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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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Commission file number 000-24389
VASCO DATA SECURITY INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 36-4169320
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1901 SOUTH MEYERS ROAD, SUITE 210
OAKBROOK TERRACE, ILLINOIS 60181
(Address of Principal Executive Offices)(Zip Code)
Registrant's telephone number, including area code: (630) 932-8844
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
-----
As of March 13, 2001, 27,887,416 shares of the Company's Common Stock,
$.001 par value per share ("Common Stock"), were outstanding. On that date, the
aggregate market value of voting and non-voting common equity (based upon the
last sale price of the Common Stock as reported on Nasdaq on March 13, 2001)
held by non-affiliates of the registrant was $75,403,086 at $6.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the Annual Meeting
of Stockholders to be held on June 12, 2001 are to be incorporated by reference
into Part III of this Form 10-K.
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PART I
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 concerning, among other things, the prospects,
developments and business strategies for the Company (as defined) and its
operations, including the development and marketing of certain new products and
the anticipated future growth in certain markets in which the Company currently
markets and sells its products or anticipates selling and marketing its products
in the future. These forward-looking statements (i) are identified by their use
of such terms and phrases as "expected," "expects," "believe," "believes,"
"will," "anticipated," "emerging," "intends," "plans," "could," "may,"
"estimates," "should," "objective" and "goals" and (ii) are subject to risks and
uncertainties and represent the Company's present expectations or beliefs
concerning future events. The Company cautions that the forward-looking
statements are qualified by important factors that could cause actual results to
differ materially from those in the forward-looking statements, including (a)
risks of general market conditions, including demand for the Company's products
and services, competition and price levels and the Company's historical
dependence on relatively few products, certain suppliers and certain key
customers, and (b) risks inherent to the computer and network security industry,
including rapidly changing technology, evolving industry standards, increasing
numbers of patent infringement claims, changes in customer requirements, price
competitive bidding, changing government regulations and potential competition
from more established firms and others. Therefore, results actually achieved may
differ materially from expected results included in, or implied by, these
statements.
ITEM 1 - DESCRIPTION OF BUSINESS
GENERAL DESCRIPTION OF BUSINESS
VASCO Data Security International, Inc. was incorporated in Delaware in
1997 and is the successor to VASCO Corp., a Delaware corporation. Our principal
executive offices are located at 1901 South Meyers Road, Suite 210, Oakbrook
Terrace, Illinois 60181 and the telephone number at that address is (630)
932-8844. Our principal offices in Europe are located at Koningin Astridlaan
164, B-1780 Wemmel (Belgium) and the telephone number at that address is
32(0)2/456.98.10. Unless otherwise noted, specifically in the section entitled
Management's Discussion and Analysis of Financial Condition and Results of
Operations, references in this prospectus to "VASCO," "company," "we," "our,"
and "us" refer to VASCO Data Security International, Inc., its predecessor,
VASCO Corp., and its subsidiaries.
The Company, through its operating subsidiaries, designs, develops,
markets and supports open standards-based hardware and software security systems
which manage and secure access to information assets.
FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
See Note 10 to VASCO Notes to Consolidated Financial Statements for
certain information about foreign and domestic operations and export sales.
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This report contains the following trademarks of the Company, some of
which are registered: VASCO, AccessKey, VACMan Server and VACMan/CryptaPak,
AuthentiCard and Digipass.
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NARRATIVE DESCRIPTION OF THE BUSINESS
GENERAL
We design, develop, market and support security products and services
which manage and secure access to computer systems of corporate and governmental
clients. Additionally, we enable secure financial transactions made over private
enterprise networks and public networks, such as the Internet. We believe that
our software and hardware products provide organizations with strong, flexible,
and effective Internet and enterprise security solutions and they compete
favorably against those of our competitors. Our Digipass product line provides
greater flexibility and a more affordable means than competing products of
authenticating to any network, including the Internet. The Digipass family of
user authentication devices, all of which incorporate an electronic digital
signature capability to guarantee the integrity of electronic transactions and
data transmissions, are commonly referred to as security tokens. Our SnareWorks
product line provides enterprise-wide solutions to secure Internet,
client/server, and mainframe applications.
Our security solutions are sold worldwide through our direct sales
force, as well as through distributors, resellers and systems integrators. We
currently have approximately 500 customers in more than 50 countries.
Representative customers of our products include Rabobank Nederland, ABN AMRO
Bank, Merkantildata Norway, SE Banken Sweden, John Hancock, Paine Webber
Incorporated, Liberty Mutual , Allmerica Financial Services and the U.S.
Government.
INDUSTRY BACKGROUND
The growth in electronic banking and electronic commerce, and the
increasing use and reliance upon proprietary or confidential information by
businesses, government and educational institutions that is remotely accessible
by many users, has made information security a paramount concern. We believe
that enterprises are seeking solutions which will continue to allow them to
expand access to data and financial assets while maintaining network security.
According to International Data Corporation (IDC), the global market
for security products is growing from $4.0 billion in 1999 to over $11.3 billion
in 2004, a compound annual growth rate of 23%.
Internet and Enterprise Security. With the advent of personal
computers and distributed information systems in the form of wide area networks,
intranets, local area networks and the Internet, as well as other direct
electronic links, many organizations have implemented applications to enable
their work force and third parties, including vendors, suppliers and customers,
to access and exchange data and perform electronic transactions. As a result of
the increased number of users having direct and remote access to such enterprise
applications, data and financial assets have become increasingly vulnerable to
unauthorized access and misuse.
Individual User Security. In addition to the need for enterprise-wide
security, the proliferation of personal computers, personal digital assistants
and mobile telephones in both the home and office settings, combined with
widespread access to the Internet, have created significant opportunities for
electronic commerce by individual users such as electronic bill payment, home
banking and home shopping.
Fueled by recent and well-publicized incidents including
misappropriation of credit card information and denial of service attacks, there
is a growing perception among many consumers that there is a risk involved in
transmitting information via the Internet. These incidents and this perception
may hamper the development of consumer-based electronic commerce. Accordingly,
we believe that electronic commerce will benefit from the implementation of
improved security measures that accurately identify users and reliably encrypt
data transmissions over the Internet.
Components of Security. Data and financial asset security, and secured
access to and participation in on-line commerce, generally consist of the
following components:
- Encryption: Maintains data privacy by converting information into an
unreadable pattern and allowing only authorized parties to decrypt the
data. Encryption can also maintain data integrity by creating digital
signatures for transmitted data, enabling the recipient to check
whether the data has been changed since or during transmission.
- Identification and Authentication: Serves as the foundation for other
security mechanisms by verifying that a user is who he or she claims to
be. Identification and authentication mechanisms are often employed
with encryption tools to authenticate users, to determine the proper
encryption key for encrypting/decrypting data, or to enable users to
digitally "sign" or verify the integrity of transmitted data.
- Access Control: Software that provides authentication, authorization,
and accounting functions, controlling a user's access to only that data
or the financial assets which he or she is authorized to access, and
which keep track of a user's activities after access has been granted.
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- Administration and Management Tools: Software which sets, implements,
and monitors security policies, the access to which is typically
regulated by access control systems. These tools are extremely
important to the overall effectiveness of a security system.
The most effective security policies employ most, if not all, of the
above components. Most companies, however, only implement a patchwork of these
components, which can result in their security systems being compromised.
THE VASCO SOLUTION
To date, most approaches to network security, including Internet
security, have been limited in scope and have failed to address all of the
critical aspects of data security. We believe that an effective enterprise-wide
solution must address and assimilate issues relating to the following:
- speed and ease of implementation, use, and administration;
- reliability;
- interoperability with diverse enterprise environments, existing
customer applications, and the security infrastructure;
- scalability; and
- overall cost of ownership.
Accordingly, we have adopted the following approach to data security:
- In designing our products, we have sought to incorporate all
industry-accepted, open, and non-proprietary protocols. This
permits interoperability between our products and the multiple
platforms, products, and applications widely in use.
- We have designed our products and services to minimize their
integration effort with, and disruption of, existing legacy
applications and the security infrastructure, such as public
key infrastructure, known as PKI. We provide customers with
easier implementations and a more rapid means of implementing
security across the enterprise, including the Internet. With
security being a critical enabling technology for on-line
business initiatives, speed and ease of security
implementation has become crucial to an organization's
success.
- We design our products and services to have a lower total cost
of security ownership than competing products and services. We
have found that product improvements and tools that lower a
customer's total cost of ownership create differentiating
sales and marketing tools, and also help in the development of
a highly loyal customer base that is open to new solutions
that we offer.
As a result of this approach, we believe that we are positioned to be a
leading provider of our open standards-based software and hardware security
solutions.
VASCO'S STRATEGY
We believe we have one of the most complete lines of security products
and services available in the market today and we intend to become a leading
worldwide provider of these products and services. A key element of our growth
strategy is to demonstrate to an increasing number of distributors, resellers
and systems integrators that, by incorporating our security products into their
own products, they can more effectively differentiate themselves in their
marketplaces and increase the
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value of their products. In addition, we demonstrate to our corporate users that
our products provide mission critical security to their internal and external
security infrastructures. Following this aggressive marketing and promotion
effort, we work with these resellers and integrators to support their sales of
solutions which include our products. Also, we plan to expand our direct sales
marketing program to new and existing blue chip customers.
For example Novell, S-1, Brokat and Intel Network Services (formerly
Shiva) have all built support for our products. We currently market to the
distribution channels of these companies and are already recognizing increasing
revenue as these channels sell our solutions to their end customers. In
addition, our SnareWorks product line has a base of customers we market to
directly such as Allmerica and 3M. We are aggressively expanding the use of this
strategy world wide. Further, we intend to:
Increase Sales and Marketing Efforts Worldwide. We intend to increase
sales of our security products and services in our firmly established European
markets and to aggressively increase our sales and support presence and
marketing efforts in North America, South America, Asia/Pacific, Australia and
the Middle East. We plan to:
- market new services and products to our existing customers by
providing testimonial evidence of user experiences from other
customers;
- launch a worldwide marketing campaign to raise awareness of our
solutions among the decision makers in the security products industry;
- form additional strategic relationships with resellers and vendors
of complementary, innovative security products and systems; and
- develop a marketing and sales infrastructure in new markets.
Continue Innovation. We intend to continue to enhance and broaden our
line of security products to meet the changing needs of our existing and
potential customers by:
- building on our core software and hardware security expertise, such as
expanding our technology for use on different platforms (like mobile
phones and personal digital assistants) and incorporating biometrics
into our products;
- acquiring complementary technologies or businesses;
- developing additional applications for our products in areas which may
include securing the exchange of data in the healthcare field and
providing security for Internet gambling and lottery transactions,
among others.
VASCO'S PRODUCTS
Digipass Product Line
Our Digipass product line, which exists as a family of authentication
devices as well as extensive software libraries, provides a flexible and
affordable means of authenticating users to any network, including the Internet.
Security can be broken into three factors:
- What you have (the Digipass device itself);
- What you know (the PIN code to activate the Digipass); and
- Who you are (biometrics).
The Digipass family is currently based on the first two factors. We are
developing voice technology to incorporate the third factor into the Digipass.
Using the Digipass system, in order to enter a remote system or to digitally
sign data one needs:
- the hardware device (the token) itself so that if you do not
physically have the token, you will not be able to log on to
the system; and
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- the PIN code for the token so if you do not know the appropriate
code the user will not be able to use the applications stored
inside.
Both of these factors help to make sure that a natural person is
authenticating (or signing), instead of a computer or another device. These
factors also enable extremely high portability for security anytime, anywhere
and anyhow.
Digipasses calculate dynamic passwords, also known as one-time
passwords to authenticate users on a computer network and for a variety of other
applications. There are several versions of the Digipass, the 50, 100, 300, 500,
600, 700 and 800, each of which has its own distinct characteristics depending
on the platform that they use and the functions they perform. However, the
Digipass family is designed to work together and customers can switch their
users' devices without requiring any changes to the customers' existing
infrastructure. In addition, these devices can be used to calculate digital
signatures, also known as electronic signatures or message authentication codes,
to protect electronic transactions and guarantee the integrity of the contents
of these transactions. In addition, the Digipass 50 is designed to be used on
other platforms such as mobile phones and personal digital assistants.
DIGIPASS AT WORK
[DIAGRAM]
The above illustration shows the various steps in the Digipass
initialization process. In the first step, the devices are initialized with
their unique set of secrets and keys per device. These secrets are stored in an
encrypted way on a diskette that is sent to the application owner (for example,
the information technology manager in a company or the security department of a
bank). These floppy disks are one way of safely transporting the Digipass
secrets to the host computer.
The files on the floppy disks will be used to read all the necessary
secrets and other data from the delivered Digipasses into a database. Then the
application owner will assign those Digipass secrets to the end-users. This
assignment is based on the serial number of the Digipass and the identity of the
end-user. The Digipass is then shipped to the end-user together with a manual
and, the protected PIN-code on a secure PIN-mailer is sent by a separate
shipment.
Using a Digipass requires a connection to the host (server) computer
that knows the parameters of the end-user's Digipass. Every time the user sends
a dynamic password or digital signature to the host computer, the computer will
retrieve all the necessary information from the database and will check the
validity of the password or signature. After the host has checked the validity
of the dynamic password or signature, it will notify the end-user of the
correctness or incorrectness of the validity check.
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Digipass security devices are not terminal dependent and do not require
any specific software platform since they only interact with a person.
Currently, the Digipass is used in many applications, the largest of
which is banking. Different banking applications are:
- corporate banking through direct dial-up, as well as over the
Internet and
- retail banking to secure transactions made through the use of a
dial-up connection with a personal computer, the traditional phone
system, the Internet, and wireless phones and other communication
devices such as personal digital assistants.
Another significant application for the Digipass is to secure access to
corporate networks for home-based, traveling and other remote users. Finally,
Digipasses are increasingly being used in a variety of e-commerce applications
where the user is part of a pre-defined user group. We intend to expand the use
of the Digipass to other groups of users and applications, including electronic
commerce transactions directed at the general public.
Cryptech Product Line. The Cryptech product line produces encrypted
microprocessor chips. These chips are used to encrypt data for use in ATMs, fax
machines, modems and security servers at high speeds using DES and RSA
algorithms.
SnareWorks Product Line
SnareWorks is uniquely positioned to provide the security bridge
between the existing software infrastructure of legacy mainframe and
client-server applications that are powering large enterprises, and the world of
the Web, e-commerce and business-to-business on the Internet. The critical
differentiating benefit of SnareWorks is that it fits into existing computing
environments transparently because no new programming is required. Not a single
line of application code needs to be modified. As a result of its unique design,
the SnareWorks product line is the only one in the industry that spans all three
architectures (Web, client-server and mainframe) and enables rapid, low-cost,
widespread deployment of true, end-to-end security.
We believe that our competitors' products generally require extensive
customization and integration which requires a complex and time-consuming
deployment effort. In comparison, SnareWorks products are different because of
the following key factors:
- Protocol Support Modules. These are small segments of computer code
that represent the knowledge modules that describe the application
protocol to SnareWorks. With these small knowledge modules it is
possible to teach SnareWorks how to apply state-of-the-art security
features to existing applications without requiring any retooling of
the applications themselves.
- Rapid and Flexible Authentication. SnareWorks enables an enterprise to
deploy rapidly a variety of authentication mechanisms, including those
available from competitors, on the desktop.
- True Secure Single Sign-On. Once initial authentication is achieved,
SnareWorks provides single sign-on to a variety of applications,
including web-based and desktop-based applications. In the case of
Web-servers, a user will not have to log into more than a single web
server or application. SnareWorks is different from other competing
products because it can adapt to all commonly deployed authorization
and authentication methodologies.
Additional key features and benefits of the SnareWorks product line are as
follows:
- Transparent Encryption. SnareWorks enables strong encryption of all
TCP/IP network traffic on every computer in a network simply by
installing it. When SnareWorks is involved in the transfer of data, the
default is automatically to encrypt all data.
- Easy Installation. SnareWorks client or desktop software can be
downloaded and installed on desktop computers and web browsers in a
matter of minutes, and does not require additional software or
alterations to existing application
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software programs. For Internet-based applications that require only
the use of a browser, there is no software to be installed on, or
downloaded to, the user's desktop. This feature significantly reduces
the time, cost and inconvenience to the customer of securing their
networks.
- Automated User Registration. SnareWorks provides an automated process
to register new users by providing them with their network identity
along with their public key certificates without the assistance of a
human administrator. This feature allows large companies to deploy
SnareWorks more rapidly than it would normally take to deploy a
solution of this scope.
- Scalable Authorization. Users or groups of related users can be granted
access to different portions or applications on a network based upon
their SnareWorks profile. SnareWorks is scalable, allowing a virtually
unlimited number of groups and users to be efficiently handled by the
software. Common groupings of users are made on the basis of their
members, roles, locations and/or time of day, among other factors.
- Log Files Based Auditing. SnareWorks provides "log files" or detailed
records of the activity surrounding a data transfer, including identity
of user, time, application accessed and date transferred. These log
files are used to monitor and audit network activity by administrators.
SnareWorks can create these files even if the applications or software
programs do not provide for the creation of log files.
- Use of Digital Signatures. A distinctive feature of SnareWorks is its
ability to significantly enhance the reliability of applications and
data through the use of digital signatures. A digital signature is an
authentic piece of data attached to an object. The recipient as well as
a third party can verify that the object to which the signature is
attached has not been altered since it was signed.
- Distributed Management. SnareWorks can be managed from a central
location or from over a dozen graphical management editors and viewers
to provide a comprehensive view of security in the enterprise.
- Standards Based. SnareWorks supports a wide variety of standard
encryption devices, including DES, 3DES and SSL, digital signatures
(RSA), message integrity (MD5), key management (DCE/Kerberos, RSA),
digital certificates (X.509), access control (POSIX), and strong
authentication (RADIUS).
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SNAREWORKS AT WORK
Below is a graphical rendition of how SnareWorks is implemented
followed by a description of each of the elements.
[DIAGRAM]
SnareWorks Desktop Client is a thin, ultra-lightweight customer package
that provides a complete security environment for Internet-based applications
residing on a user's desktop. It enables rapid deployment of a comprehensive
security solution to thousands of users across multiple server and operating
system environments. It provides commercial off-the-shelf products and legacy
applications with:
- strong network encryption;
- pluggable authentications;
- a scalable access control model;
- secure single sign-on;
- enforcement of auditing; and
- digital signatures.
SnareWorks Web enables existing Web-based applications to utilize a
single network identity for authentication and true single sign-on. It delivers
secure authorization using a proven access control model, which enable
administrators to control even the most detailed aspects of the Web. SnareWorks
Web can be distributed to multiple Web servers across the enterprise and managed
from one central node through a sophisticated graphical user interface.
The SnareWorks Certificate Server Security Infrastructure provides
certificate management services to the SnareWorks security framework. These
services include issuance, revocation, query and reporting services for
X.509-based certificates. The Certificate Server supports both Web and command
line access to the certificate repository.
SnareWorks Rule Server provides the security services necessary to
integrate both Web and non-Web applications into the SnareWorks Framework. These
services include:
- network authentication;
- secure single sign-on;
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- fine-grain access control;
- network data encryption;
- auditing;
- event notification; and
- enforcement of numerous other security policies.
The SnareWorks Software Development Kit is a set of library files that
a developer can use to build extensions to the SnareWorks framework. It is used
to develop protocol support modules which enable SnareWorks servers to analyze
the behavior and the operation of legacy applications without requiring these
applications to be modified. Protocol support modules can provide advanced
security features to new or legacy applications. With the SnareWorks Software
Development Kit developers can extend SnareWorks to perform a variety of
functions for these applications, including:
- automatic login and secure single sign-on;
- operation-to-rule mapping;
- object-to-rule mapping;
- identity transformation;
- digital signatures;
- application verification;
- auditing;
- automated keystroke capture;
- chargeback accounting; and
- authorization products interface.
The SnareWorks Security Server is a highly scalable authentication
service that combines the best of security technologies, supporting both secret
as well as public key authentication. It provides signed network credentials
that form the basis for an enterprise-wide authorization infrastructure that can
be applied uniformly to all applications. The Security Server also includes a
distributed database for users, groups, roles, policies, passwords and security
attributes. It also provides encryption services, key generation and
password-strength facilities.
The SnareWorks Administration Console is the control center for the
SnareWorks framework. It enables security administrators to perform remote
management of SnareWorks servers and is also the primary interface for creating
connection and object rules. These rules govern the behavior of all applications
and the access rights to all data throughout the SnareWorks framework. The
Administration Console includes numerous graphical editors, which enable
administrators to control virtually all aspects of SnareWorks from anywhere in
the enterprise.
PUBLIC KEY INFRASTRUCTURE
Many corporations are increasingly relying upon digital certificates to
authenticate and identify users on a network, including the Internet. In
addition, digital certificates are used to transmit data in an encrypted format
over a network. The issuance, revocation, management and policies surrounding
these digital certificates is commonly referred to as public key infrastructure
or PKI. Like any other new comprehensive technology infrastructure, large
companies need to integrate PKI
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into their legacy and new applications. This takes time, money, and specialized,
hard-to-find personnel. While there may be significant commercial potential for
PKI, the process of integrating PKI into other enterprise-wide applications has
proven so difficult that few companies have existing PKI deployments beyond the
pilot stage.
For companies that are using certificate authority vendors such as
Entrust, Baltimore, or Verisign, SnareWorks interoperates and allows for easy
integration of PKI. In addition, for companies that have not committed to a
particular certificate authority vendor, SnareWorks provides its own certificate
authority capabilities. Finally, as described above, SnareWorks can work with
non-PKI related authentication such as tokens, smart cards, and passwords.
We also have patent pending technology that allows for secure storage
of a digital certificate's private key on a server that can be accessed from any
network using any of our Digipass family of products. The effect of this
technology is that it gives digital certificates the portability of PKI deployed
on smartcards, without the cost or infrastructure development required for
deploying smartcards and their associated smartcard readers.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS AND LICENSES
We rely on a combination of patent, copyright, trademark and trade
secret laws, as well as employee and third-party non-disclosure agreements to
protect our proprietary rights. In particular, we hold several patents in the
United States and a corresponding patent in certain European countries, which
cover certain aspects of our technology. The majority of our patents cover our
Digipass family of security tokens. The U.S. patents expire between 2003 and
2010 and the European patent expires in 2008. We believe these patents to be
valuable property rights and we rely on the strength of our patents and on trade
secret law to protect our intellectual property rights. To the extent that we
believe our patents are being infringed upon, we intend to assert vigorously our
patent protection rights, including but not limited to, pursuing all available
legal remedies.
On March 25, 1998, we entered into an arm's-length license agreement
with Lernout & Hauspie Speech Products N.V. pursuant to which we received a
five-year world wide, non-exclusive, non-transferable license to use certain
speaker verification software in access control applications. For this license,
we agreed to pay a royalty of 10% of revenue associated with the software which
will be credited against royalty prepayments aggregating $800,000. On December
31, 1998, the license was extended for an additional 5 years and we made
additional royalty prepayments to reach an aggregate of $1.7 million. In
addition, the revised agreement also provides for the initiation of a
co-marketing and co-sales effort.
Further, in connection with sales of our SnareWorks product, we offer a
SnareTools tool kit pursuant to a perpetual license agreement with Computer
Associates dated December 2, 1996, pursuant to which we pay a 2% royalty based
on net sales of the product. SnareWorks also contains infrastructure software
which is provided by IBM under an original equipment manufacturing agreement
dated October 6, 1999, and by Gradient Technologies under an original equipment
manufacturing agreement dated July 13, 1999. Both of these agreements are for
three-year terms and also provide for small royalty payments based on how our
product is configured with the end users. In the ordinary course of our business
we have entered, and may periodically enter, into license agreements with
software providers, as needed.
RESEARCH AND DEVELOPMENT
Our research and development efforts historically have been, and will
continue to be, concentrated on product enhancement, new technology development
and related new product introductions. We employ 38 full-time engineers and,
from time to time also engage independent engineering firms to conduct
non-strategic research and development efforts on our behalf. For the fiscal
years ended December 31, 1998, 1999 and 2000, we expended $2,459,000, $3,587,000
and $4,581,000 respectively, on research and development, representing
approximately 14.9%, 18.5% and 16.3% of consolidated revenues for 1998, 1999 and
2000, respectively.
While management is committed to enhancing our current product
offerings, and introducing new products, we cannot be certain that our research
and development activities will be successful. Furthermore, we may not have
sufficient financial resources to identify and develop new technologies and
bring new products to market in a timely and cost effective manner, and we
cannot ensure that any such products will be commercially successful if and when
they are introduced.
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PRODUCTION
Our security hardware products are manufactured by third parties
pursuant to purchase orders that we issue. Our hardware products are made
primarily from commercially available electronic components which are purchased
globally. Our software products are produced either in-house or by several
outside sources in North America and Europe.
The security tokens utilize commercially available programmable
microprocessors, or chips. We use two microprocessors, made by Samsung and
Epson, for the various hardware products we produce. The Samsung microprocessors
are purchased from Samsung Semiconductor in Belgium, and the Epson
microprocessors are purchased from Alcom Electronics NV/SA, also located in
Belgium. The microprocessors are the only components of our security tokens that
are not commodity items readily available on the open market. While there is an
inherent risk associated with each supplier of microprocessors, we believe
having two sources reduces the overall risk to a commercially acceptable level.
Orders of microprocessors and some other components generally require a
lead time of 12-16 weeks. We attempt to maintain a sufficient inventory of all
parts to handle short term increases in orders. Large orders that would
significantly deplete our inventory are typically required to be placed with
more than 12 weeks of lead time, allowing us to attempt to make appropriate
arrangements with our suppliers.
We purchase the majority of our product components and arrange for
shipment to third parties for assembly and testing in accordance with our design
specifications. Our security token products are assembled exclusively by two
independent companies, each of which is based in Hong Kong. Purchases from one
of the companies are made on a purchase order by purchase order basis. Purchases
from the other company are under a contract with automatic one-year renewals and
subject to termination on six months notice. Each of these companies assembles
our security tokens at facilities in mainland China. One of the companies also
maintains manufacturing capacity in Hong Kong. Equipment designed to test
product at the point of assembly is supplied by us and periodic visits are made
by our personnel for purposes of quality assurance, assembly process review and
supplier relations.
There can be no assurance that we will not experience interruptions in
the supply of either the component parts that are used in our products or
fully-assembled token devices in general. In the event that the flow of
components or finished product was interrupted there could be a considerable
delay in finding suitable replacement sources for those components, as well as
in replacement assembly subcontractors with the result that our business and
results of operations could be adversely affected. For further information about
our suppliers, refer to the "Risk Factors" section.
COMPETITION
The market for computer and network security solutions is very
competitive and, like most technology-driven markets, is subject to rapid change
and constantly evolving products and services. With respect to Digipass, our
main competitor is RSA Security, Inc. and with respect to SnareWorks, our main
competitor is Netegrity, Inc.. There are many other companies such as Computer
Associates International, Inc., AXENT Technologies, Inc., ActivCard and Gradient
Technologies, Inc. which offer hardware, software and services that range from
simple locking mechanisms to sophisticated encryption technologies. We believe
that competition in this market is likely to intensify as a result of increasing
demand for security products.
We believe that the principal competitive factors affecting the market
for computer and network security products include the strength and
effectiveness of the solution, technical features, ease of use,
quality/reliability, customer service and support, name recognition,
distribution channels and price. Although we believe that our products currently
compete favorably with respect to such factors, other than name recognition in
certain markets, there can be no assurance that we can maintain our competitive
position against current and potential competitors, especially those with
significantly greater financial, marketing, service, support, technical and
other competitive resources.
Many of our present and potential competitors have significantly
greater financial, technical, marketing, purchasing and other resources than we
do, and as a result, may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of products, or to deliver
competitive products at a lower end user price. Current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their products to
address the needs of our prospective customers. Accordingly, it is possible that
new competitors or alliances may emerge and rapidly acquire significant market
share.
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Our products are designed to allow authorized users access to a
computing environment, in some cases using patented technology as a replacement
for the static password. Although certain of our security token technologies are
patented, there are other organizations that offer token-type password
generators incorporating challenge-response or response-only approaches that
employ different technological solutions and compete with us for market share.
For additional information regarding our competition, please refer to the
section titled "Risk Factors."
SALES AND MARKETING
Our security solutions are sold through our direct sales force, as well
as through distributors, resellers and systems integrators. A sales staff of 55
coordinates our sales through both our sales channels and these strategic
partners' sales channels and makes direct sales calls either alone or with sales
personnel of vendors of computer systems. Our sales staff also provides product
education seminars to sales and technical personnel of vendors and distributors
with whom we have working relationships and to potential end-users of our
products.
Part of our expanded selling effort includes approaching our existing
strategic partners to find additional applications for our security products. In
addition, our marketing plan calls for the identification of new business
opportunities that may require enhanced security over the transmission of
electronic data or transactions where we do not currently market our products.
Our efforts also include the preparation and dissemination of white papers
prepared by our support engineers which explain how we believe our security
products can add value or otherwise be beneficial.
CUSTOMERS AND MARKETS
Customers for our products include some of the world's most recognized
names. Customers of Digipass tokens include:
BANKING/FINANCIAL SERVICES EDUCATION OTHER
-------------------------- --------- -----
ABN AMRO Bank University of Groningen Honda Europe
SNS Bank Telindus
Rabobank Nederland Pekao Infomatyka
SE Banken Sweden
A growing number of businesses are using SnareWorks. These include:
BANKING/FINANCIAL SERVICES EDUCATION OTHER
-------------------------- --------- -----
John Hancock Duke University U.S. Department of Defense
Allmerica Univ of CA - Santa Barbara Southern California Edison
UBS/Paine Webber
Peoples' Bank
During 1998, 1999 and 2000, sales to one customer from the Company's
United States operations (a reseller of the Company's product in the
Netherlands) aggregated approximately $1,950,000, $3,533,000 and $2,844,616
respectively, representing 12%, 18% and 10% of the total revenues, respectively.
Accounts receivable from this customer represented 30% and 18% of the Company's
gross accounts receivable balance at December 31, 1999 and 2000, respectively.
We are aware of the risks associated with this degree of customer concentration
and expect to further minimize our reliance on these customers.
Long term contracts with the U.S. government accounted for 4% of
revenues for the year 2000. Revenues are only recognized from these
contracts when receipt of payment is assured. Future amounts due under the
contracts are cancelable by the U.S. government and are not recognized as
revenue by the Company.
A significant portion of our sales are denominated in various foreign
currencies that could impact results of operations. To minimize exposure to
risks associated with fluctuations in currency exchange rates, we attempt to
match the timing of delivery, amount of product and the currency denomination of
purchase orders from vendors with sales orders to customers.
See Note 10 to VASCO Notes to Consolidated Financial Statements for a
breakdown of revenues between U.S. and European operations.
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EMPLOYEES
As of March 13, 2001, we employed 121 full-time employees. Of these, 63
were located in North America and 57 were located in Europe and 1 assigned in
Asia/Pacific. Of the total, 64 were involved in sales, marketing and customer
support, 39 in product production, research and development and 18 in
administration.
ITEM 2 - PROPERTIES
Our corporate offices and North American administrative, sales and
marketing, research and development and support facilities are located in the
United States in an office complex in Oakbrook Terrace, Illinois, a suburb of
Chicago. These facilities are leased through November 30, 2004, and consist of
approximately 9,000 square feet. An expansion plan to add 3,000 square feet is
scheduled by the end of the second quarter of 2001 to accommodate present growth
needs.
Our European administrative, sales and marketing, research and
development and support facilities are located in a suburb of Brussels, Belgium.
These facilities consist of approximately 23,500 square feet of office space
which are occupied under a lease expiring in October 30, 2006. We believe that
these facilities are adequate for our present growth plans.
ITEM 3 - LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to
the conduct of its business. The Company is currently not a party to any lawsuit
or proceeding which, in the opinion of management, is likely to have a material
adverse effect on the Company's business, financial condition or results of
operations.
Item 4 - Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of 2000, through solicitation of proxies or otherwise.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On March 20, 1998, the Company's Common Stock was approved for trading
on the NASD Electronic Bulletin Board system under the symbol "VDSI." On April
7, 2000, the Company's Common Stock was listed on the Nasdaq National Market in
the United States under the trading symbol "VDSI".
On March 12, 2001, the closing sale price for the Common Stock on the
Nasdaq was $5.81 per share. Such market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent an actual transaction. On February 28, 2001, there were approximately
125 holders of record of the Common Stock.
The following table sets forth the high and low closing bid quotations
for the Common Stock for the periods indicated.
HIGH LOW
---- ---
1999
First Quarter..................................... 5.38 2.97
Second Quarter.................................... 4.88 3.50
Third Quarter..................................... 3.78 2.94
Fourth Quarter.................................... 8.75 2.94
2000
First Quarter..................................... 26.00 6.44
Second Quarter.................................... 21.50 10.00
Third Quarter..................................... 16.25 7.75
Fourth Quarter.................................... 14.38 4.81
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The Company has not paid any dividends on its Common Stock since
incorporation. Dividends were paid relating to the Company's Series B Preferred
Stock, which was converted to Common Stock in September 1997. Restrictions or
limitations on the payment of dividends may be imposed under the terms of credit
agreements or other contractual obligations. In the absence of such restrictions
or limitations, the declaration and payment of dividends will be at the sole
discretion of the Board of Directors of the Company and subject to certain
limitations under the General Corporation Law of the State of Delaware. The
timing, amount and form of dividends, if any, will depend, among other things,
on the Company's results of operations, financial condition, cash requirements,
plans for expansion and other factors deemed relevant by the Board of Directors.
The Company intends to retain any future earnings for use in its business and
therefore does not anticipate paying any cash dividends in the foreseeable
future.
ITEM 6 - SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)(1)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
Statements of Operations Data:
Total revenues $ 11,265 $ 13,208 $ 16,500 $ 19,397 $ 28,066
Operating loss (8,523)(2) (4,168)(3) (1,327) (893) (2,456)
Net loss available to common stockholders (9,215)(2) (6,242)(3) (3,782) (2,212) (4,162)
Basic and diluted loss per common share $ (0.47)(2) $ (0.30)(3) $ (0.17) $ (0.09) $ (0.17)
Shares used in computing per share amounts 19,533 21,106 22,431 25,559 27,341
AS OF DECEMBER 31,
--------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
Balance Sheet Data:
Cash $ 1,851 $ 2,065 $ 1,662 $ 2,576 $ 13,833
Working capital (deficiency) 5,388 (291) (3,734) 2,473 14,307
Total assets 12,898 9,004 9,557 12,318 29,313
Long term obligations, less current portion 9,289 8,618 8,436 8,409 3,764
Common stock subject to redemption 742 495 - - -
Stockholders' equity (deficit) (843) (6,746) (9,660) (1,037) 17,348
- ---------------------------
(1) Represents the financial information of VASCO Corp. prior to March 11,
1998, as the Company had not begun operations until the Exchange Offer.
(2) Includes a pretax charge for acquired in-process research and development
of $7,351.
(3) Includes legal, accounting and printing costs of approximately $1,218
related to preparing for the Exchange Offer that was completed in March
1998.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in the following Management's Discussion
and Analysis of Financial Condition and Results of Operations are
forward-looking statements. All forward-looking statements included herein are
based on information available to the Company on the date hereof and assumptions
which the Company believes are reasonable. The Company does not assume any
obligation to update any such forward-looking statements. These forward-looking
statements involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth elsewhere in this Form
10-K and the Company's other filings with the Securities and Exchange
Commission.
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BACKGROUND
Our predecessor company, VASCO Corp., entered into the data security
business in 1991 through the acquisition of a controlling interest in ThumbScan,
Inc., which we renamed VASCO Data Security, Inc. in 1993. In 1996, we began an
expansion of our computer security business by acquiring Lintel Security NV/SA,
a Belgian corporation, including assets associated with the development of
security tokens and security technologies for personal computers and computer
networks. In addition, in 1996, we acquired the stock of Digipass NV/SA, a
Belgian corporation, which was also a developer of security tokens and security
technologies and whose name we changed to VASCO Data Security NV/SA in 1997. All
of these acquisitions were accounted for under the purchase method of
accounting.
On March 11, 1998, we completed a registered Exchange Offer with the
holders of the outstanding securities of VASCO Corp. In the Exchange Offer,
holders of the common stock and warrants, options and other rights to acquire
common stock of our predecessor company exchanged their securities for the same
number and kind of securities of our present company, and released any potential
claims that such holders might have had against our predecessor in connection
with the issuances of its securities and other corporate actions which occurred
mostly during the 1980's. In the Exchange Offer, almost 98% of our predecessor's
securities were tendered and accepted for exchange. In October 1998, we
completed the merger of our predecessor with and into the current company and
thereby eliminated all remaining outstanding securities of our predecessor and
our predecessor thereby ceased to exist.
Since the Exchange Offer, we have engaged in three acquisitions. In May
1999, we acquired the assets of SecureWare SA, a French company for a
combination of approximately $1.4 million in our stock and cash.
In October 1999, we acquired IntelliSoft Corp. for a combination of
approximately $8 million in our stock and cash distributed to dissenting
shareholders. This acquisition was accounted for under the pooling-of-interests
method of accounting and, therefore, all of our financial information has been
restated to include the results of IntelliSoft.
Our latest acquisition occurred in August 2000 when we acquired
Invincible Data Systems (IDS) in a transaction which was accounted for under the
pooling-of-interests method. A total of 322,565 shares were issued in the
transaction. Our financial information was not restated for this transaction,
which was deemed immaterial.
OVERVIEW
We design, develop, market and support security products and services
which manage and protect against unauthorized access to computer systems of
corporate and governmental clients.
Revenue and Earnings. We sell the majority of our products in European
countries with significant sales in the United States, although we intend to
actively pursue additional markets outside of Europe, particularly South
America, Asia/Pacific, Australia and the Middle East.
Revenues from sales from our Digipass family, specifically the Digipass
300 and 500 tokens, continue to represent the majority of our total revenues.
During 1998 and 1999, Digipass products accounted for more than 80% of revenues.
For 2000, in excess of 70% of the Company's sales were comprised of security
token devices. Although we believe it is likely that sales of the Digipass
family of tokens, which can be used on various platforms, will continue to
account for a majority of our total revenues for the next few years, we also
believe that revenues from sales of our other hardware and software data
security products, including the SnareWorks product line, will continue to
increase in the future. The percentage of revenue from SnareWorks products
increased from 9% in 1999 to 20% in 2000.
Research and Development. We are devoting substantial capital and
other resources to enhancing our existing security products and developing new
products to provide enterprise-wide hardware and software security solutions.
Costs of research and development, principally the design and development of
hardware and software prior to the determination of technological feasibility,
are expensed as incurred on a project-by-project basis. Our software
capitalization policy currently defines technological feasibility as a
functioning beta test prototype with confirmed manufacturability (a working
model), within a reasonably predictable range of costs. Additional criteria
include receptive customers, or potential customers, as evidenced by interest
expressed in a beta test prototype, at some suggested selling price.
Variations in Operating Results. Our quarterly operating results have
in the past varied and may in the future vary significantly. Factors affecting
operating results include:
- the level of competition;
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- the size, timing, cancellation or rescheduling of
significant orders; market acceptance of new products
and product enhancements;
- new product announcements or introductions by our competitors;
- adoption of new technologies and standards; changes in pricing
by us or our competitors;
- our ability to develop, introduce and market new products and
product enhancements on a timely basis, if at all;
- component costs and availability;
- our success in expanding our sales and marketing programs;
- technological changes in the market for data security products;
- foreign currency exchange rates;
- and general economic trends and other factors.
In addition, we have experienced, and may experience in the future,
long sales cycles due to the size of our contracts and the timing of when our
customers take delivery of our products. We also experience seasonality in our
business. These seasonal trends have included higher revenue in the last quarter
of the calendar year and lower revenue in the next succeeding quarter. We
believe that revenue has tended to be higher in the last quarter due to the
tendency of certain customers to implement or complete changes in computer or
network security prior to the end of the calendar year. In addition, revenue has
tended to be lower in the summer months, particularly in Europe, when many
businesses defer purchase decisions. Because our operating expenses are based on
anticipated revenue levels and a high percentage of our expenses are fixed, a
small variation in the timing of recognition of revenue could cause significant
variations in operating results from quarter to quarter.
Currency Fluctuations. The majority of our supply and sales transactions are
denominated in U.S. dollars, however, a significant portion of those
transactions are denominated in various foreign currencies. In order to reduce
the risks associated with fluctuations in currency exchange rates, we attempt to
match the timing of delivery, amount of product and the currency denomination of
purchase orders received from vendors with sales orders to customers.
The financial position and results of operations of the Company's
foreign subsidiaries are measured using the local currency as the functional
currency. Accordingly, assets and liabilities are translated into U.S. dollars
using current exchange rates as of the balance sheet date. Revenues and expenses
are translated at average exchange rates prevailing during the year. Translation
adjustments arising from differences in exchange rates are included as a
separate component of stockholders' equity (deficit). Gains and losses resulting
from foreign currency transactions are included in the consolidated statements
of operations. Foreign exchange transaction losses aggregating $174,000,
$272,000 and $289,000 are included in other non-operating expense for 1998,
1999, and 2000, respectively.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
consolidated financial data as a percentage of revenues for the years ended
December 31, 1998, 1999 and 2000.
Percentage of Revenue
Year Ended December 31,
---------------------------------
1998 1999 2000
----- ----- -----
Revenues............................ 100.0% 100.0% 100.0%
Cost of goods sold.................. 43.7 37.7 35.9
----- ----- -----
Gross profit........................ 56.3 62.3 64.1
Operating costs:
Sales and marketing........... 28.9 30.7 35.4
Research and development...... 14.9 18.5 16.3
General and administrative.... 20.5 17.7 19.8
Non-cash compensation......... - - 1.8
----- ----- -----
Total operating costs.... 64.3 66.9 73.3
----- ----- -----
Operating loss...................... (8.0) (4.6) (9.2)
Interest expense.................... (8.8) (4.2) 0.1
Other expense, net.................. (1.9) (0.9) (4.3)
----- ----- -----
Loss before income taxes............ (18.7) (9.7) (13.4)
Provisions for income taxes......... 4.2 1.7 1.4
----- ----- -----
Net loss............................ (22.9) (11.4) (14.8)
===== ===== =====
The following discussion is based upon the Company's consolidated
results of operations for the years ended December 31, 2000, 1999 and 1998
(percentages in the discussion are rounded to the closest full percentage point)
and should be read in conjunction with our consolidated financial statements
included elsewhere in this Form 10-K.
1999 COMPARED TO 2000
Revenues
Our consolidated revenues for the year ended December 31, 2000 were
$28,066,000, an increase of $8,669,000, or 45%, as compared to the year ended
December 31, 1999. This increase is due to a strong performance from
international operations, as the demand for Digipass products continues to grow,
resulting in increased unit sales, as well as increasing orders with smaller
quantities and less volume discounting. Also, sales of SnareWorks products in
the U.S. more than doubled 1999 revenues. The European operations contributed
$17,000,000 or 61% of total consolidated revenues, with the United States
operations contributing the remaining $11,065,000 or 39%.
Cost of Goods Sold
Our consolidated cost of goods sold for the year ended December 31,
2000 was $10,069,000, an increase of $2,763,000, or 38%, as compared to the year
ended December 31, 1999. Cost of goods sold has not increased at the same rate
as our revenues primarily due to product sales mix and also from efficiencies in
the manufacturing process, as well as the increasing demand for products with a
more favorable cost structure.
Gross Profit
Our consolidated gross profit for the year ended December 31, 2000 was
$17,997,000, an increase of $5,905,000, or 49%, over the year ended December 31,
1999. This represents a gross margin of 64% compared to 1999's consolidated
gross margin of 62%. The increase in gross margin is due to product sales mix as
SnareWorks products provide higher gross margins.
Sales and Marketing Expenses
Consolidated sales and marketing expenses for the year ended December
31, 2000 were $9,954,000, an increase of $3,992,000, or 67%, over 1999. This
increase can be attributed to increased sales efforts including increased travel
costs, headcount, and an increase in marketing activities, including tradeshows
and advertising. Sales and marketing headcount increased from 44 at the end of
1999 to 61 at the end of 2000.
Research and Development Expenses
Consolidated research and development costs for the year ended December
31, 2000 were $4,581,000, an increase of $994,000, or 28%, as compared to the
year ended December 31, 1999. Most of this increase is due to activities
relating to the development of the SnareWorks product line.
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General and Administrative Expenses
Consolidated general and administrative expenses for the year ended
December 31, 2000 were $5,561,000, an increase of $2,126,000, or 62%, over 1999.
This increase can be attributed to growth in infrastructure needed to support
our growth, increased recruiting expenses and amortization charges related to
royalties. Administrative headcount increased from 12 at the end of 1999 to 18
at the end of 2000. In addition, the Company recorded approximately $150,000 of
merger costs in 2000 related to the Invincible Data Systems transaction.
Interest Income (Expense)
Consolidated interest income, net in 2000 was $29,000 compared to
interest expense, net of $815,000 in 1999. Interest income from the proceeds
generated upon the issuance of convertible preferred stock offset interest
expense related to borrowings. See "Liquidity and Capital Resources" below.
Additionally, interest expense from debt outstanding decreased as long-term debt
was reduced from $8,409,000 at the end of 1999 to $3,764,000 at the end of 2000.
Income Taxes
We recorded tax expense for the year ended December 31, 2000 of
$395,000, which relates to one of our European subsidiaries.
At December 31, 2000, we have United States net operating loss
carryforwards approximating $12,500,000 and foreign net operating loss
carryforwards approximating $2,000,000. Such losses are available to offset our
future taxable income in the respective jurisdictions and expire in varying
amounts beginning in 2002 and continuing through 2020. In addition, if certain
substantial changes in ownership are deemed to have occurred, there would be an
annual limitation on the amount of the U.S. carryforwards which could be
utilized.
1998 COMPARED TO 1999
Revenues
Our consolidated revenues for the year ended December 31, 1999 were
$19,397,000, an increase of $2,897,000, or 18%, as compared to the year ended
December 31, 1998. This increase was due to a strong performance from
international operations, as the demand for Digipass 300 and Digipass 500 grew,
resulting in increased unit sales, as well as increased orders with smaller
quantities and less volume discounting.
Cost of Goods Sold
Our consolidated cost of goods sold for the year ended December 31,
1999 was $7,306,000, an increase of $97,000, or 1%, as compared to the year
ended December 31, 1998. This increase was consistent with the increase in
revenues for the year, further compounded by benefits from efficiencies in the
manufacturing process, as well as the increased demand for products with a more
favorable cost structure.
Gross Profit
Our consolidated gross profit for the year ended December 31, 1999 was
$12,091,000, an increase of $2,800,000, or 30%, over the year ended December 31,
1998. This represents a gross margin of 62%, as compared to 1998's consolidated
gross margin of 56%. The increase in gross margin was due to efficiencies in
manufacturing related to increased volumes, an increase in the mix of sales of
higher margin products, as well as increased orders with smaller quantities, and
less volume discounting.
Sales and Marketing Expenses
Consolidated sales and marketing expenses for the year ended December
31, 1999 were $5,962,000, an increase of $1,189,000, or 25%, over 1998. This
increase can be attributed to increased sales efforts including, in part,
increased travel costs, headcount, and an increase in marketing activities,
including tradeshows. Additionally, the acquisition of IntelliSoft in October
1999 resulted in additional headcount, as the sales operations were expanded in
the fourth quarter of 1999.
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Research and Development Expenses
Consolidated research and development costs for the year ended December
31, 1999 were $3,587,000, an increase of $1,128,000, or 46%, as compared to the
year ended December 31, 1998. This increase was, in part, related to the
acquisition of SecureWare during 1999. As SecureWare is primarily a development
center, the acquisition resulted in increased research and development headcount
and expenditures. Additionally, during 1999, we entered into a development
agreement with Intel Network Systems, Inc. related to the further enhancement of
the VACMAN product line.
General and Administrative Expenses
Consolidated general and administrative expenses for the year ended
December 31, 1999 were $3,435,000, an increase of $50,000, or 1%, over 1998.
This increase can be attributed to growth in infrastructure needed to support
our growth, as well as the impact of the acquisition of SecureWare during 1999.
Interest Expense
Consolidated interest expense in 1999 was $815,000 compared to
$1,458,000 in 1998. The decrease can be attributed to a lower borrowing base
being maintained during 1999 as compared to the prior year. See "Liquidity and
Capital Resources" below.
Income Taxes
We recorded tax expense for the year ended December 31, 1999 of
$322,000, which relates to one of our European subsidiaries.
RECENT DEVELOPMENTS
On February 2, 2001, the Company entered into a Letter of Intent to
purchase all of the outstanding stock of Identikey, Ltd., a software company
headquartered in Brisbane, Australia. The terms of the agreement provide for an
initial purchase price of 406,667 shares of common stock and a contingent
purchase price of additional shares of common stock based on targeted sales over
a 15 month period. The maximum number of additional shares that can be earned is
based upon $12,750,000 and a price of the greater of 80% of the average closing
price of the stock for the 10 days preceding the end of the measurement period,
or $7.50 per share. The revenues of Identikey, Ltd., for the year 2000 were
immaterial in relation to the Company's revenues. The transaction is expected to
close by April 2001 and will be accounted for under the purchase method.
The effect of this transaction on operating income before amortization
of goodwill and on cash flow during the next twelve months is largely related to
the amount of revenues that can be generated from their product sales. The
Company anticipates that the sales of their products will not generate positive
operating income before amortization of goodwill or positive cash flow for the
first twelve months after the acquisition.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, our aggregate consolidated indebtedness was
$4,126,000. Cash used in operating activities was $2,234,000 for the year ended
December 31, 2000. During that period we used $3,128,000 in investing activities
and financing activities provided $17,360,000. Capital expenditures were
$3,474,000 for the year ended December 31, 2000.
In 1996, we issued a 9% convertible note to Kyoto Securities, Ltd., a
Bahamian corporation, in the amount of $5,000,000. The note provided for
quarterly interest payments and was payable in full on May 29, 2001. The note
was convertible into shares of our Common Stock at a conversion price of $12.00
per share, or 416,667 shares. In April 2000, the note and accrued interest were
converted into 435,910 shares of common stock.
In 1997, we entered into a convertible loan agreement with Artesia Bank
N.V., formerly Banque Paribas Belgique S.A., in order to refinance the
$3,400,000 payment due December 31, 1997 in connection with our acquisition of
Digipass. The terms of the agreement provide that the $3,400,000 principal
amount is convertible, upon an offering, into shares of our Common Stock. This
loan bears interest at the rate of 3.25%, payable annually, and matures on
September 30, 2002. After January 1, 1999, the loan is convertible at the
average closing market price for shares of our Common Stock on the NASD
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Electronic Bulletin Board system for the 20 trading days prior to the date of
the notice of conversion, less 10%. In the event a public offering is completed,
the lender may at its option (by written notice within seven days after our
receipt of the proceeds of the public offering) require the principal amount of
the loan to be repaid in cash, in which case additional special interest is
payable as follows: $680,000 if repayment is on January 1, 1999 or later.
In April 1999, we completed a private placement of Common Stock in the
amount of $11.5 million. The transaction represented a sale of our Common Stock
to European institutional investors at a price of $3.50 per share. A total of
3,285,714 shares of Common Stock were issued as a part of this transaction.
During the first quarter of 2000, the Company filed a registration
statement in connection with an offering of its Common Stock to the public. On
April 13, 2000, the Company terminated this offering due to the volatility of
market conditions. Costs related to this offering of $1,331,000 were written off
and included in other expense in the consolidated statement of operations.
In July 2000, the Company issued 150,000 shares of preferred stock for
cash of $15,000,000. The preferred stock is convertible into 1,052,632 shares of
Common Stock at any time over the next 48 months.
The net effect of 2000 activity resulted in an increase in cash of
$11,256,000, resulting in a cash balance of $13,833,000 at December 31, 2000,
compared to $2,576,000 at the end of 1999. Our working capital at December 31,
2000 was $14,307,000, an increase of $11,834,000, or 479% from $2,473,000 at
December 31, 1999. The majority of the change is attributable to the issuance of
preferred stock. Our current ratio was 2.7 to 1.0 at December 31, 2000. We
believe that our current cash balances and anticipated cash generated from
operations will be sufficient to meet our anticipated cash needs for the
foreseeable future.
We intend to seek acquisitions of businesses, products and technologies
that are complementary or additive to ours. There can be no assurance that any
such acquisitions will be made.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Interpretation No. 44 (FIN
No. 44), "Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of Accounting Principles Board Opinion No. 25, was effective for
financial statements beginning after July 1, 2000. The Company has evaluated the
impact of this pronouncement on its financial statements and has recorded a
charge as part of its operating expenses as "Non-cash compensation". The Company
has determined that options granted to two full-time executive officers are
deemed non-employees under FIN No. 44 because their services are rendered under
consulting agreements. This resulted in compensation expense charges of $501,743
in 2000. These options were accounted for using variable plan accounting and the
amounts of future compensation expense will be determined based upon the
Company's stock price at each reporting date.
During 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities"), which is effective for
all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes a
comprehensive standard for the recognition and measurement of derivative
instruments and hedging activities. We do not expect the adoption of the new
standard to have a material effect on our consolidated financial position,
liquidity, or results of operations.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk.
Approximately 61% of our business is conducted outside the United
States, in Europe and Asia/Pacific. A significant portion of our business
operations are transacted in foreign currencies. As a result, we have exposure
to foreign exchange fluctuations. We are affected by both foreign currency
translation and transaction adjustments. Translation adjustments result from the
conversion of the foreign subsidiaries' balance sheets and income statements to
U.S. dollars at year-end exchange rates and weighted average exchange rates,
respectively. Translation adjustments resulting from this process are recorded
directly into stockholders' equity. Transaction adjustments result from currency
exchange movements when a foreign subsidiary transacts business in a currency
that differs from its local currency. These transactions are recorded as gains
or losses in our statement of operations.
21
22
Our foreign exchange exposure was minimized in 2000 as the majority of
our foreign subsidiaries' business transactions were spread across approximately
50 different countries and currencies. This geographic diversity reduces the
risk to our operating results. Also, we perform periodic reviews of outstanding
balances and settle intercompany accounts to minimize foreign exchange
transaction gains and losses.
We have minimal interest rate risk. Our $3.4 million long-term debt has
a fixed rate of 3.25%, which is not subject to market fluctuations. This note
matures in September 2002.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information in response to this item is included in our
consolidated financial statements, together with the report thereon of KPMG LLP,
appearing on pages F-1 through F-18 of this Form 10-K, and in Item 7 under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections entitled "Election of Directors" and "Section 16(a)
Beneficial Ownership Report Compliance" contained in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on June 12, 2001,
are incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" contained in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
June 12, 2001, is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners
and Management" contained in the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held on June 12, 2001, is incorporated herein by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. (1) The following consolidated financial statements and notes thereto,
and the related independent auditors' report, are included on pages
F-1 through F-17 of this Form 10-K:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1999 and 2000
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1999 and 2000
Consolidated Statements of Comprehensive Loss for the Years Ended
December 31, 1998, 1999 and 2000
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1999 and 2000
22
23
Notes to Consolidated Financial Statements
(2) The following consolidated financial statement schedule of the
Company is included on this Form 10-K:
Schedule II - Valuation and Qualifying Accounts
Financial Data Schedule
All other financial statement schedules are omitted because such
schedules are not required or the information required has been presented in the
aforementioned consolidated financial statements.
(3) The following exhibits are filed with this Form 10-K or
incorporated by reference as set forth in the next page:
23
24
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------------------------
+3.1 Certificate of Incorporation of Registrant, as amended.
++3.2 Bylaws of Registrant, as amended and restated.
4.1 Intentionally Omitted.
+4.2 Specimen of Registrant's Common Stock Certificate.
4.3 Intentionally Omitted.
+4.4 Form of Letter of Transmittal and Release.
+4.5 Form of Registrant's Warrant Agreement.
+4.6 Form of Registrant's Option Agreement.
+4.7 Form of Registrant's Convertible Note Agreement.
+10.1 Netscape Communications Corporation OEM Software Order Form
dated March 18, 1997 between VASCO Data Security, Inc. and
Netscape Communications Corporation.**
+10.2 License Agreement between VASCO Data Security, Inc. and SHIVA
Corporation effective June 5, 1997.**
+10.3 Heads of Agreement between VASCO Data Security International,
Inc., VASCO Data Security Europe S.A., Digiline International
Luxembourg, Digiline S.A., Digipass S.A., Dominique Colard and
Tops S.A. dated May 13, 1996.
+10.4 Agreement relating to additional terms and conditions to the
Heads of Agreement dated July 9, 1996, among the parties listed
in Exhibit 10.3.
+10.5 Agreement between VASCO Data Security International, Inc., VASCO
Data Security Europe SA/NV, Mario Houthooft and Guy Denudt dated
March 1, 1996.
+10.6 Asset Purchase Agreement dated as of March 1996 by and between
Lintel Security SA/NV and Lintel SA/NV, Mario Houthooft and Guy
Denudt.
+10.7 Management Agreement dated January 31, 1997 between LINK BVBA
and VASCO Data Security NV/SA (concerning services of Mario
Houthooft).
+10.8 Sublease Agreement by and between VASCO Data Security
International, Inc. and APL Land Transport Services, Inc. dated
as of August 29, 1997.
+10.9 Office Lease by and between VASCO Data Security International,
Inc. and LaSalle National Bank, not personally, but as Trustee
under Trust Agreement dated September 1, 1997, and known as Trust
Number 53107, dated July 22, 1985.
+10.10 Lease Agreement by and between TOPS S.A. and Digipass S.A.
effective July 1, 1996.
+10.11 Lease Agreement by and between Perkins Commercial Management
Company, Inc. and VASCO Data Security, Inc. dated November 21,
1995.
+10.12 Asset Purchase Agreement by and between VASCO Data Security
International, Inc. and Wizdom Systems, Inc. dated August 20,
1996.
+10.13 1997 VASCO Data Security International, Inc. Stock Option Plan,
as amended.
24
25
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------------------------
+10.14 Distributor Agreement between VASCO Data Security, Inc. and
Hucom, Inc. dated June 3, 1997.**
+10.15 Non-Exclusive Distributor Agreement by and between VASCO Data
Security, Inc. and Concord-Eracom Nederland BV dated
May 1, 1994.**
+10.16 Banque Paribas Belgique S. A. Convertible Loan Agreement for
$3.4 million.
+10.17 Pledge Agreement dated July 15, 1997 by and between T. Kendall
Hunt and Banque Paribas Belgique S.A.
+10.18 Engagement Letter between Banque Paribas S.A. and VASCO Data
Security International, Inc. dated June 20, 1997, as amended.
+10.19 Financing Agreement between Generale Bank and VASCO Data
Security International, Inc. dated as of June 27, 1997.
+10.20 Letter Agreement between Generale Bank and VASCO Data Security
International, Inc. dated June 26, 1997.
+10.21 Form of Warrant dated June 16, 1997 (with Schedule).
+10.22 Form of Warrant dated October 31, 1995 (with Schedule).
+10.23 Form of Warrant dated March 7, 1997 (with Schedule).
+10.24 Form of Warrant dated August 13, 1996 (with Schedule).
+10.25 Form of Warrant dated June 27, 1996 (with Schedule).
+10.26 Form of Warrant dated June 27, 1996 (with Schedule).
+10.27 Convertible Note in the principal amount of $500,000.00, payable
to Generale de Banque dated July 1, 1997 (with Schedule).
+10.28 Agreement by and between VASCO Data Security NV/SA and S.I.
Electronics Limited effective January 21, 1997.**
+10.29 Agreement effective May 1, 1993 by and between Digipass s.a.
and Digiline s.a.r.l.
+10.30 VASCO Data Security, Inc. purchase order issued to National
Electronic & Watch Co. LTD. **
+10.31 VASCO Data Security, Inc. purchase order issued to Micronix
Integrated Systems.**
+10.32 Agreement between Registrant and VASCO Data Security
International, Inc. dated as of August 25, 1997.
+10.33 Convertible Note dated June 1, 1996 made payable to Mario
Houthooft in the principal amount of $373,750.00.
+10.34 Convertible Note dated June 1, 1996 made payable to Guy Denudt
in the principal amount of $373,750.00.
25
26
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------------------------
+10.35 Osprey Partners Warrant (and Statement of Rights to Warrant and
Form of Exercise) issued June 1, 1992.
+10.36 Registration Rights Agreement dated as of October 19, 1995
between certain purchasing shareholders and VASCO Data Security
International, Inc.
+10.37 First Amendment to Registration Rights Agreement dated
July 1, 1996.
+10.38 Second Amendment to Registration Rights Agreement dated
March 7, 1997.
+10.39 Purchase Agreement by and between VASCO Data Security
International, Inc. and Kyoto Securities Ltd.
+10.40 Convertible Note dated May 28, 1996 payable to Kyoto Securities,
Ltd. in principal amount of $5 million.
+10.41 Amendment to Purchase Agreement and Convertible Note by and
between VASCO Data Security International, Inc. and Kyoto
Securities, Ltd.
+10.42 Executive Incentive Compensation Plan.
+10.43 Letter for Credit granted by Generale de Banque to Digipass SA
dated January 27, 1997.
++10.44 License Agreement dated as of March 25, 1998 by and between
VASCO Data Security International, Inc., for itself and its
subsidiaries, and Lernout & Hauspie Speech Products N.V.
++10.45 Loan Agreement dated as of March 31, 1998 by and between Lernout
& Hauspie Speech Products N.V. and VASCO Data Security
International, Inc.
++10.46 Convertible Note dated April 1, 1998 payable to Lernout & Hauspie
Speech Products N.V. in the principal amount of $3 million.
#10.47 Amendment I dated as of December 31, 1998 to the License
Agreement dated as of March 25, 1998 by and between VASCO Data
Security International, Inc., for itself and its subsidiaries,
and Lernout & Hauspie Speech Products N.V.
21 Subsidiaries of Registrant.
23 Consent of KPMG LLP.
- --------------------------
+ Incorporated by reference to the Registrant's Registration Statement on
Form S-4, as amended (Registration No. 333-35563), originally filed
with the Securities and Exchange Commission on September 12, 1997.
++ Incorporated by reference to the Registrant's Annual Report on Form
10-K, originally filed with the Securities and Exchange Commission on
May 5, 1998.
# Incorporated by reference to the Registrant's Annual Report on Form
10-K, originally filed with the Securities and Exchange Commission on
April 14, 1999.
** Confidential treatment has been granted for the omitted portions of
this document.
26
27
VASCO DATA SECURITY INTERNATIONAL, INC. WILL FURNISH ANY OF THE ABOVE
EXHIBITS TO ITS STOCKHOLDERS UPON WRITTEN REQUEST ADDRESSED TO THE SECRETARY AT
THE ADDRESS GIVEN ON THE COVER PAGE OF THIS FORM 10-K. THE CHARGE FOR FURNISHING
COPIES OF THE EXHIBITS IS $.25 PER PAGE, PLUS POSTAGE.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Registrant during the
quarter ended December 31, 2000.
27
28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
VASCO Data Security International, Inc.:
We have audited the accompanying consolidated balance sheets of VASCO
Data Security International, Inc. and subsidiaries (the "Company") as of
December 31, 1999 and 2000 and the related consolidated statements of
operations, comprehensive loss, stockholders' equity (deficit), and cash flows
for each of the years in the three-year period ended December 31, 2000. In
connection with our audits of the consolidated financial statements, we have
also audited the accompanying consolidated financial statement Schedule II -
Valuation and Qualifying Accounts. These consolidated financial statements and
the consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the consolidated financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of VASCO Data
Security International, Inc. and subsidiaries as of December 31, 1999 and 2000,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Chicago, Illinois
February 23, 2001
F-1
29
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1999 2000
---- ----
ASSETS
CURRENT ASSETS:
Cash $ 2,576,494 $13,832,645
Accounts receivable, net of
allowance for doubtful
accounts of $120,216
in 1999 and $286,377
in 2000 2,871,367 6,486,397
Inventories, net 805,382 1,111,751
Prepaid expenses 157,620 463,094
Deferred income taxes 83,000 83,000
Other current assets 925,334 532,081
----------- -----------
Total current assets 7,419,197 22,508,968
Property and equipment
Furniture and fixtures 1,246,555 1,350,616
Office equipment 1,013,870 4,043,015
----------- -----------
2,260,425 5,393,631
Accumulated depreciation (1,070,046) (1,596,102)
----------- -----------
1,190,379 3,797,529
Goodwill, net of accumulated
amortization of $3,134,000
in 1999 and $3,697,456 in
2000 1,989,960 1,438,537
Other assets 1,718,493 1,568,285
----------- -----------
TOTAL ASSETS $12,318,029 $29,313,319
=========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 639,322 $ 362,250
Accounts payable 2,020,465 2,790,698
Deferred revenue 803,270 1,950,322
Other accrued expenses 1,482,970 3,098,284
----------- -----------
Total current liabilities 4,946,027 8,201,554
Long-term debt, including stockholder
note of $5,000,000 in 1999
and $0 in 2000, net of
current maturities 8,408,862 3,763,858
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value -
75,000,000 shares authorized;
26,462,083 shares issued and
outstanding in 1999
27,866,583 shares issued and
outstanding in 2000 26,462 27,867
Series C Convertible Preferred
Stock, $.01 par value - 500,000
shares authorized; 150,000 shares
issued and outstanding in 2000 - 6,780,098
Additional paid-in capital 20,702,387 36,871,200
Accumulated deficit (21,873,340) (26,035,112)
Accumulated other comprehensive
income-cumulative translation
adjustment 107,631 (296,146)
----------- -----------
Total stockholders' equity (deficit) (1,036,860) 17,347,907
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $12,318,029 $29,313,319
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
30
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
1998 1999 2000
Net revenues $ 16,499,866 $ 19,397,108 $ 28,065,680
Cost of goods sold 7,209,038 7,305,672 10,068,969
--------------- --------------- ---------------
Gross profit 9,290,828 12,091,436 17,996,711
Operating costs:
Sales and marketing
(exclusive of
$152,545 reported
below as non-cash
compensation) 4,773,153 5,961,970 9,953,598
Research and development 2,459,477 3,587,483 4,581,001
General and administrative
(exclusive of $349,198
reported below as
non-cash compensation) 3,384,853 3,434,940 5,560,995
Non-cash compensation - - 501,743
--------------- --------------- ---------------
Total operating
costs 10,617,483 12,984,393 20,597,337
--------------- --------------- ---------------
Operating loss (1,326,655) (892,957) (2,600,626)
Interest income (expense) (1,457,627) (814,923) 29,334
Other expense, net (310,728) (182,294) (1,195,234)
--------------- --------------- ---------------
Loss before income taxes (3,095,010) (1,890,174) (3,766,526)
Provision for income taxes 687,002 322,310 395,246
--------------- --------------- ---------------
Net loss (3,782,012) (2,212,484) (4,161,772)
Preferred stock accretion - - (581,992)
--------------- --------------- ---------------
Net loss available to
common stockholders $ (3,782,012) $ (2,212,484) $ (4,743,764)
=============== =============== ===============
Basic and diluted net loss
per common share $ (0.17) $ (0.09) $ (0.17)
=============== =============== ===============
Weighted average common
shares outstanding 22,430,684 25,558,847 27,341,439
=============== =============== ===============
See accompanying notes to consolidated financial statements.
F-3
31
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Years Ended December 31,
-------------------------------------------------
1998 1999 2000
---- ---- ----
Net loss $ (3,782,012) $ (2,212,484) $ (4,161,772)
Other comprehensive
income (loss) - cumulative
translation adjustment 257,143 20,650 (403,777)
--------------- --------------- ---------------
Comprehensive loss $ (3,524,869) $ (2,191,834) $ (4,565,549)
=============== =============== ===============
See accompanying notes to consolidated financial statements.
F-4
32
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Accumulated Other Total
Preferred Stock Common Stock Accumulated Comprehensive Stockholders'
Description Shares Amount Shares Amount APIC Deficit Income Equity(Deficit)
- ------------------------- ------- ---------- ---------- -------- ------------ ------------ ----------------- --------------
BALANCE AT 12/31/97 - $ - 22,132,960 $ 22,133 $ 9,280,774 $(15,878,844) $ (170,162) $ (6,746,099)
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss - - - - - (3,782,012) - (3,782,012)
- ---------------------------------------------------------------------------------------------------------------------------------
Foreign currency
translation adjustment - - - - - - 257,143 257,143
- ---------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options - - 658,257 658 115,689 - - 116,347
- ---------------------------------------------------------------------------------------------------------------------------------
Exercise of stock warrants - - 14,472 15 (15) - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Expiration of put option - - - - 494,668 - - 494,668
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT 12/31/98 - $ - 22,805,689 $ 22,806 $ 9,891,116 $(19,660,856) $ 86,981 $ (9,659,953)
======================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss - - - - - (2,212,484) - (2,212,484)
- ---------------------------------------------------------------------------------------------------------------------------------
Foreign currency
translation adjustment - - - - - - 20,650 20,650
- ---------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options - - 158,000 158 44,067 - - 44,225
- ---------------------------------------------------------------------------------------------------------------------------------
Exercise of stock warrants - - 200,000 200 49,800 - - 50,000
- ---------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock - - 3,486,308 3,486 11,468,791 - - 11,472,277
- ---------------------------------------------------------------------------------------------------------------------------------
Common stock repurchased
and retired - - (187,914) (188) (751,387) - - (751,575)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT 12/31/99 - $ - 26,462,083 $ 26,462 $ 20,702,387 $(21,873,340) $ 107,631 $ (1,036,860)
======================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss - - - - - (4,161,772) - (4,161,772)
- ---------------------------------------------------------------------------------------------------------------------------------
Foreign currency
translation adjustment - - - - - - (403,777) (403,777)
- ---------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options - - 342,400 342 556,871 - - 557,213
- ---------------------------------------------------------------------------------------------------------------------------------
Exercise of stock warrants - - 303,625 304 1,724,413 - - 1,724,717
- ---------------------------------------------------------------------------------------------------------------------------------
Conversion of note and
interest to common stock - - 435,910 436 5,164,618 - - 5,165,054
- ---------------------------------------------------------------------------------------------------------------------------------
Common stock issured for
acquisition - - 322,565 323 1,266 - - 1,589
- ---------------------------------------------------------------------------------------------------------------------------------
Issuance of Series C
Convertible Preferred
Stock and warrants 150,000 6,198,106 - - 8,801,894 - - 15,000,000
- ---------------------------------------------------------------------------------------------------------------------------------
Preferred stock accretion - 581,992 - - (581,992) - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Non-cash compensation - - - 501,743 - - 501,743
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT 12/31/00 150,000 $6,780,098 27,866,583 $ 27,867 $ 36,871,200 $(26,035,112) (296,146) $ 17,347,907
======================================================================================================
See accompanying notes to consolidated financial statements.
F-5
33
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years ended December 31,
--------------------------------------------------
1998 1999 2000
--------------- --------------- ----------------
Cash flows from operating activities:
Net loss $ (3,782,012) $ (2,212,484) $ (4,161,772)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,027,431 1,066,144 1,415,763
Common stock issued for interest - - 165,054
Loss on disposal of fixed assets 5,013 - 2,073
Gain on sale of fixed assets - (13,318) -
Non-cash compensation expense - - 501,743
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net (1,045,440) 715,523 (3,615,030)
Inventories, net (271,033) 466,945 (306,369)
Prepaid expenses 231,660 (65,294) (305,474)
Other current assets (18,624) (574,569) 393,253
Prepaid royalties and other assets (600,000) (1,118,493) 150,208
Accounts payable 105,045 788,332 770,234
Customer deposits 120,575 (1,550) 67,569
Accrued expenses 474,150 (662,790) 2,772,721
--------------- --------------- ----------------
Net cash used in operations (3,753,235) (1,611,554) (2,150,027)
--------------- --------------- ----------------
Cash flows from investing activities:
Acquisition of SecureWare/DMIC - (587,532) -
Additions to property and equipment (284,155) (895,144) (3,473,564)
--------------- --------------- ----------------
Net cash used in investing activities (284,155) (1,482,676) (3,473,564)
--------------- --------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of debt 6,161,424 - -
Repayment of debt (2,900,000) (6,091,586) -
Proceeds from exercise of stock options/warrants 116,347 94,225 2,281,930
Net proceeds from sales of common stock - 10,736,926 -
Issuance of Series C Convertible Preferred Stock - - 15,000,000
Repurchase of common stock - (751,575) -
--------------- --------------- ----------------
Net cash provided by financing activities 3,377,771 3,987,990 17,281,930
Adjustment to conform immaterial pooled business - - 1,589
Effect of exchange rate changes on cash 257,143 20,650 (403,777)
--------------- --------------- ----------------
Net increase (decrease) in cash (402,476) 914,410 11,256,151
Cash, beginning of year 2,064,560 1,662,084 2,576,494
--------------- --------------- ----------------
Cash, end of year $ 1,662,084 $ 2,576,494 $ 13,832,645
=============== =============== ================
Supplemental disclosure of cash flow information:
Interest paid $ 878,892 $ 893,799 $ 323,341
Income taxes paid $ 709,661 $ 900,373 $ 293,875
Supplemental disclosure of non-cash activity -
conversion of note to common stock $ - $ - $ 5,000,000
See accompanying notes to consolidated financial statements.
F-6
34
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
VASCO Data Security International, Inc. and its wholly owned
subsidiaries (the Company) designs, develops, markets and supports security
products and services which manage and protect against unauthorized access to
computer systems of corporate and government customers.
Principles of Consolidation
The consolidated financial statements include the accounts of VASCO
Data Security International, Inc. and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Foreign Currency Translation and Transactions
The financial position and results of operations of the Company's
foreign subsidiaries are measured using the local currency as the functional
currency. Accordingly, assets and liabilities are translated into U.S. dollars
using current exchange rates as of the balance sheet date. Revenues and expenses
are translated at average exchange rates prevailing during the year. Translation
adjustments arising from differences in exchange rates are included as a
separate component of stockholders' equity (deficit). Gains and losses resulting
from foreign currency transactions are included in the consolidated statements
of operations. Foreign exchange transaction losses aggregating $174,000,
$272,000 and $289,000 are included in other non-operating expense for 1998,
1999, and 2000, respectively.
Revenue Recognition
License Fees. Revenues from the sale of computer security hardware and
software are recorded upon shipment or, if an acceptance period is allowed, at
the later of shipment or customer acceptance. No significant obligations exist
with regard to delivery or customer acceptance at the time of recognizing
revenue.
Support Agreements. Support agreements generally call for the Company
to provide technical support and software updates to customers. Revenue on
technical support and software update rights is recognized ratably over the term
of the support agreement.
Consulting and Education Services. The Company provides consulting and
education services to its customers. Revenue from such services is generally
recognized during the period in which the services are performed.
Non-monetary Transaction. In October 2000, the Company entered into an
agreement to sell SnareWorks and Digipass products in the amount of $2,000,000
along with support agreements and consulting services of $450,000 to a U.S.
customer. At approximately the same time, VASCO entered into an agreement with
the same company to purchase products to be used internally for product
development and testing in an amount of $2,500,000. Although cash was exchanged
in these transactions, the Company treated these as non-monetary (barter)
transactions, in accordance with accounting principles generally accepted in the
United States of America. Revenue of $2,075,000 and deferred revenue of $375,000
were recorded during 2000. This represented 7% of total revenues for the year
and 19% of U.S. revenues. The purchased products were capitalized as software
and are being amortized over 36 months.
Prepaid Royalties
On March 25, 1998, the Company entered into a license agreement with
Lernout & Hauspie Speech Products N.V. pursuant to which the Company received a
five-year worldwide, non-exclusive, non-transferable license to use certain
speaker verification software in access control applications. For this license,
the Company agreed to pay a royalty of 10% of revenue associated with the
software plus royalty prepayments aggregating $800,000. On December 31, 1998,
the license was extended for an additional 5 years and the Company made royalty
prepayments to reach an aggregate of $1.7 million. Prepaid royalties amounted to
$1,700,000 and $1,487,500 at December 31, 1999 and 2000, respectively.
Amortization of the royalty prepayments commenced during the third quarter of
2000 and is being amortized over 42 months.
F-7
35
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets ranging from three to seven years. Additions and improvements are
capitalized, while expenditures for maintenance and repairs are charged to
operations as incurred. Gains or losses resulting from sales or retirements are
recorded as incurred, at which time related costs and accumulated depreciation
are removed from the accounts. `
Software Costs
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed". Research
and development costs, prior to the establishment of technological feasibility,
determined based upon the creation of a working model, are expensed as incurred.
The Company's policy is to amortize capitalized costs by the greater of (a) the
ratio that current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life of the product, generally two
to five years, including the period being reported on.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Fair Value of Financial Instruments
The following disclosures of the estimated fair value of financial
instruments are made in accordance with the requirements of SFAS No. 107,
"Disclosures and Fair Value of Financial Instruments." The estimated fair value
amounts have been determined by the Company using available market information
and appropriate valuation methodologies. The fair values of the Company's
financial instruments were not materially different from their carrying amounts
at December 31, 1999 and 2000, except for notes payable and long-term debt, for
which the fair values were not determinable.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the consolidated financial statements have been
reclassified to conform to the 2000 presentation.
Goodwill and Other Intangibles
Goodwill is amortized on a straight-line basis over the expected period
to be benefited, which is seven years. Other intangibles are amortized on a
straight-line basis and consist of software and hardware technology which is
being amortized over a period of four years and workforce and customer lists of
approximately $320,000 and $542,000 which are being amortized over a period of
seven years.
The Company periodically evaluates whether events and circumstances
that have occurred indicate that the remaining balance of goodwill and other
intangibles may not be recoverable or that the remaining estimated useful lives
may warrant revision. When such factors indicate that goodwill and other
intangibles should be evaluated for possible impairment, the Company uses an
estimate of undiscounted future cash flows to measure whether the goodwill and
other intangibles are recoverable.
F-8
36
Stock-Based Compensation
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which permits entities to recognize the compensation
expense associated with the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and provide pro forma disclosures as if the fair
value method defined in SFAS No. 123 had been applied. The Company has elected
to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosures required by SFAS No. 123.
Loss Per Common Share
Basic earnings per share is based on the weighted average number of
shares outstanding and excludes the dilutive effect of unexercised common stock
equivalents. Diluted earnings per share is based on the weighted average number
of shares outstanding and includes the dilutive effect of unexercised common
stock equivalents to the extent they are not anti-dilutive.
Shares issuable from securities that could potentially dilute basic
earnings per share in the future that were not included in the computation of
earnings per share because their effect was anti-dilutive were as follows:
1998 1999 2000
---- ---- ----
Stock options...................... 1,475,500 2,377,200 2,342,217
Warrants........................... 1,004,034 804,034 1,764,883
Convertible notes (June 1996)...... 416,667 416,667 -
Convertible notes (August 1997)*... 1,123,387 732,658 532,029
Convertible notes (March 1998)..... 528,048 - -
--------- --------- ---------
Total..................... 4,547,636 4,547,636 4,639,129
========= ========= =========
* Due to the contingent nature of the conversion feature of these notes, a
20-day average market price was used to calculate the number of potentially
dilutive shares.
Additionally, the net loss applicable to common stockholders for the
years ended December 31, 1998, 1999 and 2000 would have been decreased by adding
back interest expense related to the convertible notes of approximately
$1,394,000, $704,000 and $275,000, respectively.
NOTE 2 - ACQUISITIONS
Effective May 1, 1999, the Company acquired substantially all of the
assets of SecureWare SA and DMIC SA (SecureWare), as well as certain developed
software licenses from the founder of SecureWare in exchange for $738,735 in
cash (of which $151,203 was recorded in accrued liabilities at December 31,
1999) plus 174,575 shares of the Company's common stock, which had a market
value based upon the trading price of the common stock on the NASD Bulletin
Board ("Market Value") of approximately $650,000 at the time of the acquisition.
SecureWare, located in Bordeaux, France, is a software developer focusing on
developing security solutions for a number of operating systems.
The acquisition of SecureWare was accounted for under the purchase
method of accounting, and accordingly, the acquired assets have been recorded at
their estimated fair values at the date of acquisition. Purchased software
related to this transaction was $889,000 and is being amortized over a period of
5 years. Goodwill related to this transaction was $406,000 and is being
amortized over a period of 7 years.
On October 6, 1999, the Company acquired all of the outstanding
capital stock of IntelliSoft Corporation (IntelliSoft) in exchange for 1,812,078
shares of Common Stock which had a Market Value of approximately $7,250,000 at
the time of the acquisition. In addition, the Company paid $751,575 to
IntelliSoft dissenters to acquire their capital stock interests, which
represented 9.4% of the outstanding capital stock of IntelliSoft at the date of
the acquisition. The acquisition of these shares has
F-9
37
been treated as the purchase and retirement of common stock. IntelliSoft,
located in Acton, MA, specializes in developing true secure single sign-on, Web
authorization, PKI, VPN, and enterprise management solutions. This transaction
was accounted for under the pooling-of-interests method of accounting.
Accordingly, the consolidated financial statements have been restated as if
IntelliSoft had been combined for all periods presented.
At the end of August 2000, the Company acquired Invincible Data
Systems (IDS) in a transaction which has been accounted for under the
pooling-of-interests method. A total of 322,565 shares were issued in this
transaction, which is deemed immaterial.
NOTE 3 - INVENTORIES
Inventories, consisting principally of hardware and component parts,
are stated at the lower of cost or market. Cost is determined using the
first-in-first-out (FIFO) method.
Inventories are comprised of the following:
December 31,
-----------------------
1999 2000
---- ----
Component parts............................ $ 213,909 $ 451,487
Work-in-process and finished goods......... 591,473 660,264
---------- ----------
Total.................... $ 805,382 $1,111,751
========== ==========
NOTE 4 - ACCRUED EXPENSES
Accrued expenses are comprised of the following:
December 31,
-----------------------
1999 2000
---- ----
Accrued interest........................... $ 698,946 654,941
Accrued payroll............................ 268,455 709,899
Accrued royalties.......................... - 270,480
Other accrued expenses..................... 515,569 1,462,964
---------- ----------
Total.................... $1,482,970 $3,098,284
========== ==========
NOTE 5 - INCOME TAXES
At December 31, 2000, the Company has United States net operating loss
carryforwards approximating $12,500,000 and foreign net operating loss
carryforwards approximating $2,000,000. Such losses are available to offset
future taxable income in the respective jurisdictions and expire in varying
amounts beginning in 2002 and continuing through 2020. In addition, if certain
substantial changes in the Company's ownership are deemed to have occurred,
there would be an annual limitation on the amount of the U.S. carryforwards
which could be utilized.
Pretax loss from continuing operations was taxed in the following
jurisdictions:
For the Year Ended
December 31,
------------------------------------------
1998 1999 2000
---- ---- ----
Domestic............ (3,165,857) (1,809,920) $(4,148,166)
Foreign............. 70,847 (80,254) 526,640
----------- ----------- -----------
Total...... $(3,095,010) $(1,890,174) $(3,621,526)
=========== =========== ===========
F-10
38
The provision for income taxes consists of the following:
For the Year Ended
December 31,
------------------------------------------
1998 1999 2000
---- ---- ----
Current:
Federal............ $ - $ - $ -
State.............. (2,514) 2,632
Foreign............ 689,516 322,310 392,614
Deferred:
Federal............ $ - $ - $ -
State.............. - - -
Foreign............ - - -
----------- ----------- -----------
Total...... $ 687,002 $ 322,310 $ 395,246
=========== =========== ===========
The differences between income taxes computed using the statutory
federal income tax rate of 34% and the provisions for income taxes reported in
the consolidated statements of operations are as follows:
For the Year Ended
December 31,
-----------------------------------------------------
1998 1999 2000
---- ---- ----
Expected tax benefit at the statutory rate $ (1,052,303) $ (642,659) $ (1,231,023)
Increase (decrease) in income taxes resulting from:
Foreign taxes at rates other than 34%........................ 665,000 205,916 (4,243)
Change in valuation allowance primarily related to NOL....... 1,035,000 676,000 1,739,000
Nondeductible expenses....................................... 100,000 155,938 34,420
Other, net................................................... (60,695) (72,885) (142,908)
--------------- ---------------- ----------------
Total.......................................... $ 687,002 $ 322,310 $ 395,246
=============== ================ ================
The deferred income tax balances are comprised of the following:
December 31,
----------------------------------
1999 2000
---- ----
Deferred tax assets:
U.S. net operating loss carryforwards................ $ 3,519,000 $ 4,832,000
Foreign net operating loss carryforwards............. 582,000 800,000
Accounts receivable.................................. 35,000 89,000
Accrued expenses..................................... 16,000 12,000
Deferred revenue..................................... 43,000 257,000
Fixed assets......................................... 17,000 -
Other................................................ 5,000 -
--------------- ---------------
Total gross deferred income tax assets................. 4,217,000 5,990,000
Less valuation allowance............................... (4,121,000) (5,860,000)
--------------- ---------------
96,000 130,000
Deferred tax liabilities:
Fixed assets........................................ (13,000) (47,000)
--------------- ---------------
Net deferred income taxes.............................. $ 83,000 $ 83,000
=============== ===============
The net change in the total valuation allowance for the years ended
December 31, 1998, 1999 and 2000 was an increase of $1,035,000, $676,000 and
$1,739,000, respectively. In assessing the realizability of deferred tax assets,
the Company considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the period in which these temporary differences become deductible. This
assessment was performed considering the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies. The
Company has determined that it is more likely than not that
F-11
39
$83,000 of deferred tax assets will be realized. The remaining valuation
allowance of $5,860,000 is maintained on deferred tax assets which the Company
has not determined to be more likely than not realizable as of December 31,
2000. This valuation allowance will be reviewed on a regular basis and
adjustments made as appropriate.
NOTE 6 - DEBT
Debt consists of the following:
December 31,
----------------------------------
1999 2000
---- ----
Convertible stockholder note, interest payable at 9% (see Note 8).... $ 5,000,000 $ -
Convertible note, interest payable at 3.25%.......................... 3,400,000 3,400,000
Installment notes payable............................................ 648,184 726,108
--------------- ----------------
9,048,184 4,126,108
Less current maturities.............................................. (639,322) (362,250)
--------------- ----------------
Long-term debt....................................................... $ 8,408,862 $ 3,763,858
=============== ================
In August 1997, the Company renegotiated the guarantee related to the
final payment for the 1996 acquisition of Digipass into a term loan in the
amount of $3.4 million. The note matures on September 30, 2002 and bears
interest at a rate of 3.25%. In the event a public offering is completed, the
lender may at its option require the principal amount of the loan to be repaid
in cash, in which case the Company must pay additional special interest in the
amount of $680,000 which is accrued at December 31, 2000.
Aggregate maturities of debt at December 31, 2000 are as follows:
2001............................................................ $ 362,250
2002............................................................ 3,763,858
---------------
Total................................................. $ 4,126,108
===============
Interest expense to stockholders was $497,795, $450,000 and $165,000
for the years ended December 31, 1998, 1999 and 2000, respectively.
NOTE 7 - STOCKHOLDERS' EQUITY
Preferred Stock
In July 2000, the Company issued 150,000 shares of preferred stock for
cash of $15,000,000. The preferred stock is convertible into 1,052,632 shares of
common stock at any time over the next 48 months. In conjunction with this
financing, the company issued warrants to purchase 789,474 common shares at $15
per share with an estimated imputed value using the Black-Scholes pricing-model
of approximately $4.1 million and warrants to purchase 480,000 shares at $4.25
per share with an estimated imputed value using the Black-Scholes pricing-model
of approximately $4.7 million. The warrants issued at $15 per share are
immediately exercisable. The warrants issued at $4.25 are execisable over 48
months and the related imputed value is being accreted reducing earnings
available to common stockholders. In September 2000, 30,000 warrants at $4.25
per share were exercised.
Common Stock
In 2000, the Company issued 435,910 shares of common stock to convert a
$5,000,000 note and related accrued interest. In September, the Company issued
322,565 shares of common stock as part of the acquisition of Invincible Data
Systems.
F-12
40
Also in 2000, the Company issued 342,400 shares of common stock as a
result of the exercise of options under the Company's stock compensation plan
(see Note 8) generating total proceeds of $557,213; 303,625 shares of common
stock were issued as a result of the exercise of the warrants, generating total
proceeds of $1,724,717.
During 1999, the Company issued 158,000 shares of common stock as a
result of the exercise of options under the Company's stock option plan (see
Note 8) generating total proceeds of $44,225; 200,000 shares of common stock
were issued as a result of the exercise of the warrants generating total
proceeds of $50,000.
Warrants
Warrant activity for the years ended December 31, 1998, 1999 and 2000 are
summarized below:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE EXERCISE PRICE
-------------- --------------
Outstanding at January 31, 1997.... 1,056,922 $ 4.85 $ .25 - 10.00
Granted............................ 5,000 5.19 5.19
Exercised.......................... (57,888) 5.19 5.19
Canceled........................... - - -
---------
Outstanding at December 31, 1998... 1,004,034 4.83 .25 - 10.00
Granted............................ - - -
Exercised.......................... (200,000) .25 .25
Canceled........................... - - -
---------
Outstanding at December 31, 1999... 804,034 5.97 4.00 - 10.00
Granted............................ 1,269,474 10.94 4.25 - 15.00
Exercised.......................... (303,625) 5.68 4.00 - 10.00
Canceled........................... (5,000) 5.19
--------- ------ ---------------
Outstanding at December 31, 2000... 1,764,833 $ 9.59 $ 4.25 - 15.00
========= ====== ===============
Exercisable at December 31, 2000... 1,344,833 $ 9.59 $ 4.25 - 15.00
========= ====== ===============
NOTE 8 - STOCK COMPENSATION PLAN
The Company's 1997 Stock Compensation Plan, as amended, ("Compensation
Plan") is designed and intended as a performance incentive. The Compensation
Plan is administered by the Compensation Committee as appointed by the Board of
Directors of the Company (Compensation Committee).
The Compensation Plan permits the grant of options to employees of the
Company to purchase shares of common stock and is intended to be a nonqualified
plan. All options granted to employees are for a period of ten years, are
granted at a price equal to the fair market value of the common stock on the
date of the grant and are typically vested 20% on the first anniversary of the
grant, with an additional 20% vesting on each subsequent anniversary of the
grant. Alternative vesting schedules include either date or event-based vesting.
The Compensation Plan further permits the grant of options to
directors, consultants and other key persons (non-employees) to purchase shares
of common stock. All options granted to non-employees are granted at a price
equal to the fair market value of the common stock on the date of the grant, and
may contain vesting requirements and/or restrictions as determined by the
Compensation Committee at the time of grant. Non-cash compensation expense of
$501,743 was recognized in 2000 in accordance with FIN 44, "Accounting for
Certain Transactions Involving Stock Compensation", an interpretation of
Accounting Principles Board Opinion No. 25. This charge was attributed to stock
options issued to officers of the Company who are located outside the U.S. and
whose services are rendered under consulting agreements.
F-13
41
As of December 31, 2000, the Compensation Plan was authorized to issue
options representing up to 5,573,317 shares of the Company's common stock. The
authorized shares under the Compensation Plan represent 20% of the issued and
outstanding shares of the Company.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Compensation Plan. Had compensation cost for the Compensation
Plan been determined consistent with SFAS No. 123, the Company's net loss
available to common stockholders and net loss per common share would have been
the pro forma amounts indicated below:
For the Year Ended December 31,
---------------------------------------------------------
1998 1999 2000
---- ---- ----
Net loss available to common stockholders:
As reported................................... $ (3,782,012) $ (2,212,484) $ (4,743,764)
Pro forma..................................... (4,126,931) (2,789,233) (5,261,025)
Net loss per common share-basic and diluted:
As reported................................... $ (0.17) $ (0.09) $ (0.17)
Pro forma..................................... (0.18) (0.11) (0.19)
For purposes of calculating the compensation cost consistent with SFAS
No. 123, the fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1999 and 2000: dividend yield of 0%;
expected volatility of 50%; risk free interest rates ranging from 4.00% to
6.80%; and expected lives of five years.
The following is a summary of activity under the Compensation Plan:
Options Outstanding Options Exercisable
------------------------- -------------------
Weighted Weighted Weighted Average
Number Average Number Average Fair Value of
of Shares Price of Shares Price Options Granted
---------- -------- --------- ------ ---------------
Outstanding at December 31, 1997........ 1,945,257 $ 1.85 1,460,629 $1.29
Granted................................. 245,250 5.09 $2.55
Exercised............................... (658,257) 0.18
Forfeited............................... (56,750) 4.25
---------- --------
Outstanding at December 31, 1998........ 1,475,500 3.05 1,088,375 2.48
Granted................................. 1,174,000 3.13 $1.58
Exercised............................... (158,000) 0.28
Forfeited............................... (114,300) 4.01
---------- --------
Outstanding at December 31, 1999........ 2,377,200 3.23 1,074,138 3.04
Granted................................. 560,000 11.29 $5.82
Exercised............................... (342,400) 1.63
Forfeited............................... (252,583) 5.08
---------- --------
Outstanding at December 31, 2000........ 2,342,217 $ 5.30 984,775 $3.71
========== ======== ========= =====
F-14
42
The following table summarizes information about stock options
outstanding at December 31, 2000:
Options Outstanding Options Exercisable
---------------------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices of Shares Contractual Life Price of Shares Price
------------------------ ---------- ---------------- -------- --------- --------
$8.50 - 23.00.................. 541,250 9.36 years $11.22 - -
$2.50 - 7.25................... 1,698,467 7.27 years $ 3.73 882,275 $ 4.12
$0.1875 - 0.25................. 102,500 2.27 years $ 0.20 102,500 $ 0.20
---------- ---------
2,342,217 984,775
========== =========
NOTE 9 - EMPLOYEE BENEFIT PLAN
The Company maintains a contributory profit sharing plan established
pursuant to the provisions of Section 401(k) of the Internal Revenue Code, which
provides benefits for eligible employees of the Company. The Company made no
contributions to the plan during the years ended December 31, 1998, 1999 and
2000.
NOTE 10 - GEOGRAPHIC AND CUSTOMER INFORMATION
During 1998, 1999 and 2000, sales to one customer from the Company's
United States operations (a reseller of the Company's product in the
Netherlands) aggregated approximately $1,950,000, $3,533,000 and $2,844,616
respectively, representing 12%, 18% and 10% of the total revenues, respectively.
Accounts receivable from this customer represented 30% and 18% of the Company's
gross accounts receivable balance at December 31, 1999 and 2000, respectively.
The Company allocates revenue based on the location of the country
which initiates the sale. Information regarding geographic areas for the year
ended December 31, 1998 is as follows:
United States Belgium Total
------------- ----------- -----------
Revenue.................. $ 4,269,000 $12,231,000 $16,500,000
Gross profit............. 2,870,000 6,421,000 9,291,000
Long-lived assets ....... 207,000 183,000 390,000
Information regarding geographic areas for the year ended December 31,
1999 is as follows:
United States Belgium France Total
------------- ----------- ----------- -----------
Revenue.................. $ 7,188,000 $12,015,000 $ 194,000 $19,397,000
Gross profit............. 5,081,000 6,899,000 111,000 12,091,000
Long-lived assets ....... 331,000 810,000 49,000 1,190,000
Information regarding geographic areas for the year ended December 31,
2000 is as follows:
United States Belgium France Total
------------- ----------- ----------- -----------
Revenue.................. $ 11,065,000 $16,831,000 $ 170,000 $28,066,000
Gross profit............. 8,846,000 9,060,000 91,000 17,997,000
Long-lived assets ....... 2,906,000 836,000 56,000 3,798,000
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under operating lease
agreements expiring at various times thru 2010.
Future minimum rental payments required under noncancelable leases are
as follows:
F-15
43
Year Amount
---- ---------------
2001........................................ $ 715,260
2002........................................ 683,907
2003........................................ 599,543
2004........................................ 562,536
2005........................................ 345,200
Thereafter.................................. 411,453
---------------
$ 3,317,899
===============
Rent expense under operating leases aggregated approximately $357,000,
$434,000 and $693,344 for the years ended December 31, 1998, 1999 and 2000,
respectively.
From time to time, the Company has been involved in litigation
incidental to the conduct of its business. Currently, the Company is not a party
to any lawsuit or proceeding which, in management's opinion, is likely to have a
material adverse effect on its business, financial condition or results of
operations.
NOTE 12 - SUBSEQUENT EVENTS
On February 2, 2001, the Company entered into a Letter of Intent to
purchase all of the outstanding stock of Identikey, Ltd., a software company
headquartered in Brisbane, Australia. The terms of the agreement provide for an
initial purchase price of 406,667 shares of common stock and a contingent
purchase price of additional shares of common stock based on targeted sales over
a 15 month period. The maximum number of additional shares that can be earned is
based upon $12,750,000 and a price of the greater of 80% of the average closing
price of the stock for the 10 days preceding the end of the measurement period,
or $7.50 per share. The revenues of Identikey, Ltd., for the year 2000 were
immaterial in relation to the Company's revenues. The transaction is expected to
close by April 2001 and will be accounted for under the purchase method.
F-16
44
SCHEDULE II
VASCO DATA SECURITY INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
Bad Debt
Allowance for Doubtful Accounts Beginning Expense Accounts Ending
For Trade Accounts Receivable Balance (Recovery) Written Off Balance
- ----------------------------- --------- ---------- ----------- --------
Year ended December 31, 1998......... $ 429,000 $ (272,000) $ (102,000) $ 55,000
Year ended December 31, 1999......... 55,000 65,216 - 120,216
Year ended December 31, 2000......... 120,216 195,161 (29,000) 286,377
Obsolescence
Beginning Expense Inventory Ending
Reserve for Obsolete Inventories Balance (Recovery) Written Off Balance
- -------------------------------- --------- ---------- ----------- --------
Year ended December 31, 1998......... $ 164,000 $ 35,000 $ (70,000) $129,000
Year ended December 31, 1999......... 129,000 (36,000) (93,000) -
Year ended December 31, 2000......... - 109,000 (109,000) -
F-17
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 28, 2001.
VASCO Data Security International, Inc.
/s/ Mario R. Houthooft
---------------------------------------
Mario R. Houthooft
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
in the capacities indicated on April 15, 1999.
POWER OF ATTORNEY
Each of the undersigned, in his capacity as an officer or director, or
both, as the case may be, of VASCO Data Security International, Inc. does hereby
appoint Mario Houthooft, and each of them severally, his true and lawful
attorneys or attorney to execute in his name, place and stead, in his capacity
as director or officer, or both, as the case may be, this Annual Report on Form
10-K for the fiscal year ended December 31, 2000 and any and all amendments
thereto and to file the same with all exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission. Each of said
attorneys shall have power to act hereunder with or without the other attorney
and shall have full power and authority to do and perform in the name and on
behalf of each of said directors or officers, or both, as the case may be, every
act whatsoever requisite or necessary to be done in the premises, as fully and
to all intents and purposes as to which each of said officers or directors, or
both, as the case may be, might or could do in person, hereby ratifying and
confirming all that said attorneys or attorney may lawfully do or cause to be
done by virtue hereof.
SIGNATURE TITLE
/s/ Mario R. Houthooft Chief Executive Officer and President
- ------------------------------------- and Director
Mario R. Houthooft (Principal Executive Officer)
/s/ T. Kendall Hunt Chairman and Executive Vice-President
- -------------------------------------
T. Kendall Hunt
/s/ Dennis D. Wilson Chief Financial Officer
- ------------------------------------- Principal Financial Officer
Dennis D.Wilson and Principal Accounting Officer
/s/ Christian Dumolin Director
- -------------------------------------
Christian Dumolin
/s/ Michael P. Cullinane Director
- -------------------------------------
Michael P. Cullinane
/s/ Pol Hauspie Director
- -------------------------------------
Pol Hauspie
/s/ Forrest D. Laidley Director
- -------------------------------------
Forrest D. Laidley
/s/ Michael A. Mulshine Director
- -------------------------------------
Michael A. Mulshine