics).
The Digipass family is currently based on the first two factors. We are
developing voice technology to incorporate the third factor into the Digipass.
Using the Digipass system, in order to enter a remote system or to digitally
sign data one needs:
- the hardware device (the token) itself so that if you do not physically
have the token, you will not be able to log on to the system; and
- the PIN code for the token so if you do not know the appropriate code the
user will not be able to use the applications stored inside.
Both of these factors help to make sure that a natural person is
authenticating (or signing), instead of a computer or another device. These
factors also enable extremely high portability for security anytime, anywhere
and anyhow.
Digipasses calculate dynamic passwords, also known as one-time passwords, to
authenticate users on a computer network and for a variety of other
applications. There are several versions of the Digipass, the 50, 100, 300, 500,
600 and 700, each of which has its own distinct characteristics depending on the
platform that they use and the functions they perform. However, the Digipass
family is designed to work together and customers can switch their users'
devices without requiring any changes to the customers existing infrastructure.
In addition, these devices can be used to calculate digital signatures, also
known as electronic signatures or message authentication codes, to protect
electronic transactions and guarantee the integrity of the contents of these
transactions. In addition, the Digipass 50 is designed to be used on other
platforms such as mobile phones and personal digital assistants.
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DIGIPASS AT WORK
[CHART]
[Graphic appears here. Description of contents described in paragraph below.]
The above illustration shows the various steps in the Digipass
initialization process. In the first step the devices are initialized with their
unique set of secrets and keys per device. These secrets are stored in an
encrypted way on a diskette that is sent to the application owner (for example,
the information technology manager in a company or the security department of a
bank). These floppy disks are one way of safely transporting the Digipass
secrets to the host computer.
The files on the floppy disks will be used to read all the necessary secrets
and other data from the delivered Digipasses into a database. Then the
application owner will assign those Digipass secrets to the end-users. This
assignment is based on the serial number of the Digipass and the identity of the
end-user. The Digipass is then shipped to the end-user together with a manual,
and the protected PIN-code is sent by a secure separate shipment.
Using a Digipass requires a connection to the host (server) computer that
knows the parameters of the end-user's Digipass. Every time the user sends a
dynamic password or digital signature to the host computer, the computer will
retrieve all the necessary information from the database and will check the
validity of the password or signature. After the host has checked the validity
of the dynamic password or signature, it will notify the end-user of the
correctness or incorrectness of the validity check.
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Digipass security devices are not terminal dependent and do not require any
specific software platform since they only interact with a person.
Currently, the Digipass is used in many applications, the largest of which
is banking. Different banking applications are:
- corporate banking through direct dial-up, as well as over the Internet and
- retail banking to secure transactions made through the use of a dial-up
connection with a personal computer, the traditional phone system, the
Internet, and wireless phones and other communication devices such as
personal digital assistants.
Another significant application for the Digipass is to secure access to
corporate networks for home-based, traveling and other remote users. Finally,
Digipasses are increasingly being used in a variety of e-commerce applications
where the user is part of a pre-defined user group. We intend to expand the use
of the Digipass to other groups of users and applications, including electronic
commerce transactions directed at the general public.
IDENTISOFT'S CRYPTECH PRODUCT LINE. IdentiSoft has a product line that
produces cryptographic microprocessor chips. These chips are used to encrypt
data for use in automated teller machines, or ATMs, fax machines, modems and
security servers at high speeds using data encryption standard, or DES, and
Rivest, Shamir and Adleman, or RSA, algorithms.
THE INTELLISOFT DIVISION
Our IntelliSoft division, consisting of SnareWorks and VACMAN, offers
enterprise-wide security software that provides encryption, access control and
administration and management tools. Through the product architecture, the
software can be configured to provide security for mainframe, client/server and
Internet applications.
INTELLISOFT'S SNAREWORKS PRODUCT LINE
SnareWorks is uniquely positioned to provide the security bridge between the
existing software infrastructure of legacy mainframe and client-server
applications that are powering large enterprises, and the world of the Web,
e-commerce and business-to-business on the Internet. The critical
differentiating benefit of SnareWorks is that it fits into existing computing
environments transparently because little, if any, new programming is required.
As a result of its unique design, the SnareWorks product line is the only one in
the industry that spans all three architectures (Web, client-server and
mainframe) and enables rapid, low-cost, widespread deployment of true,
end-to-end security.
We believe that our competitors' products generally require extensive
customization and integration which requires a complex and time-consuming
deployment effort. In comparison, SnareWorks products are different because of
the following key factors:
- PROTOCOL SUPPORT MODULES. These are small segments of computer code that
represent the knowledge modules that describe the application protocol to
SnareWorks. With these small knowledge modules it is possible to teach
SnareWorks how to apply state-of-the-art security features to existing
applications without requiring any retooling of the applications
themselves.
- RAPID AND FLEXIBLE AUTHENTICATION. SnareWorks enables an enterprise to
deploy rapidly a variety of authentication mechanisms, including those
available from competitors, on the desktop.
- TRUE SECURE SINGLE SIGN-ON. Once initial authentication is achieved,
SnareWorks provides single sign-on to a variety of applications, including
Web-based and desktop-based applications. In the case of Web-servers, a
user will not have to log into more than a single Web-server or
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application. SnareWorks is different from other competing products because
it can adapt to all commonly deployed authorization and authentication
methodologies.
Additional key features and benefits of the SnareWorks product line are as
follows:
- TRANSPARENT ENCRYPTION. SnareWorks enables strong encryption of all
transmission control protocol/Internet protocol, or TCP/IP network traffic
on every computer in a network simply by installing it. When SnareWorks is
involved in the transfer of data, the default is automatically to encrypt
all data.
- EASY INSTALLATION. SnareWorks client or desktop software can be downloaded
and installed on desktop computers and Web browsers in a matter of
minutes, and do not require additional software or alterations to existing
application software programs. For Internet-based applications that
require only the use of a browser, there is no software to be installed
on, or downloaded to, the user's desktop. This feature significantly
reduces the time, cost and inconvenience to the customer of securing their
networks.
- AUTOMATED USER REGISTRATION. SnareWorks provides an automated process to
register new users by providing them with their network identity along
with their public key certificates without the assistance of a human
administrator. This feature allows large companies to deploy SnareWorks
more rapidly than it would normally take to deploy a solution of this
scope.
- SCALABLE AUTHORIZATION. Users or groups of related users can be granted
access to different portions or applications on a network based upon their
SnareWorks profile. SnareWorks is scalable, allowing a virtually unlimited
number of groups and users to be efficiently handled by the software.
Common groupings of users are made on the basis of their members, roles,
locations and/or time of day, among other factors.
- LOG FILES BASED AUDITING. SnareWorks provides "log files" or detailed
records of the activity surrounding a data transfer, including identity of
user, time, application accessed and date transferred. These log files are
used to monitor and audit network activity by administrators. SnareWorks
can create these files even if the applications or software programs do
not provide for the creation of log files.
- USE OF DIGITAL SIGNATURES. A distinctive feature of SnareWorks is its
ability to significantly enhance the reliability of applications and data
through the use of digital signatures. A digital signature is an authentic
piece of data attached to an object. The recipient as well as a third
party can verify that the object to which the signature is attached has
not been altered since it was signed.
- DISTRIBUTED MANAGEMENT. SnareWorks can be managed from a central location
or from over a dozen graphical management editors and viewers to provide a
comprehensive view of security in the enterprise.
- STANDARDS BASED. SnareWorks supports a wide variety of standard encryption
devices, including DES, 3DES and SSL, digital signatures (RSA), message
integrity (MD5), key management (DCE/Kerberos, RSA), digital certificates
(X.509), access control (POSIX) and strong authentication (RADIUS).
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SNAREWORKS AT WORK
Below is a graphical rendition of how SnareWorks is implemented followed by
a description of each of the SnareWorks elements.
[CHART]
[Graphic appears here. Description of contents described in paragraph below.]
SnareWorks Desktop Client is a thin, ultra-lightweight customer package that
provides a complete security environment for Internet-based applications
residing on a user's desktop. It enables rapid deployment of a comprehensive
security solution to thousands of users across multiple server and operating
system environments. It provides commercial off-the-shelf products and legacy
applications with:
- strong network encryption;
- pluggable authentications;
- a scalable access control model;
- secure single sign-on;
- enforcement of auditing; and
- digital signatures.
SnareWorks Web enables existing Web-based applications to utilize a single
network identity for authentication and true single sign-on. It delivers secure
authorization using a proven access control model, which enables administrators
to control even the most detailed aspects of the Web. SnareWorks Web can be
distributed to multiple Web servers across the enterprise and managed from one
central node through a sophisticated graphical user interface.
The SnareWorks Certificate Server Security Infrastructure provides
certificate management services to the SnareWorks security framework. These
services include issuance, revocation, query and reporting services for
X.509-based certificates. The Certificate Server supports both Web and command
line access to the certificate repository.
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SnareWorks Rule Server provides the security services necessary to integrate
both Web and non-Web applications into the SnareWorks Framework. These services
include:
- network authentication;
- secure single sign-on;
- fine-grain access control;
- network data encryption;
- auditing;
- event notification; and
- enforcement of numerous other security policies.
The SnareWorks Software Development Kit is a set of library files that a
developer can use to build extensions to the SnareWorks framework. It is used to
develop protocol support modules which enable SnareWorks servers to analyze the
behavior and the operation of legacy applications without requiring these
applications to be modified. Protocol support modules can provide advanced
security features to new or legacy applications. With the SnareWorks Software
Development Kit developers can extend SnareWorks to perform a variety of
functions for these applications, including:
- automatic login and secure single sign-on;
- operation-to-rule mapping;
- object-to-rule mapping;
- identity transformation;
- digital signatures;
- application verification;
- auditing;
- automated keystroke capture;
- chargeback accounting; and
- authorization products interface.
The SnareWorks Security Server is a highly scalable authentication service
that combines the best of security technologies, supporting both secret as well
as public key authentication. It provides signed network credentials that form
the basis for an enterprise-wide authorization infrastructure that can be
applied uniformly to all applications. The Security Server also includes a
distributed database for users, groups, roles, policies, passwords and security
attributes. It also provides encryption services, key generation and
password-strength facilities.
The SnareWorks Administration Console is the control center for the
SnareWorks framework. It enables security administrators to perform remote
management of SnareWorks servers and is also the primary interface for creating
connection and object rules. These rules govern the behavior of all applications
and the access rights to all data throughout the SnareWorks framework. The
Administration Console includes numerous graphical editors, which enable
administrators to control virtually all aspects of SnareWorks from anywhere in
the enterprise.
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INTELLISOFT AND PUBLIC KEY INFRASTRUCTURE
Many corporations are increasingly relying upon digital certificates to
authenticate and identify users on a network, including the Internet. In
addition, digital certificates are used to transmit data in an encrypted format
over a network. The issuance, revocation, management and policies surrounding
these digital certificates is commonly referred to as public key infrastructure
or PKI. Like any other new comprehensive technology infrastructure, large
companies need to integrate PKI into their legacy and new applications. This
takes time, money, and specialized, hard-to-find personnel. While there may be
significant commercial potential for PKI, the process of integrating PKI into
other enterprise wide applications has proven so difficult that few companies
have existing PKI deployments beyond the pilot stage.
For companies that are using certificate authority vendors such as Entrust,
Baltimore, or Verisign, SnareWorks interoperates and allows for easy integration
of PKI. In addition, for companies that have not committed to a particular
certificate authority vendor, SnareWorks provides its own certificate authority
capabilities. Finally, as described above, SnareWorks can work with non-PKI
related authentication such as tokens, smart cards, and passwords.
We also have patent pending technology that allows for secure storage of a
digital certificate's private key on a server that can be accessed from any
network using any of our Digipass family of products. The effect of this
technology is that it gives digital certificates the portability of PKI deployed
on smartcards, without the cost or infrastructure development required for
deploying smartcards and their associated smartcard readers.
INTELLISOFT'S VACMAN PRODUCT LINE
IntelliSoft's VACMAN product line provides organizations with access control
software to manage secure remote access to computer networks. The product line
consists of the VACMAN Radius Server, the VACMAN Programmer, the VACMAN OPTIMUM
and the VACMAN controller.
Key features of the VACMAN product line are:
- interoperability with a wide range of commercially standard products and
protocols including ODBC databases or any server supporting the RADIUS
standard;
- the ability to program Digipass tokens, giving customers complete control
of the initialization, customization and maintenance processes; and
- the allowance of quick integration of Digipass Authentication software
into industry standard platforms such as Sun Solaris and UNIX.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS AND LICENSES
We rely on a combination of patent, copyright, trademark and trade secret
laws, as well as employee and third-party non-disclosure agreements to protect
our proprietary rights. In particular, we hold several patents in the United
States and a corresponding patent in certain European countries, which cover
certain aspects of our technology. The majority of our patents cover our
Digipass family of security tokens. The U.S. patents expire between 2003 and
2010 and the European patent expires in 2008. We believe these patents to be
valuable property rights and we rely on the strength of our patents and on trade
secret law to protect our intellectual property rights. To the extent that we
believe our patents are being infringed upon, we intend to assert vigorously our
patent protection rights, including but not limited to, pursuing all available
legal remedies.
On March 25, 1998, we entered into an arm's-length license agreement with
Lernout & Hauspie Speech Products NV/SA pursuant to which we received a
five-year world-wide, non-exclusive, non-transferable license to use certain
speaker verification software in access control applications. For this
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license, we agreed to pay a royalty of 10% of revenue associated with the
software which will be credited against royalty prepayments aggregating
$800,000. On December 31, 1998, the license was extended for an additional
five years and we made additional royalty prepayments to reach an aggregate of
$1.6 million. In addition, the revised agreement also provides for the
initiation of a co-marketing and co-sales effort.
Further, in connection with sales of our SnareWorks product, we offer a
SnareTools tool kit pursuant to a perpetual license agreement with Computer
Associates dated December 2, 1996, pursuant to which we pay a 2% royalty based
on net sales of the product. SnareWorks also contains infrastructure software
which is provided by IBM under an original equipment manufacturing agreement
dated October 6, 1999, and by Gradient Technologies under an original equipment
manufacturing agreement dated July 13, 1999. Both of these agreements are for
three-year terms and also provide for small royalty payments based on how our
product is configured with the end users. In the ordinary course of our business
we have entered, and may periodically enter, into license agreements with
software providers, as needed.
RESEARCH AND DEVELOPMENT
Our research and development efforts historically have been, and will
continue to be, concentrated on product enhancement, new technology development
and related new product introductions. We employ 24 full-time engineers and,
from time to time also engage independent engineering firms to conduct
non-strategic research and development efforts on our behalf. For the fiscal
years ended December 31, 1997, 1998 and 1999, we expended $2,313,756, $2,459,477
and $3,587,483, respectively, on research and development, representing
approximately 17.5%, 14.9% and 18.5% of consolidated revenues for 1997, 1998 and
1999, respectively.
While management is committed to enhancing our current product offerings and
introducing new products, we cannot be certain that our research and development
activities will be successful. Furthermore, we may not have sufficient financial
resources to identify and develop new technologies and bring new products to
market in a timely and cost effective manner, and we cannot ensure that any such
products will be commercially successful if and when they are introduced.
PRODUCTION
Our security hardware products are manufactured by third parties pursuant to
purchase orders that we issue. Our hardware products are made primarily from
commercially available electronic components which are purchased globally. Our
software products are produced either in-house or by several outside sources in
North America and Europe.
The security tokens utilize commercially available programmable
microprocessors, or chips. We use two microprocessors, made by Samsung and
Epson, for the various hardware products we produce. The Samsung microprocessors
are purchased from Samsung Semiconductor in Belgium, and the Epson
microprocessors are purchased from Alcom Electronics NV/SA, also located in
Belgium. The microprocessors are the only components of our security tokens that
are not commodity items readily available on the open market. While there is an
inherent risk associated with each supplier of microprocessors, we believe
having two sources reduces the overall risk to a commercially acceptable level.
Orders of microprocessors and some other components generally require a lead
time of 12 to 16 weeks. We attempt to maintain a sufficient inventory of all
parts to handle short-term increases in orders. Large orders that would
significantly deplete our inventory are typically required to be placed with
more than 12 weeks of lead time, allowing us to attempt to make appropriate
arrangements with our suppliers.
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We purchase the majority of our product components and arrange for shipment
to third parties for assembly and testing in accordance with our design
specifications. Our security token products are assembled exclusively by two
independent companies, each of which is based in Hong Kong. Purchases from one
of the companies are made on a purchase order by purchase order basis. Purchases
from the other company are under a contract that extends to January 21, 2001,
with automatic one-year renewals and subject to termination on six months
notice. Each of these companies assembles our security tokens at facilities in
mainland China. One of the companies also maintains manufacturing capacity in
Hong Kong. Equipment designed to test product at the point of assembly is
supplied by us and periodic visits are made by our personnel for purposes of
quality assurance, assembly process review and supplier relations.
There can be no assurance that we will not experience interruptions in the
supply of either the component parts that are used in our products or
fully-assembled token devices in general. In the event that the flow of
components or finished product was interrupted there could be a considerable
delay in finding suitable replacement sources for those components, as well as
in replacement assembly subcontractors with the result that our business and
results of operations could be adversely affected. For further information about
our suppliers, refer to the "Risk Factors" section.
COMPETITION
The market for computer and network security solutions is very competitive
and, like most technology-driven markets, is subject to rapid change and
constantly evolving products and services. With respect to Digipass, our main
competitor is RSA Security Inc., and with respect to our SnareWorks and VACMAN
product lines, our main competitor is Netegrity, Inc. There are many other
companies such as Computer Associates International, Inc., AXENT Technologies,
Inc., ActivCard and Gradient Technologies, Inc. which offer hardware, software
and services that range from simple locking mechanisms to sophisticated
encryption technologies. We believe that competition in this market is likely to
intensify as a result of increasing demand for security products.
We believe that the principal competitive factors affecting the market for
computer and network security products include the strength and effectiveness of
the solution, technical features, ease of use, quality/reliability, customer
service and support, name recognition, distribution channels and price. Although
we believe that our products currently compete favorably with respect to such
factors, other than name recognition in certain markets, there can be no
assurance that we can maintain our competitive position against current and
potential competitors, especially those with significantly greater financial,
marketing, service, support, technical and other competitive resources.
Many of our present and potential competitors have significantly greater
financial, technical, marketing, purchasing and other resources than we do, and
as a result, may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of products, or to deliver competitive products
at a lower end user price. Current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products to address the needs of our
prospective customers. Accordingly, it is possible that new competitors or
alliances may emerge and rapidly acquire significant market share.
Our products are designed to allow authorized users access to a computing
environment, in some cases using patented technology as a replacement for the
static password. Although certain of our security token technologies are
patented, there are other organizations that offer token-type password
generators incorporating challenge-response or response-only approaches that
employ different technological solutions and compete with us for market share.
For additional information regarding our competition, please refer to the
section titled "Risk Factors."
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SALES AND MARKETING
Our security solutions are sold worldwide through our direct sales force, as
well as through distributors, resellers and systems integrators. A sales staff
of 24 coordinates our sales through both our sales channels and these strategic
partners' sales channels and makes direct sales calls either alone or with sales
personnel of vendors of computer systems. Our sales staff also provides product
education seminars to sales and technical personnel of vendors and distributors
with whom we have working relationships and to potential end-users of our
products.
Part of our expanded selling effort includes approaching our existing
strategic partners to find additional applications for our security products. In
addition, our marketing plan calls for the identification of new business
opportunities that may require enhanced security over the transmission of
electronic data or transactions where we do not currently market our products.
Our efforts also include the preparation and dissemination of white papers
prepared by our support engineers which explain how we believe our security
products can add value or otherwise be beneficial.
Early in the fourth quarter of 1999, we expanded our relationship with
Saatchi & Saatchi to spearhead our worldwide marketing campaign. This worldwide
campaign will include print and media advertising to targeted sectors, as well
as interactive Web-based promotional activity.
CUSTOMERS AND MARKETS
Customers for our products include some of the world's most recognized
names. Customers of Digipass tokens include:
<TABLE>
<CAPTION>
BANKING TELECOM AUTOMOTIVE OTHER
- ------- ------- ---------- -----
<S> <C> <C> <C>
ABN-AMRO Bank France Telecom Mobile Honda Europe Centerlink (Australia)
SNS Bank Nokia Skoda/Volkswagen Ministry of Finance
Rabobank Nederland Belgacom Volvo (Belgium)
SE-Banken Dutchtone Daimler Chrysler University of Groningen
(The Netherlands)
</TABLE>
In addition, a growing number of businesses and institutions are using
SnareWorks and VACMAN. These include: Duke University, 3M, Liberty Mutual and
Cable & Wireless.
Cryptech customers are primarily original equipment manufacturers.
In 1999, Concord Eracam Nederland NV accounted for 18% of our revenues. In
addition, we have four other customers who each accounted for 5% or more of our
revenues. We are aware of the risks associated with this degree of customer
concentration and expect to further minimize our reliance on these customers.
EMPLOYEES
As of March 14, 2000, we employed 85 full-time employees, and 1 part-time
employee. Of these, 43 were located in North America and 43 were located in
Europe. Of the total, 44 were involved in sales, marketing and customer support,
21 in product production, research and development and 21 in administration. We
organize internal and external training programs for our employees and reward
employees for obtaining training which benefits their work performance. We had a
total of 80, 60 and 46 employees at the end of the years ended December 31,
1999, 1998 and 1997, respectively.
Our employees are not represented by unions and we have never experienced a
work stoppage. We believe our relationship with our employees is good.
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PROPERTY
Our corporate offices and North American administrative, sales and
marketing, research and development and support facilities are located in the
United States in an office complex in Oakbrook Terrace, Illinois, a suburb of
Chicago. These facilities are leased through November 30, 2004, and consist of
approximately 9,000 square feet. We believe that the Oakbrook Terrace facilities
will be adequate for our present growth plans.
Our European administrative, sales and marketing, research and development
and support facilities are located in a suburb of Brussels, Belgium. These
facilities consist of approximately 23,500 square feet of office space which are
occupied under a lease expiring in September 30, 2005. We believe that these
facilities are adequate for our present growth plans.
GOVERNMENT REGULATION
All of our products are subject to export controls and restrictions in the
United States and Belgium. In the United States, controls and restrictions are
administered by the United States Department of Commerce in conjunction with the
National Security Agency and other U.S. government agencies. Exports of products
with encryption capabilities are subject to varying degrees of control and
restriction depending upon a number of factors. Generally speaking, these
products are subject to a one-time government review and classification prior to
export. Products with longer bit (encryption) lengths often require issuance of
a government license prior to export. In addition, recent changes in U.S.
encryption regulations take into account other factors such as whether the
product is a retail product and whether it is being exported to a
non-governmental customer. U.S. export laws also prohibit the export of
encryption products to a number of specified countries that are deemed to
support terrorism or to be hostile to the United States.
There can be no assurance, however, that the list of products and countries
for which export approval is required, and the regulatory requirements with
regard thereto, will not be revised from time to time. Our inability to obtain
required approvals under these regulations could materially adversely affect our
ability to make international sales of the products under U.S. export control
laws.
Our core authentication products, do not, nor are they likely to, fall under
U.S. encryption export control regulations. Although all of our authentication
products utilize encryption technologies, the products cannot read and encrypt
client data. Thus, they are not subject to the U.S. encryption export control
regulations.
Similarly, VDS NV/SA, our Belgian operating subsidiary, is subject to export
licensing requirements under Belgian law. The inability of VDS NV/SA to obtain
required approvals or licenses under Belgian law also could have a material
adverse effect on our financial condition or results of operations.
The Belgian export of VDS NV/SA's cryptographic products, consisting of DES
and RSA microprocessors and PC/DES and RSA cards (including software development
kits), is subject to European Community regulations. VDS NV/SA's cryptographic
products are considered to be "goods of dual use" under those regulations (i.e.,
goods that can be used for both civil and military purposes). As such, an
individual export license given by the Belgian authorities per customer is
required for their export, except to Luxembourg and the Netherlands. Only the
VDS NV/SA products that perform encryption of data for confidentiality reasons
require an individual export license, and VDS NV/SA has obtained such licenses
for the export of these products.
VDS NV/SA, as owner and exporter of the cryptographic products, must apply
to the Belgian Ministry of Economic Affairs for an export license for each
company to which it exports such products. An export license is valid for one
customer for one year from the date of issue. It can be reused for
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several consecutive deliveries to that customer until the total export quantity,
as indicated on the license, has been exhausted. If the quantity is not
completely exported during the one year license period, the license can be
renewed once for another year. VDS NV/SA applies for such licenses for customers
that wish to purchase cryptographic products.
LITIGATION
From time to time, we have been involved in litigation incidental to the
conduct of our business. Currently, we are not a party to any lawsuit or
proceeding which, in our management's opinion, is likely to have a material
adverse effect on our business, financial condition or results of operations.
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MANAGEMENT
OUR DIRECTORS AND OFFICERS
Our executive officers and directors, and their respective ages as of
February 8, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Mario R. Houthooft........................ 46 Chief Executive Officer, Pesident and
Director
T. Kendall Hunt........................... 56 Chairman of the Board and Executive Vice
President
Dennis D. Wilson.......................... 48 Vice President and Chief Financial Officer
Jan Valcke................................ 45 General Manager, IdentiSoft Division
Jonathan Chinitz.......................... 40 General Manager, IntelliSoft Division
Forrest D. Laidley........................ 55 Secretary and Director
Christian Dumolin......................... 54 Director
Michael A. Mulshine....................... 60 Director
Michael P. Cullinane...................... 50 Director
Pol Hauspie............................... 48 Director
</TABLE>
MARIO R. HOUTHOOFT--Mr. Houthooft serves as our Chief Executive Officer,
President and a Director. Mr. Houthooft was elected to our Board of Directors as
of April 10, 1998. From 1992 until joining us, he served in various management
positions with Lintel Security. Prior thereto, he was with Cryptech Company,
which he founded, from 1985 where he served in various positions. Mr. Houthooft
received a degree in Electrical Engineering from University of Ghent, Ghent,
Belgium.
T. KENDALL HUNT--Mr. Hunt is Chairman of the Board and Executive Vice
President. He served as our Chief Executive Officer through June 16, 1999. He
has been a director since July 1997. He served since 1990 as Chairman and
President of our predecessor. Mr. Hunt received a B.B.A. from the University of
Miami, Miami, Florida and an M.B.A. from Pepperdine University, Malibu,
California.
DENNIS D. WILSON--On March 15, 2000, we announced that Mr. Dennis D. Wilson,
would join us as Vice President and Chief Financial Officer effective March 20,
2000. Prior to joining us, Mr. Wilson was Chief Accounting Officer and Director
of Financial Reporting for Schawk, Inc., based in Des Plaines, Illinois, a
multi-divisional, international company. Prior to joining Schawk, Mr. Wilson
held senior financial management positions with Family Service Centers in
Illinois and Ernst & Young, Chicago. He is currently a member of the Board of
Directors of Aasche Transportation Services, Inc., a Nasdaq-listed Illinois
company. Mr. Wilson is a Certified Public Accountant. Mr. Wilson received a B.S.
ED. degree from Bowling Green State University.
JAN VALCKE--Mr. Valcke has been our Vice President since 1996 and, the
General Manager of the IdentiSoft Division since December 1999. From 1992 until
joining VASCO Data Security NV/SA, he served as Vice President of Sales and
Marketing of Digipass NV/SA, member of the Digiline International group. He was
co-founder and member of the Board of Directors of Digiline since 1988.
Mr. Valcke received a degree in Science from Kortrijk High School, Kortrijk,
Belgium.
JONATHAN CHINITZ--Mr. Chinitz has been General Manager of our IntelliSoft
Division since December, 1999, and was President and founder of IntelliSoft
Corp. from 1992 through 1999 before its acquisition by us in 1999. Mr. Chinitz
has been involved in the distributed security market since 1991. Mr. Chinitz
received a B.S. in Computer Sciences from Hebrew University, Jerusalem, Israel
and a M.S. in Computer Sciences from Boston University, Boston, Massachusetts.
FORREST D. LAIDLEY--Mr. Laidley is our Secretary and has been a director
since July 1997. He has been involved with us and our predecessors for certain
periods since 1984 in similar capacities. He is currently a partner in the law
firm of Tressler, Soderstrom, Maloney & Priess and prior to that was a
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partner in the law firm of Laidley & Porter (and predecessor firm) in
Libertyville, Illinois since 1985. He serves on the Advisory Council on Main
Street Libertyville and is a director of Harris Bank Libertyville, an Illinois
chartered banking institution, and is President and sole stockholder of Forrest
Properties, Inc., an Illinois real estate development corporation. Mr. Laidley
received a B.A. in History from Yale University, New Haven, Connecticut and a
J.D. from DePaul University, Chicago, Illinois.
CHRISTIAN DUMOLIN--Mr. Dumolin has been a director since April 23, 1999. He
is a member of our Audit Committee. Mr. Dumolin is President and CEO of Koceram
NV/SA since 1980. Koceram is a producer of building products, developing
business through several subsidiaries, including Koramic Building Products NV/SA
and TrustCapital NV/SA, both of which are quoted on the Brussels' (Belgium)
Stock Exchange. In addition, Koceram is involved in financial activities
(development and venture capital) and real estate activities. Mr. Dumolin is
also a member of the Council of Regency of the National Bank of Belgium.
MICHAEL A. MULSHINE--Mr. Mulshine has been a director since July 1997. He
served since 1992 as a director of our predecessor. He is a member of our Audit
Committee and Compensation Committee. He is, and since 1977 has been, a
principal of Osprey Partners, a management consulting firm. Since 1985 he has
been a director and Secretary of SEDONA Corporation, a developer and marketer of
enterprise scale Internet solutions. Mr. Mulshine received a B.S. in Electrical
Engineering from Newark College of Engineering, Newark, New Jersey.
MICHAEL P. CULLINANE--Mr. Cullinane has been a director since April 10,
1998. He is the Chairman of our Compensation Committee and a member of our Audit
Committee. Mr. Cullinane is currently the Executive Vice President and Chief
Financial Officer of divine interVentures, inc. From 1988 to June 1999 he served
as Executive Vice President, Chief Financial Officer and treasurer of PLATINUM
Technology, Inc. PLATINUM Technology provides software products and consulting
services that help Global 10,000 IT organizations manage and improve their IT
infrastructure, which consists of data, systems, and applications.
Mr. Cullinane is a director of PLATINUM Entertainment, Inc. and Made 2 Manage
Systems, Inc. and Interactive Intelligence, Inc., all of which are public
companies. Mr. Cullinane received a B.B.A. from the University of Notre Dame,
South Bend, Indiana.
POL HAUSPIE--Mr. Hauspie has been a director since January 27, 1999.
Mr. Hauspie, is a co-founder of Lernout & Hauspie Speech Products NV/SA and has
served as a Managing Director, President, Co-Chairman of the Board and
Co-Chairman in the office of the Chief Executive since its incorporation. In
1977 Mr. Hauspie founded HPP Computer Center, a developer and marketer of
software for accountants and financial advisors, and served as its president
until its sale in 1987 to finance the start-up of Lernout & Hauspie Speech
Products NV/SA. Mr. Hauspie also serves on the board of several private
companies and Excalibur Technologies Corporation, a public company. Mr. Hauspie
received an accounting degree from the University Sint Aloysius in Brussels,
Belgium.
Each of our directors holds office for a one-year term and until his
respective successor has been duly elected and qualified. Our executive officers
are elected by and serve at the discretion of our Board of Directors.
Forrest D. Laidley, Christian Dumolin, Michael A. Mulshine and Michael P.
Cullinane are our independent directors.
BOARD COMMITTEES
Our Board of Directors currently maintains two standing committees, the
Audit Committee and the Compensation Committee, both of which are comprised only
of independent directors. The Audit Committee, which is chaired by Michael P.
Cullinane currently comprised of Christian Dumolin and Michael A. Mulshine,
recommends to the Board of Directors the engagement of our independent
accountants, reviews with such accountants the plan, scope and results of their
audit of the consolidated
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financial statements and reviews the independence of such accountants. The
Compensation Committee is chaired by Forrest D. Laidley and is comprised of
Messrs. Cullinane and Mulshine. This Committee reviews and makes recommendations
to the Board of Directors regarding all forms of compensation to be provided to
our executive officers, directors and consultants.
COMPENSATION OF DIRECTORS
Our directors are reimbursed for expenses incurred in connection with their
attendance at periodic Board meetings. Directors receive no cash compensation
for their services; however, non-employee directors are eligible to receive
stock option grants from time to time. In 1999 the non-employee directors,
Messrs. Laidley, Hauspie, Cullinane and Mulshine, each received options to
purchase 8,000 shares of common stock at an exercise price of $3.125 per share,
and in February 2000, Messrs. Laidley, Hauspie, Cullinane, Mulshine and Dumolin
each received options to purchase 8,000 shares of common stock, at an exercise
price of $8.875 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Compensation Committee is comprised of Messrs. Laidley, Cullinane and
Mulshine.
Forrest D. Laidley serves as a Director and our Secretary. Mr. Laidley was a
partner in the law firm of Laidley & Porter which has performed various legal
services for us since our inception. Mr. Laidley and his former partners have
made equity investments in us from time to time through various private
placements and are currently stockholders and warrant holders. Mr. Laidley's
current firm, Tressler, Soderstrom, Maloney & Priess, is currently performing
legal services for us. Mr. Laidley's services currently are and have been on a
noncompensation basis, although his firm is compensated for services rendered to
us by attorneys other than Mr. Laidley. Mr. Laidley's firm was paid
approximately $2,750 during the year ended December 31, 1999.
EMPLOYMENT AND CONSULTING AGREEMENTS
Messrs. T. Kendall Hunt and Jonathan Chinitz entered into employment
agreements with us. Mr. Hunt's agreement, dated June 15, 1999, employs Mr. Hunt
as our Chairman and Executive Vice President. Mr. Chinitz's agreement, dated as
of October 5, 1999, employs Mr. Chinitz as our Vice President and General
Manager of the IntelliSoft Division.
Mr. Hunt's agreement does not provide for a specific term of employment
while Mr. Chinitz's provides for a three-year term. Under both the agreements,
Messrs. Hunt and Chinitz may be terminated upon death or disability (as defined
in the employment agreement), for cause (as defined in the employment
agreement), or without cause. In the event they are terminated without cause,
they are entitled to certain severance benefits. The employment agreement
contains provisions restricting their ability to compete against us in the event
their employment is terminated.
The employment agreements provide Messrs. Hunt and Chinitz with a base
salary which is subject to review in accordance with our normal practice for
executive salary review from time to time in effect. In addition, they are both
entitled to receive an annual bonus as determined by our Compensation Committee.
Mr. Chinitz receives a car allowance of approximately $1,000 per month.
In the event either of them is terminated by us upon a "Change of Control"
(as defined in the employment agreement), he is entitled to certain severance
benefits consisting of continued salary payments for a set period of time.
Mr. Houthooft is compensated under the terms of a consulting agreement
between him, us and his private Belgian limited company dated June 15, 1999,
that initially provided for an annual salary of $165,000 plus an annual bonus as
determined by our compensation committee, and a separate agreement between VASCO
Data Security Europe NV/SA and his private Belgian limited company
45
<PAGE>
effective January 1, 1997. The agreements provide that Mr. Houthooft has
supervision and control over, and responsibility for, the overall management of
VASCO and that he shall have such other powers and duties as our board may from
time to time prescribe. The agreements may be terminated by us with or without
cause, and include non-compete clauses, which under his agreements with us range
from 12 to 18 months depending upon the reason for such termination, including
termination as a result of a change of control. The agreements also provide for
severance payments in the event of termination for reasons other than cause.
Mr. Valcke is compensated under the terms of a consulting agreement between
him, VASCO and his private Belgian limited company effective on November 1,
1999, that provides for an annual salary of $117,000 plus an annual bonus equal
to $37,500. Part of the bonus is conditioned upon Mr. Valcke meeting established
budget forecasts. The agreement is terminable by either party upon 30 days
notice or without notice and a $12,000 payment and includes a termination for
cause provision. The agreement also includes a six-month non-compete and
non-solicitation provision.
1997 STOCK COMPENSATION PLAN, AS AMENDED AND RESTATED At our annual meeting
of stockholders in 1999, our stockholders approved an amendment and restatement
of our 1997 Stock Compensation Plan. The purpose of the plan is to advance the
interests of our company and stockholders by providing a means to attract,
retain and reward our employees and non-employee directors, as well as
consultants that we may engage. The plan is administered by our Compensation
Committee which has full and final authority to select persons eligible to
receive awards, the type and number of such awards and the vesting and
expiration of individual awards.
The plan was amended to provide for an evergreen authorization of shares
eligible for awards equal to 20% of our outstanding shares of common stock at
any one time. In addition, the amendment authorized restricted stock, deferred
stock, stock appreciation rights, performance awards settleable in cash or
stock, and other types of awards based on stock or factors influencing the value
of stock, and included specific obligations relating to non-competition and
proprietary information that may be imposed on persons receiving awards. The
option exercise price is determined by the committee, but generally may not be
less than the fair market value of the stock on the date of grant.
The committee in its discretion may determine the vesting schedule of
options and other awards, the post-termination exercise periods of awards and
the events that will result in the acceleration of vesting and lapse of
restrictions of outstanding awards. Under the plan as amended and restated, in
the even of a change of control of our company as defined in the plan, all
outstanding awards will immediately vest and be fully exercisable.
As of January 31, 2000, our employees and non-employee directors and
consultants held outstanding options under the plan for the purchase of an
aggregate of 2,129,350 shares of our common stock with exercise prices ranging
between $.1875 and $12.50 per share, of which options for the purchase of
1,368,675 shares were fully vested and exercisable. Based on the 26,865,964
shares of our common stock outstanding as of March 8, 2000, we are eligible to
issue awards under the plan for an aggregate of 5,373,193 shares of our common
stock.
COMPENSATION OF MANAGEMENT
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to us in all capacities during the three years ended
December 31, 1997, 1998 and 1999 for our Chief Executive Officer and President
as well as the general managers of our IntelliSoft and IdentiSoft divisions, who
are our only executive officers whose total salary and bonus for such year
exceeded $100,000, who are referred to as the Named Executive Officers.
46
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS SECURITIES
ANNUAL COMPENSATION UNDERLYING OPTIONS/ ALL OTHER
-------------------------------- STOCK APPRECIATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS RIGHTS (#) ($)(5)
- --------------------------- -------- ---------- -------- ------------------- -------------
<S> <C> <C> <C> <C> <C>
T. Kendall Hunt ..................... 1999 165,000 -- 30,000 --
Executive Vice President and 1998 155,000 -- -- --
Chairman of the Board(1) 1997 150,000 -- 125,000 --
Mario R. Houthooft .................. 1999 165,000 -- 430,000 --
Chief Executive Officer, President
and Director(2)
Jan Valcke .......................... 1999 142,800 -- 115,000 --
General Manager(3)
Jonathan Chinitz .................... 1999 32,692 -- 10,000 3,000
General Manager(4)
</TABLE>
- ------------------------
(1) Mr. Hunt resigned as our President and Chief Executive Officer on June 16,
1999.
(2) Mr. Houthooft was appointed as our President and Chief Executive Officer on
June 16, 1999. Mr. Houthooft is compensated under a consulting agreement
which is described in the subsection labeled Employment and Consulting
Agreements.
(3) Mr. Valcke was appointed General Manager of our IdentiSoft division on
December 28, 1999. Mr. Valcke is compensated under a consulting agreement.
To read more about the consulting agreement see the subsection entitled
Employment and Consulting Agreements.
(4) Mr. Chinitz joined us on October 6, 1999 and was appointed General Manager
of our IntelliSoft division on December 28, 1999.
(5) Our managers are eligible to participate in standard health and benefit
plans.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth all options granted to the Named Executive
Officers during 1999.
<TABLE>
<CAPTION>
POTENTIAL REALIZED
VALUE AT ANNUAL
NUMBER OF PERCENTAGE OF RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTIONS TERM (4)
OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME (SHARES) FISCAL YEAR 1999 ($/SH) DATE 5%($) 10%($)
- ---- --------------- ---------------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
T. Kendall Hunt............ 30,000(1) 2.6% 3.13 1/11/2009 59,053 149,652
Mario R. Houthooft......... 30,000(1) 2.6% 3.13 1/11/2009 59,053 149,652
200,000(2) 17.6% 3.00 11/18/2009 377,337 377,337
200,000(3) 17.6% 3.00 11/18/2009 377,337 377,337
Jan Valcke................. 10,000(1) 0.9% 3.13 1/11/2009 19,684 49,884
5,000(1) 0.4% 2.94 8/18/2009 9,245 23,428
100,000(2) 8.8% 3.00 11/18/2009 188,668 478,123
Jonathan Chinitz........... 10,000(1) 0.9% 3.59 10/6/2009 22,577 57,215
</TABLE>
- ------------------------
(1) Options vest in five equal installments beginning on the anniversary date of
grant.
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<PAGE>
(2) Options vest in four equal installments beginning on January 1, 2001.
(3) Options vest on the earlier of November 18, 2006 or, in 50,000 share
increments based on the stock price achieving the following levels:
- 50,000 shares when the stock price is above $10.00 per share for 30
consecutive trading days;
- 50,000 shares when the stock price is above $20.00 per share for 30
consecutive trading days;
- 50,000 shares when the stock price is above $30.00 per share for 30
consecutive trading days; and
- 50,000 shares when the stock price is above $40.00 per share for 30
consecutive trading days.
(4) The potential realizable value amounts shown illustrate the values that
might be realized upon exercise immediately prior to the expiration of their
term using five percent and ten percent appreciation rates as required to be
used in this table by the Securities and Exchange Commission, compounded
annually, and are not intended to forecast possible future appreciation, if
any, of our stock price. Additionally, these values do not take into
consideration the provisions of the options providing for nontransferability
or termination of the options following termination of employment.
Therefore, the actual values realized may be greater or less than the
potential realizable values set forth in the table.
Information regarding certain option grants in prior years may be found in
our annual report filings on Form 10-K.
YEAR-END OPTION VALUES
The following table sets forth the aggregate value as of December 31, 1999
of unexercised stock options held by the executive officers. The executive
officers did not exercise any stock options during 1999 and the relevant columns
have therefore been omitted.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE(1) OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
T. Kendall Hunt................................ 99,750 55,250 410,205 245,195
Mario R. Houthooft............................. 157,000 448,000 514,280 2,202,320
Jan Valcke..................................... 13,500 120,250 51,835 591,115
Jonathan Chinitz............................... -- 10,000 -- 44,700
</TABLE>
- ------------------------
(1) Market value of underlying security is based on the average of the bid and
asked price per share ($8.06) of the common stock as reported on the NASD
Electronic Bulletin Board on December 31, 1999 minus the exercise price.
48
<PAGE>
CERTAIN TRANSACTIONS
TRANSACTION WITH EXECUTIVE OFFICER
On October 6, 1999, we acquired all of the capital stock of IntelliSoft
Corp. for 1,812,078 shares of our common stock plus $751,575 to acquire the
capital stock interests of IntelliSoft Corp. dissenters, which represented 9.4%
of the outstanding capital stock of IntelliSoft Corp. Prior to the merger
IntelliSoft was owned, in part, by Jonathan Chinitz, the General Manager of our
IntelliSoft Division. In connection with the transaction, Mr. Chinitz received
470,152 shares of our common stock at a market price of $4.00.
TRANSACTION WITH LERNOUT & HAUSPIE, A SIGNIFICANT STOCKHOLDER
On March 25, 1998 we entered into an arm's-length license agreement with
Lernout & Hauspie Speech Products NV/SA pursuant to which we received a
five-year world-wide, non-exclusive, non-transferable license to use certain
speaker verification software in access control applications. For this license,
we agreed to pay a royalty of 10% of revenue associated with the software which
will be credited against royalty prepayments aggregating $800,000. On
December 31, 1998, the license was extended for an additional 5 years and we
made additional royalty prepayments to reach an aggregate of $1.6 million. In
addition, the revised agreement also provides for the initiation of a
co-marketing and co-sales effort.
REGISTRATION AND OTHER ARRANGEMENTS
In April 1999, we sold 3,285,714 shares of our common stock to six investors
in a private placement which included registration rights for those shares.
Under those registration rights, we were to cause a resale registration
statement to be filed within six months of the sale of the shares which
registration statement was not filed. In addition, we agreed to include up to
20% of the investors shares in any public offering by us on or partially on
EASDAQ. The shares also are subject to a lock-up period for the 180 days
following the completion of a public offering of our common stock on EASDAQ. As
part of this offering, we agreed to include such 20% portion of these shares in
the over-allotment option for sale and the investors agreed to waive the
previous filing of a resale registration statement. However, to the extent that
the overallotment option is not exercised, the shares subject to the
overallotment may be sold provided that their subsequent sale would not have a
negative impact on the market and the sale is made through the global
coordinator.
49
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the common stock as of March 8, 2000 prior to the
offering, after the offering and after the over allotment if exercised, for
(1) each person or entity who is known to us to beneficially own five percent or
more of the common stock, (2) each of our directors and executive officers,
(3) each selling stockholder; and (4) all directors and executive officers as a
group. Unless otherwise indicated, the persons named in the table have sole
voting and investment power with respect to the shares indicated as beneficially
owned by them or which they have the right to acquire within the next 60 days.
<TABLE>
<CAPTION>
SHARES TO BE SOLD
IN THE OVER-
PRIOR TO THE OFFERING AFTER THE OFFERING ALLOTMENT,
----------------------- ----------------------- IF EXERCISED
SHARES PERCENT SHARES -------------------
NAME AND ADDRESS BENEFICIALLY OF BENEFICIALLY PERCENT PERCENT
OF BENEFICIAL OWNER OWNED CLASS OWNED OF CLASS NUMBER OF CLASS
- ------------------- ------------ -------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
T. Kendall Hunt(1)................................. 10,081,225 37.5 10,081,225 37.5 0 *
1901 South Meyers Road
Suite 210
Oakbrook Terrace, Illinois 60181
Forrest D. Laidley(2).............................. 642,883 2.4 642,883 2.4 0 *
185 Milwaukee Avenue, Suite 240
Lincolnshire, Illinois 60069-3036
Christian Dumolin(3)............................... 857,143 3.2 857,143 3.2 0 *
Ter Bede Business Center
B-8500 Kortrijk Belgium
Michael A. Mulshine(4)............................. 204,000 * 204,000 * 0 *
2517 Route 35, Suite D-201
Manasquan, New Jersey 08736
Michael Cullinane.................................. 16,000 * 16,000 * 0 *
1815 South Meyers Road
Oakbrook Terrace, Illinois 60181
Mario R. Houthooft................................. 543,783 2.0 543,783 2.0 0 *
Koningin Astridlaan 164
B-1780 Wemmel (Belgium)
Pol Hauspie(5)..................................... 1,936,572 7.2 1,936,572 7.2 0 *
St. Krispijnstraat 7
B-8900 Ieper, Belgium
Jan Valcke......................................... 13,500 * 13,500 * 0 *
Koningin Astridlaan 164
B-1780 Wemmel (Belgium)
Jonathan Chinitz(6)................................ 940,101 3.5 940,101 3.5 0 *
3 Wingate Lane
Acton, Massachusetts 01720
All Executive Officers and Directors as a Group 15,235,207 56.7 15,235,207 56.7
(9 Persons)......................................
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
SHARES TO BE SOLD
IN THE OVER-
PRIOR TO THE OFFERING AFTER THE OFFERING ALLOTMENT,
----------------------- ----------------------- IF EXERCISED
SHARES PERCENT SHARES -------------------
NAME AND ADDRESS BENEFICIALLY OF BENEFICIALLY PERCENT PERCENT
OF BENEFICIAL OWNER OWNED CLASS OWNED OF CLASS NUMBER OF CLASS
- ------------------- ------------ -------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
SELLING STOCKHOLDERS:
L&H Investment Company............................. 1,928,572 7.2 1,928,572 * 214,286 *
St. Krispijnstraat 7
B-8900 Ieper, Belgium
Sofinim NV/SA...................................... 285,714 1.1 285,714 * 42,857 *
Montoyerstraat 63
B-1000 Brussels, Belgium
Mercator & Noordstar............................... 285,714 1.1 285,714 * 42,857 *
Kortrijksesteenweg
B-9000 Ghent, Belgium
Trust Capital Technology........................... 857,143 3.2 857,143 * 128,571 *
Ter Bede Business Center
Kapel ter Bede 86
B-8500 Kortrijk, Belgium
Coukinvest NV/SA................................... 142,857 * 142,857 * 21,429 *
Waregemstraat 26
B-8570 Vichte, Belgium
</TABLE>
- --------------------------
* Less than one percent
(1) Includes 200,000 shares held in the T. Kendall Hunt Charitable Remainder
Trust and 1,111,300 shares held by Barbara J. Hunt, Mr. Hunt's spouse, as to
which shares Mr. Hunt disclaims beneficial ownership.
(2) Includes 250,000 shares held by Mr. Laidley and his spouse as joint tenants.
(3) Includes 857,143 shares held by Trust Capital Technology NV/SA, an entity of
which Mr. Dumolin is the chief executive officer. Mr. Dumolin disclaims
beneficial ownership of all of these shares, some of which will be sold if
the over-allotment is exercised.
(4) Includes 153,000 shares held by Carol J. Mulshine, Mr. Mulshine's spouse as
to which Mr. Mulshine disclaims beneficial ownership of 151,500
(5) Includes 1,928,572 shares held by L&H Investment Company, an entity
indirectly, partially owned by Mr. Hauspie. Mr. Hauspie disclaims beneficial
ownership of all of these shares, some of which will be sold if the
over-allotment is exercised.
(6) Includes 469,949 shares held by the Chinitz/Fries Irrevocable Trust, the
beneficiaries of which are Mr. Chinitz's children and the trustee of which
is Mr. Chinitz's spouse.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 75,000,000 shares of common stock,
par value $.001 per share, and 500,000 shares of preferred stock, par value $.01
per share. No shares of preferred stock are designated or have been issued, and
as of March 8, 2000, there were 26,865,964 shares of our common stock issued and
outstanding. On February 3, 2000 our board of directors authorized the issuance
of the shares in this offering. The purpose for which we were organized is to
engage in any lawful act or activity for which a corporation may be organized
under the General Corporation Law of the State of Delaware.
COMMON STOCK
Each issued and outstanding share of our common stock entitles the holder to
cast one vote on each matter submitted to a vote of the stockholders, including
the election of directors. There is no cumulative voting with respect to the
election of directors. As a result, subject to the rights of holders of any
series of preferred stock that may be designated in the future, one or more
holders of a majority of the outstanding shares of common stock can elect all of
the directors. Subject to the rights of any outstanding shares of any series of
preferred stock then outstanding, the holders of common stock will be entitled
to such dividends as may be declared from time to time by the board of directors
out of funds legally available therefor. Holders of our common stock will be
entitled to share ratably in all assets available for distribution upon
liquidation after payment or provision for all liabilities and any preferential
liquidation rights of any preferred stock then outstanding.
The holders of our common stock have no preemptive or other subscription
rights to purchase our shares. Shares of our common stock will not be subject to
any redemption provisions and will not be convertible into any of our other
securities.
Under Section 160 of the Delaware General Corporate Law, we may redeem,
repurchase or otherwise acquire, own or hold our shares of common stock;
provided, however that we may not redeem or repurchase our shares of common
stock if our capital is impaired or the repurchase would cause our capital to be
impaired.
PREFERRED STOCK
The preferred stock authorized in the our certificate of incorporation may
be issued from time to time by the board of directors as shares of one or more
series. Subject to the provisions of our certificate of incorporation, and
limitations imposed by law, the board of directors is expressly authorized to
adopt resolutions to issue the shares, to fix the number of shares and to change
the number of shares constituting any series, and to provide for the voting
powers, designations, preferences and relative, participating, optional or other
special rights, qualifications, limitations or restrictions thereof, including
dividend rights (including whether dividends are cumulative), dividend rates,
terms of redemption (including sinking fund provisions), redemption prices,
conversion rights and liquidation preferences of the shares constituting any
series of the preferred stock, in each case subject to the rights of the holders
of any series of preferred stock then outstanding, but without any further
action or vote by the holders of common stock.
One of the effects of undesignated preferred stock may be to enable the
board of directors to render more difficult or discourage an attempt to obtain
control of the company by means of a tender offer, proxy contest, merger or
otherwise, and thereby to afford time to the board of directors to determine
whether such change in control is in our best interests and the interests of our
shareholders. The issuance of shares of preferred stock pursuant to the board of
directors' authority described herein may adversely affect the rights of the
holders of common stock. For example, preferred stock issued by us may rank
prior to the common stock as to dividend rights, liquidation preference or both,
may have full or limited voting rights and may be convertible into shares of
common stock. Accordingly, the
52
<PAGE>
issuance of shares of preferred stock may discourage bids for the common stock
at a premium or may otherwise adversely affect the market price of the common
stock.
CERTAIN ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
As noted above, our board of directors, without stockholder approval, has
the authority under our certificate of incorporation to issue preferred stock
and rights superior to the rights of the holders of common stock. As a result,
preferred stock could be issued quickly and easily, could adversely affect the
rights of holders of common stock and could be issued with terms calculated to
delay or prevent a change of control of VASCO or make removal of management more
difficult.
ELECTION AND REMOVAL OF DIRECTORS. Our certificate and bylaws provides for
the annual election of our board of directors by our stockholders.
STOCKHOLDER MEETINGS. Our bylaws provide that the stockholders may not call
a special meeting of the stockholders. Rather, only the board of directors or
the chief executive officer will be able to call special meetings of
stockholders.
DELAWARE ANTI-TAKEOVER LAW. We are a Delaware corporation subject to Section
203 of the Delaware General Corporation Law. Under Section 203, certain
"business combinations" between a Delaware corporation whose stock generally is
publicly traded or held of record by more than 2,000 stockholders and an
"interested stockholder" are prohibited for a three-year period following the
date that such stockholder became an interested stockholder, unless:
- the corporation has elected in its certificate of incorporation not to be
governed by Section 203. We have not made such an election,
- the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder was approved by the board
of directors of the corporation before such stockholder became an
interested stockholder,
- upon consummation of the transaction that made such stockholder an
interested stockholder, the interested stockholder owned at least 85% of
the voting stock of the corporation outstanding at the commencement of the
transaction excluding voting stock owned by directors who are also
officers or held in employee benefit plans in which the employees do not
have a confidential right to tender stock held by the plan in the tender
or exchange offer, or
- the business combination is approved by the board of directors of the
corporation and authorized at a meeting by two-thirds of the voting stock
which the interested stockholder did not own.
The three-year prohibition also does not apply to some business combinations
proposed by an interested stockholder following the announcement or notification
of an extraordinary transaction involving the corporation and a person who had
not been an interested stockholder during the previous three years or who became
an interested stockholder with the approval of a majority of the corporation's
directors. The term "business combination" is defined generally to include
mergers or consolidations between a Delaware corporation and an interested
stockholder, transactions with an interested stockholder involving the assets or
stock of the corporation or its majority-owned subsidiaries, and transactions
which increase an interested stockholder's percentage ownership of stock. The
term "interested stockholder" is defined generally as those stockholders who
become beneficial owners of 15% or more of a Delaware corporation's voting
stock, together with the affiliates or associates of that stockholder.
53
<PAGE>
LIMITATION OF OFFICER AND DIRECTOR LIABILITY AND INDEMNIFICATION
ARRANGEMENTS. Our certificate of incorporation limits the liability of our
directors to VASCO or our stockholders to the maximum extent permitted by
Delaware law. Delaware law provides that directors will not be personally liable
for monetary damages for breach of their fiduciary duties as directors, except
liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders,
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- unlawful payments of dividends or unlawful stock repurchases or
redemptions, or
- any transaction from which the director derived an improper personal
benefit.
This charter provision has no effect on any non-monetary remedies that may
be available to us or our stockholders, nor does it relieve us or our officers
or directors from compliance with federal or state securities laws. Our bylaws
provide that we shall indemnify and hold harmless, to the fullest extent
permitted by applicable law as it presently exists or may be amended, any person
who was or is made a party or is threatened to be made a party or is otherwise
involved in any action, suit, or proceeding by reason of the fact that he is or
was a director or officer of ours, or is or was serving at our written request
as a director, officer, employee or agent of another entity, against all
liability and loss suffered and expenses (including attorney's fees as incurred)
reasonably incurred by him.
These charter and bylaw provisions and provisions of Delaware law may have
the effect of delaying, deterring or preventing a change of control of VASCO.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Illinois Stock
Transfer & Trust Company, Chicago, Illinois.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices of our common stock. Upon completion
of this offering, we will have outstanding an aggregate of 29,865,964 shares of
our common stock, assuming no exercise of outstanding options or warrants. Of
these shares, all 3,450,000 shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
such shares are purchased by "affiliates" as that term is defined in Rule 144
under the Securities Act. Of the remaining shares of our common stock held by
existing stockholders 5,097,792 are "restricted securities" as that term is
defined in Rule 144 under the Securities Act of 1933, as amended, or are subject
to transfer restrictions under Regulation S. Restricted securities may be sold
in the public market only if registered or if they qualify for an exemption from
registration under Rule 144 under the Securities Act, which rules are summarized
below. The number of shares of our common stock available for sale in the public
market is limited by lock-up agreements that were entered into in connection
with this offering. Under such lock-up agreements, the holders of approximately
59% of our outstanding shares of common stock agreed not to sell or otherwise
dispose of any of their shares until 180 days after the date of this prospectus.
However, Fortis Bank may, after consultation with the market authority of EASDAQ
and us, release all or any portion of the securities subject to such lock-up
agreements.
As of March 8, 2000, there were options outstanding for an aggregate of
2,110,350 shares of common stock with exercise prices ranging between $.1875 and
$24.25 per share, of which options for 833,825 shares were fully vested and
exercisable. Options are typically granted to our employees, directors and
independent contractors.
As of March 8, 2000, there were outstanding warrants to purchase an
aggregate of 681,758 shares of common stock with exercise prices ranging from
$4.00 to $10.00. Warrants are typically granted to unrelated third parties.
RULE 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned our common stock for at least one year would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the number of common shares then outstanding, which will equal
approximately 290,000 shares immediately after this offering; or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
RULE 144(K)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner other than an affiliate, is entitled to sell such shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144.
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<PAGE>
UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of the
common stock applicable to Non-United States Holders of this common stock. For
the purpose of this discussion, a Non-United States Holder is any holder that
for United States federal income tax purposes is not a United States person. The
following discussion is based on current provisions of the Internal Revenue Code
of 1986, as amended, and administrative and judicial interpretations thereof,
all as in effect on the date hereof, and all of which are subject to change,
possibly with retroactive effect. We have not and will not seek a ruling from
the Internal Revenue Service with respect to the United States federal income
and estate tax consequences described below and, as a result, there can be no
assurance that the Internal Revenue Service will not disagree with or challenge
any of the conclusions set forth in this discussion. For purposes of this
discussion, the term United States person means:
- a citizen or resident of the United States;
- a corporation or other entity taxable as a corporation, or a partnership,
created or organized in the United States or under the laws of the United
States or any political subdivision thereof;
- an estate whose income is included in gross income for United States
federal income tax purposes regardless of its source; or
- a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who
have the authority to control all substantial decisions of the trust or a
trust in existence on August 20, 1996 and that was treated as a domestic
trust prior to such time, provided it properly elects to continue such
treatment.
This discussion does not consider all aspects of United States taxation. In
particular, it does not consider:
- United States state and local or non-United States tax consequences;
- specific facts and circumstances that may be relevant to a particular
Non-United States Holder's tax position, including, if the Non-United
States Holder is a partnership, that the United States tax consequences of
holding and disposing of our common stock may be affected by certain
determinations made at the partner level;
- the tax consequences for the shareholders or beneficiaries of a Non-United
States Holder;
- special tax rules that may apply to certain Non-United States Holders,
including, without limitation, banks, insurance companies, dealers in
securities and traders in securities who elect to apply a mark-to-market
method of accounting; or
- special tax rules that may apply to a Non-United States Holder that holds
our common stock as part of a "straddle," "hedge" or "conversion
transaction."
DIVIDENDS
If we pay a dividend, any dividend paid to a Non-United States Holder of
common stock generally will be subject to United States withholding tax either
at a rate of 30% of the gross amount of the dividend or such lower rate as may
be specified by an applicable tax treaty. Dividends received by a Non-United
States Holder that are effectively connected with a United States trade or
business conducted by the Non-United States Holder or, if an income tax treaty
applies, are attributable to a permanent establishment, or in the case of an
individual, a "fixed base," in the United States, as provided in that treaty
("U.S. trade or business income"), are generally not subject to such withholding
tax if the Non-United States Holder files the appropriate U.S. Internal Revenue
Service Form with the payor. However, such U.S. trade or business income,
generally net of certain deductions and possibly
56
<PAGE>
subject to certain credits, is at the same graduated rates applicable to United
States persons. Any U.S. trade or business income received by a Non-United
States Holder that is a corporation may also, under certain circumstances, be
subject to an additional "branch profits tax" at a 30% rate or such lower rate
as specified by an applicable income tax treaty.
Dividends paid on or prior to December 31, 2000 to an address in a foreign
country are presumed, absent actual knowledge to the contrary, to be paid to a
resident of such country for purposes of the withholding discussed above and for
the purposes of determining the applicability of a tax treaty rate. Under
Regulations which are currently scheduled to go into effect for dividends paid
after December 31, 2000:
- a Non-United States Holder of common stock who claims the benefit of an
applicable income tax treaty rate generally will be required to satisfy
applicable certification and other requirements;
- in the case of common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of the
partnership and the partnership will be required to provide certain
information, including a United States taxpayer identification number; and
- look-through rules will apply for tiered partnerships.
A Non-United States Holder of common stock that is eligible for a reduced
rate of withholding tax pursuant to a tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund with
the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
his common stock unless:
- the gain is U.S. trade or business income (which gain, in the case of a
corporate Non-United States Holder, must also be taken into account for
branch profits tax purposes);
- the Non-United States Holder is subject to tax pursuant to the provisions
of the United States tax law applicable to certain United States
expatriates; or
- VASCO is or has been a "United States real property holding corporation"
for United States federal income tax purposes at any time within the
shorter of the five-year period preceding the disposition or the holder's
holding period for its common stock.
Generally, a corporation is a "United States real property holding
corporation" if the fair market value of its "United States real property
interests" equals or exceeds 50% of the sum of the fair market value of its
worldwide real property interests plus its other assets used or held for use in
a trade or business. We believe that VASCO has not been and is not currently,
and we do not anticipate it becoming, a "United States real property holding
corporation" for United States federal income tax purposes. The tax relating to
stock in a "United States real property holding corporation" will not apply to a
Non-United States Holder whose holdings, direct and indirect, at all times
during the applicable period, constituted 5% or less of the common stock,
provided that the common stock was regularly traded on an established securities
market.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, we must report annually to the Internal Revenue Service the
amount of dividends paid, the name and address of the recipient, and the amount,
if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or other agreements, the Internal Revenue Service may make its reports
available to tax authorities in the recipient's country of resident.
57
<PAGE>
Dividends paid to a Non-United States Holder at an address within the United
States may be subject to backup withholding at a rate of 31% if the Non-United
States Holder fails to establish that it is entitled to an exemption or to
provide a correct taxpayer identification number and other information to the
payer. Backup withholding will generally not apply to dividends paid to
Non-United States Holders at an address outside the United States on or prior to
December 31, 2000 unless the payer has knowledge that the payee is a United
States person. Under recently finalized Treasury Regulations regarding
withholding and information reporting, payment of dividends to Non-United States
Holders at an address outside the United States after December 31, 2000 may be
subject to backup withholding at a rate of 31% unless such Non-United States
Holder satisfies various certification requirements.
Under current Treasury Regulations, the payment of the proceeds of the
disposition of common stock to or through the United States office of a broker
is subject to information reporting and backup withholding at a rate of 31%
unless the holder certifies its non-United States status under penalties or
perjury or otherwise establishes an exemption. Generally, the payment of the
proceeds of the disposition by a Non-United States Holder of common stock
outside the United States to or through a non-United States office of a broker
will not be subject to backup withholding but will be subject to information
reporting requirements if the broker is:
- a United States person;
- a "controlled foreign corporation" for United States federal income tax
purposes; or
- a foreign person 50% or more of whose gross income for certain periods is
from the conduct of a United States trade or business unless the broker
has documentary evidence in its files of the holders' Non-United States
status and certain other conditions are met, or the holder otherwise
establishes an exemption. Neither backup withholding nor information
reporting generally will apply to a payment of the proceeds of a
disposition of common stock by or through a foreign office of a foreign
broker not subject to the preceding sentence.
In general, except regarding certain foreign partnerships the recently
promulgated final Treasury Regulations, described above, do not significantly
alter the substantive withholding and information reporting requirements but
would alter the procedures for claiming benefits of an income tax treaty and
change the certifications procedures relating to the receipt by intermediaries
of payments on behalf of the beneficial owner of shares of common stock.
Non-United States Holders should consult their tax advisors regarding the
effect, if any, of those final Treasury Regulations on an investment in the
common stock. In general, those final Treasury Regulations are currently
scheduled to go into effect for payments made after December 31, 2000.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
ESTATE TAX
An individual Non-United States Holder who owns common stock at the time of
his death or had made certain lifetime transfer of an interest in common stock
will be required to include the value of that common stock in such holder's
gross estate for United States federal estate tax purposes, unless an applicable
estate tax treaty provides otherwise.
The foregoing discussion is a summary of the principal federal income and
estate tax consequences of the ownership, sale or other disposition of common
stock by Non-United States Holders. Accordingly, investors are urged to consult
their own tax advisors with respect to the income tax consequences of the
ownership and disposition of common stock, including the application and effect
of the laws of any state, local, foreign or other taxing jurisdiction.
58
<PAGE>
UNDERWRITING
GENERAL
We intend to offer the common stock in the United States, Belgium and other
European countries through a number of underwriters. Fortis Bank is acting as
global coordinator and book running manager in Europe and First Analysis
Securities Corporation is acting as book running manager in the United States.
None of the European underwriters will sell shares in the United States. Subject
to the terms and conditions set forth in a purchase agreement among our company
and the underwriters to be executed after the effectiveness of the registration
statement of which this prospectus forms a part, we have agreed to sell to the
underwriters, and each of the underwriters severally and not jointly has agreed
to purchase from us, the number of shares of common stock set forth opposite its
name below:
<TABLE>
<CAPTION>
NUMBER
EUROPEAN UNDERWRITERS OF SHARES
- --------------------- ---------
<S> <C>
Fortis Bank.................................................
Artesia Bank N.V............................................
Bank Degroof................................................
U.S. UNDERWRITERS
- ------------------------------------------------------------
First Analysis Securities Corporation.......................
H.C. Wainwright & Co., Inc..................................
--------
Total.................................................
========
</TABLE>
The purchase agreement provides that the obligations of the underwriters to
pay for and accept delivery of the shares offered in this prospectus are subject
to the approval of legal matters by their counsel and to other conditions
relating to the investment quality of the offered securities. The underwriters
have agreed to purchase all of the shares being sold if any of the shares being
sold are purchased. In the event of a default by an underwriter, the purchase
agreement provides that, in certain circumstances, the purchase commitments by
the nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of those liabilities.
COMMISSIONS AND DISCOUNTS
The global coordinator has advised us that the underwriters propose
initially to offer the shares of common stock to the public at the public
offering price set forth on the cover page of this prospectus, and to certain
dealers at such price less a concession. To broker dealers in the Belgian retail
tranche, this concession is not in excess of $ per share of common stock
and to other dealers, this concession is not in excess of $ per share of
common stock. The underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share of common stock to certain other dealers.
After the initial public offering, the price of the shares in the secondary
market, as well as concession and discount change.
The following table shows the per share and the total public offering price,
the underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information
59
<PAGE>
is presented assuming either no exercise or full exercise by the underwriters of
their over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.................... $ $ $
Underwriting discount.................... $ $ $
Proceeds, before expenses, to us......... $ $ $
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $ million and are payable by us. In addition, we have agreed with
the underwriters to pay the fees and expenses of legal counsel to the
underwriters.
OVER-ALLOTMENT OPTION
The selling stockholders have granted an option to the underwriters,
exercisable for 30 days after the date of this prospectus, to purchase up to an
aggregate of 450,000 additional shares of our common stock at the public
offering price set forth on the cover page of this prospectus, less the
underwriting discount. The underwriters may exercise this option solely to cover
over-allotments, if any, made on the sale of our common stock offered hereby. To
the extent that the underwriters exercise this option, each underwriter will be
obligated, subject to certain conditions, to purchase a number of additional
shares of our common stock proportionate to such underwriter's initial amount
reflected in the foregoing table. We will not receive any proceeds from the sale
by the selling stockholders.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors and those of our existing
stockholders listed in the table in the section headed "Principal Stockholders"
have agreed that without the prior written consent of the global coordinator on
behalf of the underwriters after consultation with the market authority of
EASDAQ and us, for a period of 180 days after the date of this prospectus, they
will not:
- offer, pledge, allot, issue, sell, contract to sell, sell any option or
contract to purchase, purchase any option to sell, grant any option, right
or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly any shares of our common stock or securities convertible into
or exchangeable or exercisable for or exchangeable for shares of our
common stock; or
- enter into any swap or other agreement that transfers to another, in whole
or in part the economic consequence of ownership of our common stock
whether any such transaction is to be settled by delivery of our common
stock or other securities, in cash or otherwise provided, however, that in
the event the over-allotment option is not exercised, those stockholders
who would otherwise have sold their shares, may seek the approval of the
global coordinator to sell their shares through the global coordinator or
its affiliates.
However, to the extent that the overallotment option is not exercised, the
shares subject to the overallotment may be sold provided that their subsequent
sale would not have a negative impact on the market and the sale is made through
the global coordinator.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of our common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
certain selling group members to bid for and purchase our common stock. As an
exception to these rules, both the European underwriters and the U.S.
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the shares on the Nasdaq National Market and on EASDAQ, as
permitted. Specifically, the underwriters may over allot in connection with the
offering, creating short positions in the shares for
60
<PAGE>
their own account. In addition, to cover over allotments or to stabilize the
price of the shares, the underwriters may bid for, and purchase, the shares in
the open market. Finally, the underwriters may reclaim selling concessions
allotted to an underwriter or a dealer for distributing the shares in the
offering, if the underwriters repurchase previously distributed shares in the
transactions to cover syndicate short positions, in stabilization transactions
or otherwise. Any of these activities may stabilize or maintain the market price
of the shares above independent market levels. The underwriters are not required
to engage in these activities and may end any of these activities at any time.
Some of the underwriters and their affiliates may engage in other
transactions with, and perform services for, our company in the ordinary course
of business and have engaged, and may in the future engage, in commercial
banking and investment banking transactions with our company, for which they may
receive customary compensation. In addition, Fortis Bank is a large customer of
our products. Also, Artesia Bank NV/SA's predecessor, Banque Paribas Belgique
NV/SA, granted us a convertible loan in 1997 which is described in "Management's
Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources" and which may be converted into
common stock in the near future.
QUOTATION ON THE NASDAQ NATIONAL MARKET AND ON EASDAQ
We expect the shares to be approved for quotation on the Nasdaq National
Market and on EASDAQ under the symbol "VDSI."
The public offering price will be determined through negotiations between us
and the global coordinator on behalf of the underwriters. Among the factors
considered in determining the initial public offering price, in addition to
prevailing market conditions, are the trading price of our common stock on the
over-the-counter market, certain of our financial information, the history of,
and the prospects for, our company and the industry in which we compete, and an
assessment of our management, our past and present operations, the prospects
for, and timing of, future revenue of our company and the present state of our
development. There can be no assurance that our common stock will trade in the
public market subsequent to the offering at or above the initial public offering
price.
The underwriters have advised us that they do not expect sales of our common
stock to any accounts over which they exercise discretionary authority to exceed
5% of the number of shares being offered in this offering.
61
<PAGE>
LEGAL MATTERS
The validity of the common shares offered hereby will be passed upon for
VASCO by Piper Marbury Rudnick & Wolfe LLP, Washington, DC. Various legal
matters in connection with the offering will be passed upon for the underwriters
by Baker & McKenzie, New York, New York.
EXPERTS
The consolidated financial statements of VASCO Data Security International,
Inc. as of December 31, 1998 and 1999, and for each of the years in the
three-year period ended December 31, 1999, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein and upon the authority
of said firm as experts in accounting and auditing. During 1999, we were billed
approximately $200,000 by KPMG LLP for services performed on our behalf.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits and schedules thereto, under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information set forth in the registration statement or
the exhibits and schedules which are part of the registration statement. For
further information about us and the shares of common stock to be sold in the
offering, please refer to the registration statement and the exhibits and
schedules, thereto.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information in our files in the Securities and
Exchange Commission's public reference room at 450 Fifth Street, N.W.,
Washington, D.C., 20549. You can request copies of these documents, upon payment
of a duplicating fee, by writing to the Securities and Exchange Commission.
Please call the Securities and Exchange Commission at 1-800-SEC-1330 for further
information about the public reference rooms. Our Securities and Exchange
Commission filings, including the registration statement, are also available to
you on the Securities and Exchange Commission's Internet site
(http://www.sec.gov).
Companies approved for trading on EASDAQ are required to publish relevant
financial and other information regularly and to keep the public informed of all
events likely to affect the market price of their securities. Price-sensitive
information is available to investors in Europe through the EASDAQ-Reuters
Regulatory Company Reporting System and other international information
providers. Investors who do not have direct access to such information should
ask their financial advisors for the terms on which such information will be
provided to them by these financial advisors. We will ensure that a summary of
our quarterly and annual financial statements will be provided to stockholders
in Europe across the EASDAQ Company Reporting System, or ECR System. A hard copy
of the annual report will be provided to stockholders promptly after it becomes
available. Complete quarterly statements will either be sent by us to our
stockholders or will be available upon request from the us at our executive
offices. Copies of all documents filed by us with EASDAQ are also available for
inspection at the offices of EASDAQ, 56 Rue de Colonies, Bte.15, B-1000
Brussels, Belgium.
62
<PAGE>
FORWARD LOOKING STATEMENTS
Many statements made in this prospectus under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere are
forward-looking statements that are not based on historical facts. These
forward-looking statements are usually accompanied by words such as "believes,"
"anticipates," "plans," "intends," "expects" and similar expressions. Because
these forward-looking statements involve risks and uncertainties, there are
important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including those
discussed under "Risk Factors."
This prospectus contains information concerning VASCO and the computer and
network security market generally. Some of this information is forward-looking
in nature and is based on a variety of assumptions regarding the ways in which
this market will develop. These assumptions have been derived from information
currently available to us.
63
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
VASCO DATA SECURITY INTERNATIONAL, INC.
DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Comprehensive Loss............... F-5
Consolidated Statements of Stockholders' Deficit............ F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to the Consolidated Financial Statements.............. F-8
Schedule II--Valuation and Qualifying Accounts.............. F-21
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
VASCO Data Security International, Inc.:
We have audited the accompanying consolidated balance sheets of VASCO Data
Security
International, Inc. and subsidiaries (the "Company") as of December 31, 1998 and
1999 and the related consolidated statements of operations, comprehensive loss,
stockholders' deficit, and cash flows for each of the years in the three-year
period ended December 31, 1999. In connection with our audits of the
consolidated financial statements, we have also audited the accompanying
consolidated financial statement Schedule II--Valuation and Qualifying Accounts.
These consolidated financial statements and the consolidated financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and the
consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of VASCO Data
Security International, Inc. and subsidiaries as of December 31, 1998 and 1999,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Chicago, Illinois
February 24, 2000
F-2
<PAGE>
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 1,662,084 $ 2,576,494
Accounts receivable, net of allowance for doubtful
accounts of $55,000 and $120,216 in 1998 and 1999....... 3,586,890 2,871,367
Inventories, net.......................................... 1,272,327 805,382
Prepaid expenses.......................................... 92,326 157,620
Deferred income taxes..................................... 83,000 83,000
Other current assets...................................... 350,765 925,334
----------- -----------
Total current assets.................................. 7,047,392 7,419,197
Property and equipment
Furniture and fixtures.................................... 580,427 1,246,555
Office equipment.......................................... 637,335 1,013,870
----------- -----------
1,217,762 2,260,425
Accumulated depreciation.................................. (827,602) (1,070,046)
----------- -----------
390,160 1,190,379
Goodwill and other intangible assets, net of accumulated
amortization of $2,311,000 and $3,134,000 in 1998 and
1999...................................................... 1,519,032 1,989,960
Prepaid royalties and other assets.......................... 600,000 1,718,493
----------- -----------
TOTAL ASSETS................................................ $ 9,556,584 $12,318,029
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 6,703,867 $ 639,322
Accounts payable.......................................... 1,232,133 2,020,465
Unearned income........................................... 669,051 667,501
Accrued expenses.......................................... 2,175,583 1,618,739
----------- -----------
Total current liabilities............................. 10,780,634 4,946,027
Long-term debt, including stockholder note of $5,000,000 in
1998 and 1999............................................. 8,435,903 8,408,862
STOCKHOLDERS' DEFICIT:
Preferred stock, $.01 par value; 500,000 shares
authorized; none issued and outstanding................. -- --
Common stock, $.001 par value; 75,000,000 shares
authorized; 22,805,689 shares issued and outstanding in
1998; 26,462,083 shares issued and outstanding in
1999.................................................... 22,806 26,462
Additional paid-in capital................................ 9,891,116 20,702,387
Accumulated deficit....................................... (19,660,856) (21,873,340)
Accumulated other comprehensive income-cumulative
translation adjustment.................................. 86,981 107,631
----------- -----------
Total stockholders' deficit................................. (9,659,953) (1,036,860)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT................. $ 9,556,584 $12,318,029
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues.......................................... $13,207,980 $16,499,866 $19,397,108
Cost of goods sold.................................... 6,488,798 7,209,038 7,305,672
----------- ----------- -----------
Gross profit.......................................... 6,719,182 9,290,828 12,091,436
Operating costs:
Sales and marketing................................. 3,689,373 4,773,153 5,961,970
Research and development............................ 2,313,756 2,459,477 3,587,483
General and administrative.......................... 4,883,675 3,384,853 3,434,940
----------- ----------- -----------
Total operating costs............................. 10,886,804 10,617,483 12,984,393
----------- ----------- -----------
Operating loss........................................ (4,167,622) (1,326,655) (892,957)
Interest expense...................................... (1,148,183) (1,457,627) (814,923)
Other expense, net.................................... (237,355) (310,728) (182,294)
----------- ----------- -----------
Loss before income taxes.............................. (5,553,160) (3,095,010) (1,890,174)
Provision for income taxes............................ 606,579 687,002 322,310
----------- ----------- -----------
Net loss.............................................. (6,159,739) (3,782,012) (2,212,484)
Preferred stock dividends........................... (81,900) -- --
----------- ----------- -----------
Net loss available to common stockholders............. $(6,241,639) $(3,782,012) $(2,212,484)
=========== =========== ===========
Basic and diluted net loss per common share........... $ (0.30) $ (0.17) $ (0.09)
=========== =========== ===========
Weighted average common shares outstanding............ 21,105,676 22,430,684 25,558,847
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net loss............................................... $(6,159,739) $(3,782,012) $(2,212,484)
Other comprehensive income (loss)--cumulative
translation adjustment............................... (65,106) 257,143 20,650
----------- ----------- -----------
Comprehensive loss..................................... $(6,224,845) $(3,524,869) $(2,191,834)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ------------------- --------------------- PAID-IN ACCUMULATED
DESCRIPTION SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
- ----------- -------- -------- -------- -------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT 12/31/96.......... 117,181 $ 1,172 9,000 $90 20,453,324 $20,454 $ 8,877,473 $(9,637,205)
Net loss..................... -- -- -- -- -- -- -- (6,159,739)
Foreign currency translation
adjustment................. -- -- -- -- -- -- -- --
Cash dividends paid on
preferred B................ -- -- -- -- -- -- -- (81,900)
Exercise of stock options.... -- -- -- -- 189,375 189 42,281 --
Cancellation of common
stock...................... -- -- -- -- (16,489) (17) -- --
Issuance of common stock..... -- -- -- -- 83,714 83 361,184 --
Conversion of Series A
preferred stock............ (117,181) (1,172) -- -- 778,383 779 391 --
Conversion of Series B
preferred stock............ -- -- (9,000) (90) 644,653 645 (555) --
Repurchase of common stock... -- -- -- -- -- -- -- --
-------- ------- ------ --- ---------- ------- ----------- ------------
BALANCE AT 12/31/97.......... -- $ -- -- $-- 22,132,960 $22,133 $ 9,280,774 $(15,878,844)
Net loss..................... -- -- -- -- -- -- -- (3,782,012)
Foreign currency translation
adjustment................. -- -- -- -- -- -- -- --
Exercise of stock options.... -- -- -- -- 658,257 658 115,689 --
Exercise of stock warrants... -- -- -- -- 14,472 15 (15) --
Expiration of put option..... -- -- -- -- -- -- 494,668 --
-------- ------- ------ --- ---------- ------- ----------- ------------
BALANCE AT 12/31/98.......... -- $ -- -- $-- 22,805,689 $22,806 $ 9,891,116 $(19,660,856)
Net loss..................... -- -- -- -- -- -- -- (2,212,484)
Foreign currency translation
adjustment................. -- -- -- -- -- -- -- --
Exercise of stock options.... -- -- -- -- 158,000 158 44,067 --
Exercise of stock warrants... -- -- -- -- 200,000 200 49,800 --
Issuance of common stock..... -- -- -- -- 3,486,308 3,486 11,468,791 --
Common stock repurchased and
retired.................... -- -- -- -- (187,914) (188) (751,387) --
-------- ------- ------ --- ---------- ------- ----------- ------------
BALANCE AT 12/31/99.......... -- $ -- -- $-- 26,462,083 $26,462 $20,702,387 $(21,873,340)
======== ======= ====== === ========== ======= =========== ============
<CAPTION>
ACCUMULATED OTHER TREASURY STOCK TOTAL
COMPREHENSIVE --------------------- STOCKHOLDERS'
DESCRIPTION INCOME SHARES AMOUNT DEFICIT
- ----------- ------------------ -------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE AT 12/31/96.......... $(105,056) -- $ -- $ (843,072)
Net loss..................... -- -- -- (6,159,739)
Foreign currency translation
adjustment................. (65,106) -- -- (65,106)
Cash dividends paid on
preferred B................ -- -- -- (81,900)
Exercise of stock options.... -- -- -- 42,470
Cancellation of common
stock...................... -- -- -- (17)
Issuance of common stock..... -- (32,504) 227,528 588,795
Conversion of Series A
preferred stock............ -- (2,824) 19,768 19,766
Conversion of Series B
preferred stock............ -- -- -- --
Repurchase of common stock... -- 35,328 (247,296) (247,296)
--------- -------- ---------- -----------
BALANCE AT 12/31/97.......... $(170,162) -- $ -- $(6,746,099)
Net loss..................... -- -- -- (3,782,012)
Foreign currency translation
adjustment................. 257,143 -- -- 257,143
Exercise of stock options.... -- -- -- 116,347
Exercise of stock warrants... -- -- -- --
Expiration of put option..... -- -- -- 494,668
--------- -------- ---------- -----------
BALANCE AT 12/31/98.......... $ 86,981 -- $ -- $(9,659,953)
Net loss..................... -- -- -- (2,212,484)
Foreign currency translation
adjustment................. 20,650 -- -- 20,650
Exercise of stock options.... -- -- -- 44,225
Exercise of stock warrants... -- -- -- 50,000
Issuance of common stock..... -- -- -- 11,472,277
Common stock repurchased and
retired.................... -- -- -- (751,575)
--------- -------- ---------- -----------
BALANCE AT 12/31/99.......... $ 107,631 -- $ -- $(1,036,860)
========= ======== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................. $(6,159,739) $(3,782,012) $(2,212,484)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 1,216,000 1,027,431 1,066,144
Interest paid in shares of common stock.......... 418,279 -- --
Deferred income taxes............................ 200,000 -- --
Loss on disposition of fixed assets.............. -- 5,013 --
Gain on sale of fixed assets..................... -- -- (13,318)
Changes in assets and liabilities, net of
acquisition:
Accounts receivable, net....................... 1,124,443 (1,045,440) 715,523
Inventories, net............................... 1,181,449 (271,033) 466,945
Prepaid expenses............................... 258,420 231,660 (65,294)
Other current assets........................... 292,963 (18,624) (574,569)
Prepaid royalties and other assets............. -- (600,000) (1,118,493)
Accounts payable............................... (853,005) 105,045 788,332
Unearned income................................ (473,719) 120,575 (1,550)
Accrued expenses............................... 1,043,349 474,150 (662,790)
----------- ----------- -----------
Net cash used in operating activities................ (1,751,560) (3,753,235) (1,611,554)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of SecureWare............................ -- -- (587,532)
Additions to property and equipment, net of
acquisition........................................ (74,247) (284,155) (895,144)
----------- ----------- -----------
Net cash used in investing activities.................. (74,247) (284,155) (1,482,676)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of debt....................... 2,516,000 6,161,424 --
Repayment of debt.................................... (67,564) (2,900,000) (6,091,586)
Series B preferred stock dividends................... (81,900) -- --
Proceeds from exercise of stock options and
warrants........................................... 42,470 116,347 94,225
Net proceeds from sales of common stock.............. (56,895) -- 10,736,926
Repurchase of common stock........................... (247,226) -- (751,575)
----------- ----------- -----------
Net cash provided by financing activities.............. 2,104,885 3,377,771 3,987,990
Effect of exchange rate changes on cash................ (65,106) 257,143 20,650
----------- ----------- -----------
Net increase (decrease) in cash........................ 213,972 (402,476) 914,410
Cash, beginning of year................................ 1,850,588 2,064,560 1,662,084
----------- ----------- -----------
Cash, end of year...................................... $ 2,064,560 $ 1,662,084 $ 2,576,494
=========== =========== ===========
Supplemental disclosure of cash flow information:
Interest paid.......................................... $ 53,865 $ 878,892 $ 893,799
Income taxes paid...................................... $ 415,480 $ 709,661 $ 900,373
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
VASCO DATA SECURITY INTERNATIONAL, INC.
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
VASCO Data Security International, Inc. and its wholly owned subsidiaries
(the Company) designs, develops, markets and supports security products and
services which manage and protect against unauthorized access to computer
systems of corporate and government customers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of VASCO Data
Security International, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
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 year. Translation
adjustments arising from differences in exchange rates are included as a
separate component of stockholders' deficit. Gains and losses resulting from
foreign currency transactions are included in the consolidated statements of
operations. Foreign exchange transaction losses aggregating $12,000, $174,000
and $272,000 are included in other non-operating expense for 1997, 1998, and
1999, respectively
REVENUE RECOGNITION
The American Institute of Certified Public Accountants Statement of Position
97-2, "Software Revenue Recognition" (SOP 97-2) was issued in October 1997 and
is effective for transactions entered into in fiscal years beginning after
December 15, 1997. SOP 97-2 addresses various aspects of the recognition of
revenues on software transactions and supersedes SOP 91-1, the policy previous
followed by the Company. The Company adopted SOP 97-2 in fiscal year 1998,
beginning January 1, 1998. The adoption of this statement has not resulted in a
material impact on the Company's financial statements.
LICENSE FEES. Revenues from the sale of computer security hardware and
software are recorded upon shipment or, if an acceptance period is allowed, at
the later of shipment or customer acceptance. No significant obligations exist
with regard to delivery or customer acceptance at the time of recognizing
revenue.
SUPPORT AGREEMENTS. Support agreements generally call for the Company to
provide technical support and software updates to customers. Revenue on
technical support and software update rights is recognized ratably over the term
of the support agreement.
CONSULTING AND EDUCATION SERVICES. The Company provides consulting and
education services to its customers. Revenue from such services is generally
recognized during the period in which the services are performed.
PREPAID ROYALTIES
On March 25, 1998, the Company entered into a license agreement with
Lernout & Hauspie Speech Products NV/SA pursuant to which the Company received a
five-year worldwide, non-exclusive, non-transferable license to use certain
speaker verification software in access control applications. For
F-8
<PAGE>
VASCO DATA SECURITY INTERNATIONAL, INC.
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
this license, the Company agreed to pay a royalty of 10% of revenue associated
with the software which will be credited against royalty prepayments aggregating
$800,000. On December 31, 1998, the license was extended for an additional five
years and the Company made royalty prepayments to reach an aggregate of
$1,700,000. Prepaid royalties amounted to $600,000 and $1,700,000 at
December 31, 1998 and 1999, respectively. Amortization of the royalty
prepayments will commence during the second quarter of 2000 when the
applications incorporating the Lernout & Hauspie software are released to the
general public.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets
ranging from three to seven years. Additions and improvements are capitalized,
while expenditures for maintenance and repairs are charged to operations as
incurred. Gains or losses resulting from sales or retirements are recorded as
incurred, at which time related costs and accumulated depreciation are removed
from the accounts. "
SOFTWARE COSTS
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed". Research
and development costs, prior to the establishment of technological feasibility,
determined based upon the creation of a working model, are expensed as incurred.
The Company's policy is to amortize capitalized costs by the greater of (a) the
ratio that current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life of the product, generally two
to five years, including the period being reported on.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair value of financial
instruments are made in accordance with the requirements of SFAS No. 107,
"Disclosures and Fair Value of Financial Instruments." The estimated fair value
amounts have been determined by the Company using available market information
and appropriate valuation methodologies. The fair values of the Company's
financial instruments were not materially different from their carrying amounts
at December 31, 1998 and 1999, except for notes payable and long-term debt, for
which the fair values were not determinable.
F-9
<PAGE>
VASCO DATA SECURITY INTERNATIONAL, INC.
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements have been
reclassified to confirm to the 1999 presentation.
GOODWILL AND OTHER INTANGIBLES
Goodwill is amortized on a straight-line basis over the expected period to
be benefited, which is seven years. Other intangibles are amortized on a
straight-line basis and consist of software and hardware technology which is
being amortized over a period of four years and workforce and customer lists
which are being amortized over a period of seven years.
The Company periodically evaluates whether events and circumstances that
have occurred indicate that the remaining balance of goodwill and other
intangibles may not be recoverable or that the remaining estimated useful lives
may warrant revision. When such factors indicate that goodwill and other
intangibles should be evaluated for possible impairment, the Company uses an
estimate of undiscounted future cash flows to measure whether the goodwill and
other intangibles are recoverable.
STOCK-BASED COMPENSATION
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which permits entities to recognize the compensation
expense associated with the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and provide pro forma disclosures as if the fair
value method defined in SFAS No. 123 had been applied. The Company has elected
to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosures required by SFAS No. 123.
LOSS PER COMMON SHARE
Basic earnings per share is based on the weighted average number of shares
outstanding and excludes the dilutive effect of unexercised common stock
equivalents. Diluted earnings per share is based on the weighted average number
of shares outstanding and includes the dilutive effect of unexercised common
stock equivalents to the extent they are not anti-dilutive.
F-10
<PAGE>
VASCO DATA SECURITY INTERNATIONAL, INC.
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Shares issuable from securities that could potentially dilute basic earnings
per share in the future that were not included in the computation of earnings
per share because their effect was anti-dilutive were as follows at
December 31:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Stock options............................... 1,945,257 1,475,500 2,377,200
Warrants.................................... 1,056,922 1,004,034 804,034
Convertible notes (June 1996)............... 518,595 416,667 416,667
Convertible notes (July 1997)*.............. 657,895 -- --
Convertible notes (August 1997)*............ 893,632 1,123,387 732,658
Convertible notes (March 1998).............. -- 528,048 --
--------- --------- ---------
Total................................... 5,072,301 4,547,636 4,330,559
========= ========= =========
</TABLE>
* Due to the contingent nature of the conversion feature of these notes, a
20-day average market price was used to calculate the number of potentially
dilutive shares.
Additionally, the net loss applicable to common stockholders for the years
ended December 31, 1997, 1998 and 1999 would have been decreased by adding back
interest expense related to the convertible notes of approximately $980,000,
$1,394,000 and $704,000, respectively.
NOTE 2--ACQUISITIONS
Effective May 1, 1999, the Company acquired substantially all of the assets
of SecureWare SA and DMIC SA (SecureWare), as well as certain developed software
licenses from the founder of SecureWare in exchange for $738,735 in cash (of
which $151,203 is recorded in accrued liabilities at December 31, 1999) plus
174,575 shares of the Company's common stock, which had a market value based
upon the trading price of the common stock on the NASD Electronic Bulletin Board
("Market Value") of approximately $650,000 at the time of the acquisition.
SecureWare, located in Bordeaux, France, is a software developer focusing on
developing security solutions for a number of operating systems.
The acquisition of SecureWare was accounted for under the purchase method of
accounting, and accordingly, the acquired assets have been recorded at their
estimated fair values at the date of acquisition. Purchased software related to
this transaction was $889,000 and is being amortized over a period of five
years. Goodwill related to this transaction was $406,000 and is being amortized
over a period of seven years. The remaining purchase price is related to
acquired fixed assets. The effect on the pro forma results of operations had the
acquisition occurred at the beginning of 1999 was immaterial.
On October 6, 1999, the Company acquired all of the outstanding capital
stock of IntelliSoft Corp. (IntelliSoft) in exchange for 1,812,078 shares of
common stock, which had a Market Value of approximately $7,250,000 at the time
of the acquisition. In addition, the Company paid $751,575 to IntelliSoft
dissenters to acquire their capital stock interests, which represented 9.4% of
the outstanding capital stock of IntelliSoft at the date of the acquisition. The
acquisition of these shares has been treated as the purchase and retirement of
common stock. IntelliSoft, located in Acton, MA, specializes in developing true
secure single sign-on, Web authorization, PKI, VPN, and enterprise management
solutions. This transaction was accounted for under the pooling-of-interests
method. Accordingly, the
F-11
<PAGE>
VASCO DATA SECURITY INTERNATIONAL, INC.
NOTE 2--ACQUISITIONS (CONTINUED)
consolidated financial statements, including share amounts, have been restated
as if IntelliSoft had been combined for all periods presented.
The following information reconciles total revenues and net loss of the
Company as previously reported in the Company's Annual Report on Form 10-K for
the years ended December 31, 1997 and 1998 with the amounts presented in the
accompanying consolidated statements of operations for the years ended
December 31, 1997 and 1998, as well as presents the separate results of
operations of IntelliSoft for the year ended December 31, 1999 during the period
preceding the acquisition.
<TABLE>
<CAPTION>
VASCO(1) INTELLISOFT COMBINED
------------ ----------- ------------
<S> <C> <C> <C>
Revenues for the year ended:
December 31, 1997.................................. $ 12,302,000 $ 906,000 $ 13,208,000
December 31, 1998.................................. 15,016,000 1,484,000 16,500,000
Nine months ended:
September 30, 1999................................. N/A 1,635,000 N/A
------------ ----------- ------------
Net income (loss) for the year ended:
December 31, 1997.................................. $ (5,916,000) $ (244,000) $ (6,160,000)
December 31, 1998.................................. (3,649,000) (133,000) (3,782,000)
Nine months ended:
September 30, 1999................................. N/A $ 161,000 N/A
------------ ----------- ------------
</TABLE>
- ------------------------
(1) Represents the historical results of the Company without considering the
effect of the pooling of interests consummated during 1999.
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 are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
----------- --------
<S> <C> <C>
Component parts....................................... $ 407,597 $213,909
Work-in-process and finished goods.................... 993,372 591,473
Obsolescence reserves................................. (129,000) --
----------- --------
Total............................................. $ 1,272,327 $805,382
=========== ========
</TABLE>
F-12
<PAGE>
VASCO DATA SECURITY INTERNATIONAL, INC.
NOTE 4--ACCRUED EXPENSES
Accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Accrued interest..................................... $ 860,957 $ 698,946
Accrued payroll...................................... 223,369 268,455
Other accrued expenses............................... 1,091,257 651,338
---------- ----------
Total............................................ $2,175,583 $1,618,739
========== ==========
</TABLE>
NOTE 5--INCOME TAXES
At December 31, 1999, the Company has United States net operating loss
carryforwards approximating $9,100,000 and foreign net operating loss
carryforwards approximating $1,400,000. Such losses are available to offset
future taxable income in the respective jurisdictions and expire in varying
amounts beginning in 2002 and continuing through 2019. 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
which could be utilized.
Pretax loss from continuing operations was taxed in the following
jurisdictions:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Domestic............................... $(4,898,541) $(3,165,857) $(1,809,920)
Foreign................................ (654,619) 70,847 (80,254)
----------- ----------- -----------
Total.............................. $(5,553,160) $(3,095,010) $(1,890,174)
=========== =========== ===========
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal....................................... $ -- $ -- $ --
State......................................... -- (2,514) --
Foreign....................................... 406,579 689,516 322,310
Deferred:
Federal....................................... $175,176 $ -- $ --
State......................................... 24,824 -- --
Foreign....................................... -- -- --
-------- -------- --------
Total..................................... $606,579 $687,002 $322,310
======== ======== ========
</TABLE>
F-13
<PAGE>
VASCO DATA SECURITY INTERNATIONAL, INC.
NOTE 5--INCOME TAXES (CONTINUED)
The differences between income taxes computed using the statutory federal
income tax rate of 34% and the provisions for income taxes reported in the
consolidated statements of operations are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------
1997 1998 1999
----------- ----------- ---------
<S> <C> <C> <C>
$(1,052,303)
Expected tax benefit at the statutory rate............... $(1,888,074) $(642
Increase (decrease) in income taxes resulting from:
Foreign taxes at rates other than 34%.................. 149,549 665,000 205,916
Net operating losses not benefited..................... 1,779,000 1,035,000 676,000
Nondeductible expenses................................. 622,257 100,000 155,938
Other, net............................................. (56,153) (60,695) (72,885)
----------- ----------- ---------
Total................................................ $ 606,579 $ 687,002 $ 322,310
=========== =========== =========
</TABLE>
The deferred income tax balances are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
U.S. net operating loss carryforwards............ $ 2,886,000 $ 3,519,000
Foreign net operating loss carryforwards......... 439,000 582,000
Inventory........................................ 25,000 --
Accounts receivable.............................. 11,000 35,000
Accrued expenses................................. 128,000 16,000
Deferred revenue................................. 13,000 43,000
Other............................................ 28,000 22,000
----------- -----------
Total gross deferred income tax assets............. 3,530,000 4,217,000
Less valuation allowance........................... (3,445,000) (4,121,000)
----------- -----------
85,000 96,000
Deferred tax liabilities:
Fixed assets..................................... (2,000) (13,000)
----------- -----------
Net deferred income taxes.......................... $ 83,000 $ 83,000
=========== ===========
</TABLE>
The net change in the total valuation allowance for the years ended
December 31, 1997, 1998 and 1999 was an increase of $1,779,000, $1,035,000 and
$676,000, respectively. In assessing the realizability of deferred tax assets,
the Company considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the period in which these temporary differences become deductible. This
assessment was performed considering the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies. The
Company has determined that it is more likely than not that $83,000 of deferred
tax assets will be realized. The remaining valuation allowance of $4,121,000 is
maintained on deferred tax assets which the Company has not determined to be
more likely than not realizable as of December 31, 1999. This valuation
allowance will be reviewed on a regular basis and adjustments made as
appropriate.
F-14
<PAGE>
VASCO DATA SECURITY INTERNATIONAL, INC.
NOTE 6--DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Convertible stockholder note, interest payable at
9%................................................. $5,000,000 $5,000,000
Convertible note, interest payable at 3.25%.......... 3,400,000 3,400,000
Convertible note, interest payable at 9.5%........... 3,000,000 --
Revolving line of credit, interest payable at
6.48%.............................................. 3,000,000 --
Short-term credit facility, interest payable at
8.1%............................................... 450,000 --
Installment notes payable............................ 289,770 648,184
---------- ----------
15,139,770 9,048,184
Less current maturities.............................. (6,703,867) (639,322)
---------- ----------
Long-term debt....................................... $8,435,903 $8,408,862
========== ==========
</TABLE>
In August 1997, the Company renegotiated the guarantee related to the final
payment for the 1996 acquisition of Digipass into a term loan in the amount of
$3.4 million. The note matures on September 30, 2002 and bears interest at a
rate of 3.25% annually. In the event a public offering is completed, the lender
may at its option require the principal amount of the loan to be repaid in cash,
in which case the Company must pay additional special interest in the amount of
$680,000. In addition, the note is convertible into common stock of the Company
at the option of the bank, at a conversion price as specified in the agreement.
As part of this transaction, T. Kendall Hunt, then the Company's Chief Executive
Officer, entered into a pledge agreement with this financial institution
pursuant to which he pledged, as collateral for the convertible note, 1,416,666
of his shares of common stock of the Company, which number of shares is subject
to adjustment based on the market value of the shares.
During 1996, the Company continued to raise capital privately, including a
private placement consisting of the issuance of 666,666 shares of common stock
and a $5,000,000 convertible note due May 29, 2001. The note is convertible at
the option of the holder throughout the term of the note and is convertible at
the option of the Company in the event that the Company completes a qualified
public offering. The note bears interest at 9%, with interest payable to the
holder on a quarterly basis. The holder may, at its option, elect to receive
interest payments in cash or common stock. In calculating the shares of common
stock to be issued in lieu of cash interest, the average closing price for the
Company's common stock for the previous 20 days is used.
Aggregate maturities of debt at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 639,322
2001........................................................ 5,008,862
2002........................................................ 3,400,000
----------
Total................................................. $9,048,184
==========
</TABLE>
Interest expense to stockholders was $507,100, $497,795 and $450,000 for the
years ended December 31, 1997, 1998 and 1999, respectively.
F-15
<PAGE>
VASCO DATA SECURITY INTERNATIONAL, INC.
NOTE 7--STOCKHOLDERS' EQUITY
COMMON STOCK
During 1999, the Company issued 174,575 shares of common stock as part of
the acquisition of SecureWare and 1,812,078 shares of common stock as part of
the acquisition of IntelliSoft (see Note 2). The Company also raised additional
capital during 1999 in a private placement of 3,285,714 shares of common stock
at a price of $3.50 per share. Total issuance costs of $763,074 have been netted
against the $11,500,000 in proceeds from the placement in the Company's
financial statements.
Also in 1999, the Company issued 158,000 shares of common stock as a result
of the exercise of options under the Company's stock compensation plan (see
Note 8) generating total proceeds of $44,225; 200,000 shares of common stock
were issued as a result of the exercise of the Company's stock warrants,
generating total proceeds of $50,000; and 26,019 shares of common stock were
issued in lieu of interest that was accrued at December 31, 1998, related to the
$5,000,000 convertible note placed during 1996 (see Note 6).
During 1998, the "put" option associated with a 1995 private placement of
equity units expired, resulting in the reclassification of the put obligation to
additional paid-in capital.
During 1998, the Company issued 658,257 shares of common stock as a result
of the exercise of options under the Company's stock option plan (see Note 8)
generating total proceeds of $116,347; 14,472 shares of common stock were issued
as a result of the exercise of the Company's stock warrants, under the cashless
exercise provision contained within the warrant.
WARRANTS
Warrant activity for the years ended December 31, 1997, 1998 and 1999 are
summarized below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE EXERCISE PRICE
--------- ---------------- -----------------------
<S> <C> <C> <C> <C> <C>
Outstanding at January 1, 1997...................... 899,412 $4.78 $ .25 -- 7.00
Granted............................................. 210,510 5.44 4.00 -- 10.00
Exercised........................................... --
Canceled............................................ (53,000) 6.00 6.00
---------
Outstanding at December 31, 1997.................... 1,056,922 4.85 .25 -- 10.00
Granted............................................. 5,000 5.19 5.19
Exercised........................................... (57,888) 5.19 5.19
Canceled............................................ -- -- --
---------
Outstanding at December 31, 1998.................... 1,004,034 4.83 .25 -- 10.00
Granted............................................. -- -- --
Exercised........................................... (200,000) .25 .25
Canceled............................................ -- -- --
---------
Outstanding at December 31, 1999.................... 804,034 5.97 4.00 -- 10.00
=========
</TABLE>
NOTE 8--STOCK COMPENSATION PLAN
The Company's 1997 Stock Compensation Plan, as amended, ("Compensation
Plan") is designed and intended as a performance incentive. The Compensation
Plan is administered by the Compensation Committee as appointed by the Board of
Directors of the Company (Compensation Committee).
F-16
<PAGE>
VASCO DATA SECURITY INTERNATIONAL, INC.
NOTE 8--STOCK COMPENSATION PLAN (CONTINUED)
The Compensation Plan permits the grant of options to employees of the
Company to purchase shares of common stock and is intended to be a nonqualified
plan. All options granted to employees are for a period of ten years, are
granted at a price equal to the fair market value of the common stock on the
date of the grant and are typically vested 20% on the first anniversary of the
grant, with an additional 20% vesting on each subsequent anniversary of the
grant. Alternative vesting schedules include either date or event-based vesting.
The Compensation Plan further permits the grant of options to directors,
consultants and other key persons (non-employees) to purchase shares of common
stock. All options granted to non-employees are granted at a price equal to the
fair market value of the common stock on the date of the grant, and may contain
vesting requirements and/or restrictions as determined by the Compensation
Committee at the time of grant.
As of December 31, 1999, the Compensation Plan was authorized to issue
options representing up to 5,292,417 shares of the Company's common stock. The
authorized shares under the Compensation Plan represent 20% of the issued and
outstanding shares of the Company.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Compensation Plan. Had compensation cost for the Compensation
Plan been determined consistent with SFAS No. 123, the Company's net loss
available to common stockholders and net loss per common share would have been
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net loss available to common stockholders:
As reported.......................................... $(6,241,639) $(3,782,012) $(2,212,484)
Pro forma............................................ (6,514,741) (4,126,931) (2,789,233)
Net loss per common share-basic and diluted:
As reported.......................................... $ (0.30) $ (0.17) $ (0.09)
Pro forma............................................ (0.31) (0.18) (0.11)
</TABLE>
For purposes of calculating the compensation cost consistent with SFAS
No. 123, the fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1998 and 1999: dividend yield of 0%;
expected volatility of 50%; risk free interest rates ranging from 4.00% to
6.80%; and expected lives of five years.
F-17
<PAGE>
VASCO DATA SECURITY INTERNATIONAL, INC.
NOTE 8--STOCK COMPENSATION PLAN (CONTINUED)
The following is a summary of activity under the Compensation Plan:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED AVERAGE
NUMBER AVERAGE NUMBER AVERAGE FAIR VALUE OF
OF SHARES PRICE OF SHARES PRICE OPTIONS GRANTED
--------- -------- --------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31, 1996....... 1,661,632 $1.01 1,299,757 $0.57
Granted................................ 512,500 4.18 $1.95
Exercised.............................. (189,375) 0.22
Forfeited.............................. (39,500) 3.91
--------- -----
Outstanding at December 31, 1997....... 1,945,257 1.85 1,460,629 1.29
Granted................................ 245,250 5.09 $2.55
Exercised.............................. (658,257) 0.18
Forfeited.............................. (56,750) 4.25
--------- -----
Outstanding at December 31, 1998....... 1,475,500 3.05 1,088,375 2.48
Granted................................ 1,174,000 3.13 $1.58
Exercised.............................. (158,000) 0.28
Forfeited.............................. (114,300) 4.01
--------- -----
Outstanding at December 31, 1999....... 2,377,200 $3.23 1,074,138 $3.04
========= ===== ========= =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OF SHARES CONTRACTUAL LIFE PRICE OF SHARES PRICE
- ------------------------ --------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$2.50--7.25.............................. 2,022,700 8.29 years $3.76 719,638 $4.45
$0.1875--0.25............................ 354,500 3.52 years $0.20 354,500 $0.20
</TABLE>
NOTE 9--EMPLOYEE BENEFIT PLAN
The Company maintains a contributory profit sharing plan established
pursuant to the provisions of Section 401(k) of the Internal Revenue Code, which
provides benefits for eligible employees of the Company. The Company made no
contributions to the plan during the years ended December 31, 1997, 1998 and
1999.
NOTE 10--SEGMENT INFORMATION
In fiscal 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which establishes standards
for reporting information about operating segments and related disclosures about
products and services, geographic information and major customers.
The Company has identified IdentiSoft and IntelliSoft as its reportable
operating segments based on the nature of its products and services and
financial reports which are evaluated regularly by management in deciding how to
allocate resources and assess performance. The IdentiSoft segment offers
software and handheld hardware security products that provide user
authentication. The
F-18
<PAGE>
VASCO DATA SECURITY INTERNATIONAL, INC.
NOTE 10--SEGMENT INFORMATION (CONTINUED)
IntelliSoft segment offers enterprise-wide security products that provide
encryption, access control, and administration and management tools. The Company
does not identify or allocate operating expenses to its reportable segments.
Information on reportable segments for the years ended December 31, 1997, 1998
and 1999 is as follows:
<TABLE>
<CAPTION>
IDENTISOFT INTELLISOFT TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Year Ended December 31, 1997:
Net revenues......................................... $11,911,000 $1,297,000 13,208,000
Cost of goods sold................................... 6,113,000 376,000 6,489,000
Gross profit......................................... 5,798,000 921,000 6,719,000
Year Ended December 31, 1998:
Net revenues......................................... 14,652,000 1,848,000 16,500,000
Cost of goods sold................................... 6,845,000 364,000 7,209,000
Gross profit......................................... 7,807,000 1,484,000 9,291,000
Year Ended December 31, 1999:
Net revenues......................................... 16,483,000 2,914,000 19,397,000
Cost of goods sold................................... 6,953,000 353,000 7,306,000
Gross profit......................................... 9,530,000 2,561,000 12,091,000
</TABLE>
The Company does not measure total assets by reportable business segment for
purposes of assessing performance and making operating decisions.
During 1997, 1998 and 1999, sales to one customer from the Company's United
States operations (a reseller of the Company's product in the Netherlands)
aggregated approximately $1,994,000, $1,950,000 and $3,533,000 respectively,
representing 15%, 12% and 18% of the total net revenues, respectively. Accounts
receivable from this customer represented 25% and 30% of the Company's gross
accounts receivable balance at December 31, 1998 and 1999, respectively.
The Company allocates revenues based on the location of the country which
initiates the sale. Information regarding geographic areas for the year ended
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
UNITED STATES BELGIUM TOTAL
------------- ----------- -----------
<S> <C> <C> <C>
Net revenues........................................... $3,690,000 $ 9,518,000 $13,208,000
Long-lived assets...................................... 232,000 111,000 343,000
</TABLE>
Information regarding geographic areas for the year ended December 31, 1998
is as follows:
<TABLE>
<CAPTION>
UNITED STATES BELGIUM TOTAL
------------- ----------- -----------
<S> <C> <C> <C>
Net revenues........................................... $4,269,000 $12,231,000 $16,500,000
Long-lived assets...................................... 207,000 183,000 390,000
</TABLE>
Information regarding geographic areas for the year ended December 31, 1999
is as follows:
<TABLE>
<CAPTION>
UNITED STATES BELGIUM FRANCE TOTAL
------------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Net revenues................................. $7,188,000 $12,015,000 $194,000 $19,397,000
Long-lived assets............................ 331,000 810,000 49,000 1,190,000
</TABLE>
F-19
<PAGE>
VASCO DATA SECURITY INTERNATIONAL, INC.
NOTE 11--COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under operating lease
agreements expiring at various times during 2004.
Future minimum rental payments required under noncancelable leases are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- --------
<S> <C>
2000........................................................ $610,567
2001........................................................ $607,147
2002........................................................ $610,079
2003........................................................ $577,748
2004........................................................ $555,376
</TABLE>
Rent expense under operating leases aggregated approximately $261,000,
$357,000 and $434,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
From time to time, the Company has been involved in litigation incidental to
the conduct of its business. Currently, the Company is not a party to any
lawsuit or proceeding which, in management's opinion, is likely to have a
material adverse effect on its business, financial condition or results of
operations.
NOTE 12--SUBSEQUENT EVENTS
On January 27, 2000, VASCO filed for the listing of its common stock on the
Nasdaq National Market. Additionally, on February 11, 2000 VASCO filed with the
SEC for a public offering of its common stock for approximately $50,000,000. In
connection with this offering, filings were made with the EASDAQ and the Nasdaq
Stock Market.
F-20
<PAGE>
SCHEDULE II
VASCO DATA SECURITY INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BAD DEBT
ALLOWANCE FOR DOUBTFUL ACCOUNTS BEGINNING EXPENSE ACCOUNTS ENDING
FOR TRADE ACCOUNTS RECEIVABLE BALANCE (RECOVERY) WRITTEN OFF BALANCE
- ------------------------------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1997...................... $452,000 $ 97,000 $(120,000) $429,000
Year ended December 31, 1998...................... 429,000 (272,000) (102,000) 55,000
Year ended December 31, 1999...................... 55,000 65,216 -- 120,216
</TABLE>
<TABLE>
<CAPTION>
OBSOLESCENCE
BEGINNING EXPENSE INVENTORY ENDING
RESERVE FOR OBSOLETE INVENTORIES BALANCE (RECOVERY) WRITTEN OFF BALANCE
- -------------------------------- --------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1997...................... $154,000 $ 101,000 $ (91,000) $164,000
Year ended December 31, 1998...................... 164,000 35,000 (70,000) 129,000
Year ended December 31, 1999...................... 129,000 (36,000) (93,000) --
</TABLE>
F-21
<PAGE>
ANNEX A
SUPPLEMENTAL INFORMATION AND SELLING RESTRICTIONS
(EXCLUSIVELY FOR PURPOSES OF THE PUBLIC OFFERING IN BELGIUM,
THE ADMISSION OF THE SHARES FOR LISTING ON EASDAQ AND
THE SALE OF SHARES TO INSTITUTIONAL INVESTORS
OUTSIDE OF BELGIUM AND THE UNITED STATES)
APPROVAL OF THE PROSPECTUS BY THE BELGIAN COMMISSION FOR BANKING AND FINANCE
On March 28, 2000, the Belgian Commission for Banking and Finance
("COMMISSIE VOOR HET BANK- EN FINANCIEWEZEN / COMMISSION BANCAIRE ET
FINANCIERE") ("CBF") approved this prospectus in accordance with article 29ter,
Section 1 of the Royal Decree n(o) 185 of July 9, 1935, as amended.
The approval of this prospectus does not imply any judgement by the CBF on
the merits or the quality of the offering, the shares or our company, or the
adequacy and quality of this prospectus, and neither does it render any
judgement on the position of the persons realizing the offering. The notice
prescribed by article 29, Section1 of the aforementioned Royal Decree has been
published in the Belgian press.
PERSONS RESPONSIBLE FOR THE CONTENTS OF THE PROSPECTUS
VASCO Data Security Systems International, Inc., represented by Mr. Mario
Houthooft, Chief Executive Officer, takes responsibility for the contents of
this prospectus.
I am, to the best of my knowledge and after having made all reasonable
inquiries, of the opinion that the information given in this prospectus is
accurate in all material respects and is not misleading and contains no omission
of any information that could make any statement herein materially misleading.
VASCO Data Security International, Inc.
Mr. Mario Houthooft,
Chief Executive Officer
ADDITIONAL GENERAL INFORMATION ABOUT VASCO
CORPORATE STRUCTURE OF VASCO
VASCO Data Security International, Inc. was incorporated under the laws of
Delaware in 1997. Its registered office is at 1901 South Meyers Road, Suite 210,
Oakbrook Terrace, Illinois 60181, Illinois. Its telephone number at that address
is (630) 932-8844.
VASCO Data Security, Inc. was incorporated under the laws of the state of
Delaware in 1984. Since its inception, it is a fully owned subsidiary of VASCO
Data Security International, Inc. The registered office of VASCO Data Security,
Inc. is at 1901 South Meyers Road, Suite 210, Oakbrook Terrace, Illinois 60181,
Illinois. Its telephone number at that address is (630) 932-8844.
VASCO Data Security Europe NV/SA was incorporated under the laws of Belgium
in 1996. Since its inception, it is a fully owned subsidiary of VASCO Data
Security International, Inc. The registered office of VASCO Data Security Europe
NV/SA is at Koningin Astridlaan 164, B-1780 Wemmel (Belgium).
VASCO Data Security NV/SA was incorporated under the laws of Belgium in 1992
under the name "Digipass S.A.", which was changed into VASCO Data Security in
1997. It is a fully owned subsidiary of VASCO Data Security Europe NV/SA since
1996. The registered office of VASCO Data Security NV/SA is at Koningin
Astridlaan 164, B-1780 Wemmel (Belgium).
A-1
<PAGE>
Lintel Security NV/SA was incorporated under the laws of Belgium in 1996. It
is a fully owned subsidiary of VASCO Data Security Europe NV/SA since 1996. The
registered office of Lintel Security NV/SA is at Koningin Astridlaan 164, B-1780
Wemmel (Belgium).
VASCO Data Security France SA was incorporated under the laws of France in
1999. Since its inception, it is a fully owned subsidiary of VASCO Data Security
Europe NV/SA. The registered office of VASCO Data Security France SA is at 481
Boulevard Alfred Daney, F-33300 Bordeaux (France).
At the date of the prospectus, the organizational chart of VASCO is as
follows:
[CHART]
The corporate organization of VASCO as depicted above is the result of
acquisitions completed during the last two years and other events. However, the
corporate structure is not representative of the business organization of VASCO
which is divided in the IntelliSoft and IdentiSoft divisions and which use
resources of all of the subsidiaries and the parent companies.
U.S. CORPORATE GOVERNANCE MODEL
In the United States, a corporation's business and affairs are managed by
its board of directors. The powers of a board of directors are determined by the
corporation law of the state in which the corporation is organized, known as its
state of incorporation. Corporate directors and officers must act diligently
under applicable guidelines or they will be held responsible for their acts and
their failures to act.
DIRECTORS. Generally, under state law, directors have responsibility for
such matters as setting the policies of the corporation, authorizing major
corporate actions, including the sale of securities, assuring that there are
effective auditing procedures in place, determining the adequacy of compensation
and selecting officers and monitoring the performance of those officers in the
day to day management of the affairs of the corporation.
Directors are obligated to maintain an awareness of corporate developments
and to consider any material adverse development that may come to their
attention. Directors are expected to spend a substantial amount of time in
connection with the business of the corporation and must comply with their
fiduciary duties of loyalty and care to the corporation.
The standards to which directors are held, are primarily established by
state law. A corporate director is a fiduciary whose dealings with the
corporation are subject to rigorous scrutiny. In carrying out their
responsibilities, directors have a duty of loyalty and a duty of care, both to
the corporation and to its stockholders who are the ultimate owners of the
corporation. The duty of loyalty dictates that a director must act in good faith
and must not allow personal interests to prevail over the interests of the
corporation and its stockholder. The duty of care requires a director to be
diligent and prudent and to act on the basis of adequate information in arriving
at a business decision. But directors have broad freedom of action. Thus, while
they may be liable for any action that injures the corporation, whether it
results from negligence or from participation in, approval of, or acquiescence
in a wrongful act, they are not liable merely because, through their exercise of
valid business judgment, they chose a course of action which turned out badly
for the corporation. The doctrine that bars judicial inquiry into actions of
directors taken in good faith and in honest pursuit of the legitimate purposes
of the corporation, is called the "business judgment rule."
A-2
<PAGE>
OFFICERS. The board of directors exercises the rights and powers of the
corporation granted by state law. Since corporate acts are performed through a
corporation's directors, all powers directly conferred or impliedly granted by
state law to the corporation, must be exercised by the directors or under their
direction. Legally, the officers of a corporation are the agents through whom
the board of directors acts. The board sets the goals and determines the
strategy to achieve those goals and then designates the officers to give effect
to those decisions. State law, either directly or indirectly, places the
officers under the control of the directors.
Specific powers and duties of officers, and provisions governing their
exercise, are occasionally provided by state law. As a rule, however, the
authority of an officer is found in the corporation's charter, bylaws or
resolutions of the board of directors. The president of a corporation is
accorded a substantial amount of "apparent" authority, since he or she is the
active head of the corporation in its dealings with the public.
ORGANIZATION OF VASCO. As indicated in the organizational chart above, we
are organized as a publicly-held Delaware holding company with five wholly-owned
subsidiaries. Our board of directors currently maintains two standing
committees, the Audit Committee and the Compensation Committee. Our Audit
Committee recommends the engagement of our independent auditors, reviews with
the auditors the scope of their audit of our financial statements and reviews
the independence of the auditors. Our Compensation Committee reviews and
recommends all forms of compensation to be provided to our executive officers,
directors and consultants.
During 1999, our board of directors met once each fiscal quarter, and the
Audit and Compensation Committees each met twice. We have no other committees
organized at the present time and none are expected to be established in the
foreseeable future. At our board meetings, however, the operating officers of
our two primary divisions report to the board on the results of their operations
for the preceding quarter and forecast the development of their respective
businesses for the near term. In addition, reports on budget and other financial
data, as well as research and development activities are presented to the board
at these meetings. The board does not expect to significantly change its
operating procedures during 2000.
RECENT CAPITAL ISSUANCES
At the time of the reorganization of VASCO in 1998, the following securities
of our predecessor, VASCO Corp., were outstanding or issuable pursuant to
outstanding operations, warrants and other rights to acquire:
- Common Stock, 20,132,968 shares issued and outstanding
- Common Stock, 1,977,757 shares underlying outstanding options under stock
option plans described in the prospectus
- Common Stock, 1,056,922 shares underlying outstanding warrants
- Common Stock, 6,418,595 shares issuable pursuant to the following debt
securities:
- 9% Convertible Note held by Kyoto Securities, Ltd., $5.0 million
principal amount (will be converted into 416,667 shares of our common
stock upon completion of the offering)
- 3.25% Convertible Loan Agreement with Artesia, N.V., formerly Banque
Paribas Belgique NV/SA, $3.4 million principal amount (may be converted
to approximately 154,500 shares of our common stock upon completion of
the offering)
- 9.5% Convertible Loan Agreement, $3.0 million principal amount (repaid
in 1999)
A-3
<PAGE>
As a result of the exchange offer and our reorganization, the foregoing
securities of our predecessor were exchanged on a one-for-one basis for the same
securities issued by VASCO. Nearly 98% of our predecessor's securities were
tendered for exchange in the reorganization. The remaining securities were
exchanged as part of a second step clean-up merger of our predecessor into
VASCO.
Since the reorganization, we have issued the following additional securities
as part of private sales of our common stock, stock option awards and exercises,
and in connection with our acquisition activities:
<TABLE>
<S> <C>
1998 Issuance of 658,257 shares of our common stock in connection
with the exercise of outstanding options under our stock
option plans. 26,019 shares were issued in lieu of interest
payments and 14,472 shares were issued upon the exercise of
outstanding warrants.
April 1999 Private sale of 3,285,714 shares of our common stock to six
institutional investors for an aggregate of $11.5 million in
gross proceeds.
May 1999 Issuance of 174,575 shares of our common stock in connection
with our acquisition of SecureWare.
October 1999 Issuance of 1,812,078 shares of our common stock in
connection with the acquisition of IntelliSoft Corp.
1999 Issuance of 158,000 shares of our common stock in connection
with the exercise of outstanding options under our stock
option plans and 200,000 shares in connection with the
exercise of outstanding warrants.
2000 Issuance of 403,881 shares of our common stock in connection
with the exercise of outstanding options under our stock
option plans and upon the exercise of outstanding warrants.
</TABLE>
As of March 8, 2000, we had 26,865,964 shares of our common stock
outstanding.
ADDITIONAL FINANCIAL INFORMATION
We expect that our unaudited summary consolidated financial results for the
three months ended March 31, 2000 will be released on or about April 3, 2000.
This release will be announced in the Belgian financial press.
ADMISSION TO LISTING ON EASDAQ
ADMISSION TO LISTING OF THE SHARES ON EASDAQ
On February 11, 2000, VASCO applied for the admission to listing of all of
its shares on EASDAQ. We expect that the shares will be listed from April 14,
2000.
The shares shall be freely transferable within the European Union and shall,
upon closing of the underwriting agreement, be fully paid up.
Prior to the offering, these shares have not been listed, traded or quoted
on any regulated or organized market or stock exchange in Europe.
NATURE OF THE TRADING MARKET
EASDAQ's goal is to provide a trading forum for growth companies seeking
development capital to access the stock market. Admission to the EASDAQ is
subject to certain adequacy and liquidity requirements determined by the EASDAQ
Market Authority. In addition, companies applying for admission to trading on
EASDAQ are required to publish relevant financial and other information
A-4
<PAGE>
regularly and to keep the public informed of all events likely to affect the
market price of their securities.
EASDAQ became operational in November 1996. There can be no assurance that
EASDAQ will develop into a stable and liquid market for securities or that price
fluctuations on the EASDAQ will not have a negative impact on the market price
of the shares. No assurance can be given that any market for the shares will
develop or be sustained. No predication can be made as to the effect, if any,
that future sales of shares, or the availability of shares for future sale, will
have on the market price of the shares prevailing from time to time.
During EASDAQ business hours the market makers shall, in accordance with
EASDAQ rules, display bid and ask prices at which they are willing to purchase
from and sell to other EASDAQ members financial instruments listed or traded on
EASDAQ. Quotations must be valid at least for the minimum quotation size for
that financial instrument as specified by the Market Authority.
CLEARING AND SETTLEMENT SYSTEM
The following summarizes our understanding of the operation of the clearing
system that will apply to transactions on NASDAQ and on EASDAQ. Persons
proposing to trade the shares on NASDAQ or EASDAQ should inform themselves about
the costs of such trading.
The shares will be represented by one or more global share certificates that
will be deposited with Illinois Stock Transfer and Trust Company, on behalf of
the Depository Trust Company ("DTC"). DTC is a trust company that holds
securities for its participating organizations and that facilitates the
settlement of transactions in each securities between participants through
electronic book-entry changes in accounts of DTC participants. DTC participants
include securities brokers and dealers, banks and trust companies, clearing
corporations and certain other organizations. Access to DTC's systems is also
available to other entities as bankers, brokers, dealers and trust companies
that clear through or maintain a custodial relationship either directly or
indirectly with a DTC participant. Euroclear and Clearstream are such indirect
DTC participants.
Our common stock is expected to be quoted on EASDAQ in U.S. dollars.
Transactions in our shares on EASDAQ will be settled through the Euroclear or
Clearstream Systems. Investors in the shares who wish to trade on EASDAQ must
have a securities account with a financial institution which has direct or
indirect access to Euroclear or Clearstream.
Euroclear and Clearstream hold securities and book-entry interests in
securities for their direct participants and facilitate the clearance and
settlement of securities transactions between their respective participants, and
between their participants and participants of certain other securities
intermediaries, including DTC, through electronic book-entry changes in accounts
of such participants or other securities intermediaries.
Euroclear and Clearstream provide their respective participants, amongst
other things, with safekeeping, administration, clearance and settlement,
securities lending and borrowing, and related services. Euroclear and
Clearstream have established an electronic bridge between their two systems
across which their respective participants may settle trades with each other.
Euroclear and Clearstream participants are investment banks, securities
brokers and dealers, banks, central banks, supranationals, custodians,
investment managers, foreign depositories, corporations, trust companies and
certain other organizations and include the underwriters.
Clearstream and Euroclear will not monitor any transfer and ownership
restrictions. Book-entry settlement is mandatory for all financial instruments
traded on EASDAQ. Physical certificates cannot be used to settle a market
transaction. The clearing agency conducts a real-time gross payment system
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in connection with its clearance operation, payments being made simultaneously
with the book-entry transfers between securities accounts.
OFFERING
TOTAL NUMBER OF OFFERED SHARES
On February 3, 2000, our board of directors has decided to authorize the
issuance and sale of up to 4,000,000 shares, all or part of which are expected
to be purchased on or about April 13, 2000, by the underwriters with the purpose
of placing them to the public. The selling shareholders intend to sell 450,000
existing shares (depending on the exercise of the over-allotment option). The
underwriters intend to offer the shares to the investors, subject to the
successful negotiation and execution of the underwriting agreement.
The total number of shares outstanding before the offering amounts to
26,865,964.
The total number of shares outstanding after the offering amounts to
29,865,964, assuming that all the shares will be subscribed to upon the
completion of the offering.
OVER-ALLOTMENT OPTION
Upon the signing of the underwriting agreement, the selling shareholders are
expected to grant the Global Coordinator, on behalf of the underwriters, an
option to acquire up to 450,000 existing shares to cover over-allotments, if
any. The net proceeds of the sale of these existing shares through the offering,
in case and to the extent that the over-allotment option be exercised, will go
to the selling shareholders only.
The over-allotment option is exercisable by the Global Coordinator within a
period of 30 days after the closing date.
PLACEMENT OF THE OFFERED SHARES
The shares are offered through:
- a public offering in Belgium,
- a public offering in the United States, and
- a private offering in each of France, Germany, Spain, Switzerland,
Luxembourg, The Netherlands and the United Kingdom.
BOOKBUILDING AND SUBSCRIPTION PROCEDURE
During the offering period, as described below, binding offers to purchase
the shares will be solicited from retail and institutional investors in Belgium
and from certain institutional investors outside Belgium, excluding the United
States (the "Bookbuilding"). The purpose of the Bookbuilding is to allow the
market to determine the final offering price.
During the offering period, investors will be invited to submit to the
underwriters their orders indicating the number of shares they (bindingly) offer
to purchase.
Retail investors will have to indicate the maximum price at which they make
such binding purchase offer, in the absence of which such purchase offer will be
considered void.
All purchase orders received during the offering period, which are at a
price level equal or higher than the final offering price will be eligible for
allocation of all or part of the shares ordered.
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If a new significant fact which might have an influence on the public's
judgment, occurs between the approval of the prospectus by the CBF and the
closing of the offering, and we have to provide an amendment to the prospectus
pursuant to article 29, Section 2 of the Royal Decree n(o) 185 of July 9, 1935,
investors shall have the right to cancel their purchase order on the date of the
publication of the amendment in the Belgian financial press and on the first
business day following such publication.
DETERMINATION OF THE FINAL OFFERING PRICE
The final offering price will be a single U.S. dollars price applicable for
all investors and is expected to be fixed, by the Global Coordinator and
ourselves taking into account relevant elements including, but not limited to,
the closing price of the shares, on the pricing date, on the NASD Electronic
Bulletin Board, the number of offers received, the quality of the investors
making such offers, the prices at which the offers were made and the market
circumstances. The final offering price is expected to be fixed on the first
business date after the closing of the offering period which is scheduled to
close at the latest on April 13, 2000, but can be curtailed as indicated below.
At the latest on the first day of listing of the shares on EASDAQ, we shall
publish in the Belgian financial press where you can obtain information on the
final offering price.
ALLOCATION OF SHARES
In the event that the number of shares is insufficient to satisfy all bids
made at or about the final offering price, the application shall lead to partial
allocation. It is our intention to establish a balanced basis of retail and
institutional shareholders as well as a broad basis of international
shareholders. A ratio of 80% institutional and 20% retail investors is used as a
working hypothesis to establish such a base. Subject to our objectives, and
using objective criteria as to the allocation of shares to Belgian retail
investors, Fortis Bank as Global Coordinator, will, in consultation with
ourselves, determine how to allocate the shares among investors.
With regard to the public offering in Belgium, priority may be given to
retail investors having subscribed with Fortis Bank, Artesia Bank N.V. and Bank
Degroof. In relation to the institutional investors, priority may be given to
the orders introduced first.
If the underwriters determine, or have reason to believe, that for a single
investor several orders were submitted, the underwriters may reduce or disregard
the allotment. In addition, subscriptions whose abnormally large size could
disrupt the secondary market, may be reduced or disregarded.
Information where you can find the allocation key with respect to Belgian
retail investors, will be published in Belgian financial press at the latest on
the first day of listing of the shares on EASDAQ.
OFFERING PERIOD
The offering period for the offering will coincide with the bookbuilding
period described above. The offering period will commence on March 31, 2000 and
is expected to close at the latest by 4 p.m., Brussels time, on April 13, 2000.
The offering period can, by agreement between the Global Coordinator and
ourselves, be curtailed as soon as the total amount of the shares (including the
existing shares depending on the exercise of the over-allotment option) in the
offering has been, in the opinion of the Global Coordinator and ourselves,
sufficiently oversubscribed, taking into account the then prevailing and
expected market circumstances. The decision to curtail the offering period can
be different for European retail and institutional investors on the one hand,
and for U.S. retail and institutional investors on the other hand. The decision
to curtail the offering period for Belgian investors will be published in the
Belgian financial press. No subscriptions will be accepted after closing of the
offering period.
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PAYMENT
The shares must be fully paid by the investors to the underwriters in U.S.
dollars.
Belgian retail investors must authorize their bank to debit their account,
for value at the latest for an amount in U.S. dollars, equal to the final
offering price multiplied by the number of shares which will be allocated to
them, and increased by the applicable stock exchange tax.
Institutional investors must indicate in their fax the account number which
will be debited, for value at the latest April 18, 2000 for an amount in U.S.
dollars, equal to the final offering price, multiplied by the number of shares
which will be allocated to them, and increased by the stock exchange tax, if
applicable.
Any possible costs charged by financial intermediaries not acting as selling
agent which received bids are to be borne by the investor.
Investors wishing to subscribe shares at a financial institution which is
not their own, are usually requested to open an account at this institution and,
as the case may be, to deposit an advance payment on the amount of their
subscription. Investors should make inquiries about the costs financial
institutions may charge for opening or closing an account, for transferring
securities from one securities account to another or any other transaction with
securities, and about the arrangements for the return of moneys to investors if
their purchase orders are not accepted, in whole or in part, and the timetable
for the return of such moneys.
FORM AND DELIVERY OF THE SHARES
The shares, which are all in bearer form and represented by global
certificates deposited with the clearing agency, will be allocated in book-entry
form. The book-entry will indicate for whose account the clearing agency
ultimately holds, as a depository, what number of shares and will, hence,
indirectly evidence title to the shares.
Book-entry is mandatory for settlement of market transactions on EASDAQ. The
clearing agency will not clear any settlements for shares not represented on the
global share certificates deposited with the clearing agency.
Each shareholder is entitled to receive physical delivery of a stock
certificate representing their shares of common stock. Any shareholder wishing
to receive a stock certificate should contact Jim Reed at Illinois Stock
Transfer Company at 312-427-2953. Written requests may be directed to Mr. Reed
at 209 West Jackson Blvd., Suite 903, Chicago, Illinois 60606. Certificates will
be delivered without charge to shareholders making a request. As such separate
shares would no longer be deposited with the clearing agency, trading of these
shares on EASDAQ would no longer be available. In addition, a special tax on the
physical delivery of bearer shares could be imposed in the amount of 0.2% of the
value of the relevant shares. See also under "Belgian Tax Considerations--(e)
Tax on the Physical Delivery of Bearer Securities."
PAYING AGENT
In Belgium, Fortis Bank, Artesia Bank N.V. and Bank Degroof will act as a
paying agent for the shares, free of charge for the shareholders. The cost of
distributing dividends through the paying agent, if any, will be paid by us. Any
changes or additions of paying agents will be announced in the Belgian financial
press and through the EASDAQ Publication Means (i.e., the "EASDAQ Company
Reporting System" or "ECR System").
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COSTS OF THE OFFERING
On the basis of an offering price of U.S. dollars $19.25 per share, the
overall costs for the offering are estimated (and subject to confirmation) at
aprroximately U.S. dollars $4,395,000 and include:
<TABLE>
<S> <C> <C>
the legal, administrative and authorities: $ 199,512.00
other costs: auditors: 200,000.00
legal costs: 200,000.00
other costs: 330,000.00
the underwriting commission,
management commission and selling
commission due to the underwriters
in the offering (excluding
commission in the event of an
exercise of the over-allotment 3,465,000
option):
</TABLE>
Except for the 0.17% Stock Exchange Tax applicable to Belgian residents,
payable by the investors in respect of the shares, and the fees to the
underwriters with regard to the sale of the existing shares, if any, which will
be paid by the selling shareholders, all costs relating to the offering of the
shares are borne by us.
REPORTING REQUIREMENTS OF 5% OWNERS OF OUR COMMON STOCK
The U.S. Securities Exchange Act of 1934, as amended by the Williams Act of
1968, extends the disclosure requirements of the U.S. federal securities laws
not only to tender offer situations, but also to individuals and companies
purchasing substantial blocks of securities of publicly-held companies. The Act
seeks to give the investing public enough information about those attempting to
acquire, and those attempting to keep, corporate control to enable stockholders
to make an informed decision on whether to hold or to sell their shares.
In this regard, a person or a group, whether in the United States or not,
whose acquisitions result in the beneficial ownership of more than 5% of a class
of a company's registered securities is required to file a report on
Schedule 13D within 10 days of the acquisition. The Schedule must be filed with
the SEC, the issuer of the securities being purchased and the exchange upon the
securities are traded. Among other things, Schedule 13D requires disclosure of
the purchaser's identity and purpose and its source of funds for the
acquisition.
SELLING RESTRICTIONS
THE UNITED KINGDOM
Each underwriter has agreed that (1) it has not offered and sold and, prior
to the expiry of the period of six months from the closing of the offering, will
not offer or sell any shares to persons in the United Kingdom except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulation 1995; (2) it has complied with and will
comply with all applicable provisions of the Financial Services Act 1986 and the
Public Offers of Securities Regulation 1995 with respect to anything done by it
in relation to the shares in, from or otherwise involving the United Kingdom;
and (3) it has only issued or passed on and will only issue or pass on to any
person in the United Kingdom any document received by it in connection with the
offer of the shares if that person is of a kind described in article 11(3) of
the United Kingdom
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Financial Services Act 1986 (Investment Advertisements)(Exemptions) Order 1996
(as amended) or is a person to whom the document may otherwise lawfully be
issued or passed on.
FRANCE
The present private placement is not described in an information memorandum
subject to the visa of the Commission des Operations de Bourse. The offerees may
participate in this private placement provided that they are acting for their
own account pursuant to the provisions set forth in the Decree n DEG.98-880 of 1
October 1998. The resale, directly or indirectly, to the public of the
securities as so purchased can only be made in accordance with the provisions of
articles 6 and 7 of the ordinance n DEG.67-833 of 28 September 1967.
THE NETHERLANDS
The shares may not be offered, sold, transferred or delivered in or from the
Netherlands as part of their initial distribution or at any time thereafter,
directly or indirectly, other than to individuals or legal entities who or which
trade or invest in securities in the conduct of business or a profession, such
as banks, brokers, dealers, institutional investors and multinationals with a
treasury department, in accordance with article 2 of the Dutch Exemption
Regulation to the Act on the Supervision on Securities Transactions 1995
("VRIJSTELLINGSREGELING WET TOEZICHT EFFECTENVERKEER 1995").
LUXEMBOURG
Each underwriter has represented and agreed that it will not publicly offer
or sell any shares in Luxembourg except for shares listed on the Luxembourg
Stock Exchange or other shares for which the requirements of Luxembourg law
concerning public offerings of securities have been met.
BELGIAN TAX CONSIDERATIONS
The following summary is based on the tax laws of the Kingdom of Belgium as
in effect on the date of this prospectus and is subject to changes including
changes that could have retroactive effect. This summary does not take into
account or discuss the tax laws of any country other than the Kingdom of
Belgium. Prospective purchasers of shares of common stock should consult their
own tax advisers as to the Belgian and other tax consequences of the purchase,
ownership and disposition of the shares of common stock. This summary does not
describe Belgian federal and regional estate and gift tax considerations.
Furthermore, it does not address Belgian tax consideration relevant to potential
purchasers, subject to taxing jurisdictions other than, or in addition to, the
Kingdom of Belgium, and does not address all possible categories of securities'
holders, some of whom may be subject to special rules.
(A) WITHOLDING TAXES
The summary below only relates to Belgian withholding tax. As referred to in
the section of the prospectus on U.S. tax matters, dividends distributed are
also subject to U.S. withholding tax. The US withholding tax on dividends
amounts to 30%. This rate can be reduced to 15% (or 5% if a shareholder holds
more than 10% of the shares) pursuant to the tax treaty between Belgium and the
U.S., provided that the shareholder concerned provides the appropriate Belgian
residence certification required by the U.S. Revenue Service.
1. INDIVIDUAL SHAREHOLDERS
(a) Dividends distributed to an individual shareholder subject to the
Belgian individual income tax are, in principle, subject to a 25%
withholding tax in case the dividends are paid or attributed through
a Belgian financial intermediary. This withholding tax is a final tax
if the shareholder is holding his shares of common stock as a private
investment,
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rather than a business asset. If the withholding tax is the final
tax, the dividend income does not need to be reported in the
individual annual income tax return.
(b) Dividends paid or attributed to an individual shareholder subject to
the Belgian individual income tax are not subject to a withholding
tax in case the dividends are not paid or attributed through a
Belgian financial intermediary or Belgian paying agent.
2. CORPORATE SHAREHOLDERS
Dividend income received by a Belgian resident company, subject to
Belgian corporate income tax from a non-resident company, is exempt from
withholding tax, provided that the appropriate formalities have been
fulfilled.
3. SHAREHOLDERS SUBJECT TO THE LEGAL ENTITY TAX
("RECHTSPERSONENBELASTING/IMPOT DES PERSONNES MORALES")
Dividends received by a Belgian resident entity subject to the Legal
Entity Tax ("Rechtspersonenbelasting/Impot des personnes morales") (e.g.
pension funds), are, in principle, subject to a withholding tax of 25%.
(B) INCOME TAX.
1. INDIVIDUAL SHAREHOLDERS
For dividends paid or attributed to an individual shareholder subject to
the Belgian individual income tax which have not been subject to a
withholding tax, said individual shareholder should mention the amount of
the dividend received in his annual individual income tax return. The
dividend income will then be subject to a separate tax at a rate of 25%,
increased with the applicable municipal surcharge.
If the shares of common stock are connected with the shareholder's
business, the dividends are taxable at the ordinary rate for business
income (varying from 25% to 55%, to be increased by the applicable
municipal surcharge and a 3% crisis surcharge).
2. CORPORATE SHAREHOLDERS
For Belgian resident companies, the dividend income must be added to
their taxable income, which is, in principle, taxed at the income tax
rate of (currently) 40.17% (under certain conditions, reduced rates
apply).
If such company holds an equity participation of at least 5% or with an
acquisition value of at least BEF 50,000,000 at the time of the dividend
distribution, 95% of the gross dividend received can in principle be
deducted from the taxable income ("participation exemption"). The minimum
shareholding requirement does not apply if the corporate investor is
identified as a credit institution mentioned in article 56, Section1 of
the Belgian Tax Code (1992), as an insurance company mentioned in article
56, Section2, 2 DEG., h of the Belgian Income Tax Code (1992), as a
stockbroker company mentioned in article 47 of the Belgian Act of April
6, 1995 or as an investment company as defined in article 2, Section2,
6 DEG. of the Belgian Income Tax Code (1992).
Belgian dividend withholding tax, if any, can be credited against the
corporate final income tax, provided that the company concerned has the
full ownership of the shares of common stock at the time of payment or
attribution of the dividends and provided that the dividend distribution
does not entail a reduction in value of or capital loss on the shares of
common stock.
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<PAGE>
3. SHAREHOLDERS SUBJECT TO THE LEGAL ENTITY TAX
("RECHTSPERSONENBELASTING/IMPOT DES PERSONNES MORALES")
The above mentioned withholding tax constitutes a final tax. In case no
Belgian dividend withholding tax is levied, the shareholder itself must
pay the dividend withholding tax.
(C) CAPITAL GAINS TAXATION
1. INDIVIDUAL SHAREHOLDERS
Individual Belgian resident shareholders holding ordinary shares of
common stock as a private investment are normally not subject to capital
gains taxation on the disposal of shares of common stock. However,
capital gains may become taxable at a rate of 33%, increased with a 3%
crisis surcharge and the applicable municipal surcharge, in case the
capital gains are considered as speculative income, i.e. income resulting
from operations or speculations exceeding the normal administration of
one own private estate.
If the shares of common stock are effectively connected with a business
activity, capital gains on the disposal of the shares of common stock
become taxable at a separate rate of 16.5% (increased with a 3% crisis
surcharge and the applicable municipal surcharge) in case the shares of
common stock have been invested in the business for more than 5 years. If
the shares have not been invested in the business for more than 5 years,
the progressive individual income tax rates (varying from 25% to 55%
increased with a 3% crisis surcharge and the applicable municipal
surcharge) apply.
2. CORPORATE SHAREHOLDERS.
Capital gains on shares of common stock are, in general, tax exempt for
Belgian resident companies if the dividends thereof qualify for the
"participation exemption". The participation conditions, as set out
above, do not apply for the capital gains exemption.
Capital losses realised on shares of common stock are not tax deductible
under Belgian tax law.
3. SHAREHOLDERS SUBJECT TO THE LEGAL ENTITY TAX
("RECHTSPERSONENBELASTING/IMPOT DES PERSONNES MORALES")
Capital gains on shares of common stock are, in general, tax-exempt.
Capital losses realized on shares of common stock are not tax deductible
under Belgian tax law.
(D) TAX ON STOCK EXCHANGE TRANSACTIONS
The purchase and sale in Belgium, through a "professional intermediary",
of existing shares of common stock are subject to the tax on stock
exchange transactions (the "Tax on Stock Exchange Transactions") in the
amount of 0.17% (but limited to BEF 10,000 per transaction and per
party). The delivery in Belgium, through a "professional intermediary",
of newly issued shares of common stock is subject to the Tax on Stock
Exchange Transactions in the amount of 0.35% (but limited to BEF 10,000
per transaction and per party).
The Tax on Stock Exchange Transactions is not due by professional
intermediaries mentioned in article 2 of the Act of April 6, 1995, acting
for their own account, insurance companies mentioned in article 2,
Section1, of the Act of July 9, 1975, acting for their own account,
pension funds mentioned in article 2, Section3, 6 DEG. of the Act of July
9, 1975, acting for their own account, collective investment institutions
mentioned in the Act of December 4, 1990, acting for their own account or
by non-residents upon delivery of a certificate of non-residence.
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(E) TAX ON THE PHYSICAL DELIVERY OF BEARER SECURITIES
A special tax on the physical delivery of bearer securities applies,
amounting to 0.2% of the value of the relevant securities. Such physical
delivery triggering the tax should normally not occur since book-entry
form is mandatory for settlement of all financial instruments traded on
EASDAQ and NASDAQ. The tax may, however, be due if the physical delivery
takes place through a Belgian professional intermediary.
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[Graphic illustration of company products]
<PAGE>
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PROSPECTUS
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FORTIS BANK
FIRST ANALYSIS SECURITIES CORPORATION
H.C. WAINWRIGHT & CO., INC.
ARTESIA BANK N.V.
BANK DEGROOF
, 2000
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