<PAGE>
FILED PURSUANT TO RULE 424(B)1
REGISTRATION NO. 333-11540
PROSPECTUS
[LOGO]
4,000,000 AMERICAN DEPOSITARY SHARES,
EACH REPRESENTING ONE ORDINARY SHARE
ActivCard S.A. is offering 4,000,000 of its ordinary shares, in the form of
American Depositary Shares. Each ADS represents one of our ordinary shares. The
ADSs are evidenced by American Depositary Receipts. A portion of the offering
may be issued in the form of ordinary shares
Our ordinary shares are listed on Easdaq under the symbol "ACTV." The ADSs have
been approved for listing on the Nasdaq National Market under the symbol "ACTI."
INVESTING IN THE ADSS INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
- ------------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT ACTIVCARD
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per ADS $76.50 $5.355 $71.145
- ------------------------------------------------------------------------------------------------------------
Total $306,000,000 $21,420,000 $284,580,000
- ------------------------------------------------------------------------------------------------------------
</TABLE>
To cover over-allotments the underwriters may purchase up to an additional
600,000 shares from certain stockholders at the initial public offering price
less the underwriting discount.
J.P. MORGAN & CO. SG COWEN
WIT SOUNDVIEW
March 15, 2000
<PAGE>
[INSIDE FRONT COVER]
This inside front cover pictures two thirds of a map of the world on the
left-hand side of the page and a young man on the right-hand side of the page.
At the bottom right hand side of the page is a picture of an ActivCard chip
card. The words "Who are you?" are superimposed on the picture.
Below the picture is the following text:
Prove it.
ActivCard enables you to prove who you are. In the anytime, anywhere, virtual
world of the Internet, your identity is the key to e-business. By linking our
core technology into systems delivered by Axent, Baltimore Technologies,
Entrust, Hewlett Packard, Lucent, Novell, Schlumberger, Sun Microsystems, Visa,
VeriSign, and other market leaders, ActivCard makes verifying who you are on the
Internet as easy as using an ATM. Internet banking, e-commerce, access to
corporate resources, medical records, digital signature, electronic cash, and
loyalty programs all require that you prove your identity over the Internet.
e-Business comes down to a question of identity, from there--anything is
possible.
ActivCard. The Key to e-Business
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Enforceability of Civil Liabilities... iii
Exchange Rates........................ iii
Prospectus Summary.................... 1
Risk Factors.......................... 6
Special Note Regarding Forward-Looking
Statements.......................... 17
Use of Proceeds....................... 18
Dividend Policy....................... 18
Capitalization........................ 19
Dilution.............................. 20
Price Range of Shares................. 21
Selected Consolidated Historical
Financial Data...................... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
</TABLE>
<TABLE>
Business.............................. 33
<CAPTION>
Page
----
<S> <C>
Management............................ 47
Certain Transactions with Related
Parties............................. 51
Principal and Selling Shareholders.... 52
Description of Share Capital.......... 53
Description of American Depositary
Shares.............................. 58
Shares Eligible for Future Sale....... 63
Taxation.............................. 64
Underwriting.......................... 69
Legal Matters......................... 72
Experts............................... 72
Where You Can Find Information........ 72
Index to Financial Statements......... F-1
</TABLE>
------------------------
WE ARE NOT MAKING OFFERS TO, AND ARE NOT ACCEPTING OFFERS TO BUY FROM, HOLDERS
IN ANY JURISDICTION IN WHICH THIS OFFER WOULD NOT COMPLY WITH LOCAL SECURITIES
LAWS.
We have not authorized any person to give you any information or to make any
representation that is not contained in this prospectus in connection with this
offer to sell ADSs. If such information or representation is given or made to
you, you must not rely upon it as having been authorized by us. You should not
assume that the delivery of this prospectus or any sale made under it implies
that the information in this prospectus is correct as of any date subsequent to
the date of this prospectus, which is stated on the cover page.
Until April 10, 2000 (25 days after the date of this prospectus), all dealers
that effect transactions in the ADSs, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
We intend to furnish to our stockholders annual reports containing audited
financial statements.
This prospectus has not been submitted for approval by the French COMMISSION DES
OPERATIONS DE BOURSE.
Accordingly, each of ActivCard and the underwriters has represented and agreed
that, it has not offered or sold and will not offer or sell, directly or
indirectly, the ADSs or ordinary shares to the public in the Republic of France,
and has not distributed or caused to be distributed and will not distribute or
cause to be distributed to the public in the Republic of France this prospectus
or any other material relating to the ADS or ordinary shares, and that such
offers, sales and distributions have been and shall only be made in the Republic
of France to (i) qualified investors (investisseurs qualifies) and/or (ii) a
restricted circle or investors (cercle restraint d'investis seurs), all as
defined in and in accordance with Article 6 of ordonnance no. 67-833 dated
28 September 1967, as amended, and decret no. 98-880 dated 1 October 1998.
Investors in the Republic of France may only participate in the issue of ADSs or
ordinary shares, for their own account in accordance with conditions set out in
decret no. 98-880 dated 1 October 1998. ADS or ordinary shares may only be
issued, directly or indirectly, to the public in the Republic of France in
accordance with Articles 6 and 7 of ordonnance no. 97-833 dated 28 September
1967, as amended. Where an issue of securities is effected as an exception to
the rules relating to an appel public a l'epargne in the Republic of France
(public offer rules) by way of an offer to a restricted circle of investors,
such investors must, to the extent that the ADS or ordinary shares are
i
<PAGE>
offered to 100 or more of such investors, provide certification as to their
personal association, of a professional or personal nature, with a member of the
management of the issuer.
Our ADSs and ordinary shares may not be offered or sold prior to the expiry of
six months from the date of the offer of the ADSs and ordinary shares to any
person in the United Kingdom except to persons whose ordinary activities involve
then 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 Regulations
1995. No document issued in connection with the public offering may be or passed
on to any person in the United Kingdom unless that person is of a kind described
in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemption) Order 1996, as amended, or is a person to whom the document may
otherwise by lawfully issued or passed on.
The offering of the ADSs and ordinary shares in the Republic of Italy has not
been registered with the COMMIZIONE NAZIONALE PER LE SOCIETA E LA BORSA pursuant
to Italian securities legislation. The distribution of this prospectus in the
Republic of Italy is restricted to persons who qualify as professional investors
under applicable Italian securities regulation.
------------------------
ACTIVCARD-REGISTERED TRADEMARK- IS A REGISTERED TRADEMARK OF THE COMPANY AND
ACTIVCARD ACTIVATED-TM-, ACTIVATED-TM-, ACTIVCOUPLER-TM-, ACTIVPACK-TM-,
ACTIVREADER-TM-, CORPORATE WALLET-TM-, DIGITAL IDENTITY-TM-, DIGITAL IDENTITY
FRAMEWORK-TM-, AND SMARTREADER-TM- ARE TRADEMARKS OF THE COMPANY. THIS
PROSPECTUS ALSO CONTAINS TRADEMARKS OF OTHER COMPANIES.
ii
<PAGE>
ENFORCEABILITY OF CIVIL LIABILITIES
We are a SOCIETE ANONYME, a corporation organized under the laws of France. A
substantial portion of our assets are located outside the United States and
certain experts named in this prospectus are residents of France. As a result,
it may not be possible for investors to effect service of process within the
United States upon our company or upon such persons with respect to matters
arising under the U.S. federal securities laws. It also may not be possible to
enforce against them in U.S. courts judgments predicated upon the civil
liability provisions of the U.S. federal securities laws. We have been advised
by Shearman & Sterling, Paris, our French counsel, that strict conditions apply
to, and therefore there is doubt as to whether French courts would apply, the
civil liability provisions of the U.S. federal securities laws in original
actions in French courts. We have also been advised that there is doubt as to
whether French courts would enforce a judgment of a U.S. court predicated solely
upon the civil liability provisions of the U.S. federal securities laws.
EXCHANGE RATES
We publish our financial statements in U.S. dollars. References to "dollars" or
"$" are to U.S. dollars and references to "francs" or "FF" are to French francs.
In 1998 and 1999, we recorded a majority of our revenue in U.S. dollars. Going
forward, we anticipate that an increasing proportion of our revenues will be
generated in U.S. dollars. Historically we recorded a significant portion of our
expenses in French francs and we expect that a significant portion of our
expenses will continue to be incurred in French francs. Fluctuations in the
value of the French franc and other currencies relative to the U.S. dollar have
caused and will continue to cause dollar-translated amounts to vary from one
period to another. Due to the constantly changing currency exposures and the
substantial volatility of currency exchange rates, we cannot predict the effect
of exchange rate fluctuations upon our future operating results.
On December 31, 1999, the Banque de France rate was FF6.53 per U.S. $1.00 (on
the basis of 1 Euro per U.S. $1.005). The table below sets forth, for the
periods indicated, the high, low, average and end of period rates expressed in
French francs per U.S. $1.00 issued by the Banque de France used by us in the
preparation of our consolidated financial statements. See Note 1.3 of the Notes
to our Consolidated Financial Statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
-----------------------------------------
AVERAGE END OF
YEAR ENDED DECEMBER 31, HIGH LOW RATE PERIOD
- --------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
1994......................................... 5.98 5.11 5.55 5.35
1995......................................... 5.39 4.78 5.00 4.90
1996......................................... 5.29 4.90 5.18 5.24
1997......................................... 6.35 5.19 5.84 5.99
1998......................................... 6.21 5.39 5.92 5.60
1999......................................... 6.53 5.61 6.03 6.53
</TABLE>
As of January 1999, the French franc has been fixed at a conversion rate of euro
1.00=FF6.55957. The following table sets forth, for the dates and periods
indicated, certain information regarding the Noon Buying Rate for the euro
expressed in euro per U.S. $1.00.
<TABLE>
<CAPTION>
-----------------------------------------
AVERAGE END OF
YEAR ENDED DECEMBER 31, HIGH LOW RATE PERIOD
- --------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
1999......................................... 1.1693 1.0045 1.0878 1.0045
2000 (January 4 through March 15)............ 1.0460 0.9676 1.0103 1.0314
</TABLE>
iii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE
FINANCIAL DATA AND THE NOTES THERETO, AND THE RISKS OF INVESTING IN OUR SHARES
DISCUSSED UNDER THE "RISK FACTORS" SECTION BEFORE MAKING AN INVESTMENT DECISION.
EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT
4,000,000 SHARES, IN THE FORM OF AMERICAN DEPOSITARY SHARES, WILL BE SOLD IN
THIS OFFERING AND THAT THE UNDERWRITERS HAVE NOT EXERCISED THEIR RIGHT TO
PURCHASE AN ADDITIONAL 600,000 SHARES FOR SALE TO THE PUBLIC.
IN THIS PROSPECTUS, UNLESS THE CONTEXT INDICATES OTHERWISE, THE TERMS
"ACTIVCARD," THE "COMPANY," "WE" OR "US" REFER TO ACTIVCARD S.A., A CORPORATION
ORGANIZED UNDER THE LAWS OF THE REPUBLIC OF FRANCE, TOGETHER WITH ITS
SUBSIDIARIES.
OVERVIEW
We provide solutions for authenticating and managing the digital identities of
employees, suppliers, partners and customers accessing e-business resources. Our
secure user identification solutions allow companies to control access to their
information networks at the level appropriate for each particular user and are
designed to provide the authentication necessary to prevent online fraud and
other computer related crimes. Our products and technologies are designed to
manage digital identities by addressing the administrative, security and
usability concerns inherent in network computing.
Our range of products includes end-user authentication products, back-end server
software for digital identity administration and software development kits. Our
principal products include:
- ACTIVCARD GOLD, a smart card-based authentication and credential
management package,
- ACTIVREADER, a multi-purpose, secure smart card reader,
- ACTIVCARD ONE AND ACTIVCARD PLUS, token-based authentication products, and
- ACTIVPACK, integrated back-end server and management solutions for
Microsoft, Novell and IBM network systems.
Our products manage static passwords, generate one-time use passwords for secure
log-in, remote and Internet access, and enable digital signatures.
Authentication, which proves the identity of users and systems on the network,
is a critical component in network security solutions. Both our end-user and
server products are designed to ensure that users are properly authenticated and
cannot repudiate their transactions while allowing network managers to securely
administer the multiple systems that comprise their networks. Our software
development kits allow other software vendors to integrate our end-user products
and server software into their network applications.
Through our strategic relationships with companies such as AXENT Technologies,
Hewlett-Packard, Lucent Technologies, Novell, Schlumberger, SCM Microsystems,
Sun Microsystems and Visa International, our digital identity framework has been
embedded in several leading systems and components. In addition, our digital
identity framework is fully compatible with products and technologies produced
by companies such as Baltimore Technologies, Entrust, Microsoft, Mondex
International (a division of MasterCard), SCM Microsystems, Sun Microsystems and
VeriSign.
We sell our products principally through distribution partners, such as original
equipment manufacturers (OEMs), value-added resellers (VARs), system integrators
and distributors. Historically, our principal customers have been European
banking and financial services companies. We also market our products to
companies in the telecommunications, healthcare, networking technologies and
manufacturing sectors. We believe that there are more than one million people
using our products for secure banking, web access and remote access to corporate
networks.
INDUSTRY
Individuals and corporations increasingly rely upon computer networks, including
the Internet, to communicate, access information and conduct commerce. The
number of Internet users worldwide is expected to grow from 142 million in 1998
to 399 million in 2002, with electronic commerce growing from $50 billion to
$774 billion over
1
<PAGE>
the same period. The recent and dramatic development of electronic commerce,
coupled with the proliferation of extranet and intranet applications and
network-connected devices, has substantially increased network complexity for
all businesses. The risks of network fraud and the challenges of maintaining
online confidentiality have increased correspondingly. Transaction security is a
fundamental concern for companies migrating more of their business to the
Internet. Network administrators and participants are increasingly turning to
smart cards as a means to provide secure network access without sacrificing
ease-of-use. It is estimated that 800,000 network access smart cards were
deployed worldwide in 1999, and by 2003 that number is projected to grow to 125
million.
THE ACTIVCARD SOLUTION
We employ a combination of patented authentication methods, smart card and token
technology and management tools to provide companies and individual users with
an administratively efficient, easy to use, cost-effective and secure framework
for managing digital identity. Our digital identity framework:
- ENABLES PERSONALIZED SERVICES FROM ANY NETWORK-CONNECTED DEVICE;
- PROVIDES A COMBINATION OF HIGH LEVEL SECURITY AND EASE-OF-USE;
- SUPPORTS MULTIPLE CREDENTIALS (E.G., DIGITAL CERTIFICATES, DYNAMIC AND
STATIC PASSWORDS); AND
- OFFERS A UNIQUE, MODULAR AND HIGHLY SCALABLE DESIGN.
Our digital identity framework ensures that users are properly authenticated
while allowing network managers to securely administer the diverse systems that
comprise their network environment. Our solutions also provide non-repudiation
of online transactions. For example, we provide the authentication technology
necessary to enable ATM transactions to occur over the Internet, downloading
electronic cash directly onto a card, through a variety of terminals, such as
PCs, televisions and mobile telephones. Our recently introduced ActivGold
product incorporates multi-application smart cards to provide a platform to
consolidate various independent credentials, such as a corporate picture ID,
building access, network login, online digital signature and credit card,
thereby enabling a personalized online experience. These digital credentials
collectively define the digital identity of a user or system.
OUR BUSINESS STRATEGY
Our objective is to become the leading supplier of products and technologies
that enable information technology managers, product manufacturers, system
integrators and network service providers to integrate managed digital identity
services quickly and efficiently into their applications. Our strategy to
achieve this objective includes the following key elements:
- BUILD UPON OUR EXISTING CUSTOMER BASE
- EXPAND OUR BASE OF STRATEGIC PARTNERS, OEMS AND DISTRIBUTORS
- CUSTOMIZE FLEXIBLE PRICING MODELS TO ADDRESS OUR CUSTOMERS NEEDS
- INCREASE SALES THROUGH OUR STRATEGIC PARTNERSHIPS
- DEVELOP KEY TECHNOLOGY COMPONENTS FOCUSED ON THE CREATION, DISTRIBUTION,
PROTECTION AND CONTROL OF MULTIPLE CREDENTIALS
- MAKE DIGITAL IDENTITY THE ESSENTIAL COMPONENT ENABLING NEXT GENERATION
INTERNET-BASED BUSINESS
RECENT DEVELOPMENTS
As a result of our continuing efforts to develop relationships with business
partners, Schlumberger Systems, Business Brain Showa-Ota Inc., Sun Microsystems,
Inc. and SCM Microsystems, Inc. have subscribed to a total of 990,675 of our
ordinary shares at a subscription price of $17.16 per share. The subscription
price was determined at a board of directors meeting held on December 16, 1999
and is based on the average closing price of our shares between November 25 and
December 8, 1999. The sales of these shares were approved by our stockholders on
February 9, 2000 and closed on February 16, 2000. We received net proceeds of
approximately $16.5 million from the sale of these shares.
2
<PAGE>
The terms of our $6.0 million aggregate principal amount of bonds issued in
October 1999 require us to call them for redemption upon consummation of the
subscriptions referred to above. Upon call for redemption, the holders may elect
to convert all or a portion of the bonds into shares, for an aggregate of
300,000 shares if all are converted. If none of these bonds are converted, we
would be required to use approximately $6.2 million of the proceeds of the sale
of the subscribed shares to redeem the bonds.
OUR ADDRESS
Our principal European office is located at 24-28, Avenue du General de Gaulle,
92156 Suresnes Cedex, France. Our principal U.S. office is located at 6531
Dumbarton Circle, Fremont, California 94555, our telephone number is (510)
574-0100 and our website is www.activcard.com. Information contained in our
website is not a part of this prospectus.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
SECURITIES WE ARE OFFERING................ 4,000,000 shares are being offered, in the form of ADSs,
to the public in the United States and to institutional
investors outside the United States.
ORDINARY SHARES TO BE OUTSTANDING
FOLLOWING THE OFFERING.................. 37,380,701 shares (including 990,675 shares issued
pursuant to the private placements that closed on
February 16, 2000 and assuming 300,000 shares to be
issued upon conversion of our $6.0 million non-
interest-bearing convertible bonds issued in
October 1999), excluding:
- 5,748,751 shares issuable upon exercise of
outstanding options, warrants and complementary
(share purchase) rights,
- 760,550 shares issuable upon conversion of our
convertible bonds issued in July and October 1997,
and
- 142,790 shares reserved for future issuance under
our stock option plans.
This information assumes no exercise of the
underwriter's over-allotment option.
AMERICAN DEPOSITARY SHARES................ Each ADS represents the right to receive one ordinary
share.
UNDERWRITERS' OVER-ALLOTMENT OPTION....... The underwriters have the option to purchase 600,000
additional shares, in the form of ADSs, from certain
selling shareholders solely to cover over-allotments.
USE OF PROCEEDS........................... We intend to use the net proceeds to fund anticipated
operating losses, working capital, acquisitions and
other general corporate purposes.
NASDAQ NATIONAL MARKET SYMBOL............. "ACTI"
EASDAQ SYMBOL............................. "ACTV"
PAYMENT AND SETTLEMENT.................... We expect that the ADSs will be ready for delivery
through the facilities of The Depository Trust Company,
Euroclear and Clearstream, Luxembourg on or about
March 21, 2000. The Underwriters may elect to take
delivery of a portion of the offering as ordinary
shares. We expect to use the facilities of SICOVAM to
facilitate transfers between ADSs and ordinary shares.
LOCK-UPS.................................. We, our executive officers and directors, and certain of
our shareholders, have agreed not to sell or agree to
sell, directly or indirectly, additional ADSs or shares
or securities convertible or exchangeable for shares for
a period of 150 days from the date hereof, except with
the prior written consent of J.P. Morgan Securities Inc.
See "Underwriting" for a more complete description of
these arrangements.
</TABLE>
4
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
You should read the following information for each of the three years in the
period ended December 31, 1999 together with our consolidated financial
statements, including their notes, that are contained elsewhere in this
prospectus. These financial statements and their notes were prepared in
accordance with US GAAP and audited by Ernst & Young Audit, independent
auditors.
<TABLE>
<CAPTION>
------------------------------------------
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
IN THOUSANDS, EXCEPT PER SHARE DATA ------------ ------------ ------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenue:
Products............................................ $ 6,210 $ 7,624 $ 9,976
Engineering services................................ 1,357 642 286
------------ ------------ ------------
Total revenues........................................ $ 7,567 $ 8,266 $ 10,262
============ ============ ============
Gross profit.......................................... $ 2,741 $ 3,043 $ 4,925
Income (loss) from operations......................... (10,067) (10,391) (15,740)
Interest and other financial income (expenses), net... (181) (360) (187)
Income tax benefit.................................... 714 452 15
Minority interest..................................... 32 1 -
Net loss.............................................. (9,502) (10,298) (15,912)
Basic and diluted net loss per share.................. $ (0.61) $ (0.55) $ (0.55)
============ ============ ============
Number of shares used in computing basic and diluted
net loss per share.................................. 15,460,178 18,618,463 29,114,715
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------
DECEMBER 31,
-----------------------------------------------
1999
1997 1998 1999 AS ADJUSTED(1)
IN THOUSANDS -------- -------- -------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 5,291 $ 4,150 $ 8,790 $307,767
Total current assets.................................. 10,356 9,302 14,398 312,746
Total assets.......................................... 13,051 12,375 16,434 314,782
Total current liabilities............................. 5,263 5,902 5,953 5,324
Total long-term liabilities........................... 2,749 1,448 230 230
Convertible loan...................................... 8,030 8,030 9,259 3,500
Shareholders' equity (deficit)........................ (2,991) (3,005) 992 305,728
</TABLE>
- ------------------------
(1) Adjusted to reflect: (i) consummation of this offering and the receipt of
net proceeds of $282,580,000 based on a public offering price of $76.50 per ADS;
(ii) consummation of the sale of 990,675 shares in February 2000 to four
strategic investors for net proceeds of approximately $16.5 million; and
(iii) the conversion of all of our $6.0 million non-interest bearing convertible
bonds issued in October 1999 into 300,000 shares. These bonds are required to be
redeemed by us with the proceeds of our private placements to strategic
investors which closed on February 16, 2000 unless, upon notice of redemption,
holders elect to convert all or a portion of such bonds into shares. If none of
the holders of these bonds elect to convert the bonds to shares, our cash and
cash equivalents, total current assets, total assets and shareholders' equity
would be reduced by $6.2 million. See "Description of Share Capital--Convertible
Bonds."
5
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER
INFORMATION IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE RISKS
DESCRIBED BELOW BEFORE DECIDING TO INVEST IN OUR ADSS. ANY OF THE RISK FACTORS
COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION OR
OPERATING RESULTS. IN THAT CASE, THE TRADING PRICE OF OUR ADSS COULD DECLINE,
AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NEVER ACHIEVE
PROFITABILITY
We have not achieved profitability and expect to continue to incur operating
losses for the foreseeable future. We incurred net losses of $15.9 million in
1999, $10.3 million in 1998 and $9.5 million in 1997. We expect to incur losses
for the year ended December 31, 2000. As of December 31, 1999, our accumulated
losses were $67.6 million, which represent our losses since we began our
operations. Even with the use of the proceeds of this offering, we may not
become profitable or able to significantly increase our revenue. We have
recently increased our operating expenses and capital expenditures and expect
further increases in operating expenses to facilitate the commercialization of
our technology over the next twelve months. Although our revenues have grown in
recent quarters, we will need to significantly increase revenues to achieve
profitability. Even if we do achieve profitability, we may be unable to sustain
profitability on a quarterly or annual basis in the future. It is possible that
our revenues will grow more slowly than we anticipate or that operating expenses
will exceed our expectations.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS AND TECHNOLOGY
MAY BECOME OBSOLETE
If we do not continually modify and adapt our products and improve the
performance features and reliability of our products in response to advances and
changes in technology and standards, our business could be adversely affected,
and our products and technology could become obsolete or less marketable. The
market for network security products is characterized by rapid technological
advances, changes in customer requirements, evolving industry standards and
frequent new product introductions and enhancements. Moreover, if new Internet,
networking or telecommunications technologies or standards become widely adopted
or if other technological changes occur, we may need to adapt our products. Our
future operating results will depend upon our ability on a timely basis to
enhance our current products and to develop and introduce new products that
address the increasingly sophisticated needs of the marketplace and that keep
pace with technological developments, new competitive product offerings and
emerging industry standards. The process of developing our products and services
is extremely complex and requires significant continuing development efforts.
OUR OPERATING RESULTS ARE UNCERTAIN AND MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD
NEGATIVELY AFFECT THE VALUE OF YOUR INVESTMENT
Our operating results are difficult to forecast and may continue to fluctuate.
As a result, period-to-period comparisons of our operating results are not
meaningful. Factors that could influence our operating results include:
- significant advances in techniques for attacking cryptographic systems;
- publicity regarding the successful circumvention of security features of
products similar to ours;
- government regulation limiting the use, scope and strength of the
cryptography used in our products;
- the size, timing and shipment of individual orders;
- market acceptance of our new products;
- customer order deferrals in anticipation of new products or changes in
their deployment plans;
- lengthy sales cycle of our products;
- foreign currency exchange rates; and
- changes in our distribution channels.
6
<PAGE>
Our expense levels are based, in part, on our expectations of future revenue,
and if such expectations are not met, our operating results will be adversely
affected.
THERE ARE SEASONAL FLUCTUATIONS IN OUR SALES, WHICH COULD AFFECT THE VALUE OF
YOUR INVESTMENT
We experience significant seasonality in our sales. We believe that revenue will
tend to be higher in the last quarter of each calendar year due to the budget
cycles of our customers and the tendency of certain of these customers to
implement changes in network systems prior to the end of the calendar year.
Additionally, we believe that revenues are also higher in the second quarter of
each year due to the greater number of purchasing decisions being made toward
the end of such period, which is immediately prior to the start of the summer
vacation season in Europe. As a result of these factors, we expect that revenue
will tend to be lower in the first quarter of each calendar year compared to the
previous quarter, and to be lower in the summer months, particularly in Europe,
when businesses tend to defer purchase decisions. Because our operating expenses
are fixed, a small variation in the timing of recognition of revenue can cause
significant variations in operating results from quarter to quarter.
WE DEPEND ON THE SALES OF OUR CURRENT TECHNOLOGY AND RELATED PRODUCTS AND DO NOT
EXPECT TO MATERIALLY DIVERSIFY OUR BUSINESS IN THE FORESEEABLE FUTURE
Substantially all of our revenue is derived from the sale of our user
identification technology and related products. We anticipate that substantially
all of the growth in our revenue, if any, will also be derived from these
sources. If for any reason our sales of this technology and these products are
impeded, and we have not diversified our product offerings, our business and
results of operations could be harmed.
WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUE FROM A SMALL NUMBER OF CUSTOMERS
AND, THEREFORE, THE LOSS OF EVEN ONE OF THESE CUSTOMERS COULD SIGNIFICANTLY AND
NEGATIVELY IMPACT OUR OPERATING RESULTS
We depend on a limited number of customers for a substantial portion of our
revenue and many of our contracts with our significant customers are short-term.
If any of these customers did not renew their contract upon expiration, or if
there was a substantial reduction in sales to any of our significant customers,
it would adversely affect our business and operating results, unless we were
able to replace the revenue we received from these customers. For the year ended
December 31, 1998, we derived approximately 46% of our revenue from sales to
Protect Data Sverige AB and 14% of our revenue from sales to Network Security
AS. Protect Data and Network Security are our two largest product distributors,
who sell our products to banks and financial institutions principally in
Scandinavia. For the year ended December 31, 1999, we derived approximately 40%
of our revenue from sales to Protect Data and 10% of our revenue from sales to
Network Security. Two distributor accounts, Sparbanken and Kreditkassen, final
buyers of our products, constituted 39% and 11%, respectively, of our total
revenues for the year ended December 31, 1998, and 36% and 5%, respectively, of
our total revenues for the year ended December 31, 1999. Additionally, sales to
Verifone represented 9% of revenue for the year ended December 31, 1999. We
expect to continue to depend upon a small number of large customers for a
substantial portion of our revenue.
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 sale 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. Because our operating expenses are based on anticipated revenue levels,
a small fluctuation in the timing of sales can cause our operating results to
vary significantly from period to period. If revenue falls significantly below
anticipated levels, our business would be seriously harmed.
A typical sales cycle is often six to nine months in the case of the enterprise
customer, and more than twelve months in the case of the service operator
customer. 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;
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- customers' internal budgeting process; and
- internal procedures customers may require for the approval of large
purchases.
Furthermore, the implementation process is subject to delays resulting from
administrative concerns associated with incorporating new technologies into
existing networks, deployment of a new network system and data migration to the
new system. Full deployment of our technology and products for such networks,
servers or other host systems is usually scheduled to occur over a two- to
three-year period and sales of tokens and related products would also occur over
this period.
OUR INDUSTRY IS YOUNG AND IN A CONSTANT STATE OF FLUX WHICH MAY RESULT IN THE
DEVELOPMENT OF DIFFERENT SECURITY PLATFORMS AND INDUSTRY STANDARDS THAT ARE NOT
COMPATIBLE WITH OUR CURRENT PRODUCTS OR TECHNOLOGY
We believe that smart cards are the ideal platform for network and electronic
commerce security and our business model is premised on the smart card becoming
the secure access platform standard of the future. However, should platforms
other than the smart card emerge as a preferred platform, our current focus
could put us at a disadvantage to competitors who have been focusing on
alternative platforms and our future growth and operating results could suffer.
In addition, we operate in markets for which industry-wide standards have not
yet emerged. While we are actively engaged in discussing with our industry peers
what those standards should be, it is possible that any standards eventually
adopted could prove disadvantageous to or incompatible with our business model
and product lines.
WE ENGAGE IN COMPETITIVE BIDDING PRACTICE FOR SOME OF OUR CONTRACTS, WHICH IS
EXPENSIVE AND COULD RESULT IN OUR COSTS EXCEEDING OUR REVENUES ON SOME CONTRACTS
We generate a portion of our revenue from contracts and purchase orders awarded
through a competitive bidding process. Our bids may not always be accepted or,
if accepted, awarded contracts may not generate enough revenue to be profitable.
The competitive bidding process is typically lengthy and often results in the
expenditure of financial and other resources in connection with bids that are
not accepted. Additionally, inherent in the competitive bidding process is the
risk that our costs may exceed projected costs upon which a submitted bid or
contract price is based.
OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISKS ASSOCIATED WITH OPERATING IN
FOREIGN MARKETS, INCLUDING FLUCTUATIONS IN CURRENCY EXCHANGE RATES, WHICH COULD
ADVERSELY AFFECT OUR OPERATIONS AND FINANCIAL CONDITION
International sales are a substantial portion of our business. A severe economic
decline in one of our major foreign markets could make it difficult for
customers from those countries to pay us on a timely basis. Any such failure to
pay, or deferral of payment, could adversely affect our operations and financial
condition. In 1998 and in 1999, 90% and 82%, respectively, of our total sales
came from markets outside the United States.
We face a number of risks inherent in doing business in international markets,
including among others:
- unexpected changes in regulatory requirements;
- potentially adverse tax consequences;
- export controls relating to encryption technology;
- tariffs and other trade barriers;
- difficulties in staffing and managing foreign operations;
- changing economic or political conditions;
- exposures to different legal standards;
- burdens of complying with a variety of foreign laws;
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- fluctuations in currency exchange rates; and
- seasonal reductions in business activity during the summer months in
Europe and other parts of the world.
We contract for the manufacture of our ActivCard tokens with RJP International
Limited (RJP), a Hong Kong-based manufacturer whose manufacturing facilities are
located in a "special economic zone" in Guandong Province in the People's
Republic of China (PRC) and with a second-source supplier in Singapore. With
respect to manufacturing in the PRC, the Chinese government has exercised, and
continues to exercise, substantial control over many sectors of the Chinese
economy. Consequently, changes in policy by the Chinese government could
adversely affect our ability to source our ActivCard tokens in China. The
preferential tax treatment granted to enterprises located in "special economic
zones" could also be withdrawn, which could adversely affect the cost of
manufacturing in China. In addition, changes in the political status and
economic policies of Hong Kong, in particular, changes that may result from the
recent return of Hong Kong from the United Kingdom to China, could adversely
affect our ability to source our ActivCard tokens from RJP.
While we prepare our financial statements in U.S. dollars, we have historically
recorded the substantial portion of our expenses in French francs. We expect
that a significant portion of our expenses will continue to be incurred in
French francs and, to a lesser extent, in other foreign currencies. Fluctuations
in the value of the French franc and other currencies relative to the U.S.
dollar have caused and will continue to cause dollar-translated amounts to vary
from one period to another. Due to the constantly changing currency exposures
and the substantial volatility of currency exchange rates, we cannot predict the
effect of exchange rate fluctuations upon future operating results.
THE LOSS OF THE SERVICES OF OUR EXECUTIVE OFFICERS OR KEY PERSONNEL WOULD LIKELY
CAUSE OUR BUSINESS TO SUFFER
Our future success depends largely on the efforts and abilities of our executive
officers and senior management, particularly Jean-Gerard Galvez, our Chairman,
President and Chief Executive Officer, Yves Audebert, our Founder, Vice Chairman
and Chief Technology Officer and other key employees, including our technical
and sales personnel. The loss of the services of any of these persons could harm
our business. We have employment agreements with only a few of our key personnel
but do not maintain any key-person insurance for any of our employees. In
addition, we believe that our future success will depend in large part upon our
ability to attract and retain additional key personnel. A failure to attract
additional personnel where necessary could significantly harm our business or
financial performance.
IF WE ARE UNABLE TO HIRE AND RETAIN QUALIFIED TECHNICAL PERSONNEL OUR BUSINESS
WILL SUFFER
Our future success depends in part on the availability of qualified technical
personnel, including personnel trained in software and hardware applications
within specialized fields. As a result, we may not be able to successfully
attract or retain skilled technical employees, which may impede our ability to
develop, install, implement and otherwise service our software and hardware
systems and to efficiently conduct our operations. The information technology
and network security industries are characterized by a high level of employee
mobility, and the market for such individuals in certain regions is extremely
competitive. This competition means there are fewer highly qualified employees
available to hire, the costs of hiring and retaining such individuals are high
and such personnel may not remain with our company once hired. Furthermore,
there is increasing pressure to provide technical employees with stock options
and other equity interests in our company, which may dilute our earnings per
share.
WE MAY HAVE DIFFICULTIES MANAGING OUR FUTURE GROWTH
We plan to continue to grow, particularly in the United States, and to continue
to increase the number of our sales, support, service, marketing and product
development personnel significantly. This planned expansion, if achieved, would
place a strain on our resources and increase operating costs. Our ability to
manage our staff and growth effectively will require us to continue to improve
our operations, financial and management controls, reporting systems and
procedures; to train, motivate and manage our employees; and, as required, to
install new management information systems. There can be no assurance that
existing management or any new members of management will
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be able to augment or improve existing systems and controls or implement new
systems and controls in response to anticipated future growth. Furthermore, in
1995, we commenced operations in North America, which included the establishment
of a U.S. management team. As a result, we have a limited operating history
under our current U.S. management. If we are successful in achieving growth
plans, such growth is likely to place a significant burden on our operating and
financial systems, resulting in increased responsibility for senior management
and other personnel within our company.
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 has been to enter into strategic alliances and
other cooperative arrangements with other companies in our industry. We
currently are involved in cooperative efforts with respect to incorporation of
our products into products of others, research and development efforts,
marketing efforts 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. For example,
Schlumberger distributes software for logical security applications using smart
cards in addition to the smart card products that they license from us. VeriFone
offers a family of smart card readers in addition to the smart card readers that
they purchase from us. This competition may adversely affect our relationships
with our strategic partners, which could adversely affect our business.
WE MAY BE REQUIRED TO TAKE ACTIONS THAT ARE CONTRARY TO OUR BUSINESS OBJECTIVES
TO AVOID BEING DEEMED AN INVESTMENT COMPANY AS DEFINED UNDER THE INVESTMENT
COMPANY ACT OF 1940
Generally, a company is an investment company and must register under the
Investment Company Act and comply with its regulations if the value of the
company's investment securities exceeds 40% of the value of the company's total
assets or if the company primarily engages, or holds itself out as being
primarily engaged, in the business of investing, owning or holding securities.
Our investment securities may exceed 40% of the value of our total assets.
The Investment Company Act provides that a company is not an investment company
and is not required to register under the Investment Company Act if the company
is primarily engaged, directly or through a wholly-owned subsidiary or
subsidiaries, in a business or businesses other than that of investing,
reinvesting, owning, holding or trading in securities. We believe that we are
engaged primarily and directly in the business of providing solutions for
authenticating and managing the digital identities of employees, suppliers,
partners and customers accessing e-business resources, and that we are not an
investment company as that term is defined under the Investment Company Act of
1940.
Because of the consequences that would result if the U.S. Securities and
Exchange Commission or a court were to determine that we are an investment
company, we are currently relying on a one-year temporary exemption from the
registration requirements of the Investment Company Act. If necessary, before
the end of the one-year period, we may seek an order from the Securities and
Exchange Commission declaring that we are not an investment company.
If we were unable to obtain such an order and the one-year temporary exemption
were no longer available, we may be required to take actions to avoid the
requirement to register as an investment company. For example, we may need to
acquire additional income or loss generating assets that we might not otherwise
have acquired, restrict our investment in securities pending use in our
operations to items such as cash and U.S. government securities and/or be forced
to forego opportunities to acquire interests in companies that would be
important to our strategy. In addition, we may need to sell some assets which
are considered to be investment securities, including certain short-term
securities and interests in other companies.
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The Investment Company Act contains substantive regulations with respect to
investment companies including restrictions on their capital structure,
operations, transactions with affiliates, and other matters which would be
incompatible with our operations. If we were to be deemed an investment company,
we would, among other things, effectively be precluded from making any public
offering in the United States until such time as we were no longer an investment
company. We could also be subject to administrative or legal proceedings, and,
among other things, contracts to which we are a party might be rendered
unenforceable or subject to recission.
RISKS RELATED TO OUR INDUSTRY
IF THE USE OF THE INTERNET AND OTHER COMMUNICATIONS NETWORKS DOES NOT CONTINUE
TO GROW, DEMAND FOR OUR PRODUCTS MAY NOT INCREASE
Successful implementation of our strategy depends in large part on the continued
growth in the use of the Internet and other communications networks based on
Internet protocols. If the use of these networks does not continue to grow, or
if it grows more slowly than we expect, the demand for our products may not
increase. Because electronic commerce and communications over these networks is
evolving, we cannot predict the size of the market and its sustainable growth
rate. To date, many businesses and consumers have been deterred from using these
networks for a number of reasons, including, but not limited to:
- potentially inadequate development of network infrastructure;
- security concerns including the potential for user impersonation and fraud
or theft of stored data and information communicated over networks;
- inconsistent quality of service;
- lack of availability of cost-effective, high-speed service;
- limited numbers of local access points for corporate users;
- inability to integrate business applications on the networks;
- the need to operate with multiple and frequently incompatible products;
- limitations on networks due to increased users and lack of sufficient
infrastructure to support increased levels of use;
- increased governmental regulation and delays in development or adoption of
new standards and protocols to handle increased levels of activity; and
- lack of tools to simplify access to and use of networks.
The adoption of the Internet and other communication networks based on Internet
protocols will require a broad acceptance of new methods of conducting business
and exchanging information. Companies and government agencies that already have
invested substantial resources in other methods of conducting business may be
reluctant to adopt new methods. Also, persons with established patterns of
purchasing goods and services and effecting payments may be reluctant to change.
WE FACE INTENSE COMPETITION FROM OTHER NETWORK SECURITY COMPANIES AND MAY BE
UNABLE TO COMPETE SUCCESSFULLY IN AN EVOLVING MARKET
Our industry is highly competitive and evolving, and we may be unable to compete
successfully in the future, which may harm our business. We compete in numerous
markets, including
- data security;
- access control;
- smart card-based security applications and token authentication;
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- electronic commerce applications; and
- systems integration.
These markets are characterized by rapidly changing technology and industry
standards, evolving user needs and the frequent introduction of new products. We
believe that the principal factors affecting competition in our markets include
product functionality, performance, flexibility and features of products, use of
open standards technology, quality of service and support, reputation and price.
Based on our current plans, we believe that the net proceeds from the offering
and cash flows generated by operations will be adequate to satisfy our research
and development requirements at least through 2000. However, if our research and
development plans change due to unforseen circumstances, we may need additional
funding before 2001 to maintain our focus on research and development which
could adversely affect the competitiveness of our products.
Many of our competitors are more established, have greater name recognition and
have substantially greater financial, technical and marketing resources than we
have. In addition, there are several smaller and start-up companies with which
we compete from time to time. We also expect that competition will increase as a
result of consolidation in the information technology and network security
industries. Furthermore, our current and potential competitors have established
or may in the future establish collaborative relationships among themselves or
with third parties, including third parties with whom we have strategic
relationships, to increase the functionalities of their products. Accordingly,
it is possible that new competitors or alliances may emerge and rapidly acquire
significant market share, which could materially and adversely affect our
financial condition and results of operations.
GOVERNMENT REGULATION OF TECHNOLOGY EXPORTS COULD LIMIT OUR ABILITY TO MARKET
OUR PRODUCTS ABROAD AND TO COMPETE EFFECTIVELY
- Our international sales and operations may be subject to the following
risks:
- imposition of government controls;
- new or changed export license requirements;
- restrictions on the export of critical technology;
- import or trade restrictions; and
- changes in tariffs.
While we believe our technology and products are designed to meet the regulatory
standards of many foreign markets, any inability to obtain foreign regulatory
approvals on a timely basis could have a material adverse effect on our
financial condition or results of operations. Certain of our products are
subject to export controls under U.S. and French laws, and we believe that we
have obtained all necessary export approvals when required. However, 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. Our failure to
obtain required approvals under these regulations could adversely affect our
ability to make international sales. For example, because of the U.S.
governmental controls on the exportation of encryption technology, we have been
unable to export some of our products with the most robust information security
encryption technology and will be required to provide for recovery of encryption
keys for access by governmental authorities in order to export products
containing those robust encryption algorithms. As a result, foreign competitors
facing less stringent controls on their products may be able to compete more
effectively than us in the global information security market. These factors may
have a material adverse effect on our financial condition or results of
operations.
Due to the increasing popularity of the Internet and Internet protocol-based
communication networks, it is possible that laws and regulations may be enacted
covering issues such as user privacy, pricing, content and quality of products
and services. The increased attention focused upon these issues as a result of
the adoption of additional laws
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and regulations may reduce the rate of growth of these networks, which in turn
could result in decreased demand for our technology.
RISKS RELATING TO OUR PRODUCTS
WE DEPEND UPON A LIMITED NUMBER OF MANUFACTURERS AND SUPPLIERS, WHICH MAKES US
VULNERABLE IF WE LOSE ACCESS TO THEM
We depend upon a small number of companies for the manufacture of our products,
and the loss of any one of them could materially harm our business. We contract
with RJP International, Ltd., a Hong Kong company, and with Omni Electronics Pte
Ltd., located in Singapore, for the manufacture and assembly of our ActivCard
tokens. The assembly of certain components used in our products is performed in
France by Selem. The assembly of the ActivCard Gold is performed in the United
States and Netherlands by Metatec. These are currently our sole sources for the
manufacture and assembly of these products. A reduction or interruption in
supply and the failure to identify and establish relationships with additional
manufacturers and assemblers would adversely affect our results of operations
and could impact customer relations.
Although most of the parts and components used in the manufacture of our
products are readily available from a number of suppliers, certain components
are currently available only from a single source or from limited sources. Our
inability to obtain sufficient source components, or to obtain or develop
alternative sources at competitive prices and quality, could result in delays in
product shipments or increase our material costs, either of which would
adversely affect our financial condition or results of operations. In
particular, the microcontroller chips contained in our older ActivCard Plus
tokens are currently purchased from a sole source supplier, Samsung
Semiconductor Europe GmbH, which produces the chips in South Korea. We cannot
assure you Samsung will be able to furnish enough chips to meet our demands or
that we will be able to continue to purchase chips of acceptable quality from
Samsung at commercially acceptable prices. We believe that, if Samsung were to
discontinue the manufacture of the chips or to become unwilling or unable to
meet our future requirements, we would be able to procure chips of acceptable
quality from another supplier, and our contractual relationship with Samsung
would not restrict our ability to do so. We could also redesign our ActivCard
Plus tokens for a different microprocessor. However, delay or failure to
identify additional suppliers at commercially acceptable prices or redesign the
circuits could adversely affect our results of operations.
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; and
- increased government regulation limiting the use, scope or strength of
cryptography.
WE COULD FACE LIABILITY FOR DEFECTS IN OUR PRODUCTS
Products as complex as those we offer may contain undetected errors or "bugs" or
result in failures when first introduced or when new versions are released. The
occurrence of these errors could result in adverse publicity, delay in product
introduction, diversion of resources to remedy defects, loss of or a delay in
market acceptance or claims by customers against our company, or could cause us
to incur additional costs, any of which could adversely affect our
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business. Despite our product testing efforts and testing by current and
potential customers, it is possible that errors will be found in products or
enhancements after commencement of commercial shipments. We do not maintain
insurance to guard against losses caused by product defects.
WE COULD FACE POTENTIAL LIABILITY FOR ACTUAL OR PERCEIVED FAILURE OF OUR
PRODUCTS AND TECHNOLOGY AND OTHER RISKS ASSOCIATED WITH THE DELIVERY OF PROJECTS
TO OUR CUSTOMERS
Our network security products are used to prevent unauthorized access to and
attacks on critical enterprise information. Because our customers rely on our
products for critical security applications, we may be exposed to potential
liability claims for damage caused to an enterprise as a result of an actual or
perceived failure of our products. An actual or perceived breach of enterprise
network or data security systems of one of our customers, regardless of whether
the breach is attributable to our products or solutions, could adversely affect
the market's perception of our company, products and solutions and therefore our
business. Furthermore, the nature of many of our professional services exposes
us to a variety of risks. Many of our professional service engagements involve
projects that are critical to the operations of our customers' businesses. Our
failure or inability to meet a customer's expectations in the performance of our
services or products, or to do so in the time frame required by the customer,
regardless of our responsibility for the failure, could:
- result in a claim for substantial damages against us by the customers;
- discourage customers from engaging us for such services; and
- damage our business reputation.
In addition, as a professional service provider, a portion of our business
involves employing people and placing them in the workplace of other businesses.
Therefore, we are also exposed to liability with respect to actions taken by our
employees while on assignment, such as damages caused by employee errors and
omissions, misuse of customer proprietary information, misappropriation of
funds, discrimination and harassment, theft of customer property, other criminal
activity or torts and other claims.
We currently carry general liability insurance, errors and omissions insurance
and insurance to guard against losses caused by employee dishonesty. We believe
that this insurance is comparable to other similar companies in our industry.
However, that insurance may not continue to be available to us on reasonable
terms or in sufficient amounts to cover one or more large claims, or the insurer
may disclaim coverage as to any future claim. We do not maintain insurance
coverage for employee errors or security breaches, nor do we maintain specific
insurance coverage for any interruptions in our business operations. The
successful assertion of one or more large claims against us that exceed
available insurance coverage, or changes in our insurance policies, including
premium increases or the imposition of large deductibles or co-insurance
requirements, could adversely affect our business.
OUR OPERATIONS MAY SUFFER IF WE ARE UNABLE TO PROTECT THE INTELLECTUAL AND
PROPRIETARY RIGHTS NECESSARY TO PRODUCE OUR PRODUCTS
We depend substantially on our proprietary information and technologies. We rely
on a combination of trademark, patent, copyright and trade secret laws and
license agreements to establish and protect our rights in software products and
other proprietary technology. Although we believe that our intellectual property
is not susceptible to compromise during the manufacturing process because our
software is embedded, through a masking process, in the microcontroller before
delivery to the manufacturer occurs and is not made independently available to
the manufacturer, we do manufacture and sell products in countries that offer
less protection for intellectual property than the United States or France. We
enter into confidentiality or license agreements with our employees and
distributors, as well as with our customers and potential customers seeking
proprietary information, and limit access to and distribution of our software,
documentation and other proprietary information. We cannot assure that the steps
taken by us in this regard will be adequate to deter misappropriation or
independent third-party development of our technology. In particular, it may be
possible for unauthorized parties to copy certain portions of our products or
obtain and use information that we regard as proprietary. Any inability to
protect our proprietary technologies could adversely affect our business.
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We have filed and been granted nine patents in the United States, which expire
at various dates ranging from 2008 to 2011. In addition to the patents granted
in the United States, we have been granted patents in Europe, Australia, Canada,
Mexico and Taiwan. In general, patent rights are of similar duration
(approximately 20 years) in all countries where patents have been issued. Upon
expiration of such patents, competitors may develop and sell products based on
technologies similar or equivalent to those currently covered by our patents.
The nature of the process for obtaining patents and the extent of protection
provided by patent laws varies from country to country. We have filed a number
of patent applications which are presently pending. We cannot assure you that
patents will be issued with respect to pending or future patent applications, or
that our issued patents will not be challenged, invalidated or circumvented, or
that the patents that have been issued to us will prevent the development of
competitive products. In addition, we cannot always be certain that we were the
first creator of inventions covered by pending patent applications or the first
to file patent applications on certain inventions.
WE MAY FACE CLAIMS OF INFRINGEMENT ON PROPRIETARY RIGHTS OF OTHERS, WHICH COULD
SUBJECT US TO COSTLY LITIGATION AND THE POSSIBLE RESTRICTION ON THE USE OF SUCH
PROPRIETARY RIGHTS
There is a risk that our products infringe on the proprietary rights of third
parties. While we do not believe that our products infringe on proprietary
rights of third parties, infringement or invalidity claims may nevertheless be
asserted or prosecuted against us and our products may be found to have
infringed the rights of third parties. Such claims are costly to defend and
could subject us to substantial litigation costs. If any claims or actions are
asserted against us, we may be required to modify our products or may be forced
to obtain a license for such intellectual property rights in a timely manner. We
may not be able to modify our products or obtain a license on commercially
reasonable terms, or at all. Our failure to do so could adversely affect our
business. See "Business--Intellectual Property."
WE MAY FACE SYSTEM FAILURES AND OTHER COSTS RESULTING FROM YEAR 2000 RISKS
Although we have not experienced Y2K problems with respect to any of our
products, it is still possible that, even after January 1, 2000, Y2K-related
issues may cause problems or disruptions. While we believe that all of our
systems are Y2K compliant, we cannot assure you that we will not discover a
problem during the year 2000 and still experience unanticipated material costs
due to undetected errors or defects in the technology used on our systems. Also,
failure of other systems used by our customers may adversely affect the
performance of our products, which may in turn adversely affect our business.
Should any such problem arise, it is possible that customers or third parties
might seek indemnification or damages from us as a result of Y2K issue-related
errors caused by or not prevented by our products or services. We cannot predict
the extent to which we might be liable for such costs but it is still
conceivable, in general, that Y2K errors could result in substantial judgments
against providers of information technology such as our company.
RISKS RELATING TO THIS OFFERING
IT IS POSSIBLE THAT THE PRICE OF OUR SECURITIES WILL BE VOLATILE, WHICH MAY
EXPOSE US TO CLAIMS BY OUR SHAREHOLDERS
In general, the market prices of equity securities of high technology companies
are often highly volatile and subject to movements in price that may be
unrelated to the operating performance of the particular company. The trading
price of our ADSs and our shares may be highly volatile as a result of factors
specific to our company or applicable to the market and industry in general,
including the following:
- variations in our annual or quarterly financial results or those of our
competitors;
- changes by financial research analysts in their recommendations or
estimates of our earnings;
- conditions in the economy in general or in the information technology
service sector in particular;
- announcements of technological innovations or new products or services by
us or our competitors; and
15
<PAGE>
- unfavorable publicity or changes in applicable laws and regulations (or
judicial or administrative interpretations thereof) affecting us or the
information technology service sectors.
In addition, the stock market has recently been subject to extreme price and
volume fluctuations. This volatility has had a significant effect on the market
prices of securities issued by many companies for reasons unrelated to the
operating performance of these companies. In the past, following periods of
volatility in the market price of a company's securities, some companies have
been sued by their stockholders. If we were sued, it could result in substantial
costs and a diversion of management's attention and resources, which could
adversely affect our business. Since September 1, 1999, the closing price of our
shares on Easdaq has increased from $4.50 to $79.50 on March 15, 2000, near its
all time high of $94.75 during the same period. Traditionally, shares traded
exclusively on Easdaq are less liquid than those traded on recognized North
American stock exchanges. Consequently, our Easdaq trading history cannot be
considered to be representative of the future performance of the price of our
ADSs on Nasdaq.
THIS OFFERING WILL RESULT IN AN IMMEDIATE AND SUBSTANTIAL DILUTION OF OUR SHARES
This offering involves an immediate and substantial dilution of $68.32 per share
(89%) between the adjusted net tangible book value per share of our shares after
this offering and the public offering price based on a price of $76.50 per
share. In addition, should a significant percentage of our convertible bond
holders convert their bonds into ordinary shares in lieu of redeeming them, our
current shareholders will suffer further dilution of their equity interests in
our company. See "Use of Proceeds" and "Dilution."
EXISTING SHAREHOLDERS WILL BE ABLE TO EXERCISE CONTROL OF OUR COMPANY AND MAY
MAKE DECISIONS THAT ARE NOT IN THE BEST INTERESTS OF ALL SHAREHOLDERS
Insider control of a large amount of our shares could have an adverse effect on
the market price of our ADSs. At the completion of this offering,
Messrs. Galvez and Audebert will beneficially own or control 8.7% of our shares,
and our executive officers and directors, including Messrs. Galvez and Audebert,
will beneficially own or control 12.1% of our shares. Although they are under no
obligation to do so, if our officers, directors and their affiliates were to
vote together they would have the ability to control the election of our board
of directors and the outcome of corporate actions requiring shareholder
approval, including mergers and other changes of corporate control, going
private transactions and other extraordinary transactions. Additionally entities
controlled by Singapore Technologies Pte. Ltd. will beneficially own or control
14.0% of our shares upon completion of the offering. This concentration of
ownership may have the effect of delaying or preventing a change of control of
ActivCard, even if this change of control benefits our shareholders generally.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 37,380,701 ordinary shares
(37,473,701 ordinary shares if the underwriters' over-allotment option is
exercised in full) issued and outstanding (including the issuance of 990,675
shares in the private placements which closed on February 16, 2000 and the
issuance of 300,000 shares upon the conversion of our October 1999 bonds). Of
these shares, 32,963,516 (33,056,516 if the underwriters' over-allotment option
is exercised in full) will be freely tradable in the public market, including
the 300,000 shares to be issued upon conversion of our October 1999 bonds,
without restrictions or further registration under the Securities Act, unless
the shares are held by "affiliates," as that term is defined in
Rule 144(a) under the Securities Act. Shares held by affiliates will be subject
to the resale limitations of Rule 144. The remaining 4,417,185 shares
outstanding will be "restricted securities" under the Securities Act and may not
be sold in the absence of registration under the Securities Act or an exemption
therefrom, including pursuant to Rule 144 or an offshore transaction pursuant to
Regulation S. In addition, at December 31, 1999, (i) 3,491,420 shares were
reserved for issuance upon exercise of outstanding stock options pursuant to our
equity incentive plan at prices ranging from $1.67 to $19.75 per share,
(ii) 1,495,894 shares were reserved for issuance upon exercise of outstanding
warrants at exercise prices ranging from $3.80 to $8.93 per share,
(iii) 760,550 shares were reserved for issuance upon conversion of our
convertible notes at a price of $4.60 per share, (iv) 761,437 shares were
reserved for issuance upon exercise of share purchase rights at prices
16
<PAGE>
ranging from $1.25 to $3.91 per share and (v) 142,790 shares were reserved for
future issuance under our various stock option plans.
Our company, together with our executive officers and directors, and certain
shareholders, have entered into lock-up agreements in connection with this
offering generally providing that they will not offer, sell, contract to sell or
grant any option to purchase or otherwise dispose of our ADSs or shares or any
securities exchangeable for or convertible into our ADSs or shares for a period
of 150 days after the date of this prospectus without the prior written consent
of J.P. Morgan Securities Inc.
Sales of large numbers of our ordinary shares could cause the price of our
shares to decline.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and other materials we have filed or may file with the
Securities and Exchange Commission, as well as information included in oral
statements or other written statements made, or to be made, by us, contain,
disclosures which are "forward-looking statements." Forward-looking statements
include all statements that do not relate solely to historical or current facts,
and can be identified by the use of words such as "may," "believe," "will,"
"expect," "project," "estimate," "anticipate," "plan" or "continue." These
forward-looking statements address, among other things, strategic objectives and
the anticipated effects of the sale of the shares and ADSs. See "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." These forward-looking statements are based on the
current plans and expectations of our management and are subject to a number of
uncertainties and risks that could significantly affect our current plans and
expectations and future financial condition and results. These factors include,
but are not limited to:
- the highly competitive nature of our industry;
- estimates regarding the growth of Internet use and electronic commerce;
- changes in federal, state, local or foreign regulation affecting our
industry;
- the departure of key members of our management;
- our international operations;
- changes in our strategic relationships;
- our ability to implement successfully our development strategy;
- fluctuations in the market value of our shares;
- changes in general economic conditions;
- the complexity and the success of integrated computer systems, and
- other risk factors described in this prospectus.
As a consequence, current plans, anticipated actions and future financial
conditions and results may differ from those expressed in any forward-looking
statements made by or on behalf of our company. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. You are cautioned not to unduly
rely on such forward-looking statements when evaluating the information
presented herein.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the offering are estimated to be approximately
$282.6 million, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses. We will not receive any of the
proceeds from the sale of ADSs by the selling shareholders if the underwriters
exercise their over-allotment option.
The principal purposes of this offering are to fund our anticipated operating
losses, increase our working capital, complete anticipated acquisitions and fund
other general corporate purposes.
Additionally, we may use a portion of the net proceeds to acquire businesses,
products and technologies that are complementary to ours. We are continuing to
identify and prioritize additional security technologies which we may wish to
develop, either internally or through the licensing or acquisition of products
from third parties. While we engage from time to time in discussions with
respect to potential acquisitions, we do not have any plans, commitments or
agreements with respect to any such acquisitions as of the date of this
prospectus, and there can be no assurances that any such acquisitions will be
made.
Pending the uses mentioned above, we intend to invest the net proceeds from this
offering in short-term, investment grade, interest-bearing instruments.
DIVIDEND POLICY
We have never declared or paid cash dividends on our share capital. We currently
intend to retain all future earnings to finance future growth and therefore do
not anticipate paying any dividends in the foreseeable future.
Dividends are subject to shareholders' approval at an ordinary shareholders'
meeting and the provisions of any loan or other agreements to which we may in
the future become a party. Under French law, dividends approved at an ordinary
shareholders' meeting are required to be paid by us within nine months of the
end of our fiscal year unless otherwise authorized by a court order.
The amount of dividends available for distribution during a given financial year
is divided between all our shareholders, in proportion to such shareholders'
holdings. Dividends are paid in cash, or in the form of new ordinary shares.
Pursuant to our STATUTS the decision to offer the shareholders the choice
between the payment of a dividend in cash or in ordinary shares is subject to
shareholders' approval at an ordinary shareholders' meeting. If no such decision
is made, payment of the dividend is automatically made in cash.
18
<PAGE>
CAPITALIZATION
The following table describes our capitalization as of December 31, 1999 on:
- a historical basis, and
- an as adjusted basis to reflect (i) our receipt of the net proceeds from
the offering at a public offering price of $76.50 per ADS, net of
underwriting discounts and offering expenses, (ii) our receipt of the net
proceeds of $16.5 million from the private placement of 990,675 shares in
February 2000 and (iii) the application of $6.2 million of the proceeds
from the private placement to redeem all of our $6 million non-interest
bearing convertible bonds issued in October 1999 and due October 15, 2001
(assuming such bonds are not converted to shares by the holders thereof).
<TABLE>
<CAPTION>
-------------------------
AS OF DECEMBER 31,
1999
-------------------------
HISTORICAL AS ADJUSTED
DOLLARS IN THOUSANDS ---------- ------------
<S> <C> <C>
Short-term debt and current portion of long-term debt....... $ 1,419 $ 1,419
Long-term debt, excluding current portion................... 198 198
Convertible loan............................................ 9,259 3,500
Shareholders' equity:
Ordinary shares, FRF 6.25 nominal value; 32,090,026 shares
issued and outstanding at December 31, 1999............... 36,339 41,305
Additional paid-in capital................................ 34,483 334,253
Accumulated deficit....................................... (67,640) (67,640)
Deferred stock compensation............................... (124) (124)
Cumulative translation adjustment......................... (2,066) (2,066)
-------- --------
Total shareholders' equity.............................. 992 305,728
-------- --------
Total capitalization........................................ $ 11,868 $310,845
======== ========
</TABLE>
In addition to the shares to be outstanding after the offering, at December 31,
1999, we could issue additional shares under the following plans and
arrangements:
- 3,491,420 shares issuable upon exercise of options outstanding at a
weighted average price of $5.10 per share,
- 1,495,894 shares issuable upon the exercise of warrants outstanding at a
weighted average price of $5.07 per share,
- 760,550 shares issuable upon conversion of our convertible bonds at a
price of $4.60 per share (excluding the 300,000 shares issuable upon the
conversion of our convertible bonds issued in October 1999),
- 761,437 shares issuable upon exercise of share purchase rights at a
weighted average price of $1.52 per share as of, and
- 142,790 shares available for future issuance under our various stock
plans.
The share amounts above reflect a conversion, for the options and warrants
exercisable in French francs, at the exchange rate of FF6.5295 to $1.00 in
effect as of December 31, 1999.
19
<PAGE>
DILUTION
As of December 31, 1999, our net tangible book value, after giving effect to the
issuance of 990,675 shares in the private placements which closed on
February 16, 2000 and the issuance of 300,000 shares upon the conversion of our
October 1999 bonds, was $23,148,000, or $0.69 per share. Net tangible book value
per share represents the amount of our total tangible assets reduced by the
amount of our total liabilities, divided by the number of shares outstanding. As
of December 31, 1999, our net tangible book value, as further adjusted for the
sale of 4,000,000 ADSs in the offering at a public offering price at $76.50 per
ADS and after deducting the underwriting discounts and commissions and other
estimated expenses, would have been approximately $8.18 per share. This
represents an immediate increase of $7.49 per share to existing stockholders and
an immediate dilution of $68.32 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial offering price per ADS.............................. $76.50
Net tangible book value per share before the offering..... .69
Increase in net tangible book value per share attributable
to new investors........................................ 7.49
------
Pro forma net tangible book value per share after this
offering.................................................. 8.18
------
Dilution per share to new investors......................... $68.32
======
</TABLE>
The foregoing table summarizes, on a pro forma basis to give effect as of
December 31, 1999 to the offering, the differences between the existing
shareholders and the new investors with respect to the number of shares
purchased from us, the total consideration paid to us and the average price per
share paid, before deducting underwriting commissions and estimated offering
expenses payable by us, at a public offering price of $76.50 per ADS:
<TABLE>
----------------------------------------------
AVERAGE
PRICE
SHARES PURCHASED TOTAL CONSIDERATION PER SHARE
--------------------- ----------------------- ----------
<S> <C> <C> <C> <C> <C>
Existing shareholders...................... 33,380,701 89.3% $ 95,874,000 23.9% $ 2.87
New investors.............................. 4,000,000 10.7 306,000,000 76.1 76.50
---------- ----- ------------ -----
Total.................................... 37,380,701 100.0% $401,874,000 100.0%
========== ===== ============ =====
</TABLE>
The foregoing discussion and tables are based upon the number of shares actually
issued and outstanding on December 31, 1999 plus the assumed issuance of 990,675
shares issued pursuant to the private placements of our shares which closed on
February 16, 2000, the 300,000 shares issuable upon the conversion of our
October 1999 convertible bonds, and assumes no exercise of options or warrants
outstanding as of December 31, 1999. As of that date, there were:
- 3,491,420 shares issuable upon exercise of options outstanding at a
weighted average exercise price of $5.10 per share,
- 1,495,894 shares of issuable upon exercise of warrants outstanding at a
weighted average exercise price of $5.07 per share,
- 760,550 shares issuable upon conversion of our convertible notes at a
price of $4.60 per share (excluding the 300,000 shares issuable upon the
conversion of our convertible bonds issued in October 1999),
- 761,437 shares issuable upon exercise of complementary (share purchase)
rights at a weighted average price of $1.52 per share, and
- 142,790 shares available for future issuance under our various stock
plans.
To the extent these options and warrants are exercised, there will be further
dilution to new investors.
20
<PAGE>
PRICE RANGE OF SHARES
Our initial public offering was consummated in December 1996. Our shares are
listed on Easdaq under the symbol "ACTV."
The following table sets forth, for the periods indicated, the high and low sale
prices for our shares as reported on the Easdaq.
<TABLE>
<CAPTION>
-----------------------------------
SHARES AVERAGE DAILY
------------------- TRADING
HIGH LOW VOLUME
-------- -------- -------------
<S> <C> <C> <C>
1997
First Quarter............................................... $ 8.25 $ 8.00 7,788
Second Quarter.............................................. $ 8.12 $ 3.31 47,828
Third Quarter............................................... $ 3.50 $ 2.88 15,402
Fourth Quarter.............................................. $ 3.13 $ 2.44 38,399
1998
First Quarter............................................... $ 3.63 $ 2.13 22,044
Second Quarter.............................................. $ 6.25 $ 2.25 46,900
Third Quarter............................................... $ 4.75 $ 3.00 12,528
Fourth Quarter.............................................. $ 2.85 $ 1.66 13,612
1999
First Quarter............................................... $ 4.69 $ 1.60 167,254
Second Quarter.............................................. $ 5.92 $ 3.69 66,689
Third Quarter............................................... $ 5.83 $ 4.07 49,222
Fourth Quarter.............................................. $25.00 $ 4.65 296,973
2000
First Quarter (through March 15, 2000)...................... $94.75 $22.50 399,674
</TABLE>
Our price at the close of trading on March 15, 2000 was $79.50 per share. As of
March 15, 2000, we estimate that there were approximately 88 registered holders.
21
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
Our selected historical consolidated financial data for the years ended
December 31, 1995, 1996, 1997, 1998 and 1999 have been derived from, and should
be read in conjunction with, our audited consolidated financial statements and
the related notes thereto included elsewhere in this prospectus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1995 1996 1997 1998 1999
IN THOUSANDS, EXCEPT PER SHARE DATA ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Products........................ $ 443 $ 5,686 $ 6,210 $ 7,624 $ 9,976
Engineering services............ 2,609 2,627 1,357 642 286
---------- ----------- ----------- ----------- -----------
Total revenues.................... 3,052 8,313 7,567 8,266 10,262
---------- ----------- ----------- ----------- -----------
Cost of revenue:
Products........................ 345 3,521 3,470 4,564 5,099
Engineering services............ 2,255 1,599 1,356 659 238
---------- ----------- ----------- ----------- -----------
Total cost of revenue............. 2,600 5,120 4,826 5,223 5,337
---------- ----------- ----------- ----------- -----------
Gross profit (loss)............... 452 3,193 2,741 3,043 4,925
Costs and expenses:
Research and development........ 1,550 3,070 3,281 3,888 5,233
Marketing and selling........... 2,156 6,790 7,210 7,042 9,829
General and administrative(1)... 3,766 4,313 2,317 2,504 5,603
---------- ----------- ----------- ----------- -----------
Total costs and expenses.......... 7,472 14,173 12,808 13,434 20,665
---------- ----------- ----------- ----------- -----------
Income (loss) from operations..... (7,020) (10,980) (10,067) (10,391) (15,740)
Interest and other financial income
(expenses), net................. (389) (225) (181) (360) (187)
Income tax benefit (loss)......... 53 68 714 452 15
Loss from discontinued
operations...................... -- -- -- -- --
Minority interest................. -- 97 32 1 --
---------- ----------- ----------- ----------- -----------
Net loss.......................... $ (7,356) $ (11,040) $ (9,502) $ (10,298) $ (15,912)
========== =========== =========== =========== ===========
Basic and diluted net loss per
share........................... $ (1.37) $ (0.92) $ (0.61) $ (0.55) $ (0.55)
========== =========== =========== =========== ===========
Number of shares used in computing
basic and diluted net loss per
share........................... 5,384,078 12,006,618 15,460,178 18,618,463 29,114,715
</TABLE>
- ------------------------
(1) General and administrative expense for the year ended December 31, 1999
includes $3.04 million resulting from the settlement of a two-year old legal
action, including a cash payment of $637,500 for legal expenses and a grant
of 480,000 new shares valued at $2,400,000.
22
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------
AT DECEMBER 31,
-------------------------------------------------------------------
1999
1995 1996 1997 1998 1999 AS ADJUSTED
IN THOUSANDS -------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 2,652 $ 9,593 $ 5,291 $ 4,150 $ 8,790 $307,767
Total current assets.................. 6,529 15,779 10,356 9,302 14,398 312,746
Total assets.......................... 7,640 17,495 13,051 12,375 16,434 314,782
Total current liabilities............. 7,602 8,568 5,263 5,902 5,953 5,324
Total long-term liabilities........... 2,718 2,160 2,749 1,448 230 230
Convertible bonds..................... -- -- 8,030 8,030 9,259 3,500
Shareholders' equity (deficit)........ (2,680) 6,767 (2,991) (3,005) 992 305,728
</TABLE>
- ------------------------
(1) Adjusted to reflect: (i) the consummation of this offering assuming net
proceeds of $282,580,000 based on a public offering price of $76.50 per ADS;
(ii) consummation of the sale of 990,675 shares in February 2000 to four
strategic investors for net proceeds of approximately $16.5 million; and
(iii) the conversion of all of our $6 million non-interest bearing
convertible bonds due 2001 issued in October 1999 into 300,000 shares. These
bonds are required to be redeemed by us with the proceeds of our private
placements to strategic investors that closed on February 16, 2000 unless,
upon notice of redemption, holders elect to convert all or a portion of such
bonds into shares. If none of the holders of these bonds elect to convert
the bonds to shares, our cash and cash equivalents, total current assets and
total assets would be reduced by $6.2 million. See "Description of Share
Capital--Convertible Bonds."
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE NOTES TO THOSE STATEMENTS THAT APPEAR ELSEWHERE IN THIS
PROSPECTUS. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT
REFLECT OUR PLANS, ESTIMATES AND BELIEFS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS PROSPECTUS, PARTICULARLY IN "RISK
FACTORS."
OVERVIEW
We develop, market and support software and related hardware products that
provide or enable authentication, electronic certification and digital
signatures for use on the Internet or in network systems, services and
applications. Our secure user identification solutions allow companies to
control access to their information networks at the level appropriate for
employees, partners and customers and provide the authentication necessary to
prevent online fraud and other computer-related crimes. Our products and
technologies are designed to manage digital identities by addressing the
administrative, security and usability concerns inherent in network computing.
From our founding in 1985 until 1994, we (i) provided software and hardware
engineering services for defense-related companies, government agencies and
multilateral institutions and (ii) developed, manufactured and sold customized
portable products, similar in form to tokens, for large-scale applications, such
as interactive television. In December 1993, as a result of management's
assessment that it would take a significant period of time for the interactive
television market to develop, we decided to discontinue the direct marketing and
sales activities related to interactive television and began to devote our
resources principally to the development of computer and communications network
security products and contract engineering services. We first developed
management software for our data security solution in 1996. The first ActivCard
token solutions were introduced in 1995. In early 1997, we chose to focus our
efforts as a provider of products, rather than engineering services, to enhance
our gross margins and leverage our engineering investments. In January 1999, we
introduced ActivCard Gold, a smart card-based solution for network security.
A substantial majority of revenues for 1995 and preceding years was derived from
providing contracted engineering services to third parties and the manufacture
and sale of products other than ActivCard tokens and related products. In fiscal
1996 through to 1998, the majority of our revenue was generated by the sale of
token-based products. Until 1999, these revenues were mainly derived from
ActivCard One and ActivCard Plus. In January 1999, we began to focus our efforts
on smart card related products, which represented approximately 28% of revenues
in 1999. The majority of our revenues continue to be derived from sales of
security token implementations, sold mainly to European banks for network
security and online banking applications. We believe most of our revenue growth
will be from our smart card related products and we will be focusing much of our
efforts on promoting these products.
Our consolidated financial statements are prepared in accordance with U.S. GAAP.
We recognize revenue from the sale of hardware and software products upon
shipment of the products and acceptance from the customer, provided no
significant obligations remain and collection of the receivable is considered
probable. Product revenue consists of hardware platform sales and license fees
associated with embedded and server-based software. Sales to Original Equipment
Manufacturers (OEMs) are recognized as revenue unless there is a specific
acceptance period in the order. Revenue from engineering services is recognized
in accordance with the percentage-of-completion method and to the extent such
revenue is derived from services provided pursuant to a signed contact. As of
December 31, 1999, we had not capitalized any software development costs and all
research and development costs have been expensed as incurred. See Note 1.11 of
Notes to Consolidated Financial Statements and the notes thereto included
elsewhere in this prospectus.
If a software sale to an OEM contains support requirements, its value is
determined and deferred. This deferred revenue is recognized over the estimated
effective lifetime of that software version. Sales to Value Added Resellers
(VARs) are recognized as revenue when shipped. VARs do not stock our inventory
for resale. Our product is shipped
24
<PAGE>
to the VAR for immediate reshipment to the end customer on an on-order basis or
directly to the end customer. Sales to distributors are not recognized as
revenue. If full right of return exists, we defer revenue on shipments to
distributors and recognize revenue on distributor sales to end-users from a
point-of-sale report or equivalent. Revenue is recognized, however, on direct
shipments made to distributor end-customer accounts.
Most of our product sales through 1999 were in Europe, although sales in the
United States increased in 1999. Sales in Europe in 1998 accounted for 84% of
total company sales, compared to 78% in 1999. U.S. sales increased from 10% in
1998 to 18% of total sales in 1999. Sales of smart card related software and
hardware products increased from approximately 8% of total sales in 1998 to
approximately 28% of total sales in 1999. The increase in smart card related
products sales in 1999 has been about evenly split between Europe and the United
States.
RECENT DEVELOPMENTS
Schlumberger Systems, Business Brain Showa-Ota Inc., Sun Microsystems, Inc. and
SCM Microsystems, Inc. have subscribed to 174,825, 116,550, 582,750 and 116,550,
respectively, of our ordinary shares at a subscription price of $17.16 per
share. The subscription price was determined at a board of directors meeting
held on December 16, 1999 and is based on the average closing price of our share
between November 25 and December 8, 1999. The sales of these shares was approved
by our stockholders on February 9, 2000 and closed on February 16, 2000. We
received net proceeds of approximately $16.5 million.
The terms of our $6.0 million aggregate principal amount of bonds issued in
October 1999 require us to call them for redemption upon consummation of the
subscriptions referred to above. Upon call for redemption, the holders may elect
to convert all or a portion of the bonds into shares, for an aggregate of
300,000 shares if all are converted. If none of the bonds are converted, we
would be required to use approximately $6.2 million of the proceeds of the sale
of the subscribed shares to redeem the bonds.
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
REVENUE
Revenue totaled $10.3 million in 1999, $8.3 million in 1998 and $7.6 million in
1997. Total revenue in 1999 increased by 24% due to increased security product
sales which more than offset lower engineering service revenue. This increase is
primarily attributable to increased global sales of smart card related products
which represented 28% of our total revenue in 1999 compared to less than 8% in
1998. Revenue from the sale of products totaled $10.0 million in 1999, $7.6
million in 1998 and $6.2 million in 1997. Product revenue in 1999 increased by
31%, primarily from an annual increase in sales of 21% in Europe and of 120% in
the United States. Consistent with our strategy to shift from a lower margin
engineering services business to a higher margin product sales based company,
engineering services revenue decreased in 1999 by 55%, from $642,000 in 1998 to
$286,000 in 1999. Most of our sales through 1999 have been in Europe.
<TABLE>
<CAPTION>
------------------------------
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
IN THOUSANDS -------- -------- --------
<S> <C> <C> <C>
Revenue:
Smart card-related products......................... $ 460 $ 634 $ 2,916
Token-related products.............................. 5,750 6,990 7,060
Engineering services................................ 1,357 642 286
------ ------ -------
Total revenue..................................... $7,567 $8,266 $10,262
====== ====== =======
</TABLE>
COST OF REVENUE
The cost of revenue totaled $5.3 million in 1999, $5.2 million in 1998 and $4.8
million in 1997. The cost of sales of products revenue, consisting mainly of
labor, manufacturing, delivery and other production costs, totaled $5.1 million
25
<PAGE>
in 1999, $4.6 million in 1998 and $3.5 million in 1997, representing 51%, 60%
and 56%, respectively, of the total products revenue generated in each year. In
1998, the cost of sales of product revenue increased as a result of the
introduction of new network security products and relatively high manufacturing
and labor costs related to low quantities sold. The cost of engineering services
revenue, consisting mainly of employee salaries and a related portion of our
overhead totaled $238,000 in 1999, $659,000 in 1998 and $1.4 million in 1997,
representing 83%, 103%, and 100% respectively, of total engineering services
revenue in each year. Costs in these years were affected by (i) costs associated
with downsizing the engineering department, (ii) a relatively steady amount of
indirect costs despite the reduction in engineering services revenue and
(iii) for 1997 and 1998, higher than anticipated costs on certain long-term
projects. We expect to reduce significantly our engineering service business and
related expenses as our focus shifts to the product business.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses, consisting
primarily of salaries, costs of components used in such activities and related
overhead costs, totaled $5.2 million in 1999, $3.9 million in 1998 and $3.3
million in 1997. The substantial majority of the research and development
expenses incurred in 1999 and 1998 related to the introduction of the new
ActivCard Gold products and OEM integration projects. Research and development
expenses incurred in 1997 related primarily to the development of ActivReader
and efforts to further the integration of our products with those of its
distributors and partners.
MARKETING AND SELLING. Marketing and selling expenses consist primarily of
salaries and other payroll expenses such as commissions, travel expenses of
sales and marketing personnel, and costs associated with marketing programs and
promotions. Marketing and selling expenses totaled $9.8 million in 1999, $7.0
million in 1998 and $7.2 million in 1997. This 40% increase in marketing and
selling spending in 1999 and 1998 was primarily associated with increasing our
number of salesmen and systems engineers, implementing a more aggressive
commission program and opening new sales offices.
GENERAL AND ADMINISTRATIVE. General and administrative expenses totaled $5.6
million in 1999, $2.5 million in 1998 and $2.3 million in 1997. These expenses
consist primarily of personnel costs for administration, accounting and finance,
human resources and general management as well as consulting, legal and
accounting fees and stock compensation expenses. The primary cause of the
increase in 1999 was a settlement agreement signed in July between the Company
and a former officer in our original U.S. subsidiary that resolved a lawsuit
filed in 1997. The agreement called for a payment of $637,500 for legal expenses
and a grant of 480,000 new shares valued at $2,400,000 at a price per share of
$5.00 as of June 30, 1999. This grant was voted upon by shareholders and issued
on July 27, 1999. See "Business--Legal Proceedings."
INTEREST AND FINANCIAL EXPENSES
Net interest and other financial expenses totaled $187,000 in 1999, $360,000 in
1998 and $181,000 in 1997. The increase in net financial expenses from 1997 to
1998 was due primarily to the increase in net interest expense. Net interest
expense totaled $523,000 in 1998 compared to $159,000 in 1997 as a result of the
increase in outstanding indebtedness (mainly convertible loans which began on
July 1, 1997, which increased interest expense to $344,000) and lower interest
income on short-term investments. The increase in net interest expenses was
partially offset by a foreign exchange gain of $163,000 in 1998 compared to a
foreign exchange loss of $22,000 in 1997. The decrease in net financial expenses
from 1998 to 1999 was mainly attributed to greater interest income and currency
translation gains. Net interest expenses totaled $449,000 in 1999 compared to
$523,000 in 1998 as a result of the increase in interest income earned on
available-for-sales securities from the proceeds of the rights issue and bonds
issue in February 1999 and October 1999, respectively. Moreover, the foreign
exchange gain totaled $262,000 in 1999 compared to a foreign exchange gain of
$163,000 in 1998.
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INCOME TAX BENEFIT
The income tax benefit attributable to continuing operations totaled $15,000 in
1999, $452,000 in 1998 and $714,000 in 1997, primarily arising from research and
development and training tax credits. The research and development tax credit is
equal to 50% of the difference between (i) specifically defined and codified
research and development expenditure incurred during each fiscal year and
(ii) the average of the research and development expenditures during the
preceding two years, as adjusted by a coefficient based on a consumer index. The
credit is capped at FF40 million. The credit may be discounted with a bank or
used to pay corporate income tax due in France at the standard rate of 33.33%
during the three years following calculation. The Company incurs the research
and development costs primarily in France. The income tax benefits in 1999 were
insignificant compared to 1998 and 1997 due to the flat level of research and
development expenditures incurred in 1999 and during the preceding two years. In
1997, the Company implemented a research and development project tracking
system, which identifies and supports research and development expenditures for
new product development. The lack of such system prior to 1997 explains the high
level of research and development tax credits calculated in 1997 and 1998.
As of December 31, 1999, we had French net operating loss carryforwards of
approximately $29.2 million. Approximately $19.7 million of these net operating
loss carryforwards will expire in the years 2000 through 2004, if not utilized,
with the remaining having no expiration date. As of December 31, 1999, our U.S.
subsidiary, ActivCard, Inc. also had net operating loss carryforwards of
approximately $20.4 million in the U.S., which expire in the years 2011 through
2014, and net operating loss carryforwards in Singapore of approximately $2.7
million with no expiration date. The utilization of these net operating loss
carryforwards is limited to our future operations in the tax jurisdiction in
which such carryforwards arose. Due to our history of losses, we have provided
valuation allowances covering 100% of net deferred tax assets. See Note 6 of the
Notes to our Consolidated Financial Statements.
QUARTERLY INFORMATION
GENERAL
The following tables set forth our statement of operations data for the
three-month periods indicated. This unaudited quarterly information has been
prepared on the same basis as the audited information presented elsewhere herein
and, in management's opinion, includes all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
information for the quarters presented. Our three-month results have, in the
past, been
27
<PAGE>
subject to fluctuations and thus the operating results for any quarter presented
here not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
IN THOUSANDS -------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Products............... $ 1,376 $ 2,322 $ 1,597 $ 2,329 $ 1,702 $ 2,938 $ 2,338 $ 2,998
Engineering Services... 241 193 116 92 45 69 104 68
------- ------- ------- ------- ------- ------- ------- -------
Total revenues........... 1,617 2,515 1,713 2,421 1,747 3,007 2,442 3,066
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenue:
Products............... 786 1,227 1,034 1,517 955 1,633 1,179 1,332
Engineering Services... 298 196 70 95 28 55 80 75
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenue.... 1,084 1,423 1,104 1,612 983 1,688 1,259 1,407
------- ------- ------- ------- ------- ------- ------- -------
Gross profit (loss)...... 533 1,092 609 809 764 1,319 1,183 1,659
Costs and expenses:
Research and
development.......... 922 913 1,000 1,053 1,184 1,212 1,228 1,609
Marketing and
selling.............. 1,753 1,621 1,685 1,983 1,920 2,359 2,443 3,107
General and
administrative(1).... 656 678 546 624 620 3,684 619 680
------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............... 3,331 3,212 3,231 3,660 3,724 7,255 4,290 5,396
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (2,798) (2,120) (2,622) (2,851) (2,960) (5,936) (3,107) (3,737)
Interest and other
financial income
(expenses), net........ (101) (25) (138) (96) (223) 38 (174) 172
------- ------- ------- ------- ------- ------- ------- -------
Loss from continuing
operations before
income taxes........... (2,899) (2,145) (2,760) (2,947) (3,183) (5,898) (3,281) (3,565)
------- ------- ------- ------- ------- ------- ------- -------
Income tax benefit....... - 133 68 251 - - - 15
Net loss before minority
interest............... (2,899) (2,012) (2,692) (2,696) (3,183) (5,898) (3,281) (3,550)
Minority interest........ - - 4 (3) - - - -
------- ------- ------- ------- ------- ------- ------- -------
Net loss................. $(2,899) $(2,012) $(2,688) $(2,699) $(3,183) $(5,898) $(3,281) $(3,550)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As a Percentage of Total
Revenues:
Revenue:
Products............... 85.1% 92.3% 93.2% 96.2% 97.4% 97.7% 95.7% 97.8%
Engineering services... 14.9 7.7 6.8 3.8 2.6 2.3 4.3 2.2
------- ------- ------- ------- ------- ------- ------- -------
Total revenues........... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenue.... 67.0 56.6 64.4 66.6 56.3 56.1 51.6 45.9
Gross profit (loss)...... 33.0 43.4 35.6 33.4 43.7 43.9 48.4 54.1
Costs and expenses:
Research and
development.......... 57.0 36.3 58.4 43.5 67.8 40.3 50.3 52.5
Marketing and
selling.............. 108.4 64.5 98.4 81.9 109.9 78.5 100.1 101.3
General and
administrative (1).... 40.6 27.0 31.9 25.8 35.5 122.5 25.3 22.2
------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............... 206.0 127.7 188.6 151.2 213.2 241.3 175.7 176.0
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (173.0) (84.3) (153.1) (117.8) (169.4) (197.4) (127.2) (121.9)
Interest and other
financial income
(expenses), net........ (6.2) (1.0) (8.1) (4.0) (12.8) 1.3 (7.1) 5.6
------- ------- ------- ------- ------- ------- ------- -------
Loss from continuing
operations before
income taxes........... (179.3) (85.3) (161.1) (121.7) (182.2) (196.1) (134.4) (116.3)
------- ------- ------- ------- ------- ------- ------- -------
Income tax benefit....... - 5.3 4.0 10.4 - - - 0.5
Net loss before minority
interest............... (179.3) (80.0) (157.1) (111.4) (182.2) (196.1) (134.4) (115.8)
Minority interest........ - - 0.2 (0.1) - - - -
------- ------- ------- ------- ------- ------- ------- -------
Net loss................. (179.3)% (80.0)% (156.9)% (111.5)% (182.2)% (196.1)% (134.4)% (115.8)%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ------------------------
(1) General and administrative expense for the year ended December 31, 1999
includes $3.04 million resulting from the settlement of a two-year old legal
action, including a cash payment of $637,500 for legal expenses and a grant
of 480,000 new shares valued at $2,400,000.
We believe that revenue will tend to be higher in the second and fourth quarters
due to the budget cycles of our customers and the tendency of certain of these
customers to implement changes in computer or network security prior to
traditional summer holidays and toward the end of the calendar year. In
addition, revenue will tend to be lower in the first quarter of the year
compared to the previous quarter and lower in the summer months, particularly in
Europe, when businesses often defer purchase decisions. Because our operating
expenses are based on anticipated revenue levels and a significant percentage of
our expenses are fixed, a small variation in the time of recognition of revenue
can cause significant variations in operating results from quarter to quarter.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations and investments in capital
equipment through the sale of equity and convertible debt securities, French
franc-denominated interest-free loans provided by agencies of the French
government, bank indebtedness and loans from our shareholders. We do not
anticipate that interest-free loans from agencies of the French government or
loans from our shareholders will be made in the future and our financing plans
do not contemplate the further receipt of such loans.
29
<PAGE>
As of December 31, 1999, we had cash and cash equivalents of $8.8 million
compared to $4.2 million at December 31, 1998 and $5.3 million at December 31,
1997. Operations used cash totaling $12.9 million in 1999, $9.6 million in 1998,
$9.8 million in 1997 and $11.4 million in 1996. Accounts receivable days' sales
outstanding decreased from 140 days at December 31, 1996 to 90 days at
December 31, 1997, increased modestly to 94 days at December 31, 1998, and
decreased to 76 days at December 31, 1999 due to increased management focus. The
credit terms extended to our customers, which is typically 30 days, have not
changed during these periods. The decrease of $1.0 million in accounts payable
from December 31, 1996 to December 31, 1997 reflected our efforts to reduce
spending in 1997, with payables remaining at this same level on December 31,
1998 and December 31, 1999.
Investment activity consists primarily of purchases and sales of property and
equipment. In 1999, investments resulted in a net use of cash of $255,000; in
1998 of $589,000; and in 1997 of $62,000.
In 1999, our financing activities provided net funds of $18.2 million, primarily
from capital increases of $9.7 million from an issue of ordinary shares in
February, $6 million from an issue of convertible bonds with detachable warrants
in October and $3.5 million from the exercise of warrants, reserved rights and
stock options during the year, partially offset by repayments of loans and
principal payments of capital leases totaling $1.1 million. In 1998, our
financing activities provided net funds of $9.2 million, primarily the cash
proceeds from the sale of ordinary shares and the exercise of warrants, reserved
rights and stock options of $10.3 million, offset by the repayment of loans from
third parties of $737,000 and the payment of capital lease obligations of
$296,000. In 1997, our financing activities provided net funds of $6.4 million,
primarily from the issuance of $8.0 million of convertible subordinated debt.
At December 31, 1999, we had long-term debt of $10.9 million, composed of $3.6
million convertible debt (including short-term accrued interest), $5.8 million
of convertible bonds (including short-term accrued interest), $661,000 in French
franc-denominated interest-free loans, $350,000 in debt related to license
agreements, $464,000 in capital lease obligations and $7,000 in French
franc-denominated bank loans. At December 31, 1998, we had long-term debt of
$10.8 million, composed of $8.3 million of convertible debt, $1.2 million in
French franc-denominated interest-free loans, $650,000 in debt related to
license agreements, $462,000 in capital lease obligations and $90,000 in French
franc-denominated bank loans. At December 31, 1997, we had long-term debt of
$11.7 million, composed of $8.3 million of convertible debt, $1.4 million in
French franc-denominated interest-free loans, $850,000 in debt related to
license agreements, $737,000 in capital lease obligations and $336,000 in French
franc-denominated bank loans.
In October 1999, we issued units consisting of an aggregate of $6.0 million
principal amount of non-interest bearing convertible bonds due October 15, 2001
and warrants to purchase an aggregate of 1,200,000 shares at an exercise price
of $5.00 per share. The bonds are convertible into 300,000 shares at any time on
or after the earlier of April 15, 2000 and the consummation of this offering,
and can be redeemed by us prior to maturity at redemption prices ranging from
103% to 112% of their principal amount. The terms of these bonds require us to
call them for redemption upon consummation of the private placement of our
shares expected to close on or about February 16, 2000. Upon such call for
redemption, the holders may elect to convert all or a portion of the bonds into
shares, for an aggregate of 300,000 shares if all are converted. We will use up
to approximately $6.2 million of the proceeds of the private placements to
redeem bonds that are not converted, if any.
We have no material commitments for capital expenditures during 2000. Our future
capital requirements, the timing and amount of expenditures, and the adequacy of
funds available to us will depend on our success in developing and selling new
and existing products. Based on our current plans, we believe that the net
proceeds from the offering and cash flows generated by operations will be
adequate to satisfy our capital requirements at least through 2000. However, if
our research and development plans change, we may need additional funding before
2001. Additionally, our management may also from time to time consider the
acquisition of complementary businesses or technologies which may require
additional financing, although it has no present understandings, commitments or
agreements, nor is it engaged in any discussions or negotiations, with respect
to any such transaction.
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<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in results of operations unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. We do not expect SFAS No. 133 to have a significant impact on our
consolidated financial statements.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET AND INTEREST RATE RISK
We are exposed to minimal market risks. We do not hold or issue derivative,
derivative commodity instruments or other financial instruments for trading
purposes. We are exposed to currency exchange fluctuations, as we sell our
products internationally. We manage the sensitivity of our international sales
by denominating substantially all transactions in U.S. dollars.
In 1997, 1998 and 1999, nearly 100% of our revenues were billed and recorded in
dollars. Although we purchase many of our components for dollars, approximately
50% of our cost of revenues and operating expenses are in French francs.
In 1997, we incurred a net foreign exchange loss of $22,000 composed of a
realized foreign exchange gain of $42,000, mainly attributable to transactions
with customers and a net unrealized foreign exchange loss of $64,000. The
strengthening of the U.S. dollar against the French franc at 5.99 French francs
per U.S. dollar on December 31, 1997 caused this net unrealized foreign exchange
loss primarily from exchange losses on revaluation of convertible bonds and debt
of $189,000 and $101,000 respectively, partially offset by an exchange gain of
$152,000 of dollar-denominated bank accounts. In 1998, the net foreign exchange
gain amounted to $163,000 which mainly consisted in a net unrealized gain of
$177,000 partially offset by a realized foreign exchange loss of $14,000. As the
U.S. dollar weakened against the French franc, closing at 5.60 French francs per
U.S. dollar on December 31, 1998, the net unrealized gain of $177,000 was mainly
composed of a foreign exchange gain of $522,000 on the revaluation of the
convertible bonds partially offset by foreign exchange losses on U.S.
dollar-denominated bank accounts and intercompany accounts of $246,000 and
$108,000, respectively. In 1999, the net foreign exchange gain amounted to
$262,000, which mainly consisted of a net unrealized gain of $563,000 partially
offset by a realized foreign exchange loss of $301,000. As the U.S. dollar
strengthened against the French franc closing at 6.53 French francs per U.S.
dollar on December 31, 1999, the net unrealized gain of $563,000 was mainly
composed of foreign exchange gains on the revaluation of the intercompany
accounts and U.S. dollar-denominated bank accounts of $1,021,000 and $512,000,
respectively, partially offset by a foreign exchange loss of $1,050,000 on the
revaluation of the convertible bonds.
We are exposed to interest rate risk, as we use additional financing
periodically to fund capital expenditures. The interest rate risk that we may be
able to obtain on financings will depend on market conditions at that time and
may differ from the rates we have secured in the past. Sensitivity of results of
operations to market and interest rate risks is managed by maintaining a
conservative investment portfolio.
We have not previously engaged in, and do not now contemplate entering into,
currency and interest rate hedging transactions. We may enter into such
transactions on a non-speculative basis to the extent that we may in the future
have substantial foreign currency exposure.
YEAR 2000 CONSIDERATIONS
Although we have not experienced Y2K problems, it is still possible that, even
after January 1, 2000, Y2K-related issues may cause problems or disruptions.
While we believe that all of our systems are Y2K compliant, we cannot assure you
that we will not discover a problem during the year 2000 and still experience
unanticipated material costs
31
<PAGE>
due to undetected errors or defects in the technology used on our systems. Also,
failure of other systems used by our customers may adversely affect the
performance of our products, which may in turn adversely affect our business.
Should any such problem arise, it is possible that customers or third parties
might seek indemnification or damages from us as a result of Y2K issue-related
errors caused by or not prevented by our products or services. We cannot predict
the extent to which we might be liable for such costs but it is still
conceivable, in general, that Y2K errors could result in substantial judgments
against providers of information technology such as our company.
INFLATION
Inflation has not had a material impact on our revenues, operating income and
net income during any of our three most recent fiscal years. However, to the
extent inflationary pressures affect short-term interest rates, a significant
portion of our debt service costs may be affected, as may be the interest rates
we charge to our customers.
32
<PAGE>
BUSINESS
OVERVIEW
We provide solutions for authenticating and managing the digital identities of
employees, suppliers, partners and customers accessing e-business resources. Our
products and technologies are designed to manage digital identities. Our secure
user identification solutions allow companies to control access to their
information networks at the level appropriate for each particular user and are
designed to provide the authentication necessary to prevent online fraud and
other computer related crimes. Our solutions provide businesses, service
providers and consumers the confidence to do business online by addressing the
administrative, security and usability concerns inherent in network computing.
Our digital identity framework ensures that users are properly authenticated
while allowing network managers to securely administer the diverse systems that
comprise their network environment. Our solutions also provide non-repudiation
of online transactions. For example, we provide the authentication technology
necessary to enable ATM transactions to occur over the Internet, downloading
electronic cash directly onto a card through a variety of terminals, such as
PCs, televisions and mobile telephones. Our ActivCard Gold product incorporates
multi-application smart cards to provide a platform to consolidate various
independent credentials, such as a corporate picture ID, building access,
network login, online digital signature and credit card, thereby enabling a
personalized online experience. These digital credentials collectively define
the digital identity of a user or system.
Through our strategic relationships with companies such as AXENT Technologies,
Hewlett-Packard, Lucent Technologies, Novell, Schlumberger, SCM Microsystems,
Sun Microsystems and Visa International, our digital identity framework has been
embedded in several leading systems and components. In addition, our digital
identity framework is compatible with the products and technologies of Baltimore
Technologies, Entrust, Microsoft, Mondex International, a division of
MasterCard, SCM Microsystems and other reader manufacturers, Sun Microsystems,
and Verisign. We also sell our products through distribution partners, such as
original equipment manufacturers (OEMs), value-added resellers (VARs), system
integrators and distributors.
Historically, our principal customers have been European banking and financial
services companies. These financial and other institutions use our products for
advanced remote and Internet banking as well as Internet access, secure access
to data and increased efficiency in corporate network connectivity. We also
market our products to companies in the telecommunications, healthcare,
networking technologies and manufacturing sectors. Based on the number of our
products sold, we believe that there are more than one million people using our
products for secure banking, web access and remote access to corporate networks.
INDUSTRY
Individuals and corporations increasingly rely upon computer networks, including
the Internet, to communicate, access information and conduct commerce. Modern
businesses frequently employ one or more local area networks to connect computer
users located in a single facility and wide area networks to connect users in
disparate facilities. The Internet and other direct links provide users access
to information and provide customers, suppliers and others with access to an
enterprise's computing resources and information.
This online business environment has different security requirements than
traditional commerce environments. Enterprise networks are no longer defined by
the physical boundaries of a single company location but often encompass remote
sites and include mobile users and telecommuters around the world. All these
changes introduce numerous additional security concerns because of the increased
use of remote access and extranets and the reliance on shared public networks
such as the Internet rather than private leased lines for e-mail and electronic
commerce. Security requirements therefore are becoming much more complex.
The Internet significantly impacts our professional and personal lives, from the
distribution of information to business logistics, from consumer retailing to
entertainment, and from banking to customer service. The migration of many
companies towards Internet-based business models is occurring at a rapid pace
and is changing the nature of how
33
<PAGE>
companies conduct their businesses. Disparate systems are coming together and
becoming more accessible and less expensive to use. As a result, businesses are
developing strategies to capitalize on the opportunities and economies made
possible by the Internet.
The evolution of Internet technology has resulted in the desire for service
providers to personalize what people experience when interacting with network
connected systems and services. This could include the creation of personalized
remotely accessed electronic desktops or "webtops" that follow the user
regardless of how or where the user is connected to the network, such as at
home, in a hotel room, in a car, on an airplane, or in a shopping mall. Such
connections already exist through PCs, personal digital assistants (PDAs),
televisions and other terminals.
ENTERPRISE DATA SECURITY
In the past, network security was primarily the concern of companies engaged in
security sensitive industries. For example, banks and financial institutions
have generally used some form of security technology, such as encryption, to
protect customer transactions, such as interbank transfers. Increasingly,
however, these financial institutions are extending the reach of their services
across the Internet and, as a result, are being forced to implement additional
data security measures adapted to this public infrastructure. Historically,
healthcare and insurance companies have ensured the confidentiality of their
data and patient records by limiting the amount of information online and
relying on paper-based systems. Increasingly, these institutions are attempting
to share more information online with healthcare providers and patients, which
is requiring enhanced data security to protect confidentiality.
The recent and dramatic development of electronic commerce, coupled with the
proliferation of extranet and intranet applications, has substantially increased
network complexity for all businesses. The risks of network fraud and the
challenges of maintaining online confidentially have increased correspondingly.
Unauthorized intrusions, falsifications and damage on corporate computer
networks are costly to companies. Transaction security is a fundamental concern
for companies migrating more of their business to the Internet. A growing market
for Internet security software products has emerged as a result, estimated by
International Data Corporation (IDC) at $4.2 billion in 1999 and forecasted to
grow to $7.4 billion by 2002.
E-COMMERCE
Computer networks provide an efficient medium for communications and commerce
because of their global reach, accessibility, use of open standards, and ability
to enable real-time interaction. Until recently, computer networks have been
used primarily for informal messaging, general information browsing and the
exchange of non-sensitive data. Organizations are now using computer networks
for increasingly sensitive tasks, such as attracting new customers, accessing
new markets, improving customer service and satisfaction and lowering support
and distribution costs.
The use of computer networks is extending to a number of more valuable and
sensitive activities, including business-to-business transactions,
Internet-based electronic data interchange (EDI) and online retail purchases and
payments. IDC estimates that the number of Internet users worldwide will grow
from 142 million in 1998 to 399 million in 2002, with electronic commerce
growing from $50 billion to $774 billion over the same period. Online companies
have enjoyed dramatic growth in their customer base and revenue as consumers
execute an increasing number of transactions over the Internet. The Internet's
ease of use, 24-hour availability, speed of delivery, global reach, and ability
to facilitate research and product and vendor comparisons are helping to fuel
this growth in e-commerce. The growth in the use of the Internet for
communications and transactions, however, has raised serious concerns on the
part of businesses and consumers regarding authentication and non-repudiation.
AUTHENTICATION AS THE KEYSTONE TO DATA SECURITY
Implementing network security today requires a special set of skills and
products that are generally lacking in corporate information technology
departments. Experts from government and industry organizations have
standardized the classification of data security as follows:
34
<PAGE>
- ACCESS CONTROL manages access rights to sensitive information (e.g.,
firewalls) and is implemented as a basic feature of operating system
platforms and file systems;
- CONFIDENTIALITY involves the encryption of data transmissions so that only
the intended recipient can access the information (e.g., Data Link
Encryption and Virtual Private Networks (VPN), including the Secure
Sockets Layer (SSL));
- DATA INTEGRITY ensures that data is not compromised or manipulated (e.g.,
products incorporating Digital Signature or Message Authentication Code
(MAC) technology);
- NON-REPUDIATION provides undeniable proof that transactions, once
committed, are valid, binding and irrevocable; and
- AUTHENTICATION proves the identity of users and systems on the network.
Authentication, in particular, is a critical component of access control,
confidentiality, data integrity and non-repudiation. For instance, to provide
access to the network or to sensitive information, the network must be able to
identify the user accurately. Network systems, services and applications
currently authenticate online users with a variety of digital credentials,
including static passwords, dynamic passwords and digital signatures.
STATIC PASSWORDS. Primarily because of their widespread availability and
ease-of-use, nearly all processing systems in use today employ simple passwords
for authentication purposes, which are only periodically changed. However, a
password cannot be relied upon for absolute proof of identity because any
individual possessing it can gain access. Static passwords are susceptible to
various forms of interception and replay which further serve to diminish their
security.
DYNAMIC PASSWORDS. A more advanced form of authentication involves the use of
dynamic passwords that change with each use, making their interception useless.
Dynamic passwords are often based on a combination of different variables or
codes, one of which is typically a secret code, and others which are objective
variables such as event or time based codes. Because the variables change on
every log-in, combining the secret code or "key" with these variables produces a
password that is valid for only one particular session. This system is referred
to as symmetric key infrastructure because of the use of the same secret code or
"key" at both ends of the communication channel.
DIGITAL SIGNATURE. Public Key Infrastructure (PKI) is an authentication
technology that relies on a public-private key pair rather than solely secret
keys to encrypt and decrypt data and to generate digital signatures and
certificates. Digital certificates are secure data files containing a user's
public key along with other information identifying that user. The public key is
made available to anyone who wants it, but the corresponding private key is held
only by its owner. Senders use the public key to encrypt data to be sent to a
user, and the user decrypts the data by employing the corresponding private key.
A trusted third party (a Certification Authority, also known as a CA) takes
responsibility for issuing public/private keys, signing certificates and
vouching for the binding of a particular key to a user, much like a government
agency might vouch for its citizens by issuing passports. PKI is emerging as a
leading technology for future application and network security, including access
control to information resources from web browsers, secure e-mail, signing
digital forms, firewalls, routers supporting VPNs, directories, and single
sign-on to corporate applications.
TWO-FACTOR AUTHENTICATION. Two-factor authentication is the combination of
something the user has and something the user knows. The use of an automated
teller machine (ATM) is a familiar application of two-factor authentication,
with its bank card (SOMETHING THE USER HAS) and personal identification number
(PIN) (SOMETHING THE USER KNOWS) components. With network applications, because
credentials that are written down or stored on a PC are vulnerable to disclosure
and subsequent use by unauthorized persons, the industry is adopting two-factor
authentication. In this case, the SOMETHING THE USER HAS is very often a small
handheld device, known in the industry as a token, which is used to create a
physical connection or to generate dynamic passwords, while the SOMETHING THE
USER KNOWS is a PIN. Tokens can take the form of a connector to the PC, a device
similar to a pocket calculator, a ring or a credit card. Several million people
are using tokens worldwide for applications ranging from remote access to
corporate resources to secure Internet banking. Two-factor authentication is a
superior security solution to static passwords as users are
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unlikely to part with the physical component of a two-factor authentication
solution because doing so would block the user's own access. Static passwords,
by comparison, can be divulged to third parties without in any way impeding the
legitimate user's access.
SMART CARDS AS THE ENABLING PLATFORM
The smart card, also known as the chip card, is another area of technology
development that is increasingly used for both e-commerce and enterprise data
security applications. The smart card is a plastic card, the size of a credit
card, with its own embedded processor chip and operating system. Smart cards are
the most recent step in card evolution, improving upon the traditional magnetic
stripe currently in use on many plastic cards. The smart card acts like a
miniature PC with its own processor/memory architecture, using an operating
system on which applications are executed. Smart cards, like PCs, are capable of
supporting multiple user applications simultaneously and can be updated as new
information or applications become available, rather than requiring a
replacement card. Smart cards provide an ideal platform to consolidate a user's
various independent credentials, such as a corporate picture ID, building
access, network login, online digital signature and corporate credit card, among
other things. Multi-application smart card operating systems are being developed
by Sun Microsystems (JavaCard), Maosco (Multos) and Microsoft (Windows SC).
Banks in Europe and Asia have deployed smart cards for several years and already
have millions of users. Smart cards are being used by banks and financial
institutions as credit and debit cards, and also for electronic cash. American
Express has recently announced its Blue, a next-generation credit card which
combines smart card technology with existing magnetic stripes. In the United
States, smart cards are currently in use in self-contained communities, such as
college campuses and offices. The U.S. government recently made use of smart
card technology to re-engineer the logistics surrounding the deployment of
troops.
The wide-scale deployment of multi-application smart cards is most likely to be
driven by current credit card issuers. It is these institutions that possess the
necessary infrastructure and experience to widely implement multi-application
smart cards. Financial service providers will start by integrating customer
identification capabilities, which Visa International and Mondex International
are currently doing, and by continuing to move into other value-added
applications. Smart cards support multiple applications (e.g., credit, debit,
e-cash, loyalty, building access, network login) and can be updated while in the
customer's possession. Financial service providers that adopt this platform will
be able to sell additional services to customers without having to update or
modify the software application. Doing so on other platforms would generally
require the financial service provider to replace cards already shipped to
customers. This model is also available to other industries currently using card
platforms for customer loyalty/account control. Dataquest estimates that 800,000
network access smart cards were deployed globally in 1999 and that by 2003 that
number is expected to increase to 125 million.
THE INDUSTRY CHALLENGE
Security products currently employed in the market place generally involve a
trade-off among administrative, security and usability features. The currently
available security products are rarely able to offer a high degree of security
functionality and ease-of-use without significantly increasing the total cost of
network ownership. According to a recent Forrester Research survey of the
"global 2,500 firms," password maintenance, password security, and managing
multiple tokens are identified as the most significant authentication issues
faced today.
ADMINISTRATION. Networks are heterogeneous by design and each system, service or
application typically requires its own set of user credentials. The
administrative complexity of a network is typically compounded by the variety of
security systems in place for each of its services and applications. This
variety of security systems require multiple passwords which are often lost or
forgotten by the user. According to a recent survey by Forrester Research, more
than 40% of help desk calls involve resetting passwords for employees. In many
situations, the approach to network security involves the addition of one or
more dedicated servers to facilitate the security solution, thereby adding
significantly to the administrative burden of maintaining the network. Further
exacerbating network administration is
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the lack of scalability in most security systems: as the network expands, the
security system is often outgrown and needs to be duplicated or replaced.
SECURITY. Static passwords historically have been used to solve network security
issues. However, static passwords are often written down, readily divulged to
third parties and often obvious. Users also typically select the same password
for all their applications and services, thereby allowing the third party who
obtains one password to enjoy the entire range of access. Dynamic passwords
successfully address some of the problems of static passwords. In isolation,
however, dynamic passwords generally require a pre-existing relationship between
the user and the network service and do not provide non-repudiation services.
Many dynamic password implementations generate the password directly on the PC,
rather than within a token, and are therefore vulnerable to unauthorized access.
Similarly, most PKI implementations either store the keys directly on a PC hard
drive or generate the signature directly on the PC, thereby making the security
system similarly vulnerable. In addition, while PKI is emerging as a leading
security technology and provides non-repudiation, it is often too costly and
administratively burdensome to be implemented in existing network environments.
USABILITY. Networks often employ different security systems to access various
parts of a network to enable certain transactions. Users must possess the
hardware and codes necessary for each system in place as well as the knowledge
to operate that system. This is becoming increasingly complex as the number of
security systems a user faces proliferates. In some cases users are now required
to remember numerous passwords which identify the user to the corporate network
systems and online suppliers. In addition, security solutions which share user
credentials on a computer's hard drive restrict the user to that specific
computer.
THE ACTIVCARD SOLUTION
Our software products and technologies are designed to securely create,
distribute, protect and control digital credentials online to validate the
identity of various users. We employ a combination of patented authentication
and smart card technology and management tools to provide companies and
individual users with an administratively efficient, easy to use, cost-effective
and secure method of managing digital identities. Our solution provides a
digital identity framework that offers secure and transparent interactions
between users and services. Our digital identity framework offers a seamless
transition from the existing multiple authentication methods to one which
incorporates a single digital identity. Our digital identity framework provides
a lower total cost of ownership and a higher level of security, usability and
efficiency than other electronic security and authentication methods.
Our digital identity framework:
- ENABLES PERSONALIZED SERVICES FROM ANY NETWORK-CONNECTED DEVICE. The
proliferation of the Internet and enhancements to the telecommunications
infrastructure have resulted in a wide range of standards-based
Internet-connected devices, including PCs, televisions, PDAs and mobile
phones. Our digital identity technology allows users to securely access
personalized Internet-based services through a variety of network-
connected devices. By combining mobility, through device independence,
with a higher level of convenience and security, our solutions enable
improved business processes and increased user satisfaction.
- PROVIDES AN OPTIMAL COMBINATION OF SECURITY AND EASE-OF-USE. Our digital
identity framework brings the simple ATM experience -PIN, enter- to
network users. This feature of our digital identity framework ensures that
the agreed upon security is in place without overburdening the user with
its complexity. In addition to simplifying the network login, our digital
identity framework also enables other applications requiring user
identification, such as building access.
- FACILITATES SECURE ELECTRONIC COMMERCE TRANSACTIONS. We believe that many
large scale deployments of multi-application smart cards will be driven by
current credit card issuers. Our digital identity framework adds logical
security services to the multi-application smart card platforms being
developed by leading financial service providers Visa International (Visa
Open Platform) and MasterCard/Mondex (Multos) for electronic commerce
transactions. Our digital identity framework ensures a high level of
security for on-line commerce by enabling digital signatures and encrypted
e-mail.
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- SUPPORTS MULTIPLE CREDENTIALS (E.G., DIGITAL CERTIFICATES, DYNAMIC AND
STATIC PASSWORDS). Our digital identity framework bridges the gap between
existing infrastructures and new technologies, by incorporating existing
and emerging authentication technologies in a single product. By
supporting multiple credential types, our digital identity framework
offers a seamless migration from existing authentication methods to
emerging technologies while hiding the system complexities from the user.
- OFFERS A UNIQUE, MODULAR AND HIGHLY SCALABLE DESIGN. Unlike many of our
competitors' products, which often require a separate dedicated network
server, our technology can be integrated into existing servers with only
minimal disruption. Our digital identity framework has been specifically
designed to support industry standard smart card platforms, drivers and
application programming interfaces (APIs) so as to be easily embedded into
or integrated with leading network systems, applications and services
delivered by companies such as AXENT Technologies, Hewlett-Packard, Lucent
Technologies, Microsoft, Novell, Schlumberger, SCM Microsystems and Sun
Microsystems. Because of our relationships with integration partners, our
digital identity framework is already preinstalled on many different
network server platforms being sold today. Our solution is able to utilize
customers' servers without requiring either additional servers or
substantial overhauls to existing servers. Our patented technology for
password synchronization allows solutions incorporating our digital
identity framework to scale for much larger implementations.
Existing systems have independent methods of identifying their users. As these
systems shift to the Internet, users will want to consolidate the various
credentials used to identify them on-line. This consolidation of credentials is
then stored on a smart card and becomes a personalized digital identity. Our
digital identity framework has the ability to consolidate the various
credentials and methods of authentication. A token or smart card coupled with
the appropriate PIN is all that is required for the user to successfully access
the services sought. Inserting a card and entering the valid PIN enables an
individual user's smart card to generate the credentials required to establish a
secure, trusted path between the user and the service requested.
We believe that our digital identity framework, when embedded into network
systems, services and applications currently being delivered by market leaders,
has the potential to change the way that individuals and corporations conduct
business and interact with Internet-based services. For example, in the future
it may be possible that the smart card used by a business traveler in checking
out of his hotel will simultaneously generate and file an expense report with
that traveler's employer. Personalized "webtops" offer a new level of
interaction between users and corporate, government and consumer services.
Combined with network services designed to support remote users, our digital
identity framework allows users to access personalized "webtops" through a
variety of hardware platforms, including remote PCs, kiosks and set-top boxes.
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[LOGO]
OUR BUSINESS STRATEGY
Our objective is to become the leading supplier of products and technologies
enabling information technology managers, product manufacturers, system
integrators and network service providers to integrate digital identity services
quickly and efficiently into their applications. Our strategy to achieve this
objective encompasses the following key elements:
- LEVERAGE OUR EXISTING CUSTOMER BASE. We intend to leverage our existing
customer base, which has deployed our token-based authentication solutions
to more than one million users. We will seek to migrate these customers to
our new product offerings, including ActivCard Gold. We also intend to
market our product offerings to new customers by referencing our existing
customer base.
- EXPAND OUR BASE OF STRATEGIC PARTNERS, OEMS AND DISTRIBUTORS. We are
committed to expanding our base of strategic partners, original equipment
manufacturers and distributors to ensure that our technology is available
on as many servers and software platforms as possible. We have integrated
our authentication technology into the network management systems and
Internet security suites of industry leaders such as AXENT, Lucent and
Novell. We expect these and our other strategic relationships to provide
significant market leverage as the need for managing digital identity
solutions develops in step with the increase in electronic commerce.
- CUSTOMIZE FLEXIBLE PRICING MODELS TO ADDRESS OUR CUSTOMERS' NEEDS. We are
exploring pricing alternatives with customers based on their individual
needs. Our products are generally offered with up-front license fees.
However, we are developing flexible pricing alternatives, applicable to
service providers, designed around recurring per-user license fees. We
believe that increased pricing flexibility will better serve to align the
interests of our customers with our own and could lead to steadier revenue
streams in the future.
- INCREASE SALES THROUGH OUR STRATEGIC PARTNERSHIPS. We intend to increase
sales by enhancing our relationships with strategic partners who, by
embedding our technology in their products, promote our products while
serving their own interests. We frequently participate in sales calls with
our partners to potential purchasers in order to help market products in
which our solutions play a principal part.
- DEVELOP ADDITIONAL KEY TECHNOLOGY COMPONENTS FOCUSED ON MANAGING MULTIPLE
CREDENTIALS. We will continue to research and develop products and
technologies that are focused on the creation, distribution, protection
and control of multiple credentials. We are providing the market with
toolkits so that our technology can be easily
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embedded or integrated with solutions from the leaders in network systems,
services and applications, and complement the capabilities provided by
industry leaders in enterprise computing.
- MAKE DIGITAL IDENTITY THE ESSENTIAL COMPONENT ENABLING NEXT GENERATION
INTERNET-BASED BUSINESS. We are establishing ourselves as a leader in
digital identity technology that links card providers, financial services
providers and network system providers, thus allowing the smart card to be
deployed in large-scale system implementations. We believe smart cards
will be a dominant platform on which digital credentials are securely
stored or generated. The digital identity framework has the potential to
take computing to a personal level, with the existing PC serving as a
generic terminal and the personal identity being provided by the smart
card or other personal security device.
PRINCIPAL PRODUCTS AND TECHNOLOGY
Our principal products and technology are built upon our digital identity
framework and software development kits. Our digital identity framework is
designed to be scalable and permit the authentication process to be performed
with a comparatively higher throughput than our competitors. The level of
security in our products is also higher because we are able to combine three
variables in generating a dynamic password. Our range of products includes
end-user products and back-end server solutions.
Our digital identity framework includes client, back-end and administrative
software modules and application programming interfaces. The client services
support standards based interfaces, encryption standards and smart card
operating systems, including but not limited to Microsoft PC/SC and CAPI/CSP,
PKCS#7, 10 and 11, DES, ANSI X9.9, JavaCard, Visa Open Platform and Multos. It
offers support for our patented synchronous authentication algorithms for user,
host and message authentication services and offers many ease-of-use features
such as password drag-n-drop, remote initialization and other smart card aware
services. Our back-end and administrative services include symmetric
authentication services, PIN policy management, local and remote initialization
services, import and export services, "pull" services and agents, including
random, timestamp, x9.17 derivation, key pair generator and certificate
requestor (CA integration), "push" services and agents to ActivCard personnel
security devices, the post issuance server and the static password manager.
We provide our partners with software development kits that allow them to
integrate our digital identity framework into their network applications,
systems and services, and include both client and administration feature sets.
Our software development kits are the foundation for our packaged products, as
well as partner integrations and software licensing arrangements.
END-USER PRODUCTS
We have a variety of end-user smart-card products which generate one-time use
passwords for secure log-in, remote and Internet access and digital signatures.
These products are both delivered by us to customers and packaged and sold by
OEMs and integration partners.
- ACTIVCARD GOLD. ActivCard Gold is an easy-to-use, software and hardware,
smart card-based authentication package used to access multiple
applications, systems and services. It stores and processes user data and
identification that can then be used for various forms of authentication,
including physical access and network access using the same smart card
token. It supports advanced applications and security concepts and can be
expanded for future applications. For corporate environments, ActivCard
Gold provides a high level of security to the desktop environment, either
for local access or when users are at remote locations. ActivCard Gold
provides the following advantages:
- local login to the Microsoft Windows NT domain;
- remote access to the corporate network (through a firewall or network
access server using RADIUS);
- secure access to the corporate web server or only to specific pages;
and
- e-mail digital signature and encryption.
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- ActivCard Gold also allows companies to extend secure access to customers,
dealers and suppliers for extranet applications, web-hosted services and
electronic commerce (e.g., home banking and Internet retail). Coupled with
ActivCard back-end authentication software, ActivCard Gold provides the
familiarity of the ATM interface (PIN, enter) with advanced authentication
and administration services.
- ACTIVREADER. Our ActivReader smart card reader uses a design we have
developed and refined over the past ten years. The ActivReader is the
first reader designed for the newest multipurpose smart card applications.
ActivReader provides a secure, portable, hand-held smart card terminal
equipped with a liquid crystal display and a keypad that can work
off-line, or when connected to a personal computer via a serial link or to
a server through a phone line. ActivReader provides security in excess of
that generally required by today's financial services industry for their
electronic transactions. It has been certified compliant with the standard
secure electronic transmission protocol used by Europay, MasterCard and
Visa International (EMV).
- ACTIVCARD ONE. ActivCard One is a token-based, end-user product for use by
customers requiring fewer security features than those offered by our more
complex products. ActivCard One is a device that is integrated into
numerous market leading products and scalable back-end server solutions.
- ACTIVCARD PLUS. ActivCard Plus is a token-based, end-user product that can
be programmed to perform user, host and message authentication and can
authenticate with up to four different servers from the same token. This
product can verify that the server is legitimate, offer message
authentication, remember prior transactions and has dual tone,
multi-frequency capability.
- SCHLUMBERGER CRYPTOFLEX SECURITY KIT. A PKI-only implementation of
ActivCard Gold that is licensed to Schlumberger for distribution with its
smart cards.
BACK-END SERVER SOLUTIONS
We have integrated our server software with a number of common industry hardware
and server-side operating system platforms. Our software is designed to ensure
that our end-user, token-based security solutions run smoothly and securely
while minimizing the administrative burden on information technology
professionals charged with managing network security.
Some examples of our back-end server solutions are:
- ACTIVPACK FOR WINDOWS NT. ActivPack for Windows NT provides secure remote
access, secure Internet website access and secure domain login for Windows
NT environments. ActivPack for Windows NT extends the standard security
mechanism with ActivCard dynamic passwords.
- ACTIVPACK FOR MVS/RACF. ActivPack for MVS/RACF adds dynamic password
authentication to leading access control products for IBM S/390, replacing
the RACF static password.
- ACTIVPACK FOR NOVELL DIRECTORY SERVICES. ActivPack for Novell Directory
Services is a secure, server-based solution that links users to a network
through Novell Directory Services (NDS). NDS provides authentication,
authorization, and accounting services for users by connecting them to
services running anywhere in the network.
- AXENT TECHNOLOGIES DEFENDER SECURITY SERVER (DSS). DSS provides two-factor
authentication for leading operating systems, communication servers, and
firewalls. The DSS is a central point of dynamic password authentication
for both remote and local access to critical resources. The
challenge/response authentication process along with the user's unique
token ensures only authorized users gain access.
CUSTOMERS
Historically, the final buyers of our products have been in European banking and
financial services. These customers are generally sophisticated and
knowledgeable purchasers of security systems and work with highly confidential
information. We believe that as corporate networks proliferate and become more
complex, the number of industries
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concerned with system security and access to information will grow. In the year
ended December 31, 1999, Sparbanken and Kreditkassen each accounted for more
than 10% of our total revenue.
Our customer base includes the following entities:
<TABLE>
<S> <C>
AIB Komercni Banka
Alpha Media Kreditkassen
Axent Logos
Barclays Protect Data Slovaquie
Blue Cross/Blue Shield Provinsbankerna
Cyber-COMM Risk Management
Eika Gurppen Sparbanken
Expandia Banka Telenor Novit
Internet Security Hewlett Packard
Ion Networks Visa
</TABLE>
SALES, BUSINESS DEVELOPMENT AND MARKETING
SALES
We market and sell our products and technologies through a network of
distribution partners such as systems integrators, value-added resellers,
original equipment manufacturers and international distributors supported by our
direct sales force. Our sales force is responsible for soliciting prospective
customers and providing technical advice and support with respect to our
products and technologies.
As of December 31, 1999, we employed a direct sales and marketing force of
forty-eight individuals located in offices in France, Germany, Singapore,
Sweden, United Kingdom and the United States to market our products and
technology to industry and vertical market segments, including electronic
commerce, financial, telecommunications, healthcare and information service
companies.
Our distribution partners typically incorporate products from a variety of
suppliers to address a broader set of final buyer requirements. We currently
have over 50 distribution partners in over 30 countries worldwide, including
Alphamedia (France), Icon Systems (Germany), Ingram Micro (Worldwide), Intercede
(UK), NCL Communications (Japan), Protect Data (Sweden), Risk Management (US)
and Zaslon (Slovenia).
We provide technical support with personnel located in our offices in: Suresnes,
France; Fremont, California; Watchung, New Jersey; and Singapore. These offices
provide technical support to our integration and distribution partners, who in
turn, provide first level service to final buyers. We offer formalized product
training programs and have established "ActivCard Authorized" reseller programs
in the marketplace.
In addition, we provide telephone and online services to answer inquiries
related to implementation, integration and operation of our products and
technologies. We are increasing the resources we dedicate to technical service
and support in line with the increased distribution of our products, including a
technical service web site with controlled access through the Internet. We offer
a maintenance program for the software products covering updates and minor
releases. Our standard practice is to provide a warranty on all our products for
one year after shipment for hardware products and three months after shipment
for software products.
BUSINESS DEVELOPMENT
Our business development efforts are focused on establishing and managing
collaborative relationships with strategic industry participants. Key to the
success of this effort is the coordination of resources across different
functional organizations and regional operations throughout our company.
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Our strategic relationships assist us in expanding our sales, marketing and
technical capabilities and increase the distribution and market acceptance of
our digital identity products and technologies. Integration partners embed our
technology in their own products, which are then sold to the final buyer. We
believe that our relationships with these integration partners allow us to
cost-effectively leverage third-party products and thereby provide our final
buyers with customized digital identity technology solutions. We have developed
significant strategic relationships with integration partners in an effort to:
- incorporate our products into third-parties' products;
- conduct joint research and development efforts; and
- develop joint proposals and presentations for products and services and
reseller arrangements.
Our strategic relationships currently include the following:
- AXENT TECHNOLOGIES. AXENT has embedded our digital identity framework into
its OmniGuard Defender enterprise security server and network security
systems.
- HEWLETT PACKARD / VERIFONE. Hewlett Packard is delivering our ActivReader,
portable trusted smart card reader, as its next generation Personal ATM.
- MONDEX INTERNATIONAL. We have contracted with Mondex International, a
subsidiary of MasterCard, to deliver logical security services for Multos
smart cards, making Multos cards compatible with our digital identity
framework.
- NOVELL. Novell has embedded our digital identity framework into its core
product lines through Novell Directory Services.
- SCHLUMBERGER. Schlumberger, one of the world's largest smart card
manufacturers, will deliver products to the market based on our digital
identity framework.
- VISA INTERNATIONAL. We have contracted with Visa to deliver logical
security services for Visa Open Platform (VOP) smart cards, making the VOP
cards utilized by member banks compatible with our digital identity
framework.
MARKETING
We utilize a variety of marketing initiatives to support our business
strategies, including the following:
PRODUCT MARKETING. The product marketing process has been key in our transition
from an engineering consulting services company to a network products company.
Our product marketing effort supports our strategy by defining products that
meet market needs and are deliverable via selected channels. We focus our
product marketing efforts on market requirements and delivery of products to
market. Additionally, our solutions marketing efforts focus on close
coordination with the product strategies of our strategic partners insuring the
market viability and acceptance of their products and solutions. Our recent
sales proposals to customers include flexible price modeling that can be
tailored to the individual customer's needs. We believe that such price
flexibility will better serve to align the interests of our customers with our
own and may lead to revenue streams in the future having a more significant
recurring revenue component.
MARKETING COMMUNICATIONS. Our marketing communications strategy combines
different programs and mediums to increase brand and product awareness. We use
direct marketing and leverage our strategic partners in order to maximize our
market exposure, while at the same time controlling our marketing costs. These
efforts include an emphasis on press and analyst communications, advertising,
public relations, World Wide Web, telemarketing, trade shows and seminars. Our
marketing programs are designed to target information technology managers,
service operators, and industry-leading integration partners.
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RESEARCH AND DEVELOPMENT
We develop technology-oriented solutions for advanced credential management
capabilities, which are based on customer requirements but with broad market
applicability. The focus of our research and development organization is to
implement advanced technology rapidly and in a manner that can be integrated
into large-scale systems. Specific areas in which we are investing research and
development resources include the support of multi-application operating systems
for smart card platforms, embedded systems and trusted devices, as well as
evaluation and implementation of specifications defined by international
standards organizations.
Our research and development organization possesses a broad range of industry
expertise, including hardware and software design, cryptographic technology,
network application, Java and smart cards. Additionally, we have experience in
delivering products and technology for various market segments such as banking,
healthcare, defense, enterprise computing and telecommunications.
We have increased the resources assigned to the technical direction function
that is focused on designing the architecture of our software and hardware
technology. These additions have made our company capable of supporting the
requirements of the advanced integration solutions necessary for success in the
broader networking market.
INTELLECTUAL PROPERTY
We rely on a combination of patents, trade secrets, copyright and trademark law,
nondisclosure agreements and technical measures to protect our intellectual
property and proprietary rights. We have entered into confidentiality and
licensing agreements with our employees and distributors, as well as with our
customers and potential customers seeking proprietary information. We also limit
access to and distribution of our software, documentation and other proprietary
information.
We currently have three major patents directly applicable to our current product
offerings issued in the United States. These patents cover various aspects of
security technology. In addition to the patents granted in the United States, we
have been granted patents in Europe, Australia, Canada, Mexico, Taiwan,
Singapore and Hong Kong. We are currently in the process of negotiating a
license to use two patents in Japan. The three major patents are briefly
described as follows:
- three-variable synchronous algorithm for generating dynamic password,
which provides a higher level of security than alternative implementations
using a single variable;
- methodology used for the resynchronization of the variables utilized in
the generation of dynamic passwords, which provides a significant increase
in system performance, throughput and scalability; and
- generation of a synchronous dynamic password on a smart card processor
using a time-based variable as input, which provides a higher level of
security than alternative implementations that generate a password by
removing secrets from the card.
In addition to these three patents, we have been granted four additional patents
for the use of handheld portable devices in the interactive television and
loyalty application fields. Our patents and applications expire at various dates
ranging from 2008 to 2016. In general, patent rights are of similar duration
(approximately 20 years) in all countries where patents have been issued. The
nature of the process for obtaining patents and the extent of protection
provided by patent laws varies from country to country.
MANUFACTURING, SOURCE OF SUPPLY AND QUALITY CONTROL
We have established relationships with hardware assemblers and multinational
software reproducers. Existing relationships include Omni (Singapore), Sharp Win
(Hong Kong) and Kidder (Hong Kong) for hardware assembly; and Metatec (U.S. and
The Netherlands) for software reproduction. Additionally, we have outsourcing
arrangements for product warehousing and fulfillment services. Our global
production and distribution capacity supports our current requirements and can
easily be increased by augmenting existing production lines with current
suppliers. We maintain
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<PAGE>
ownership of all manufacturing tools, molds and software, supply all critical
components and define all manufacturing processes and quality control plans,
thereby granting us the ability to relocate the manufacturing process should any
unforeseen interruption occur.
HARDWARE. ActivCard hardware, including tokens, smart card readers, and the
ActivReader trusted terminal/smart card reader are assembled by our Hong Kong-
and Singapore-based manufacturers at facilities that are either ISO9000 and
ISO9002 or in the process of becoming certified. ISO9000 refers to the
international guidelines on quality management and system elements established
by ISO (International Organization for International Standardization), an
international body of normalization organizations. ISO9002 is a quality
assurance model used by companies that design, produce, install, inspect and
test service items. Our hardware products are shipped directly to distribution
partners or to corporate warehouses in Fremont, California and Suresnes, France
for subsequent distribution.
SOFTWARE. Our software products, such as ActivCard Gold and ActivPack for
Windows NT, are produced and packaged in Fremont, California and Breda, The
Netherlands. High capacity CD-ROM replication, full-service kit assembly,
warehousing, and direct-to-user product fulfillment is provided by Metatec (U.S.
and Netherlands).
SUPPLIERS. Our products are designed and built with high quality standard parts
and components. Our current suppliers include Samsung, OKI, Maxim and Siemens
AG. We generally maintain a three-month supply of critical components, including
microcontrollers, LCDs and transistors. The relationships with our suppliers of
critical components have existed for over two years and we have not suffered any
material breaks in supply during that period. We currently purchase smart cards
from Schlumberger and PCMCIA smart card readers from SCM Microsystems.
QUALITY CONTROL. We maintain strict internal and external quality control
processes, which are performed during product design, production and acceptance.
We contract with Societe Generale de Surveillance (Switzerland) to assure that
our quality control specifications are adequately met at various levels from
inventory audits to final product inspections. During 1999, we have implemented
a computer-assisted production and inventory management system to increase
quality as production volumes advance.
COMPETITION
The authentication market is highly competitive. The markets for our products
and services are intensely competitive and are characterized by rapidly changing
technology and industry standards, evolving user needs and the frequent
introduction of new products. We believe that the principal factors affecting
competition in our markets include product functionality, performance,
flexibility and features, use of open standards technology, quality of service
and support, company reputation and price.
We face significant competition from a number of different sources. Many of our
competitors are larger and more established, benefit from greater name
recognition and have substantially greater financial, technical and marketing
resources than we have.
Our competitors include, among others, Datakey, Inc., a maker of proprietary
smarts cards and token solutions, Gemplus S.C.A., a smart card manufacturer, RSA
Security, Inc., a token and network security manufacturer and cryptographic
technology supplier, and Vasco Data Security, Inc., a token manufacturer and
supplier.
In addition, there are several smaller or start-up companies which we compete
with from time to time. We also expect that competition will increase as a
result of consolidation in the information security technology and product
reseller industries. We may be unable to compete successfully in the future with
our competitors, which may adversely affect our business.
EMPLOYEES
As of December 31, 1999, we had 113 full-time employees worldwide. Of these, 37
were involved in research and development, 10 were involved in manufacturing
engineering and quality control, 48 in sales and marketing and 15 in general
administration. As of December 31, 1999, 41 of our employees, including our
executive officers, were based
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in the United States, 69 were based in Europe and 3 were based in Asia. As
required by French law, we hold periodic meetings with representatives of our
employees. We consider our relationships with our employees to be satisfactory
and we are not a party to any collective bargaining agreement.
PROPERTIES
Our principal administrative, research and development, sales, marketing and
support facilities consist of 12,000 square feet of office space leased in
Suresnes, France. We occupy these premises under a lease expiring on June 30,
2006. We may, however, terminate the lease on June 30, 2000 or June 30, 2003
without any penalty. We also lease 10,700 square feet of office space in
Fremont, California, which houses our North and South American sales, marketing,
development, and support activities. This lease expires on February 28, 2008. We
also lease, pursuant to short-term leases, facilities in Singapore and New
Jersey, primarily as offices for our sales force and technical support
personnel. We believe that our facilities are adequate for our current
operations.
LEGAL PROCEEDINGS
From time to time, we have been parties to or targets of lawsuits, claims,
investigations and proceedings. Generally, such incidents are handled and
defended in the ordinary course of our business. Other than as described below,
we do not expect any liabilities, which may arise from any such proceedings
currently pending or anticipated to have a material effect on our consolidated
results of operations or financial condition.
On October 25, 1996, Fintel S.A., a company that develops and markets electronic
systems, named us in an unfair competition action against Nomad Systems S.A. We
have requested the dismissal of the claim and believe that this litigation
between Fintel and Nomad Systems S.A. will not have any material adverse impact
on our operations or financial condition. A judgment of Tribunal de Commerce de
Paris dated on May 27, 1998 has agreed to a dismissal of the claims requested by
us.
On October 31, 1997, an action was filed in the United States District Court for
the Northern District of California against us, our current U.S. subsidiary,
ActivCard, Inc., and three individuals who are either former or current officers
of ours. The plaintiff is a former shareholder in our original U.S. subsidiary
ActivCard Networks, Inc. In June of 1996, ActivCard Networks, Inc. was merged
into ActivCard, Inc., and the lawsuit alleged violations of U.S. securities
laws, breach of contract, breach of fiduciary duty, fraud and conspiracy arising
out of this merger. The plaintiff sought compensatory damages alleged to exceed
$7.5 million as well as punitive damages. Late in 1998, we agreed with the
plaintiff to engage in a mediation before a judge to explore the possibility of
an amicable settlement of all the claims. A settlement agreement was signed in
July 1999, and the impact of the agreement is included in the 1999 accounts. The
settlement agreement was composed of a $637,500 cash payment for legal expenses
and a grant of 480,000 new shares. The suit was dismissed in August 1999.
The plaintiff has agreed to waive certain rights with respect to the shares
granted under the settlement agreement in exchange for a payment equal to the
product of the number of shares owned by the plaintiff on August 11, 2000 (not
to exceed 105,000 shares) and the amount, if any, by which the average of the
five highest reported intra-day sales prices per share for the ADSs on the
Nasdaq National Market exceeds the average of the five highest reported
intra-day sales prices per share on Easdaq during the period beginning on the
first day that the ADSs are traded on Nasdaq and ending August 11, 2000.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
We currently have authorized eight directors. Each director is appointed for a
one-year period at our annual general meeting of shareholders and serves until
the next annual general meeting or until his successor is duly appointed and
qualified. Our executive officers serve at the discretion of the board.
The table below provides the names, ages and positions with ActivCard of our
executive officers and directors:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NAME AGE POSITION
- ---------------------------------- -------- ---------------------------------------------------------------
<S> <C> <C>
Jean-Gerard Galvez................ 46 Chairman, President and Chief Executive Officer
Yves Audebert..................... 43 Founder, Vice Chairman and Chief Technology Officer
George Wikle...................... 53 Chief Financial Officer and Secretary
Thomas A. Arthur.................. 37 Senior Vice President, Worldwide Sales and Business Development
Douglas M. Kernan................. 40 Vice President, Corporate Marketing
Marc Hudavert..................... 39 Vice President and General Manager, ActivCard Europe
James E. Ousley (1)(2)............ 53 Director and Chairman, ActivCard, Inc.
Sergio Cellini (1)................ 43 Director
Clifford Gundle (2)............... 63 Director
Montague Koppel (2)............... 71 Director
Lee Kheng Nam..................... 51 Director
Antoine R. Spillmann (1).......... 36 Director
</TABLE>
- ------------------------
(1) Member of audit committee.
(2) Member of compensation committee.
In conjunction with the private placements of our shares expected to close on or
about February 16, 2000, our board of directors has agreed, if requested by
Schlumberger Systemes or Sun Microsystems, Inc., as the case may be, to
recommend to our shareholders the election to our board a director nominated by
Schlumberger Systemes and a director nominated by Sun Microsystems, Inc. Any
such nomination will be subject to the approval of our shareholders at the next
shareholders' meeting following nomination.
JEAN-GERARD GALVEZ has been President and Chief Executive Officer and a Director
since November 1995, and Chairman of our board of directors since July 1996.
From June 1994 to October 1995, Mr. Galvez served as Vice President of
International Operations for Banctec Corp., a U.S. provider of turnkey image
processing systems for banking and financial service firms and
telecommunications companies. From 1989 to 1994, Mr. Galvez was the European
Area Executive for Control Data Corp., a Minneapolis-based computer system
integrator for the manufacturing industry. Prior to joining Control Data Corp.,
Mr. Galvez served in various capacities for Imprimis Technology, a disk drive
manufacturer and for Dupont de Nemours Corporation. Mr. Galvez holds a Master's
degree in Business Administration and a Bachelor's degree in Chemical
Engineering from the Institut National Polytechnique de Nancy, France.
YVES AUDEBERT co-founded our company in 1985 and, from 1985 to present, has
served as Chief Technology Officer and as Vice Chairman of the board of
directors. Mr. Audebert served as Chairman of the board of directors from
May 1996 until July 1996. From our inception in 1985, Mr. Audebert served
alternately with Achille Delahay, a co-founder, as Chairman, President and Chief
Executive Officer. From 1980 to 1985, Mr. Audebert was responsible for
developing shipboard fiber optic systems at Thomson-CSF, a French defense
company. Mr. Audebert holds an engineering diploma from the Ecole Polytechnique
de Paris and an advanced diploma from the Ecole Superieure des
Telecommunications.
GEORGE WIKLE has served as our Chief Financial Officer since October 1997. From
April 1996 to September 1997 Mr. Wikle was Executive Vice President of
Operations and Finance of Brio Technology, Inc., a desktop data warehouse
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software company. He had previously held the position of Vice President of
Corporate Solutions for Brio Technology. From October 1992 to September 1994,
Mr. Wikle was President and Chief Executive Officer of ASCNET, Inc., an
emergency cellular phone service provider. From October 1984 to September 1991,
Mr. Wikle was Vice President of Finance at Performance Semiconductor Corporation
and also Chairman of its UK subsidiary. From April 1976 to September 1984, he
was Chief Operating Officer or Chief Financial Officer of Sorcim, makers of
SuperCalc software; Friden Alcatel, a subsidiary of Companie Generale
d'Electricite, France; and the Communication Equipment Products Group of Memorex
Corporation. Mr. Wikle earned his B.S. degree in accounting and German and MBA
degree in Finance and International Business from the University of California,
Berkeley.
THOMAS A. ARTHUR has served as the Vice President and General Manager of
ActivCard, Inc., our United States subsidiary since April 1997. In
January 1999, he was appointed our Senior Vice President, Worldwide Sales and
Business Development. From 1987 to April 1997, Mr. Arthur held various executive
level positions at Novell, Inc., including most recently as General Manager,
Internet Business Infrastructure. Prior to joining Novell, Mr. Arthur was
Western Regional Sales Representative for Excelan, Inc., a computer network
company subsequently acquired by Novell. Mr. Arthur holds a degree in Economics
from the University of California, Davis.
DOUGLAS M. KERNAN has served as Vice President, Corporate Marketing since
June 1997. From June 1996 to June 1997, Mr. Kernan was Vice President of
Marketing for Semaphore Communications, Inc., a network communications security
startup. From May 1987 to June 1996, Mr. Kernan held various executive level
positions at Novell, Inc., most recently as the Director of Marketing for
Novell's Communications Products Division. Prior to Novell, he held engineering
and support roles with Dialogic Systems and Lockheed Missile and Space Company.
Mr. Kernan holds a B.S. degree in Computer Science and Economics from Union
College in Schenectady, N.Y.
MARC HUDAVERT has served as Vice President and General Manager, ActivCard Europe
since September 1996. From 1994 until September 1996, Mr. Hudavert was
Commercial Director of Telis TSC, a France Telecom Group subsidiary specializing
in systems integration for corporate computer and communications networks. From
1991 to the end of 1993, he served in various general management capacities for
SDRC, a U.S. software publisher; from the beginning of 1989 to the end of 1991,
for Ferranti, a U.K. computer services provider; and from mid-1987 to the
beginning of 1989 for Prime Computer, a U.S. computer manufacturer.
Mr. Hudavert received his BS degree in Engineering and MBA degree from the Ecole
Centrale de Lyon.
JAMES E. OUSLEY has been a member of our board of directors since
September 1996, and Chairman of ActivCard, Inc. since May 1999. Mr. Ousley is
currently President and Chief Executive Officer of Syntegra (USA), a global
internet business solutions provider and division of British Telecommunications.
From 1991 to 1999 he served as President and Chief Executive Officer of Control
Data Systems which was acquired by British Telecommunications. From 1968 to 1991
Mr. Ousley served in various sales and executive management positions for
Control Data Corporation. Mr. Ousley serves on the Board of Datalink, Inc. and
Bell Micro, Inc. and holds a BS degree from the University of Nebraska.
SERGIO CELLINI has been a member of our board of directors since March 1998.
Mr. Cellini is currently serving as General Manager of Excite Italia, a Dutch
portal company. From April 1997 to April 1999, Mr. Cellini served as the
Director of Venture Capital for Telecom Italia. Mr. Cellini was employed with
Editoriale L'Expresso, a publishing company, in various positions, most recently
as Managing Director of Newspaper Publishing, publisher of "The Independent" in
London. From March 1981 to March 1986, Mr. Cellini was a Senior Associate with
Booz, Allen & Hamilton, a U.S. firm, in Paris, Madrid and Milan. Mr. Cellini
holds a Master's degree in Management from the Sloan School of MIT.
CLIFFORD GUNDLE has been a Director of our company since May 1999. Mr. Gundle
has over 40 years of international experience in business ownership and
executive positions. He founded and ran numerous manufacturing and investment
companies in South Africa, the U.S. and United Kingdom which are listed on the
Johannesburg, American, London and Irish stock exchanges. He is a member of the
Dean's Council of Harvard University.
MONTAGUE KOPPEL has been a member of our board of directors since March 1998.
Since 1986, Mr. Koppel has been a director of Flextech plc, a media company.
Since 1982, Mr. Koppel has worked as an international legal
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consultant. Previously, Mr. Koppel was a trial and commercial lawyer in South
Africa and served on the board of directors of various companies.
LEE KHENG NAM has been a member of our board of directors since September 1999.
Since March 1995 Mr. Lee has served as President of Vertex Investment (II) Pte
Ltd., the venture capital arm of Singapore Technologies Group and a 15.9%
shareholder in the Company. Mr. Lee also currently serves on the board of
directors of several companies in the Singapore Technologies Group, including
Vickers Ballas Holdings Ltd. and Vickers Capital Limited. He is also currently a
board member of investee companies such as Creative Technology Ltd. and
Centillium Technology Inc. From January 1981 to September 1983, Mr. Lee served
as Senior Manager of the Project Development Department of NatSteel Group, a
company listed on the Singapore Stock Exchange. From January 1979 to
January 1981, Mr. Lee was the Deputy Director of Planning for the Singapore
Ministry of National Development. Mr. Lee holds a Bachelor of Science in
Mechanical Engineering (First Class Honors) from Queen's University, Canada, a
Master of Science in Operations Research & Systems Analysis from the US Naval
Postgraduate School and a Diploma in Business Administration from the University
of Singapore.
ANTOINE R. SPILLMANN has been a member of our board of directors since
March 1998. He is currently the Managing Director of the investment bank of
Bryan Garnier & Co. Limited and has served in that capacity since founding it in
mid-1996. From 1995 to 1996, Mr. Spillmann was global account coordinator for
equity sales for Switzerland for ABN Amro Hoare Govett. From 1992 to 1995,
Mr. Spillmann was Director of European and UK equity sales to Swiss institutions
for Lehman Brothers. Mr. Spillmann was educated at the St. Galen University and
HBC Lausanne, and earned a diploma in Investment Management and Corporate
Finance from the London Business School.
BOARD COMMITTEES
Our board currently has two committees, an audit committee and the compensation
committee. The audit committee reviews the results and scope of the audit and
other services provided by our independent public accountants. The audit
committee currently consists of Messrs. Ousley, Spillmann and Cellini. The
compensation committee makes recommendations concerning salaries and incentive
compensation for employees of and consultants to the Company and administers and
allocates stock options pursuant to our stock option plans. The compensation
committee currently consists of Messrs. Ousley, Gundle and Koppel.
No interlocking relationships exist between our board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has such interlocking relationship existed in the past.
DIRECTOR COMPENSATION
In May 1999 our shareholders approved annual directors compensation of $90,000,
which was allocated by the board of directors to its members during 1999.
In June 1998 our shareholders approved annual directors compensation (jetons de
presence) of $98,000 for 1998, which was allocated by the board of directors to
its members. The board allocated $78,000 to the directors in 1998.
EXECUTIVE COMPENSATION
For the year ended December 31, 1999, the aggregate amount of compensation paid
to all of our executive officers and key managers as a group (six persons
including Messrs. Galvez, Audebert, Arthur, Hudavert, Kernan and Wikle) paid and
accrued for services in all capacities was $1,860,000. See "Employee Stock Plans
and Directors' Warrants" for information regarding stock options held by our
executive officers.
Executive and key management compensation for the year ended December 31, 1999
(in U.S. dollars) was as follows:
<TABLE>
<CAPTION>
BASIC SALARY BENEFITS BONUSES LONG-TERM
------------ -------- -------- ---------
<S> <C> <C> <C> <C>
Executives and key management....................... $1,099,000 $238,000 $581,300 --
</TABLE>
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<PAGE>
We have not paid our officers and directors any pension, retirement or other
similar benefits during the year ended December 31, 1999, nor during the year
ended December 31, 1998.
EMPLOYMENT AND CONSULTING AGREEMENTS
Each of Jean-Gerard Galvez and Marc Hudavert is party to an employment agreement
with us. Mr. Galvez's employment agreement is terminable by either party on six
months' notice. Mr. Hudavert's employment agreement is terminable by either
party on three months' notice. The agreements contain non-competition covenants
for a period of two years after their termination. Each employment agreement
also contains an express confidentiality obligation. According to French law and
as explicitly stated in the employment agreements, we own any intellectual
property rights created by the executives in the course of their employment.
EMPLOYEE STOCK PLANS AND WARRANTS
At December 31, 1999, options and warrants to subscribe for an aggregate of
4,987,314 shares were issued and outstanding at an average exercise price of
$5.09 per share (reflecting a conversion, for the options and warrants
exercisable in French francs, at the exchange rate of FF6.5295 to $1.00 in
effect on December 31, 1999). Such options and warrants to subscribe for shares
expire at various dates on or prior to December 2006. Of such options and
warrants to subscribe for shares, options and warrants to subscribe for 218,010
shares not including complementary rights, exercisable at an average exercise
price of $4.447 and which expire at various dates through 2005, were held by two
of our executive officers. Warrants to subscribe for 236,000 shares not
including complementary rights, exercisable at an average exercise price of
$5.67 and which expire between 2001 and 2004, were held by members of our board
of directors. Under French law, we cannot grant options to members of our board
of directors who do not work for us or who do not hold a management position
with us or our affiliates.
On February 9, 2000, our shareholders approved the issuance to Lee Kheng Nam of
warrants to subscribe to 30,000 new shares having a par value of FF6.25 and
issued by a capital increase of a maximum aggregate amount of FF187,500.
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CERTAIN TRANSACTIONS WITH RELATED PARTIES
In June 1996, we entered into an agreement with Vertex II, a 15.7% shareholder
of our company, pursuant to which Vertex II acquired, directly and through its
affiliate, Vertex Asia, 20% of the share capital of ActivCard Asia for an
aggregate purchase price of Singapore $200,000.
Antoine R. Spillmann, currently a member of our board of directors, is the
Managing Director of the investment banking firm of Bryan Garnier & Company,
which has served as a placement agent for our securities in Europe, including
two rights issues, our convertible bonds issued in 1997 and our convertible
bonds issued in October 1999. Bryan Garnier received commission payments of 3%
($279,526), 6.5% ($674,633), 5% ($401,500) and 6% ($360,000), respectively, on
the gross proceeds of these offerings. Additionally, in connection with the
placement of convertible bonds in 1997, Bryan Garnier received warrants
exercisable at $4.60 per share for 52,152 shares. See "Description of Share
Capital Convertible--Bonds."
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table provides information concerning the beneficial ownership of
our shares as of January 31, 2000 and as adjusted to reflect the sale of ADSs in
the offering by:
- each shareholder known by us who owns more than 10% of our outstanding
ordinary shares
- all of our directors and officers as a group and
- the selling shareholders that will sell an aggregate of 600,000 shares in
the form of ADSs, if the underwriters over-allotment option is exercised
in full
The number of shares beneficially owned by each stockholder is determined under
rules issued by the Securities and Exchange Commission. The information is not
necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes any shares as to which the individual
or entity has sole or shared voting power or investment power and any shares as
to which the individual or entity has the right to acquire beneficial ownership
within 60 days after January 31, 2000 through the exercise of any stock option
or other right.
<TABLE>
<CAPTION>
--------------------------------------------
PERCENT OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES -------------------------
BENEFICIALLY BEFORE THE AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING(1) OFFERING(1)
- ------------------------------------ ---------------- ----------- -----------
<S> <C> <C> <C>
Vertex (2).................................................. 5,122,743 15.8% 14.0%
Vertex Management Pte. Ltd.
77 Science Park Drive
#02-15 Cintech III
Singapore Science Park
Singapore 118256
George Wikle(3)............................................. 136,972 0.4% 0.2%
Thomas Arthur(4)............................................ 149,461 0.5% 0.4%
Douglas Kernan(5)........................................... 95,723 0.3% 0.2%
Directors and officers as a group (12 persons)(6)........... 4,495,846 13.6% 12.1%
</TABLE>
- ------------------------------
(1) Based on 32,376,390 shares issued at January 31, 2000 without adjustments to
reflect the exercise of all options, warrants and convertible bonds to
subscribe for ordinary shares as of such date. Excludes 990,675 shares to be
issued pursuant to our private placements of shares which closed on
February 16, 2000 and 300,000 shares to be issued upon conversion of our
bonds issued in October 1999.
(2) 2,452,831 shares (including 34,550 shares issuable upon conversion of 1,382
bonds within 60 days of January 31, 2000) owned by Vertex Investment Int
(III) Inc., a British Virgin Island corporation ("Vertex Investment"),
1,334,956 shares owned by Vertex Investment (II) Ltd., a Singapore
corporation ("Vertex II"), and 1,334,956 shares owned by Vertex Asia Ltd., a
Singapore corporation ("Vertex Asia"). Vertex Investment, Vertex II and
Vertex Asia are a group of investment companies under the common control of
Singapore Technologies Pte. Ltd., a Singapore corporation. Singapore
Technologies Pte. Ltd. is 22.11% owned by Singapore Technologies Holdings
Pte. Ltd., which is in turn a wholly owned subsidiary of Ministry of
Finance, Inc., a government agency. Vertex has granted to the underwriters a
30-day option to purchase an aggregate of 500,000 shares (comprised at
250,000 shares from Vertex Investment International (III), Inc.; 125,000
shares from Vertex Investment (II) Ltd. and 125,000 shares from Vertex Asia
Limited), in the form of ADSs, solely to cover over allotments, if any. If
the over-allotment option is exercised in full, Vertex would own 4,588,193
shares, representing 14.0% of the outstanding ordinary shares after the
offering.
(3) Includes options to purchase 136,972 shares exercisable within 60 days of
January 31, 2000 at an exercise price of $4.65 or $4.93 per share.
Mr. Wikle has granted to the underwriters a 30-day option to purchase 40,000
shares, in the form of ADSs, solely to cover over-allotments, if any. If the
over-allotment option is exercised in full, Mr. Wikle would own 16,972
shares, representing 0.3% of the outstanding ordinary shares after the
offering.
(4) Includes options to purchase 149,461 shares exercisable within 60 days of
January 31, 2000 at an exercise price of $4.65 or $4.93 per share.
Mr. Arthur has granted to the underwriters a 30-day option to purchase
40,000 shares, in the form of ADSs, solely to cover over-allotments, if any.
If the over-allotment option is exercised in full, Mr. Arthur would own
109,461 shares, representing 0.3% of the outstanding ordinary shares after
the offering.
(5) Includes options to purchase 88,723 shares exercisable within 60 days of
January 31, 2000 at an exercise price of $4.65 or $4.93 per share.
Mr. Kernan has granted to the underwriters a 30-day option to purchase
20,000 shares, in the form of ADSs, solely to cover over-allotments, if any.
If the over-allotment option is exercised in full, Mr. Kernan would own
68,723 shares, representing 0.2% of the outstanding ordinary shares after
the offering.
(6) Includes 551,564 shares under outstanding stock options, warrants and
compensatory rights exercisable within 60 days of January 31, 2000.
At January 31, 2000, 24,318,390 shares, including shares beneficially owned by
certain directors and officers, were managed through the Euroclear and
Clearstream, Luxembourg systems, which represent approximately 75.12% of the
issued and outstanding shares of the company. Approximately 101 shareholders
hold shares traded through Euroclear and Clearstream, Luxembourg.
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<PAGE>
DESCRIPTION OF SHARE CAPITAL
SET FORTH BELOW IS INFORMATION CONCERNING OUR SHARE CAPITAL TOGETHER WITH
RELATED SUMMARY INFORMATION CONCERNING PROVISIONS OF OUR STATUTS AND APPLICABLE
FRENCH LAW. THIS DESCRIPTION OF OUR SHARE CAPITAL AND SUMMARY INFORMATION IS NOT
COMPLETE AND MAY NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER BEFORE
INVESTING IN THE ORDINARY SHARES OR ADSS. YOU SHOULD CAREFULLY READ OUR STATUTS,
WHICH HAS BEEN FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT CONTAINING THIS
PROSPECTUS.
GENERAL
Our company was incorporated on June 12, 1987 and will expire according to
provisions of our STATUTS on June 11, 2086.
At December 31, 1999, our outstanding share capital on a fully diluted basis
consisted of 39,042,117 shares, nominal value 6.25 FF per share (including
1,060,550 shares issuable upon conversion of our outstanding convertible bonds,
4,987,314 shares issuable upon exercise of warrants and stock options, 761,437
shares issuable pursuant to stock purchase rights, 142,790 shares issuable upon
allocation and subscription of stock options unallocated at the time. All of our
outstanding shares are fully paid. Pursuant to our STATUTS, our shares may be
held only in registered form. See "--Form and Holding of Shares."
CHANGES IN SHARE CAPITAL
Our share capital may be increased only with the approval of our shareholders at
an extraordinary general meeting following a recommendation of our board of
directors. Increases in share capital may be effected by the issuance of
additional shares, by an increase in the nominal value of existing shares or the
creation of a new class of shares. Additional shares may be issued for cash, in
satisfaction of indebtedness incurred by us, for assets contributed in kind,
upon the conversion of debt securities previously issued by us or by the
capitalization of reserves. French law permits different classes of shares to
have different liquidation, voting and dividend rights.
Our share capital may be decreased only with the approval of our shareholders at
an extraordinary general meeting. Our share capital may be decreased by reducing
the nominal value of the shares or by decreasing the number of outstanding
shares. The conditions under which share capital may be reduced will vary
depending upon whether or not the reduction is attributable to losses incurred
by us. The number of outstanding shares may be decreased by the repurchase and
cancellation by us of our shares. If the reduction is not attributable to losses
incurred by us, each shareholder will be offered an opportunity to participate
in any exchange or repurchase. If, as a consequence of losses, our net assets
are reduced below one half of our share capital, our board of directors must,
within four months from the approval of the accounts indicating such loss,
convene an extraordinary general meeting of our shareholders in order to decide
whether to dissolve the company before expiration of our statutory term. If the
dissolution is not declared, the share capital, by the end of the second fiscal
year following the fiscal year during which the losses were incurred and subject
to the legal provisions concerning the minimum capital of SOCIETES ANONYMES,
must be reduced by an amount at least equal to the losses which could not be
charged on reserves, if during that period the net assets have not been restored
up to an amount at least equal to one half of the capital.
On February 9, 2000, our shareholders authorized the board to issue new shares
or securities having a maximum aggregate nominal value of FF300,000,000. Shares
issued pursuant to these resolutions may, at the board's discretion, be used in
order to obtain a listing of our shares on Nasdaq or any other stock exchange
market by way of public offering.
On February 9, 2000, our shareholders authorized the board of directors to
increase our share capital in the nominal amount of FF6,191,718.80 represented
by 990,675 new shares to be subscribed to by Business Brain Showa-Ota Inc.,
Schlumberger Systemes, SCM Microsystems, Inc. and Sun Microsystems, Inc.
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<PAGE>
PREEMPTIVE SUBSCRIPTION RIGHTS
Unless previously waived, holders of our shares have preemptive rights to
subscribe for additional shares issued by us for cash on a PRO RATA basis.
Shareholders may waive such preemptive subscription rights either individually
or at an extraordinary general meeting under certain circumstances. Preemptive
subscription rights, if not previously waived, are transferable during the
subscription period relating to a particular offering of our shares. Our
shareholders have waived their preemptive rights with respect to the issuance of
new securities, including the shares offered hereby, having a maximum aggregate
nominal value of FF300,000,000.
REGISTRATION RIGHTS
After this offering, the holders of 699,300 shares will be entitled to rights
with respect to the registration of such shares under the Securities Act. Under
the terms of our agreement with the holders of these registrable securities, if
we proposed to register any of our securities under the Securities Act, either
for our own account or for the account of other security holders exercising
registration rights, these holders are entitled to receive notice of the
registration and are entitled to include shares of these registrable securities
therein. Additionally, holders of 582,750 shares are entitled to demand
registration rights pursuant to which they may require us to file a registration
statement under the Securities Act at our expense with respect to their shares,
and we are required to use our best efforts to effect this registration. All of
these registration rights are subject to conditions and limitations, among them
the right of the underwriters of an offering to limit the number of shares
included in the registration and our right not to effect a requested
registration within six months following an offering of our securities,
including the offering made hereby.
ATTENDANCE AND VOTING AT SHAREHOLDER'S MEETINGS
In accordance with French law, there are two types of shareholder's general
meetings, ordinary and extraordinary. Ordinary general meetings of shareholders
are required for matters such as the election of directors, the appointment of
statutory auditors, the approval of the annual report prepared by our board of
directors and the annual accounts, the declaration of dividends and the issuance
of bonds. Extraordinary general meetings of shareholders are required for
approval of matters such as amendments to our STATUTS, modifications of
shareholders' rights, approval of mergers, increases or decreases in share
capital, the creation of a new class of capital stock and the authorization of
the issuance of investment certificates or notes convertible or exchangeable
into capital stock. In particular, shareholder approval will be required for
mergers where we are not the surviving entity or where we are the surviving
entity, but in connection with which we are issuing a portion of our share
capital to the acquired entity.
Our board of directors is required to convene an annual ordinary general meeting
of shareholders within six months after the end of our fiscal year. Other
ordinary or extraordinary meetings may be convened at any time during the year.
Meetings of shareholders may be convened by board of directors or, if our board
of directors fails to call such a meeting, by our auditors, currently Ernst &
Young Audit and Jean-Louis Brun d'Arre, or by an agent appointed by a court. The
court may be requested to appoint an agent either by shareholders holding at
least 10% of our share capital or by any interested party in cases of particular
urgency. Following a successful take-over bid or an acquisition of control, the
new majority shareholders may call an ordinary or extraordinary general meeting
of shareholders. The notice for each shareholder meeting must state the matters
to be considered at such meeting.
French law provides that, at least 15 days before the date set for any general
meeting on first call, and at least six days before any second call, notice of
the meeting must be sent by mail to all holders of properly registered shares.
The Company may publish an additional notice of the meeting, in a journal
authorized to publish legal announcements in the DEPARTEMENT in which we are
registered, at least thirty days prior to the date of the meeting. A preliminary
written notice must be sent to each shareholder who has requested to be notified
in writing 35 days before the date set of any ordinary or extraordinary general
meeting. Shareholders holding a defined percentage of our share capital, which
varies depending on the absolute amount of the share capital, may propose
resolutions to be submitted for approval by the shareholders at the meeting.
Shareholder attendance and the exercise of voting rights at ordinary general
meetings and extraordinary general meetings of our shareholders are subject to
certain conditions. In order to exercise voting rights, our STATUTS requires
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that a shareholder must have its shares registered in its name in a shareholder
account maintained by or on behalf of us from at least one business day prior to
the meeting until the end of the day of the meeting. Certain procedures to
effect such requirements will apply to a holder of ADSs desiring to exercise the
voting rights relating to the shares corresponding to such ADSs. See
"Description of American Depositary Shares--Voting Rights."
All shareholders who have properly registered their shares have the right to
participate in general meetings, either in person, by proxy, or by mail, and to
vote according to the number of shares they hold. Each share confers on the
shareholder the right to one vote. Under French law, shares held by entities
controlled directly or indirectly by us shall not be entitled to any voting
rights. Proxies may be granted by a shareholder to his or her spouse, to another
shareholder or to a legal representative, in the case of a corporation, or by
sending a proxy in blank to us without nominating any representative. In the
latter case, the chairman of the meeting of shareholders will vote the shares
covered by such blank proxy in favor of all resolutions proposed by the board of
directors and against all others.
The presence in person or by proxy of shareholders holding not less than 25% (in
the case of an ordinary general meeting) or 33.3% (in the case of an
extraordinary general meeting) of shares entitled to vote is necessary for a
quorum. If a quorum is not present at any meeting, the meeting is adjourned.
Upon recommencement of an adjourned meeting, there is no quorum requirement in
the case of an ordinary general meeting and the presence in person or by proxy
of shareholders holding not less than 25% of our shares entitled to vote is
necessary for a quorum in the case of an extraordinary general meeting.
At an ordinary general meeting, a simple majority of the votes cast is required
to pass a resolution. At an extraordinary general meeting, a two-thirds majority
of the votes cast is required. However, a unanimous vote is required to increase
liabilities of shareholders. Abstention by those present or represented by proxy
is deemed a vote against a resolution submitted to a vote.
The rights of a holder of shares of a class of our capital stock, can be amended
only after an extraordinary general meeting of all shareholders of such class
has taken place and the proposal to amend such rights has been approved by a
two-thirds majority vote of the outstanding shares of such class present in
person or represented by proxy.
In addition to obtaining rights to certain information regarding our company,
any shareholder may, during the two-week period preceding a shareholder's
meeting, submit to our board of directors written questions relating to the
agenda for the meeting. Our board of directors is required to respond to such
questions during the meeting, except if it is contrary to the best interests of
the company, such as responses requiring the disclosure of confidential
information or trade secrets.
As set forth in our STATUTS, shareholders' meetings are held at our registered
office or at any other location specified in the preliminary written notice.
DIVIDEND AND LIQUIDATION RIGHTS
Subject to the requirements of French law and our STATUTS, net income in each
fiscal year (after deduction for depreciation and reserves), as increased or
reduced, as the case may be, by any of our profit or loss carried forward from
prior years, is available for distribution to our shareholders as dividends.
Dividends may also be distributed from our reserves, subject to approval by our
shareholders and certain limitations. If net income (as shown on an interim
income statements certified by our statutory auditors) is sufficient, our board
of directors has the authority, subject to French law and regulations, without
the approval of shareholders, to distribute cash interim dividends. Dividends
paid in newly issued shares require shareholder approval.
We are required to establish and maintain a legal reserve by making a minimum
provision of 5% of our net income in each year as may be necessary to maintain
such reserve at a level equal to 10% of the aggregate nominal value of our share
capital, as increased or reduced from time to time. The legal reserve is
distributable only upon our liquidation. Our STATUTS also provide that our
distributable profits (after reduction of any amounts required to be allocated
to the legal reserve) can be allocated to one or more special purpose reserves
or distributed as dividends, as may be determined by the general meeting of
shareholders.
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The payment of dividends is fixed by the ordinary general meeting of
shareholders at which the annual accounts are approved and following
recommendation of our board of directors. Dividends are distributable to
shareholders PRO RATA according to their respective holdings of shares.
Dividends are payable to holders of shares issued on the date of the shareholder
meeting approving the distribution of dividends or, in the case of interim
dividends, on the date of the meeting of our board of directors approving the
distribution of interim dividends. The actual dividend payment date is
determined by our shareholders at the ordinary general meeting approving the
declaration of the dividends or by our board of directors in the absence of such
determination by our shareholders. The payment of the dividends must occur
within nine months of the end of our fiscal year. Dividends not claimed within
five years of the date of payment revert to the French State. Our STATUTS
authorize our shareholders, in an ordinary general meeting, to authorize the
grant to each shareholder of an option to receive all or part of any annual or
interim dividends in either cash or shares.
We have not paid any cash dividends on our shares since our incorporation. We
currently anticipate that we will retain all future earnings for use in our
business and do not anticipate paying any dividends in the foreseeable future.
In the event that we are liquidated, our assets remaining after payment of our
debts, liquidation expenses and all of our remaining obligations will be
distributed first to repay in full the capital of the shares, then the surplus,
if any, will be distributed PRO RATA among the holders of shares in proportion
to the nominal value of their shareholdings and subject to any special rights
granted to holders of priority shares, if any.
REPURCHASE OF SHARES
Pursuant to French law, we may not make open market repurchases of our shares or
otherwise acquire shares except (a) to reduce our share capital by subsequent
cancellation of such shares under certain circumstances with approval of our
shareholders at an extraordinary general meeting, and (b) to obtain shares for
distribution to our employees under an approved profit-sharing or stock option
plan. The number of shares repurchased under (b) may not, in either case, result
in us holding more than 10% of the then outstanding shares. Shares held by us
are deemed to be outstanding under French law but are not entitled to any
dividends, voting rights or preemptive rights. French law imposes certain other
restrictions on our ability to purchase our own shares in addition to the
general principles disclosed pursuant to this paragraph. We currently do not own
any of our shares.
FORM AND HOLDING OF SHARES
FORM OF SHARES. Our STATUTS provides that shares may be held only in registered
form.
HOLDING OF SHARES. Shares are registered in the name of the respective owners
thereof in individual accounts maintained by or on behalf of us. Each account
shows the name of the shareholder and the number of shares it holds. We will
issue or cause to be issued ATTESTATIONS D'INSCRIPTION EN COMPTE or
confirmations as to holdings of shares registered in the account to the persons
in whose names such shares are registered. These confirmations do not constitute
documents of title.
DISCLOSURE OF 5% OWNERSHIP. Pursuant to our by-laws, a holder who acquires or
disposes of our shares must notify us in accordance with the Easdaq Market
Authority within five business days of the date of such transaction where its
completion would make the holder's shares exceed or fall below a five percent
threshold of our outstanding voting financial instruments.
LISTING
Our shares are listed on Easdaq. The ADSs have been approved for listing on
Nasdaq.
TRANSFER AGENT AND REGISTRAR
The Bank of New York will act as transfer agent and registrar for our ordinary
shares offered hereby.
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EXCHANGE CONTROLS
FOREIGN INVESTMENT REGULATIONS
Pursuant to a French law dated February 14, 1996, prior authorization is no
longer required for the acquisition of a controlling interest in a French
corporation by any person, whether or not such person is a resident of the
European Union, except where such corporation is engaged in defense related
activities. ADV Technologies, one of our subsidiaries, has provided various
engineering and other services to the French Ministry of Defense in the past,
but no longer has any significant business relationship with the French Ministry
of Defense.
Under French law, there is no limitation on the right of non-resident or foreign
shareholders to vote the securities of a French company.
EXCHANGE CONTROL
The payment of all dividends to foreign shareholders must be effected through an
authorized intermediary bank. All registered banks and financial institutions in
France are authorized intermediaries.
CONVERTIBLE BONDS
In July and October 1997, we issued $6.03 and $2.0 million, respectively,
aggregate principal amount of convertible bonds. These bonds bear interest at a
rate of 7.75% payable on a bi-annual basis. These bonds mature on June 19, 2002.
Since June 1999 the bonds have been redeemable at par value, subject to the
closing price of our shares on the Nasdaq National Market (assuming we are
listed on Nasdaq National Market) having been greater than twice the conversion
price ($4.60) for a period of at least 25 consecutive trading days. As of
December 31, 1999, 350 bonds convertible into 760,550 shares were outstanding.
In October 1999, we issued 6.0 million aggregate principal amount of
non-interest bearing convertible bonds. The bonds are to be redeemed at 112% of
their principal amount on October 15, 2001. We are entitled to redeem these
bonds at redemption prices ranging from 103% to 112% of their principal amount
depending on the date we select for redemption, which can be any time prior to
their stated maturity date. After April 15, 2000, at the option of the holder,
each bond can be converted into 25 of our shares. Additionally, in the event of
a public offering of shares or any capital increase of the company of at least
$12 million, we are required to redeem the bonds, provided that any holder
notified of such redemption may elect to convert such bonds into shares. In
addition, 100 warrants were issued with each convertible bond, each warrant
entitling the holder to one of our shares at an exercise price of $5.00. The
warrants are exercisable on or after April 15, 2000 and expire on April 15,
2002. The bonds and warrants are separately tradeable.
PRIVATE PLACEMENTS
Schlumberger Systemes, Business Brain Showa-Inc., Sun Microsystems, Inc. and SCM
Microsystems, Inc. have subscribed to 174,825, 116,550, 582,750 and 116,550,
respectively, of our ordinary shares at a subscription price of $17.16 per
share. The subscription price was determined at a board of directors meeting
held on December 16, 1999 and is based on the average closing price of our share
between November 25 and December 8, 1999. The sale of these shares was approved
by our stockholders on February 9, 2000 and closed on February 16, 2000. We
received net proceeds after commissions of approximately $16.5 million.
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DESCRIPTION OF AMERICAN DEPOSITARY SHARES
AMERICAN DEPOSITARY SHARES
The Bank of New York will issue the ADSs. Each ADS will represent an ownership
interest in one ordinary share. We will deposit the shares (or the right to
receive shares) at the Paris, France office of Banque Paribas, our custodian
(the "Custodian"). Each ADS will also represent securities, cash or other
property deposited with The Bank of New York but not distributed to ADS holders.
The Bank of New York's office is located at 101 Barclay Street, New York, NY
10286.
You may hold ADSs either directly or indirectly through your broker or other
financial institution. This description assumes you hold your ADSs directly and
are, therefore, considered an "ADS holder." If you hold the ADSs indirectly, you
must rely on the procedures of your broker or other financial institution to
assert the rights of ADS holders described in this section. You should consult
with your broker or financial institution to find out what those procedures are.
Because The Bank of New York will actually be the legal owner of the shares, you
must rely on it to exercise the rights of a shareholder. The agreement and the
ADSs are generally governed by New York law.
Although all material elements of the deposit agreement are summarized in this
prospectus, you should read the entire agreement and the information contained
in the American Depositary Receipts representing the ADSs. Directions on how to
obtain copies of these are provided in the section entitled "Where You Can Find
Information."
SHARE DIVIDENDS AND OTHER DISTRIBUTIONS
The Bank of New York has agreed to pay to you the cash dividends or other
distributions it or the custodian receives on shares or other deposited
securities after deducting its fees and expenses, if applicable. You will
receive these distributions in proportion to the number of shares your ADSs
represent.
CASH. The Bank of New York will convert any cash dividend or other cash
distribution we pay on the shares into U.S. dollars, if it can do so on a
reasonable basis and can transfer the U.S. dollars in the United States. If that
is not possible or if any approval from the French government is needed and
cannot be obtained, the agreement allows The Bank of New York to distribute
French francs only to those ADSs holders to whom it is possible to do so. It
will hold the French francs it cannot convert for the account of the ADS holders
who have not been paid. It will not invest the French francs and it will not be
liable for the interest.
Before making a distribution, any withholding taxes that must be paid under
French law will be deducted. See "Taxation--U.S. Taxation--Dividends." The Bank
of New York will distribute only whole U.S. dollars and cents and will round
fractional cents to the nearest whole cent. IF THE EXCHANGE RATES FLUCTUATE
DURING A TIME WHEN THE BANK OF NEW YORK CANNOT CONVERT THE FRENCH CURRENCY, YOU
MAY LOSE SOME OR ALL OF THE VALUE OF THE DISTRIBUTION.
SHARES. The Bank of New York may distribute new ADSs representing any shares we
may distribute as a dividend or free distribution if we furnish it promptly with
satisfactory evidence that it is legal to do so. The Bank of New York will only
distribute whole ADSs. It will sell shares which would require it to use a
fractional ADS and distribute the net proceeds in the same way as it does with
cash. If The Bank of New York does not distribute additional ADSs, each ADS will
also represent the new shares.
RIGHTS TO RECEIVE ADDITIONAL SHARES. If we offer holders of our ordinary shares
any rights to subscribe for additional shares or any other rights, The Bank of
New York may make these rights available to you. We must first instruct The Bank
of New York to do so and furnish it with satisfactory evidence that it is legal
to do so. If we do not furnish this evidence and/or give these instructions, and
The Bank of New York decides it is practical to sell the rights, The Bank of New
York will sell the rights and distribute the proceeds, in the same manner it
deals with cash. The Bank of New York may allow rights that are not distributed
or sold to lapse. In that case, you will receive no value for them.
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If The Bank of New York makes rights available to you, it will exercise the
rights and purchase the shares on your behalf. The Bank of New York will then
deposit the shares and issue ADSs to you. It will only exercise rights if you
pay it the exercise price and any other charges the rights require you to pay.
U.S. securities laws may restrict the sale, deposit, cancellation and transfer
of ADSs issued after the exercise of rights. For example, you may not be able to
trade the ADSs freely in the United States. In this case, The Bank of New York
may issue the ADSs under a separate restricted deposit agreement which will
contain the same provisions as the agreement, except for the changes needed to
put the restrictions in place.
OTHER DISTRIBUTIONS. The Bank of New York will send to you anything else we
distribute on deposited securities by any means it thinks are legal, fair and
practical. If it cannot legally make the distribution The Bank of New York has a
choice. It may decide to sell what we distribute and distribute the net proceeds
in the same manner as it deals with cash or it may decide to hold what we
distributed, in which case the ADSs will also represent the newly distributed
property.
The Bank of New York is not responsible if it decides that it is unlawful or
impractical to make a distribution available to any ADS holders. We have no
obligation to register ADSs shares, rights or other securities under the
Securities Act. We also have no obligation to take any action to permit the
distribution of ADSs, shares, rights or anything else to ADS holders. This means
that you may not receive the distribution we make on our shares or any value for
them if it is illegal or impractical for us to make them available to you.
DEPOSIT, WITHDRAWAL AND CANCELLATION
The Bank of New York will issue ADSs to you or your broker upon the deposit of
shares or evidence of rights to receive shares with the Custodian. Upon payment
of its fees and expenses and of any taxes or charges, such as stamp taxes or
stock transfer taxes or fees, The Bank of New York will register the appropriate
number of ADSs in the names you requested and will deliver the ADSs at its
office to the persons you request.
You may turn in your ADSs at The Bank of New York's office. Upon payment of its
fees and expenses and of any taxes or charges, such as stamp taxes or stock
transfer taxes or fees, The Bank of New York will deliver (1) the underlying
shares to an account designated by you and (2) any other deposited securities
underlying the ADS at the office of the Custodian. Alternatively, at your
request, risk and expense, The Bank of New York will deliver the deposited
securities at its office.
VOTING RIGHTS
You may instruct The Bank of New York to vote the shares underlying your ADSs
but only if we ask The Bank of New York to ask for your instructions. Otherwise,
you will not be able to exercise your right to vote unless you withdraw the
shares from the ADS program and place them in a "blocked" account established by
The Bank of New York for that very purpose. However, you may not know about a
shareholders' meeting sufficiently in advance to withdraw your shares in order
to vote them.
If we ask for your instructions, The Bank of New York will notify you of the
upcoming vote and arrange to deliver our voting materials to you. The materials
will (1) describe the matters to be voted on and (2) explain how you, on a
certain date, may instruct The Bank of New York to vote the shares or other
deposited securities underlying your ADSs as you direct. For instructions to be
valid, The Bank of New York must receive them on or before the date specified.
The Bank of New York will try, as far as practical, subject to French law, the
provisions of our STATUTS and the deposited securities, to vote or to have its
agents vote the shares or other deposited securities as you instruct in the
voting instruction card that you return to them. The Bank of New York will only
vote or attempt to vote in accordance with your instructions.
Under French company law, shareholders holding a defined percentage of our share
capital can propose new resolutions or modifications to resolutions previously
presented to our board of directors. In such a case your instructions to vote on
the prior resolution would be counted as a vote against the revised resolution.
In addition, we and The Bank of New York may agree to modify or amend the above
voting procedures or adopt additional voting
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procedures from time to time as they determine may be necessary or appropriate
to comply with French or United States law or our STATUTS. There can be no
assurance that such modifications, amendments or additional voting procedures
will not limit the practical ability of ADS holders to give voting instructions
in respect of our shares represented by ADSs or will not include restrictions on
the ability of ADS holders to sell ADSs during a specified period of time prior
to a shareholders' meeting.
We cannot assure you that you will receive the voting materials in time to
ensure that you can instruct The Bank of New York how to vote your shares. The
Bank of New York and its agents are not responsible in respect of whether or not
you are entitled to vote or the proper entry of information in our share
registry. This means that you may not be able to exercise your right to vote and
there may be nothing you can do if your shares are not voted as you wish.
FEES AND EXPENSES
<TABLE>
ADS HOLDERS MUST PAY: FOR:
- -------------------------------------------- --------------------------------------------
<S> <C>
$5.00 (or less) per 100 ADSs Each issuance of an ADS, including as a
result of a distribution of shares or rights
or other property. Each cancellation of an
ADS, including if the agreement terminates
- -----------------------------------------------------------------------------------------------
$2.00 (or less) per 100 ADSs Any cash distribution
- -----------------------------------------------------------------------------------------------
Registration or Transfer Fees Transfer and registration of shares on the
share register of the Foreign Registrar from
your name to The Bank of New York or its
agent when you deposit or withdraw shares
- -----------------------------------------------------------------------------------------------
Expense of The Bank of New York Conversion of French francs to U.S. dollars
Cable, telex and facsimile transmission
expenses
- -----------------------------------------------------------------------------------------------
Taxes and other governmental charges The As necessary
Bank of New York the Custodian are required
to pay on any ADS or share underlying an
ADS, for example, stock transfer taxes,
stamp duty or withholding taxes
</TABLE>
PAYMENT OF TAXES
You will be responsible for any taxes or other governmental charges payable on
your ADSs or on the deposited securities underlying your ADSs. The Bank of New
York may refuse to transfer your ADSs or allow you to withdraw the deposited
securities underlying your ADSs until such taxes or other charges are paid. It
may apply payments owed to you or sell deposited securities underlying your ADSs
to pay any taxes owed and you will remain liable for any deficiency. If it sells
deposited securities, it will, if appropriate, reduce the number of ADSs to
reflect the sale and pay to you any proceeds, or send to you any property,
remaining after it has paid the taxes.
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RECLASSIFICATIONS, RECAPITALIZATIONS AND MERGERS
<TABLE>
IF WE: THEN:
- -------------------------------------------- --------------------------------------------
<S> <C>
Change the nominal or par value of our The cash, shares or other securities
shares; reclassify, split up or consolidate received by The Bank of New York will become
any of the deposited securities deposited securities
- -----------------------------------------------------------------------------------------------
Distribute securities on the shares that are Each ADS will automatically represent its
not distributed to you equal share of the new deposited securities
- -----------------------------------------------------------------------------------------------
Recapitalize, reorganize, merge, liquidate, The Bank of New York may, and will if we
sell all of substantially all of our assets, request, distribute some or all the cash,
or take any similar action shares or other securities it received. It
may also issue new ADSs or ask you to
surrender your outstanding ADSs in exchange
for new ADSs, identifying the new deposited
securities
</TABLE>
AMENDMENT AND TERMINATION
We may agree with The Bank of New York to amend the agreement and the ADSs
without your consent for any reason. If the amendment adds or increases fees or
charges, except for taxes and other governmental charges or certain expenses of
The Bank of New York, or prejudices an important right of ADS holders, it will
only become effective 30 days after The Bank of New York notifies you of the
amendment. At the time an amendment becomes effective, you are considered, by
continuing to hold your ADS, to agree to the amendment and to be bound by the
ADSs and the agreement as amended.
The Bank of New York will terminate the agreement if we ask it to do so. The
Bank of New York may also terminate the agreement if The Bank of New York has
told us that it would like to resign and we have not appointed a new depository
bank within 90 days. In both cases, The Bank of New York must notify you at
least 90 days before termination.
After termination, The Bank of New York and its agents will be required only to
advise you that the agreement is terminated, and collect distributions on the
deposited securities and deliver shares and other deposited securities upon
cancellation of ADSs. One year after termination, The Bank of New York will, if
practical, sell any remaining deposited securities by public or private sale.
After that, The Bank of New York will hold the proceeds of the sale, as well as
any other cash it is holding under agreement for the pro rata benefit of the ADS
holders that have not surrendered their ADSs. It will not invest the money and
will have no liability for interest. The Bank of New York's only obligations
will be to account for the proceeds of the sale and other cash. After
termination our only obligations will be with respect to indemnification and to
pay certain amounts to The Bank of New York.
LIMITATIONS ON OBLIGATIONS AND LIABILITY TO ADS HOLDERS
The agreement expressly limits our company's and The Bank of New York's
obligations and liabilities. Our company and The Bank of New York:
- are only obligated to take the actions specifically set forth in the
agreement without negligence or bad faith;
- are not liable if either is prevented or delayed by law or circumstances
beyond their control from performing our obligations under the agreement;
- are not liable if either exercises discretion permitted under the
agreement;
- have no obligation to become involved in a lawsuit or other proceeding
related to the ADSs or the agreement on your behalf or on behalf of any
other party; and
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- may rely upon any documents they believe in good faith to be genuine and
to have been signed or presented by the proper party.
In the agreement, our company and The Bank of New York agree to indemnify each
other under certain circumstances.
REQUIREMENTS FOR DEPOSITARY ACTIONS
Before The Bank of New York will issue or register transfer of an ADS, make a
distribution to an ADS, or a withdrawal of shares, The Bank of New York may
require:
- payment of stock transfer of other taxes or governmental charges and
transfer or registration fees charged by third parties for the transfer of
any shares or other deposited securities;
- production of satisfactory proof of the identity and genuineness of any
signature or other information it deems necessary; and
- compliance with regulations it may establish, from time to time,
consistent with the agreement, including presentation of transfer
documents.
The Bank of New York may refuse to deliver, transfer, or register transfers of
ADSs generally when the books of The Bank of New York or our company are closed,
or at any time if The Bank of New York or our company thinks it advisable to do
so.
You have the right to cancel your ADSs and withdraw the underlying shares at any
time except:
- when temporary delays arise because (1) we or The Bank of New York closed
its transfer books; (2) the transfer of shares is blocked to permit voting
at the shareholders' meeting; or (3) we are paying a dividend on the
shares;
- when you or other ADS holders seeking to withdraw shares owe money to pay
fees, taxes and similar charges; or
- when it is necessary to prohibit withdrawals in order to comply with any
laws or governmental regulations that apply to ADSs or the withdrawal of
shares or other deposited securities.
The right of withdrawal may not be limited by any other provision of the
agreement.
PRE-RELEASE OF ADSS
In certain circumstances, subject to the provisions of the agreement, The Bank
of New York may issue ADSs before deposit of the underlying shares. This called
a pre-release of the ADSs. The Bank of New York may also deliver shares upon
cancellation of pre-released ADSs (even if the ADSs are canceled before the
pre-release) transaction has been closed out). A pre-release is closed out as
soon as the underlying shares are delivered to The Bank of New York. The Bank of
New York may receive ADSs instead of shares to close out a pre-release. The Bank
of New York may pre-release ADSs only under the following conditions:
(1) before or at the time of the pre-release, the person to whom the pre-release
is being made must represent to The Bank of New York in writing that it or its
customer owns the shares or ADSs to be deposited; (2) the pre-release must be
fully collateralized with cash or other collateral that The Bank of New York
considers appropriate; and (3) The Bank of New York must be able to close out
the pre-release on not more than five business days' notice. In addition, The
Bank of New York will limit the number of ADSs that may be outstanding at any
time as a result of pre-release, although, The Bank of New York may disregard
the limit from time to time, if it thinks it is appropriate to do so.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 37,380,701 (37,473,701 ordinary
shares if the underwriter's over-allotment option is exercised in full) ordinary
shares issued and outstanding (which gives effect to the 990,675 shares, issued
in our private placements which closed on February 16, 2000 and the issuance of
300,000 shares upon the conversion of our 1999 bonds). Of these shares,
32,963,516 (33,056,516 if the underwriter's over-allotment option is exercised
in full) shares will be freely tradable in the public market, including the
300,000 shares to be issued upon conversion of our October 1999 bonds, without
restrictions or further registration under the Securities Act, unless the shares
are held by "affiliates," as that term is defined in Rule 144(a) under the
Securities Act. Shares held by affiliates will be subject to the resale
limitations of Rule 144. The remaining 4,417,185 shares outstanding will be
"restricted securities" under the Securities Act and may not be sold in the
absence of registration under the Securities Act or an exemption therefrom,
including pursuant to Rule 144 or an offshore transaction pursuant to Regulation
S. In addition, at December 31, 1999, (i) 3,491,420 shares were reserved for
issuance upon exercise of outstanding stock options pursuant to our equity
incentive plan at prices ranging from $1.67 to $19.75 per share, (ii) 1,495,894
shares were reserved for issuance upon exercise of outstanding warrants at
exercise prices ranging from $3.80 to $8.93 per share, (iii) 760,550 shares were
reserved for issuance upon conversion of our convertible notes at a price of
$4.60 per share, (iv) 761,437 shares were reserved for issuance upon exercise of
share purchase rights at prices ranging from $1.25 to $3.91 per share and
(v) 142,790 shares reserved for future issuance under our various stock option
plans.
Our company, together with our directors, officers and certain shareholders have
entered into lock-up agreements in connection with this offering generally
providing that they will not offer, sell, contract to sell or grant any option
to purchase or otherwise dispose of our ADSs or shares or any securities
exercisable for or convertible into our ADSs or shares owned by them for a
period of 150 days after the date of this prospectus without the prior written
consent of J.P. Morgan Securities Inc. Notwithstanding possible earlier
eligibility for sale under the provisions of Rules 144, 144(k) and 701, shares
subject to lock-up agreements will not become eligible for resale until these
agreements expire or are waived by J.P. Morgan Securities Inc. Taking into
account the lock-up agreements, and assuming J.P. Morgan Securities Inc. does
not release shareholders from these agreements, the following shares will be
eligible for sale in the public market at the following times:
- beginning on the effective date of this prospectus, 29,234,728 shares,
including those sold in the offering, will be immediately available for
sale in the public market;
- beginning 90 days after the effective date, approximately 22,973 shares
will be eligible for sale under Rule 701; and
- beginning 150 days after the effective date, approximately 3,034,807
shares will be eligible for sale under Rule 144 at various times.
In general, under Rule 144 as currently in effect, after the expiration of the
lock-up agreements, a person who has beneficially owned restricted securities
for at least one year would be entitled to sell within any three-month period of
a number of shares that does not exceed the greater of:
- 1% of the number of shares then outstanding, which will equal
approximately 373,800 shares immediately after the offering; or
- the average weekly trading volume of the shares during the four calendar
weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to manner of
sale, notice, and the availability of current public information about us. Under
Rule 144(k), a person who is not deemed to have been our affiliate 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, is entitled to sell these
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits our employees, officers, directors or
consultants who purchased shares under a written compensatory plan or contract
to resell these shares in reliance upon Rule 144 but without compliance with
specific restrictions. Rule 701 provides that affiliates may sell their
Rule 701 shares under Rule 144 without complying with the holding period, public
information, volume limitation or notice provisions of Rule 144.
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TAXATION
TAXATION OF U.S. HOLDERS
The following discussion is a general summary of the material U.S. federal
income and French tax consequences of the purchase, ownership and disposition of
ADSs that may be applicable to a purchaser of ADSs that is a U.S. holder (which
consequences generally will be similar to those of the purchase, ownership and
disposition of shares by a U.S. holder). For this purpose, you are a "U.S.
holder" if you are a beneficial owner of ADSs that:
(a) owns, directly, indirectly or constructively, less than 10% of both our
voting stock and share capital;
(b) is, for U.S. federal income tax purposes, either: (i) a citizen or
individual resident of the United States; (ii) a corporation or partnership
created or organized in or under the laws of the United States (or of any
political subdivision thereof); or (iii) a trust or estate, the income of
which is subject to U.S. federal income taxation regardless of its source;
(c) is entitled to benefits under the Convention between the United States of
America and the French Republic for Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital of
August 31, 1994 (the "Treaty"); and
(d) holds such ADSs as capital assets within the meaning of Section 1221 of the
U.S. Internal Revenue Code of 1986, as amended (the "Code").
The discussion set forth below is included for general information only and does
not represent tax advice. This discussion does not address all aspects of
taxation that may be relevant to U.S. holders in light of their particular
circumstances or to certain U.S. holders that are subject to special provisions
of U.S. tax law, including, but not limited to, some United States expatriates,
insurance companies, tax-exempt organizations, financial institutions, persons
subject to alternative minimum tax, traders or dealers in securities or
currencies, persons holding ADSs as a position in a "straddle," or as part of a
hedging, conversion or other integrated transaction, and U.S. persons whose
functional currency is not the U.S. dollar. You should consult your own tax
advisor with respect to the tax consequences to you of the purchase, ownership
and disposition of ADSs, including the tax consequences under state, local and
other tax laws and the possible effects of changes in United States federal and
other tax laws.
This discussion is based on the Code, existing and proposed Treasury regulations
promulgated thereunder, administrative and judicial interpretations thereof, the
Treaty, French tax law, and on the practice of the French tax authorities,
including tax regulations issued by the French tax authorities on June 7, 1994
and March 1, 1996 (the "Regulations"), all as of the date hereof and all of
which are subject to change, possibly with retroactive effect, and differing
interpretations.
We believe, and the following discussion assumes, that we are not currently a
passive foreign investment company ("PFIC") and that, based on the likely
composition of our income and assets, we will not constitute a PFIC in the
foreseeable future. However, because we have substantial passive assets in the
form of cash, and because the value of our goodwill and other assets may
fluctuate significantly, we can provide no assurance regarding our PFIC status
for 2000 and subsequent years. If we are, for any taxable year, a PFIC for U.S.
federal income tax purposes, the U.S. federal income tax consequences to a U.S.
holder that owns ADSs at any time during such taxable year may differ from those
described below. You should consult your own tax advisor regarding the potential
application of the PFIC rules to our company and with respect to the U.S. tax
consequences to you if we were a PFIC at anytime.
For purposes of the Treaty and U.S. federal income tax, U.S. holders of ADSs
(other than potentially a holder of pre release ADSs) will be treated as the
owner of the Shares represented by such ADSs. This conclusion is based on the
assumption that the deposit agreement is the only arrangement that governs the
U.S. holders' rights with respect to the ADSs, that the terms of the deposit
agreement will not be modified and that each obligation provided for in, or
otherwise contemplated by, the deposit agreement will be performed in accordance
with its terms.
A U.S. holder that is a partnership for U.S. federal income tax purposes (other
than a publicly traded partnership) generally will not be subject to U.S.
Federal income tax on income derived from holding the ADSs. If a partner in a
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partnership holding ADSs would otherwise qualify as a U.S. holder, if such
partner held the ADSs directly, the partner generally will be subject to U.S.
federal income tax on such partner's distributive share of the income of the
partnership derived from holding the ADSs in the same manner as a U.S. Holder.
TAXATION OF DIVIDENDS
WITHHOLDING/AVOIR FISCAL. In France, dividends are paid out of after-tax income
and French residents are entitled to a tax credit, known as the AVOIR FISCAL.
The AVOIR FISCAL generally is equal to 50% of the dividend paid, unless it is
not used by an individual, in which case it is generally equal to 40% of the
dividend paid.
In addition, in case the dividends are subject to the PRECOMPTE, shareholders
entitled to the AVOIR FISCAL at the rate of 40% are generally entitled to an
additional amount of AVOIR FISCAL equal to 20% of any such PRECOMPTE actually
paid to each by the Company (see "--precompte").
Under French domestic law, dividends paid to you normally would be subject to a
25% French withholding tax and you would not be eligible for the benefit of the
AVOIR FISCAL.
Under the Treaty, the rate of French withholding tax on dividends paid to you on
your ADSs is reduced to 15% if your ownership of the ADSs is not effectively
connected with a permanent establishment or a fixed base you have in France. If
you are an eligible U.S. holder (as defined below), dividends paid to you on
your ADSs will be immediately subject to the reduced rate of 15%, provided that
you establish before the date of payment of the dividend that you are a resident
of the United States under the Treaty in accordance with the procedures
described below. If you are an eligible U.S. holder, you will also be entitled
to a payment by the French tax authorities equal to the AVOIR FISCAL, less a 15%
withholding tax. As noted below, such payment will not be made to you until
after the close of the calendar year in which the dividend was paid and only
upon receipt by the French tax authorities of a claim made by you for such
payment in accordance with the procedures set forth below.
You are an eligible U.S. holder if you are a U.S. holder of ADSs:
(a) who owns all the rights attached to full ownership of such ADSs, including
but not limited to dividend rights;
(b) who is: (i) an individual U.S. holder; (ii) a United States corporation
that owns, directly or indirectly, less than 10% of the capital of the
company (provided that, in the case of a corporation that is a regulated
investment company, less than 20% of its shares are beneficially owned by
persons who are neither citizens nor residents of the United States); or
(iii) a partnership or trust that is treated as a resident of the United
States pursuant to the provisions of the Treaty, but only to the extent
that its partners, beneficiaries or grantors would qualify under clause
(i) or (ii) above; and
(c) whose ownership of ADSs is not effectively connected with a permanent
establishment or a fixed base in France.
In general, under the Treaty, an eligible U.S. holder may receive a payment of
the AVOIR FISCAL only if such holder (or its partners, beneficiaries or
grantors, if the holder is a partnership or trust) attests that it is subject to
U.S. federal income tax on the payment of the AVOIR FISCAL and the related
dividend. Certain entities are not entitled to the full AVOIR-FISCAL. Tax-exempt
"U.S. pension funds" (as defined below) and certain other tax-exempt entities
(including certain governmental institutions, not-for-profit organizations and,
with respect to ADSs owned through an investment retirement account ("IRA"),
individuals) ("other tax-exempt entities") that own, directly or indirectly,
less than 10% of the capital of the Company, and that satisfy certain filing
formalities specified in the Regulations:
(a) are entitled to a payment, subject to French withholding tax, equal to
30/85 of the gross AVOIR FISCAL (the "partial AVOIR FISCAL"); and
(b) are eligible for the reduced withholding tax rate of 15% on dividends.
A "U.S. pension fund" includes exempt pension funds established and managed in
order to pay retirement benefits subject to the provisions of Section
401(a) (qualified retirement plans), Section 403(b) (tax deferred annuity
contracts) or Section 457 (deferred compensation plans) of the Code.
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If you are an eligible U.S. holder, you can establish entitlement to a reduced
withholding tax rate of 15% at the time a dividend on the ADSs is paid if:
(a) you duly complete and provide the French tax authorities with Treasury Form
RF 1 A EU-NO. 5052 (the "Form") before the date of payment of the relevant
dividend together with, if you are not an individual, an affidavit
attesting that you are the beneficial owner of all the rights attached to
the full ownership of the ADSs, including but not limited to dividend
rights; or
(b) if completion of the Form is not possible prior to the payment of
dividends, you duly complete and provide the French tax authorities with a
simplified certificate (the "Certificate") stating that: (a) you are a U.S.
resident as defined pursuant to the provisions of the Treaty; (b) your
ownership of the ADSs is not effectively connected with a permanent
establishment or fixed base in France; (c) you own all the rights attached
to the full ownership of the ADSs, including but not limited to dividend
rights; (d) you meet all the requirements of the Treaty for obtaining the
benefit of the reduced rate of withholding tax and the right to payment of
the French AVOIR FISCAL; and (e) you claim the reduced rate of withholding
tax and the payment of the AVOIR FISCAL under the Treaty.
The Form or the Certificate, together with their respective instructions, will
be provided upon request by the Depositary with respect to ADSs registered with
the Depositary and are also available from the United States Internal Revenue
Service (the "IRS"). The Depositary will arrange for the filing with the French
tax authorities of all Forms or Certificates completed by U.S. holders of ADSs
provided they are returned to the Depositary within the time period specified by
the Depositary in its distribution to registered U.S. holders of ADSs. For U.S.
holders of Shares, the Form and its instructions are available from the IRS or
the CENTRE DES IMPOTS DES NON RESIDENTS (9, rue d'Uzes, 75094 Paris Cedex 2).
If you are not entitled to the AVOIR FISCAL (i.e., you are not an eligible U.S.
holder) or if you have not filed a completed Form or Certificate before the
dividend payment date, dividends paid to you on your ADSs will be subject to
French withholding tax at a rate of 25%. In such event, you may claim a refund
of the excess withholding tax and the AVOIR FISCAL by completing and providing
the French tax authorities with the Form before December 31st of the calendar
year following the year during which the dividend is paid. U.S. pension funds
and other tax-exempt entities entitled to a partial AVOIR FISCAL are subject to
the same general filing requirements as eligible U.S. holders except that they
may have to supply additional documentation evidencing their entitlement to
these benefits.
Eligible U.S. holders, U.S. pension funds and other tax-exempt entities entitled
to a partial AVOIR FISCAL must file the Form or Certificate and, where
applicable, the affidavit in order to receive payment of the AVOIR FISCAL or
partial AVOIR FISCAL (whichever is applicable). The avoir fiscal or partial
AVOIR FISCAL is generally expected to be paid to eligible U.S. holders, U.S.
pension funds and other tax-exempt entities within 12 months of filing the
relevant form, but not before January 15th following the end of the calendar
year in which the related dividend is paid. Similarly, any French withholding
tax refund is generally expected to be paid within 12 months of filing the
relevant form, but not before January 15th following the end of the calendar
year in which the related dividend is paid.
For U.S. federal income tax purposes, the gross amount of any dividend and the
amount of the AVOIR FISCAL paid to you on your ADSs, including any French
withholding tax thereon and any applicable fees and expenses of the Depository,
will be included in gross income as foreign source dividend income in the year
each such payment is received (which, if you hold ADSs, will be the year of
receipt by the Depositary) to the extent paid or deemed paid out of our current
or accumulated earnings and profits as calculated for U.S. federal income tax
purposes. No dividends received deduction will be allowed with respect to
dividends paid by us.
The amount of any dividend paid in euros or francs, including the amount of any
French taxes withheld therefrom, will be equal to the U.S. dollar value of the
euros or francs on the date such dividend is distributed by us regardless of
whether the payment is in fact converted into U.S. dollars. You generally will
be required to recognize foreign currency gain or loss, which will generally be
United States source ordinary income or loss, upon the sale or disposition of
euros or francs. Moreover, you may also be required to recognize such foreign
currency gain or loss,
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which will generally be United States source ordinary income or loss, as a
result of the receipt of a refund of amounts, if any, withheld from a dividend
in excess of the Treaty rate of 15%.
To the extent that the amount of any distribution on the ADSs (including the
amount of any AVOIR FISCAL received which is treated as a distribution in the
year of receipt) exceeds a U.S. holder's pro rata portion of our current and
accumulated earnings and profits for a taxable year as calculated for U.S.
federal income tax purposes, the distribution will first be treated as a
tax-free return of capital, causing a reduction in the U.S. holder's adjusted
basis in the ADSs (but not below zero), and the balance in excess of adjusted
basis will be treated as capital gain recognized on a sale or exchange.
French withholding tax imposed at the Treaty rate of 15% on dividends paid on
the ADSs and on any related payment of the AVOIR FISCAL will be treated as
payment of a foreign income tax and, subject to certain conditions and
limitations, may be taken as a credit for U.S. federal income tax purposes.
Under the Code, the limitation on foreign taxes eligible for credit is not
calculated with respect to all worldwide income, but instead is calculated
separately with respect to specific classes of income. For this purpose,
dividends distributed by us and the related AVOIR FISCAL payments generally will
constitute "passive income" or, in the case of certain U.S. holders, "financial
services income." Alternatively, provided that you do not elect to claim a
foreign tax credit in respect of any foreign taxes paid by you in a particular
taxable year, you may claim the foreign taxes paid by you in the year as an
itemized deduction. Unlike a tax credit, a deduction does not reduce U.S.
federal income tax on a dollar-for-dollar basis. A deduction, however, is not
subject to the limitations generally applicable to foreign tax credits.
PRECOMPTE. Amounts distributed as dividends by French companies out of profits
which have not been taxed at the ordinary corporate income tax rate or which
have been earned and taxed more than five years before the distribution and
which give rise to the AVOIR FISCAL are subject to a PRECOMPTE, or prepayment,
by such companies. The PRECOMPTE is paid by the distributing company to the
French tax authorities and is generally equal to one-half of the nominal
dividend distributed.
If you are not entitled to the AVOIR FISCAL, or you are a U.S. pension fund or
other tax exempt entity entitled to a partial AVOIR FISCAL, you generally may
obtain a refund from the French tax authorities of any PRECOMPTE that we pay
with respect to the dividends distributed on your ADSs. Pursuant to the Treaty,
the amount of the PRECOMPTE refunded to United States residents is reduced by
the 15% withholding tax applicable to dividends and by the partial AVOIR FISCAL
paid to the U.S. pension funds and certain other tax-exempt entities. You are
only entitled to a refund of PRECOMPTE actually paid in cash and you are not
entitled to a refund of the PRECOMPTE that we pay by off-setting French and/or
foreign tax credits.
If you are entitled to a refund of the PRECOMPTE, you must apply for such refund
by filing a French Treasury form RF 1 B EU-NO. 5053 before the end of the
calendar year following the year in which the dividend was paid. The form and
its instructions are available from the IRS or at the CENTRE DES IMPOTS DES NON
RESIDENTS (9, rue d'Uzes, 75094 Paris Cedex 2).
For U.S. federal income tax purposes, the gross amount of the PRECOMPTE, if any,
paid to you (including any French withholding tax thereon) will be included in
gross income as dividend income in the year such payment is received. Such
amounts generally will constitute foreign source "passive" or, in the case of
certain holders, "financial services" income for foreign tax credit purposes.
The amount of any PRECOMPTE paid in euros or francs, including the amount of any
French taxes withheld therefrom, will be equal to the U.S. dollar value of the
euros or francs on the date such PRECOMPTE is included in income (which, if you
hold ADSs, will be the date of receipt by the Depositary), regardless of whether
the payment is in fact converted into U.S. dollars. You will generally be
required to recognize United States source ordinary income or loss upon the sale
or disposition of euros or francs.
TAXATION OF CAPITAL GAINS
You generally will not be subject to French tax on any capital gain from the
sale or exchange of ADSs unless those ADSs form part of the business property of
a permanent establishment or fixed base that you have in France. Special
rules apply to individuals who are residents of more than one country. The
deposit or withdrawal of Shares by you
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under the Deposit Agreement will not be a taxable event for U.S. federal income
tax purposes. In general, for U.S. federal income tax purposes, you will
recognize capital gain or loss on the sale, exchange or other disposition of
ADSs equal to the difference between the amount realized upon the sale, exchange
or other disposition and your tax basis in such ADSs. Such gain or loss
generally will be United States source gain or loss. If you are an individual,
capital gains may be subject to U.S. federal income tax at a preferential rate
provided that your holding period for the ADSs sold or otherwise disposed of
exceeds one year. The deduction of capital losses is subject to certain
limitations.
FRENCH ESTATE AND GIFT TAXES
Pursuant to the Convention Between the United States of America and the French
Republic for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Estates, Inheritance and Gifts of November 24,
1978, you will not be subject to French inheritance or gift tax as a result of a
transfer of ADSs by gift or by reason of your death unless (i) you are domiciled
in France at the time of making the gift, or at the time of death, or (ii) the
ADSs were used in, or held for use in, the conduct of a business through a
permanent establishment or fixed base in France.
FRENCH WEALTH TAX
The French wealth tax (IMPOT DE SOLIDARITE SUR LA FORTUNE) generally will not
apply to your ADSs if you are a resident of the United States pursuant to the
Treaty.
UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING
Dividend payments with respect to ADSs and proceeds from the sale, exchange or
redemption of ADSs may be subject to information reporting to the IRS and
possible U.S. backup withholding tax at a 31% rate. Backup withholding will not
apply to you, however, if you furnish a correct taxpayer identification number
and make any other required certification or if you are a corporation or
otherwise exempt from backup withholding. If you are required to establish your
exempt status, you must provide such certification on IRS Form W-9 (Request for
Taxpayer Identification Number and Certification). Finalized Treasury
Regulations, which are applicable to payments made after December 31, 2000, have
generally expanded the circumstances under which information reporting and
backup withholding may apply.
Amounts withheld as backup withholding may be credited against your U.S. federal
income tax liability, and you may obtain a refund of any excess amounts withheld
under the backup withholding rules by timely filing the appropriate claim for
refund with the IRS and furnishing any required information. You should consult
your own tax advisor regarding the application of the information reporting and
backup withholding rules.
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UNDERWRITING
ActivCard, the selling shareholders and the underwriters named below have
entered into an underwriting agreement covering the ADSs and ordinary shares to
be offered in the U.S. and international portions of this offering. J.P. Morgan
Securities Inc. is acting as book running lead manager for this offering. J.P.
Morgan Securities Inc. and SG Cowen Securities Corporation are acting as joint
lead managers for this offering. J.P. Morgan Securities Inc., SG Cowen
Securities Corporation and SoundView Technology Group, Inc. are acting as
representatives of the underwriters. Each underwriter has agreed to purchase
from ActivCard the number of ADSs set forth opposite its name in the following
table. A portion of the offering may be issued in the the form of ordinary
shares.
<TABLE>
<CAPTION>
--------------
UNDERWRITERS NUMBER OF ADSS
- ------------ --------------
<S> <C>
J.P. Morgan Securities Inc.................................. 1,712,000
SG Cowen Securities Corporation............................. 1,260,000
SoundView Technology Group, Inc............................. 632,000
Dominick & Dominick LLC..................................... 66,000
HSBC Securities (USA) Inc................................... 66,000
Jackson Securities Incorporated............................. 66,000
Sands Brothers & Co., Ltd................................... 66,000
Bryan Garnier & Company..................................... 66,000
Quartz Capital Partners Ltd................................. 66,000
---------
Total..................................................... 4,000,000
=========
</TABLE>
The underwriting agreement provides that if the underwriters take any of the
ADSs set forth above, then they must take all of the ADSs. No underwriter is
obligated to take any ADSs allocated to a defaulting underwriter except under
limited circumstances.
The underwriters are offering the ADSs, subject to the prior sale of such ADSs,
and when, as and if such ADSs are delivered to and accepted by them. The
underwriters will initially offer to sell ADSs to the public at the initial
public offering price set forth on the cover page of this prospectus. The
underwriters may sell ADSs to securities dealers at a discount of up to $3.21
per ADS from the initial public offering price. Any such securities dealers may
resell ADSs to certain other brokers or dealers at a discount of up to $.10 per
ADS from the initial public offering price. After the initial public offering,
the underwriters may vary the public offering price and other selling terms.
Vertex and Messrs. Wikle, Kernan and Arthur collectively have granted to the
underwriters an option to purchase up to an additional 600,000 shares in the
form of ADSs, at the initial public offering price to the public, less the
aggregate underwriting discount, solely to cover over-allotments. This option
may be exercised at any time up to 30 days after the date of this prospectus. To
the extent that the underwriters exercise such option, each of the underwriters
will have a firm commitment, subject to certain conditions, to purchase a number
of option shares proportionate to such underwriter's initial commitment.
The following table shows the per ADS and total underwriting discounts and
commissions that Activcard and the selling shareholders will pay to the
underwriters. These amounts are shown assuming both no purchase of and full
purchase of all additional ADSs.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per ADS................................................... $ 5.355 $ 5.355
Total................................................... $21,420,000 $24,633,000
</TABLE>
The underwriters may purchase and sell ADSs in the open market in connection
with this offering. These transactions may include short sales, stabilizing
transactions and purchases to cover positions created by short sales. Short
sales involve the sale by the underwriters of a greater number of ADSs than they
are required to purchase in the offering. Stabilizing transactions consist of
certain bids or purchases made for the purpose of preventing or slowing a
decline
69
<PAGE>
in the market price of the ADSs while the offering is in progress. The
underwriters may also impose a penalty bid, which means that an underwriter must
repay to the other underwriters a portion of the underwriting discount received
by it. An underwriter may be subject to a penalty bid if the representative of
the underwriters, while engaging in stabilizing or short covering transactions,
repurchases ADSs sold by or for the account of that underwriter. These
activities may stabilize, maintain or otherwise affect the market price of the
ADSs. As a result, the price of the ADSs may be higher than the price that
otherwise might exist in the open market. If the underwriters commence these
activities, they may discontinue them at any time. The underwriters may carry
out these transactions on the Nasdaq or Easdaq, in the over-the-counter market
or otherwise.
A prospectus in electronic format is being made available on an Internet web
site maintained by Wit SoundView's affiliate, Wit Capital Corporation. In
addition, other dealers purchasing shares from Wit SoundView in this offering
have agreed to make a prospectus in electronic format available on web sites
maintained by each of these dealers. Other than the prospectus in electronic
format, the information on Wit Capital Corporation's web site is not part of the
prospectus or the registration statement of which this prospectus forms a part,
has not been approved and/or endorsed by ActivCard or any underwriter in its
capacity as underwriter and should not be relied upon by investors.
ActivCard estimates that its total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $2.0 million. The
selling shareholders will pay their own expenses.
No action has been or will be taken in any jurisdiction, except in the United
States, that would permit a public offering of the ADSs or the ordinary shares,
or the possession, circulation or distribution of a prospectus or any other
material relating to ActivCard, the ADSs or the ordinary shares, where action
for that purpose is required.
Each underwriter has agreed that it has offered or sold the ADSs and the
ordinary shares and, prior to the expiry of six months from the date of the
offer of the ADSs and the ordinary shares, will not offer or sell any ADS or
ordinary shares to any person in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing or
investments as principal or agent, for the purposes of their businesses or
otherwise in the 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 Regulations 1995. Each underwriter has agreed that it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the ADSs
and ordinary shares in, from, or otherwise involving the United Kingdom, and
each has also agreed that 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 offering of the ADSs and ordinary shares to a person who is
of a kind described in Article 11(3) of the Financial Service At 1986
(Investment Advertisements) (Exemptions) Order 1996, as amended, or is a person
to whom the document may otherwise be lawfully issued or passed on.
We, our officers, all directors and executive officers who own ordinary shares
and certain other stockholders, warrantholders and optionholders have agreed
that for a period of 150 days following the date of this prospectus, without the
prior consent of J.P. Morgan Securities, Inc. will not, directly or indirectly,
offer, sell, assign, transfer, encumber, pledge, contract to sell, grant an
option to purchase or otherwise dispose of, other than by operation of law, any
ADSs or any other securities convertible into or exercisable or exchangeable for
ADSs, including, without limitation, options, warrants and the like which are
owned either of record or beneficially or which are acquired on or prior to the
date of this prospectus or received upon the exercise of options or warrants.
J.P. Morgan Securities, Inc. has advised us that it has no present intention of
releasing any of the parties subject to such lockup agreements until the
expiration of the 150-day period.
ActivCard and the selling shareholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933. ActivCard has agreed to reimburse the underwriters for some of their
expenses.
We intend to list the ADSs on the Nasdaq National Market under the trading
symbol "ACTI."
It is expected that delivery of the ADSs will be made to investors on or about
March 21, 2000.
70
<PAGE>
There has been no public market for the ADSs prior to this offering. In
determining the initial offering price, ActivCard and the underwriters referred
to the closing price of our ordinary shares on Easdaq on the trading day prior
to the commencement of this offering.
None of ActivCard, the selling shareholders or the underwriters can assure
investors that an active trading market will develop for the ADSs, or that the
ADSs will trade in the public market at or above the initial offering price.
From time to time in the ordinary course of their business, some of the
underwriters and their affiliates have engaged in, and may in the future engage
in, commercial and investment banking transactions with ActivCard and its
affiliates. SG Cowen Securities Corporation acted as private placement agent in
connection with our private placement of 990,675 ordinary shares which closed on
February 16, 2000 for which it received customary fees. Bryan Garnier & Cie.
Limited acted as standby underwriter in connection with our public offering of
ordinary shares in February 1999 and convertible bonds and warrants in October
1999 for which it received customary fees.
The underwriters do not intend to sell any ADSs to any accounts over which they
exercise discretionary authority.
71
<PAGE>
LEGAL MATTERS
The validity of the ADSs offered hereby will be passed upon for ActivCard by
Shearman & Sterling, New York, New York. The validity of the shares represented
by the ADSs will be passed upon by Shearman & Sterling, Paris, France. Cahill
Gordon & Reindel, New York, New York is acting as counsel for the underwriters
in connection with selected legal matters relating to this offering.
EXPERTS
The consolidated financial statements of ActivCard as of December 31, 1998 and
1999 and for the years ended December 31, 1997, 1998 and 1999 included in this
prospectus have been audited by Ernst & Young Audit, Paris, France, independent
auditors, as stated in its report appearing herein. The consolidated financial
statements of ActivCard have been included in reliance upon the report of such
firm given upon its authority as experts in accounting and auditing.
WHERE YOU CAN FIND INFORMATION
We have filed with the Securities and Exchange Commission in Washington D.C. a
registration statement on Form F-1 of which this prospectus is a part under the
Securities Act with respect to the ADSs offered hereby. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules thereto. Statements made in this prospectus as to the
contents of any contract, agreement or other document are summaries of the
material terms of such contract, agreement or other document. With respect to
each such contract, agreement or other document filed as an exhibit to the
registration statement, reference is made to the exhibit. The registration
statement (including the exhibits and schedules thereto) may be inspected and
copied at the public reference facilities maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
will also be available for inspection and copying at the regional offices of the
Securities and Exchange Commission located at Seven World Trade Center, 13th
Floor, New York New York 10048 and at Citicorp Center, 500 West Madison Street
(Suite 1400), Chicago, Illinois 60661. Copies of such material may also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Securities and
Exchange Commission also maintains a website that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of this website is
http://www.sec.gov.
We will furnish The Bank of New York, the Depositary for the ADSs, with annual
reports in English, which will include a review of operations and annual audited
consolidated financial statements audited by an independent accounting firm and
prepared in accordance with U.S. GAAP. We will also furnish the Depositary with
quarterly reports in English, which will include unaudited quarterly
consolidated financial information prepared in accordance with U.S. GAAP. The
Depositary has agreed with us that, upon receipt of such reports, it will
promptly mail such reports to all registered holders of ADSs. We will also
furnish to the Depositary summaries in English or an English version of all
notices of shareholders' meetings and other reports and communications that are
made generally available to shareholders. The Depositary will arrange for the
mailing of such documents to all registered holders of ADSs. As a foreign
private issuer, we are exempt from the rules under the Securities Exchange Act
of 1934, as amended, prescribing the furnishing and the content of proxy
statements.
As a result of this offering, it is anticipated that we will become subject to
the reporting requirements of the U.S. Securities Exchange Act of 1934,
applicable to foreign private issuers, and in accordance therewith will file
reports, including annual reports on Form 20-F, and other information with the
Commission. In addition, we have agreed to file with the Commission quarterly
reports, which will include unaudited quarterly consolidated financial
information, on Form 6-K for the first three quarters of each fiscal year and
our annual report on Form 20-F within the time period prescribed under Section
13 of the Exchange Act for the filing by domestic issuers of quarterly reports
on Form 10-Q and an annual report on Form 10-K, respectively. Such reports and
other information may be obtained, upon written request, from The Bank of New
York, as Depositary, at its Corporate Trust Office located at 101 Barclay
Street, New York, NY 10286.
Price-sensitive information will be made available to investors in Europe
through the Easdaq Regulatory Company Reporting System and international
information vendors. You can request from us a copy of the latest version of our
Articles of Association and our annual financial statements by contacting us at
24-28 Avenue du General de Gaulle, 92156 Suresnes Cedex, France, telephone
number 33-1-42-04-8400 and telefax number 31-1-42-04-8484.
72
<PAGE>
ACTIVCARD S.A.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at December 31, 1997, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-4
Consolidated Statement of Changes in Shareholders' Equity
(Deficit) for the years ended December 31, 1997, 1998 and
1999...................................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Directors and Shareholders
ActivCard S.A.
We have audited the accompanying consolidated balance sheets of ActivCard S.A.
and subsidiaries as of December 31, 1997, 1998 and 1999 and the related
consolidated statements of operations, changes in shareholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1999. The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 1997, 1998 and 1999, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG Audit
John Mackey
Paris, France
February 10, 2000
F-2
<PAGE>
ACTIVCARD S.A.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
------------------------------
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. 5,291 4,150 8,790
Accounts receivable (less allowance for doubtful account
of $134 in 1997, $89 in 1998 and $248 in 1999).......... 2,202 2,512 2,576
Unbilled work-in-process.................................. 457 18 27
Research and development tax credit receivable--current
portion................................................. 249 34 80
Inventory................................................. 771 1,133 1,224
Prepaid expenses.......................................... 478 469 906
Value-added tax recoverable............................... 804 699 496
Advances to suppliers..................................... 42 206 237
Other current assets...................................... 62 81 62
------- ------- -------
Total current assets........................................ 10,356 9,302 14,398
------- ------- -------
Property and equipment:
Office and computer equipment............................. 1,051 1,458 1,728
Furniture and fixtures.................................... 1,055 1,036 806
------- ------- -------
Total property and equipment.............................. 2,106 2,494 2,534
------- ------- -------
Less accumulated depreciation and amortization............ (1,109) (1,457) (1,646)
------- ------- -------
Property and equipment-net.................................. 997 1,037 888
------- ------- -------
Other assets:
Research and development tax credit receivable............ 826 1,325 691
Other long-term assets.................................... 872 711 457
------- ------- -------
Total assets................................................ 13,051 12,375 16,434
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Currents liabilities:
Short-term debt and current portion of long-term debt..... 1,381 1,426 1,419
Accounts payable.......................................... 2,073 2,075 2,090
Accrued payroll and related benefits...................... 1,231 1,637 1,885
Advances from customers................................... 70 78 211
Value-added tax payable................................... 472 262 218
Accrued expenses.......................................... 36 424 130
------- ------- -------
Total current liabilities................................... 5,263 5,902 5,953
------- ------- -------
Long-term debt, less current portion........................ 2,321 1,343 198
Convertible loan, less current portion...................... 8,030 8,030 9,259
Other long-term liabilities................................. 428 105 32
Commitments and contingencies (see notes 1,5,9,10 and 11)
Shareholders' equity (deficit)
Ordinary shares, FRF 6.25 nominal value 15,529,246,
20,872,438 and 32,090,026 shares issued and outstanding
at December 31, 1997, 1998 and 1999, respectively....... 18,969 24,576 36,339
Additional paid-in capital................................ 21,188 25,836 34,483
Accumulated deficit....................................... (41,430) (51,728) (67,640)
Deferred stock compensation............................... (420) (272) (124)
Accumulated translation adjustment........................ (1,298) (1,417) (2,066)
------- ------- -------
Total shareholders' equity (deficit)........................ (2,991) (3,005) 992
------- ------- -------
Total liabilities and shareholders' equity (deficit)........ 13,051 12,375 16,434
======= ======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
<PAGE>
ACTIVCARD S.A.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
---------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Products.............................................. 6,210 7,624 9,976
Engineering services.................................. 1,357 642 286
----------- ----------- -----------
Total revenues.......................................... 7,567 8,266 10,262
Cost of revenue:
Products.............................................. 3,470 4,564 5,099
Engineering services.................................. 1,356 659 238
----------- ----------- -----------
Total cost of revenue................................... 4,826 5,223 5,337
----------- ----------- -----------
Gross profit............................................ 2,741 3,043 4,925
----------- ----------- -----------
Costs and expenses
Research and development.............................. 3,281 3,888 5,233
Marketing and selling................................. 7,210 7,042 9,829
General and administrative............................ 2,317 2,504 5,603
----------- ----------- -----------
Total costs and expenses................................ 12,808 13,434 20,665
----------- ----------- -----------
Loss from operations.................................... (10,067) (10,391) (15,740)
----------- ----------- -----------
Interest expenses....................................... (301) (702) (743)
Interest income......................................... 142 179 294
Foreign exchange gain (loss)............................ (22) 163 262
----------- ----------- -----------
Financial income (expenses), net........................ (181) (360) (187)
----------- ----------- -----------
Loss before income taxes and minority interest.......... (10,248) (10,751) (15,927)
Income tax benefit...................................... 714 452 15
----------- ----------- -----------
Net loss before minority interest....................... (9,534) (10,299) (15,912)
Minority interest....................................... 32 1 --
----------- ----------- -----------
Net loss................................................ (9,502) (10,298) (15,912)
=========== =========== ===========
Basic and diluted net loss per share.................... (0.61) (0.55) (0.55)
=========== =========== ===========
Number of shares used in computing basic and diluted net
loss per share........................................ 15,460,178 18,618,463 29,114,715
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
<PAGE>
ACTIVCARD S.A.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
ACCUMULATED
ORDINARY SHARES ADDITIONAL DEFERRED OTHER SHAREHOLDERS'
--------------------- PAID-IN ACCUMULATED STOCK COMPREHENSIVE EQUITY
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION LOSS (DEFICIT)
---------- -------- ---------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1997......... 15,340,516 18,768 21,281 (31,928) (707) (647) 6,767
Exercise of warrants at FF6.25
per share..................... 174,280 185 185
Exercise of complementary rights
at FF25.28 per share.......... 7,375 8 24 32
Exercise of complementary rights
at FF25.50 per share.......... 7,075 8 23 31
Amortization of deferred
compensation.................. 147 147
Cancellation of warrants........ (140) 140 --
Comprehensive loss:
Net loss for 1997............. (9,502)
Foreign currency
translation................. (651)
Total Comprehensive Loss........ (10,153)
---------- ------ ------ -------- ----- ------- --------
BALANCE DECEMBER 31, 1997....... 15,529,246 18,969 21,188 (41,430) (420) (1,298) (2,991)
Issuance of ordinary shares at
$2.00
per share, less offering
expenses...................... 4,658,773 4,873 4,069 8,942
Exercise of warrants at FF6.25
per share..................... 404,960 441 441
Exercise of warrants at FF24.80
per share..................... 124,616 129 389 518
Exercise of complementary rights
at FF25.50 per share.......... 11,055 11 34 45
Exercise of complementary rights
at FF25.28 per share.......... 10,608 11 33 44
Exercise of complementary rights
at $2.00 per share............ 133,180 142 123 265
Amortization of deferred
compensation.................. 148 148
Comprehensive loss:
Net loss for 1998............. (10,298)
Foreign currency
translation................. (119)
Total Comprehensive Loss........ (10,417)
---------- ------ ------ -------- ----- ------- --------
BALANCE DECEMBER 31, 1998....... 20,872,438 24,576 25,836 (51,728) (272) (1,417) (3,005)
Issuance of ordinary shares at
$1.25
per share, less offering
expenses...................... 8,303,179 8,895 830 9,725
Issuance of ordinary shares at
FF6.25 per share.............. 480,000 480 1,920 2,400
Exercise of warrants at $4.60
per share..................... 52,152 52 188 240
Exercise of warrants at FF24.80
per share..................... 126,074 124 380 504
Exercise of complementary rights
at FF25.50 per share.......... 5,119 5 16 21
Exercise of complementary rights
at FF25.28 per share.......... 5,337 5 17 22
Exercise of complementary rights
at $2.00 per share............ 345,094 338 351 689
Exercise of complementary rights
at $1.25 per share............ 648,425 641 170 811
Exercise of stock options at
$4.65 per share............... 264,847 255 976 1,231
Exercise of stock options at
$4.03 per share............... 492 1 1 2
Exercise of stock options at
$1.67 per share............... 2,500 2 2 4
Conversion of bonds to shares at
$4.60 per share............... 984,369 965 3,452 4,417
Issuance of detachable warrants
from October.................. 344 344
Amortization of deferred
compensation.................. 148 148
Comprehensive loss:
Net loss for 1999............. (15,912)
Foreign currency
translation................. (649)
Total Comprehensive Loss........ (16,561)
---------- ------ ------ -------- ----- ------- --------
BALANCE DECEMBER 31, 1999....... 32,090,026 36,339 34,483 (67,640) (124) (2,066) 992
========== ====== ====== ======== ===== ======= ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
ACTIVCARD S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
------------------------------
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... (9,502) (10,298) (15,912)
Adjustments to reconcile net loss to net cash used by
operating activities:
Deferred compensation on issuance of options and
warrants................................................ 147 148 148
Deferred compensation on issuance of shares............... -- -- 2,400
Depreciation and amortization............................. 716 745 1,164
(Gain) loss on disposal of property and equipment......... -- -- 17
Minority interest......................................... (31) (1) (4)
Increase (decrease) in cash from:
Accounts receivable....................................... 1,344 (149) (452)
Unbilled work-in progress................................. (338) 448 (13)
Inventory................................................. (376) (293) (270)
Prepaid expenses.......................................... (302) 39 (663)
Value-added tax recoverable............................... 79 153 111
Advances to suppliers..................................... 77 (153) (65)
Other current assets...................................... 41 (14) 8
Research and development tax credit receivable............ (664) (199) (16)
Accounts payable.......................................... (667) (136) 332
Accrued payroll and related benefits...................... (136) 303 516
Advances from customers................................... (104) 4 154
Value-added tax payable................................... (78) (230) (8)
Accrued expenses.......................................... (173) 350 (331)
Other..................................................... 194 (295) (63)
------ ------- -------
Net cash flows from operating activities.................... (9,773) (9,578) (12,947)
------ ------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (62) (589) (265)
Proceeds from sale of property and equipment.............. -- -- 10
------ ------- -------
Net cash flows from investing activities.................. (62) (589) (255)
------ ------- -------
Cash flows from financing activities:
Change in bank overdrafts................................. (267) (21) (29)
Proceeds from financing of receivables.................... 275 -- --
Repayment of financing of receivables..................... (1,497) -- 47
Proceeds from convertible loan............................ 8,030 -- 5,656
Proceeds from issuance of detachable warrants............. -- -- 344
Proceeds from loans from third parties.................... 111 -- --
Repayment of loans from third parties..................... (342) (737) (784)
Principal payments on capital lease obligations........... (172) (296) (273)
Cash proceeds from exercise of warrants, complementary
rights and stock options................................ 248 1,313 3,526
Cash proceeds from sale of ordinary shares................ -- 8,942 9,725
------ ------- -------
Net cash flows from financing activities.................... 6,386 9,201 18,212
------ ------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................... (853) (175) (370)
------ ------- -------
Net increase (decrease) in cash and cash equivalents........ (4,302) (1,141) 4,640
------ ------- -------
Cash and cash equivalents, beginning of period.............. 9,593 5,291 4,150
------ ------- -------
Cash and cash equivalents, end of period.................... 5,291 4,150 8,790
====== ======= =======
Supplemental cash flow information:
Interest paid............................................. (119) (732) (745)
Non cash financing activities:
Common stock issued upon conversion of convertible
loan.................................................. -- -- 4,417
Fixed assets acquired under capital leases.............. 367 -- 279
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1.1 NATURE OF BUSINESS
ActivCard S.A. is organized as a societe anonyme, or limited liability
corporation, under the laws of the Republic of France. ActivCard S.A. and its
subsidiaries comprise the ActivCard Group (the "Company"), which was founded in
1985. The Company develops, manufactures, markets and supports token-based and
smart-card-based authentification solutions for computer and communication
network security. The Company also provides contract engineering services to
third parties.
1.2 BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements were prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of financial statements requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying footnotes. Actual results could differ from those estimates.
The accompanying consolidated financial statements include the Company and its
subsidiaries in France (ActivCard Europe S.A. and ADV Technologies S.A.), the
United States (ActivCard, Inc.) and Singapore (ActivCard Asia Pte Ltd.) after
eliminating all intercompany accounts and transactions.
1.3 TRANSLATION OF FINANCIAL STATEMENTS OF FOREIGN ENTITIES
The reporting currency of the Company and its subsidiaries is the U.S. dollar.
All assets and liabilities in the balance sheets of entities whose functional
currency is other than the U.S. dollar are translated into U.S. dollar
equivalents at exchange rates as follows: (1) asset and liability accounts at
year-end rates and (2) income statement accounts at weighted average exchange
rates for the year.
Translation gains or losses are recorded in shareholders' equity and transaction
gains and losses are reflected in net income. The Company has not undertaken
hedging transactions to cover its currency translation exposure.
1.4 REVENUE RECOGNITION
Revenue from the sale of hardware products is recognized upon shipment of the
product, provided that no significant obligations remain and collection of the
receivable is considered probable.
Beginning in January 1998, the Company adopted Statement of Position 97-2
"Software Revenue Recognition" as amended by Statement of Position 98-4. In
software arrangements that include rights to multiple software products,
maintenance and/or other services, the Company allocates the total arrangement
fee among each deliverables determined based on vendor-specific evidence.
Revenue from the sale of software licences is recognized upon delivery of the
software product, unless fee is not fixed or determinable or collectibility is
not probable. Revenue allocable to maintenance is recognized on a straight-line
basis over the period the maintenance is provided.
Revenue from engineering services is recognized in accordance with the
percentage-of-completion method and to the extent that such revenue is derived
from services provided pursuant to a signed contract. The extent of progress
toward completion is measured by actual hours incurred compared to estimated
total hours and is valued at the cost of hours incurred plus the prorata portion
of the estimated total margin. Contracts include both services provided on a
fixed-price basis and services invoiced based on days worked. Anticipated
contract losses are recorded in the earliest period in which such losses become
probable.
F-7
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues from engineering services typically are billed as specified milestones
are attained, but may be billed in advance in some cases. Substantially all
advances from customers recorded as liabilities at the balance sheet date are
related to engineering services. Unbilled work-in-process is recorded as an
asset at the balance sheet date.
1.5 SALES RETURNS AND WARRANTIES
Any potential sales returns are covered by the Company's allowance for sales
returns and doubtful accounts. An allowance for sales returns of $45, $32 and
$31 has been accrued at December 31, 1997, 1998 and 1999, respectively. The
Company provides for the costs of warranty in excess of its own warranty
coverage provided to the Company by the product assembly contractors.
1.6 CONCENTRATION OF RISK
The Company sells its products to various companies across several industries.
The Company performs ongoing credit evaluations of its customers and maintains
allowances for potential credit losses, and such losses have been within
management's expectations. The activity in the allowance for doubtful accounts
may be summarized as follows:
<TABLE>
<CAPTION>
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Allowance balance at January 1.............................. 155 134 89
Amounts charged to expense.................................. 386 87 195
Amounts written off......................................... (407) (132) (35)
---- ---- ---
Allowance balance at December 31............................ 134 89 249
==== ==== ===
</TABLE>
The Company generally requires no collateral, but may request letters of credit
as collateral in certain circumstances.
As of December 31, 1999, the Company contracts for the manufacture and assembly
of its token with a supplier located in China and another located in Singapore.
The microcontroller chips contained in the Company's token are purchased from a
sole source supplier in South Korea. The Company believes that alternate
manufacturers can be identified if current manufacturers are unable to meet the
Company's requirements.
1.7 NET LOSS PER SHARE
On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). Dilutive options and
warrants did not have an effect on the computation of diluted loss per share in
1997, 1998 and 1999 since they were anti-dilutive.
1.8 CASH EQUIVALENTS
The Company considers all highly liquid investments with insignificant interest
rate risk and purchased with an original maturity of three months or less to be
cash equivalents. The Company classifies investments, based on the nature of the
securities and the intent and investment goal of the Company, as trading
securities, available-for-sale securities or held to maturity securities. At
December 31, 1998 and 1999, the Company also respectively held $1,557 and $1,481
of available for sale securities, which were classified as cash equivalents.
Fair value of such securities approximated book value and there were no
unrealized gains or losses as of December 31, 1998 and 1999. The
F-8
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company had no investments as of December 31, 1997. Gross realized gains and
losses on sales of available-for-sale securities during 1997, 1998 and 1999 were
immaterial.
1.9 INVENTORIES
Inventories consist of finished goods and of components, which are stated at the
lower of cost (first-in, first-out method) or market.
1.10 PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization are
computed using principally the straight-line method over estimated useful lives
of three to five years. Assets under capital leases are amortized over the
shorter of the asset life or the lease term, amortization of such leases is
included in depreciation expense.
1.11 RESEARCH AND DEVELOPMENT EXPENSE AND CAPITALIZATION OF SOFTWARE COSTS
Research and development costs are expensed as incurred. In accordance with
Statement of Financial Accounting Standards No. 86, the Company capitalizes
eligible computer software costs upon achievement of technological feasibility
subject to net realizable value considerations. The Company has defined
technological feasibility as completion of a working model. As of December 31,
1997, 1998, and 1999 such capitalizable costs were insignificant. Accordingly,
the Company has not capitalized any costs and charged all such costs to research
and development expenses.
1.12 INCOME TAXES
In accordance with Statement of Financial Accounting Standards No. 109, the
liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates that will be in effect when the differences are
expected to reverse.
1.13 EMPLOYEE STOCK OPTIONS
In 1996, the Company adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based
Compensation". As permitted by SFAS 123, the Company has elected to continue to
account for its employee stock option plans in accordance with the provisions of
the Accounting Principles Board No. 25 (APB 25), "Accounting for Stock Issued to
Employees". Under APB 25, when the exercise price of the Company's employee
stock options is less than the market price of the underlying shares at the date
of grant, compensation expense is recognized.
1.14 COMPREHENSIVE INCOME
In 1997, the Company adopted SFAS No. 130, "Reporting Comprehensive Income".
This Statement establishes rules for the reporting of comprehensive income and
its components. Comprehensive Income consists of net income and foreign currency
translation adjustments and is presented in the Consolidated Statement of
Shareholders' Equity. The adoption of SFAS 130 had no impact on total
shareholders' equity. Prior year financial statements have been reclassified to
conform to the SFAS 130 requirements.
F-9
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1.15 SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (Statement
131). Statement 131 superseded FASB Statement No. 14, Financial Reporting for
Segments of a Business Enterprise. Statement 131 establishes standards for the
way that public business enterprise report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports.
Statement 131 also establishes standards for related disclosures about products
and engineering services, geographic areas, and major customers. The adoption of
Statement 131 did not affect results of operations or financial position and did
not affect the disclosure of segment information. See note 11.
1.16 RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standard Board issued Statement No. 133,
"Accounting for the Derivative Instruments and Hedging Activities". The
Statement will require the Company to recognize all derivatives on the balance
sheet at fair value. This statement is effective for fiscal years beginning
after June 15, 2000, and will be adopted by the Company for the year ending
December 31, 2001. The management does not anticipate that the adoption of the
new Statement will have a significant effect on the Company's revenues and
earnings, as the Company currently does not have any derivative instruments.
Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions" (SOP 98-9) was issued in
December 1998 and addresses software revenue recognition as it applies to
certain multiple-element arrangements. SOP 98-9 also amends Statement of
Position 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2" to
extend the deferral of application of certain passages of Statement of Position
97-2 through fiscal years beginning on or before March 15, 1999. All other
provisions of SOP 98-9 are effective for transactions entered into in fiscal
years after March 15, 1999. The Company will comply with the requirements of SOP
98-9 as they become effective and this is not expected to have a significant
effect on the Company's revenues and earnings.
2. PROPERTY AND EQUIPMENT
Changes in property and equipment for the periods presented were as follows:
<TABLE>
<CAPTION>
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period.............................. 2,438 2,106 2,494
Acquisitions of property and equipment...................... 62 589 265
Acquisitions of property and equipment under capital
leases.................................................... 367 -- 279
Retirement of assets (1).................................... (575) (311) (291)
Translation adjustment...................................... (186) 110 (213)
----- ----- -----
Balance at end of period.................................... 2,106 2,494 2,534
===== ===== =====
</TABLE>
(1) The retirement of assets mainly consist of assets fully amortized and
scrapped, in particular during the relocation of the French headquarters in
1997 and following fixed assets physical counts done in 1998 and 1999.
F-10
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
2. PROPERTY AND EQUIPMENT (CONTINUED)
Changes in accumulated depreciation for the periods presented were as follows:
<TABLE>
<CAPTION>
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Accumulated depreciation at beginning of period............. (1,220) (1,109) (1,457)
Depreciation................................................ (543) (574) (590)
Reversals................................................... 528 296 264
Translation adjustment...................................... 126 (70) 137
------ ------ ------
Accumulated depreciation at end of period................... (1,109) (1,457) (1,646)
====== ====== ======
</TABLE>
3. RELATED PARTY TRANSACTIONS
In 1998, Mr. Spillmann, a member of the Company's Board of Directors
representing Bryan Garnier and Co., entered into two underwriting agreements to
place two entire rights issues. Mr Spillmann conducted all transactions
connected with these underwritings on an arms length basis. Bryan Garnier and
Co. received 3% commission, amounting to $280, on gross proceeds for the first
rights issue and 6.5% commission, amounting to $675, on gross proceeds for the
second rights issue. These commissions reflected markets conditions and
complexity of placing the shares for the Company.
In 1999, Mr. Spillmann entered into an underwriting agreement to place an entire
rights issue consisting of an aggregate of $6,000 principal amount of
non-interest bearing convertible bonds due October 15, 2001 and warrants to
purchase an aggregate of 1,200,000 shares at an exercise price of $5.00 per
share. Bryan Garnier and Co. received 6% commission, amounting to $360 on gross
proceeds for the issuance.
4. SHORT-TERM AND LONG-TERM DEBT
Short-term debt, all of which is denominated in French francs, is composed of
bank overdrafts amounted to $54, $36 and $5 for the years ended December 31,
1997, 1998 and 1999, respectively.
In 1997 and 1998, The Company factored certain receivables for which the
sponsoring banks have recourse against the Company. The Company recorded a
liability that is included in short-term debt until the receivable is collected
by the bank. The amounts factored during 1997 and 1998 and secured by trade
receivables in the same amount totalled $275 and $32, respectively. In 1999, the
company did not factor receivables.
F-11
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
4. SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
The following table presents a summary of long-term debt, substantially all of
which is denominated and repayable in French francs:
<TABLE>
<CAPTION>
------------------------------
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Convertible loan, 7.75%..................................... 8,341 8,344 3,630
Non-interest bearing convertible bonds...................... -- -- 5,759
Interest free loan on license purchase...................... 850 650 350
Bank loans, 7.75%, payable in installments through 1999..... 336 90 7
Interest free loan from Anvar, payable in installments
through 1998(1)............................................ 584 357 --
Interest free loan from Coface, payable in installments
through 1999(2)............................................ 826 860 661
Capital lease obligations(3)................................ 737 462 464
Other....................................................... 4 -- --
------ ------ ------
Total long-term debt........................................ 11,678 10,763 10,871
Less current portion........................................ (1,327) (1,390) (1,414)
------ ------ ------
Long-term debt, net......................................... 10,351 9,373 9,457
</TABLE>
- ------------------------------
(1) Anvar is an agency of the French government that provides financing to
French companies for research and development.
(2) Coface is a French state-controlled entity that provides financing to French
companies to encourage exports and international expansion. The timing of
loan repayments is based on sales realized by the U.S. subsidiary. The first
repayment was scheduled for 1997; subsequent repayments will be made through
2000.
(3) The Company leases certain of its equipment under capital leases.
Capitalized costs of approximately $1,263, $1,350 and $1,239 are included in
property and equipment at December 31, 1997, 1998 and 1999, respectively.
Accumulated amortization of these leased assets was approximately $613, $913
and $892 at December 31, 1997, 1998 and 1999 respectively.
Future payments of long-term debt, excluding capital lease obligations, for the
years ending December 31 are as follows:
<TABLE>
<CAPTION>
-------------
DECEMBER 31,
-------------
<S> <C>
2000........................................................ 1,148
2001........................................................ 5,759
2002........................................................ 3,500
</TABLE>
F-12
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
4. SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
Future minimum lease payments under capital lease obligations due for the fiscal
years ending December 31 are as follows:
<TABLE>
<S> <C>
2000........................................................ 286
2001........................................................ 147
2002........................................................ 71
2003........................................................ --
Total minimum lease payments................................ 504
Less amount representing interest........................... (40)
----
Present value of net minimum lease payments................. 464
Less current portion........................................ (238)
----
Long-term portion........................................... 226
</TABLE>
Interest paid in the years ended December 31, 1997, 1998 and 1999 approximated
interest expense.
In July 1997, the Company issued 603 convertible bonds for cash proceeds of
$6,030. A complementary issuance of 200 convertible bonds took place in
October 1997, for cash proceeds of $2,000. These bonds bear interest at a rate
of 7.75% payable on a six-monthly basis. The conversion price of each bond is
$4.60 per share and is based on the average price on Easdaq, i.e. each bond
giving right to 2,173 shares of the Company. In 1999, 453 bonds amounted to
$4,530 have been converted into 984,369 shares. As of December 31, 1999, 350
bonds giving right to conversion into 760,550 shares were outstanding.
On October 15, 1999, the Company issued units consisting of an aggregate of $6.0
million principal amount of non-interest bearing convertible bonds due
October 15, 2001 and warrants to purchase an aggregate of 1,200,000 shares at an
exercise price of $5.00 per share. The bonds are convertible into 300,000 shares
at any time on or after the earlier of April 15, 2000 and the consummation of
the offering of the company on the Nasdaq, and can be redeemed prior to maturity
at redemption prices ranging from 103% to 112% of their principal amount. The
fair value of the detachable warrants of $344 has been recorded as additional
paid-in capital as a direct deduction from the principal amount of the bonds,
determined on the basis of the value of the bonds with no such warrants issued
at an effective interest rate of 9%.
5. SHAREHOLDERS' EQUITY
5.1 GENERAL
In April and May 1997, the Company issued 174,280 ordinary shares at FF6.25
($1.04) per share resulting from the exercise of warrants issued in
September 1995. Consequently, the former warrantholders exercised their
complementary rights to obtain 7,375 new shares reserved under statutory
antidilution laws in August 1996 at a price of $5.00 per share and 7,075 new
shares reserved under statutory antidilution laws in November 1996 at a price of
$5.00 per share.
In March 1998, the Company issued 4,658,773 ordinary shares at $2.00 per share
resulting from a capital increase with preferential subscription right. Two
notable investors in the rights offering were Jean-Gerard Galvez, Chairman,
President & CEO of ActivCard, and 3i plc, a major venture capital firm in
Europe. Mr. Galvez acquired 1,709,609 shares, while 3i plc acquired 450,000
shares, both in the rights offering and open market.
F-13
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
5. SHAREHOLDERS' EQUITY (CONTINUED)
Following the March 1998 capital increase, 815,321 complementary rights were
created for bondholders and warrantholders. At December 31, 1998, the number of
existing complementary rights under this category was 620,712. In 1999, 345,094
complementary rights were exercised and 15,684 were cancelled. At December 31,
1999, the number of existing complementary rights under this category was
259,934.
In April, June, November and December 1998, the Company issued 529,576 ordinary
shares with a nominal value at FF6.25 per shares resulting from the exercise of
warrants issued in September 1995 and December 1995. Complementary rights were
exercised to obtain 154,843 ordinary shares reserved under statutory
antidilution laws in August 1996, October 1996 and March 1998.
In December 1998, the Board met with the authorization of the shareholders
meeting and decided to issue a capital increase of 8,303,179 ordinary shares at
$1.25. The subscription began in January 1999, with the shares issued in
February 1999. Net cash proceeds after offering expenses amounted to $9,725.
1,259,005 complementary rights were created for bondholders and warrantholders,
with 84,579 cancelled. At December 31, 1998, the number of existing
complementary rights under this category was 1,174,426. During 1999 648,425
complementary rights were exercised and 29,442 were cancelled. At December 31,
1999, the number of existing complementary rights under this category was
496,559.
In July 1999, the Company issued 480,000 reserved ordinary shares authorized by
the May 19, 1999 shareholders meeting with the nominal value at FF6.25 in
connection with the Ken Fineman litigation (see note 10).
In February, November and December 1999, the Company issued 984,369 ordinary
shares with the nominal value at FF6.25 per shares resulting from the conversion
of 453 convertible bonds issued in 1997.
In February, November and December 1999, the Company issued 1,003,975 shares
with the nominal value at FF6.25 per shares resulting from the exercised of
complementary rights authorized by the August 1996, October 1996, March 1998 and
December 1998 shareholders meetings.
In November and December 1999, the Company issued 178,226 shares with the
nominal value at FF6.25 per shares resulting from the exercised of warrants
authorized by the December 1995 and June 1997 shareholders meetings.
In December 1999, the Company issued 267,839 shares with the nominal value at
FF6.25 per shares resulting from the exercised of 1997 and 1998 stock option
plan.
At December 31, 1999 the issued and outstanding share capital of the Company
consisted of 32,090,026 ordinary shares.
5.2 PREEMPTIVE SUBSCRIPTION RIGHTS
Shareholders have preemptive rights to subscribe for additional shares issued by
the Company for cash on a pro rata basis. Shareholders may waive such preemptive
subscription rights at an extraordinary general meeting of shareholders under
certain circumstances. Preemptive subscription rights, if not previously waived,
are transferable during the subscription period relating to a particular offer
of shares.
5.3 DIVIDEND RIGHTS
Dividends may be distributed from the statutory retained earnings, subject to
the requirements of French law and the Company's by-laws. The Company has not
distributed any dividends since its inception and had no distributable
F-14
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
5. SHAREHOLDERS' EQUITY (CONTINUED)
retained earnings at December 31, 1999. The accumulated deficit for statutory
purposes totalled $9,211 at December 31, 1999 which represents the accumulated
deficits in the statutory financial statements.
Dividend distributions, if any, will be authorized in French francs and may be
paid in any currency.
5.4 STOCK OPTIONS AND WARRANTS
In December 1995, the shareholders approved the grant of warrants to certain
executive shareholders and to a member of the Board of Directors to purchase
respectively 192,920 and 205,040 ordinary shares at a price of FF24.80 ($3.80);
determination of the vesting and expiration was delegated to the Board of
Directors. At its February 23, 1996 meeting, the Board determined that vesting
would occur one third per year, starting from the date of entry into the
Company, and that the warrants would expire on December 31, 1999. The warrant
exercise price being equal to the conversion price of the convertible loan
instrument negotiated on December 22, 1995 with a third party, such warrant
price was determined to be equal to the fair value of an ordinary share on the
date of grant of the warrants. In May and June 1996, the Company cancelled the
warrants to subscribe for 205,040 ordinary shares issued to a resigning director
and granted warrants to subscribe for 35,000 ordinary shares to a new Board
member and warrants to subscribe for 170,040 ordinary shares to the Chairman,
President and CEO of the Company, of which 135,040 were contingent upon the
realization of an initial public offering of the Company's ordinary shares. All
205,040 warrants vest over four years and were exercisable at FF24.80 ($3.80)
per ordinary share. The difference between the exercise price and the fair value
of the underlying non-contingent shares on the date of grant (estimated between
$8.00 and $9.40) was recorded as deferred compensation expense and was amortized
over the vesting period. As of December 31, 1997, warrants for 60,640 shares had
been cancelled and warrants for 337,320 shares were remaining. In 1998, 124,616
shares were exercised and 44,120 were cancelled. As of December 31, 1998,
168,584 warrants were remaining. In 1999, 126,074 shares were exercised and
42,510 warrants were remaining as of December 31, 1999.
In July 1996, the shareholders of the Company authorized the creation of a share
warrant plan, as amended in September 1996, granting to the directors of the
Company warrants to subscribe for 105,000 ordinary shares. As of December 31,
1997, warrants for 35,000 shares had been cancelled and warrants for 70,000
shares were outstanding under the share warrant plan vesting over a period of
four years and exercisable at FF51.50 ($7.89) per share. None have been
exercised. In 1999, warrants for 35,000 shares have been cancelled. As of
December 31, 1999, warrants for 35,000 shares were remaining.
In August 1996, following the issuance of 500,000 new shares at a price of $5.00
per share, bond and warrant holders at that date were granted complementary
rights to subscribe to an aggregate of 85,291 ordinary shares at a price of
$5.00 per share under statutory antidilution laws. In October 1996, following
the issuance of 500,000 convertible bonds at a price of $5.00 per bond, bond and
warrant holders at that date were granted complementary rights under statutory
antidilution laws to subscribe to an aggregate of 84,670 bonds convertible to
84,670 ordinary shares at a price of $5.00 per share. Such complementary rights
may be exercised upon conversion of the underlying bonds or exercise of the
underlying warrants. In December 1996, following the conversion of the 1,038,440
bonds issued in January 1996 into 1,038,440 ordinary shares, the former
bondholders exercised their complementary rights to obtain 43,941 new shares and
42,157 new bonds. In April and May 1997, following the exercise of warrants
issued in September 1995, the former warrantholders exercised their
complementary rights to obtain 7,375 new shares and 7,075 new bonds.
Complementary rights for 2,566 shares and 2,462 bonds have been cancelled. On
December 31, 1997, 31,409 complementary share rights and 32,976 complementary
bond rights were remaining of which 31,409 and 30,134, respectively, benefit
employees. In April, June, November and December 1998, following
F-15
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
5. SHAREHOLDERS' EQUITY (CONTINUED)
the exercise of warrants issued in September 1995 and December 1995, the former
warrantholders consequently exercised complementary rights to obtain 11,055 and
10,608 ordinary shares reserved respectively under statutory antidilution laws
in August 1996 and October 1996. In 1998, 13,219 and 12,681 complementary rights
were cancelled. In 1998, complementary rights to obtain 5,337 and 5,119 shares
were exercised respectively under statutory antidilution laws in August 1996 and
October 1996. On December 31, 1998, 7,135 complementary share rights and 9,687
complementary bond rights were remaining. In 1999, 1,421 complementary rights
were cancelled. On December 31, 1999, 1,798 complementary share rights and 3,147
complementary bond rights were remaining.
In June 1997, the shareholders of the Company authorized the creation of a 1997
stock option plan granting the Board of Directors of the Company the authority
to issue options to employees to subscribe for a maximum of 1,200,000 ordinary
shares, this amount including the options issued under the 1996 stock option
plan. Options for 312,750 shares were granted under the 1997 stock option plan
to employees subject to French regulations at FF35.54 ($5.75) per ordinary share
(vesting over a period of four years with the restriction that the employee may
not sell any share before the end of a five year period), and options for 2,500
shares were cancelled. Options for 821,500 shares were granted under the 1997
stock option plan to employees subject to US regulations at $5.75 per ordinary
share vesting over a period of four years and options for 152,000 shares were
cancelled. As of December 31, 1997, options for 310,250 shares to employees
subject to French regulation and options for 669,500 to employees subject to US
regulation are outstanding. In 1998, 74,250 shares were granted under the 1997
stock option plan to employees subject to US regulation at $5.75 and 145,250
shares were granted under the 1997 stock option plan to employees subject to
French regulation at $5.75. In 1998, following the March 1998 rights issue, the
number and price of the stock option granted under the 1997 stock option plan
have been adjusted. The stock has been repriced from $5.75 to $5.43 and the
number of shares increased 6% for each option holder. As of December 31, 1998,
options for 426,916 shares to employees subject to French regulations and
options for 709,140 to employees subject to US regulation were outstanding.
These amounts included the March 1998 adjustment. In 1999, following the
January 1999 capital increase, pursuant to the December 1998 shareholders
meeting, the number and price of stock options granted under the 1997 stock
option plan have been adjusted. The exercise price was repriced from $5.43 to
$4.65, and the number of exercisable shares increased 17% for each option
holder. This increase is reflected in the amounts mentioned hereafter. In 1999,
employees subject to US regulations exercised 264,673 options at $4.65 and
employees subject to French regulations exercised 174 options at $4.65. At
December 31, 1999 options for 463,251 shares to employees subject to French
regulations were outstanding: 460,251 at $4.65, 3,000 at $19.75. At December 31,
1999 options for 697,674 shares to employees subject to US regulations were
outstanding: 514,174 at $4.65 and 183,500 at $19.75.
In June 1997, the shareholders of the Company authorized the creation of a share
warrant plan granting to the directors of the Company warrants to subscribe for
91,000 ordinary shares. As of December 31, 1997, warrants for 91,000 shares were
outstanding under the share warrant plan vesting over a period of four years and
exercisable at FF58.30 ($8.93) per share. In 1998, 75,000 warrants were
cancelled. As of December 31, 1998, 16,000 warrants were remaining. In 1999,
5,000 warrants were cancelled and 11,000 warrants were remaining as of
December 31, 1999.
In June 1997, the shareholders of the Company authorized the creation of
warrants conferring to Bryan Garnier and Co. and Cross Border, investment
bankers, the right to subscribe to convertible bonds of the Company in the
amount of up to 4% of the convertible bonds issued in July and October 1997. As
of December 31, 1997, following the issue of 803 convertible bonds giving right
to 1,744,919 shares, 32 warrants were outstanding giving right to 69,536 shares
at a price of $4.60 per share, to be exercised no later than five years after
their attribution. No bonds have
F-16
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
5. SHAREHOLDERS' EQUITY (CONTINUED)
been converted in 1998. In 1999, 24 warrants were exercised and converted into
52,152 shares. As of December 31, 1999, 8 warrants giving right to 17,384 shares
were remaining.
In June 1998, the Shareholders of the Company authorized the creation of a share
warrant plan granting to the Directors of the Company warrants to subscribe to
120,000 ordinary new shares of the Company. The warrants exercise price is
$5.75. These warrants may be exercised no later than five years after the date
of their issuance after which they will lose all validity. In 1998, 5,000
warrants were cancelled. As of December 31, 1998 115,000 warrants were
remaining. In 1999, 5,000 warrants were cancelled and 110,000 warrants were
remaining as of December 31, 1999.
In June 1998, the shareholders of the Company authorized the creation of a 1998
stock option plan granting the Board of Directors of the Company the authority
to issue options to employees to subscribe for a maximum of 1,200,000 ordinary
shares. The option exercise price will be set by the Board of Directors on the
date when the options are allocated. The subscription price shall be equal to
the average closing price quoted on a regulated stock exchange of a member State
of the ECDE during twenty trading days of the stock exchange prior to the
allocation date of the options. These options may be exercised no later than
seven years after their allocation. In 1998, 953,000 shares were granted under
the 1998 stock option plan to employees subject to US regulations and 112,100
shares were granted under the 1998 stock option plan to employees subject to
French regulations. As of December 31, 1998, options for 110,100 shares to
employees subject to French regulations and options were outstanding: 45,000 at
$5.75, 54,100 at $4.70 and 11,000 at $2.60. As of December 31, 1998, options for
889,000 shares to employees subject to US regulations and options were
outstanding: 632,500 at $5.75, 69,500 at $4.70 and 187,000 at $2.60. In 1999,
following the January 1999 capital increase, pursuant to the December 1998
shareholders' meeting, the number and price of stock options granted under the
1998 stock option plan have been adjusted. The different exercise prices were
repriced from $5.75 to $4.93, from $4.70 to $4.03 and from $2.60 to $2.23 and
the number of exercisable shares increased 17% for each option holder. This
increase is reflected in the amounts mentioned hereafter. In 1999, employees
subject to US regulations exercised 2,992 options: 492 at $4.03 and 2,500 at
$1.67. At December 31, 1999, options for 208,797 shares to employees subject to
French regulations were outstanding: 52,650 at $4.93, 56,277 at $4.03, 12,870 at
$2.23, 83,500 at $1.67 and 3,500 at $4.23. At December 31, 1999, options for
1,139,338 shares to employees subject to US regulations were outstanding:
740,025 at $4.93, 65,613 at $4.03, 187,200 at $2.23, 102,000 at $1.67 and 44,500
at $4.23.
In May 1999, the shareholders of the Company authorized the creation of a 1999
stock option plan granting the Board of Directors of the Company the authority
to issue options to employees to subscribe for a maximum of 1,100,000 ordinary
shares. The option exercise price will be set by the Board of Directors on the
date when the options are allocated. The subscription price shall be equal to
the average closing price quoted on a regulated stock exchange of a member State
of the ECDE during twenty trading days of the stock exchange prior to the
allocation date of the options. These options may be exercised no later than
seven years after their allocation. As of December 31, 1999, options for 407,860
shares to employees subject to French regulations were outstanding: 401,860 at
$4.23 and 6,000 at $5.00. As of December 31, 1999, options for 574,500 shares to
employees subject to US regulations and options were outstanding: 475,500 at
$4.23 and 99,000 at $5.00.
In May 1999, our shareholders authorized the creation of a share warrant plan
granting to our directors warrants to subscribe for 90,000 new ordinary shares.
The warrant exercise price was $4.14. These warrants may be exercised no later
than five years after the date of their issuance after which they will expire.
In 1999 10,000 warrants were cancelled. As of December 31, 1999 80,000 warrants
were remaining.
F-17
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
5. SHAREHOLDERS' EQUITY (CONTINUED)
On October 15, 1999, the Company issued units consisting of an aggregate of $6.0
million principal amount of non-interest bearing convertible bonds due
October 15, 2001 and warrants to purchase an aggregate of 1,200,000 shares at an
exercise price of $5.00 per share. No bonds were converted or cancelled in 1999.
Pro forma information regarding net loss and loss per share is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options and warrants under the fair value method of SFAS 123. The fair
value for these options and warrants was estimated at the date of grant using a
Black-Scholes option pricing model with the following average assumptions for
1999, 1998 and 1997, respectively: risk-free interest rates of 4%, for all years
dividend yield of 0% in all years; volatility factors of the expected market
price of the Company's ordinary shares of 0.67 for 1997, 0.69 for 1998 and 0.61
to 1.59 for 1999 and a weighted-average expected life of the options of 5.8
years.
For purposes of pro forma disclosures, the estimated fair value of the options
granted is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for loss per share
information):
<TABLE>
<CAPTION>
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Pro forma net loss.......................................... (10,177) (11,376) (17,835)
Pro forma net loss per share (in U.S. dollars).............. (0.66) (0.61) (0.61)
</TABLE>
During the initial phase-in period, as required by SFAS 123, the pro forma
amounts were determined based on stock option grants in 1997, 1998 and 1999
only. Since pro forma compensation expense is recognized over vesting periods of
four years, the pro forma amounts for compensation cost may not be indicative of
the pro forma effects of application of SFAS 123 on net earnings (loss) and
earning (loss) per share for future years.
A summary of the Company's stock option and director warrant activity, and
related information for the years ended December 31 follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
1997 1998 1999
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS AND EXERCISE OPTIONS AND EXERCISE OPTIONS AND EXERCISE
WARRANTS PRICE WARRANTS PRICE WARRANTS PRICE
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of year.... 1,683,950 $5.44 1,952,566 $4.77 2,574,275 $5.32
Granted........................... 1,294,786 $6.01 1,469,985 $5.13 3,078,206 $5.34
Exercized......................... (174,280) $1.04 (529,576) $1.89 (446,065) $4.39
Forfeited......................... (851,890) $8.22 (318,700) $6.32 (219,102) $4.45
--------- --------- ---------
Outstanding--end of year.......... 1,952,566 $4.77 2,574,275 $5.32 4,987,314 $5.09
Exercisable at end of year........ 583,838 $2.54 410,372 $5.46 808,324 $4.84
</TABLE>
F-18
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
5. SHAREHOLDERS' EQUITY (CONTINUED)
The weighted-average fair value of options and warrants granted during 1997,
1998 and 1999 was as follows:
<TABLE>
<CAPTION>
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Options whose price equalled market price of the
underlying shares on the grant date....................... -- -- --
Options whose price was less than the market price of the
underlying shares on the grant date....................... -- -- $1.52
Options whose price was greater than the market price of the
underlying shares on the grant date....................... $3.68 $1.99 $5.74
</TABLE>
The summary of stock options and warrants outstanding and exercisable as of
December 31, 1999 was as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ------------------------------
RANGE OF NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING REMAINING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------- ----------- ---------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.67 - $4.03 629,970 5.34 $ 2.88 44,556 $3.22
$4.23 - $5.75 4,124,844 4.52 $ 4.75 732,018 $4.81
$9.20 - $10.41 46,000 1.92 $ 9.49 31,750 $9.41
$19.75 186,500 6.96 $19.75 -- $ --
</TABLE>
At December 31, 1999, in addition to shares reserved for the exercise of
outstanding options, 142,790 shares were reserved for future option grants.
In December 1996, the French parliament adopted a law that requires French
companies to pay French social contributions and certain salary-based taxes,
which may represent, for the Company, up to 43% of the taxable salary, on the
difference between the exercise price of a stock option and the fair market
value of the underlying shares on the exercise date if the beneficiary disposes
of the shares before a five-year period following the grant of the option. The
new law is consistent with personal income tax law that requires individuals to
pay income tax on the difference between the option exercise price and the fair
value of the shares at the grant date if the shares are sold or otherwise
disposed of within five years of the option grant. The law applies to all
options exercised after January 1, 1997 related to French resident employees.
The Company has not recorded a liability for social charges for options granted
as of December 31, 1999 as the French stock option plan prohibits any sale of
shares before a five year period.
6. INCOME TAXES
The income tax benefit in 1997, 1998 and 1999 amounted to $714, $452 and $15,
respectively, and related entirely to the current tax benefit in France. There
was no current tax related to the United States and Singapore subsidiaries and
no French, United States or Singapore deferred tax expense or benefit in any
year.
F-19
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
6. INCOME TAXES (CONTINUED)
A reconciliation of income tax benefit computed at the French statutory rate
(41.7% in 1997, 40.0% in 1998 and in 1999) to the income tax benefit recognized
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Income tax benefit computed at the French statutory rate.... 4,270 4,480 6,360
Operating losses not utilized............................... (4,270) (4,480) (6,360)
Research and development and training tax credit............ 723 460 15
Minimum tax payable......................................... (9) (8) --
------ ------ ------
Total income tax benefit.................................... 714 452 15
====== ====== ======
</TABLE>
Research and development credits are recoverable in cash in the fourth year
after the credit is earned, if the credit has not been applied against taxes
payable.
Significant components of the Company's deferred taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Deferred tax liabilities:
Provision for contingent payment deducted for tax
purposes.............................................. -- -- --
Deferred tax assets:
Net operating loss carryforwards........................ 14,209 17,702 19,373
Research and development capitalized for tax purposes... 42 30 6
Differences in amortization periods..................... 909 542 262
Other................................................... 357 231 450
------- ------- -------
Net deferred tax assets..................................... 15,517 18,505 20,091
Valuation allowance......................................... (15,517) (18,505) (20,091)
------- ------- -------
Deferred taxes, net......................................... -- -- --
======= ======= =======
</TABLE>
Due to its history of losses, the Company does not believe the recoverability of
net deferred tax assets is more likely than not. Consequently, the Company has
provided valuation allowances covering 100% of net deferred tax assets.
As of December 31, 1999, the Company has French net operating loss carryforwards
of approximately $29,171. Approximately $19,700 of these net operating loss
carryforwards will expire in the years 2000 through 2004. Remaining loss
carryforwards have no expiration date. The Company has U.S. net operating loss
carryforwards of approximately $20,358, which expire between 2011 and 2014. The
Company has net operating loss carryforward in Singapore of $2,670 with no
expiration date. These net operating loss carryforwards can only be used by the
legal entity generating the operating losses.
Taxes paid in the years ended December 31, 1997, 1998 and 1999 were
approximately $9, $8, and $10, respectively.
F-20
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
6. INCOME TAXES (CONTINUED)
In December 1999, the Company received the preliminary conclusion of a tax audit
related to the Parent Company ActivCard S.A. for the years 1996, 1997 and 1998.
The amounts reported in the reassessment notice received from the Tax
Authorities were not significant and have been recorded as liabilities.
7. EMPLOYEE RETIREMENT PLANS
The Company contributes to pensions for personnel in France and in Singapore in
accordance with local law, by contributing based on salaries to the relevant
government agencies. There exists no actuarial liability in connection with
these plans.
French law also requires payment of a lump sum retirement indemnity to all
employees based upon years of service and compensation at retirement. Benefits
do not vest prior to retirement. There is no formal plan and no funding of the
obligation is required. The Company's obligation is not material to its
financial condition, liquidity or results of operations as of December 31, 1997,
1998 and 1999 or for the years ended December 31, 1997, 1998 and 1999.
The U.S. subsidiary currently has no pension plan.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1997, 1998 and 1999, the carrying values of current financial
instruments such as cash, accounts receivable and payable, other receivables,
accrued liabilities and the current portion of long-term debt approximated their
market values, based on the short-term maturities of these instruments. At
December 31, 1997, 1998 and 1999, the fair values and carrying values of
long-term debt obligations were:
<TABLE>
<CAPTION>
---------------------------------------------------------------
1997 1998 1999
------------------- ------------------- -------------------
FAIR CARRYING FAIR CARRYING FAIR CARRYING
VALUE VALUE VALUE VALUE VALUE VALUE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Long-term debt................................ 9,539 10,351 8,255 9,373 10,947 9,698
</TABLE>
Fair value is determined based on expected future cash flows, discounted at
market interest rates.
F-21
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
9. OPERATING LEASE COMMITMENTS
The Company leases its facilities and certain equipment under operating leases,
which expire through 2008. Future minimum lease payments under operating leases
are as follows:
<TABLE>
<CAPTION>
-------------
YEAR ENDED
DECEMBER 31,
-------------
<S> <C>
2000........................................................ 596
2001........................................................ 447
2002........................................................ 419
2003........................................................ 387
2004........................................................ 400
2005........................................................ 408
2006........................................................ 420
2007........................................................ 433
2008........................................................ 73
</TABLE>
Rental expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $487, $643 and $644, respectively.
10. CONTINGENCIES
In 1990, the Company acquired shares held by minority shareholders in ActivCard
Europe S.A. (formerly Telecash S.A.) for a price of $1,669, including cash
consideration of $417. Payment of the balance was to occur at an annual rate of
7% of the annual net profit of ActivCard Europe S.A. and its now inactive
subsidiary, Telecash International BV. The Company has now satisfied its
obligations to one of the former minority shareholders, and the balance owed to
the remaining former shareholders is 4.7% of the net income of ActivCard Europe
S.A. and its subsidiary annually up to a maximum of $834 in principal, plus
interest of 9% per year, to a maximum of $556. The Company has the option of
repaying this balance in advance. No liability has been recorded as payment is
not probable based on ActivCard Europe S.A. financial projections.
Pursuant to the terms of the agreement with the minority shareholders, in the
event that ActivCard Europe S.A. and Telecash International BV were not to make
any profit for six consecutive years beginning on January 1, 1992 and up to
December 31, 1997, the minority shareholders were either to give up their rights
to payment or to buy back from the Company the shares of ActivCard Europe S.A.
at a price equivalent to the amount initially received from the Company. Since
January 1, 1992, ActivCard Europe S.A. and Telecash International BV have not
made a profit during six consecutive years. The Company has recently agreed with
one of the former minority shareholders to reduce the amount owed to him to $314
with payment to occur at an annual rate of 1.6% of the annual net consolidated
profit of ActivCard S.A. limited to a six year period, beginning January 1,
1998, after which nothing is due. The remaining minority shareholder has either
to give up its rights to payment or to buy back from the Company the shares of
ActivCard Europe S.A. representing 0.15% of ActivCard Europe S.A. at a price of
$139. Due to the Company's history of losses, no liability has been recorded.
The probability of payment will be reassessed annually based on the likelihood
of any profit being generated prior January 1, 2004.
On October 31, 1997, an action was filed in the united States District Court for
the Northern District of California against the Company, its current U.S.
subsidiary, ActivCard, Inc., and three individuals who are either former or
current officers of the Company. The plaintiff was a former shareholder in the
Company's original U.S. subsidiary,
F-22
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
10. CONTINGENCIES (CONTINUED)
ActivCard Networks, Inc. merged into ActivCard, Inc. in June of 1996. The
lawsuit alleged violation of U.S. securities laws, breach of contract, breach of
fiduciary duty, fraud and conspiracy arising out this merger. Settlement
discussions started in late 1998 and in July 1999, an amicable settlement
agreement of all claims was signed. The impact of the settlement agreement
amounted to $3,038 was recorded at June 30, 1999 as a general and administrative
expense. The settlement agreement was composed of a $638 cash payment for legal
expenses and a grant of 480,000 shares valued at $2,400 using the listed price
on Easdaq at June 30, 1999 ($5.00 per share). The fair value of shares to be
issued at June 30, 1999 was included in the balance sheet caption "shares to be
issued". The capital increase reserved to Ken Fineman was authorized by the
May 19, 1999 shareholders' meeting and was fully subscribed on July 27, 1999.
The lawsuit was dismissed on August 12, 1999.
11. SEGMENT AND GEOGRAPHIC INFORMATION
The Company and its subsidiaries operate in two industry segments: security
products including smart cards-related products and token-related products used
to protect access to computer-based information resources and engineering
services. The following is a summary of operations by segment:
<TABLE>
<CAPTION>
-----------------------------------
TOTAL
SECURITY ENGINEERING CONTINUING
PRODUCTS SERVICES ACTIVITIES
-------- ----------- ----------
<S> <C> <C> <C>
1997
Net revenues.............................................. 6,210 1,357 7,567
Income tax benefit........................................ 714 -- 714
Income (loss) from operations............................. (9,509) (558) (10,067)
Financial income (expenses)............................... (181) -- (181)
Identifiable assets....................................... 11,333 1,718 13,051
Capital expenditures...................................... 55 7 62
Depreciation and amortization............................. 642 74 716
1998
Net revenues.............................................. 7,624 642 8,266
Income tax benefit........................................ 452 -- 452
Income (loss) from operations............................. (10,276) (115) (10,391)
Financial income (expenses)............................... (355) (5) (360)
Identifiable assets....................................... 12,090 285 12,375
Capital expenditures...................................... 580 9 589
Depreciation and amortization............................. 741 4 745
1999
Net revenues.............................................. 9,976 286 10,262
Income tax benefit........................................ 13 2 15
Income (loss) from operations............................. (15,763) 23 (15,740)
Financial income (expenses)............................... (187) -- (187)
Identifiable assets....................................... 16,409 25 16,434
Capital expenditures...................................... 265 -- 265
Depreciation and amortization............................. 1,159 5 1,164
There are no significant inter-segment sales or
transfers.
</TABLE>
F-23
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
11. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
Security products revenue for the years ended December 31, 1997, 1998 and 1999
were composed as follows:
<TABLE>
<CAPTION>
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Smart card-related products................................. 460 634 2,916
Token-related products...................................... 5,750 6,990 7,060
----- ----- -----
Total Security Products revenue........................... 6,210 7,624 9,976
</TABLE>
The following is a summary of operations by geographic area for the years ended
December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
-----------------------------------------
UNITED
FRANCE STATES ASIA TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1997
Net revenues................................................ 7,186 215 166 7,567
Income (loss) from operations............................... (5,772) (2,797) (933) (9,502)
Long-lived assets........................................... 2,171 409 115 2,695
Total assets................................................ 11,882 882 287 13,051
Capital expenditures........................................ 24 23 16 63
Depreciation and amortization............................... 482 196 38 716
1998
Net revenues................................................ 6,989 836 441 8,266
Income (loss) from operations............................... (5,585) (4,199) (607) (10,391)
Long-lived assets........................................... 2,508 440 125 3,073
Total assets................................................ 10,577 1,305 493 12,375
Capital expenditures........................................ 242 278 69 589
Depreciation and amortization............................... 471 220 54 745
1999
Net revenues................................................ 7,963 1,842 457 10,262
Income (loss) from operations............................... (6,098) (8,916) (726) (15,740)
Long-lived assets........................................... 1,521 437 78 2,036
Total assets................................................ 13,045 3,147 242 16,434
Capital expenditures........................................ 45 205 15 265
Depreciation and amortization............................... 887 214 63 1,164
</TABLE>
F-24
<PAGE>
ACTIVCARD S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
11. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
Customers representing more than 10% of consolidated revenues were as follows:
<TABLE>
<CAPTION>
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Security Products Segment:
Customer A................................................ 3,365 3,767 4,112
Customer B................................................ 839 1,141 1,014
Customer C................................................ 376 -- --
Engineering Services Segment:
Customer D................................................ -- -- 137
Customer E................................................ -- -- 77
Customer F................................................ 9 5 36
Customer G................................................ 2 189 --
Customer H................................................ 107 188 --
Customer I................................................ 294 58 --
Customer J................................................ 66 19 --
Customer K................................................ 114 -- --
</TABLE>
12. SUBSEQUENT EVENTS
Schlumberger Systems, Business Brain Showa-Ota Inc., Sun MicroSystems, Inc. and
SCM Microsystems, Inc. have subscribed to 174,825, 116,550, 582,750 and 116,550
respectively, of newly issued ordinary shares of the Company at $17.16 per
share. This subscription price was derived and set at the Company's
December 16, 1999 board of directors meeting using the arithmetic average of the
ten consecutive closing prices of the Company's stock between November 25 and
December 8, 1999. The sale of these shares was approved by the Company's
shareholders' meeting held on February 9, 2000. The expected net proceeds amount
to approximately $16.5 million.
F-25
<PAGE>
[INSIDE BACK COVER]
The back inside cover will contain:
- - Photographs of the following ActivCard products shown on a background
depicting a mock-up of network architecture:
ActivCard One token,
ActivCard Gold -- smart card,
ActivReader with smart card inserted, and
compact disk representing ActivCard software.
- - Bullet points listing the following applications under the following
categories:
PATENTED SOFTWARE
- Secure Network Authentication
- Secure Internet Banking
- Secure Remote Access
E-BUSINESS SERVICES
- Digital Signature
- Email Encryption
- Static Password Management
- Integrates into Network Computing Systems
SECURE INTERNET TRANSACTIONS
- Personal ATM
- Visa Cash
- EMV Approved
- Secure Signature
- Secure Architecture
<PAGE>
[LOGO]
