Document/Exhibit Description Pages Size
1: 10-K Annual Report 90 374K
2: EX-3.2 Articles of Incorporation/Organization or By-Laws 13 46K
3: EX-10.44 Material Contract 16 53K
4: EX-10.45 Material Contract 14 50K
5: EX-10.46 Material Contract 2 10K
6: EX-21 Subsidiaries of the Registrant 1 5K
7: EX-27 Financial Data Schedule (Pre-XBRL) 1 6K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
__________TO __________
Commission file number __________
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: None
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 No X*
* The registrant has been subject to such filing
requirements since February 9, 1998.
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.
N/A
As of May 4, 1998, 20,316,585 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 registrant's
Common Stock as reported on the Over-the-Counter Bulletin Board on
May 4, 1998) held by non-affiliates of the registrant was $41,071,350
(6,845,225 shares 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
June 15, 1998 are to be incorporated by reference into Part III of
this Form 10-K.
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 the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 concerning,
among other things, the prospects, developments and business
strategies for the Company (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. See Subparagraph d. of
Item 1 _ "Factors That May Affect Future Results."
Item 1 - Description of Business
a. General Development of Business
(i) General
VASCO Data Security International, Inc., a Delaware corporation
(the "Company" or "VASCO"), was incorporated on July 15, 1997. Its
executive office is located at 1901 South Meyers Road, Suite 210,
Oakbrook Terrace, Illinois 60181; (630) 932-8844. On March 20, 1998,
the Company's Common Stock, $.001 par value per share (the "Common
Stock") was approved for trading on the Over-the-Counter Bulletin
Board system with the symbol: VDSI.
This report contains the following trademarks of the
Company, some of which are registered: VASCO, AccessKey, VACMan
Server and VACMan/CryptaPak, AuthentiCard and Digipass.
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.
(ii) 1998 Reorganization - Exchange Offer
The Company was organized in 1997 as a subsidiary of VASCO
Corp., a Delaware corporation ("VASCO Corp."). Pursuant to an
exchange offer (the "Exchange Offer") by the Company for securities
of VASCO Corp. that was completed March 11, 1998, the Company
acquired 97.7% of the common stock of VASCO Corp. Consequently,
VASCO Corp. is now a subsidiary of the Company, with the remaining
2.3% of VASCO Corp. shareholders representing a minority interest.
For the purposes of the discussion of the general business of
the Company below, references to the "Company" shall refer to VASCO
Corp. for periods prior to March 11, 1998, the date on which VASCO
Corp. became a 97.7% owned subsidiary of VASCO.
(iii) Prior Organizational History
The Company is essentially a holding company that conducts its
business through operating subsidiaries in the United States and
Europe.
The Company presently has two operating subsidiaries. VASCO Data
Security, Inc. ("VDS"), a Delaware corporation headquartered in
Oakbrook Terrace, Illinois, is owned directly by VASCO Corp. The
Company's other operating subsidiary, VASCO Data Security NV/SA
("VDS NV/SA"), is a Belgian corporation headquartered in a suburb of
Brussels, Belgium. VDS NV/SA is owned by VASCO Corp.'s European
holding company subsidiary, VASCO Data Security Europe SA ("VDSE").
VDS and VDS NV/SA are engaged in the design, development, marketing
and support of open standards-based hardware and software based
security systems which manage and secure access to data and also
provide products that permit their customers to encrypt data.
[Organization Chart appears here]
* All share are held by the parent corporation, except that shares
representing less than 1% are held by T. Kendall Hunt.
VDS. In November 1989, a Utah corporate predecessor of VASCO
Corp. acquired an option to purchase a controlling interest in
ThumbScan, Inc. ("ThumbScan"). VASCO Corp. acquired a controlling
interest in ThumbScan in January 1991, and in December 1991 VASCO
Corp. increased its holdings in ThumbScan. VASCO subsequently
acquired the remaining shares of ThumbScan. In July 1993, ThumbScan
was renamed VASCO Data Security, Inc.
VDS NV/SA. VASCO Data Security NV/SA ("VDS NV/SA") is a
combination of two European companies (Lintel Security NV and
Digipass SA) acquired by VASCO Corp., through VDSE, in 1996, and
accounts for a substantial portion of VASCO Corp.'s consolidated
revenues.
Acquisition of Lintel Security. In 1996, VASCO Corp. began a
significant expansion of its computer security business by acquiring
a 15% interest in Lintel Security NV ("Lintel Security"). Lintel
Security, a newly formed Belgian corporation, concurrently purchased
from Lintel NV, a Brussels, Belgium based company, certain assets
associated with the development of security tokens and security
technologies for personal computers ("PCs"), computer networks and
telecommunications systems using Data Encryption Standard ("DES") and
Rivest, Shamir, Adelman ("RSA") cryptographic algorithms. VASCO Corp.
acquired the remaining 85% of Lintel Security in June 1996. At the
time of acquisition of Lintel NV's assets by Lintel Security,
Lintel NV was a competitor of VASCO Corp. in Europe. The purchase
price paid for Lintel Security was approximately $4.4 million, and
was paid in cash, shares of VASCO Corp. common stock, and VASCO Corp.
warrants and convertible notes.
Acquisition of Digipass. In July 1996, VASCO Corp. acquired the
stock of Digipass SA ("Digipass") for an aggregate purchase price of
$8.2 million. Digipass, based in a suburb of Brussels, was also a
developer of security tokens and security technologies for PCs,
computer networks and telecommunications systems using the DES
cryptographic algorithm. At the time of acquisition, Digipass was a
competitor of VASCO Corp. in Europe.
Prior to VASCO Corp.'s acquisition of Digipass, certain assets
and liabilities of the interactive voice response ("IVR") business of
Digiline SA, an integrator of IVR products based in Belgium, were
transferred to Digipass. Digipass' IVR products were used primarily
in telebanking applications and incorporate authentication and access
control technology. During 1997, VDS NV/SA entered into an agreement
to sell the IVR business to Siemens Societe Anonyme for approximately
$200,000.
In January 1997, Digipass changed its name to "VASCO Data
Security NV/SA." Concurrent with this event Lintel Security's
operations were consolidated with those of VDS NV/SA at a single
location near Brussels.
VASCO Corp.'s original business was providing consulting,
training and software services to companies and government agencies.
These services were marketed as VASCO Performance Systems ("VPS"). In
1996, management determined that VASCO Corp. should focus its
energies and resources on the data security industry, where it
believed significant growth and profit potential existed.
Accordingly, on August 20, 1996, VASCO Corp. sold the assets of VPS
to Wizdom Systems, Inc. and withdrew from the consulting and
technical training business.
b.1 Financial Information about Industry Segments
During each of the last three fiscal years, the Company has
operated in only one industry segment.
b.2 Financial Information Relating to Foreign and Domestic
Operations and Export Sales
See Note 10 to VASCO CORP. Notes to Consolidated Financial
Statements for certain information about foreign and domestic
operations and export sales.
c. Narrative Description of Business
(i) General
The Company designs, develops, markets and supports open
standards-based hardware and software security systems which manage
and secure access to information assets. The Company's hardware
products include time-synchronous response only, challenge/response
and time-synchronous challenge/response user authentication devices,
some of which incorporate an electronic digital signature feature to
guarantee the integrity of data transmissions. These devices are
commonly referred to as security tokens.
The Company's security tokens are based upon its core encryption
technology, which utilizes two widely known and accepted algorithms,
DES and RSA. The Company's Cryptech division produces high speed
hardware and software encryption products used both internally for
its security tokens and for original equipment manufacturers ("OEM")
vendors requiring real time encryption services. In addition, the
Company has introduced a smartcard security token that uses the
challenge/response mode and the X.509 certificate authentication
standard.
The Company's security tokens are designed to be used with the
VASCO Access Control Manager ("VACMan") server software or to be
integrated directly into applications. Together, the Company's
software and hardware products provide what it believes is an
economical state-of-the-art authentication, authorization and
accounting security system.
The Company had sold over 2.0 million security token devices,
its primary product line, as of December 31, 1997. The Company's
security products are sold primarily to value-added resellers and
distributors, and to a lesser extent end-users.
The Company has embarked upon an aggressive campaign to expand
its distributor and reseller network. Distributors and resellers that
have entered into agreements with the Company's operating
subsidiaries include, among others, Concord-Eracom Nederland BV,
Protect Data Norge AS, Sirnet AB, All Tech Data Systems, Inc., Clark
Data Systems, Inc., HUCOM, Inc. and SEI Information Technology.
Representative end-users of the Company's products include
ABN-AMRO Bank, Generale Bank, Banque Paribas Belgique S.A., Rabobank,
S-E Banken, AMP Inc., Volvo Data North America, Inc., France Telecom,
Manitoba Telephone, Andrew Corp., and Molson Breweries.
(ii) Industry Background
The Data Security Industry. The increasing use and reliance
upon proprietary or confidential data by businesses, government and
educational institutions that is accessible remotely by users,
together with the growth in electronic commerce, has made data
security a paramount concern. The Company believes that data security
concerns will spur significant growth in the demand for both
enterprise and consumer security solutions.
Enterprise Security. With the advent of personal computers and
distributed systems in the form of wide area networks ("WANs"),
intranets which connect users in disparate facilities, local area
networks ("LANs"), which connect users located in a single facility
and the public network known as the Internet/World Wide Web (the
"Internet"), and 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. As a result of the increased number of users having
direct and remote access to enterprise networks and data, including a
growing number of mobile computer users and telecommuters that
perform some or all of their work from home or other remote
locations, data has become increasingly vulnerable to unauthorized
access.
Unauthorized access can range from users who are authorized to
access portions of an enterprise's computing resources accessing
unauthorized portions, to hackers who have no legitimate access
breaking into a network and stealing or corrupting data. The
consequences of such unauthorized access, which can often go
undetected, can range from theft of proprietary information or other
assets to the alteration or destruction of stored data. As a result
of unauthorized access stemming from the increased use of
enterprise-wide computing and remote access, network security has
become a primary concern to most companies that use and rely on data.
This increased attention to data security has stimulated demand for
data security products. The Company believes that enterprises are
seeking solutions which will continue to allow them to expand access
to data while maintaining adequate security.
Consumer Security. In addition to the need for enterprise-wide
security, the proliferation of PCs in both home and office, combined
with widespread access to the Internet, have created significant
opportunities for electronic commerce such as electronic bill
payment, home banking and home shopping. All of these activities are
primarily based on the use of the Internet and, according to
published reports, the growth in the number of Internet users
worldwide is expected to increase from approximately 28 million in
1996 to approximately 175 million by the end of 2001.
The public generally perceives that there is a risk involved in
using credit cards to make purchases via the Internet and this
perception has hampered the development of consumer-based electronic
commerce. Accordingly, the Company believes that successful expansion
of electronic commerce requires the implementation of improved
security measures, which accurately identify users and reliably
encrypt data transmissions over the Internet. This is particularly
true in North America, which has generally lagged behind Europe in
this area.
(iii) Products
(A) Current Data Security Solutions
Data security and secured access to on-line commerce generally
consist of five 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 was 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: Includes firewalls, which limit a user's
access to data to only that data which he or she is authorized
to access, and authorization and accounting systems, which also
limit access to data and keep track of a user's activities after
access has been granted.
Anti-Virus: Programs that scan for and, in many cases,
remove destructive computer programs known as computer viruses
that can become imbedded into programs residing on a computer.
Administration and Management Tools: Set, implement and
monitor 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
these five components. However, most companies only implement a
patchwork combination of these components, which can result in their
security systems being compromised.
Historically, the Company's primary products have been security
tokens. Security tokens are an integral part of identification and
authentication systems, which in turn serve as the foundation for
each of the five components of data security outlined above. The
Company has sought to leverage its identification and authentication
expertise by expanding its product offerings to include the other
components of data security, in each case incorporating the Company's
security tokens. The Company has sought to expand its product
offerings to reach its ultimate goal of supplying a full range of
security products for integrated, enterprise-wide security solutions,
which will meet the needs of the emerging data security market.
Identification and Authentication. Identification and
authentication systems provide the foundation for security systems by
validating the identity of each user attempting to access information
or data contained in a system, regardless of location. The most
common use of an identification and authentication device is to
authenticate local and remote users who have established a network
connection to a company's computer network. Authentication is often
done in conjunction with a firewall to authenticate internal users of
stand-alone PCs on networks or to authenticate customers and
suppliers who have been granted access to a restricted portion of the
company's data or other information.
There are three basic methods used to authenticate a user. The
first method identifies who the user is, utilizing a hard-to-forge
physical attribute such as the user's fingerprints, voice patterns or
eye retina patterns. In each case, the physical attribute, or
biometric, must be capable of being scanned and converted to a
digital document. While biometric devices offer a high level of
authentication, they are susceptible to replay attacks. Replay
attacks collect samples of a user's biometric "print" (i.e., voice,
finger, retina) and then replay the "print" to access a target
system. Furthermore, current technology requires additional hardware
to acquire, or read, the biometric "print." The added hardware
presents two challenges for biometric solutions: one is the cost and
the second is installation and maintenance.
The second authentication method is identifying what the user
knows, usually a password known only to the specific user. Passwords,
while easy to use, are also the least secure because they tend to be
short and static, and are often transmitted without encryption
("clear text"). As a result, passwords are vulnerable to decoding or
observation and subsequent use by unauthorized persons. Once a user's
password has been compromised, the integrity of the entire computer
network can be compromised.
The third authentication method identifies what the user has,
generally a physical device or token intended for use by that
specific user. Tokens are small devices ranging from simple credit
card-like devices to more complex devices capable of generating
time-synchronized challenge/response access codes. Early examples of
simple tokens include building access passes.
Certain token-based systems require both possession of the token
itself and a PIN to indicate that the token is being used by an
authorized user. Such an approach, referred to as two-factor
authentication, provides much greater security than single factor
systems such as passwords or simple possession of a token. Early
implementations of two-factor authentication include automatic teller
machine ("ATM") cards. ATM cards require the user to possess the card
and to know the PIN before engaging in the transaction. The Company
believes that the use of the two-factor authentication system is the
optimal solution for reliable computer and network security and has
targeted its products toward this end.
Security Tokens. A security token is a small, portable
computing device designed to generate a one-time password. They are
normally difficult to counterfeit and are assigned to an individual
user. The user transmits a token-generated password, along with an
assigned user ID, to a host or authentication server, requesting
access, generally to a network. Token-generated passwords are derived
from a secret key or seed value. An authentication server on the
network receives and decrypts the token password with a corresponding
decryption key, validates the user, and (if validated) grants access.
Currently available security tokens are event-based,
time-synchronous, response only or challenge/response based.
Event-based tokens have the same list of predetermined passwords
as the authentication server. Passwords are generated by the token in
a predetermined manner, which is expected by the server, and the
passwords remain valid for indefinite periods of time. As a result of
the passwords being generated from a predetermined list and their
ease of calculation by unauthorized users, event-based tokens are the
easiest to compromise.
Time-synchronous tokens require the authentication server and
the token to be password time-synchronous. When used, the token will
calculate and display a password using a stored secret seed value and
the current time of day. The server then determines whether the
password received is correct for the time frame that it was used in.
The principal drawbacks for time-synchronous tokens are extensive
maintenance with respect to clock synchronization and the possibility
of multiple uses within the specified time frame. Usually, steps are
taken to limit the re-use of a password, however, when a
time-synchronous token is defined to multiple authentication servers,
a common practice, then there is a risk of a password being re-used
to access other servers. Nevertheless, these devices provide a higher
level of security than event-based tokens.
Response only tokens use either an "event" or time to calculate
the response only password. Response only tokens require the user to
activate the token and read the password.
Challenge/response tokens provide the highest level of security.
The authentication server responds to a request for access by issuing
a randomly generated challenge in the form of a numeric or
alphanumeric sequence. The token, using its embedded seed value, or
key, encrypts the challenge. The result is an encrypted response
which the user then transmits back to the authentication server via
the user's PC keyboard. The server in turn retrieves the key that has
been assigned to that user and decrypts the user's response. Assuming
a match exists, the server authenticates the user and grants access.
As with time-synchronous tokens, challenge/response tokens do
not transmit an encryption key. However, unlike time-synchronous
tokens, passwords of challenge/response tokens are one-time passwords
that can never be re-used. In addition, there is no opportunity to
initiate a second, illegal session with a challenge/response token.
Each attempt at access is accompanied by a new challenge and a
correspondingly unique password response.
Although challenge/response tokens generate true one-time
passwords, it is possible to compromise the internal seed value of
pure challenge/response tokens that only use the seed value and the
challenge to calculate the response.
Time synchronous challenge/response tokens can be used to add
another variable in the calculation of the one-time password. In
addition to the secret seed value and the challenge from the host
server, the time of day can be used. Because there is a challenge,
the time synchronization does not have to be nearly as exact as with
time-synchronous tokens. When time is used as an input variable for
challenge response tokens, it is impossible, with today's most
advanced computers, to use dictionary attacks to compromise the
token.
Smartcards. Smartcards are credit card sized devices that
contain an embedded microprocessor, memory and secure operating
system. Smartcards have been used in many applications, for example,
as stored value cards, either for making general purchases or for
specific applications such as prepaid calling cards, and as health
care cards, which are used to store patient and provider information
and records. Major smartcard chip and card manufacturers include
Gemplus SA, Schlumberger Ltd., Philips Electronics N.V., Siemens A.G.
and Groupe Francois Charles Oberthur (FCO). These vendors, together
with cryptographic vendors, have worked to make smartcard standards
compatible with cryptographic standards to offer a security solution
with authentication and digital signature capabilities.
(B) The Company's Solution
To date, most approaches to network security have been limited
in scope and have failed to address critical aspects of data
security. The Company believes that the computer security industry is
moving away from incremental or point solutions to enterprise-wide,
fully integrated solutions. The Company believes that an effective
enterprise-wide solution must address and assimilate issues relating
to the following: ease of use and administration, reliability,
interoperability with heterogeneous enterprise environments and
existing customer applications, and scaleability. The Company also
believes that in order to capitalize on this growing market need for
enterprise-wide security solutions, network security products must
embody both hardware and software components and provide an
industry-accepted, open standards-based solution.
Accordingly, the Company has adopted the following approach to
data security:
(i) In designing its products, it has sought to
incorporate all industry-accepted, open, non-proprietary, remote
access protocols, such as RADIUS and TACACS+. This permits
interoperability between the Company's security token products
and leading remote access servers.
(ii) It has incorporated the two most widely known and
accepted algorithms _ the DES and RSA algorithms _ into its
products and has sought to refine its offering of
single-function, multi-function, challenge/response, response
only and digital signature security token products. The Company
believes that its combination of software and hardware products
provide security with added speed, cryptographic functionality,
reliability and flexibility not attainable with software-only
programs. Its products provide two-factor authentication
requiring the authorized user to possess both the token and the
appropriate PIN.
(iii) In addition to providing identification and
authentication features in its security products, the Company
has included in its security systems accounting and auditing
features that allow customers to track and analyze all user
access and attempted access to network systems. This permits
easier customer implementation and monitoring of corporate
security policies.
(iv) The Company has designed its security systems to
support various platforms _ such as Windows NT _ thereby
allowing customers to ensure the same security for remote users
as is provided to office-based users.
(v) The Company has sought to design products that are easy
to use and competitively priced. It also is increasing its
customer support capabilities to ensure the smooth installation
and maintenance of its systems.
As a result of this approach, the Company believes it has
positioned itself to market a new generation of open standards-based
hardware and software security systems, including those designed to
provide security to Internet users, and it intends to continue to
grow to provide a full range of identification and authentication and
other security products. See "The Company's Strategy" below.
Security Token Products. Generally, the Company's
challenge/response tokens work as follows: when a user logs onto a
computer or enters a program or network with a user ID, the computer
generates a numeric or alphanumeric challenge and displays both the
challenge and a flashing bar pattern on the terminal screen. The user
holds a token up to the flashing pattern on the screen, and the token
reads and interprets the pattern and then displays a unique, or
one-time, password on its liquid crystal display. The user then
enters this password on the computer keyboard and, if a match exists,
access to the computer, program or network is granted. If the
terminal screen is not able to display a flashing bar pattern, the
user can enter the numeric or alphanumeric challenge into the keypad
on the token. PIN protected, break-in attempts to unlock the key are
tracked by the token internally. After a pre-programmed number of
invalid attempts, the token will be locked out of the system for a
specified period of time.
Some of the Company's products also are able to perform "digital
signatures" for applications which require proof that a transaction
was authorized. A combination of numbers from the transaction are
entered into a token which produces an encrypted number that only
that specific token, and the information from the transaction, could
have created. This number is then entered as part of the transaction,
acting as a digital signature authorizing the transaction.
The Company's security tokens include AccessKey II and
AuthentiCard, each an optical, hand-held challenge/response security
token with a liquid crystal display and numeric keypad that generates
a unique password each time it is used, and Digipass, a
time-synchronous response only token that generates a one-time
password, to authenticate users of PCs and networks and to verify
data transmissions by electronic signature. In early 1998, the
Company began full production and shipping of its Digipass 300, which
is an optical, hand-held multiple-mode security token capable of
operating in time-synchronous response only, challenge/response and
time synchronous challenge/response modes and of performing digital
signature functions.
Smartcards are also emerging as viable security devices. The
Company recently announced a new smartcard product, VACMan/CryptaPak,
that combines two authentication standards on one smartcard.
VACMan/CryptaPak is a standards based smartcard solution that secures
Internet applications based on the X.509 authentication standard and
also secures remote dial-in access based on the RADIUS authentication
standard. It includes a smartcard, smartcard reader and software that
enables Netscape Communications Corporation's Communicator to
authenticate users via the X.509 certificate standard and software
that enables remote dial-in users to be authenticated via the RADIUS
authentication standard. See "The Company's Security Products" below.
Encryption Products. Hardware encryption product offerings from
the Company include DES and RSA microprocessor chips that perform
algorithmic functions for use in, among other things, ATMs, fax
machines, modems and security servers. The Company's DES and RSA
chips are also the central component of its PC DES/RSA Cards, which
are printed circuit boards that enable software applications to
provide encryption security. The Company also has acquired a
software encryption application, Point 'n Crypt, which resides on a
PC workstation and enables the user to encrypt or decrypt Windows
files or folders. See "The Company's Security Products" below.
Access Control Products. The Company has, through a strategic
relationship, developed the VACMan access control system, which
centralizes security services in a single location, supports all of
the Company's token devices, and is based on industry standard
protocols to maximize interoperability. VACMan also incorporates
authorization and accounting features. See "The Company's Security
Products" below.
(C) The Company's Strategy
The Company's objective is to establish itself as a single
source data security solutions vendor and to become a leader in the
data security market. The Company's growth is largely dependent on
the successful implementation of its business strategy. There can be
no assurance that the Company will be able to successfully implement
its business strategy or that, if implemented, such strategy will be
successful. See Subsection d of Item 1 _ "Factors That May Affect
Future Results" below. Key elements of the Company's strategy for
achieving this objective are listed below:
Increase Name Recognition. The Company intends to increase the
name recognition of its products. It believes that by establishing
itself as a brand name, it will obtain a key competitive advantage.
The Company believes that the market for data security products is
confused by multiple technologies and conflicting claims and that
end-users will ultimately be more comfortable buying a well-known
product. The Company intends to increase its name recognition by
emphasizing sales to well-known visible end-users, expanding its
distribution network, increasing its presence at technology trade
shows and other increased marketing activities such as print media
campaigns.
Expand Product Line. The Company plans to continue to broaden
its line of security products to meet its customers' needs and to
establish itself as a single source security solutions vendor. The
Company intends to accomplish this by continuing to develop
identification and authentication expertise, as well as by seeking
strategic relationships and acquiring complementary assets or
businesses.
Expand Global Presence. The implementation of data security
products for electronic banking in the European market has become
widespread and as a result, the market for the Company's products has
grown more quickly in Europe than in North America. Sales by the
Company's European subsidiary, VDS NV/SA, and its U.S. subsidiary,
VDS, represented 77% and 23%, respectively, of the Company's total
revenue for the year ended December 31, 1997. Nevertheless, sales to
U.S. customers represented just 8% of the Company's sales for the
year ended December 31, 1997. The Company believes that there are
significant opportunities for its products in the developing North
American market and further believes it is well positioned to take
advantage of this growing market. The Company intends to maintain and
expand its leadership role in the identification, authentication,
authorization and accounting markets in Europe and to leverage its
European expertise to introduce and promote the Company's
identification, authentication, authorization and accounting products
to the North American and other global markets. Enterprises that
allow remote access to proprietary databases or information, or need
to ensure secure data transmission for purposes of electronic
commerce (including via the Internet), are potential customers for
the Company's security products. The Company intends to pursue these
potential customers through its growing network of distributors and
resellers. See "Expand Marketing Channels" below.
Expand Marketing Channels. The Company intends to recruit and
support a network of value added resellers worldwide that specialize
in both vertical (banking, financial, health, telecommunications and
government) markets and horizontal (remote access and Internet
application) markets. By undertaking these activities, the Company
intends to address and fulfill the requirements of the growing remote
access market that is in need of advanced identification,
authentication, authorization and accounting products. Some of the
distributors and resellers that have entered into agreements to
distribute the Company's products in various strategic markets
include:
[Download Table]
Europe North and South America Asia
Concord-Eracom All Tech Data Systems, Inc. Horizon Systems
Nederland BV
(Netherlands) (Midwestern United States) (Hong Kong)
Protect Data Norge AS Clark Data Systems, Inc. HUCOM, Inc.
(Scandinavia) (Southwestern United States) (Japan)
Secureware Excelsys, SA
(France) (Chile)
Sirnet AB LatinWare Ltda. (Scandinavia) (Colombia)
SEI Information Technology
(Midwestern United States)
Develop Strategic Relationships. To accomplish its strategic
goals, the Company has established and is developing strategic
relationships with other vendors of complementary security products
and may seek to acquire complementary assets or businesses. Also, the
Company has identified vendors of security or remote access products
that relied solely on static passwords that the Company believes its
products can enhance.
The Company also has entered into co-development agreements with
certain companies to gain access to technology critical to the
acceptance and adoption of the Company's technology and products. The
first such agreement, with TriNet Services, Inc., resulted in the
Company's Internet AccessKey, enabling the Company to become the
first security authentication vendor to enhance security when
accessing the Internet. The Internet AccessKey won the 1996 Sun
Microsystems Java Cup International award for productivity tools.
The Company also entered into a co-development agreement with
SHIVA Corp., a leader in remote access communications equipment,
pursuant to which the Company licensed from SHIVA Corp. a generic
security server. The resulting product, VACMan, enables the Company's
technology and products to be inserted into virtually any
organization that allows remote dial-in access to its computer
networks.
In addition, the Company entered into an original equipment
manufacturer agreement with Netscape Communications Corporation
("Netscape") to bundle Netscape technology and products with the
Company's products. The first result is a new product - VACMan/LDAP -
which allows installations to define user information, including all
token information, into Netscape's Directory Server. Netscape is the
first vendor to offer a product that supports a newly adopted
worldwide standard for directory services. The Company intends to
offer a product that supports the same newly adopted worldwide
standard for directory services, which will result in a globally
distributed security database accessible by a number of applications
requiring information about users.
(D) The Company's Security Products
The Company's family of hardware products include
time-synchronous response only, challenge/response and
time-synchronous challenge/response user authentication token devices
or security tokens. Through December 31, 1997, the Company had sold
over 2.0 million security tokens (AccessKey II, AuthentiCard and
Digipass 500). In addition, the Company recently began marketing a
smartcard security token that uses the challenge/response mode and
the X.509 certificate authentication standard. The Company also
designs, develops and markets encryption chips and encryption boards
through a division called Cryptech. The primary customers of the
Cryptech products are OEMs of telecommunications equipment that
require real time encryption.
All the Company's security tokens are used with its software
authentication server, VACMan, to provide a complete identification,
authentication, authorization and accounting security system. VACMan
supports each of the Company's security devices and permits users to
centralize their security systems in a single server or network of
servers. It is designed for small, medium and large enterprises and
Internet service providers, and it provides a centralized and
flexible solution for managing network access. VACMan is scaleable
for large remote access systems and a single server can support
numerous distributed network access servers.
The Company also offers numerous additional products to extend
the security services of VACMan/Server to platforms and/or
applications that do not yet support the RADIUS protocol. Examples of
such products are VACMan/Client NT, VACMan/Client Enterprise
(Netscape Web server), VACMan/Client IIS (Microsoft Web Server), and
VACMan/Client Solaris. In addition the Company offers workstation
software to enhance network connections when using advanced products
like Digipass 300, AuthentiCard, AccessKey II or VACMan/CryptaPak.
These products have unique workstation requirements to generate a
terminal flash pattern for the security tokens and to communicate to
a smartcard reader attached to the workstation in the case of
VACMan/CryptaPak.
The Company also provides a software development kit ("SDK")
that can be used by other vendors or by clients to build RADIUS
support into their products or applications. This SDK enables them to
perform one integration project and gain support for all RADIUS
compliant security servers. The SDKs are written in the C programming
language and can be used in numerous operating system environments
such as MVS, VMS, UNIX, Windows, NetWare and DOS. The SDKs enable the
Company's strategic partners to integrate the Company's products into
their own product offerings.
The following chart describes each of the Company's principal
products:
Hardware Features
Digipass 300 -Multiple mode token capable of operating in
time-synchronous response only,
challenge/response, and time-synchronous
challenge response
-Utilizes DES algorithm
-Operates optically and/or numerically
-PIN protection and token lock/unlock feature
-Digital signature function
-Storage of multiple secret keys for up to 3
tokens/applications in one
Digipass 500 -Time-synchronous, response only token generates
one-time password
-Utilizes DES algorithm
-PIN protection feature
-Digital signature function
-Storage of multiple secret keys for up to 8
tokens/applications in one
AuthentiCard -Time-synchronous, challenge/response token
generates one-time password with each use
-Utilizes DES algorithm
-Operates optically or numerically
-PIN protection and token lock/unlock feature
-Programmable user messages
AccessKey II -Time-synchronous, challenge/response token
generates one-time password with
each use by application of patented
technology
-Optical interface reads flashing pattern on
computer screen from which token
generates one-time password
DES and RSA -Incorporate DES or RSA algorithms
Microprocessors -Cryptographic functionality
-Potential uses include ATMs, wireless telephone
networks, modems, fax machines, PCs, servers
PC DES/RSA Card -Printed circuit boards incorporating VASCO's
DES/RSA microprocessor chips
-Can be integrated into applications requiring
encryption security or used as
development and evaluation tool for DES/RSA
microprocessor chips
-Development package includes technical manuals,
layouts and documented
programming source code for DOS, Windows,
Windows NT, OS/2 and SCO/UNIX
VACMan/CryptaPak -Hardware and software package
(including -Includes smartcard token, smartcard reader and
smartcard) enabling software
-Provides challenge/response and X.509
authentication based identification
and authentication
Software Features
VACMan Suite -Centralizes security services (authentication,
authorization and accounting)
into a single set of security servers to
manage network access
-Supports all VASCO tokens
-Bundled with Netscape Directory Server
-Open standards based, supports RADIUS and
TACACS+ industry standard
protocols and offers numerous additional
RADIUS client products to
extend the security services of
VACMan/Server to a broad range
of platforms
-Utilizes either ODBC (Other Data Base
Compatibility) compliant relational
databases for administration and reporting,
or an LDAP (Lightweight
Directory Access Protocol) compliant
directory server
-Scaleable for large remote access systems
-Interoperability with a majority of remote
access servers including SHIVA,
Ascend Communications, Cisco Systems and US
Robotics (3COM)
VACMan/Point 'n -Encryption software application
Crypt
-Resides on PC workstation
-Encrypts and decrypts Windows files or folders
-When used with VASCO's VACMan/CryptaPak, user's
encryption key can be stored on the user's
smartcard
VACMan/AVAST -Full-scale anti-virus product; can detect macro
and polymorphic viruses
-Faster, more accurate and reliable detection of
viruses
-Resident scanner enabling protection against
viruses, even under Windows NT
-Ability to send warning messages by way of
Microsoft Network
-Ability to run any applications while the
system or main application starts
-On screen display of scanning results
VASCO, AccessKey, VACMan Server and VACMan/CryptaPak are trademarks
of the Company, applications for which are pending in the United
States. In addition, AuthentiCard and Digipass are trademarks
registered in Belgium.
(iv) Intellectual Property and Proprietary Rights
The Company relies on a combination of patent, copyright,
trademark and trade secret laws, as well as employee and third-party
non-disclosure agreements to protect its proprietary rights. In
particular, the Company holds several patents in the United States
and a corresponding patent in certain European countries, which cover
certain aspects of its technology. The majority of its patents cover
the Company's AccessKey II, Digipass 500, Digipass 300 and
AuthentiCard tokens. The U.S. patents expire between 2003 through
2010; the European patent expires in 2008. The Company believes these
patents to be valuable property rights and relies on the strength of
its patents and trade secret law to protect its intellectual property
rights. To the extent that the Company believes its patents are being
infringed upon, it intends to assert vigorously its patent protection
rights, including but not limited to, pursuing all available legal
remedies.
While the Company believes that its patents are material to its
future success, there can be no assurance that the Company's present
or future patents, if any, will provide a competitive advantage. It
also may be possible for others to develop products with similar or
improved functionality that will not infringe upon the Company's
intellectual property rights. Furthermore, to the extent that the
Company believes that its proprietary rights are being violated, and
regardless of its desire to do so, it may not have adequate financial
resources to engage in litigation against the party or parties who
may infringe on its proprietary technology. See Subsection d of Item
1 _ "Factors That May Affect Future Results _ Proprietary Technology
and Intellectual Property."
(v) Research and Development
The Company's research and development ("R&D") efforts are
concentrated on product enhancement, new technology development and
related new product introductions. As of December 31, 1997, the
Company employed 13 full-time engineers and, from time to time,
independent engineering firms to conduct non-strategic R&D efforts on
its behalf. For the fiscal years ended December 31, 1995, 1996 and
1997, the Company expended $242,000, $575,000 and $1,802,000,
respectively, on R&D, representing approximately 7%, 6% and 15% of
the Company's consolidated revenues for 1995, 1996 and 1997,
respectively. See Item 7 _ "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
While management is committed to enhancing its current product
offerings, and introducing new products, there can be no assurance
that the Company's R&D activities will be successful in this regard.
Furthermore, there can be no assurance that the Company will have the
financial resources required to identify and develop new technologies
and to bring new products to market in a timely and cost effective
manner, or that any such products will be commercially successful if
and when they are introduced.
(vi) Production
The Company's security hardware products are manufactured by
third parties pursuant to purchase orders issued by the Company. Its
hardware products are comprised primarily of commercially available
electronic components which are purchased globally. The Company's
software products are controlled in-house by Company personnel and
can be produced either in-house or by several outside sources in
North America and in Europe.
With the exception of the AccessKey II token, the Company's
security tokens utilize commercially available programmable
microprocessors, or chips. The Company uses two microprocessors, made
by Samsung and Epson, for the various hardware products produced
other than the AccessKey II token. 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
the Company's 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, the Company
believes having two sources reduces the overall risk.
AccessKey II uses a custom-designed and fabricated
microprocessor which is currently available from a single source,
Micronix Integrated Systems, in the United States. The Company does
not have a long-term contract with Micronix, but rather submits
blanket purchase orders for the AccessKey II microprocessor. The
Company expects AccessKey II production to be reduced during 1998 as
the production of Digipass 300, which employs a widely available
microprocessor, increases. Due to the use of a widely available
microprocessor in the Digipass 300, the risks associated with vendor
selection and lead times should be reduced.
Orders of microprocessors and some other components generally
require a lead time of 12-16 weeks. The Company attempts to maintain
a sufficient inventory of all parts to handle short term spikes in
orders. Large orders that would significantly deplete the Company's
inventory are typically required to be placed with more than 12 weeks
of lead time, allowing the Company to attempt to make appropriate
arrangements with its suppliers.
The Company purchases the majority of its product components and
arranges for shipment to third parties for assembly and testing in
accordance with design specifications. The Company's three security
token products are assembled exclusively by two independent
companies, each of which is based in Hong Kong. Purchases from one of
the companies are made on a purchase order by purchase order basis.
Purchases from the other company are under a contract that extends to
January 21, 1999, with automatic one-year renewals, subject to
termination on six month's notice. Each of these companies assembles
the Company's security tokens at facilities in mainland China. One of
the companies also maintains manufacturing capacity in Hong Kong.
Equipment designed to test products at the point of assembly is
supplied by the Company and periodic visits are made by Company
personnel for purposes of quality assurance, assembly process review
and supplier relations.
There can be no assurance that the Company will not experience
interruptions in the supply of either of the component parts that are
used in its products or fully-assembled token devices in general. In
the event that the flow of components or finished products 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 the Company's business
and results of operations could be adversely affected. See Subsection
d of Item 1 _ "Factors That May Affect Future Results _ Dependence on
Single Source Suppliers."
(vii) 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. The
industry is comprised of many companies offering hardware, software
and services that range from simple locking mechanisms to
sophisticated encryption technologies. The Company believes that
competition in this market is likely to intensify as a result of
increasing demand for security products. The Company's competition
comes from a number of sources, including (i) software operating
systems suppliers and application software vendors that incorporate a
single-factor static password security system into their products,
and (ii) token-based password generator vendors promoting response
only and/or challenge/response technology, such as ActivCard, Inc.,
AXENT Technologies, Inc., CRYPTOCard, Inc., Leemah DataCom Security
Corporation, Racal-Guardata, Inc., Secure Computing Corp., and
Security Dynamics Technologies, Inc.
In some cases, these vendors also support the Company's products
and those of its competitors. The Company also may face competition
in the future from these and other parties in the future that develop
computer and network security products based upon approaches similar
to or different from those employed by the Company. There can be no
assurance that the market for computer and network security products
will not ultimately be dominated by approaches other than the
approach marketed by the Company.
The Company believes that the principal competitive factors
affecting the market for computer and network security products
include name recognition, technical features, ease of use,
quality/reliability, level of security, customer service and support,
distribution channels and price. Although the Company believes that
its products currently compete favorably with respect to such
factors, other than name recognition in certain markets, there can be
no assurance that the Company can maintain its competitive position
against current and potential competitors, especially those with
significantly greater financial, marketing, service, support,
technical and other competitive resources.
Many of the Company's present and potential competitors have
significantly greater financial, marketing, service, support,
technical and other competitive resources than the Company 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 the
Company's prospective customers. Accordingly, it is possible that new
competitors or alliances may emerge and rapidly acquire significant
market share. If this were to occur, the financial condition or
results of operations of the Company could be materially adversely
effected. See Subsection d of Item 1 _ "Factors That May Affect
Future Results _ Competition."
The Company's 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 the Company's 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 the Company
for market share.
(viii) Sales and Marketing
The Company's computer and network security products are
marketed primarily through an indirect sales channel and distribution
network and, to a lesser extent, directly to end-users. The Company
markets its products primarily in North America and Europe through a
combination of value-added resellers, original equipment
manufacturers, independent distributors and direct sales efforts. A
sales staff of 12 (as of December 31, 1997) coordinates sales through
the distribution network and makes direct sales calls either alone or
with sales personnel of vendors of computer systems. The sales staff
also provides product education seminars to sales personnel of
vendors and distributors with whom the Company has working relations
and to potential end-users of the Company's products.
In January 1997, the VASCO Advantage Reseller ("VAR") program
was introduced. The goal of this program is to expand the Company's
marketing channels by engaging companies already proficient in
reselling computer network products and security solutions to
distribute the Company's products.
The Company works with these resellers through its United States
and European operating subsidiaries, VDS and VDS NV/SA. VDS, which is
primarily responsible for North America, South America and Japan,
started in 1997 with one reseller. Since January 1, 1997,
arrangements have been made with 39 additional resellers, for a total
of 40 as of December 31, 1997. VDS NV/SA, which is generally
responsible for developing sales in the remainder of the world, had
an existing base of 17 resellers prior to the announcement of the VAR
program. Between January 1, 1997 through December 31, 1997,
VDS NV/SA engaged an additional 20 resellers, for a total of 37.
Combined, VDS and VDS NV/SA established relationships with a total of
77 resellers in 1997, against a target of 64. As of March 31, 1998,
VDS NV/SA's resellers numbered 40 and VDS' numbered 46, for a total
of 86.
The Company's international sales and operations are subject to
risks such as the imposition of government controls, new or changed
export license requirements, restrictions on the export of critical
technology, trade restrictions and changes in tariffs. While the
Company believes its products are designed to meet the regulatory
standards of foreign markets, any inability to obtain foreign
regulatory approvals on a timely basis could have a material adverse
effect on the Company's financial condition or results of operations.
The Company's products are subject to export restrictions and
controls as administered by the National Security Agency, the
Department of State and the Department of Commerce. Encryption
products are eligible for export depending upon the level of
encryption technology incorporated into the product. U.S. export laws
also prohibit the export of encryption products to specified hostile
countries. Until recently, the Company did not need to obtain U.S.
export licenses for its products. However, two new encryption
products, VACMan/CryptaPak and VACMan/Point `n Crypt, introduced to
the product line in August 1997, require a License Exception (i.e.,
authorization to export, under stated conditions, subject to Export
Administration Regulations). The Company believes it will be able to
obtain License Exceptions for both its VACMan/CryptaPak and
VACMan/Point `n Crypt products for sales to international banking and
financial institutions.
There can be no assurance, however, that the list of products
and countries for which export approval is required, and the
regulatory policies with respect thereto will not be revised from
time to time. The inability of the Company to obtain required
approvals under these regulations could materially adversely affect
the ability of the Company to make international sales of the
products under U.S. export control.
The Company's core authentication products, AccessKey II,
Digipass 300, Digipass 500, and AuthentiCard, do not, nor are they
likely to, fall under U.S. encryption export control regulations.
Although all of the Company's authentication products utilize
encryption technologies, the products cannot read and encrypt client
data. Thus, they are not subject to the U.S. encryption export
control regulations.
Similarly, VDS NV/SA is subject to export licensing requirements
under Belgian law. VDS NV/SA, as owner and exporter of the
cryptographic products, must apply to the Belgian Ministry of
Economic Affairs for an export license for each company to which it
exports such products. An export license is valid for one customer
for one year from the date of issue. It can be reused for several
consecutive deliveries to that customer until the total export
quantity indicated on the license has been exhausted. If the quantity
is not completely exported during the one year license period, the
license can be renewed once for another year. VDS NV/SA applies for
such licenses for customers that wish to purchase cryptographic
products. The inability of VDS NV/SA to obtain required approvals or
licenses under Belgian law could have a material adverse effect on
the Company's financial condition or operations.
The Belgian export of VDS NV/SA's cryptographic products,
consisting of DES and RSA microprocessors and PC/DES and RSA cards
(including SDKs), is also subject to European Community regulations.
VDS NV/SA's cryptographic products are considered to be "goods of
dual use" under those regulations, i.e., goods that can be used for
both civil and military purposes. As such, a national individual
export license is required for their export, except to Luxembourg and
the Netherlands. Only the VDS NV/SA products that perform encryption
of data for confidentiality reasons require an individual export
license, and VDS NV/SA has obtained such licenses for the export of
these products.
(ix) Customers and Markets
Customers for the Company's security products include, to some
extent, businesses that purchase products directly from the Company
for use by their employees, clients or vendors, but the majority are
value-added resellers or distributors of related security products or
services who in turn sell to other businesses.
To date, virtually all of the Company's security products have
been sold in Europe. Sales to one European distributor,
Concord-Eracom Nederland BV, accounted for 44% and 16% of the
Company's consolidated revenues in 1996 and 1997, respectively. On a
pro forma basis (i.e., including Lintel Security and Digipass sales
for all of 1996) this customer would have accounted for 33% of the
Company's consolidated revenues for 1996. This drop is due to the
reduction in shipments to Concord-Eracom Nederland BV during 1997,
resulting in revenues from such shipments dropping to $2 million from
$4 million in 1996. In 1998, however, Concord-Eracom Nederland BV
placed an additional $1.25 million order with VASCO NA. For 1996, on
a pro forma basis, Rabobank and S-E Banken each would have accounted
for approximately 10% of the Company's total revenues. For 1997,
these two customers each accounted for approximately 18% of the
Company's total revenues. For additional information, see Item 7_
"Management's Discussion and Analysis of Financial Condition and
Results of Operations _ 1997 Compared to 1996 _ Revenues."
The Company is aware of the risks associated with this degree of
customer concentration and expects to further minimize its reliance
on these customers in 1998 and beyond. There can be no assurance,
however, that the Company's efforts to minimize this risk will
ultimately be successful or that the Company can sustain comparable
sales volume with these customers. Furthermore, the loss of these
customers' business, or an inability to maintain reasonable profit
margins on these sales, may have an adverse effect on the Company.
See Subsection d of Item 1 _ "Factors That May Affect Future Results
_ Dependence on Major Customers" and "_ Risks of International
Operations."
(x) Backlog
At March 31, 1998, the Company had firm purchase orders from
customers for an aggregate of $7,066,000 of AccessKey II,
AuthentiCard, Digipass 500 and Digipass 300 security token units,
exclusive of the units already shipped under such purchase orders as
of March 31, 1998. This compares to a balance of $3,700,000 as of
March 31, 1997.
(xi) Employees
As of December 31, 1997, the Company employed 40 full-time
employees and 6 full-time consultants. Of these, 22 were located in
North America and 24 were located in Europe. Of the 46 total, 15 were
involved in sales, marketing and customer support, 17 in product
production, research and development and 14 in administration.
d. Factors That May Affect Future Results
(i) History of Operating Losses; Accumulated Deficit
The Company has incurred losses from continuing operations
before interest and taxes for the years ended December 31, 1995, 1996
and 1997 of $534,000, $8,658,000 and $3,935,000, respectively. As of
December 31, 1997, the Company had an accumulated deficit of
$15,902,000, which amount includes write-offs of acquired in-process
technology related to the acquisitions of Lintel Security and
Digipass for the year ended December 31, 1996 in the amount of
$7,351,000. See Item 7 _ "Management's Discussion and Analysis of
Financial Condition and Results of Operations." In view of the
Company's history of losses, there can be no assurance that the
Company will be able to achieve or sustain profitability on an annual
or quarterly basis in the future.
(ii) Potential Fluctuations in Quarterly Results
The Company's quarterly operating results have in the past
varied and may in the future vary significantly. Factors affecting
operating results include: the level of competition; the size,
timing, cancellation or rescheduling of significant orders; market
acceptance of new products and product enhancements; new product
announcements or introductions by the Company's competitors; adoption
of new technologies and standards; changes in pricing by the Company
or its competitors; the ability of the Company to develop, introduce
and market new products and product enhancements on a timely basis,
if at all; component costs and availability; the Company's success in
expanding its 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,
because a high percentage of the Company's operating expenses are
fixed, a small variation in the timing of recognition of revenue can
cause significant variations in operating results from quarter to
quarter.
(iii) Additional Capital Needed
The Company requires additional capital to finance its working
capital and other needs, including the repayment of outstanding
obligations and the financing of future growth. The Company believes
its current cash balances and anticipated cash revenues from
operations will be sufficient to meet its anticipated cash needs
through December 31, 1998.
Continuance of the Company's operations beyond December 31,
1998, however, will depend on the Company's ability to obtain
adequate financing. To this end, in April 1998, the Company entered
into a loan agreement in the amount of $3 million with Lernout &
Hauspie Speech Products N.V. ("L&H"); the funding of this loan
occurred during April 1998. The loan bears interest at the Prime Rate
plus 1%, payable quarterly, and matures on January 4, 1999. L&H is an
international leader in the development of advanced speech technology
for various commercial applications and products. Although the
Company has obtained the necessary financing in the past and intends
to raise capital in the near future through, among other potential
financing sources, a possible public offering of Common Stock, there
is no assurance that it will be able to do so in the future. Further,
there is no assurance that the Company can reduce its expenditures or
sell assets or proprietary rights without having a material effect on
its business. See Item 7 _ "Management's Discussion and Analysis of
Financial Condition and Results of Operations _ Liquidity and Capital
Resources."
(iv) Rapid Technological Changes and Dependence on New
Products
The market for the Company's products is very dynamic and
characterized by rapidly changing technology, evolving industry
standards and government policies, changing customer requirements,
price-competitive bidding and frequent product enhancements and
innovations. The introduction by the Company or its competitors of
products embodying new technologies and the emergence of new industry
standards could render the Company's existing products obsolete and
unmarketable. Therefore, the Company's future success will depend in
part upon its ability to enhance its current products and develop
innovative products to distinguish itself from the competition and to
meet customers' changing needs in the data security industry.
The Company is presently expending significant resources to
enhance its existing products and develop and introduce the next
generation of token and other security products. There can be no
assurance that security-related product developments and technology
innovations by others will not adversely affect the Company's
competitive position or that the Company will be able to successfully
anticipate or adapt to changing technology, industry standards or
customer requirements on a timely basis. Any failure by the Company
to anticipate and respond to such changes could have a material
adverse effect on the Company's results of operations and financial
condition.
(v) Dependence on Major Customers
Approximately 16% of the Company's revenues during 1997 were
derived from the sale of the Company's security products to one
European distributor, Concord-Eracom Nederland BV. For 1996, on a pro
forma basis, Rabobank and S-E Banken each would have accounted for
approximately 10% of the Company's total revenues. For 1997, these
two customers each accounted for approximately 18% of the Company's
total revenues. There can be no assurance that the Company will be
able to modify its existing products or develop new products that
will continue to meet the specifications of these customers. Absent
significant future revenues from alternative sources, the unforeseen
loss of one or more of the Company's major customers' business, or
the inability to maintain reasonable profit margins on sales to any
of these customers, would have a material adverse effect on the
Company's results of operations and financial condition. See Item 7 _
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 1, Subsection c.(ix) _ "Narrative
Description of Business - Customers and Markets."
(vi) Product Concentration
Sales of the Company's AccessKey II and Digipass security tokens
together comprised the majority of the Company's net sales during
fiscal 1995, 1996 and 1997. Should the demand for or pricing of
either of these products decline due to the introduction of superior
or lower cost products by competitors, changes in the computer
industry or other factors, the Company's results of operations and
financial condition would be adversely affected.
(vii) Dependence on Development of Industry Relationships
The Company is party to collaborative arrangements with a number
of corporations and evaluates, on an ongoing basis, potential
strategic alliances and intends to continue to pursue such
relationships. The Company's future success will depend significantly
on the success of its current arrangements and its ability to
establish additional arrangements. There can be no assurance that
these arrangements will result in commercially successful products.
See Item 1, Subsection c.(iii)(C) _ "Narrative Description of
Business _ Products _ The Company's Strategy _ Develop Strategic
Relationships."
(viii) Risks of International Operations
Sales to customers outside the United States accounted for
approximately 61%, 95% and 92% of the Company's net revenues in the
years ended December 31, 1995, 1996 and 1997, respectively. Because a
significant number of the Company's principal customers are located
in other countries, management expects that international sales will
continue to generate a significant portion of the Company's total
revenue.
The Company's international business is subject to a variety of
risks, including tariffs and other trade barriers, the establishment
and expansion of indirect distribution channels in certain countries
or regions, delays in expanding its international distribution
channels, difficulties collecting international accounts receivable
from distributors or resellers, increased costs associated with
maintaining international marketing efforts, the introduction of
non-tariff barriers and difficulties in enforcing intellectual
property rights.
In addition, the majority of the supply and sales transactions
of VDS are denominated in U.S. dollars, whereas many of the supply
and sales transactions of VDS NV/SA are denominated in various
foreign currencies. A decrease in the value of any of these foreign
currencies relative to the U.S. dollar could affect the profitability
in U.S. dollars of the Company's products sold in these markets. The
Company is therefore subject to the risks associated with
fluctuations in currency exchange rates.
In order to reduce the risk of fluctuations in currency exchange
rates, VDS NV/SA began in 1997 to buy U.S. dollars based on three- to
six-month estimated future needs for U.S. dollars, has developed
price lists denominated in both U.S. dollars and foreign currencies,
and endeavors to denominate its new supply and sales transactions in
U.S. dollars. In this connection, in September 1997 VDS NV/SA
purchased $300,000 in U.S. dollars to cover purchases of supplies.
VDS NV/SA is also beginning to attempt to match as to timing of
delivery, amount of product and denomination of currency, some
purchase orders from vendors with sales orders to customers. There
can be no assurance that these matching efforts will be successful in
reducing currency exchange risks or that the risks of international
operations will not have a material adverse effect on the Company's
financial condition or results of operations.
The Company does not hold forward exchange contracts or other
hedging instruments to exchange various foreign currencies for U.S.
dollars to offset currency rate fluctuations which might affect its
obligations in relation to its repayment out of income from sales
(which are principally in foreign currency) of debt under its loan
obligations (which are principally in U.S. dollars). See Item 7 _
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(ix) Competition
The market for computer and network security products is highly
competitive and subject to rapid change. The Company believes that
the principal competitive factors affecting the market for computer
and network security products include name recognition, technical
features, ease of use, quality/reliability, level of security,
customer service and support, distribution channels and price. The
Company's competitors include organizations that provide computer and
network security products based upon approaches similar to and
different from those employed by the Company. There can be no
assurance that the market for computer and network security products
will not ultimately be dominated by approaches other than the
approach marketed by the Company. See Item 1, Subsection c.(ii) _
"Narrative Description of Business _ Industry Background" and
Subsection c.(vii) _ "Narrative Description of Business _
Competition."
Many of the Company's potential competitors have significantly
greater financial, marketing, technical and other competitive
resources than the Company. As a result, they may be able to adapt
more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the promotion and
sale of their products than can the Company. Competition could
increase if new companies enter the market or if existing competitors
expand their product lines. Any reduction in gross margins resulting
from competitive factors could have a material adverse effect on the
Company's financial condition or results of operations.
Although the Company believes it has certain technological and
other advantages over its competitors, maintaining such advantages
will require continued investment by the Company in research and
development and sales and marketing. There can be no assurance that
the Company will have sufficient resources to make such investments
or that the Company will be able to make the technological advances
necessary to maintain such competitive advantages. In addition,
current and potential competitors have established or may in the
future establish collaborative relationships among themselves or with
third parties, including third parties with whom the Company has
strategic relationships, to increase the ability of their products to
address the security needs of the Company's prospective customers.
Accordingly, it is possible that new competitors or alliances may
emerge and rapidly acquire significant market share. If this were to
occur, the financial condition and results of operations of the
Company would be materially adversely affected. See Item 1,
Subsection c.(vii) _ "Narrative Description of Business _
Competition."
(x) Dependence on Single Source Suppliers
The majority of the Company's products are manufactured by two
independent vendors headquartered in Hong Kong. One of the vendors is
under a contract that extends to January 21, 1999, with automatic
one-year renewals subject to termination on six months notice and
purchases from the other vendor are on a purchase order by purchase
order basis. Each vendor assembles the Company's security tokens at
facilities in mainland China. The importation of these products from
China exposes the Company to the possibility of product supply
disruption and increased costs in the event of changes in the
policies of the Chinese government, political unrest or unstable
economic conditions in China or developments in the United States
that are adverse to trade, including enactment of protectionist
legislation. While the Company believes that it could find substitute
contractors for the manufacture and assembly of its products, and has
had discussions to that effect with a vendor in Belgium, in the event
that the supply of components or finished products is interrupted or
relations with either of the two principal vendors is terminated,
there could be a considerable delay finding suitable replacement
sources to manufacture the Company's products which could have a
material adverse effect on the Company's results of operations and
financial condition. In addition, the Company's AccessKey II product
contains a custom-designed microprocessor which is fabricated by a
single supplier located in the United States and is procured by
purchase orders. The Company expects AccessKey II production to be
reduced during 1998 as the production of Digipass 300, which employs
a widely available microprocessor, increases. However, any unforeseen
interruption in the supply of microprocessors for the AccessKey II
from the sole supplier prior to the full phase-in of the Digipass 300
product would have a material adverse effect on the Company's results
of operations and financial condition. See Item 1, Subsection c.(vi)
_ "Narrative Description of Business _ Production."
(xi) Proprietary Technology and Intellectual Property
The Company's success depends significantly upon its proprietary
technology. The Company currently relies on a combination of patent,
copyright and trademark laws, trade secrets, confidentiality
agreements and contractual provisions to protect its proprietary
rights. The Company seeks to protect its software, documentation and
other written materials under trade secret and copyright laws, which
afford only limited protection. The Company generally enters into
confidentiality and nondisclosure agreements with its employees and
with key vendors and suppliers. The Company holds several patents in
the United States and a corresponding patent in certain European
countries, which cover certain aspects of its technology. The U.S.
patents expire between 2003 through 2010; the European patent expires
in 2008. There can be no assurance that the Company will develop
proprietary products or technologies that are patentable, that any
issued patent will provide the Company with any competitive
advantages or will not be challenged by third parties, or that
patents of others will not have a material adverse effect on the
Company's business.
There has also been substantial litigation in the technology
industry regarding intellectual property rights, and litigation may
be necessary to protect the Company's proprietary technology. The
Company expects that companies in the computer and information
security market will increasingly be subject to infringement claims
as the number of products and competitors in the Company's target
market grows. Any such claims or litigation may be time-consuming and
costly, cause product shipment delays, require the Company to
redesign its products or require the Company to enter into royalty or
licensing agreements, any of which could have a material adverse
effect on the Company's results of operations and financial
condition.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information and software that the
Company regards as proprietary. To the extent the Company believes
its proprietary rights are being violated, and regardless of its
desire to do so, it may not have adequate financial resources to
engage in litigation against the party or parties who may infringe on
its proprietary technology. In addition, the laws of some foreign
countries do not protect proprietary and intellectual property rights
to as great an extent as do the laws of the United States. There can
be no assurance that the Company's means of protecting its
proprietary and intellectual property rights will be adequate or that
the Company's competitors will not independently develop similar
technology, duplicate the Company's products or design around patents
issued to the Company or other intellectual property rights of the
Company.
(xii) Product Liability Risks
Customers rely on the Company's token-based security products to
prevent unauthorized access to their data. A malfunction of or design
defect in the Company's products could result in tort or warranty
claims. The Company does not presently maintain product liability
insurance for these types of claims. In order to reduce the risk of
exposure from such claims, the Company attempts to obtain warranty
disclaimers and liability limitation clauses in its agreements with
distributors, resellers and end-user clients. However, there can be
no assurance that the Company will be successful in obtaining such
provisions in its agreements or that such measures will be effective
in limiting the Company's liability for any such damages. Any
liability for damages resulting from security breaches could be
substantial and would have a material adverse effect on the Company's
results of operations and financial condition. In addition, a
well-publicized actual or perceived security breach involving
token-based security systems could adversely affect the market's
perception of token-based security products in general, or the
Company's products in particular, regardless of whether such breach
is attributable to the Company's products. This could result in a
decline in demand for the Company's products, which would have a
material adverse effect on the Company's results of operations and
financial condition.
(xiii) Government Regulation of Technology Exports
The Company's international sales and operations are subject to
risks such as the imposition of government controls, new or changed
export license requirements, restrictions on the export of critical
technology, trade restrictions and changes in tariffs. While the
Company believes its products are designed to meet the regulatory
standards of foreign markets, any inability to obtain foreign
regulatory approvals on a timely basis could have a material adverse
effect on the Company's financial condition or results of operations.
Certain products of the Company are subject to export controls
under U.S. law, and the Company believes it has obtained or will
obtain all necessary export approvals as required. There can be no
assurance, however, that the list of products and countries for which
export approval is required, and the regulatory policies with respect
thereto will not be revised from time to time. The inability of the
Company to obtain required approvals under these regulations could
materially adversely affect the ability of the Company to make
international sales. For example, U.S. governmental controls on the
exportation of encryption technology prohibit the Company from
exporting some of its products with the more sophisticated data
security encryption technology. As a result, foreign competitors
facing less stringent controls may be able to compete more
effectively than the Company in the global data security market.
There can be no assurance that these factors will not have a material
adverse effect on the Company's financial condition or results of
operations.
Similarly, VDS NV/SA, the Belgian operating subsidiary of the
Company, is subject to export licensing requirements under Belgian
law. The inability of VDS NV/SA to obtain required approvals or
licenses under Belgian law also could have a material adverse effect
on the Company's financial condition or results of operations. For
additional information on such export restrictions and licensing
requirements under U.S. and Belgian law, see Item 1, Subsection
c.(viii) _ "Narrative Description of Business _ Sales and Marketing."
(xiv) Dependence on Key Personnel
The Company depends, to a significant degree on the efforts of
its President, Chief Executive Officer and the Chairman of its Board
of Directors, T. Kendall Hunt, and those of other key personnel
employed by or serving as consultants to its subsidiaries, including
John Haggard, Mario Houthooft, Frank Hoornaert, Hyon Im, Jan Valcke
and Richard Vaden. Mr. Houthooft has entered into a consulting
agreement with VDS NV/SA. Neither Mr. Hunt nor the Company's other
key personnel have entered into employment agreements with the
Company. As a result, there are no restrictions on competition by
these individuals (other than Mr. Houthooft) after termination of
employment or consulting services. Key man insurance in the amount of
$1.5 million is currently maintained by the Company on the life of
Mr. Hunt but not on any of the other key personnel. The loss of the
services of Mr. Hunt or one or more of its other key personnel could
have an adverse effect on the Company's business and operating
results.
The Company's continued success is also dependent upon its
ability to attract and retain qualified employees to support its
future growth. Competition for such personnel is intense, and there
can be no assurance that the Company can retain its key employees or
that it can attract, assimilate or retain other highly qualified
personnel in the future.
(xv) Management and Control
Control of the Company presently is largely in the hands of its
Board of Directors, management and T. Kendall Hunt. As of May 4,
1998, the Board of Directors of the Company and their spouses owned
beneficially and of record approximately 56% (and Mr. Hunt and his
family owned beneficially and of record 51%) of the outstanding
shares of the Company's Common Stock. Mr. Hunt is Chairman of the
Board of Directors, Chief Executive Officer and President of the
Company. As a result, Mr. Hunt will have control over the direction
and operation of the Company and with his family will be able to
elect the directors of the Company and to approve any corporate
action requiring majority stockholder approval. Such concentration of
control may have an adverse effect on the market price of the
Company's Common Stock.
Item 2 - Properties
The Company's 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 western suburb of Chicago.
These facilities are leased through November 15, 1999, and consist of
approximately 10,000 square feet. The Company believes that the
Oakbrook Terrace facilities will be adequate for its present growth
plans.
The Company's European administrative, sales and marketing,
research and development and support facilities are located in
Belgium in an industrial park in a southwestern suburb of Brussels.
These facilities consist of approximately 10,000 square feet of
office space which are occupied under a lease expiring in July of
1999. The Company believes that these facilities are adequate through
the term of the current lease and that on expiration of the lease it
will be able to either extend the lease or find suitable facilities
at comparable rates.
Item 3 - Legal Proceedings
The Company is not currently involved in any material
litigation. However, the Company had a product acceptance dispute
with its principal customer involving the sale in 1995 of
approximately $315,000 of certain smartcard readers produced by the
Company in response to written specifications submitted by the
customer. This disagreement was settled during 1998 with a portion of
the amount being credited to the customer ($85,000) and the remainder
applied to future orders (this amount will be determined based upon
the amount of product returned by the customer, but in no case will
be greater than $230,000). Additionally, the Company has a
disagreement with certain stockholders regarding their rights as
holders of warrants following the Exchange Offer. As of the date of
this Annual Report on Form 10-K, no litigation with respect to this
matter has been commenced, and the Company is unable to determine the
extent of the matter's adverse impact, if any, upon its results of
operations or financial condition.
Item 4 - Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of 1997 to a
vote of security holders, through solicitation of proxies or
otherwise.
Pursuant to General Instruction G(3) of Form 10-K and Instruction 3
to Item 401(b) of Regulation S-K, the following information is
included as an unnumbered item in Part I of this Report in lieu of
being included in the Proxy Statement for the Company's annual
meeting of stockholders to be held on June 15, 1998.
Executive Officers of the Registrant
The executive officers of the Company, each of whom has served
since the Company's organization in July 1997, and key personnel of
its subsidiaries, and their respective ages as of December 31, 1997,
are as follows:
[Download Table]
Executive Officers of the Company
Name Age Position
T. Kendall Hunt 54 Chief Executive Officer, President,
Chairman of the Board and Director
Forrest D. Laidley 53 Secretary and Director (1)
Gregory T. Apple 31 Vice President and Treasurer
Key Personnel of VDS
Name Age Position
John C. Haggard 39 President and Chief Operating Officer (2)
Key Personnel of VDS NV/SA
Name Age Position
Mario A. Houthooft 44 Managing Director and Director (3)
(1) Mr. Laidley is also a member of the Audit Committee and a member
of the Compensation Committee of the Board of Directors of the
Company.
(2) Mr. Haggard, effective January 15, 1998, now serves as the Chief
Technology Officer of the Company.
(3) Mr. Houthooft is not an employee of VDS NV/SA, but serves as an
officer of VDS NV/SA and performs services pursuant to a
consulting agreement with VDS NV/SA. See "_ Consulting
Arrangement _ Mario Houthooft Consulting Agreement" below. Mr.
Houthooft was named to the Board of Directors on April 10, 1998.
T. Kendall "Ken" Hunt _ Mr. Hunt is Chairman of the Board, Chief
Executive Officer and President of the Company. He has been a
director of the Company since July 1997. He also serves, since 1990,
as a Director, the Chairman of the Board and President of VASCO Corp.
and prior thereto served in similar capacities during certain periods
from 1984 with VASCO Corp.'s predecessors. Mr. Hunt also serves as
VASCO Corp.'s President and Chief Executive Officer.
Forrest D. Laidley _ Mr. Laidley is Secretary of the Company.
He has been a director of the Company since July 1997. He also
serves, since 1990, as a Director, Secretary and General Counsel of
VASCO Corp. He has been involved with VASCO Corp. and its
predecessors for certain periods in these capacities since 1984. He
is currently and has been a partner in the law firm of Laidley &
Porter (and predecessor firm) in Libertyville, Illinois since 1985.
He serves on the Advisory Council on Main Street Libertyville and is
a director of Harris Bank Libertyville, an Illinois chartered banking
institution, and Carmel High School, Mundelein, Illinois.
Gregory T. Apple _ Mr. Apple is Vice President and Treasurer of
the Company. He also serves, since 1996, as Vice President of
Finance and Administration of VASCO Corp. His responsibilities
encompass all accounting and administrative aspects of the Company
and its subsidiaries. Before joining VASCO Corp. in 1996, he was
employed as Controller and Vice President of Finance of a privately
held software company, Napersoft, Inc., from 1993 until 1996, with
essentially similar responsibilities. From 1988 until joining
Napersoft, he was an auditor for KPMG Peat Marwick LLP.
John C. Haggard _ Mr. Haggard serves, since 1994, as President
and Chief Operating Officer of VDS. Prior to joining VDS, Mr. Haggard
was Assistant Vice President of Research and Development and
Technical Owner for Computer Associates International, Inc.'s
Security Control and Audit division from 1988. Since January 15,
1998, Mr. Haggard has served as the Chief Technology Officer of the
Company.
Mario Houthooft _ Mr. Houthooft serves, since January 1, 1997,
as Managing Director of VDS NV/SA pursuant to a consulting agreement.
Mr. Houthooft was elected to the Board of Directors of the Company as
of April 10, 1998. From 1992 until joining VDS NV/SA, he served in
various management positions with Lintel Security. Prior thereto, he
was with Cryptech Company from 1986 where he served in various
positions.
Consulting Arrangement
Mario Houthooft Consulting Agreement. Mr. Houthooft was one of
the two principals of Lintel NV, the company that sold certain assets
relating to data security products to Lintel Security, which was then
acquired by VASCO Corp. Mr. Houthooft's services as Managing Director
of VDS NV/SA are rendered pursuant to a management agreement by and
between VDS NV/SA and LINK BVBA, the company that employs
Mr. Houthooft. The management agreement has an indefinite term,
although it is terminable by either party upon six months notice, or
without prior notice upon payment of a specified amount. Mr.
Houthooft is to devote at least forty-five hours per week to his
VDS NV/SA duties pursuant to the agreement, which also contains
confidentiality obligations and precludes Mr. Houthooft from
soliciting VDS NV/SA employees or engaging in competing businesses
during the term of the agreement. The agreement further provides that
Mr. Houthooft will not render services to a competitor or start a
competing business in Belgium, the Netherlands and Luxembourg for a
one month period following termination of the agreement. In addition
to these restrictions, Mr. Houthooft is subject to a covenant not to
compete contained in the Lintel Security acquisition agreements
pursuant to which Mr. Houthooft agreed not to compete, directly or
indirectly, with VASCO Corp. (or any of its affiliates) in the
manufacture and sale of computer security products through December
31, 2001.
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters
There was no established public market for the Company's Common
Stock in 1997. 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 May 4, 1998, the closing sale price for the Company's Common
Stock, par value $.001, on the Over-the-Counter Bulletin Board was
$6.00 per share. Such Over-the-Counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission
and may not necessarily represent an actual transaction. On May 4,
1998, there were 85 registered holders of record of the Common Stock.
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.
In connection with the Company's organization, the Company
issued 100 shares of its Common Stock to VASCO Corp. on July 16, 1997
for an aggregate consideration of $100. The 100 shares were not
registered under the Securities Act of 1933, as amended (the "1933
Act") and were issued in reliance on Section 4(2) of the 1933 Act.
No other securities were issued by the Company in 1997.
Item 6 - Selected Financial Data
(in thousands, except per share data)(1)
[Download Table]
Year Ended December 31,
-------------------------------------------
1993 1994 1995 1996(2) 1997
Statement of Operations ---- ---- ---- ---- ----
Data:
Total revenues $ 2,199$ 2,693 $ 3,695 $ 10,192 $ 12,302
Operating income (loss) 138 192 (534) (8,658)(3) (3,935)(4)
Net income (loss)
available to
common stockholders 50 30 (465) (9,349)(3) (5,998)(4)
Basic income (loss) per
common share - - (0.03) (0.53)(3) (0.31)(4)
Shares used in
computing per
share amounts 13,877 14,260 14,817 17,533 19,106
December 31,
-------------------------------------------
1993 1994 1995 1996 1997
Balance Sheet Data: ---- ---- ---- ---- ----
Cash $ 209$ 38 $ 745$ 1,814 $ 1,898
Working capital 514 764 1,074 4,902 1,945
Total assets 1,522 2,111 2,414 12,368 8,376
Long term obligations,
less current portion 746 60 7 9,114 10,943
Common stock subject to
redemption - - 371 742 495
Stockholders' equity
(deficit) 340 1,364 966 (1,205) (6,865)
For a discussion of factors that affect the comparability of the
financial information set forth above, such as significant
acquisitions undertaken by the Company, the disposition of the
Company's VASCO Performance Systems line of business in 1996, and the
significant costs incurred during 1997 related to the Exchange Offer,
see Item 7 _ "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
___________________________
(1) Represents the financial information of VASCO Corp., as the
Company had not begun operations as of December 31, 1997.
(2) Includes the results of operations of Lintel Security from March
1996 and Digipass from July 1996; see "Financial Statements."
(3) Includes a pretax charge for acquired in-process research and
development of $7,351.
(4) Includes legal, accounting and printing costs of approximately
$1,218 related to preparing for the Exchange Offer that took place
in February/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
in Subparagraph d. of Item 1 - "Factors That May Affect Future
Results" and elsewhere in this Form 10-K.
On March 11, 1998, VASCO Data Security International, Inc. (the
"Company") successfully completed its offer (the "Exchange Offer") to
exchange the Company's shares, options, and warrants for VASCO Corp.
shares, options and warrants. Because the Company was a non-operating
subsidiary of VASCO Corp. prior to the completion of the Exchange
Offer (which occurred on March 11, 1998), the discussion of results
contained herein relates to the results of VASCO Corp. and its
subsidiaries. Accordingly, references to "VASCO" shall refer to
VASCO Corp. for periods prior to March 11, 1998.
OVERVIEW
VASCO designs, develops, markets and supports open standards-
based hardware and software security systems which manage and secure
access to data. VASCO's original corporate predecessor was founded in
1984, and VASCO entered the data security market in 1991 when it
acquired a controlling interest in what is today one of VASCO's two
operating subsidiaries, VASCO Data Security, Inc. ("VDS") (formerly
known as "ThumbScan, Inc."), a company that designs, develops and
sells security tokens, primarily to European customers. In 1996,
VASCO began developing and marketing open standards-based security
systems by introducing a hardware and software package, VACMan, that
is based on industry-accepted remote access protocols.
Recent Acquisitions. In 1996, VASCO significantly expanded its
presence in the European data security market through the acquisition
of two Belgian companies, Lintel Security (effective March 1, 1996)
and Digipass SA ("Digipass") (effective July 1, 1996), which today
comprise VASCO's other operating subsidiary, VASCO Data Security
NV/SA ("VDS NV/SA"). Both Lintel Security and Digipass at the time of
acquisition were involved in designing, developing and marketing data
security products, and Digipass was to a lesser extent involved in
developing interactive voice response ("IVR") products used primarily
for telebanking applications. Lintel Security and Digipass were
combined in January 1997 and renamed VASCO Data Security NV/SA.
During 1997, VDS NV/SA entered into an agreement to sell the IVR
business to Siemens Societe Anonyme ("Siemens") for approximately
$200,000.
The acquisition of Lintel Security was accomplished in two
steps. VASCO, through VDSE, acquired 15% of the capital stock of
Lintel Security in March of 1996, and then acquired the remaining 85%
in June of 1996. As a result, VASCO's consolidated results for 1996
include 100% of Lintel Security's results for the period from March
through June of 1996, with a minority interest elimination for the
85% not owned for this period, and 100% of Lintel Security's results
for the remainder of 1996, and all references to inclusion of Lintel
Security's results since the date of acquisition reflect these
percentage ownership figures for the appropriate time periods.
The Lintel Security purchase involved a cash payment in the
amount of $289,482 and the issuance of (i) $747,500 in convertible
notes due May 30, 1998, (ii) 428,574 shares of VASCO's common stock,
and (iii) 100,000 warrants entitling the holders to purchase an equal
number of shares of VASCO's common stock at $7.00 per share. The note
bears interest at the rate of 8% per annum, which is payable
quarterly, in cash or shares of VASCO's common stock at the option of
the holders. The notes can be converted at any time, at the option of
the holders, into shares of VASCO's common stock at $7.00 per share.
The warrants were valued at their fair value at the date of grant.
These convertible notes and warrants were exchanged pursuant to the
Exchange Offer and now represent convertible notes and warrants for
the Company's Common Stock.
The purchase of Digipass was a cash transaction involving an
initial payment of $4,800,000 and an obligation to pay an additional
$3,400,000 on or before December 31, 1997. Underlying this obligation
was a guarantee to the seller of Digipass, furnished by a European
commercial bank, which was secured by various personal and company
guarantees. VASCO renegotiated the guarantee into a convertible loan
due September 30, 2002 that bears interest at a rate of 3.25%,
payable annually, and the obligation to the seller of Digipass was
paid in full in August 1997. See "Liquidity and Capital Resources"
below.
Prior Lines of Business. Before entering the data security
industry in 1991, VASCO's primary endeavor was providing consulting,
training and software services to various institutions in the public
and private sectors through VPS. In 1996, VASCO sold the assets
comprising this line of business, which consisted primarily of
contract rights, accounts receivable and training methodologies, for
consideration consisting of a royalty, payable to VASCO, equal to 5%
of the gross training revenues of the purchaser in excess of $350,000
per annum for a period of five years from the date of the sale. VASCO
anticipates that the royalties, if any, payable by the purchaser of
the VPS assets will be immaterial.
Revenue and Earnings. The majority of sales made by VDS and VDS
NV/SA are in the European markets, although the Company intends to
actively pursue additional markets outside of Europe, particularly
Asia and North and South America.
Revenues from sales of security tokens, specifically the
AccessKey II and Digipass tokens, continue to represent the majority
of the Company's total revenues. In excess of 80% of VDS's sales for
1995, 1996 and 1997 were comprised of security token devices, with
Concord-Eracom Nederland BV accounting for 92%, 97% and 67% of VDS's
sales in 1995, 1996 and 1997, respectively. On a consolidated basis,
the percentages for 1995, 1996 and 1997 were 61%, 44% and 16%,
respectively, including revenues relating to the Lintel Security and
Digipass operations from their respective acquisition dates in 1996.
It is expected that consolidated sales to other customers and markets
will increase and, assuming this occurs, the degree of concentration
attributable to this major customer will decrease. However, the
Company expects that this major customer will continue to be a
meaningful contributor to the Company's revenues and earnings for the
foreseeable future. In 1998, for example, Concord-Eracom Nederland BV
placed an additional $1.25 million order with VDS. Consequently, the
unforeseen loss of this customer's business, or the inability to
maintain reasonable profit margins on sales to this customer, may
have an adverse effect on the Company's results of operations and
financial condition.
Although the Company believes it is likely that sales of
security tokens, including the newly introduced Digipass 300, will
continue to account for a majority of the Company's total revenues
for the foreseeable future, the Company also believes that revenues
from sales of its other hardware and software data security products,
including the additional product offerings made possible by the
Lintel Security and Digipass acquisitions, will continue to increase
in the future. No assurance, however, can be given that revenues will
increase in the future.
Research and Development. The Company is devoting its capital
and other resources to enhancing its 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. The Company's 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.
Once technical feasibility has been established, ongoing
development costs incurred prior to actual sales of the subject
product are capitalized in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed." Product
development costs are capitalized on a product-by-product basis and
are amortized by the greater of (i) the ratio that current gross
revenues for a product bear to the total of current and anticipated
future gross revenues for that product or (ii) the straight-line
method over the remaining estimated economic life of the product. The
remaining estimated economic life of these products are reviewed at
least quarterly.
Management has concluded that, in today's rapidly evolving
technology markets and with the expanding state of the computer and
network security industry in general, it may be impractical to
anticipate product life cycles in excess of two years. Historically,
however, the Company's products have experienced significantly longer
product lives than two years.
Variations in Operating Results. The Company's quarterly
operating results have in the past varied and may in the future vary
significantly. Factors affecting operating results include: the level
of competition; the size, timing, cancellation or rescheduling of
significant orders; market acceptance of new products and product
enhancements; new product announcements or introductions by the
Company's competitors; adoption of new technologies and standards;
changes in pricing by the Company or its competitors; the ability of
the Company to develop, introduce and market new products and product
enhancements on a timely basis, if at all; component costs and
availability; the Company's success in expanding its sales and
marketing programs; technological changes in the market for data
security products; foreign currency exchange rates; and general
economic trends and other factors. See Subparagraph d. of Item 1 -
"Factors That May Affect Future Operating Results."
In addition, the Company has experienced, and may experience in
the future, seasonality in its business. The seasonal trends have
included higher revenue in the last quarter of the calendar year and
lower revenue in the next succeeding quarter. The Company believes
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 the Company's operating expenses are based on
anticipated revenue levels and a high percentage of the Company's
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 the supply and sales
transactions of VASCO Data Security, Inc. are denominated in U.S.
dollars, whereas many of the supply and sales transactions of VDS
NV/SA are denominated in various foreign currencies. In order to
reduce the risks associated with fluctuations in currency exchange
rates, VDS NV/SA began in September 1997 to buy U.S. dollars based on
three to six months estimated future needs for U.S. dollars, has
developed price lists denominated in both U.S. dollars and foreign
currencies, and endeavors to denominate its new supply and sales
transactions in U.S. dollars. In September 1997, VDS NV/SA purchased
$300,000 in U.S. dollars to cover purchases of supplies. VDS NV/SA is
also beginning to 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. See Subparagraph d. of
Item 1 - "Factors That May Affect Future Operating Results - Risks of
International Operations."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated,
certain consolidated financial data as a percentage of revenue for
the years ended December 31, 1995, 1996 and 1997.
[Download Table]
Percentage of Revenue
Year Ended December 31,
--------------------
1995 1996 1997
---- ---- ----
Total revenue 100.0% 100.0% 100.0%
Cost of goods sold 78.1 57.6 51.1
----- ----- -----
Gross profit 21.9 42.4 48.9
Operating costs:
Sales and marketing 6.6 13.8 27.5
Research and development 6.5 5.6 14.6
General and administrative 23.1 35.8 38.8
Acquired in-process research
and development - 72.1 -
----- ----- -----
Total operating costs 36.2 127.3 80.9
----- ----- -----
Operating loss (14.4) (84.9) (32.0)
Interest expense (2.0) (3.4) (9.3)
Other expense, net - (0.4) (1.8)
----- ----- -----
Loss before income taxes (16.4) (88.8) (43.1)
Provisions (benefit) for
income taxes (6.8) 1.4 4.9
----- ----- -----
Net loss (9.6) (90.7) (48.0)
===== ===== =====
The following discussion is based upon VASCO's consolidated results
of operation for the years ended December 31, 1997, 1996 and 1995.
References to "VASCO" represent the consolidated entity. References
to "VASCO NA" represent VASCO Corp. and VDS, excluding the
acquisition of Lintel Security and Digipass. References to "VASCO
Europe" mean the operation of Lintel Security and Digipass following
their acquisition by VASCO. (Percentages in the discussion are
rounded to the closest full percentage point.)
1997 COMPARED TO 1996
The following discussion and analysis should be read in conjunction
with VASCO's Consolidated Financial Statements for the years ended
December 31, 1997 and 1996.
Revenues
VASCO's consolidated revenues for the year ended December 31,
1997 were $12,302,000, an increase of $2,110,000, or 21%, as compared
to the year ended December 31, 1996. VASCO Europe contributed
$9,518,000, or 77%, of total consolidated revenues, with VASCO NA
contributing the remaining $2,784,000, or 23%. Revenues (and other
operating results) attributable to VASCO Europe for 1996 are included
only from the time of acquisition of Lintel Security and of Digipass.
VASCO NA's revenues were $2,784,000 for 1997, a decrease of
$2,034,000, or 42%, as compared to 1996 and accounted for 23% of
consolidated revenues in 1997. The decrease can be attributed, in
part, to a temporary reduction in shipments to Concord-Eracom
Nederland BV during 1997. Concord-Eracom Nederland BV represented
approximately $4,200,000 in revenue for 1996, as compared to
$2,000,000 in 1997. However, during 1998 Concord-Eracom Nederland BV
has placed an additional order with VASCO NA of approximately
$1,250,000. VPS, the former technical and training unit which was
sold in August of 1996, had revenues of $204,000 in 1996 and
accounted for 4% of VASCO's revenues in 1996.
Cost of Goods Sold
VASCO's consolidated cost of goods sold for the year ended
December 31, 1997 was $6,287,000, an increase of $416,000, or 7%, as
compared to the year ended December 31, 1996. This increase is
primarily attributable to the inclusion of VASCO Europe for the
entire year 1997. VASCO Europe's cost of goods sold was $4,929,000,
accounting for 78% of the consolidated cost of goods sold.
VASCO NA's cost of goods sold was $1,358,000 in 1997,
representing a decrease of $1,135,000, or 46%, from 1996. This
decrease is consistent with the 42% decrease in revenues for the same
period and, as discussed above under "Revenues," is due to a
temporary reduction in shipments to Concord-Eracom Nederland BV
during 1997. However, the cost of goods sold for security products
decreased as a percentage at a slightly quicker pace than revenues
for security products. This is due to certain improvements in the
manufacture of the products, as well as economies of scale being
realized as the 1996 acquisitions of Lintel Security and Digipass
were fully integrated.
Gross Profit
VASCO's consolidated gross profit for the year ended December
31, 1997 was $6,015,000, an increase of $1,694,000, or 39%, over
1996. This represents a consolidated gross margin of 49%, as compared
to 1996's consolidated gross margin of 42%. VASCO Europe contributed
$4,589,000 to the consolidated gross profit representing a gross
margin of 48% as compared to 37% for the prior year. VASCO NA
contributed $1,426,000 to the 1997 gross profit as compared to
$2,325,000 for 1996, a decrease of $899,000 or 39%. This represented
a gross margin of 51% as compared to 48% for the prior year. The
increase in gross margin is due to certain improvements in the
manufacture of the products, as well as economies of scale being
realized as the 1996 acquisitions of Lintel Security and Digipass
were fully integrated.
Sales and Marketing Expenses
Consolidated sales and marketing expenses for the year ended
December 31, 1997 were $3,381,000, an increase of $1,976,000, or
141%, over 1996. The increase can be attributed to the addition of
VASCO Europe for the full year 1997; increased sales efforts
including, in part, increased travel costs; an increase in marketing
activities, including print media campaigns and other efforts, and an
increased presence at trade shows.
Research and Development
Consolidated R&D costs for the year ended December 31, 1997 were
$1,802,000, an increase of $1,228,000, or 214%, as compared to the
year ended December 31, 1996. R&D costs represented 15% of
consolidated revenues for 1997 as compared to 6% for 1996. The
increase is due to the addition of R&D headcount, both in the U.S.
and Europe, and to the acquisition of the VACMan product from Shiva
Corporation and the related integration efforts surrounding it. R&D
efforts are undertaken by both VASCO NA and VASCO Europe on behalf of
the consolidated group of companies. Whereas VASCO NA is primarily
responsible for the development of software products, VASCO Europe is
responsible for hardware development. Consequently, management of the
Company believes it is not meaningful to address R&D costs separately
at the operating company level.
VASCO expensed, as cost of goods sold, $0 and $180,000 in 1997
and 1996, respectively, reflecting the amortization of capitalized
development costs. As of December 31, 1997 and 1996, VASCO did not
carry any product development costs on its books as an asset. There
were no product development costs capitalized in 1997 or 1996.
General and Administrative Expenses
Consolidated general and administrative expenses for the year
ended December 31, 1997 were $4,768,000, an increase of $1,120,000,
or 31%, over 1996. The majority of this increase can be attributed to
the legal, accounting and printing costs associated with the
preparation of the Exchange Offer held by the Company during the
first quarter of 1998. In addition, the full-year impact of the
Lintel Security and Digipass acquisitions and the amortization of
intangibles associated with those acquisitions increased general and
administrative expenses in 1997.
Acquired In-process Research and Development
During 1996, VASCO expensed $7,351,000 pertaining to the in-
process research and development acquired in the Lintel Security and
Digipass acquisitions. Based upon independent appraisals,
approximately 67% of the acquisition premium has been expensed in
accordance with U.S. Generally Accepted Accounting Principles. As of
December 31, 1997, there remains a net balance of $2,314,000
representing the intangible assets related to the acquisitions, which
are carried on VASCO's books and amortized over an additional 18-66
months. Amortization expenses amounted to $1,083,000 and $440,000 for
the years ended December 31, 1997 and 1996, respectively.
Operating Loss
VASCO's consolidated operating loss for the year ended December
31, 1997 was $3,935,000, compared to the consolidated operating loss
of $8,658,000 for 1996. Of the 1997 loss, VASCO NA contributed a loss
in the amount of $4,130,000 and VASCO Europe contributed income in
the amount of $195,000. The 1996 consolidated operating loss included
a write-off of acquired in-process research and development in the
amount of $7,351,000 and $440,000 of amortization expense relating to
intangible assets in 1996. The 1996 operating loss, before the write-
off and the amortization, was $867,000.
VASCO's 1997 operating loss, excluding the amortization of
intangibles, was attributable to continued investment in R&D
(primarily for Digipass 300), sales and marketing investments in
North America, the expenses for development of corporate
infrastructure, such as sales personnel and administrative staff and
office equipment, and the legal, accounting and printing costs
incurred during 1997 associated with the preparation of the Exchange
Offer held by the Company during the first quarter of 1998.
Interest Expense
Consolidated interest expense in 1997 was $1,148,000 compared to
$346,000 in 1996. The increase can be attributed to average
borrowings in 1997 being substantially above those levels of the
previous year. See "Liquidity and Capital Resources" below.
Income Taxes
VASCO recorded tax expense for the year ended December 31, 1997
of $200,000 for VASCO NA and $407,000 for VASCO Europe. The tax
expense recorded for VASCO NA represents the revaluation (write-down)
of deferred tax assets. As of December 31, 1997, VASCO reflected a
net deferred tax asset of $83,000, which represented the amount that
management deemed would more likely than not be realized. The net
deferred tax asset was net of a valuation allowance of $831,000,
which was established during 1996 and adjusted during 1997,
considering the effects of reversing deferred tax liabilities,
projected future earnings, which were revised substantially as a
result of the acquisitions of Lintel Security and Digipass, and tax
planning strategies.
At December 31, 1997, VASCO had net operating loss carryforwards
of $4,722,000 and foreign net operating loss carryforwards
approximating $1,025,000, which may be used to offset future taxable
income of VASCO generated in the United States. The net operating
loss carryforwards expire in various amounts beginning in 2002 and
continuing through 2012.
Dividends and Accumulated Deficit
VASCO paid dividends of $82,000 and $108,000 during the years
ended December 31, 1997 and 1996, respectively. These dividend
payments were attributable to 9,000 shares of VASCO Series B
Preferred Stock issued in 1994. During 1997, all 9,000 shares of
VASCO Series B Preferred Stock were converted into VASCO Corp. common
stock. VASCO began 1997 with an accumulated deficit of $9,903,000.
As a result of the 1997 net loss, this deficit has increased to
$15,902,000. VASCO's 1997 increase in accumulated deficit can be attributed
primarily to increased legal, accounting and printing costs incurred
during 1997 associated with the Exchange Offer held by VASCO during
the first quarter of 1998, the amortization of intangibles related to
the 1996 acquisitions of Lintel Security and Digipass, strategic
marketing programs implemented during 1997 and a product acquisition.
1996 COMPARED TO 1995
The following discussion and analysis should be read in conjunction
with VASCO's Consolidated Financial Statements for the years ended
December 31, 1996 and 1995.
Revenues
VASCO's consolidated revenues for the year ended December 31,
1996 were $10,192,000, an increase of $6,497,000, or 176%, as
compared to the year ended December 31, 1995. VASCO Europe
contributed $5,374,000, or 53%, of total consolidated revenues. Of
the $5,374,000 total revenues contributed by VASCO Europe,
$5,180,000, or 96%, represent data security product revenues, with
the remaining $194,000, or 4%, representing revenues from the IVR
products. Revenues (and other operating results) attributable to
VASCO Europe are included only from the time of acquisition of Lintel
Security and of Digipass.
VASCO NA's revenues were $4,818,000 for 1996, an increase of
$1,118,000, or 30%, as compared to 1995 and accounted for 47% of
consolidated revenues in 1996. Security product sales increased
$2,157,000 to $4,614,000 in 1996, representing a 88% increase over
1995. Conversely, VPS, the former technical and training unit which
was sold in August of 1996, had revenues of $204,000 in 1996,
representing a decrease of $1,034,000, or 84%, for the comparable
period in 1995. VPS accounted for just 4% of VASCO NA's revenues in
1996, down from 33% in 1995.
Cost of Goods Sold
Consolidated cost of goods sold for the year ended December 31,
1996 was $5,871,000, an increase of $2,984,000, or 103%, as compared
to the year ended December 31, 1995. This increase is primarily
attributable to the acquisition of VASCO Europe in 1996 and offset to
some extent by a decrease in VASCO NA's combined cost of goods sold.
VASCO Europe's cost of goods sold was $3,378,000, accounting for 58%
of the consolidated cost of goods sold.
VASCO NA's cost of goods sold was $2,493,000 in 1996,
representing a decrease of $394,000, or 14%, from 1995. This decrease
was primarily a result of a decrease of $814,000, attributable to
VPS's operations prior to its disposal. This was partially offset by
an increase in cost of goods sold related to security products of
$420,000. VASCO NA's cost of goods sold for security products was
$2,453,000 in 1996, as compared to $2,033,000 in 1995, representing
an increase of 21%. The cost of goods sold for security products
increased as a percentage less than revenues for security products.
This is due to certain non-recurring costs related to capitalized
development costs (approximately $350,000) and inventory write-downs
(approximately $100,000) included in the cost of goods sold for 1995.
The non-recurring charge for capitalized development costs in
the fourth quarter of 1995 related to several PC security products
that were not expected to generate future revenues. In addition, two
authentication products were deemed to have a shorter useful life
than originally estimated resulting in the acceleration of
amortization expense as a result of the change in estimate. The
useful lives were reduced due to technological advances in the
market, as well as VASCO's development activities with regard to its
AKII successor product (Digipass 300).
The non-recurring inventory write-downs resulted in the fourth
quarter of 1995 from management's review of discontinued products and
various electronic components. As a result of this review, reserves
were established to write-down the inventory to its estimated net
realizable value.
Gross Profit
VASCO's consolidated gross profit for the year ended December
31, 1996 was $4,321,000, an increase of $3,513,000, or 435%, over
1995. This represents a consolidated gross margin of 42%, as compared
to 1995's consolidated gross margin of 22%. VASCO Europe contributed
$1,996,000 to the consolidated gross profit representing a gross
margin of 37%. VASCO NA contributed $2,325,000 to the 1996 gross
profit as compared to $808,000 for 1995, an increase of $1,517,000 or
188%. Data security products accounted for 93% of VASCO NA's 1996
gross profit due to the reduction in VPS activity and the eventual
disposition of VPS during the year. Data security products only
accounted for 57% of gross profit during 1995, with VPS accounting
for the remaining 43% of gross profit.
VASCO NA's gross margin increased in 1996 to 46% from 22% in
1995. This is attributable to 1995 non-recurring costs related to
capitalized development costs and write-down of certain inventory,
and increased sales of higher margin security products as opposed to
lower margin VPS services.
Sales and Marketing Expenses
Consolidated sales and marketing expenses for the year ended
December 31, 1996 were $1,405,000, an increase of $1,160,000, or
473%, over 1995. Of the total increase, $548,000, or 47%, can be
attributed to the addition of VASCO Europe. Sales and marketing
expenses increased by $612,000, or 250%, for VASCO NA. The increase
for VASCO NA can be attributed to increased sales efforts, including,
in part, the addition of four sales people, and increased travel
costs; an increase in marketing activities, including print media
campaigns and other efforts, and an increased presence at trade
shows.
Research and Development
Consolidated R&D costs for the year ended December 31, 1996 were
$575,000, an increase of $333,000, or 138%, as compared to the year
ended December 31, 1995. R&D costs represented 6% of consolidated
revenues for 1996, approximately the same percentage as 1995. R&D
efforts are undertaken by both VASCO NA and VASCO Europe on behalf of
the consolidated group of companies. Whereas VASCO NA is primarily
responsible for the development of software products, VASCO Europe is
responsible for hardware development. Consequently, management of the
Company believes it is not meaningful to address R&D costs separately
at the operating company level.
VASCO expensed, as cost of goods sold, $180,000 and $445,000 in
1996 and 1995, respectively, reflecting the amortization of
capitalized development costs. In the fourth quarter of 1995 VASCO
accelerated the amortization of capitalized development costs to
reflect an adjustment to the estimated economic life of certain
products. The accelerated portion of 1995 amortization amounted to
approximately $350,000.
Net product development costs carried on VASCO's books as an
asset were $0 and $157,000 at December 31, 1996 and December 31,
1995, respectively. There were no product development costs
capitalized in 1996 or 1995.
General and Administrative Expenses
Consolidated general and administrative expenses for the year
ended December 31, 1996 were $3,648,000, an increase of $2,793,000,
or 326%, over 1995. Of the total increase, $1,426,000, or 51%, can be
attributed to the addition of VASCO Europe. General and
administrative expenses increased by $1,367,000, or 160%, for VASCO
NA. The increase for VASCO NA can be attributed to an increase in
administrative infrastructure to support the efforts of other areas
of the VASCO, as well as amortization of intangibles associated with
the acquisitions of Lintel Security and Digipass.
Acquired In-process Research and Development
VASCO expensed, as an operating expense, $7,351,000 pertaining
to the in-process research and development acquired in the Lintel
Security and Digipass acquisitions. Based upon independent
appraisals, approximately 67% of the acquisition premium was expensed
in accordance with U.S. Generally Accepted Accounting Principles. As
of December 31, 1996, there remained $3,372,000 of intangible assets
related to the acquisitions which will be carried on VASCO's books
and be amortized over an additional 30 - 78 months. As noted above,
$440,000 of the intangible assets were amortized to expense in 1996.
Operating Loss
VASCO's consolidated operating loss for the year ended December
31, 1996 was $8,658,000, compared to the consolidated operating loss
of $534,000 for 1995. The 1996 consolidated operating loss included a
write-off of acquired in-process research and development in the
amount of $7,351,000 and the $440,000 of intangible assets amortized
to expense in 1996. The operating loss, before the write-off and the
amortization of intangibles expensed, was $867,000. Of this amount,
VASCO NA contributed a loss of $911,000 and VASCO Europe contributed
net operating income of $44,000.
VASCO's 1996 operating loss, before the write-off of acquired
in-process research and development and the amortization of
intangibles expensed, was attributable to continued investment in R&D
(primarily for Digipass 300), sales and marketing investments in
North America, one-time professional fees associated with the
acquisitions of Lintel Security and Digipass, the expenses for
development of corporate infrastructure, such as sales personnel and
administrative staff and office equipment, and, in general, the costs
associated with consolidating and assimilating the Lintel Security
and
Digipass acquisitions.
Interest Expense
Consolidated interest expense in 1996 was $346,000 compared to
$74,000 in 1995. The increase can be attributed to average borrowings
in 1996 being substantially above those levels of the previous year.
See "Liquidity and Capital Resources" below.
Income Taxes
VASCO recorded tax expense for the year ended December 31, 1996
of $162,000 for VASCO NA and $32,000 for VASCO Europe. The tax
expense recorded for VASCO NA represents the revaluation (write-down)
of deferred tax assets. As of December 31, 1996, VASCO reflected a
net deferred tax asset of $283,000, which represented the amount that
management deemed would more likely than not be realized. The net
deferred tax asset was net of a valuation allowance of $631,000,
which was established during 1996, considering the effects of
reversing deferred tax liabilities, projected future earnings, which
were revised substantially as a result of the acquisitions of Lintel
Security and Digipass, and tax planning strategies.
VASCO has net operating loss carryforwards of $1,626,000 as of
December 31, 1996, which may be used to offset future taxable income
of VASCO generated in the United States. The net operating loss
carryforwards expire in various amounts beginning in 2010 and
continuing through 2011.
Dividends and Accumulated Deficit
VASCO paid dividends of $108,000 in each of 1996 and 1995. These
dividend payments were attributable to 9,000 shares of VASCO Series B
Preferred Stock issued in 1994. VASCO began 1996 with an accumulated
deficit of $554,000. As a result of the 1996 net loss, this deficit
increased to $9,903,000.
VASCO's 1996 loss before taxes, the resulting net loss after
taxes, and the resulting increase in accumulated deficit, can be
attributed primarily to the acquisitions of Lintel Security and
Digipass and the write-off of acquired in-process research and
development. The write-off of acquired in-process research and
development accounted for 81% of VASCO's 1996 loss before taxes.
RECENT DEVELOPMENTS
Loan Agreement/License Agreement. On March 31, 1998, the
Company entered into two agreements with Lernout & Hauspie Speech
Products N.V. ("L&H"): a loan agreement and a license agreement. The
loan agreement, in the amount of $3 million, bears interest at the
Prime Rate plus 1%, payable quarterly, and matures on January 4,
1999. This loan is convertible at the option of the holder into
shares of the Company's Common Stock based upon the average closing
price of VASCO Corp.'s common stock for the 10 trading days prior to
March 11, 1998, the date the Exchange Offer closed. This loan was
funded in April 1998.
The license agreement with L&H is for the use of L&H's speech
recognition and speech verification technology for data security,
telecom and physical access applications. This license agreement
includes a prepayment of royalties by the Company in the amount of
$600,000, payable no later than June 30, 1998 and an additional
prepayment in the amount of $200,000, payable no later than March 31,
1999. L&H is an international leader in the development of advanced
speech technology for various commercial applications and products.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, VASCO has financed its operations through a
combination of the issuance of equity securities, private borrowings,
short-term commercial borrowings, cash flow from operations, and
loans from Mr. T. Kendall Hunt, VASCO's Chief Executive Officer and
one of the stockholders of its original corporate predecessor.
In 1995, VASCO borrowed $130,000 from Mr. Hunt, resulting in a
total loan payable balance of $190,000 at the end of 1995. This loan
was repaid in 1996 from the proceeds of private placements during
1996.
Also during 1995, VASCO privately placed units consisting of
217,352 shares of VASCO's common stock and 108,676 VASCO Warrants to
purchase one share of VASCO common stock at $6.00. The VASCO Warrants
are exercisable at the option of the holder; however, VASCO maintains
the right to require exercise of the warrants 30 days prior to a
public offering of VASCO's common stock. Total issue fees and costs
of $22,261 have been netted against $369,498 of proceeds from the
placement.
Of the total 108,676 units issued in the private placement
described in the immediately preceding paragraph, 53,000 units were
sold to a group of investors subject to a Registration Rights
Agreement ("Rights Agreement") entered into on October 19, 1995. The
agreement required that the common stock portion of the units
(106,000 shares) be covered by an effective registration statement
under the Securities Act by July 1, 1996. The described remedy in the
event of default was a put option (the "put"), allowing the investors
to exchange their units for consideration of $7.00 per unit, or $3.50
per common share. Due to a delay in making the required filing with
the Securities and Exchange Commission, VASCO agreed to an extension
and renegotiation of the Rights Agreement. This resulted in a
requirement for an effective registration statement on or before
March 31, 1997 and an increase in the put price to $14.00 per unit,
or $7.00 per share. This filing deadline also was not satisfied and
VASCO and the investor group entered into an amended agreement under
which (i) the investors "put" approximately one-third of their shares
(35,328 shares) back to VASCO with payments totaling $247,261 being
remitted to the investor group, (ii) additional VASCO Warrants to
purchase an aggregate of 141,344 shares of VASCO common stock at a
price of $5.19 per share were granted to the investor group, (iii)
the March 31, 1997 deadline for an effective registration statement
was changed to March 31, 1998, and (iv) the investor group received
the right to put their shares to VASCO if after March 7, 1997, VASCO
raises financing of $5,000,000 or more. These warrants were exchanged
pursuant to the Exchange Offer and now represent warrants for the
Company's Common Stock. [The Company and the investor group disagree
as to the applicability of certain provisions of the Rights Agreement
following the Exchange Offer.]
During the second quarter of 1996, VASCO placed additional units
consisting of 666,666 shares of VASCO common stock and 137,777
warrants, each of which entitles the holder to purchase one share of
VASCO common stock at $4.50. The private placement of shares and
warrants generated gross proceeds of $3,000,000. In addition, in the
same transaction, VASCO borrowed $5,000,000 and issued a $5,000,000
convertible note due on May 28, 2001. The note bears interest at 9%,
with interest payable to the holder on a quarterly basis. The holder
may, at its option, elect to receive interest payments in cash or
Common Stock. In calculating the shares of VASCO common stock to be
issued in lieu of cash interest, the average closing price for shares
of VASCO common stock for the previous 20 trading days is used. In
the event VASCO receives funds equal to or greater than $30,000,000
from a public offering of its Common Stock, the holder of this note
has the right to require VASCO to pay all amounts due and owing under
the note within 30 days of receipt by VASCO of notice from the holder
of exercise of this right. Total issue fees and costs of $170,000
related to the equity portion of this transaction have been netted
against the $3,000,000 of proceeds from the equity private placement.
In addition, 55,555 shares of VASCO common stock and 8,889 VASCO
Warrants, each of which entitles the holder to purchase one share of
VASCO common stock at $4.50, were issued as commissions related to
the placement. These warrants were exchanged pursuant to the Exchange
Offer and now represent warrants for the Company's Common Stock.
The proceeds from the $8,000,000 private placement ($3,000,000
equity and $5,000,000 debt) were used to make the first installment
of $4,800,000 toward the Digipass purchase, to satisfy one-time
expenses related to the Lintel Security and Digipass acquisitions, to
retire VASCO's debt to its commercial lender and to Mr. Hunt, and to
fund working capital requirements in general.
In 1996, VASCO raised additional funds in a private placement of
units consisting of 237,060 shares of VASCO common stock and 35,329
VASCO Warrants, each of which entitles the holder to purchase one
share of VASCO common stock at $4.50. Total issue fees and costs of
$47,885 were netted against the $1,066,770 in total proceeds from the
placement in VASCO's financial statements. In addition, 16,489 shares
of VASCO common stock were issued as commissions related to the
placement. These warrants were exchanged pursuant to the Exchange
Offer and now represent warrants for the Company's Common Stock.
The net effect of 1996 activity resulted in an increase in cash
of $1,069,000, resulting in a cash balance of $1,814,000 at December
31, 1996, compared to $745,000 at the end of 1995. VASCO's working
capital at December 31, 1996 was $4,902,000, an increase of
$3,828,000, or 356%, from $1,074,000 at the end of 1995. The majority
of the improvement is attributable to an increase in all current
asset categories, aided by the addition of VASCO Europe's assets and
the private placements made during the year, offset with the final
payment related to the Digipass acquisition in the amount of
$3,400,000. VASCO's current ratio was 2.32 at December 31, 1996,
compared to 2.01 at the end of 1995.
Effective in June 1997, VASCO established a bridge loan with
Generale Bank in the amount of $2,500,000, evidenced by five
convertible notes in the amount of $500,000 each. Upon completion of
the Exchange Offer, the Company became obligated for all obligations
under the loan and the notes. These notes bear interest at a rate of
3.25%, payable quarterly, and are due September 30, 1998, at which
time 116% of the principal amount becomes due and payable. In the
event the Company completes a public offering prior to September 30,
1998, the holder of a note has the option within seven days after the
completion of a public offering to require the note to be repaid at
100% of the principal amount thereof in cash or in Common Stock
(valued at the public offering price), at the holder's election,
together with all accrued and unpaid interest to the date of
repayment plus additional special interest payable in cash as
follows: $88,235 if repayment is between January 1, 1998 and March
31, 1998, both dates inclusive; and $125,000 if repayment is between
April 1, 1998 and September 30, 1998, both dates inclusive. In the
event that the holder of the note does not elect within seven days
after completion of the public offering to require the note to be
repaid, the holder may at any time thereafter (until the close of
business on the September 30, 1998 maturity date) require the
principal amount of the note to be repaid in shares of Common Stock
(valued at the public offering price) plus accrued and unpaid
interest to the date of repayment (but no additional special interest
shall be payable). If the notes have not been repaid prior to the
September 30, 1998 maturity date, and the Company fails to repay the
note prior to November 1, 1998, then on and from November 1, 1998
(but before payment of the note), in the event a public offering has
not been completed the bank may convert the principal amount into
shares of the Company's Common Stock (i) at a conversion price equal
to a historical 20 day trading price in the United States if the
stock is listed or quoted on the Nasdaq, Easdaq or another national
U.S. stock exchange, plus the payment of $250,000 in special
interest, payable in cash or shares at the option of the bank, or
(ii) if the shares are not so listed, at a conversion price of $1.00.
VASCO also issued warrants entitling the bank to acquire an aggregate
of 40,000 shares of VASCO's common stock at exercise prices ranging
from $4 to $10 per share, which warrants became warrants for the
Company's Common Stock upon completion of the Exchange Offer. These
notes are expected to be renegotiated upon maturity.
The net effect of 1997 activity resulted in an increase in cash
of $84,000, resulting in a cash balance of $1,898,000 at December 31,
1997, compared to $1,814,000 at the end of 1996. VASCO's working
capital at December 31, 1997 was $1,945,000, a decrease of
$2,957,000, or 60%, from $4,902,000 at the end of 1996. The majority
of the change is attributable to a decrease in all current asset
categories with the exception of cash, with current liabilities
remaining consistent from year to year. VASCO's current ratio was
1.51 at December 31, 1997, compared to 2.32 at the end of 1996.
VDSE entered into a convertible loan agreement with Banque
Paribas Belgique S.A. effective August, 1997, in order to refinance
the $3.4 million payment due December 31, 1997 in connection with
VASCO's acquisition of Digipass. The terms of the agreement provide
that the $3.4 million principal amount is convertible, at the option
of the lender, into shares of the Company's Common Stock. This loan
bears interest at the rate of 3.25%, payable annually, and matures on
September 30, 2002. The loan is convertible, commencing on the
earlier of January 1, 1999 or the date of a public offering of the
Company's shares on the EASDAQ and/or NASDAQ and terminating on
August 31, 2002, at a conversion price equal to the per share public
offering price, provided, however, that if no such offering has
occurred prior to January 1, 1999, and the loan is converted after
such date but prior to a public offering, the conversion price is the
average closing market price for shares of the Company's Common Stock
on the NASD Electronic Bulletin Board system for the 20 trading days
prior to the date of the notice of conversion, less 10%. In the event
a public offering is completed, the lender may at its option (by
written notice within seven days after receipt by the Company of
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: $340,000 if repayment is on or before June 30,
1998, $510,000 if repayment is between July 1, 1998 and December 31,
1998 (both dates inclusive), and $680,000 if repayment is on January
1, 1999 or later.
The Company intends to seek acquisitions of businesses, products
and technologies that are complementary or additive to those of the
Company. While from time to time the Company engages in discussions
with respect to potential acquisitions, the Company has no plans,
commitments or agreements with respect to any such acquisitions as of
the date of this Form 10-K and currently does not have excess cash
for use in making acquisitions. There can be no assurance that any
such acquisition will be made.
The Company believes that its current cash balances and
anticipated cash revenues from operations will be sufficient to meet
its anticipated cash needs through December 31, 1998. Continuance of
the Company's operations beyond December 31, 1998, however, will
depend on the Company's ability to obtain adequate financing. To this
end, in March 1998, the Company entered into a loan agreement in the
amount of $3 million with Lernout & Hauspie Speech Products N.V.
("L&H"); the funding of this loan is occurred early in the second
quarter of 1998. The loan bears interest at the highest "prime rate"
published in The Wall Street Journal under the heading "Money Rates"
on such day plus 1%, payable quarterly, and matures on January 4,
1999. L&H is an international leader in the development of advanced
speech technology for various commercial applications and products.
The loan is convertible at the option of L&H into shares of the
Company's Common Stock at the rate of $5.6813 per share (based on the
average closing price of VASCO Corp.'s common stock for the ten
trading days prior to March 12, 1998).
L&H and VASCO have agreed to work together to apply L&H's
patented voice technology in various applications of voice
authentication. VASCO's first application is for data and network
security, authenticating the user through a voiceprint, matching only
to a specific individual's pre-recorded voice . Voice authentication
will compliment VASCO's other methods of authentication, providing
strong, yet flexible choices for the end customer. It will also
allow VASCO to reach markets that it currently cannot serve,
presenting new opportunities for growth.
The Company has also entered into engagement letters with Banque
Paribas S.A. and Generale Bank for a possible future public offering.
Further, the Company has had preliminary discussions regarding other
possible debt or equity financing. There can be no assurance,
however, that the Company will be successful in effecting a public
offering or obtaining other additional financing.
YEAR 2000 CONSIDERATIONS
Many existing computer systems and software products are coded
to accept only two digit entries in the date code field with respect
to year. With the 21st century less than two years away, the date
code field must be adjusted to allow for a four digit year. The
Company believes that its internal systems are Year 2000 compliant,
but the Company will need to take the required steps to make its
existing products compliant. The total estimated cost of this
exercise is $100,000, with an anticipated completion date of December
31, 1998. There can be no assurance, however, that the Company will
meet its anticipated completion date or that the total cost will not
exceed $100,000. The Company believes that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues
as companies expend significant resources to upgrade their current
software systems for Year 2000 compliance. This, in turn, could
result in reduced funds available to be spent on other technology
applications, such as those offered by the Company, which could have
a material adverse effect on the Company's business and results of
operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standard Board issued
SFAS No. 130, "Reporting Comprehensive Income." The Company is
required to adopt SFAS No. 130 for periods beginning after December
15, 1997. This statement establishes standards for reporting
comprehensive income and its components in a full set of general-
purpose financial statements. The standard requires all items that
are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed in equal prominence with the other
financial statements. The standard is not expected to have a
material impact on the Company's current presentation of income.
In June 1997, the Financial Accounting Standards Board also
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company is required to adopt the
disclosures of SFAS No. 131 beginning with its December 31, 1998
annual financial statements. This statement establishes standards
for the way companies are to report information about operating
segments. It also establishes standards for related disclosures
about products and services, geographic areas and major customers.
The Company is currently evaluating the impact of this standard on
its financial statements.
In November 1997, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") No. 97-2, "Software
Revenue Recognition." The Company is required to adopt SOP 97-2 on
January 1, 1998. SOP 97-2 is intended to reduce diversity in current
revenue recognition practices within the software industry. The
Company is currently evaluating the effects of SOP 97-2 on its
operations.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8 - Financial Statements and Supplementary Data
The information in response to this item is included in the
Company's consolidated financial statements, together with the report
thereon of KPMG Peat Marwick 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 15, 1998, are incorporated herein by reference. The section
entitled "Executive Officers of the Registrant" appearing immediately
after Part I of this Report is 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 15, 1998, 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 15, 1998, 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-18 of this Form 10-K:
Consolidated Balance Sheets as of December 31, 1996 and 1997
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Stockholders' Equity (Deficit) of the
Years Ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
(2) The following financial statement schedule of the Company
is included on page S-2 of this Form 10-K:
Schedule II
All other financial statement schedules are omitted because such
schedules are not required or the information required has been
presented in the aforementioned financial statements.
(3) The following exhibits are filed with this Form 10-K or
incorporated by reference as set forth below:
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 Corp., 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 Corp., 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 Corp. and APL
Land Transport Services, Inc. dated as of August 29,
1997.
+10.9 Office Lease by and between VASCO Corp. 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 sa and Digipass
sa 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 Corp.
and Wizdom Systems, Inc. dated August 20, 1996.
+10.13 1997 VASCO Data Security International, Inc. Stock
Option Plan, as amended.
+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 Corp. dated June 20, 1997, as amended.
+10.19 Financing Agreement between Generale Bank and VASCO
Corp. dated as of June 27, 1997.
+10.20 Letter Agreement between Generale Bank and VASCO Corp.
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 Corp. 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.
+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 Corp.
+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 Corp. 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 Corp. 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.
21 Subsidiaries of Registrant.
27 Financial Data Schedule.
+ 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
September 12, 1997.
** Confidential treatment has been granted for the omitted portions
of this document.
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, 1997.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report to security holders covering the Registrant's
last fiscal year has been sent to security holders and no proxy
statement, form of proxy or other proxy soliciting material has been
sent to the Registrant's security holders with respect to any annual
or other meeting of security holders. This Form 10-K and the
Registrant's proxy statement for its Annual Meeting of Stockholders
to be held June 15, 1998 will be sent to Registrant's security
holders subsequent to the filing of this Form 10-K. The Registrant
will file with the Securities and Exchange Commission the proxy
statement for Registrant's Annual Meeting to be held June 15, 1998.
[Download Table]
VASCO CORP.
CONSOLIDATED BALANCE SHEETS
December 31,
----------------
ASSETS 1996 1997
Current assets: ---- ----
Cash $1,813,593 $ 1,897,666
Accounts receivable, net of allowance for
doubtful accounts of $452,000 and
$429,000 in 1996 and 1997 3,242,618 2,458,451
Inventories, net 2,182,743 1,001,294
Prepaid expenses 471,902 86,426
Notes receivable 225,141 -
Deferred income taxes 283,000 83,000
Other current assets 399,963 221,572
--------- ---------
Total current assets 8,618,960 5,748,409
Property and equipment:
Furniture and fixtures 143,560 488,338
Office equipment 592,965 322,434
--------- ---------
736,525 810,772
Accumulated depreciation (360,079) (497,381)
--------- ---------
376,446 313,391
Goodwill, net of accumulated and $198,267
amortization of $58,571 in 1996 and 1997 819,041 704,124
Other assets 2,553,108 1,609,901
---------- ----------
Total assets $12,367,555 $ 8,375,825
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current maturities of long-debt $ 91,160 $ 3,185,400
Accounts payable 1,945,644 1,083,965
Customer deposits 1,022,195 426,914
Other accrued expenses 658,084 1,606,810
--------- ---------
Total current liabilities 3,717,083 3,803,089
Long-term debt, including stockholder
notes of $5,713,750 and $5,000,000
in 1996 and 1997 9,113,750 8,442,946
Common stock subject to redemption 741,894 494,668
Stockholders' equity (deficit):
Preferred stock, 8% cumulative series A
convertible, $.01 par value -
317,181 shares authorized; 117,171
shares issued and outstanding
in 1996; -0- shares issued and
outstanding in 1997 1,172 -
Preferred stock, 12% cumulative series B
convertible, $.01 par value -
9,500 shares authorized; 9,000 shares
issued and outstanding in 1996;
-0- shares issued and outstanding in
1997 90 -
Common stock, $.001 par value -
50,000,000 shares authorized;
18,453,332 shares issued and outstanding
in 1996; 20,132,968 shares issued and
outstanding in 1997 18,454 20,133
Additional paid-in capital 8,783,425 9,186,726
Accumulated deficit (9,903,257) (15,901,575)
Cumulative translation adjustment (105,056) (170,162)
--------- ---------
Total stockholders' equity (deficit) (1,205,172) (6,864,878)
--------- ---------
Total liabilities and stockholders'
equity (deficit) $12,367,555 $ 8,375,825
========== =========
See accompanying notes to consolidated financial statements.
[Download Table]
VASCO CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31,
-------------------------------
1995 1996 1997
---- ---- ----
Revenue:
Data security products and
services $ 2,457,587 $ 9,988,885 $ 12,302,185
Training and consulting 1,237,546 203,600 -
---------- ---------- ----------
Total revenues 3,695,133 10,192,485 12,302,185
Cost of goods sold:
Data security products and
services 2,033,186 5,678,223 6,286,688
Training and consulting 854,217 193,245 -
---------- ---------- ----------
Total cost of goods sold 2,887,403 5,871,468 6,286,688
---------- ---------- ----------
Gross profit 807,730 4,321,017 6,015,497
---------- ---------- ----------
Operating costs:
Sales and marketing 245,212 1,405,453 3,380,777
Research and development 242,002 574,766 1,801,575
General and administrative 854,979 3,647,760 4,768,378
Acquired in-process research
and development - 7,350,992 -
---------- ---------- ----------
Total operating costs 1,342,193 12,978,971 9,950,730
---------- ---------- ----------
Operating loss (534,463) (8,657,954) (3,935,233)
Interest expense (73,576) (346,248) (1,148,183)
Other expense, net - (42,407) (226,423)
---------- ---------- ----------
Loss before income taxes (608,039) (9,046,609) (5,309,839)
Provision (benefit) for
income taxes (251,000) 194,000 606,579
---------- ---------- ----------
Net loss (357,039) (9,240,609) (5,916,418)
Preferred stock dividends (108,254) (108,160) (81,900)
---------- ---------- ----------
Net loss available to
common stockholders $ (465,293) $ (9,348,769) $ (5,998,318)
========== ========== ==========
Basic loss per common share $ (0.03) $ (0.53) $ (0.31)
========== ========== ==========
Weighted average common shares
outstanding 14,817,264 17,533,369 19,105,684
========== ========== ==========
See accompanying notes to consolidated financial statements.
[Enlarge/Download Table]
VASCO CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Series A Series B Cumulative
Preferred Preferred Transla-
Stock Stock Common Stock Accum tion Treasury Stock Total
Description Shares Amt Shares Amt Shares Amt APIC Deficit Adj. Shares Amt Equity
----------- ------ --- ------ --- ------ --- ---- ------- ---- ------ --- ------
Balance at 12/31/94 317,181 $3,172 9,000 $90 15,693,575 $15,694 $1,394,588 $(89,195) $ - 1,201,250 $(40,650) $1,283,699
Net loss - - - - - - - (357,039) - - - (357,039)
Cash dividends paid
on preferred B - - - - - - - (108,000) - - - (108,000)
Dividends payable on
pref. A upon conv. - - - - - - - (254) - - - (254)
Issuance of treasury
stock - - - - - - 159,688 - - (217,352) 7,349 167,037
Stock compensation - - - - 50,000 50 66,708 - - (250,975) 8,486 75,244
Exercise of stock
options - - - - 50,000 50 78,244 - - (445,000) 17,706 96,000
Common stock subject
to redemption - - - - - - (190,694) - - - - (190,694)
---------------------------------------------------------------------------------------------------------------
Balance at 12/31/95 317,181 3,172 9,000 90 15,793,575 15,794 1,508,534 (554,488) - 287,923 (7,109) 965,993
Net loss - - - - - - - (9,240,609) - - - (9,240,609)
Cash dividends paid
on preferred B - - - - - - - (108,000) - - - (108,000)
Dividends payable on
pref. A upon conv. - - - - - - - (160) - - - (160)
Exercise of stock
options - - - - 24,000 24 5,215 - - - - 5,239
Issuance of common
stock - - - - 1,161,773 1,162 4,252,240 - - - - 4,253,402
Issuance of common
stock in connection
with Lintel acq. - - - - 140,651 141 3,387,769 - - (287,923) 7,109 3,395,019
Conv. of Series A
preferred stock (200,000)(2,000) - - 1,333,333 1,333 667 - - - - -
Cum. translation adj. - - - - - - - - (105,056) - - (105,056)
Common stock subject
to redemption - - - - - - (371,000) - - - - (371,000)
---------------------------------------------------------------------------------------------------------------
Balance at 12/31/96 117,181 1,172 9,000 90 18,453,332 18,454 8,783,425 (9,903,257)(105,056) - - (1,205,172)
Net loss - - - - - - - (5,916,418) - - - (5,916,418)
Cash dividends paid
on preferred B - - - - - - - (81,900) - - - (81,900)
Exercise of stock
options - - - - 189,375 189 42,281 - - - - 42,470
Cancellation of
common stock - - - - (16,489) (17) - - - - - (17)
Issuance of
common stock - - - - 83,714 83 418,079 - - (32,504) 227,528 645,690
Conv. of Series A
preferred stock (117,181)(1,172) - - 778,383 779 391 - - (2,842) 19,768 19,766
Conv. of Series B
preferred stock - - (9,000)(90) 644,653 645 (555) - - - - -
Repurchase of common
stock - - - - - - - - - 35,328 (247,296) (247,296)
Legal fees associated
with sale of stock - - - - - - (56,895) - - - - (56,895)
Cum. translation adj. - - - - - - - - (65,106) - - (65,106)
---------------------------------------------------------------------------------------------------------------
Balance at 12/31/97 - $ - - $ - 20,132,968 $ 20,133 $9,186,726$(15,901,575)$(170,162) - $ - $(6,864,878)
===============================================================================================================
See accompanying notes to consolidated financial statements.
[Download Table]
VASCO CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
-------------------------------
1995 1996 1997
Cash flows from operating activities: ---- ---- ----
Net loss $ (357,039) $ (9,240,609) $ (5,916,418)
Adjustments to reconcile net loss to
net cash provided by
(used in) operating activities:
Acquired in-process research and
development - 7,350,992 -
Depreciation and amortization 483,545 728,734 1,248,807
Interest paid in shares of
common stock - 118,750 418,196
Deferred income taxes (251,000) 162,000 200,000
Compensation expense 75,244 - -
Changes in current assets and
current liabilities, net of
acquisitions:
Accounts receivable, net 168,858 (1,067,374) 784,167
Inventories, net 53,302 578,143 1,181,449
Other current assets (48,640) (279,940) 563,867
Accounts payable (23,911) 459,068 (861,679)
Customer deposits - 1,022,195 (595,281)
Other accrued expenses (41,660) (1,728,397) 948,726
---------- ---------- ----------
Net cash provided by (used in)
operations 58,699 (1,896,438) (2,028,166)
---------- ---------- ----------
Cash flows from investing activities:
Acquisition of Lintel/Digipass - (4,461,144) -
Additions to property and equipment (93,749) (283,142) (127,646)
---------- ---------- ----------
Net cash used in investing activities (93,749) (4,744,286) (127,646)
---------- ---------- ----------
Cash flows from financing activities:
Series B preferred stock dividends (108,000) (108,000) (81,900)
Net proceeds from issuance of common
stock 443,237 4,133,605 (56,895)
Proceeds from exercise of stock
options - 5,238 42,470
Repurchase of common stock - - (247,261)
Proceeds from issuance of debt 10,986 4,986,096 2,716,141
Repayment of debt (404,697) (1,202,178) (67,564)
---------- ---------- ----------
Net cash provided by financing
activities 741,526 7,814,761 2,304,991
Effect of exchange rate changes on cash - (105,056) (65,106)
---------- ---------- ----------
Net increase in cash 706,476 1,068,981 84,073
Cash, beginning of period 38,136 744,612 1,813,593
---------- ---------- ----------
Cash, end of period $ 744,612 $ 1,813,593 $ 1,897,666
========== ========== ==========
Supplemental disclosure of cash flow
information:
Interest paid $ 67,087 $ 51,929 $ 53,865
Income taxes paid - $ 120,319 $ 415,480
Supplemental disclosure of noncash investing and
financing activities:
Fair value of assets acquired from
Lintel/Digipass $12,003,644
Cash paid (4,461,144)
----------
Notes payable, common stock and
warrants issued $ 7,542,500
==========
Common stock issued upon conversion of
Series A preferred stock $ - $ 2,000 $ 1,172
========= ============ ==========
Common stock issued upon conversion of
Series B preferred stock $ - $ - $ 90
========= =========== ==========
See accompanying notes to consolidated financial statements.
VASCO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Nature of Operations
VASCO Corp. and its wholly owned subsidiaries, VASCO Data
Security, Inc., and VASCO Data Security NV/SA (the Company), offer a
variety of computer security products and services. The Company's
patented and proprietary hardware and software products provide
computer security, Advanced Authentication Technology and RSA/DES
encryption for financial institutions, industry and government. The
primary market for these products is Europe.
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.
Principles of Consolidation
The consolidated financial statements include the accounts of
VASCO Corp. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Revenue Recognition
Revenues from the sale of computer security hardware and
imbedded software are recorded upon shipment. No significant Company
obligations exist with regard to delivery or customer acceptance
following shipment.
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. The
cost and accumulated depreciation of property sold or retired are
removed from the respective accounts and the resultant gains or
losses, if any, are included in current operations.
Software Costs
The Company capitalizes software development costs in accordance
with Statement of Financial Accounting Standards (SFAS) No. 86.
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. Unamortized capitalized costs determined to be in
excess of the net realizable value of a product are expensed at the
date of such determination.
The Company expensed $444,795, $180,275 and $0 in 1995, 1996 and
1997, respectively, for the amortization of capitalized software
costs.
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 and Long-Lived Assets
The following disclosures of the estimated fair value of
financial instrument 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, 1996 and 1997, except for notes payable and long-term
debt, for which the fair value is not determinable.
On January 1, 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of," under which the Company has reviewed
long-lived assets and certain intangible assets and determined that
their carrying values as of December 31, 1997 are recoverable in
future periods.
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 25, "Accounting for Stock Issued to
Employees," and provide pro forma net income and earnings per share
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 25 and provide the pro forma disclosures of SFAS No. 123.
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. Gains and losses resulting from
foreign currency transactions are included in the consolidated
statements of operations.
Goodwill
Goodwill is amortized on a straight-line basis over the expected
period to be benefited, which is seven years. Adjustments to the
carrying value of goodwill are made if the sum of expected future
undiscounted net cash flows from the business acquired is less than
the book value of goodwill.
Loss Per Common Share
In the fourth quarter of 1997, the Company adopted SFAS No. 128,
"Earnings Per Share," which established new methods for computing and
presenting earnings per share ("EPS") and replaced the presentation
of primary and fully-diluted EPS with basic ("Basic") and diluted
EPS. 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.
Because the Company reported a net loss for the years ended December
31, 1995, 1996 and 1997, per share amounts have been presented under
the basic method only.
Had the Company reported net earnings for the years ended
December 31, 1995, 1996 and 1997, the weighted average number of
shares outstanding would have potentially been diluted by the
following common equivalent securities (not assuming the effects of
applying the treasury stock method to outstanding stock options or
the if-converted method to convertible securities):
[Download Table]
1995 1996 1997
---- ---- ----
Stock options ......... 1,425,382 1,661,632 1,945,257
Warrants .............. 200,000 928,578 1,056,922
Convertible notes (June 1996) - 518,595 518,595
Convertible notes (July 1997)* - - 657,895
Convertible notes
(August 1997)* ........ - - 893,632
--------- --------- ---------
1,625,382 3,108,805 5,072,301
========= ========= =========
* Due to the contingent nature of the conversion feature of these
notes, a 20-day average market price was used to calculate the
diluted number of shares.
Additionally, net earnings applicable to common stockholders for
the years ended December 31, 1996 and 1997 would have been increased
by interest expense related to the convertible notes of $265,450 and
$980,250, respectively.
Note 2 - Acquisitions
Effective March 1, 1996, the Company acquired a 15% interest in
Lintel NV (Lintel). On June 1, 1996, the Company acquired the
remaining 85% of Lintel. Lintel, located in Brussels, Belgium, was a
developer of security technologies for personal computers, computer
networks and telecommunications systems, using cryptographic
algorithms such as DES and RSA. The results of Lintel's operations
are included in the Company's consolidated statement of operations
from March 1, 1996 with minority interest being reflected in other
expense in the consolidated statement of operation for the period
from March 1, 1996 to June 1, 1996. The purchase price was
$4,432,000, consisting of $289,482 in cash, $747,500 in 8%
convertible notes payable due May 30, 1998 and convertible to common
stock at a rate of $7.00 per share, 428,574 shares of the Company's
common stock valued at $7.00 per share, and 100,000 purchase warrants
for the Company's common stock at an exercise price of $7.00. The
warrants were recorded at their fair value on the date of grant.
The acquisition of Lintel was accounted for as a purchase and,
accordingly, the acquired assets have been recorded at their
estimated fair values at the date of the acquisition. Acquired in-
process research and development in the amount of $2,900,000 was
expensed during 1996 in conjunction with the acquisition, based upon
an independent third-party valuation. Goodwill related to this
transaction was $387,000, which is being amortized over a period of
seven years.
Effective July 1, 1996, the Company acquired Digipass s.a.
(Digipass). Digipass, located in Belgium, was a developer of
security technologies for personal computers, computer networks and
telecommunications systems using the DES cryptographic algorithm.
Prior to the Company's acquisition of Digipass, the assets of the
interactive voice response (IVR) business of Digiline SA were
transferred to Digipass. Digipass' IVR products are used primarily
in telebanking applications and in corporate authentication and
access control technology. The purchase price was $8,200,000, with
$4,800,000 being paid at the effective date of acquisition, and the
balance of $3,400,000 in the form of a note, which was paid in August
1997.
The acquisition of Digipass was accounted for as a purchase and,
accordingly, the acquired assets and liabilities have been recorded
at their estimated fair values at the date of the acquisition.
Acquired in-process research and development in the amount of
$4,451,000 was expensed during 1996, based upon an independent third-
party valuation. Goodwill related to this transaction was $491,000,
which is being amortized over a period of seven years. The results
of operations for Digipass have been included in the consolidated
statement of operations subsequent to July 1, 1996.
Other assets, resulting from the acquisitions of Lintel and
Digipass, are comprised of the following at December 31, 1997 and
1996 (net of accumulated amortization):
[Download Table]
December 31,
-----------------
1996 1997
---- ----
Software and hardware technology . $ 1,540,417 $ 988,417
Workforce ........................ 514,167 200,388
Customer lists ................... 498,524 421,096
--------- ---------
$ 2,553,108 $ 1,609,901
========= =========
Software and hardware technology is being amortized over a
period of three to four years while workforce and customer lists are
being amortized over a period of seven years. Amortization of these
assets was $374,892 and $943,207 for the years ended December 31,
1996 and 1997, respectively. Included in the 1997 amortization is a
write-down in the amount of $234,493 related to the workforce of
Digipass, due to attrition realized during the year.
The following unaudited pro forma summary presents the Company's
results of operations as if the acquisitions has occurred at the
beginning of 1996. This summary is provided for informational
purposes only. If does not necessarily reflect the actual results
that would have occurred had the acquisitions been made as of those
dates or of results that may occur in the future.
[Download Table]
For the Year Ended
December 31,
------------------
1995 1996
---- ----
Total revenues .................$ 11,622,809 $13,654,420
Net loss ....................... (1,738,359) (9,507,076)
Net loss per common share ...... (0.12) (0.53)
Note 3 - Inventories
Inventories, consisting principally of hardware and component
parts, are stated at the lower of cost or market. Cost is determined
using the first-in-first-out (FIFO) method.
Inventories are comprised of the following:
[Download Table]
December 31,
----------------
1996 1997
---- ----
Component parts ................$ 338,325 $ 569,922
Work-in-process and finished
goods .......................... 1,998,286 595,133
Obsolescence reserves .......... (153,868) (163,761)
--------- ---------
$ 2,182,743 $ 1,001,294
========= =========
The Company uses multiple suppliers for the microprocessors used
in the production of hardware products, as well as for the assembly
of the products. The microprocessors are the only components of the
Company's hardware devices that would be considered non-commodity
items and may not be readily available on the open market. There is,
however, an inherent risk associated with each supplier of
microprocessors. In order to increase orders of microprocessors, a
lead time of 12 weeks is typically needed. The Company maintains a
sufficient inventory of all component parts to handle short-term
spikes in order quantities.
Note 4 - Other Accrued Expenses
Other accrued expenses are comprised of the following:
[Download Table]
December 31,
----------------
1996 1997
---- ----
Accrued expenses ............... $330,919 $ 553,683
Accrued interest ............... 126,966 657,799
Accrued payroll ................ - 171,231
Accrued dividends .............. 196,977 168,509
Other .......................... 3,222 55,588
-------- ----------
$658,084 $1,606,810
======== ==========
Note 5 - Income Taxes
At December 31, 1997, the Company has net operating loss
carryforwards approximating $4,722,000 and foreign net operating loss
carryforwards approximating $1,025,000. Such losses are available to
offset future taxable income at VASCO Corp. and its U.S. subsidiary
and expire in varying amounts beginning in 2002 and continuing
through 2012. In addition, if certain substantial changes in the
Company's ownership should occur, there would be an annual limitation
on the amount of the carryforwards which could be utilized. In fiscal
1995, the Company had no current tax provision due to the utilization
of approximately $66,000 of loss carryforward benefits.
Pretax loss from continuing operations was taxed in the
following jurisdictions:
[Download Table]
For the Year Ended
December 31,
-------------------------------
1995 1996 1997
---- ---- ----
Domestic ........... $ (608,039) $ (1,205,853) $ (4,655,220)
Foreign ............ - (7,840,756) (654,619)
--------- ----------- -----------
Total ......... $ (608,039) $ (9,046,609) $ (5,309,839)
========= =========== ===========
The provision for income taxes consists of the following:
[Download Table]
For the Year Ended
December 31,
-------------------------
1995 1996 1997
Current: ---- ---- ----
Federal ........... $ - $ - $ -
State ............. - - -
Foreign ........... - 31,670 406,579
Deferred:
Federal............ $ (219,846)$ 142,182 $ 175,176
State ............. (31,154) 20,148 24,824
Foreign ........... - - -
--------- ------- --------
Total ......... $ (251,000)$ 194,000 $ 606,579
========= ======= ========
The differences between income taxes computed using the
statutory federal income tax rate of 34% and the provisions
(benefits) for income taxes reported in the consolidated statements
of operations are as follows:
[Download Table]
For the Year Ended
December 31,
-----------------------------
1995 1996 1997
---- ---- ----
Expected tax benefit at the $(121,393) $(3,075,847) $(1,805,345)
Increase (decrease) in income taxes
resulting from:
State tax expense, net of federal (29,319) (56,414) (144,937)
Foreign taxes at rates other than - 163,107 149,549
Change in valuation allowance ... - 631,000 1,779,000
Nondeductible acquired in-process
technology - 2,499,337 -
Nondeductible expenses .......... (85,340) 2,831 622,257
Other, net ...................... (14,948) 29,986 6,055
--------- ---------- ----------
$(251,000) $ 194,000 $ 606,579
========= ========== ==========
The deferred income tax balances are comprised of the following:
[Download Table]
December 31,
-----------------
1996 1997
Deferred tax assets: ---- ----
U.S. net operating loss carryforward $ 631,000 $ 1,833,000
Foreign net operating loss
carryforward - 412,000
Inventory .................. 60,000 44,000
Accounts receivable ........ 175,000 149,000
Fixed assets ............... 44,000 30,000
Other ...................... 4,000 25,000
-------- ---------
Total gross deferred income tax assets 914,000 2,493,000
Less valuation allowance ...... (631,000) (2,410,000)
-------- ---------
Net deferred income taxes ..... $ 283,000 $ 83,000
======== =========
The net change in the total valuation allowance for the years
ended December 31, 1996 and 1997 was an increase of $631,000 and
$1,779,000, respectively. In assessing the realizability of deferred
tax assets, the Company considers whether it is more likely than not
that some portion or all of the deferred tax assets will be realized.
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the period in which these
temporary differences become deductible. This assessment was
performed considering the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning
strategies. The Company has determined that it is more likely than
not that $83,000 of deferred tax assets will be realized. The
remaining valuation allowance of $2,410,000 is maintained on deferred
tax assets which the Company has not determined to be more likely
than not realizable as of December 31, 1997. This valuation
allowance will be reviewed on a regular basis and adjustments made as
appropriate.
Note 6 - Debt
[Download Table]
Debt consists of the following:
December 31,
-----------------
1996 1997
---- ----
Convertible stockholder note, interest
payable at 9% ......................... $ 5,000,000 $ 5,000,000
Convertible stockholders' notes,
interest payable at 8% ................ 713,750 636,921
Note related to Digipass acquisition,
interest payable at 5.33% 3,400,000 -
Convertible note, interest payable at 3.25% - 3,400,000
Convertible note, interest payable at 3.25% - 2,500,000
Installment notes payable ............. 88,578 91,425
Installment notes payable, secured by
certain equipment ..................... 2,582 -
--------- ---------
9,204,910 11,628,346
Less current maturities ............. (91,160) (3,185,400)
--------- ---------
Long-term debt ...................... $ 9,113,750 $ 8,442,946
========= =========
In June 1997, the Company entered into a new financing agreement
with a European bank. The new agreement provides for $2.5 million in
financing, matures on September 30, 1998, bears interest at a rate of
3.25% annually and is convertible into common stock of the Company at
the option of the bank, at conversion prices as specified in the
agreement. In the event the Company completes a public offering prior
to September 30, 1998, the holder of a note has the option within
seven days after the completion of a public offering to require the
note to be repaid at 100% of the principal amount thereof in cash or
in common stock (valued at the public offering price), at the
holder's election, together with all accrued and unpaid interest to
the date of repayment plus additional special interest payable in
cash as follows: $88,235 if repayment is between January 1, 1998 and
March 31, 1998 and $125,000 if repayment is between April 1, 1998 and
September 30, 1998.
In August 1997, the Company renegotiated the guarantee related
to the final payment for the 1996 acquisition of Digipass into a term
loan in the amount of $3.4 million. The note matures on September
30, 2002 and bears interest at a rate of 3.25% annually. In the event
a public offering is completed, the lender may at its option require
the principal amount of the loan to be repaid in cash, in which case
additional special interest is payable as follows: $340,000 if
repayment is on or before June 30, 1998, $510,000 if repayment is
between July 1, 1998 and December 31, 1998 and $680,000 if repayment
is on January 1, 1999 or later. In addition, the note is convertible
into common stock of the Company at the option of the bank, at a
conversion prices as specified in the agreement.
During 1996, the Company acquired two companies located in
Europe (see Note 2). To facilitate the first acquisition, Lintel,
one component of the purchase price was represented by two
convertible notes, each payable in the amount of $373,750 ($747,500
total) due May 30, 1998. The notes are convertible at the holders'
option at a rate of $7.00 per share of common stock. During 1996 and
1997, these notes were paid down by $33,750 and $76,829,
respectively. Each of these notes bears an interest rate of 8%, with
interest payments made on a quarterly basis. At the holders' option,
the interest may be paid either in cash or in common stock of the
Company. In calculating the shares of common stock to be issued in
lieu of cash interest, the average closing price for the Company's
common stock for the previous 20 trading days is used.
During 1996, the Company continued to raise capital privately,
including a private placement consisting of the issuance of 666,666
shares of common stock and a $5,000,000 convertible note due May 29,
2001. The note bears interest at 9%, with interest payable to the
holder on a quarterly basis. The holder may, at its option, elect to
receive interest payments in cash or common stock. In calculating
the shares of common stock to be issued in lieu of cash interest, the
average closing price for the Company's common stock for the previous
20 trading days is used.
Aggregate maturities of debt at December 31, 1997 are as follow:
[Download Table]
1998 ............................... $ 3,185,400
1999 ............................... 20,223
2000 ............................... 22,723
2001 ............................... 5,000,000
2002 and thereafter ................ 3,400,000
----------
Total .................... $11,628,346
==========
Interest expense to stockholders was $12,900, $265,565 and
$507,100 for the years ended December 31, 1995, 1996 and 1997,
respectively.
Note 7 - Stockholders' Equity
Preferred Stock
The Company has the authority to issue 500,000 shares of
preferred stock of which 317,181 have been designated Series A, 8%
convertible preferred stock and 9,500 have been designated Series B,
12% convertible preferred stock. The remaining 173,319 shares are
undesignated.
The Series A, 8% convertible preferred stock (Series A Shares)
consists of 317,181 shares that carry a cumulative dividend, payable
upon conversion, of 8% per annum. During 1996, 200,000 Series A
Shares were converted into 1,333,333 shares of common stock; the
remaining 117,181 Series A Shares were converted into 781,207 shares
of common stock during 1997.
The Series B, 12% convertible preferred stock (Series B Shares)
consists of 9,000 shares that carry a cumulative dividend, payable
monthly, of 12% per annum based on a liquidation value of $100 per
share. On September 17, 1997, all 9,000 Series B Shares were
converted into 644,653 shares of common stock.
Common Stock
During 1995, the Company privately placed 108,676 equity units,
each consisting of two shares of common stock reissued from treasury
with one warrant to purchase one share of common stock at $6.00.
Included in the 108,676 equity units are 53,000 equity units subject
to redemption, at the option of the holder, at a price of $7.00 per
share, or $14.00 per equity unit. In March 1997, 17,664 of these
equity units (representing 35,328 shares of common stock and 17,664
warrants) were redeemed at $14.00 per equity unit, with 70,667
warrants to purchase one share of common stock at $5.19 being issued
to the holders of the redeemed units.
In July 1997, the Company reissued 2,824 shares of common stock
from treasury and 778,383 original issue shares in conjunction with
the conversion of the 117,181 Series A Shares (see Preferred Stock
above). Additionally, in September 1997, the Company issued 644,653
shares of common stock in conjunction with the conversion of the
9,000 Series B Shares (see Preferred Stock above).
Additional common stock transactions during 1997 were as
follows: 189,375 shares of common stock were issued as a result of
the exercise of options under the Company's incentive stock option
plan (see Note 8) for total proceeds of $42,470; 16,489 shares of
common stock that had been issued in December 1996 were subsequently
canceled; and 116,218 shares of common stock were issued in lieu of
interest related to the $5,000,000 convertible note placed during
1996 (see Note 6).
During 1996, the Company reissued 287,923 shares of treasury
stock, issued 140,651 shares of common stock and 100,000 warrants to
purchase one share of common stock at $7.00 as a part of the
acquisition of Lintel (see Note 2). The warrants were recorded at
their fair value on the date of grant. In addition, the Company
continued to raise money through private placements of its common
stock. In the first quarter of 1996, the Company privately placed
167,482 shares of common stock and 83,741 warrants to purchase one
share of common stock at $6.00, generating $284,720 in net proceeds.
The warrants are exercisable at the option of the holder, however,
the Company maintains the right to require exercise of the warrants
30 days prior to a public offering of the Company's stock.
During the second quarter of 1996, the Company placed 666,666
shares of common stock with 137,777 warrants to purchase one share of
common stock at $4.50. Total issue fees and costs of $170,000 have
been netted against $3,000,000 of proceeds from the placement in the
Company's financial statements. In addition, 55,555 shares of common
stock and 8,889 warrants to purchase one share of common stock at
$4.50 were issued as commissions related to the placement.
The Company raised additional funds in 1996 in a private
placement of 237,060 shares of common stock with 35,329 warrants to
purchase one share of common stock at $4.50. Total issue fees and
costs of $47,885 have been netted against the $1,066,770 in total
proceeds from the placement in the Company's financial statements.
In addition, 16,489 shares of common stock were issued as commissions
related to the placement, but were canceled in 1997.
Additional common stock transactions during 1996 were as
follows: 1,333,333 shares of common stock were issued pursuant to
the conversion of 200,000 shares of Series A preferred stock; 24,000
shares of common stock were issued as a result of the exercise of
options under the Company's incentive stock option plan (see Note 8)
for total proceeds of $5,238; and 20,021 shares of common stock were
issued in lieu of an interest payment in the amount of $118,750
related to the private debt placement that occurred during 1996 (see
Note 6).
Note 8 - Stock Option Plan
The Company's 1987 Stock Option Plan, as amended, (Option Plan)
is designed and intended as a performance incentive. The Option Plan
is administered by the Compensation Committee as appointed by the
Board of Directors of the Company (Compensation Committee).
The Option Plan permits the grant of options to employees of the
Company to purchase shares of common stock intended to qualify as
incentive stock options under Section 422 of the Internal Revenue
Code of 1986, as amended (Code). 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 vested 25% on the date of grant and an additional 25% on each
subsequent anniversary of the grant.
The Option Plan further permits the grant of options to
directors, consultants and other key persons (non-employees) to
purchase shares of common stock not intended to qualify as incentive
stock options under the Code. All options granted to non-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
may contain vesting requirements and/or restrictions as determined by
the Compensation Committee at the time of grant. These options are
vested 50% six months from the date of grant and the remaining 50% on
the first anniversary of the date of grant.
During 1996, the Compensation Committee increased the shares
authorized under the Option Plan by 500,000 to 3,000,000.
The Company applies APB Opinion No. 25 and related
interpretations in accounting for the Option Plan. Had compensation
cost for the Option 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:
[Download Table]
For the Year Ended December 31,
--------------------------------
1995 1996 1997
Net loss available to common ---- ---- ----
stockholders
As reported ............ $ (465,293) $ (9,348,769) $ (5,998,318)
Pro forma .............. (472,846) (9,542,493) (6,271,420)
Net loss per common share
As reported ............ $ (0.03) $ (0.53) $ (0.31)
Pro forma .............. (0.03) (0.54) (0.33)
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
fiscal 1995, 1996 and 1997: dividend yield of 0%; expected
volatility of 50%; risk free interest rates ranging from 6.29% to
6.80%; and expected lives of five years.
The following is a summary of activity under the Option Plan:
[Download Table]
Weighted Weighted
Options Average Options Average
Outstanding Price Exercisable Price
Outstanding at December 31, 1994 1,848,257 $ 0.20 1,761,382 $ 0.19
Granted......................... 411,000 0.20
Exercised....................... (495,000) 0.18
Forfeited....................... (338,875) 0.18
Outstanding at December 31, 1995 1,425,382 0.20 1,232,257 0.20
Granted......................... 335,000 4.65
Exercised....................... (24,000) 0.23
Forfeited....................... (74,750) 2.14
Outstanding at December 31, 1996 1,661,632 1.01 1,299,757 0.57
Granted......................... 512,500 4.18
Exercised....................... (189,375) 0.22
Forfeited....................... (39,500) 3.91
Outstanding at December 31, 1997 1,945,257 $ 1.85 1,460,629 $ 1.29
The following table summarizes information about stock options
outstanding at December 31, 1997:
[Download Table]
Options Outstanding Options Exercisable
------------------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise of Shares Contractual Price of Shares Price
Prices Life
----------------- --------- ----------- -------- --------- --------
$3.00 - 6.00 ........ 774,500 8.68 years $ 4.36 365,497 $ 4.55
$0.125 - 0.375 ...... 1,170,757 3.09 years $ 0.20 1,095,132 $ 0.20
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, 1995, 1996 and 1997.
Note 10 - Geographic and Customer Information
During 1995, 1996 and 1997, sales to one customer (a reseller of
the Company's product) aggregated approximately $2,259,000,
$4,297,000 and $1,994,000 respectively, representing 61%, 44% and 16%
of the total revenues, respectively. Accounts receivable from this
customer represented 31% and 40% of the Company's gross accounts
receivable balance at December 31, 1996 and 1997, respectively.
United States sales to unaffiliated customers includes export sales
from the Company's United States operations to unaffiliated customers
in the Netherlands of approximately $2,318,000, $4,297,000 and
$1,994,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
Information regarding geographic areas for the year ended
December 31, 1995 is as follows:
[Download Table]
United Belgium Eliminations Total
States
Sales to unaffiliated ------ ------- ------------ -----
customers ............. $3,695,000 $ - $ - $ 3,695,000
Operating income (loss) (534,000) - - (534,000)
Identifiable assets ... 2,414,000 - - 2,414,000
Information regarding geographic areas for the year ended
December 31, 1996 is as follows:
[Download Table]
United Belgium Eliminations Total
States
Sales to unaffiliated ------ ------- ------------ -----
customers ............. $4,758,000 $5,434,000 $ - $10,192,000
Operating income (loss) (2,919,000) (5,739,000) - (8,658,000)
Identifiable assets ... 12,738,000 8,756,000 (9,126,000) 12,368,000
Information regarding geographic areas for the year ended
December 31, 1997 is as follows:
[Download Table]
United Belgium Eliminations Total
States
Sales to unaffiliated ------ ------- ------------ -----
customers ............. $2,974,000 $9,566,000 $ (238,000) $12,302,000
Operating income (loss) (3,988,000) 53,000 - (3,935,000)
Identifiable assets ... 10,653,000 5,689,000 (7,966,000) 8,376,000
Note 11 - Commitments and Contingencies
The Company leases office space and equipment under operating
lease agreements expiring at various times through 2000.
Future minimum rental payments required under noncancelable
leases are as follows:
[Download Table]
Year Amount
1998 ................................ $ 226,421
1999 ................................ 139,304
2000 ................................ 539
Rent expense under operating leases aggregated approximately
$60,000, $158,000 and $213,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
During a period of time extending from the mid-1980s to the mid-
1990s the Company engaged in certain matters that were not in
compliance with requisite corporate law. There have been no lawsuits
asserted or filed against the Company related to these matters.
Management cannot assess the likelihood that a lawsuit would be filed
nor can management estimate a potential range of loss.
The Company is subject to legal proceedings and claims which
have arisen in the ordinary course of its business and have not been
finally adjudicated. These actions, when ultimately concluded and
determined, will not, in the opinion of management, have a material
adverse impact on the financial position, results of operations and
liquidity of the Company.
Note 12 - Subsequent Events (unaudited)
Exchange Offer. VASCO Data Security International, Inc. ("VDSI
Inc.") was organized in 1997 as a subsidiary of VASCO Corp., a
Delaware corporation ("VASCO Corp."). Pursuant to an exchange offer
("Exchange Offer") by VDSI Inc. for securities of VASCO Corp. that
was completed March 11, 1998, VDSI Inc. acquired 97.7% of the common
stock of VASCO Corp. Consequently, VASCO Corp. became a subsidiary
of VDSI Inc., with the remaining 2.3% of VASCO Corp. shareholders
representing a minority interest.
Loan Agreement/License Agreement. On March 31, 1998, the
Company entered into two agreements with Lernout & Hauspie Speech
Products N.V. ("L&H"), consisting of a loan agreement and a license
agreement. The loan agreement, in the amount of $3 million, bears
interest at the prime rate plus 1%, payable quarterly, and matures on
January 4, 1999. This loan is convertible at the option of the holder
into shares of the Company's common stock based upon the average
closing price of VASCO Corp.'s common stock for the 10 trading days
prior to March 11, 1998, the date the Exchange Offer closed. This
loan was funded in April 1998.
The license agreement with L&H is for the use of L&H's speech
recognition and speech verification technology for data security,
telecom and physical access applications. This license agreement
includes a prepayment of royalties by the Company in the amount of
$600,000, payable no later than June 30, 1998 and an additional
prepayment in the amount of $200,000, payable no later than March 31,
1999. L&H is an international leader in the development of advanced
speech technology for various commercial applications and products.
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
VASCO Corp.:
We have audited the accompanying consolidated balance sheets of
VASCO Corp. and subsidiaries (the "Company") as of December 31, 1996
and 1997 and the related statements of operations, stockholders'
equity (deficit), and cash flows for each of the years in the three-
year period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
VASCO Corp. and subsidiaries as of December 31, 1996 and 1997, and
the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
March 13, 1998
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors of
VASCO Corp.:
Under date of March 13, 1998, we reported on the consolidated
balance sheets of VASCO Corp. and subsidiaries (the "Company") as of
December 31, 1996 and 1997, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for each
of the years in the three-year period ended December 31, 1997. These
consolidated financial statements and our report thereon are included
in the annual report on Form 10-K for the year ended December 31,
1997. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related
consolidated financial statement schedule. The financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement
schedule based on our audits.
In our opinion, such 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 Peat Marwick LLP
Chicago, Illinois
March 13, 1998
SCHEDULE II
VASCO CORP.
VALUATION AND QUALIFYING ACCOUNTS
[Download Table]
Allowance for Doubtful Accounts Beginning Bad Debt Accounts Ending
For Trade Accounts Receivable Balance Expense Written Off Balance
------------------------------- --------- -------- ----------- -------
Year ended December 31, 1995 $ 96,000 $ 165,000 $ (79,000) $ 182,000
Year ended December 31, 1996 182,000 346,000 (76,000) 452,000
Year ended December 31, 1997 452,000 97,000 (120,000) 429,000
Beginning Obsolescence Inventory Ending
Reserve for Obsolete Inventories Balance Expense Written Off Balance
-------------------------------- --------- ------------ ----------- -------
Year ended December 31, 1995 $ 15,000 $ 99,000 $ - $ 114,000
Year ended December 31, 1996 114,000 40,000 - 154,000
Year ended December 31, 1997 154,000 101,000 (91,000) 164,000
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on May 4, 1998.
VASCO Data Security International, Inc.
/s/ T. Kendall Hunt
T. Kendall Hunt
Chairman of the Board, 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 May 4, 1998.
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 T. Kendall Hunt and Gregory
T. Apple, 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, 1997 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/ T. Kendall Hunt Chairman of the Board, Chief
Executive Officer
T. Kendall Hunt and President and Director
(Principal Executive Officer)
/s/ Gregory T. Apple Vice President and Treasurer
Gregory T. Apple (Principal Financial Officer
and Principal Accounting Officer)
/s/ Robert E. Anderson Director
Robert E. Anderson
/s/ Michael P. Cullinane Director
Michael P. Cullinane
/s/ Mario A. Houthooft Director
Mario A. Houthooft
/s/ Forrest D. Laidley Director
Forrest D. Laidley
/s/ Michael A. Mulshine Director
Michael A. Mulshine
Dates Referenced Herein and Documents Incorporated by Reference
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