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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 24, 1997
REGISTRATION NO. 333-35563
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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VASCO DATA SECURITY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 3577 36-4169320
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
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1901 SOUTH MEYERS ROAD, SUITE 210
OAKBROOK TERRACE, ILLINOIS 60181
(630) 932-8844
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-------------------------
T. KENDALL HUNT
CHIEF EXECUTIVE OFFICER
VASCO DATA SECURITY INTERNATIONAL, INC.
1901 SOUTH MEYERS ROAD, SUITE 210
OAKBROOK TERRACE, ILLINOIS 60181
(630) 932-8844
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------------
Copies to:
CHARLES J. MCCARTHY
STEPHEN J. CAMPO
TIMOTHY R. DONOVAN
JENNER & BLOCK
ONE IBM PLAZA
CHICAGO, ILLINOIS 60611
(312) 222-9350
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effectiveness of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. [X]
-------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This Prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such state.
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION DATED NOVEMBER 21, 1997
VASCO DATA SECURITY INTERNATIONAL, INC.
OFFER TO EXCHANGE SHARES, OPTIONS AND WARRANTS
FOR
VASCO CORP.
SHARES, OPTIONS AND WARRANTS
(AND ASSOCIATED CORPORATE MATTER CLAIMS)
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. CHICAGO, ILLINOIS TIME, ON
, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). SHARES, OPTIONS,
AND WARRANTS NOT PREVIOUSLY ACCEPTED FOR EXCHANGE MAY BE WITHDRAWN AT ANY TIME
PRIOR TO THE EXPIRATION DATE.
VASCO Data Security International, Inc. ("New VASCO") is a Delaware
corporation newly formed by representatives of VASCO CORP., a Delaware
corporation ("Current VASCO"), to effect a reorganization (the "Reorganization")
of Current VASCO through an exchange of securities.
Certain historical corporate actions taken by Current VASCO and its
predecessor entities were not in compliance with applicable corporate law or are
not reflected in proper documentation (collectively these actions are referred
to in this document as "Corporate Matters"). The Board of Directors of Current
VASCO believes that the Corporate Matters may hinder or preclude Current VASCO
in its future efforts to raise capital. For a more complete description of the
Corporate Matters, see "REORGANIZATION OF CURRENT VASCO -- Reasons for the
Reorganization" and "-- Corporate Matters."
The Board of Directors of Current VASCO believes that through an exchange
of outstanding Current VASCO securities for securities of New VASCO (the
"Exchange Offer"), efforts to raise capital in the future by New VASCO will be
facilitated. See "SUMMARY -- Benefits and Disadvantages of Participating in the
Exchange Offer."
New VASCO hereby offers to exchange:
(a) Its Common Stock (par value $0.001 per share) in exchange for (i)
shares of Current VASCO Common Stock (par value $0.001 per share) on a
one-for-one basis, and (ii) a release by each exchanging holder of any and
all potential claims against Current VASCO and its predecessor entities
arising out of or relating to the Corporate Matters (collectively these
potential claims are referred to in this document as the "Associated
Corporate Matter Claims");
(b) Its options (collectively such options are referred to in this
document as "New VASCO Stock Options") to purchase its Common Stock in
exchange for (i) the cancellation of outstanding options to purchase
Current VASCO Common Stock granted under Current VASCO stock option
programs (collectively such options are referred to in this document as
"Current VASCO Stock Options"), and (ii) a release by each exchanging
holder of any and all Associated Corporate Matter Claims. The New VASCO
Stock Options will be for the same number of shares and have the same
exercise price, vesting terms, termination provisions and expiration dates
as the Current VASCO Stock Options and will be issued under New VASCO's
1997 Stock Option Plan, as amended, as nonqualified options for federal
income tax purposes;
(continued on next page)
SEE "RISK FACTORS" HEREIN, BEGINNING AT PAGE 15, FOR MATTERS THAT SHOULD BE
CONSIDERED WITH RESPECT TO THE EXCHANGE OFFER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE EXCHANGE OFFER DESCRIBED IN THIS PROSPECTUS OR THE
NEW VASCO SHARES, OPTIONS OR WARRANTS TO BE ISSUED IN THE EXCHANGE OFFER, AND
THEY HAVE NOT DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE.
FURTHERMORE, NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES REGULATOR HAS DETERMINED THE FAIRNESS OR MERITS OF THE EXCHANGE
OFFER. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus is dated , 1997.
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(c) Its options (collectively such options are referred to in this
document as "New VASCO Conversion Options") to acquire its Common Stock in
exchange for (i) the cancellation of outstanding options to acquire Current
VASCO Common Stock pursuant to conversion of Current VASCO convertible
notes (collectively such options are referred to in this document as
"Current VASCO Conversion Options"), and (ii) a release by each exchanging
holder of any and all Associated Corporate Matter Claims. The New VASCO
Conversion Options will be for the same number of shares and will have the
same conversion price, conversion period and other terms of conversion as
the Current VASCO Conversion Options;
(d) Its warrants (collectively such warrants are referred to in this
document as "New VASCO Warrants") to purchase its Common Stock in exchange
for (i) the cancellation of outstanding warrants to purchase Current VASCO
Common Stock (collectively such warrants are referred to in this document
as "Current VASCO Warrants"), and (ii) a release by each exchanging holder
of any and all Associated Corporate Matter Claims. The New VASCO Warrants
will be for the same number of shares and have the same exercise price and
expiration dates as the Current VASCO Warrants.
The release to be executed in connection with an exchange of Current VASCO
securities will release and waive any and all Associated Corporate Matter Claims
the exchanging holder (or, if the Current VASCO securities are held in a nominee
name, the beneficial owner of the Current VASCO securities) may have even if
less than all of the exchanging holder's (beneficial owner's) Current VASCO
securities are exchanged; provided that if a nominee holds Current VASCO
securities on behalf of more than one beneficial owner, any release executed by
the nominee will be effective only with respect to any Associated Corporate
Matter Claims of beneficial owners directing such nominee to exchange all or any
part of the Current VASCO securities in which such beneficial owner has an
interest. If the Exchange Offer and Reorganization are completed and a security
holder or group of security holders brings suit, the validity and enforceability
of the release will be determined by a court of law. See "RISK FACTORS -- Risks
Relating to Exchange Offer and New VASCO -- No Assurances as to Enforceability
of Releases of Associated Corporate Matter Claims" and "REORGANIZATION OF
CURRENT VASCO -- Releases from Security Holders in Exchange Offer."
The Exchange Offer is subject to the terms and conditions set forth in this
Prospectus, including the condition that there must as of the Expiration Date be
tendered for exchange at least 80% of the outstanding shares of Current VASCO
Common Stock (referred to in this document as the "Minimum Condition"). Based on
the number of shares of Current VASCO outstanding on October 31, 1997, if an
aggregate of 16,106,374 shares of Current VASCO Common Stock are tendered for
exchange, the Minimum Condition will be satisfied.
The Exchange Offer is intended for federal income tax purposes to be a
tax-free transaction with respect to the exchange of the Current VASCO Common
Stock, the Current VASCO Stock Options, the Current VASCO Conversion Options and
those Current VASCO Warrants that were issued for services (referred to herein
as "Current VASCO Compensatory Warrants"). The exchange of Current VASCO
Warrants that were not issued for services (referred to herein as "Current VASCO
Noncompensatory Warrants") may be deemed to be a taxable event for federal
income tax purposes. See "REORGANIZATION OF CURRENT VASCO -- Federal Income Tax
Consequences."
The Exchange Agent for the exchange of Current VASCO Common Stock and
Current VASCO Warrants is Illinois Stock Transfer Company, 223 West Jackson
Boulevard, Suite 1210, Chicago, Illinois 60606; telephone (312) 427-2953.
Exchanges of Current VASCO Stock Options and Current VASCO Conversion
Options are to be made through Gregory T. Apple, Vice President and Treasurer,
VASCO Data Security International, Inc., 1901 South Meyers Road, Suite 210,
Oakbrook Terrace, Illinois 60181; telephone (630) 932-8844.
New VASCO is not required to deliver an annual report to its security
holders pursuant to Section 14 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). New VASCO nonetheless expects to prepare and
deliver an annual report to security holders. Unless it becomes obligated under
the Exchange Act, however, any such voluntary annual report might not contain
all information that would otherwise be required under Rule 14a-3 under the
Exchange Act. New VASCO expects that any such annual report would contain
financial information that has been examined and reported upon by, with an
opinion expressed by, independent public or certified public accountants.
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TABLE OF CONTENTS
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SUMMARY..................................................... 1
The Companies............................................. 1
Reorganization of Current VASCO........................... 1
The Exchange Offer........................................ 2
Questions and Answers About The Exchange Offer............ 5
WHERE YOU CAN FIND MORE INFORMATION......................... 13
SUMMARY FINANCIAL INFORMATION............................... 14
RISK FACTORS................................................ 15
Risks Relating to Exchange Offer And New VASCO............ 15
Factors Relating to Operations............................ 20
CURRENT VASCO AND NEW VASCO................................. 25
REORGANIZATION OF CURRENT VASCO............................. 26
Organizational History of Current VASCO................... 26
The Reorganization........................................ 27
Reasons for the Reorganization............................ 29
Corporate Matters......................................... 29
Associated Corporate Matter Claims........................ 33
Releases from Security Holders in Exchange Offer.......... 37
Federal Income Tax Consequences........................... 40
Differences in Capital Stock.............................. 43
No Appraisal Rights....................................... 43
THE EXCHANGE OFFER.......................................... 44
Terms of the Exchange Offer............................... 44
Other Arrangements Relating to the Exchange Offer......... 45
Expiration Date; Extensions; Termination; Amendment....... 46
Procedures for Tendering Current VASCO Shares and Current
VASCO Warrants......................................... 46
Guaranteed Delivery Procedure for Current VASCO Shares.... 47
The Exchange Agent........................................ 48
Procedures for Tendering Current VASCO Stock Options and
Current VASCO Conversion Options....................... 48
Withdrawal Rights......................................... 48
Conditions to the Exchange Offer.......................... 49
Acceptance of Current VASCO Securities and Issuance of New
VASCO Securities....................................... 50
Payment of Expenses....................................... 51
MARKET PRICE OF CURRENT VASCO COMMON STOCK AND DIVIDEND
POLICY.................................................... 52
SELECTED CONSOLIDATED FINANCIAL INFORMATION................. 53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 54
CERTAIN INFORMATION CONCERNING CURRENT VASCO................ 69
Business.................................................. 69
Management................................................ 85
Current VASCO Equity Equivalent Securities................ 91
PRINCIPAL STOCKHOLDERS...................................... 94
CERTAIN INFORMATION CONCERNING NEW VASCO.................... 96
Organization of New VASCO................................. 96
Management................................................ 96
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DESCRIPTION OF CAPITAL STOCK OF NEW VASCO................... 97
Common Shares............................................. 97
Preferred Shares.......................................... 97
Stock Options, Warrants and Convertible Notes............. 97
Registration Rights and Other Arrangements................ 99
COMPARISON OF STOCKHOLDER RIGHTS............................ 101
Comparison of Current VASCO Stockholder Rights Following
the Exchange Offer..................................... 101
Comparison of Rights of Holders of Stock Options and
Warrants Following the Exchange Offer.................. 102
LEGAL MATTERS............................................... 102
EXPERTS..................................................... 102
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ii
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SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
Exchange Offer and the Reorganization of VASCO CORP., you should read carefully
this entire document and, as applicable, the Letter of Transmittal and Release,
the New VASCO Option Agreement, the New VASCO Convertible Note Agreement or the
New VASCO Warrant Agreement that accompanies this document. We also refer you to
certain exhibits and other information not included in this document. See "WHERE
YOU CAN FIND MORE INFORMATION."
THE COMPANIES
VASCO CORP., a Delaware corporation, was incorporated on August 16, 1990
(referred to herein as "Current VASCO"). VASCO Data Security International,
Inc., a Delaware corporation, was incorporated on July 15, 1997 (referred to
herein as "New VASCO"). The executive office for each of the corporations is
located at 1901 South Meyers Road, Suite 210, Oakbrook Terrace, Illinois 60181;
(630) 932-8844.
Current VASCO, 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. Current VASCO's hardware
products include time-synchronous response only, challenge/response and
time-synchronous challenge/response user authentication devices, some of which
incorporate an electronic signature feature to guarantee the integrity of data
transmissions. These devices are commonly referred to as security tokens.
Current VASCO's security tokens are based upon Current VASCO's core encryption
technology, which utilizes two widely known and accepted algorithms, Data
Encryption Standard ("DES") and Rivest, Shamir, Adelman ("RSA"). Current VASCO's
Cryptech division produces high speed hardware and software encryption products
used both internally for Current VASCO's security tokens and for original
equipment manufacturer ("OEM") vendors requiring real time encryption services.
In addition, Current VASCO recently has introduced a smartcard security token
that uses the challenge/response mode and the X.509 certificate authentication
standard. Current VASCO's security tokens are designed to be used with the VASCO
Access Control Manager server software or to be integrated directly into
applications.
New VASCO is a newly organized corporation. It was formed by
representatives of Current VASCO for purposes of the Reorganization and will be
dissolved if the Exchange Offer is not consummated, unless the Board of
Directors of Current VASCO determines to pursue another form of Reorganization.
REORGANIZATION OF CURRENT VASCO
Current VASCO plans to reorganize so that its security holders who, in the
Exchange Offer, exchange their securities and release Associated Corporate
Matter Claims become security holders of New VASCO. If you exchange your Current
VASCO Common Stock (such shares of common stock are referred to in this document
as "Current VASCO Shares"), you will become a holder of New VASCO Common Stock
(such shares of common stock are referred to in this document as "New VASCO
Shares"). Similarly, if you exchange your Current VASCO Stock Options, Current
VASCO Conversion Options or Current VASCO Warrants (collectively such stock
options, conversion options and warrants are referred to in this document as
"Current VASCO Equity Equivalent Securities"), you will become a holder of, as
the case may be, New VASCO Stock Options, New VASCO Conversion Options or New
VASCO Warrants (collectively such stock options, conversion options and warrants
are referred to in this document as "New VASCO Equity Equivalent Securities").
If the Exchange Offer is consummated, Current VASCO will become a majority-owned
subsidiary of New VASCO.
For ease of reference, Current VASCO Shares and Current VASCO Equity
Equivalent Securities are referred to collectively in this document as "Current
VASCO Securities," and New VASCO Shares and New VASCO Equity Equivalent
Securities are referred to collectively in this document as "New VASCO
Securities."
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THE EXCHANGE OFFER
In the Exchange Offer, New VASCO is offering to exchange New VASCO
Securities for (i) Current VASCO Securities, and (ii) a release by each
exchanging holder of any and all Associated Corporate Matter Claims. The New
VASCO Securities you receive in exchange for Current VASCO Securities will have
the same material terms as the Current VASCO Securities you surrender, except
that the New VASCO Stock Options will be issued under and subject to the terms
of the 1997 VASCO Data Security International, Inc. Stock Option Plan, as
amended (the "New VASCO 1997 Stock Option Plan"). The New VASCO Stock Options
will be for the same number of shares and have the same vesting, exercise price,
termination provisions and expiration dates as the Current VASCO Stock Options
you exchange. With respect to the Current VASCO Conversion Options, the New
VASCO Conversion Options will have the same conversion price, conversion period
and other terms of conversion as the Current VASCO Conversion Options you
exchange. The New VASCO Warrants will also be for the same number of shares,
with the same exercise price and expiration dates, as the Current VASCO Warrants
you surrender. In addition, New VASCO's Certificate of Incorporation, as
amended, (i) authorizes the issuance of up to 75,000,000 shares of common stock,
while the Restated and Amended Certificate of Incorporation of Current VASCO, as
amended, authorizes the issuance of 50,000,000 common shares, and (ii) the New
VASCO Certificate of Incorporation, as amended, does not contain a requirement
found in the Restated and Amended Certificate of Incorporation of Current VASCO,
as amended, that all dividends on preferred stock must be paid before payment of
dividends on common stock, which deletion will permit the creation of a class or
series of preferred stock that could participate with common stock in dividend
payments. See "COMPARISON OF STOCKHOLDER RIGHTS."
Your release of any and all Associated Corporate Matter Claims will be
effected when the Exchange Offer is consummated if you exchange your Current
VASCO Securities and sign and deliver the Letter of Transmittal and Release, the
New VASCO Option Agreement, the New VASCO Convertible Note Agreement or the New
VASCO Warrant Agreement, as applicable, that accompanies this Prospectus. YOU
SHOULD CAREFULLY REVIEW THE PROVISIONS OF ANY OF THESE DOCUMENTS THAT YOU USE TO
EFFECT THE EXCHANGE OF YOUR CURRENT VASCO SECURITIES.
BENEFITS AND DISADVANTAGES OF PARTICIPATING IN THE EXCHANGE OFFER
Current VASCO's management believes that, subject to all of the factors set
forth in this document under the heading "RISK FACTORS," the following are the
principal benefits and disadvantages of participating in the Exchange Offer,
from the perspective of a holder of Current VASCO Securities:
Benefits
- Consummation of the Exchange Offer should minimize the effect of the
Corporate Matters on Current VASCO's ability to realize its plans for
growth, by establishing a new holding company that would not be hindered
by the Corporate Matters from raising capital in the public and private
markets.
- Current VASCO has executed engagement letters with Banque Paribas S.A.
and Generale Bank for a possible future public offering. New VASCO
currently expects that the possible offering, if it occurs, would
commence in 1998; no date has yet been determined. As contemplated in the
engagement letters, the offering would involve up to approximately $60
million of New VASCO Common Stock to be sold in offerings in the United
States and Europe. In addition, Banque Paribas S.A., as global
coordinator and lead manager for the offering, has an option of up to $9
million to allow the underwriters to stabilize the market after
allocation of the offering. The engagement letter also contemplates that
New VASCO would apply to list the offered shares of New VASCO Common
Stock on the European Association of Securities Dealers Automated
Quotation ("Easdaq") and/or Nasdaq. Unissued, but authorized, shares of
New VASCO Common Stock may be used for this offering. For the potential
dilutive effects of such an offering on investors, see "RISK FACTORS --
Risks Relating to Exchange Offer and New VASCO -- Potential Dilution."
Any such offering would be conditioned on the completion of the Exchange
Offer and is subject to a number of additional
2
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contingencies and there can be no assurance that it will occur. If the
Exchange Offer is consummated and New VASCO's future capital-raising
efforts in the public markets are successful, New VASCO intends to apply
for quotation of the New VASCO Common Stock on the Nasdaq National
Market, and to register to become a reporting company under the Exchange
Act. If the New VASCO Common Stock is quoted on the Nasdaq National
Market, it is likely that the shares of New VASCO Common Stock will be
more liquid than the shares of Current VASCO Common Stock presently
outstanding, as well as any shares of Current VASCO Common Stock that are
not exchanged in the Exchange Offer. There can be no assurance, however,
that New VASCO's capital-raising efforts will be successful or that the
New VASCO Common Stock will be so quoted or registered under the Exchange
Act.
Disadvantages
- Current VASCO's plans to raise capital in the future, to the extent
facilitated by consummation of the Exchange Offer, are likely to result
in dilution of the interests of the holders of Current VASCO Shares or,
after the Exchange Offer, of New VASCO Shares. See "RISK FACTORS -- Risks
Relating to Exchange Offer and New VASCO -- Potential Dilution," and "--
Factors Relating to Operations -- Additional Capital Needed."
- The exchange of Current VASCO Noncompensatory Warrants for New VASCO
Warrants may be deemed to be a taxable transaction. See "REORGANIZATION
OF CURRENT VASCO -- Federal Income Tax Consequences."
- Holders of Current VASCO Securities must agree to relinquish any and all
Associated Corporate Matter Claims they may hold in order to receive any
New VASCO Securities in the Exchange Offer. See "RISK FACTORS -- Risks
Relating to Exchange Offer and New VASCO -- Not all Potential Claims will
be Eliminated."
THERE ARE NUMEROUS OTHER SIGNIFICANT FACTORS THAT YOU SHOULD CONSIDER IN
EVALUATING THE EXCHANGE OFFER. IN PARTICULAR, YOU SHOULD CAREFULLY REVIEW THE
INFORMATION SET FORTH IN THE "RISK FACTORS" SECTION OF THIS PROSPECTUS, AS WELL
AS CONSIDER THE TAX CONSEQUENCES OF THE EXCHANGE OFFER, WHICH ARE SET FORTH
UNDER THE HEADING "REORGANIZATION OF CURRENT VASCO -- FEDERAL INCOME TAX
CONSEQUENCES."
Certain Features of the Exchange Offer. The following are highlights of
certain features of the Exchange Offer:
- EXPIRATION DATE: The Exchange Offer expires at 5:00 p.m., Chicago,
Illinois time, on , 1997, unless extended by New
VASCO (the "Expiration Date").
- PROCEDURE FOR TENDERING CURRENT VASCO SHARES AND CURRENT VASCO WARRANTS:
To tender (a) your Current VASCO Shares, you should deliver your Current
VASCO stock certificates and a duly signed Letter of Transmittal and
Release, or (b) your Current VASCO Warrants, you should complete, sign
and deliver the New VASCO Warrant Agreement (with original Current VASCO
Warrants attached thereto), so as to be received prior to the Expiration
Date by the following exchange agent (the "Exchange Agent"):
Illinois Stock Transfer Company
223 West Jackson Boulevard, Suite 1210
Chicago, Illinois 60606
(312) 427-2953
With respect to the tender of current VASCO Shares, under certain
circumstances your signature on the Letter of Transmittal and Release must
be guaranteed and there is also a procedure for a guaranteed delivery if
you are unable to deliver all your documents prior to the Expiration Date.
IF YOUR CURRENT VASCO STOCK CERTIFICATES ARE REGISTERED IN THE NAME OF A
NOMINEE, THE LETTER OF TRANSMITTAL AND RELEASE MUST BE SIGNED BY THE
NOMINEE AND BY THE BENEFICIAL OWNER(S) OF THE CURRENT VASCO SHARES. The
instructions to the Letter of Transmittal and Release and the sections of
this document entitled "THE EXCHANGE OFFER -- Procedures for Tendering
Current VASCO Shares and
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Current VASCO Warrants" and "-- Guaranteed Delivery Procedure for Current
VASCO Shares" explain these features. To tender your Current VASCO
Warrants, you must attach them to the New VASCO Warrant Agreement. See
"THE EXCHANGE OFFER -- Procedures for Tendering Current VASCO Shares and
Current VASCO Warrants."
- PROCEDURE FOR TENDERING CURRENT VASCO STOCK OPTIONS AND CURRENT VASCO
CONVERSION OPTIONS: To exchange your Current VASCO Stock Options and
Current VASCO Conversion Options you should complete, sign and deliver
one or both of the following agreements, as appropriate, which accompany
this document: the New VASCO Option Agreement with respect to Current
VASCO Stock Options, or the New VASCO Convertible Note Agreement with
respect to Current VASCO Conversion Options. These agreements must be
delivered to, and received by, the following individual prior to the
Expiration Date:
Gregory T. Apple
Vice President and Treasurer
VASCO Data Security International, Inc.
1901 South Meyers Road, Suite 210
Oakbrook Terrace, Illinois 60181
(630) 932-8844
- WITHDRAWAL RIGHTS: If you want to withdraw your deposit of Current VASCO
Securities, you must deliver written notice of withdrawal to the Exchange
Agent in the case of Current VASCO Shares or Current VASCO Warrants, or
to Mr. Apple in the case of Current VASCO Stock Options or Current VASCO
Conversion Options, prior to 5:00 p.m., Chicago, Illinois time on the
Expiration Date, which is , 1997 (or such later date if
extended), or unless the tender has previously been accepted, after [60
days after date of commencement of the offer].
- CONDITIONS TO THE EXCHANGE OFFER. The consummation of the Exchange Offer
is conditioned on the following as of the Expiration Date:
- there must be no Securities and Exchange Commission order threatened or
in effect suspending the effectiveness of the Registration Statement of
which this document is a part;
- shares representing at least 80% of the outstanding shares of Current
VASCO Common Stock must be tendered;
- there must be no pending or threatened action or proceeding which, in
the judgment of the Board of Directors of New VASCO, might impair the
Exchange Offer or have a material adverse effect on the benefits of the
Exchange Offer to New VASCO; and
- there must be no proposed, adopted or enacted new law, statute, rule or
regulation that might materially impair the Exchange Offer or have a
material adverse effect on the benefits of the Exchange Offer to New
VASCO or make the exchange of Current VASCO Shares in the Exchange Offer
taxable for federal income tax purposes.
New VASCO may in its discretion waive or amend any of the foregoing
conditions and reserves the right to terminate and abandon the Exchange
Offer at any time prior to the Expiration Date. See "THE EXCHANGE OFFER --
Expiration Date; Extensions; Termination; Amendment" and "-- Conditions to
the Exchange Offer."
Exchange by Directors of Current VASCO. As of October 31, 1997, 20,132,968
shares of Current VASCO Common Stock were outstanding of which 10,682,330 were
owned by Current VASCO's directors and their spouses ("Current VASCO
Affiliates"). In addition, as of October 31, 1997 the Current VASCO Affiliates
owned, directly or indirectly, Current VASCO Stock Options for an aggregate of
909,507 shares of Current VASCO Common Stock and Current VASCO Warrants for an
aggregate of 205,883 shares of Current VASCO Common Stock. The Current VASCO
Affiliates have indicated their intent to exchange all of their Current VASCO
Securities in the Exchange Offer.
4
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QUESTIONS AND ANSWERS
ABOUT THE EXCHANGE OFFER
Q. WHY IS CURRENT VASCO PROPOSING THE EXCHANGE OFFER?
A. Current VASCO plans on expanding and raising additional capital which could
include financings and public stock offerings. In this connection, Current
VASCO's independent legal counsel, the law firm of Jenner & Block, Chicago,
Illinois, reviewed the historical corporate proceedings of Current VASCO and
its predecessors and noted the absence of certain corporate documentation
and the noncompliance with certain procedural requirements, which matters
are referred to in this document as "Corporate Matters" and are more fully
discussed below under "REORGANIZATION OF CURRENT VASCO -- Reasons for the
Reorganization", and "-- Corporate Matters." While these Corporate Matters
have not hindered Current VASCO's business operations, they present problems
in obtaining legal opinions as to compliance with applicable corporate law
governing prior reorganizations and certain prior issuances of Current VASCO
capital stock. The inability to obtain a legal opinion does not mean that
the transactions were invalid but that a legal opinion as to their
compliance with applicable corporate law cannot be given. Opinions as to
validity of the issuance of all outstanding shares may be required in future
financings, stock offerings or other transactions that could be beneficial
to security holders.
Management of Current VASCO believes that the Reorganization will
facilitate obtaining legal opinions as to the validity of stock issuances
by the new corporation. Consequently, Current VASCO has proposed that you
become a stockholder, or the holder of options or warrants to purchase
stock, of New VASCO through the Exchange Offer and that New VASCO be the
entity in the future that issues shares to future stockholders. Management
has obtained the legal opinion of Jenner & Block that the New VASCO Common
Stock to be issued in the Exchange Offer will be validly issued. Legal
opinions with respect to future issuances of stock by New VASCO will depend
on the circumstances existing at the time of the respective issuances.
THE BOARD OF DIRECTORS OF CURRENT VASCO BELIEVES THAT THE EXCHANGE OFFER IS
IN THE BEST INTERESTS OF CURRENT VASCO AND HAS UNANIMOUSLY APPROVED THE
EXCHANGE OFFER. THE DIRECTORS OF CURRENT VASCO AND THEIR SPOUSES OWN IN THE
AGGREGATE APPROXIMATELY 53% OF THE CURRENT VASCO COMMON STOCK OUTSTANDING.
THEY HAVE INDICATED THEIR INTENT TO EXCHANGE THEIR CURRENT VASCO SHARES FOR
NEW VASCO SHARES PURSUANT TO THE EXCHANGE OFFER.
To review the reasons for the Exchange Offer in greater detail, see
"REORGANIZATION OF CURRENT VASCO -- Reasons for the Reorganization." To
review a comparison of the principal benefits and disadvantages of the
Exchange Offer, see "Benefits and Disadvantages of Participating in the
Exchange Offer" above.
Q. WHAT ARE THE CORPORATE MATTERS?
A. The company's history dates back to May 1984, when VASCO CORP., a
predecessor, but distinct legal entity ("Old VASCO"), of Current VASCO was
incorporated in the State of Delaware. In September 1986, Old VASCO
reorganized with a publicly held Utah company, which later was combined with
Current VASCO in 1990. The documentation and procedure surrounding these
corporate transactions, as well as other corporate actions taken by Current
VASCO and its predecessors, appear to have been irregular and not in full
compliance with requisite corporate law. These corporate irregularities are
collectively referred to in this document as "Corporate Matters." Included
among the following are all of the known instances of material
non-compliance:
- the failure by Old VASCO to document whether an amendment to its
Certificate of Incorporation was duly authorized or to file a Certificate
of Amendment with the Delaware Secretary of State to amend its
Certificate of Incorporation in December 1984 to effect a three-for-one
stock split, to increase the 50,000 authorized shares of its common stock
to 150,000 authorized common shares, and to provide for 600,000 shares of
non-voting common stock prior to purportedly effecting the stock split
and issuing a
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number of such non-voting common shares which cannot be determined due to
the unavailability of documentation concerning any purported issuance of
such non-voting common shares;
- the failure of Old VASCO to document whether it afforded its
stockholders, in connection with any issuances of Old VASCO capital stock
subsequent to the initial issuance of 50,000 common shares in connection
with the incorporation of Old VASCO in May 1984, the preemptive rights to
purchase, upon the issuance or sale of Old VASCO stock (or securities
convertible into Old VASCO stock), shares (or securities) in proportion
to the amount of Old VASCO common stock then owned by such holder,
subject to conditions and time limitations prescribed (and at a price
determined as permitted by law), by Old VASCO's Board of Directors, as
provided for in the Old VASCO Certificate of Incorporation;
- the failure by Old VASCO to document whether director and stockholder
approval was obtained for an amendment to its Certificate of
Incorporation increasing the number of authorized shares of common stock
to 6,900,000 shares in September 1986;
- the failure to document the approval by Old VASCO's stockholders of the
September 1986 reorganization through the share exchange undertaken by
Old VASCO and Ridge Point Enterprises, Inc. ("Ridge Point"), a Utah
corporation which concurrently changed its name to Vasco Corp. ("VASCO
Utah"), the failure to document whether all stockholders of Old VASCO
voluntarily exchanged their shares for shares of Ridge Point/VASCO Utah,
and the failure to document the mechanics of the exchange of 6,900,000
common shares of Old VASCO for 12,800,000 common shares of Ridge
Point/VASCO Utah;
- the failure to properly document any stockholder approval of the
dissolution of Old VASCO and to document actions taken to dissolve,
liquidate and wind-up Old VASCO in August 1987, and the failure to vest
effectively title and ownership in VASCO Utah of Old VASCO's assets and
to document the assumption by VASCO Utah of Old VASCO's liabilities;
- the purported issuance of 317,181 shares of preferred stock in November
1989 by VASCO Utah at a time when the issuance of preferred shares was
not authorized by VASCO Utah's charter;
- the administrative dissolution of VASCO Utah in July 1990 prior to the
intended merger transaction with Current VASCO and before the filing of a
Certificate of Merger with the State of Delaware in August 1990;
- the failure of VASCO Utah to document whether it afforded its
stockholders the appraisal rights provided for by Utah law in connection
with the intended 1990 merger of VASCO Utah with Current VASCO;
- the purported issuance of 317,181 shares of preferred stock by Current
VASCO in connection with the 1990 merger of VASCO Utah with Current VASCO
when, although Current VASCO's Certificate of Incorporation authorized
500,000 shares of preferred stock, the rights, powers and preferences of
such stock were not specified in Current VASCO's Certificate of
Incorporation and its Certificate of Incorporation did not provide its
Board of Directors the power to designate such rights, powers and
preferences;
- the following procedural irregularities which call into question the
validity of the intended 1990 merger of VASCO Utah and Current VASCO, as
well as Current VASCO's title to the assets of VASCO Utah purportedly
succeeded to by Current VASCO by virtue of the merger:
(1) the incorporation of Current VASCO after the date of the 1990 plan
of merger,
(2) Current VASCO's approval of the plan of merger, including approval
of the plan of merger prior to the incorporation of Current VASCO, the
lack of documented stockholder approval as called for by the plan of
merger and the effectiveness of the approval by Current VASCO's then Board
of Directors,
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(3) the authorization and issuance of shares of common and preferred
stock by Current VASCO pursuant to the merger,
(4) the adoption of Current VASCO's initial bylaws, the appointment of
Current VASCO's initial directors and the election of its initial
officers,
(5) the administrative dissolution of VASCO Utah in July 1990 prior to
the filing of a Certificate of Merger with the State of Delaware in August
1990, and
(6) the failure to file Articles of Merger with the State of Utah in
connection with the intended merger of VASCO Utah and Current VASCO in
August 1990; and
- beginning in 1985, the failure to: document approval by the board of
directors and stockholders of Current VASCO and its predecessors of stock
option plans; specify and authorize the number of shares of stock to be
subject to such plans; reserve the number of shares subject to such
plans; document the authorization for the grant of options pursuant to
such plans and the issuance of shares upon exercise of such options; and
design such plans in a manner that would ensure options granted
thereunder would be treated as incentive stock options under Section 422
of the Internal Revenue Code of 1986, as amended.
The Corporate Matters identified above were brought to the attention of
Current VASCO by its independent legal counsel, who, commencing in 1996,
reviewed the historical corporate proceedings of Current VASCO and its
predecessors.
See "REORGANIZATION OF CURRENT VASCO -- Reasons for the Reorganization" and
"-- Corporate Matters."
Current VASCO had been operating with the understanding that its historical
corporate transactions, including the 1990 merger, were effected in full
compliance with the applicable laws of Delaware and Utah. If the 1990
merger was not valid, the succession to VASCO Utah's assets by Current
VASCO may not have been properly effected in 1990. In April 1997, Current
VASCO contacted the Division of Corporations of the Utah Department of
Commerce and inquired whether the Division would accept for filing Articles
of Merger relating to the intended 1990 merger transaction. The Division
responded that it would not accept the Articles of Merger for filing.
Management of Current VASCO believes that VASCO Utah's assets, which
consisted primarily of furniture, fixtures and office equipment that are no
longer in use by Current VASCO, are not material, and are not related to,
the business presently conducted by Current VASCO. However, as
documentation to further support the intended 1990 merger transaction,
which was approved by holders of approximately 90% of the shares of VASCO
Utah entitled to vote on the 1990 merger, the individuals who were members
of the Board of Directors of VASCO Utah in 1990 have recently executed a
transfer document assigning all of VASCO Utah's right, title and interest
in its assets to Current VASCO. No assurance can be given as to what
effect, if any, this attempt to document retroactively what was intended at
the time may have had on Current VASCO's title to VASCO Utah's assets.
The Corporate Matters uncovered in the review of the historical
organization of Current VASCO and its predecessors have not previously
caused problems in the business operations of Current VASCO. However, these
issues do preclude the obtaining of a legal opinion as to the validity of
the issuances of certain shares by predecessors of Current VASCO, of the
1990 merger transaction and of the issuance of shares by Current VASCO
pursuant to and subsequent to the 1990 merger transaction.
To review the Corporate Matters in greater detail, see "REORGANIZATION OF
CURRENT VASCO -- Organizational History of Current VASCO," "-- Reasons for
the Reorganization" and "-- Corporate Matters."
Q. IF I AM A CURRENT VASCO STOCKHOLDER, WHAT AM I BEING ASKED TO GIVE UP?
A. You are being asked to exchange for New VASCO Shares, your Current VASCO
Shares and the release of any and all Associated Corporate Matter Claims.
The release of Associated Corporate Matter Claims
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will be effected by the accompanying Letter of Transmittal and Release,
which you should review carefully. By executing and delivering the Letter of
Transmittal and Release, you will release any and all Associated Corporate
Matter Claims you may have, even if you do not exchange all of your Current
VASCO Shares. Although no claims based on the Corporate Matters have been
asserted and the existence and extent of any such rights, interests and
claims are uncertain, under certain theories the Associated Corporate Matter
Claims that holders of Current VASCO Shares will agree to release by
exchanging any of their Current VASCO Shares for New VASCO Shares (and
executing and delivering the Letter of Transmittal and Release) could
include, among other things, claims for rescission of stock issuances,
acquisitions, sales or exchanges, claims of a direct interest in assets of
Current VASCO or one of its predecessor entities, claims for rescission of
corporate transactions, or claims for monetary damages in connection with,
resulting from or relating to the Corporate Matters.
For example, a Current VASCO stockholder who acquired stock from Current
VASCO in the past three years might arguably assert a claim under federal
or state securities laws, which provide remedies for material misstatements
or omissions in connection with the sale of securities. For a discussion of
some of the types of claims and of the remedies that may be available to
the holders of Current VASCO Shares if they successfully assert Associated
Corporate Matter Claims, see "REORGANIZATION OF CURRENT VASCO -- Associated
Corporate Matter Claims." For a discussion of the impact of the release on
possible claims, see "REORGANIZATION OF CURRENT VASCO -- Releases from
Security Holders in Exchange Offer."
The nature of the Associated Corporate Matter Claims that may be available
to you if you also hold Current VASCO Stock Options, Current VASCO
Conversion Options and/or Current VASCO Warrants may differ from the
Associated Corporate Matter Claims available to holders of Current VASCO
Shares. In this connection, see the response below to the question: "What
am I being asked to give up in exchange for New VASCO options or warrants?"
For a more complete discussion of the types of Associated Corporate Matter
Claims, and possible remedies therefor, that may be available to holders of
Current VASCO Securities depending on whether they hold Current VASCO
Shares, Current VASCO Stock Options, Current VASCO Conversion Options or
Current VASCO Warrants, see "REORGANIZATION OF CURRENT VASCO -- Associated
Corporate Matter Claims."
Q. WHAT WILL I RECEIVE IN THE EXCHANGE OFFER?
A. If you exchange Current VASCO Shares (and release any and all Associated
Corporate Matter Claims), you will receive one New VASCO Share, for each
share of Current VASCO Common Stock exchanged.
Current VASCO Common Stock is quoted on the Over-the-Counter Bulletin Board
(the "OTC BB"). However, there has been no public market for the New VASCO
Common Stock, and there can be no assurance that an active public market
for the New VASCO Common Stock will develop or that the New VASCO Common
Stock will be quoted or listed on the OTC BB or any other quotation system
or stock exchange following the Exchange Offer.
To review in greater detail the terms of the Exchange Offer, see "THE
EXCHANGE OFFER -- Terms of the Exchange Offer." To review in greater detail
the rights of stockholders of New VASCO, see "DESCRIPTION OF CAPITAL STOCK
OF NEW VASCO" and "COMPARISON OF STOCKHOLDER RIGHTS."
Q. WHAT IF I DON'T EXCHANGE MY CURRENT VASCO SHARES?
A. If the Exchange Offer is consummated and you did not exchange your Current
VASCO Shares and release any and all Associated Corporate Matter Claims you
may have, you will remain a stockholder of Current VASCO and will continue
to be afforded your rights as such, including your rights under Delaware law
and the Current VASCO Restated and Amended Certificate of Incorporation, as
amended, to participate in dividends, if any, to holders of Current VASCO
Common Stock. However, as the principal stockholder of Current VASCO, New
VASCO will have the power to control and direct the
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affairs of Current VASCO. New VASCO may, without the consent of any other
stockholder of Current VASCO, but subject to appraisal rights, if any,
and/or other remedies, if any, available under Delaware law, at a later date
merge Current VASCO into New VASCO or into or with a subsidiary of New VASCO
on a stock or cash basis or undertake some other corporate reorganization of
Current VASCO without a meeting of stockholders and, if New VASCO is the
owner of at least 90% of the outstanding shares of each class of stock of
Current VASCO, the Board of Directors of New VASCO could effect a merger of
Current VASCO with and into New VASCO without a vote of the stockholders of
Current VASCO (again, subject to appraisal rights, if any, or any other
available remedies under Delaware law). At the present time, neither Current
VASCO nor New VASCO has any plans or proposals to merge Current VASCO
following the Exchange Offer or to effect a second-step transaction to
eliminate any shares of Current VASCO that are not tendered in the Exchange
Offer. In addition, it is possible that the Current VASCO Common Stock will
not be quoted on the OTC BB if the Exchange Offer is consummated. If you do
not exchange any of your Current VASCO Shares or any of your Current VASCO
Equity Equivalent Securities, you will retain your ability to assert
Associated Corporate Matter Claims, if any, which may be available under
applicable law.
See "RISK FACTORS -- Risks Relating to Exchange Offer and New VASCO --
Stockholders Who Do Not Exchange will become Minority Stockholders of
Current VASCO," "-- Reduced Liquidity of Current VASCO Common Stock," and
"-- Limited or No Liquidity in New VASCO Common Stock" for more detail on
the effects of not participating in the Exchange Offer.
Q. WILL MY RIGHTS AS A STOCKHOLDER OF NEW VASCO BE ANY DIFFERENT THAN MY RIGHTS
AS A STOCKHOLDER OF CURRENT VASCO?
A. No, except that you will have released any and all Associated Corporate
Matter Claims.
Both Current VASCO and New VASCO are Delaware corporations and are governed
by the laws of the State of Delaware. The certificates of incorporation and
bylaws of the two companies are substantially the same, except for (i) the
authorization to issue up to 75,000,000 shares of New VASCO Common Stock in
New VASCO's Certificate of Incorporation, as amended, whereas Current
VASCO's Restated and Amended Certificate of Incorporation, as amended,
authorizes the issuance of 50,000,000 shares of Current VASCO Common Stock,
(ii) the fact that New VASCO does not have designated Series A Preferred
Stock or Series B Preferred Stock since there are no longer any shares of
Current VASCO Series A Preferred Stock or Series B Preferred Stock
outstanding, (iii) the deletion from New VASCO's Certificate of
Incorporation, as amended, of a general requirement that all dividends on
preferred stock be paid before payment of dividends on common stock, which
deletion will permit the creation of a class or series of preferred stock
that could participate with common stock in dividend payments, and (iv)
certain clarifying and conforming changes and certain changes included to
reflect current Delaware law.
See "RISK FACTORS -- Risks Relating to Exchange Offer and New VASCO --
Potential Dilution," "DESCRIPTION OF CAPITAL STOCK OF NEW VASCO" and
"COMPARISON OF STOCKHOLDER RIGHTS" for further detail on rights of New
VASCO stockholders.
Q. WHAT DO I DO TO EXCHANGE MY CURRENT VASCO SHARES (AND ANY AND ALL ASSOCIATED
CORPORATE MATTER CLAIMS) FOR NEW VASCO SHARES?
A. You should complete and sign the Letter of Transmittal and Release that
accompanied this Prospectus and deliver the Letter of Transmittal and
Release with your stock certificates for Current VASCO Shares, and any other
documentation or signatures required by the Letter of Transmittal and
Release, to the Exchange Agent prior to the Expiration Date:
Illinois Stock Transfer Company
223 West Jackson Boulevard, Suite 1210
Chicago, Illinois 60606
(312) 427-2953
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Read carefully the instructions on the Letter of Transmittal and Release.
You will bear the risk of loss in delivering the stock certificates to the
Exchange Agent. IF YOU MAIL THEM, WE SUGGEST THAT YOU USE PROPERLY INSURED,
REGISTERED MAIL, WITH RETURN RECEIPT REQUESTED, AND THAT THE MAILING BE
MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO
THE EXCHANGE AGENT ON OR PRIOR TO THAT TIME.
Q. IF I AM THE HOLDER OF OPTIONS OR WARRANTS EXERCISABLE FOR CURRENT VASCO
COMMON STOCK, CAN I EXCHANGE THEM FOR OPTIONS OR WARRANTS OF NEW VASCO?
A. Yes. The Current VASCO Stock Options are exchangeable for New VASCO Stock
Options for the same number of shares of New VASCO Common Stock with the
same exercise price, same vesting terms, same termination provisions and the
same expiration date as presently exist for the corresponding Current VASCO
Stock Options. The New VASCO Stock Options will be issued under the New
VASCO 1997 Stock Option Plan and will be nonqualified stock options for tax
purposes.
The Current VASCO Conversion Options are exchangeable for New VASCO
Conversion Options for the same number of shares of New VASCO Common Stock,
with the same conversion price, conversion expiration date and other
conversion terms as the Current VASCO Conversion Options surrendered.
New VASCO is also offering to exchange New VASCO Warrants, having the same
number of shares, exercise price and exercise terms as corresponding
Current VASCO Warrants tendered for exchange.
For further information on New VASCO Stock Options, New VASCO Conversion
Options and New VASCO Warrants see "DESCRIPTION OF CAPITAL STOCK OF NEW
VASCO -- Stock Options, Warrants and Convertible Notes."
Q. WHAT AM I BEING ASKED TO GIVE UP IN EXCHANGE FOR NEW VASCO OPTIONS OR
WARRANTS?
A. You are being asked to agree to the cancellation of your Current VASCO Stock
Options, Current VASCO Conversion Options or Current VASCO Warrants and to
release any and all Associated Corporate Matter Claims. The Associated
Corporate Matter Claims potentially available to holders of Current VASCO
Stock Options, Current VASCO Conversion Options and Current VASCO Warrants
may differ from those available to holders of Current VASCO Shares, since
unlike Current VASCO Shares these classes of Current VASCO Securities do not
represent an equity or ownership interest in Current VASCO, but rather
constitute a contractual right to acquire such an equity or ownership
interest. As a result, Associated Corporate Matter Claims that may be
available to holders of Current VASCO Shares which derive from legal
principles designed to safeguard the interests of corporate stockholders may
not be available to holders of Current VASCO options and warrants. Examples
of Associated Corporate Matter Claims that may be available to holders of
Current VASCO Stock Options, Current VASCO Conversion Options and Current
VASCO Warrants include those arising under contract law and securities law
principles. For example, a holder of Current VASCO Equity Equivalent
Securities who acquired such securities in the past three years arguably
could have a claim under federal or state securities laws, which provide
remedies for material misstatements or omissions in connection with the sale
of securities. Holders of Current VASCO Stock Options may also be entitled
to assert Associated Corporate Matter Claims regarding the treatment, for
federal income tax purposes, they receive due to the exercise of their stock
options. For a more complete discussion of the types of Associated Corporate
Matter Claims, and possible remedies therefor, that may be available to
holders of Current VASCO Securities depending on whether they hold Current
VASCO Shares, Current VASCO Stock Options, Current VASCO Conversion Options
or Current VASCO Warrants, see "REORGANIZATION OF CURRENT VASCO --
Associated Corporate Matter Claims."
The release of any and all Associated Corporate Matter Claims will be
effected by, as appropriate, the New VASCO Option Agreement, the New VASCO
Convertible Note Agreement or the New VASCO Warrant Agreement. By executing
and delivering one or more of these documents, which you should review
carefully, you will release any and all Associated Corporate Matter Claims
you may have, even if you do not exchange all of your Current VASCO Equity
Equivalent Securities.
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Also, you are being asked to exchange your Current VASCO Stock Option for a
New VASCO Stock Option which will not be an incentive stock option, as
defined in Section 422 of the Internal Revenue Code of 1986, as amended
("ISOs"). There is different tax treatment for ISOs and for nonqualified
stock options such as those offered by New VASCO in the Exchange Offer. For
example, if the holder of an ISO exercises it and meets certain applicable
holding requirements, the holder may avoid current taxability on the gain
realized upon exercise. When the holder of a nonqualified option exercises
it, the holder is taxable upon the gain realized. Holders of ISOs
frequently exercise them and fail to comply with the holding requirements
with the result that their tax effects are the same as those that would
have applied if the options had been nonqualified in any event.
Q. WHAT IF I DON'T EXCHANGE MY OPTIONS OR WARRANTS?
A. If you do not exchange any of your Current VASCO Equity Equivalent
Securities, you will continue to be a holder of options or warrants to
purchase shares of Current VASCO Common Stock, and if you also do not
exchange any of your Current VASCO Shares, you will retain your ability to
assert Associated Corporate Matter Claims, if any, which may be available
under applicable law. If the Exchange Offer is consummated and you
subsequently exercise your Current VASCO Equity Equivalent Securities and
acquire Current VASCO Common Stock you will be a minority stockholder of
Current VASCO. In this connection, see the response above to the question:
"What if I don't exchange my Current VASCO Shares?"
Q. WHAT DO I DO TO EXCHANGE MY OPTIONS OR WARRANTS?
A. To exchange your Current VASCO Stock Options or Current VASCO Conversion
Options, you will need to deliver a signed New VASCO Option Agreement or New
VASCO Convertible Note Agreement, as applicable, to the following individual
prior to the Expiration Date:
Gregory T. Apple
Vice President and Treasurer
VASCO Data Security International, Inc.
1901 South Meyers Road
Suite 210
Oakbrook Terrace, Illinois 60181
To exchange your Current VASCO Warrants, you will need to deliver a signed
New VASCO Warrant Agreement, with your original Current VASCO Warrants
attached thereto, to the Exchange Agent prior to the Expiration Date at the
following address:
Illinois Stock Transfer Company
223 West Jackson Boulevard, Suite 1210
Chicago, Illinois 60606
(312) 427-2953
The exchange of Current VASCO Equity Equivalent Securities won't be
effective unless the Exchange Offer is consummated.
Q. WILL THERE BE ANY DIFFERENCES IN THE MANAGEMENT OF CURRENT VASCO AND NEW
VASCO?
A. No. The persons who are officers and the persons who are directors of both
companies are currently identical. Changes in the persons who are officers
and directors of the companies may occur after the completion of the
Exchange Offer, however.
See "CERTAIN INFORMATION CONCERNING CURRENT VASCO -- Management" and
"CERTAIN INFORMATION CONCERNING NEW VASCO -- Management" for further
information on directors and officers.
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Q. WILL THE EXCHANGE OFFER AFFECT THE BUSINESS OPERATIONS OF CURRENT VASCO?
A. No. Current VASCO presently conducts business through two operating
subsidiaries. The subsidiaries will continue business operations without
regard to the Exchange Offer and will remain as subsidiaries of Current
VASCO. If the Exchange Offer is consummated, the subsidiaries will become
indirect subsidiaries of New VASCO. However, if not all of the Current VASCO
Shares are exchanged or if not all of the Current VASCO Equity Equivalent
Securities are exchanged and after the Exchange Offer are converted or
exercised into Current VASCO Common Stock, New VASCO will own less than 100%
of Current VASCO and, indirectly, these two subsidiaries.
Q. WHAT IS REQUIRED FOR THE EXCHANGE OFFER TO BE EFFECTED?
A. In order for the Exchange Offer to be consummated, stockholders of Current
VASCO who possess at least 80% of the outstanding shares of Current VASCO
Common Stock must tender their shares for exchange and execute and deliver a
Letter of Transmittal and Release prior to the Expiration Date. This is
called the "Minimum Condition."
Current VASCO's present directors and their spouses owned at October 31,
1997 approximately 53% of the outstanding shares of Current VASCO Common
Stock, and they have indicated their intention to tender all of their
Current VASCO Shares (and to release any and all Associated Corporate
Matter Claims) in exchange for New VASCO Shares.
There are certain other conditions to the Exchange Offer and information on
these conditions is set forth under "THE EXCHANGE OFFER -- Conditions to
the Exchange Offer."
Q. WHAT IF 80% OF THE CURRENT VASCO COMMON STOCK IS NOT TENDERED IN THE
EXCHANGE OFFER?
A. Current VASCO and New VASCO have not decided the course of action that will
be taken if 80% of the Current VASCO Common Stock is not tendered in the
Exchange Offer. However, preliminary consideration has been given to
restructuring the Reorganization under Section 351 of the Internal Revenue
Code of 1986, as amended, if the Minimum Condition is not satisfied. In a
Section 351 transaction stockholders of Current VASCO would be invited to
contribute their shares (and a release of any and all Associated Corporate
Matter Claims) to New VASCO in exchange for New VASCO Common Stock, similar
to the exchange contemplated by the Exchange Offer. Section 351 does not
require New VASCO to obtain 80%, or any stated percentage, of the Current
VASCO Common Stock. However, if less than 80% of the Current VASCO Common
Stock is acquired, New VASCO would not be able to file consolidated federal
income tax returns with Current VASCO. If the Minimum Condition is not met
and a determination is made to effect a reorganization under Section 351,
New VASCO intends to extend the Expiration Date of the Exchange Offer and
amend this document to make appropriate disclosures with respect to a
reorganization under Section 351.
Q. WHAT IS THE DEADLINE FOR THE EXCHANGE OFFER?
A. The Expiration Date for the Exchange Offer is at 5:00 p.m. Chicago, Illinois
time on , 1997, unless extended by New VASCO.
For greater detail on the Expiration Date, see "THE EXCHANGE OFFER --
Expiration Date; Extensions; Termination; Amendment."
Q. WHAT IF I DEPOSIT MY STOCK CERTIFICATES OR WARRANT AGREEMENT WITH THE
EXCHANGE AGENT OR MY AGREEMENT WITH RESPECT TO OPTIONS WITH MR. APPLE AND
THEN CHANGE MY MIND? WILL I BE ABLE TO WITHDRAW MY STOCK CERTIFICATES OR
AGREEMENT?
A. Stock certificates or agreements may be withdrawn at any time prior to the
Expiration Date or, unless the tender has previously been accepted for
exchange after , 1997 [60 days after date of commencement of the
offer].
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For greater detail on withdrawal rights, see "THE EXCHANGE OFFER --
Withdrawal Rights."
Q. WHAT ARE THE TAX CONSEQUENCES FOR EXCHANGING MY SHARES, OPTIONS AND WARRANTS
(AND ANY AND ALL ASSOCIATED CORPORATE MATTER CLAIMS)?
A. The exchange of Current VASCO Shares, Current VASCO Stock Options, Current
VASCO Conversion Options and Current VASCO Compensatory Warrants (and the
release of any and all Associated Corporate Matter Claims) for New VASCO
Shares, New VASCO Stock Options, New VASCO Conversion Options or New VASCO
Warrants will be tax-free for federal income tax purposes. The exchange of
Current VASCO Noncompensatory Warrants (and the release of any and all
Associated Corporate Matter Claims) for New VASCO Warrants may be deemed to
be a taxable event.
To review the tax consequences in greater detail, see "REORGANIZATION OF
CURRENT VASCO -- Federal Income Tax Consequences."
Q. ARE THERE APPRAISAL RIGHTS?
A. Under Delaware law, holders of Current VASCO Securities do not have any
right to an appraisal of the value of their securities in connection with
the Exchange Offer.
For information regarding the security holdings of Current VASCO's
management (who also serve as New VASCO's management), as well as other
arrangements concerning Current VASCO and its management, see "PRINCIPAL
STOCKHOLDERS," "CERTAIN INFORMATION CONCERNING CURRENT VASCO" and "CERTAIN
INFORMATION CONCERNING NEW VASCO."
Q. ARE ANY STATE OR FEDERAL REGULATORY APPROVALS REQUIRED FOR THE EXCHANGE
OFFER?
A. No special state or federal regulatory approvals of the Exchange Offer must
be obtained, except for necessary filings under securities laws.
* * * * * * * * * *
WHERE YOU CAN FIND MORE INFORMATION
New VASCO has filed with the Securities and Exchange Commission a
Registration Statement on Form S-4 to register the New VASCO Securities to be
issued to holders of Current VASCO Securities in the Exchange Offer, as well as
to register the New VASCO Common Stock that may be purchased upon the exercise
of certain New VASCO Securities. This document is a part of that Registration
Statement and constitutes a Prospectus of New VASCO. As allowed by Securities
and Exchange Commission rules, this document does not contain all the
information you can find in the Registration Statement or the exhibits to the
Registration Statement.
You may read and copy the full Registration Statement and the exhibits at
the Securities and Exchange Commission's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. Please call the Commission at
1-800-SEC-0330 for further information on the public reference rooms. The
Registration Statement and exhibits are also available to the public from
commercial document retrieval services and are available to the public at the
web site maintained by the Commission at "http://www.sec.gov."
* * * * * * * * * *
13
<PAGE> 19
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)(1)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996(2) 1996(2) 1997
---- ---- ---- ---- ------- ------- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data(1):
Total revenues....... $ 2,302 $ 2,199 $ 2,693 $ 3,695 $10,192 $ 6,211 $ 9,437
Operating income
(loss)............. 557 138 192 (534) (8,658)(3) (8,031)(3) (2,212)
Net income (loss)
available to common
stockholders....... 289 50 30 (465) (9,349)(3) (8,068)(3) (3,393)
Net income (loss) per
common share....... 0.02 -- -- (0.03) (0.53)(3) (0.49)(3) (0.18)
Shares used in
computing per share
amounts............ 13,686 13,877 14,260 14,817 17,533 16,300 18,753
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-------------------------
ACTUAL PRO FORMA(4)
------ ------------
(UNAUDITED)
<S> <C> <C>
Balance Sheet Data(1):
Cash........................................................ $ 3,060 $ 3,060
Working capital............................................. 4,487 4,487
Total assets................................................ 10,202 10,202
Long term obligations, less current portion................. 11,689 11,689
Common stock subject to redemption.......................... 495 495
Stockholders' equity (deficit).............................. (4,577) (4,577)
</TABLE>
For a discussion of factors that affect the comparability of the financial
information set forth above, such as significant acquisitions undertaken by
Current VASCO and the disposition of Current VASCO's VASCO Performance Systems
line of business in 1996, see "REORGANIZATION OF CURRENT VASCO -- Organizational
History of Current VASCO," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," and "RISK FACTORS."
- -------------------------
(1) Represents the financial information of Current VASCO. New VASCO has not
begun operations.
(2) Includes the results of operations of Lintel Security NV/SA from March 1996
and Digipass SA from July 1996; see "FINANCIAL STATEMENTS."
(3) Includes a pretax charge for acquired in-process research and development of
$7,351.
(4) Represents the pro forma balance sheet data assuming the Exchange Offer was
completed as of September 30, 1997, based upon a 100% exchange of equity
interests.
14
<PAGE> 20
RISK FACTORS
This Prospectus contains forward-looking statements. All forward-looking
statements included in this Prospectus are based on information available to New
VASCO and Current VASCO on the date hereof and assumptions which New VASCO and
Current VASCO believe are reasonable. Neither New VASCO nor Current VASCO
assumes any obligation to update any such forward-looking statements. These
forward-looking statements involve risks and uncertainties. Current VASCO's (and
if the Exchange Offer is consummated, New VASCO'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 the following risk
factors and elsewhere in this Prospectus.
The following risk factors, as well as the other information set forth
elsewhere in this Prospectus, should be considered carefully in evaluating
whether to participate in the Exchange Offer.
RISKS RELATING TO EXCHANGE OFFER AND NEW VASCO
The following factors relate primarily to the Exchange Offer and New VASCO,
and will apply if the Exchange Offer is consummated.
STOCKHOLDERS WHO DO NOT EXCHANGE WILL BECOME MINORITY STOCKHOLDERS OF
CURRENT VASCO. Any holder of Current VASCO Shares who participates in the
Exchange Offer will receive an ownership interest in New VASCO which in turn
will own a controlling interest in Current VASCO but, if such stockholder has
exchanged all of its Current VASCO Shares, will cease to own shares in Current
VASCO. Holders of Current VASCO Shares who do not participate in the Exchange
Offer with respect to all of their Current VASCO Shares will retain a direct
ownership interest in Current VASCO as a holder of a minority interest in a
subsidiary of New VASCO. Those holders of Current VASCO Shares who do not
participate in the Exchange Offer will retain their ability to assert Associated
Corporate Matter Claims, if any, which may be available under applicable law and
will continue to be afforded their rights as holders of Current VASCO Shares,
including the right under Delaware law and the Current VASCO Restated and
Amended Certificate of Incorporation, as amended, to participate in dividends
declared and paid, if any, to the holders of Current VASCO Common Stock.
Upon consummation of the Exchange Offer, New VASCO, as the principal
stockholder of Current VASCO, will have the power to control and direct the
affairs of Current VASCO by written consent and without the consent of any other
stockholder of Current VASCO, and, if New VASCO is the owner of at least 90% of
the outstanding shares of each class of stock of Current VASCO, the Board of
Directors of New VASCO could, subject to appraisal rights, if any, and other
remedies, if any, available under Delaware law, effect a merger of Current VASCO
into New VASCO without a vote of the stockholders of Current VASCO. At the
present time, neither Current VASCO nor New VASCO has any plans or proposals to
merge Current VASCO following the Exchange Offer or to effect a second-step
transaction to eliminate any shares of Current VASCO that are not tendered in
the Exchange Offer.
REDUCED LIQUIDITY OF CURRENT VASCO COMMON STOCK. The shares of Current
VASCO Common Stock are currently traded in the over-the-counter market and
quoted on the OTC BB. There has been only limited trading of the Current VASCO
Common Stock and such trading volume is likely to decrease following the
Exchange Offer. It is likely that the trading market for, and liquidity of an
investment in, Current VASCO, if any, would be reduced or eliminated upon
consummation of the Exchange Offer. In addition, it is likely that Current VASCO
Common Stock would no longer be quoted on the OTC BB. The consummation of the
Exchange Offer may have the further effect of depressing the market value of
Current VASCO Common Stock. See "REORGANIZATION OF CURRENT VASCO -- Differences
in Capital Stock."
LIMITED OR NO LIQUIDITY IN NEW VASCO COMMON STOCK. Prior to the Exchange
Offer there has been no public market for the New VASCO Common Stock, and there
can be no assurance that an active public market for the New VASCO Common Stock
will develop or that the New VASCO Common Stock will be quoted on the OTC BB or
otherwise. Consequently, after the Exchange Offer the holders of Current VASCO
15
<PAGE> 21
Common Stock and New VASCO Common Stock may not be able to sell their shares at
any particular time or at a price which would reflect an active public market.
POSSIBLE VOLATILITY OF STOCK PRICE. The market prices for securities of
technology-dependent companies have been volatile. Factors such as announcements
of variations in quarterly financial results, a reduction in sales, changes in
governmental regulations, competitive developments, and sales of substantial
blocks of the securities of New VASCO by the holders thereof, among other
things, could cause the market price of New VASCO's Common Stock to fluctuate
significantly. The sale in the public trading markets of a significant number of
shares of New VASCO Common Stock issued in connection with future financing
requirements or acquisitions, if any, may also cause substantial fluctuations
in, or may adversely affect, the price of the New VASCO Common Stock over short
time periods. In addition, the stock market has experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies that often has been unrelated or disproportionate to the
operating performance of such companies. These broad market fluctuations may
adversely affect the market price of the New VASCO Common Stock following the
Exchange Offer.
LOW PRICE OF NEW VASCO COMMON STOCK MAY AFFECT MARKETABILITY BY IMPOSING
CERTAIN BROKER-DEALER TRADING RESTRICTIONS. There is no trading market for New
VASCO Common Stock as of the date of this Prospectus. If a trading market for
New VASCO Common Stock develops, but the trading price does not reach $5.00 per
share, trading in such securities would be subject to the Securities and
Exchange Commission's "penny stock" regulations. "Penny stocks" generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the Nasdaq
system, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system).
The penny stock regulations require additional disclosure by broker-dealers
in connection with any trades involving penny stock. The regulations impose
various sales practice requirements on broker-dealers who sell penny stock to
persons other than established customers and accredited investors (generally
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchase and have received the
purchaser's written consent to the transaction prior to sale. Prior to any penny
stock transaction, the broker-dealer must deliver a disclosure schedule
explaining the penny stock market and the risks associated therewith. The
broker-dealer also must disclose the commissions payable to both the broker-
dealer and the registered representative, current quotations for the securities
and, if the broker-dealer is the sole market-maker, the broker-dealer must
disclose this fact and the broker-dealer's presumed control over the market.
Finally, monthly statements must be sent disclosing recent price information for
the penny stock held in the account and information on the limited market in
penny stocks.
The additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions in New VASCO Common Stock
which could severely limit the market liquidity of New VASCO Common Stock and
the ability of stockholders to sell their shares of New VASCO Common Stock in
the secondary market.
The foregoing required penny stock restrictions will not apply to New VASCO
Common Stock if it is listed on Nasdaq and has certain price and volume
information provided on a current and continuing basis or if New VASCO meets
certain minimum net tangible assets or average revenue criteria. There can be no
assurance that New VASCO Common Stock will qualify for exemption from these
restrictions.
ADVERSE EFFECTS OF EXERCISE OF EXISTING OPTIONS AND CONVERTIBLE
SECURITIES. A substantial number of shares of Current VASCO Common Stock are
issuable upon exercise or conversion of outstanding Current VASCO Equity
Equivalent Securities and pursuant to other contractual arrangements of Current
VASCO. Certain of these shares may be issued at below-market prices. In the
event these rights are exchanged in the Exchange Offer (or, in the case of the
other contractual arrangements, if corresponding contractual arrangements are
entered into by New VASCO), the shares of New VASCO Common Stock issued upon
exercise of these rights may become available for sale in the future in the
public market, which could have an adverse effect on the market price of New
VASCO Common Stock. In the event that a significant number of Current VASCO
Equity Equivalent Securities are not exchanged pursuant to the Exchange Offer
and,
16
<PAGE> 22
subsequent to consummation of the Exchange Offer, are converted or exercised
into shares of Current VASCO Common Stock so that New VASCO ceases to be a
holder of more than 80% of the outstanding equity of Current VASCO, New VASCO
would not be able to account for Current VASCO and its subsidiaries on a
consolidated basis for tax purposes, with the possible result that income taxes
of the entities reporting on a separate basis may in the aggregate be higher
than if the entities reported on a consolidated basis which could, in turn, have
an adverse effect on New VASCO's results of operations and financial condition.
POTENTIAL DILUTION. New VASCO's Certificate of Incorporation, as amended,
authorizes the issuance of seventy-five million (75,000,000) shares of New VASCO
Common Stock. As of October 31, 1997, there were 74,999,900 authorized but
unissued shares of New VASCO Common Stock available for issuance, and 100 shares
of New VASCO Common Stock issued and outstanding, all of which are held of
record by Current VASCO. New VASCO's Board of Directors has the power to issue
any or all of such authorized but unissued shares without stockholder approval.
In the event the Reorganization is completed, it is anticipated that New
VASCO will attempt to meet its future financing needs through the issuance of
equity or debt securities in public or private offerings. Current VASCO has
executed engagement letters with Banque Paribas S.A. and Generale Bank for a
possible future public offering, the completion of which is subject to a number
of contingencies. To the extent that any such offering was to involve the sale
of New VASCO Common Stock or a derivative thereof at a price lower than that
paid by any investors prior thereto, including investors in Current VASCO and
its predecessors, such offering would have an immediate and possibly substantial
impact on investors who purchased prior thereto at higher prices. In addition,
to the extent outstanding options and warrants to purchase New VASCO Common
Stock are exercised, there will be further dilution to new investors. See
"Factors Relating to Operations -- Additional Capital Needed" below.
PREFERRED STOCK ISSUANCE. New VASCO's Certificate of Incorporation, as
amended, also authorizes the issuance of five hundred thousand (500,000) shares
of preferred stock with such designations, rights, powers and preferences as may
be determined from time to time by the New VASCO Board of Directors. The New
VASCO Board of Directors is empowered, without stockholder approval, to issue up
to 500,000 shares of preferred stock with such dividend, liquidation,
conversion, voting or other rights, powers and preferences as may be determined
from time to time by the New VASCO Board of Directors. The issuance of preferred
stock could adversely affect the voting power or other rights of the holders of
shares of New VASCO Common Stock. In addition, the authorized preferred stock
and shares of New VASCO Common Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying, or preventing a change in
control of New VASCO, depending upon the determination of the New VASCO Board of
Directors as to whether such a change in control would be in the best interests
of New VASCO's stockholders.
NOT ALL POTENTIAL CLAIMS WILL BE ELIMINATED. While Current VASCO believes
that, following the Reorganization, New VASCO will be in a better position to
raise capital through public and private markets, there is no assurance that the
Reorganization will eliminate all potential claims against Current VASCO or its
predecessors based on or arising out of the Corporate Matters. Holders of
Current VASCO Securities who do not participate in the Exchange Offer may
attempt to assert Associated Corporate Matter Claims against Current VASCO (or
its predecessors) after the Exchange Offer is consummated. Parties other than
holders of Current VASCO Securities might also attempt to assert Associated
Corporate Matter Claims against Current VASCO (or its predecessors); such
parties might include, among others, former holders of securities issued by
Current VASCO (or its predecessors) and third parties that have entered into
contracts with Current VASCO (or its predecessors). The assertion of Associated
Corporate Matter Claims could have an adverse effect on Current VASCO's or,
following the Exchange Offer, New VASCO's ability to raise capital and in turn
an adverse effect on its results of operations and financial condition. See
"REORGANIZATION OF CURRENT VASCO -- Associated Corporate Matter Claims."
POTENTIAL CLAIMS AGAINST DIRECTORS AND OFFICERS OF CURRENT VASCO AND ITS
PREDECESSORS. The Associated Corporate Matter Claims that holders are being
asked to release, waive and relinquish in the Exchange Offer do not include
claims, if any, that an exchanging holder of Current VASCO Securities may or
17
<PAGE> 23
may not be entitled to assert against any past or present officers or directors
of Current VASCO or its predecessors, arising from or in connection with the
Corporate Matters, regardless of whether such claims are raised in an individual
or derivative capacity. For a description of the Associated Corporate Matter
Claims and a discussion of the releases with respect thereto, see
"REORGANIZATION OF CURRENT VASCO -- Associated Corporate Matter Claims," and "--
Releases from Security Holders in Exchange Offer."
Any such claim, if asserted against the officers or directors of Current
VASCO, who are also the officers and directors of New VASCO, could be
time-consuming to defend, result in costly litigation and divert management's
attention and resources, which could have a material adverse effect on New
VASCO's business, operating results and financial condition.
Any such claim may or may not be subject to factual, legal or equitable
defenses and, if asserted, may or may not be subject to indemnification by
Current VASCO to the extent permitted by applicable law. The Delaware General
Corporation Law ("DGCL") provides that a corporation may indemnify directors,
officers, employees and agents against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement in connection with specified
actions, suits, or proceedings whether civil, criminal, administrative, or
investigative (other than an action by or in the right of the corporation, that
is, a "derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification is
permitted only for expenses (including attorneys' fees) incurred in connection
with the defense or settlement of such action, and the statute requires court
approval before there can be any indemnification for expenses where the person
seeking indemnification has been found liable to the corporation. The statute
provides that it is not exclusive of other indemnification that may be granted
by a corporation's charter, bylaws, disinterested director vote, stockholder
vote, agreement, or otherwise.
Current VASCO's bylaws provide that it will indemnify and hold harmless, to
the fullest extent permitted by applicable law, any person (an "Indemnitee") who
was or is made or is threatened to be made a party or is otherwise involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding"), by reason of the fact that he, or a person for
whom he is the legal representative, is or was a director or officer of Current
VASCO, against all liability and loss suffered and expenses (including
attorneys' fees) reasonably incurred by such Indemnitee. In addition, except
under certain circumstances, Current VASCO is required to indemnify an
Indemnitee in connection with a proceeding (or part thereof) commenced by such
Indemnitee only if the commencement of such proceeding (or part thereof) by the
Indemnitee was authorized by the Board of Directors. Directors and officers of
Current VASCO's predecessors may also be entitled to indemnification to the
extent permitted by the DGCL.
Because a claim for indemnification depends on factual determinations as to
whether the Indemnitees acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful, Current VASCO is unable to determine whether
it will provide such indemnification to Indemnitees unless and until a claim for
indemnification is made. If the Exchange Offer is consummated, New VASCO will be
the principal stockholder of Current VASCO. Therefore, claims for
indemnification, if made, could result in Current VASCO assuming expenses, fees,
and judgments of Indemnitees, which could have a material adverse effect on New
VASCO's business, operating results and financial condition.
NO ASSURANCES AS TO ENFORCEABILITY OF RELEASES OF ASSOCIATED CORPORATE
MATTER CLAIMS. The enforceability of the releases of Associated Corporate Matter
Claims has not been determined by any court. While management of New VASCO
believes that a release when given by an exchanging security holder pursuant to
the Exchange Offer should be enforceable, no assurances can be given as to the
enforceability of all or part of a release until the release has been tested in
a court proceeding and a final nonappealable decision has been reached. If the
Exchange Offer is completed, a security holder or group of security holders
might subsequently contest the release on the grounds that a release violates
the "anti-waiver provisions" of the federal securities laws, or does not extend
to a Corporate Matter not specifically disclosed in this Prospectus or some
other
18
<PAGE> 24
theory. See "REORGANIZATION OF CURRENT VASCO -- Releases from Security Holders
in Exchange Offer."
The determination of the validity and enforceability of the releases will
depend on a number of factors, including the specific facts in each case, the
nature of the claim and the application of legal principles to the specific
facts. If a court determines that a release is not valid or enforceable with
respect to an asserted claim, New VASCO will not receive the protection of the
release.
LACK OF DIVIDENDS. Current VASCO has not paid any dividends on Current
VASCO Common Stock to date. The future payment of dividends on New VASCO Common
Stock by New VASCO upon consummation of the Exchange Offer will be contingent
upon New VASCO's revenues and earnings, if any, capital requirements and general
financial condition. The payment of any future dividends will be subject to the
discretion of New VASCO's Board of Directors. It is the present intention of the
New VASCO Board of Directors to retain all earnings, if any, for use in New
VASCO's consolidated business operations and, accordingly, it is not anticipated
that any dividends will be declared on the New VASCO Common Stock in the
foreseeable future. See "MARKET PRICE OF CURRENT VASCO COMMON STOCK AND DIVIDEND
POLICY" and "DESCRIPTION OF CAPITAL STOCK OF NEW VASCO -- Common Shares."
POTENTIAL BENEFITS OF EXCHANGE OFFER TO MEMBERS OF CURRENT VASCO'S
MANAGEMENT AND BOARD OF DIRECTORS AND LARGE SECURITY HOLDERS. The completion of
the Exchange Offer may benefit members of Current VASCO's present management and
Board of Directors, as well as certain holders of large numbers of Current VASCO
Securities. For example, the New VASCO 1997 Stock Option Plan provides that the
compensation committee, to be appointed by the New VASCO Board of Directors to
administer the New VASCO 1997 Stock Option Plan, will have the authority to,
among other things, grant New VASCO Stock Options to persons who are officers,
employees, directors, consultants or advisers of New VASCO and its subsidiaries,
to set the terms of the New VASCO Stock Options granted thereunder, and to
adjust the terms of the New VASCO Stock Options in the event of changes that
impact New VASCO or the price (or status) of shares of New VASCO Common Stock.
In addition, to the extent that the Exchange Offer facilitates the raising
of capital by New VASCO by means of a registered public offering of New VASCO
Securities, certain members of Current VASCO's management, as well as certain
holders of a large number of Current VASCO Securities, may be granted the
opportunity to have a number of the shares of New VASCO Common Stock that they
receive in the Exchange Offer included in any such registered offering, if New
VASCO enters into registration rights agreements with such holders in connection
with the Exchange Offer with provisions comparable to the agreements such
persons have entered into with Current VASCO with respect to shares of Current
VASCO Common Stock. A registered public offering of New VASCO Securities
following the Exchange Offer may also include a number of shares of New VASCO
Common Stock received by New VASCO's Board of Directors and management in the
Exchange Offer, in addition to newly issued shares of New VASCO Common Stock,
depending on the structure of any such offering that may be negotiated by New
VASCO and the prospective underwriters thereof.
Certain Current VASCO Warrants also provide that the shares of Current
VASCO Common Stock into which they may be exercised shall be included in the
next registration statement to be filed by Current VASCO with the Securities and
Exchange Commission. To the extent that such Current VASCO Warrants are tendered
in the Exchange Offer, the New VASCO Warrants issued in exchange therefor will
entitle the holders, including Mario Houthooft, Managing Director of Current
VASCO's European operating subsidiary, and Osprey Partners, a firm in which a
member of the Board of Directors of Current VASCO and of New VASCO, Michael
Mulshine, is a principal, to the same right with respect to the shares of New
VASCO Common Stock underlying such New VASCO Warrants. See "DESCRIPTION OF
CAPITAL STOCK OF NEW VASCO -- Registration Rights and Other Arrangements."
19
<PAGE> 25
FACTORS RELATING TO OPERATIONS
The following factors are applicable to the operations of Current VASCO and
are not dependent on the completion of the Reorganization. However, in the event
the Reorganization is completed, the factors will also apply to New VASCO.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT. Current VASCO has
incurred losses from continuing operations before interest and taxes for the
years ended December 31, 1995, December 31, 1996 and the nine months ended
September 30, 1997 of $534,000, $8,658,000 and $2,212,000, respectively. As of
September 30, 1997, Current VASCO had an accumulated deficit of $13,296,000,
which amount includes a write-off of acquired in-process technology related to
the acquisitions of Lintel Security NV and Digipass SA for the year ended
December 31, 1996 in the amount of $7,351,000. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." In view of Current
VASCO's loss history, there can be no assurance that Current VASCO will be able
to achieve or sustain profitability on an annual or quarterly basis in the
future.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. Current VASCO'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 Current VASCO's competitors; adoption of new
technologies and standards; changes in pricing by Current VASCO or its
competitors; the ability of Current VASCO to develop, introduce and market new
products and product enhancements on a timely basis, if at all; component costs
and availability; Current VASCO'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 Current VASCO'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.
ADDITIONAL CAPITAL NEEDED. Current VASCO requires additional capital to
finance its working capital and other needs, including the repayment of
outstanding obligations and the financing of future growth. While Current VASCO
intends to raise capital in the near future through, among other potential
financing sources, a possible public offering of New VASCO Common Stock, the
inability of Current VASCO to obtain additional funds will adversely affect its
results of operations and financial condition and its ability to conduct its
business. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Liquidity and Capital Resources." In addition, while
the Reorganization of Current VASCO pursuant to the Exchange Offer is intended
to enhance New VASCO's ability to raise capital in the public markets, there can
be no assurance that the Reorganization will be successful or, if it is
successful, that the Reorganization will improve New VASCO's ability to raise
capital in the public markets or otherwise.
RAPID TECHNOLOGICAL CHANGES AND DEPENDENCE ON NEW PRODUCTS. The market for
Current VASCO'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 Current VASCO or its
competitors of products embodying new technologies and the emergence of new
industry standards could render Current VASCO's existing products obsolete and
unmarketable. Therefore, Current VASCO'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. Current VASCO 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 Current VASCO's competitive position or that Current VASCO
will be able to successfully anticipate or adapt to changing technology,
industry standards or customer requirements on a timely basis. Any failure by
Current VASCO to anticipate and respond to such changes could have a material
adverse effect on Current VASCO's results of operations and financial condition.
20
<PAGE> 26
DEPENDENCE ON MAJOR CUSTOMERS. Approximately 44% (approximately 33% on a
pro forma basis after giving effect to the Digipass SA and Lintel Security NV
acquisitions and assuming the acquisitions had occurred on January 1, 1996) of
Current VASCO's revenues during 1996 were derived from the sale of Current
VASCO's security products to one European distributor, Concord-Eracom Nederland
BV, a customer with which Current VASCO presently has a product acceptance
dispute regarding the sale in 1995 of certain smartcard readers. On the same pro
forma consolidated basis, taking into account Lintel Security NV and Digipass SA
sales for the calendar year 1996, two other European customers each would have
accounted for approximately 10% of Current VASCO's total revenues. There can be
no assurance that Current VASCO 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 Current VASCO'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 Current VASCO's results of
operations and financial condition. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "CERTAIN INFORMATION
CONCERNING CURRENT VASCO -- Business -- Customers and Markets" and "--
Litigation."
PRODUCT CONCENTRATION. Sales of Current VASCO's AccessKey II and Digipass
security tokens together comprised the majority of Current VASCO's net sales
during fiscal 1995 and 1996. 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, Current VASCO's
results of operations and financial condition would be adversely affected.
DEPENDENCE ON DEVELOPMENT OF INDUSTRY RELATIONSHIPS. Current VASCO 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. Current VASCO'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 "CERTAIN INFORMATION CONCERNING CURRENT
VASCO -- Business -- Current VASCO Security Products -- Strategic
Relationships."
RISKS OF INTERNATIONAL OPERATIONS. Sales to customers outside the United
States accounted for approximately 44%, 61% and 95% of Current VASCO's net
revenues in the years ended December 31, 1994, 1995 and 1996, respectively.
Because a significant number of Current VASCO's principal customers are located
in other countries, management expects that international sales will continue to
generate a significant portion of Current VASCO's (and, upon consummation of the
Exchange Offer, New VASCO's) total revenue. Current VASCO'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 VASCO Data Security, Inc. are
denominated in U.S. dollars, whereas many of the supply and sales transactions
of VASCO Data Security 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 Current VASCO's
products sold in these markets. Current VASCO 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, VASCO Data Security 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 VASCO Data
Security NV/SA purchased $300,000 in U.S. dollars to cover purchases of supplies
for a six-month period. VASCO Data Security 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
21
<PAGE> 27
international operations will not have a material adverse effect on Current
VASCO's financial condition or results of operations. Current VASCO 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 "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
COMPETITION. The market for computer and network security products is
highly competitive and subject to rapid change. Current VASCO 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. Current VASCO's competitors include
organizations that provide computer and network security products based upon
approaches similar to and different from those employed by Current VASCO. 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 Current VASCO. See "CERTAIN INFORMATION CONCERNING CURRENT VASCO -- Business
- -- The Data Security Industry -- Industry Background," "-- Current VASCO
Security Products" and "-- Competition."
Many of Current VASCO's potential competitors have significantly greater
financial, marketing, technical and other competitive resources than Current
VASCO. 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 Current VASCO.
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 Current VASCO's
financial condition or results of operations.
Although Current VASCO believes it has certain technological and other
advantages over its competitors, maintaining such advantages will require
continued investment by Current VASCO in research and development and sales and
marketing. There can be no assurance that Current VASCO will have sufficient
resources to make such investments or that Current VASCO 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 Current VASCO has strategic
relationships, to increase the ability of their products to address the security
needs of Current VASCO'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 Current VASCO would be materially adversely affected. See "CERTAIN
INFORMATION CONCERNING CURRENT VASCO -- Business -- Competition."
DEPENDENCE ON SINGLE SOURCE SUPPLIERS. The majority of Current VASCO'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 Current VASCO's security tokens at facilities in mainland
China. The importation of these products from China exposes Current VASCO 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
Current VASCO 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 Current VASCO's products which could have a material
adverse effect on Current VASCO's results of operations and financial condition.
In addition, Current VASCO'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. Current VASCO expects AccessKey II
production to be reduced by the end of 1997 and be
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<PAGE> 28
replaced by AccessKey III, which will employ a widely available microprocessor.
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 AccessKey
III product would have a material adverse effect on Current VASCO's results of
operations and financial condition. See "CERTAIN INFORMATION CONCERNING CURRENT
VASCO -- Business -- Production."
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY. Current VASCO's success
depends significantly upon its proprietary technology. Current VASCO currently
relies on a combination of patent, copyright and trademark laws, trade secrets,
confidentiality agreements and contractual provisions to protect its proprietary
rights. Current VASCO seeks to protect its software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. Current VASCO generally enters into confidentiality and
nondisclosure agreements with its employees and with key vendors and suppliers.
Current VASCO holds several patents in the United States and a corresponding
patent in certain European countries, which cover certain aspects of its
technology. The remaining terms of the U.S. patents are between six and nine
years. There can be no assurance that Current VASCO will develop proprietary
products or technologies that are patentable, that any issued patent will
provide Current VASCO 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 Current VASCO's business.
There has also been substantial litigation in the technology industry
regarding intellectual property rights, and litigation may be necessary to
protect Current VASCO's proprietary technology. Current VASCO 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
Current VASCO's target market grows. Any such claims or litigation may be
time-consuming and costly, cause product shipment delays, require Current VASCO
to redesign its products or require Current VASCO to enter into royalty or
licensing agreements, any of which could have a material adverse effect on
Current VASCO's results of operations and financial condition.
Despite Current VASCO's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of Current VASCO's products or
to obtain and use information and software that Current VASCO regards as
proprietary. To the extent Current VASCO 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 Current VASCO's means of protecting its proprietary and intellectual
property rights will be adequate or that Current VASCO's competitors will not
independently develop similar technology, duplicate Current VASCO's products or
design around patents issued to Current VASCO or other intellectual property
rights of Current VASCO.
PRODUCT LIABILITY RISKS. Customers rely on Current VASCO's token-based
security products to prevent unauthorized access to their data. A malfunction of
or design defect in Current VASCO's products could result in tort or warranty
claims. Current VASCO does not presently maintain product liability insurance
for these types of claims. In order to reduce the risk of exposure from such
claims, Current VASCO 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 Current VASCO will be
successful in obtaining such provisions in its agreements or that such measures
will be effective in limiting Current VASCO'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 Current VASCO'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
Current VASCO's products in particular, regardless of whether such breach is
attributable to Current VASCO's products. This could result in a decline in
demand for Current VASCO's products, which would have a material adverse effect
on Current VASCO's results of operations and financial condition.
GOVERNMENT REGULATION OF TECHNOLOGY EXPORTS. Current VASCO's international
sales and operations are subject to risks such as the imposition of government
controls, new or changed export license
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<PAGE> 29
requirements, restrictions on the export of critical technology, trade
restrictions and changes in tariffs. While Current VASCO 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 Current VASCO's financial condition or results of operations.
Certain products of Current VASCO are subject to export controls under U.S.
law, and Current VASCO 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 Current VASCO to obtain required approvals under these
regulations could materially adversely affect the ability of Current VASCO to
make international sales. For example, U.S. governmental controls on the
exportation of encryption technology prohibit Current VASCO 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 Current VASCO in the global data security market.
There can be no assurance that these factors will not have a material adverse
effect on Current VASCO's financial condition or results of operations.
Similarly, VASCO Data Security NV/SA, the Belgian operating subsidiary of
Current VASCO, is subject to export licensing requirements under Belgian law.
The inability of VASCO Data Security NV/SA to obtain required approvals or
licenses under Belgian law also could have a material adverse effect on Current
VASCO's financial condition or results of operations. For additional information
on such export restrictions and licensing requirements under U.S. and Belgian
law, see "CERTAIN INFORMATION CONCERNING NEW VASCO -- Business -- Competition."
DEPENDENCE ON KEY PERSONNEL. Current VASCO now depends, and upon the
consummation of the Exchange Offer New VASCO will depend, to a significant
degree on the efforts of Current VASCO's 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. Neither Mr. Hunt nor Current VASCO's other key personnel have entered
into employment agreements with Current VASCO or New VASCO, with the exception
of Mr. Houthooft, who has entered into a consulting agreement with VASCO Data
Security NV/SA, Current VASCO's European operating subsidiary. 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 Current VASCO
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 Current VASCO's business and operating results.
Current VASCO'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 Current VASCO
can retain its key employees or that it can attract, assimilate or retain other
highly qualified personnel in the future.
MANAGEMENT AND CONTROL. Control of Current VASCO presently is, and after
the consummation of the Exchange Offer control of New VASCO will be, largely in
the hands of its Board of Directors, management and T. Kendall Hunt. Upon
consummation of the Exchange Offer, based on the number of shares of Current
VASCO Common Stock outstanding on October 31, 1997, the Board of Directors of
New VASCO and their spouses will own beneficially and of record approximately
53% (and Mr. Hunt and his family will own beneficially and of record 51.8%) of
the outstanding shares of New VASCO Common Stock, assuming all of the shares of
Current VASCO Common Stock are exchanged for shares of New VASCO Common Stock.
Mr. Hunt will also be Chairman of the New VASCO Board of Directors, Chief
Executive Officer and President of New VASCO. As a result, T. Kendall Hunt will
have control over the direction and operation of New VASCO and with his family
will be able to elect the directors of New VASCO and to approve corporate action
requiring majority stockholder approval. Such concentration of control may have
an adverse effect on the market price of New VASCO Common Stock.
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<PAGE> 30
CURRENT VASCO AND NEW VASCO
Current VASCO is a Delaware corporation which, through its operating
subsidiaries, designs, develops, markets and supports open standards-based
hardware and software security systems which manage and secure access to data.
Current VASCO's hardware products include time-synchronous response only,
challenge/response and time-synchronous challenge/response user authentication
devices, some of which incorporate an electronic signature feature to guarantee
the integrity of data transmissions. These devices are commonly referred to as
security tokens. Current VASCO's security tokens are based upon Current VASCO's
core encryption technology, which utilizes two widely known and accepted
algorithms, Data Encryption Standard ("DES") and Rivest, Shamir, Adelman
("RSA"). Current VASCO's Cryptech division produces high speed hardware and
software encryption products used both internally for Current VASCO's security
tokens and for OEM vendors requiring real time encryption services. In addition,
Current VASCO recently has introduced a smartcard security token that uses the
challenge/response mode and the X.509 certificate authentication standard.
Current VASCO's security tokens are designed to be used with the VASCO Access
Control Manager server software or to be integrated directly into applications.
See "CERTAIN INFORMATION CONCERNING CURRENT VASCO -- Business" for further
information about the business of Current VASCO.
New VASCO is a newly incorporated Delaware corporation which has been
organized by representatives of Current VASCO for the purpose of effecting the
Reorganization of Current VASCO through the Exchange Offer. See "REORGANIZATION
OF CURRENT VASCO" and "THE EXCHANGE OFFER" for details on the Reorganization of
Current VASCO and on the Exchange Offer.
The principal executive offices of Current VASCO and of New VASCO are
located at 1901 South Meyers Road, Suite 210, Oakbrook Terrace, Illinois 60181;
telephone: (630) 932-8844.
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<PAGE> 31
REORGANIZATION OF CURRENT VASCO
Current VASCO is essentially a holding company that conducts its business
through operating subsidiaries in the United States and Europe.
ORGANIZATIONAL HISTORY OF CURRENT VASCO
Current VASCO's Present Organizational Structure. Current VASCO presently
has two operating subsidiaries. VASCO Data Security, Inc. ("VDSI"), a Delaware
corporation headquartered in Oakbrook Terrace, Illinois, is owned directly by
Current VASCO. Current VASCO'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 Current VASCO's European holding
company subsidiary, VASCO Data Security Europe SA ("VDSE"). VDSI 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.
<TABLE>
<S><C>
__________________________________
| |
________________________________| VASCO CORP. |_____________________
| | | |
| 100% |________________________________| | 100%*
___________|______________ |
| | ________________|___________________
____________|_________ ____________|______________ | |
| | | | | VASCO Data Security |
| VASCO Data Security| |VASCO Data Security, Inc.| | Europe SA |
| International, Inc.| | US Operating Company | | European Holding Company |
|____________________| |_________________________| | |
|__________________________________|
|
|
| 100%*
________________|___________________
| |
| VASCO Data Security |
| NV/SA |
| European Operating Company |
|__________________________________|
</TABLE>
* All shares are held by the parent corporation, except that shares representing
less than 1% are held by T. Kendall Hunt.
VDSI. In November 1989, a Utah corporate predecessor of Current VASCO
acquired an option to purchase a controlling interest in ThumbScan, Inc.
("ThumbScan"). Current VASCO acquired a controlling interest in ThumbScan in
January 1991, and in December 1991 Current VASCO increased its holdings in
ThumbScan. Current VASCO subsequently acquired the remaining shares of
ThumbScan. In July 1993, ThumbScan was renamed VASCO Data Security, Inc.
VDS NV/SA. VDS NV/SA is a combination of two European companies (Lintel
Security NV and Digipass SA) acquired by Current VASCO, through VDSE, in 1996,
and accounts for a substantial portion of Current VASCO's consolidated revenues.
ACQUISITION OF LINTEL SECURITY. Effective March 1, 1996, Current VASCO
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 DES and RSA cryptographic
algorithms. Current VASCO 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 Current VASCO in Europe. The purchase price paid
for Lintel Security was approximately $4.4 million, and
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<PAGE> 32
was paid in cash, shares of Current VASCO Common Stock, Current VASCO Warrants
and notes that include Current VASCO Conversion Options.
ACQUISITION OF DIGIPASS. In July 1996, Current VASCO 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 Current VASCO in Europe.
Prior to Current VASCO'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 are used primarily in telebanking applications and
incorporate authentication and access control technology. In some cases,
customers for Digipass' IVR products are the same as those for Digipass'
computer security products.
In January 1997, Digipass changed its name to VASCO Data Security NV/SA
("VDS NV/SA"). Concurrent with this event Lintel Security's operations were
consolidated with those of VDS NV/SA at a single location near Brussels.
CURRENT VASCO'S HISTORICAL TRANSACTIONS. VASCO CORP. ("Old VASCO") was
incorporated as a Delaware corporation on May 22, 1984. Current VASCO's
President, T. Kendall Hunt, was an initial director and stockholder of Old
VASCO. On September 5, 1986 Old VASCO was combined with Ridge Point Enterprises,
Inc. ("Ridge Point"), a non-operating company incorporated in Utah on January 7,
1985. This combination was effected by means of share exchange, resulting in Old
VASCO becoming a subsidiary of Ridge Point, which concurrently changed its name
to Vasco Corp. ("VASCO Utah"). Old VASCO then filed a certificate of dissolution
with the State of Delaware on August 3, 1987. On August 20, 1990, a certificate
of merger was filed with the Secretary of State of the State of Delaware for the
intended merger of VASCO Utah with a newly formed Delaware corporation and since
that date business has been conducted as VASCO CORP., a Delaware corporation
(referred to in this document as "Current VASCO"). The organization of, and
certain corporate transactions undertaken by, Current VASCO and/or its
predecessors were not effected in strict accordance with applicable statutory
and procedural requirements. See "Reasons for the Reorganization" below.
Current VASCO'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 Current VASCO should focus its energies and resources on the data security
industry, where it believes significant growth and profit potential exist and on
August 20, 1996 Current VASCO sold the assets of VPS to Wizdom Systems, Inc. and
withdrew from the consulting and technical training business.
THE REORGANIZATION
The Board of Directors of Current VASCO has concluded that reorganizing
Current VASCO's corporate structure is in the best interests of Current VASCO's
stockholders. After considering various alternatives, management determined that
Current VASCO should effect the Reorganization by means of the Exchange Offer by
New VASCO to the holders of all outstanding Current VASCO Securities. See
"Reasons for the Reorganization" below. In the Exchange Offer, New VASCO is
offering to exchange New VASCO Securities for (i) Current VASCO Securities and
(ii) a release by each exchanging holder of Current VASCO Securities of any and
all Associated Corporate Matter Claims. See "Reasons for the Reorganization" and
"Associated Corporate Matter Claims" below and "THE EXCHANGE OFFER -- Terms of
the Exchange Offer."
Current VASCO has one class of equity security outstanding: Current VASCO
Common Stock. In addition, Current VASCO has issued Current VASCO Equity
Equivalent Securities, consisting of Current VASCO Stock Options, Current VASCO
Conversion Options and Current VASCO Warrants, all of which are exercisable or
convertible into Current VASCO Common Stock.
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<PAGE> 33
New VASCO has created a single class of equity security, New VASCO Common
Stock, the provisions of which are substantially identical with the
corresponding Current VASCO Common Stock, with the exception of the fact that
New VASCO's Certificate of Incorporation, as amended, authorizes the issuance of
75,000,000 shares of New VASCO Common Stock as compared to 50,000,000 shares of
authorized Current VASCO Common Stock. See "Federal Income Tax Consequences"
below, "DESCRIPTION OF CAPITAL STOCK OF NEW VASCO" and "COMPARISON OF
STOCKHOLDER RIGHTS."
New VASCO has also created New VASCO Stock Options and New VASCO Warrants
as substitutes for the Current VASCO Stock Options and Current VASCO Warrants,
and is offering to grant New VASCO Conversion Options to holders of Current
VASCO Conversion Options.
New VASCO has entered into an agreement with Current VASCO that provides
for New VASCO's assumption, upon consummation of the Exchange Offer, of certain
Current VASCO obligations under a financing agreement with Generale Bank for a
$2.5 million loan and with respect to a registration rights agreement with
certain holders of Current VASCO Equity Equivalent Securities, as well as for
the substitution of New VASCO Common Stock for Current VASCO Common Stock in
connection with Current VASCO Equity Equivalent Securities that are exchanged in
the Exchange Offer and certain related agreements of Current VASCO. See
"DESCRIPTION OF CAPITAL STOCK OF NEW VASCO -- Registration Rights and Other
Arrangements."
In order for the Reorganization and the Exchange Offer to become effective,
as of the Expiration Date the Minimum Condition must be satisfied, unless waived
by New VASCO. Based on the number of Current VASCO Shares outstanding at October
31, 1997, at least 16,106,374 shares of Current VASCO Common Stock must be
tendered for exchange to satisfy the Minimum Condition. See "THE EXCHANGE OFFER
- -- Conditions to the Exchange Offer" for more detail on conditions of the
Exchange Offer.
If the Exchange Offer is consummated, New VASCO will initially be a holding
company owning at least 80% of the outstanding shares of capital stock of
Current VASCO and possessing the requisite voting power to control the affairs
of Current VASCO. Current VASCO stockholders who exchange their Current VASCO
Shares and release their Associated Corporate Matter Claims will become
stockholders of New VASCO. Holders of Current VASCO Shares who do not exchange
such shares and release their Associated Corporate Matter Claims for New VASCO
Shares will remain stockholders of Current VASCO. See "RISK FACTORS -- Risks
Relating to Exchange Offer and New VASCO."
New VASCO has conducted no operations and has virtually no assets. The
Reorganization will not result in any change in the business or the consolidated
assets, liabilities or net worth of Current VASCO and will not result in any
change in the persons who constitute the Board of Directors and management of
Current VASCO or New VASCO (although the officers and directors may change
following completion of the Exchange Offer). See "CERTAIN INFORMATION CONCERNING
CURRENT VASCO -- Management" and "CERTAIN INFORMATION CONCERNING NEW VASCO --
Management."
The Reorganization may be abandoned by the Board of Directors of New VASCO
prior to its consummation if circumstances arise which, in the opinion of the
New VASCO Board of Directors, make the Reorganization inadvisable. The New VASCO
Board of Directors currently has no reason to believe that the Reorganization
will be abandoned.
After the Exchange Offer, New VASCO may merge Current VASCO with or into
New VASCO or a subsidiary of New VASCO, cause Current VASCO to distribute assets
to New VASCO, or make other changes in the corporate structure, assets,
liabilities and businesses among New VASCO and its subsidiaries subject to
appraisal rights, if any, or any other remedies available under Delaware law.
However, at the present time neither Current VASCO nor New VASCO has any plans
or proposals to effect any such transaction. The acquisition of Current VASCO
Shares by New VASCO pursuant to the Exchange Offer will be treated by New VASCO
for accounting purposes as an "as if" pooling of interest of entities under
common control.
See "Reasons for the Reorganization" below; "DESCRIPTION OF CAPITAL STOCK
OF NEW VASCO" and "COMPARISON OF STOCKHOLDER RIGHTS."
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<PAGE> 34
REASONS FOR THE REORGANIZATION
In early 1996, Management of Current VASCO began to explore the possibility
of voluntarily registering the Current VASCO Common Stock under the Exchange
Act, and registering future capital offerings under the Securities Act of 1933,
as amended (the "Securities Act"). In May 1996, Current VASCO filed with the
Securities and Exchange Commission a registration statement on Form 10-SB to
register voluntarily the Current VASCO Common Stock under the Exchange Act.
Current VASCO filed the registration statement to increase the amount and
frequency of information concerning Current VASCO available to the public and in
anticipation of applying for the listing of Current VASCO Common Stock on a
securities exchange at such time as Current VASCO could satisfy applicable
listing requirements. While the registration statement on Form 10-SB was on file
with the Securities and Exchange Commission, Current VASCO, which was in the
process of acquiring Lintel Security and Digipass, engaged new independent legal
counsel. The significance of these acquisitions to Current VASCO's operations at
the time would have triggered a requirement under Securities and Exchange
Commission rules that audited financial statements of Lintel Security and
Digipass be filed as part of the Form 10-SB. However, such audited financial
statements had not previously been prepared for Lintel Security or Digipass. In
addition, Current VASCO's new independent legal counsel had begun to examine the
historical corporate documentation furnished by Current VASCO, and requested
that Current VASCO provide additional documentation. Since the requested
information could not be located in a timely manner and the audited financial
statements for Lintel Security and Digipass were not available for timely filing
as part of the Form 10-SB, Current VASCO withdrew the filing in July 1996. After
reviewing the organizational history of Current VASCO and its predecessors,
independent legal counsel noted the absence of certain historical corporate
documentation and certain other corporate procedural irregularities. These
corporate irregularities, collectively referred to in this document as
"Corporate Matters," are described in the following section.
CORPORATE MATTERS
Old VASCO. Old VASCO's original Certificate of Incorporation, filed with
the Delaware Secretary of State on May 22, 1984, authorized 50,000 shares of
common stock, all of which were issued to two stockholders upon the
incorporation of Old VASCO, and provided for pre-emptive rights. In December
1984, a Certificate of Amendment to Old VASCO's Certificate of Incorporation was
prepared which purported (i) to increase Old VASCO's authorized common stock to
150,000 shares to effect a three-for-one split of all issued and outstanding
shares, and (ii) to authorize 600,000 shares of non-voting common stock, 300,000
of which were to be issued as of the date of the purported amendment for
consideration in the amount of $0.333 per share.
However, the Delaware Secretary of State does not have any record that the
proposed amendment was filed, calling into question the validity of any shares
issued by Old VASCO over and above the 50,000 originally authorized in Old
VASCO's Certificate of Incorporation. There is no documentary evidence available
to Current VASCO establishing that share certificates were physically issued in
connection with the three-for-one stock split referenced in the December 1984
intended amendment. There is, however, some documentation that indicates the
300,000 non-voting common shares may have been issued sometime during or after
February 1985, although no stock certificates or receipts are available to
confirm such issuance nor is there a stock ledger recording any such issuance of
common stock. There is also no evidence that Old VASCO's two initial
stockholders, one of whom was T. Kendall Hunt, were afforded pre-emptive rights
in connection with any issuance of shares by Old VASCO pursuant or subsequent to
the intended 1984 amendment.
There is also a lack of available documentation concerning other issuances,
if any, of common stock of Old VASCO subsequent to the intended 1984 amendment
and prior to an amendment to its Certificate of Incorporation, dated August 15,
1986 but filed with the Delaware Secretary of State on September 2, 1986, which
increased Old VASCO's authorized capital stock to 6,900,000 common shares in
connection with the transaction combining Old VASCO and Ridge Point/VASCO Utah.
There is no available evidence establishing either that the 1986 amendment was
properly approved by Old VASCO's board of directors or stockholders or that
pre-emptive rights were afforded to Old VASCO's stockholders in connection with
the
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issuance, if any, of shares purportedly authorized by the 1986 amendment. Based
on documentation available to Current VASCO, it cannot be determined how many
shares of Old VASCO were issued and outstanding at the time of the 1986
amendment.
The Plan and Agreement of Reorganization entered into by Old VASCO and
Ridge Point/VASCO Utah on September 5, 1986, recites that all 6,900,000
authorized common shares of Old VASCO were issued and outstanding as of the date
of the agreement. Documentation is not available which details the issuance of
shares by Old VASCO prior to the date of the Plan and Agreement of
Reorganization, nor is there any evidence that Old VASCO stockholders were
afforded pre-emptive rights in connection with any issuance of shares over and
above the originally authorized 50,000 shares issued in May 1984.
1986 Reorganization. The 1986 reorganization of Old VASCO and Ridge
Point/VASCO Utah was structured as an exchange of shares pursuant to which Old
VASCO's stockholders exchanged 6,900,000 common shares, representing all of the
issued and outstanding shares of Old VASCO according to the Plan and Agreement
of Reorganization, for 12,800,000 shares of Ridge Point/VASCO Utah, resulting in
Old VASCO becoming a subsidiary of Ridge Point/VASCO Utah. There is no
documentation available which establishes that Old VASCO's stockholders, who
were not parties to the agreement, voluntarily exchanged their shares for shares
in Ridge Point/VASCO Utah, nor is there any available evidence reflecting that
all such Old VASCO shares were exchanged. In addition, Old VASCO filed a
Certificate of Dissolution with the Delaware Secretary of State in August 1987,
although there is no available documentation reflecting authorization of the
dissolution of Old VASCO by Ridge Point/VASCO Utah as Old VASCO's controlling
stockholder. No documentation is available with respect to the vesting of title
and ownership of Old VASCO's assets in Ridge Point/VASCO Utah, the assumption by
Ridge Point/VASCO Utah of Old VASCO's liabilities, or the manner in which Old
VASCO was liquidated, dissolved or wound up.
VASCO Utah. In November 1989, VASCO Utah purportedly issued 317,181 shares
of preferred stock, although VASCO Utah's charter did not authorize any
preferred shares. Gerald Guice, a former director of VASCO Utah and Current
VASCO, was issued 200,000 shares of preferred stock in consideration for a loan
made by Mr. Guice to VASCO Utah, and T. Kendall Hunt was issued 117,181 shares
of preferred stock in consideration for a loan made by Mr. Hunt to VASCO Utah.
VASCO Utah was administratively dissolved in July 1990, prior to the intended
merger with Current VASCO.
Intended 1990 Merger. In addition to the administrative dissolution of
VASCO Utah prior to the intended merger of VASCO Utah with and into Current
VASCO in 1990, the unavailability of documentation concerning, and the timing of
certain actions taken in connection with, the intended 1990 merger raise the
following issues. There is no documentation available that:
(i) indicates whether VASCO Utah's stockholders were afforded the
appraisal rights provided for by Utah law in connection with the intended
1990 merger;
(ii) reflects the appointment of Current VASCO's initial directors,
the election of its initial officers or the adoption of its initial bylaws;
(iii) reflects the authorization of the issuance of shares prior or
pursuant to the intended merger; or
(iv) reflects proper authorization of the intended merger by Current
VASCO's board of directors or stockholders, if any.
Further, in connection with the intended merger, Current VASCO apparently
issued 317,181 shares of preferred stock to Messrs. Guice and Hunt in exchange
for the 317,181 unauthorized preferred shares they held in VASCO Utah. At the
time of the intended 1990 merger, Current VASCO's Certificate of Incorporation
authorized 500,000 preferred shares. However, the rights, powers and preferences
of Current VASCO's authorized preferred shares had not been designated at the
time of the intended 1990 merger, and Current VASCO's Certificate of
Incorporation did not provide its Board of Directors with the power to so
designate the authorized shares of preferred stock. This power to designate
Current VASCO's preferred shares was granted to Current VASCO's Board of
Directors as a result of a Restated and Amended Certificate of Incorporation
filed with the Delaware Secretary of State on September 14, 1994, and pursuant
to this
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authority Current VASCO's Board of Directors designated the 317,181 shares of
its authorized preferred stock held by Messrs. Guice and Hunt as Class A
Cumulative Convertible Preferred Stock by filing a Certificate of Designation
with the Delaware Secretary of State on September 14, 1994. Pursuant to the
terms of the preferred shares as so designated, in 1996 Mr. Guice and in 1997
Mr. Hunt converted the 317,181 preferred shares into an aggregate of 2,114,540
shares of Current VASCO Common Stock.
The documentation that is available with respect to the intended 1990
merger raises the following issues:
(i) the plan of merger, to which VASCO Utah and Current VASCO were
parties, was entered into on June 14, 1990 although Current VASCO was not
incorporated under Delaware law until August 16, 1990; and
(ii) there are inconsistencies between the plan of merger, the
certificate of merger as approved by Current VASCO's sole director by means
of written consent in lieu of a meeting dated August 16, 1990, other
resolutions contained in the August 16, 1990 director's consent, a consent
of Current VASCO's Board of Directors dated August 22, 1990 and the
Certificate of Merger as filed with the Delaware Secretary of State on
August 20, 1990.
The timing of actions taken in connection with the intended 1990 merger,
coupled with the prior administrative dissolution of VASCO Utah and the
inconsistencies in the documentation listed above, call into question the
validity of the intended 1990 merger pursuant to which, according to the June
14, 1990 plan of merger, Current VASCO was to issue 14,361,325 shares of Current
VASCO Common Stock and a number of shares of preferred stock equal to the number
of VASCO Utah preferred shares purportedly outstanding, presumably 317,181.
Options. The documentation available to Current VASCO indicates that
employee stock option plans were adopted beginning in 1985 by Old VASCO and
additional plans were adopted over the years by VASCO Utah. Current VASCO's
Board of Directors has taken action to increase the number of shares available
for issuance under a stock option plan that appears to have been originally
approved by Old VASCO's stockholders at a meeting held on September 2, 1986. The
effect of the various corporate transactions undertaken by Current VASCO and its
predecessors, and the general unavailability of historical corporate
documentation, precludes Current VASCO from conclusively determining whether all
options granted by Current VASCO and its predecessors were incentive stock
options, as defined in Section 422 of the Internal Revenue Code of 1986, as
amended ("ISOs"). As of the date of this Prospectus, Current VASCO believes that
3,000,000 shares of Current VASCO Common Stock have been made subject to
issuance under its employee stock option plan, and Current VASCO records reflect
that options granted under the stock option plan to purchase an aggregate of
1,977,757 shares of Current VASCO Common Stock were outstanding as of October
31, 1997. For a discussion as to the tax treatment of ISOs, see "Associated
Corporate Matter Claims -- Other Possible Claims by Holders of Current VASCO
Equity Equivalent Securities" below.
The corporate irregularities collectively referred to in this document as
"Corporate Matters" include all acts or omissions occurring on or before the
date of this Prospectus which arise from or in connection with the following,
whether undertaken by, involving or relating to Current VASCO or any of its
predecessor entities:
(i) any prior authorization, designation or issuance of stock, any
stock split, reclassification, redesignation, dividend or distribution of
or upon stock, any amendment to the certificate or articles of
incorporation or bylaws including those affecting the amount, rights,
powers or preferences of stock, and any failure to properly authorize,
approve or effect any of the foregoing actions, including
(a) the failure by Old VASCO to document whether an amendment to
its Certificate of Incorporation was duly authorized or to file a
Certificate of Amendment with the Delaware Secretary of State to amend
its Certificate of Incorporation in December 1984 to effect a three-for-
one stock split to increase the 50,000 authorized shares of its common
stock to 150,000 authorized common shares and to provide for 600,000
shares of non-voting common stock prior to purportedly effecting the
stock split and issuing a number of such non-voting common shares which
cannot be determined due to the unavailability of documentation
concerning any purported issuance of such non-voting common shares, (b)
the failure by Old VASCO to document whether director and
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stockholder approval was obtained for an amendment to its Certificate of
Incorporation increasing the number of authorized shares of common stock
to 6,900,000 shares in September 1986, (c) the purported issuance of
317,181 shares of preferred stock in November 1989 by VASCO Utah at a
time when the issuance of preferred shares was not authorized by VASCO
Utah's charter, and (d) the purported issuance of 317,181 shares of
preferred stock by Current VASCO in connection with the 1990 merger
when, although Current VASCO's Certificate of Incorporation authorized
500,000 shares of preferred stock, the rights, powers and preferences of
such stock were not specified in Current VASCO's Certificate of
Incorporation and its Certificate of Incorporation did not provide its
Board of Directors the power to designate such rights, powers and
preferences;
(ii) any failure to properly design, approve, adopt, administer, or
authorize the number of shares subject to, any stock option plan or
program, including actions required to allow for options awarded thereunder
to be treated as ISOs under the Internal Revenue Code of 1986, as amended
(the "Code"), including, beginning in 1985, the failure by Old VASCO, VASCO
Utah and/or Current VASCO to
(a) document approval by the Board of Directors and stockholders of
stock option plans, (b) specify and authorize the number of shares of
stock to be subject to such plans, (c) reserve the number of shares
subject to such plans, (d) document the authorization for the grant of
options pursuant to such plans and the issuance of shares upon exercise
of such options, and (e) design such plans in a manner that would ensure
options granted thereunder would be treated as ISOs;
(iii) any organization or any merger, consolidation, share exchange,
reorganization, recapitalization, sale of assets or like event, or any
failure properly to authorize, approve, effect or consummate same,
including
(a) the failure to document the approval by Old VASCO's
stockholders of the September 1986 reorganization through the share
exchange undertaken by Old VASCO and Ridge Point/VASCO Utah, (b) the
failure to document whether all stockholders of Old VASCO voluntarily
exchanged their shares for shares of Ridge Point/VASCO Utah, (c) the
failure to document the mechanics of the exchange of 6,900,000 common
shares of Old VASCO for 12,800,000 common shares of Ridge Point/VASCO
Utah, and (d) the following procedural irregularities which call into
question the validity of the intended 1990 merger of VASCO Utah and
Current VASCO, as well as Current VASCO's title to the assets of VASCO
Utah purportedly succeeded to by Current VASCO by virtue of the merger:
(1) the incorporation of Current VASCO after the date of the 1990 plan
of merger, (2) Current VASCO's approval of the plan of merger, including
approval of the plan of merger prior to the incorporation of Current
VASCO, the lack of documented stockholder approval as called for by the
plan of merger and the effectiveness of the approval by Current VASCO's
then Board of Directors, (3) the authorization and issuance of shares of
common and preferred stock by Current VASCO pursuant to the merger, (4)
the adoption of Current VASCO's initial bylaws, the appointment of
Current VASCO's initial directors and the election of its initial
officers, (5) the administrative dissolution of VASCO Utah in July 1990
prior to the filing of a Certificate of Merger with the State of
Delaware in August 1990, and (6) the failure to file Articles of Merger
with the State of Utah in connection with the intended merger of VASCO
Utah and Current VASCO in August 1990;
(iv) the dissolution, liquidation or winding up of any of Current
VASCO's predecessors, or any failure properly to approve or effect said
dissolution, liquidation or winding up, including
(a) the failure to properly document any stockholder approval of
the dissolution of Old VASCO and to document actions taken to dissolve,
liquidate and wind-up Old VASCO in August 1987, (b) the failure to vest
effectively title and ownership in VASCO Utah of Old VASCO's assets and
to document the assumption by VASCO Utah of Old VASCO's liabilities, and
(c) the administrative dissolution of VASCO Utah in July 1990 prior to
the intended merger transaction with Current VASCO and before the filing
of a Certificate of Merger with the State of Delaware in August 1990;
and
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(v) any failure to afford security holders any appraisal, preemptive
or other rights, whether accorded by statute or by the articles of
incorporation, certificate of incorporation or bylaws of Current VASCO or
any of its predecessors, in connection with any of the matters described in
the foregoing clauses (i), (ii), (iii) or (iv), including
(a) the failure of Old VASCO to document whether it afforded its
stockholders, in connection with any issuances of Old VASCO capital
stock subsequent to the initial issuance of 50,000 common shares in
connection with the incorporation of Old VASCO in May 1984, the
preemptive rights to purchase, upon the issuance or sale of Old VASCO
stock (or securities convertible into Old VASCO stock), shares (or
securities) in proportion to the amount of Old VASCO common stock then
owned by such holder, subject to conditions and time limitations
prescribed (and at a price determined as permitted by law) by Old
VASCO's Board of Directors, as provided for in the Old VASCO Certificate
of Incorporation and (b) the failure of VASCO Utah to document whether
it afforded its stockholders the appraisal rights provided for by Utah
law in connection with the intended 1990 merger of VASCO Utah with
Current VASCO.
In an attempt to remedy certain Corporate Matters, in April 1997, Current
VASCO contacted the Division of Corporations of the Utah Department of Commerce
and inquired whether the Division would accept for filing Articles of Merger
relating to the intended 1990 merger transaction. The Division responded that it
would not accept the Articles of Merger for filing. Current VASCO had been
operating on the belief that all prior issuances of capital stock, as well as
all corporate organizations and reorganizations, had been effected in compliance
with requisite corporate law. Current VASCO also considered a possible merger
with a subsidiary, but rejected that alternative because a merger would not
effect a release by Current VASCO's stockholders of Associated Corporate Matter
Claims and there was no assurance of obtaining a legal opinion that shares
issued in such a merger would be validly issued.
The Corporate Matters have not previously presented any problems to Current
VASCO in the conduct of its business operations. However, the Corporate Matters
may preclude legal opinions as to the compliance with applicable corporate law
with respect to the issuance of certain shares of Current VASCO presently
outstanding, and may complicate a future public offering. In the proposed
Reorganization, the holders of Current VASCO Securities who exchange their
securities for New VASCO Securities will also release any and all Associated
Corporate Matter Claims, and in such event the effect of the Corporate Matters
on Current VASCO will be diminished. See "REORGANIZATION OF CURRENT VASCO --
Releases from Security Holders in Exchange Offer."
If the Exchange Offer is consummated, New VASCO would initially serve as a
holding company for Current VASCO and its subsidiaries and be the entity for
raising capital in the public market. Management believes that the
Reorganization, if consummated, will facilitate plans to raise additional
capital to meet financing needs by increasing the likelihood of obtaining an
opinion of counsel concerning the validity of to-be-issued New VASCO Shares.
However, there can be no assurance that the Reorganization will successfully
facilitate the raising of capital by New VASCO.
ASSOCIATED CORPORATE MATTER CLAIMS
In the Exchange Offer the Current VASCO security holders who exchange their
securities for New VASCO Securities are required to release any and all
potential claims against Current VASCO and its predecessor entities arising out
of or related to the Corporate Matters (the "Associated Corporate Matter
Claims"). See "THE EXCHANGE OFFER -- Terms of the Exchange Offer." Although no
Associated Corporate Matter Claim has ever been asserted against Current VASCO
or its predecessors, the potential for claims arising from or in connection with
Corporate Matters exists. The strength of a potential claim can be assessed only
upon an examination of all of the facts and circumstances on which a claim is
based and the application thereto of relevant law. Factors relevant to such an
assessment would appear to include, among others, the date on which securities
were acquired, whether such Current VASCO Securities were acquired directly from
Current VASCO (or its predecessors) or in the open market, whether the holder
voluntarily participated in one or more of the historical corporate transactions
undertaken by Current VASCO and its predecessors, and the extent to which the
holder incurred damages, if any, as a result of the Corporate
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Matters. For information on types of possible claims Current VASCO security
holders may have against Current VASCO and its predecessor entities, see "--
Possible Securities Law Claims," "-- Other Possible Claims by Holders of Current
VASCO Shares," and "-- Other Possible Claims by Holders of Current VASCO Equity
Equivalent Securities" below.
Current VASCO's Board of Directors believes that, due largely to the
unavailability of documentation relevant to, as well as the novel questions of
law implicated by and the passage of time relating to, the transactions
comprising the Corporate Matters, it is not possible to identify with any
certainty the types of claims (or potential remedies) that might conceivably be
available to holders of Current VASCO Securities or to prior security holders as
a result of the Corporate Matters.
Under certain theories, the Associated Corporate Matter Claims that may be
available to holders of Current VASCO Securities might include, among other
things, claims for rescission of stock issuances, acquisitions, sales or
exchanges, claims of a direct interest in assets of Current VASCO or one of its
predecessor entities, claims for rescission of corporate transactions, or claims
for monetary damages in connection with, resulting from or relating to the
Corporate Matters. For additional information on the types of relief that might
be available to potential claimants, see "-- Possible Securities Law Claims,"
"-- Other Possible Claims by Holders of Current VASCO Shares," and "-- Other
Possible Claims by Holders of Current VASCO Equity Equivalent Securities" below.
In addition, to the extent that Current VASCO entered into agreements with
the holders of such Current VASCO Securities related to the issuance thereof,
contract law claims might be asserted. In the event a claim is asserted, the
facts surrounding each claim and the applicable law would need to be examined to
determine the availability and merits of such claims or the potentially
available remedies.
Set forth below is a discussion of certain types of Associated Corporate
Matter Claims that under certain theories might be asserted by holders of
Current VASCO Securities and, to the extent they can be identified, various
potential remedies that could be sought as a result of the Corporate Matters.
The release of these claims is included in the releases requested in the
Exchange Offer. The discussion below also includes references to certain
defenses that might be raised in defense of claims.
THE TYPES OF THEORIES OF CLAIMS, REMEDIES AND DEFENSES DISCUSSED BELOW ARE
THOSE IDENTIFIED BY NEW VASCO AS POTENTIAL THEORIES. THERE MAY BE OTHER THEORIES
AND EACH HOLDER (BENEFICIAL OWNER) OF CURRENT VASCO SECURITIES SHOULD CONSULT
LEGAL COUNSEL OR OTHER ADVISERS OF THE HOLDER'S (BENEFICIAL OWNER'S) CHOICE IN
CONNECTION WITH DETERMINING WHETHER TO PARTICIPATE IN THE EXCHANGE OFFER.
Possible Securities Law Claims
Associated Corporate Matter Claims might be asserted by holders of Current
VASCO Securities under federal or state securities laws, pursuant to which
either rescission of the transactions in which such Current VASCO Securities
were issued or damages could be sought on the basis of the nondisclosure of the
existence of the Corporate Matters.
For example, if a security holder prior to the date of this Prospectus
purchased stock directly from Current VASCO, the purchaser might assert a claim
under federal or state securities laws, such as Section 12(a)(2) of the federal
Securities Act. Section 12(a)(2) provides, in pertinent part, that any person
who sells a security by means of a prospectus or oral communication which
includes an untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements, in light of the circumstances
under which they were made, not misleading shall be liable, subject to certain
limitations, to the purchaser of the securities for the consideration paid, with
interest thereon, less the amount of any income received thereon, upon the
tender of such security, or for damages if the purchaser no longer owns the
security. Any action to enforce liability under Section 12(a)(2) must be brought
within the applicable period of the statute of limitations (see "Statutes of
Limitations" below). Further, there is case authority to the effect that Section
12(a)(2) does not apply to private placements of securities not subject to
federal registration requirements.
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See, e.g., Gustafson v. Alloyd Co., 513 U.S. 561 (1995); Glamorgan Coal Corp. v.
Ratner's, 1995 U.S. Dist. Lexis 9548, 1995 WL 906169 (S.D.N.Y. July 10, 1995).
A purchaser might also seek to assert a claim under Section 10(b) of the
Exchange Act, and Rule 10b-5 promulgated thereunder. Rule 10b-5 essentially
prohibits (1) fraudulent devices and schemes, (2) misstatements or omissions of
material facts, and (3) acts and practices which operate as a fraud or deceit in
connection with the purchase or sale of a security. In order to maintain an
action, the plaintiff must be either the purchaser or seller of the securities
in question. In addition, a showing of negligent conduct will not suffice; the
defendant must have acted with "scienter," that is, the intent to deceive,
manipulate or defraud or recklessness in that regard. Other elements of a Rule
10b-5 action include the requirement that the act or omission must be material
and have caused the loss for which recovery is sought. The measure of damages
under a Rule 10b-5 action depends to a large extent on the underlying facts, but
possible measures include rescission and out-of-pocket recovery. As with actions
under Section 12(a)(2), any action to enforce liability under Rule 10b-5 must be
brought within the applicable limitations period (see "Statutes of Limitations"
below).
State blue sky laws also provide remedies for persons injured in securities
transactions. The Uniform Securities Act, which has been adopted (with
modifications) by many states, includes a provision closely modeled on Section
12(a)(2) of the Securities Act. In addition to damages, the provision allows
recovery of attorneys' fees and pre-judgment interest. The Uniform Securities
Act also contains a provision similar to Rule 10b-5 under the Exchange Act. In
those states which permit actions under these Rule 10b-5 counterparts, the
plaintiff may not be required to prove scienter or recklessness, as under Rule
10b-5. In addition, some states may provide common law causes of action for
persons injured in securities transactions, including claims for fraud and
negligent misrepresentation. The standards for those common law actions vary
from state to state.
The release of Associated Corporate Matter Claims in the Exchange Offer is
intended to include a release of any and all claims arising from and out of
Corporate Matters, including any claims under Section 12(a)(2) of the Securities
Act, Rule 10b-5 under the Exchange Act, and any other state and federal claims
the exchanging security holder may have. See "REORGANIZATION OF CURRENT VASCO --
Releases from Security Holders in Exchange Offer."
Other Possible Claims by Holders of Current VASCO Shares
Holders of Current VASCO Shares might allege Associated Corporate Matter
Claims that arise under state corporation law requirements. Such claims might
include those based on the Corporate Matters discussed below.
OLD VASCO PRE-EMPTIVE RIGHTS. Holders of Current VASCO Shares who held
shares in Old VASCO might claim that, to the extent they may not have been
afforded the pre-emptive rights provided for in the Old VASCO Certificate of
Incorporation in connection with the issuance of capital stock of Old VASCO,
they were damaged by any failure of Old VASCO to afford such pre-emptive rights.
They might assert claims for breach of contract and seek damages flowing from
the alleged breach or arguably might seek specific performance to enforce the
pre-emptive rights.
1986 REORGANIZATION. With respect to the 1986 reorganization of Old VASCO
and Ridge Point/VASCO Utah, Associated Corporate Matter Claims that might be
asserted by holders of Current VASCO Shares who held shares of Old VASCO common
stock include claims to challenge or set aside that transaction, or otherwise
claim damages in connection therewith, to the extent such holders assert they
did not voluntarily surrender their Old VASCO shares in exchange for shares in
Ridge Point/VASCO Utah. Holders of Current VASCO Shares who held shares of
common stock in VASCO Utah might also challenge the purported issuance of Series
A preferred stock by VASCO Utah in 1989, at a time when no shares of preferred
stock were authorized by VASCO Utah's charter. The issuance of such preferred
shares might be challenged as having been void under Utah law at the time of
issuance, even though such shares of preferred stock were issued for valuable
consideration. It is unclear what remedies, if any, might flow from such claims.
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INTENDED 1990 MERGER. In connection with the administrative dissolution of
VASCO Utah prior to the intended 1990 merger with Current VASCO, a stockholder
of VASCO Utah common stock at the time of the dissolution might assert a direct
interest in VASCO Utah's assets because of the dissolution. The strength of such
claims, and the potential remedies that may be available therefor, is unclear.
Holders of Current VASCO Shares who held shares in VASCO Utah might also
assert claims because of the administrative dissolution of VASCO Utah prior to
the attempted merger with Current VASCO in 1990. The dissolution of VASCO Utah
calls into question the validity of this transaction as a statutory merger under
Utah and Delaware law, although approximately 90% of VASCO Utah's shareholders
at the time approved the proposed merger and no challenge to the validity of
this transaction has ever been brought. Regardless of the effect of the
administrative dissolution of VASCO Utah, Current VASCO issued shares of its
capital stock to all holders of VASCO Utah capital stock in exchange for the
shares they held in VASCO Utah. The issuance of Current VASCO Shares to the
holders of VASCO Utah capital stock may affect the strength of any Associated
Corporate Matter Claims seeking damages, a rescission of the transaction, or
other relief.
UNAUTHORIZED SHARES. It is not clear what claims or remedies a holder of
Current VASCO Common Stock who received shares in exchange for shares that were
previously issued but at the time of issuance had not been authorized under the
certificate of incorporation or other charter document of the issuing
corporation. Under one theory, such a holder arguably might claim that the
holder has the right to return the shares to Current VASCO in exchange for the
consideration paid to the corporation originally issuing the unauthorized
shares, plus interest, less dividends, if any.
It is also not clear whether claims or remedies with respect to prior
issuances of unauthorized shares could be asserted by holders of Current VASCO
Common Stock whose Current VASCO Shares, and any shares of predecessor entities
for which the Current VASCO Shares were exchanged, were duly authorized by the
certificate of incorporation or other charter document of the issuing
corporation. Under one theory, such holders of authorized Current VASCO Common
Stock arguably might assert that the Current VASCO Shares issued to others in
exchange for unauthorized shares should be voided by Current VASCO. If such
shares were voided by Current VASCO a holder of the voided shares might seek
restitution from Current VASCO.
Other Possible Claims by Holders of Current VASCO Equity Equivalent Securities
Associated Corporate Matter Claims that might be asserted by holders of
Current VASCO Warrants, Current VASCO Conversion Options and Current VASCO Stock
Options would appear to derive primarily from contract and/or securities law
principles. As a result, the facts and circumstances surrounding the manner in
which those Current VASCO Equity Equivalent Securities were issued will be
determinative of the nature and extent of any Associated Corporate Matter
Claims, and the remedies therefor, available to the holders of such Current
VASCO Equity Equivalent Securities.
The Current VASCO Warrants presently outstanding were issued either as a
component of an investment in units including other Current VASCO Securities,
such as Current VASCO Shares and/or convertible notes with Current VASCO
Conversion Options, or to compensate certain persons for services performed for
Current VASCO. Debt obligations with Current VASCO Conversion Options were
issued in exchange for loans of funds to Current VASCO or with respect to the
purchase of the stock of Lintel Security for the payment of a portion of the
purchase price for the stock of Lintel Security. Current VASCO Stock Options
have been issued as a performance incentive to employees, directors, consultants
and other key persons of Current VASCO and its subsidiaries.
With respect to Current VASCO Stock Options granted to employees of Current
VASCO and its subsidiaries, Current VASCO's Board of Directors intended that
such stock options qualify as incentive stock options ("ISOs") under the
Internal Revenue Code of 1986, as amended. However, documentation necessary to
support such income tax treatment may not be available in all instances. There
is different tax treatment for ISOs and for nonqualified stock options. For
example, if the holder of an ISO exercises it and meets certain applicable
holding requirements, the holder may avoid current taxability on the gain
realized upon exercise. When the holder of a nonqualified option exercises it,
the holder is taxable upon the gain realized. Holders of
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ISOs frequently exercise them and fail to comply with the holding requirements
with the result that their tax effects are the same as those that would have
applied if the options had been nonqualified in any event. To the extent that
various Current VASCO Stock Options may not entitle the holder to incentive
stock option treatment under the U.S. tax laws, by participating in the Exchange
Offer such holders will be agreeing to release any Associated Corporate Matter
Claims that might be asserted on this basis.
Statutes of Limitations
In the event an Associated Corporate Matter Claim is asserted, in addition
to any available factual or legal defenses on the merits, or equitable defenses
such as the doctrine of laches, that may be advanced to defeat the claim, an
attempt may be made to bar the claim on the basis of the applicable statute of
limitations. For example, a claim under Section 12(a)(2) of the Securities Act
in connection with the sale of securities must be brought within one year after
the discovery of the untrue statement or omission, or after such discovery
should have been made by the exercise of reasonable diligence, but in no event
more than three years after the sale. A claim under Rule 10b-5 promulgated under
the Exchange Act must also be brought within such time periods. Lampf, Pleva,
Lipkind, Prupis and Petigrow v. Gilbertson, 501 U.S. 350 (1991).
If an action is brought under the securities laws of the State of Illinois,
the state where Current VASCO is headquartered, the Illinois Securities Law of
1953, as amended (the "Illinois Securities Law"), provides that the action must
be brought prior to the expiration of three years from the date of sale;
provided that if the party bringing the action neither knew nor in the exercise
of reasonable diligence should have known of any alleged violation of the
Illinois Securities Law which is the basis of the action, the three-year period
begins to run upon the earlier of (i) the date upon which the party has actual
knowledge of the alleged violation of the Illinois Securities Law, or (ii) the
date upon which the party bringing the action has notice of facts which in the
exercise of reasonable diligence would lead to actual knowledge of the alleged
violation of the Illinois Securities Law, but in no event is the period of
limitation extended by more than two years beyond the expiration of the
three-year period otherwise applicable. In addition, the Illinois Securities Law
provides that notice of any election to void a sale of securities made in
violation of the Illinois Securities Law must be given by the purchaser within
six months after the purchaser has knowledge that the sale is voidable.
Securities laws of other states may contain statute of limitations provisions
similar to those in Illinois or the time periods for bringing an action may be
longer or shorter than those in Illinois. The Uniform Securities Act, which has
been adopted (with modifications) by many states, contains a statute of
limitations precluding actions brought more than one year after actual or
constructive knowledge of a violation, but in no event beyond three years from
the date of sale.
With respect to a claim based on a contract, if the statute of limitations
of Illinois, the state where Current VASCO is headquartered, applies, the action
must be brought within ten years from the date the cause of action under the
contract arose. 735 Ill. Comp. Stat. sec. 5/13-206. However, depending on the
place where the action is brought and the facts relating to the contract, the
statute of limitations of a state other than Illinois may apply.
If a claim is asserted under the laws of the State of Delaware, Current
VASCO's state of incorporation, Delaware law generally provides for a three-year
limitations period, subject to the potential application of equitable
principles. In addition, depending on the jurisdiction in which a claim is
asserted, the nature of the claim and other factors, there may be other statutes
of limitations that apply in an action to enforce a claim.
RELEASES FROM SECURITY HOLDERS IN EXCHANGE OFFER
Each of the security holders who exchanges securities in the Exchange Offer
is required to grant a release of any and all Associated Corporate Matter
Claims. The releases are set forth in the applicable Letter of Transmittal and
Release, New VASCO Warrant Agreement, New VASCO Option Agreement and New VASCO
Convertible Note Agreement which an exchanging security holder (beneficial
owner) is required to execute and deliver to New VASCO in connection with
exchanging securities in the Exchange Offer. Each of the Current VASCO security
holders or beneficial owners, as the case may be, should carefully study the
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<PAGE> 43
applicable document containing the release prior to signing it and consult with
their legal and other advisers as they deem necessary.
The validity or enforceability of a release of all Associated Corporate
Matter Claims pursuant to the Exchange Offer has not been legally tested or
determined by any court. Management of New VASCO believes that a release given
by an exchanging security holder will be given for valid consideration from New
VASCO and should constitute a valid contract binding on and enforceable against
the exchanging security holder. However, there has been no court determination
on the issue and no assurances can be given that if tested in judicial
proceedings, the releases will be determined to be valid and enforceable. If the
Exchange Offer is completed, it is possible that theories might be advanced in
opposition to the validity and enforceability of the releases. Set forth below
is a discussion of certain theories that might be raised in opposition to the
releases, but an analysis of the nature and scope of theories that may be
asserted in opposition to the releases will depend on the specific facts, the
legal principles and other factors involved in each contest.
Notwithstanding the foregoing, to the extent federal or state securities
laws limit the release of a claim under a federal securities law or under a
state securities law, as applicable, to mature, ripened claims of which the
releasor had knowledge before signing the release, the release of a federal
securities law claim or state securities law claim shall be limited to a release
of mature, ripened claims of which the releasor had knowledge prior to signing
the release.
Federal Securities Laws Anti-Waiver Provisions
Section 14 of the Securities Act and Section 29 of the Exchange Act contain
provisions, in general, to the effect that agreements waiving compliance with
the Securities Act or the Exchange Act, respectively, are void. These provisions
in the federal securities laws are sometimes referred to as the "anti-waiver
provisions." The anti-waiver provisions have been uniformly interpreted to
"forbid . . . enforcement of agreements to waive 'compliance' with the
provisions of the [Exchange Act.]" Shearson/American Express v. McMahon, 482
U.S. 220, 228 (1987). However, a release "'of claims under the federal
securities laws is valid only as to mature, ripened claims of which the
releasing party had knowledge before signing the release."' Hamilton v.
Harrington, 807 F.2d 102, 105 (7th 1986); Goodman v. Epstein, 582 F.2d 388, 402
(7th Cir 1978), cert. denied, 440 U.S. 939 (1979); see Petro-Ventures, Inc. v.
Takessian, 967 F.2d 1337, 1341 (9th Cir. 1992); Burgess v. Premier Corporation,
727 F.2d 826 (9th Cir. 1984); Korn v. Franchard, 388 F. Supp. 1326, 1328
(S.D.N.Y. 1975). For example, in Petro-Ventures, Inc. v. Takessian, 967 F.2d at
1341, a release of "all claims, demands, damages or causes of action they might
have, each against the other, based upon the negotiations of sale . . .
regardless of whether or not said claims have been set forth in the litigation"
was determined not to be void under Section 29(a) of the Exchange Act. Also, in
Goodman v. Epstein, 582 F.2d at 402, it was recognized that Section 29(a) "does
NOT bar a release or settlement of an existing, matured claim but only
'anticipatory waiver of compliance with the provisions of the Securities
Exchange Act of 1934'. . .".
The court in Goodman also upheld a requirement that a person executing a
release has a duty to make "reasonable inquiry" into the matter concerning which
the release was executed. A "reasonable inquiry" is dependent on the specific
facts and subject to decision by a court determining the validity of a release.
New VASCO believes that this Prospectus identifies the Corporate Matters that
might be discovered on "reasonable inquiry" of Current VASCO's records and that
a study of this Prospectus by a Current VASCO security holder delivering a
release pursuant to the Exchange Offer should satisfy a "reasonable inquiry"
requirement. Consequently, it is New VASCO's position that a Current VASCO
security holder who delivers a release pursuant to the Exchange Offer should not
thereafter be entitled to assert that the release did not extend to a mature,
ripened claim with respect to a Corporate Matter identified in this Prospectus.
New VASCO seeks a release from all claims that have matured and ripened.
The releases requested in the Exchange Offer do not seek to avoid compliance
with existing securities laws, nor do they seek to provide a release from any
continuing violations of the securities laws. The releases requested in the
Exchange Offer are intended to avoid legal entanglements related to past
practices. New VASCO believes that, based on the
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<PAGE> 44
advice of its independent legal counsel, Jenner & Block, the releases of such
claims should be valid and enforceable and should not be precluded by the
anti-waiver provisions.
The foregoing discussion of the anti-waiver provisions is not an exhaustive
analysis of the anti-waiver provisions and should not be interpreted as a
definitive statement of the law under the anti-waiver provisions. The effect of
the anti-waiver provisions on a release of securities law matters is a complex
issue. The ultimate determination as to the validity of a release will depend on
facts and legal principles involved in any challenge to a release, if and when a
challenge is made, and in such event will be made by a court of law.
Scope of Releases
The releases requested in the Exchange Offer are with respect to the
Corporate Matters, which include specifically identified corporate
irregularities and extend to general types of corporate activities. The release
in each of the Letter of Transmittal and Release, the New VASCO Option
Agreement, the New VASCO Convertible Note Agreement and the New VASCO Warrant
Agreement extends to the following types of corporate activities:
"all direct or indirect . . . claims . . . as a result of acts or
omissions occurring on or before the date of the Prospectus which arise
from or are in connection with
(i) any prior authorization, designation or issuance of stock, any
stock split, reclassification, redesignation, dividend or distribution of
or upon stock, any amendment to the certificate or articles of
incorporation or bylaws including those affecting the amount, rights,
powers or preferences of stock, and any failure to properly authorize,
approve or effect any of the foregoing actions, . . . ;
(ii) any failure to properly design, approve, adopt, administer, or
authorize the number of shares subject to, any stock option plan or
program . . . ;
(iii) any organization or any merger, consolidation, share exchange,
reorganization, recapitalization, sale of assets or like event, or any
failure properly to authorize, approve, effect or consummate same. . .;
(iv) the dissolution, liquidation or winding up of any of Current
VASCO's predecessors, or any failure properly to approve or effect said
dissolution, liquidation or winding up . . .; and
(v) any failure to afford security holders any appraisal, pre-emptive
or other rights, whether accorded by statute or by the articles of
incorporation, certificate of incorporation or bylaws of Current VASCO or
any of its predecessors, in connection with any of the matters described in
the foregoing clauses (i), (ii), (iii) or (iv) . . . ." (Emphasis added.)
Each of the Letter of Transmittal and Release, the New VASCO Option
Agreement, the New VASCO Convertible Note Agreement, and the New VASCO Warrant
Agreement also provides a release from any statute, rule or legal doctrine that
provides that a general release does not extend to claims which a releasor does
not know or suspect to exist in the releasor's favor at the time of executing
such release, which if known by the releasor would have materially affected its
settlement with the released party. Notwithstanding the foregoing, to the extent
federal or state securities laws limit the release of a claim under a federal
securities law or under a state securities law, as applicable, to mature,
ripened claims of which the releasor had knowledge before signing the release,
the release of a federal securities law claim or state securities law claim
shall be limited to a release of mature, ripened claims of which the releasor
had knowledge prior to signing the release.
New VASCO and Current VASCO believe that the waivers of general categories
of corporate deficiencies contained in the releases, in addition to the
specifically identified deficiencies, are desirable. If adequate corporate
documentation for Current VASCO and its predecessors were available, the ability
to determine all prior corporate activity and procedures or to identify
additional specific deficiencies would be facilitated. In the absence of such
corporate documentation, New VASCO and Current VASCO believe it is advisable to
obtain releases with respect to Corporate Matters of the type generally
described above in addition to the specific Corporate Matters identified. By
seeking to obtain such general releases, New VASCO and Current VASCO are
attempting to reduce potential claims, if any, that might be asserted following
the completion of the Exchange Offer against New VASCO, or Current VASCO or its
predecessors.
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Each of the Letter of Transmittal and Release, New VASCO Warrant Agreement,
New VASCO Option Agreement and New VASCO Convertible Note Agreement contains a
provision that the document is to be governed by Illinois law. Although there is
no assurance that a court considering the validity or enforceability of a
release contained in such document will apply Illinois law, New VASCO and
Current VASCO believe that Illinois law should be applicable, except to the
extent securities law claims may be governed by applicable securities laws.
There is Illinois case authority to the effect that "a release is a
contract, wherein a party abandons a claim to a person against whom the claim
exists . . . [and] its construction is governed by contract law." Murphy v. S-M
Delaware, Inc., 95 Ill. App. 3d 562, 564 (1st Dist. 1981); see Shultz v.
Delta-Rail Corp., 156 Ill. App. 3d 1, 10 (2d Dist. 1987); Farm Credit Bank v.
Federal Land Bank, 202 Ill. App. 3d 609, 611 (4th Dist. 1990). Further, in
Shultz the court repeated the oft-stated principle that "the intention of the
parties controls the scope and effect of a release; such intention is discerned
from the language and the circumstances of the transaction." 156 Ill. App. 3d at
10. Under Illinois law broad releases that are acknowledged and signed by
shareholders are generally upheld as simple contracts. Murphy, 95 Ill. App. 3d
at 566. It is the intention of New VASCO and Current VASCO that the releases be
broadly interpreted and that they extend not only to the specific Corporate
Matters identified but also to any claims arising from or in connection with the
Corporate Matters generally described in the respective releases. There is no
assurance, however, that the releases will be broadly interpreted or that they
will be validated. The specific facts with respect to a release and the
application of legal principles to the facts will be determined by judicial
proceedings if the validity of a release is challenged in court.
Notwithstanding the foregoing, to the extent federal or state securities
laws limit the release of a claim under a federal securities law or under a
state securities law, as applicable, to mature, ripened claims of which the
releasor had knowledge before signing the release, the release of a federal
securities law claim or state securities law claim shall be limited to a release
of mature, ripened claims of which the releasor had knowledge prior to signing
the release.
FEDERAL INCOME TAX CONSEQUENCES
Introduction. The following discussion is based upon the advice of Jenner &
Block as to certain of the material United States federal income tax
consequences that may be relevant to a citizen or resident of the United States,
a corporation, partnership or other entity created or organized under the laws
of the United States and an estate or trust the income of which is subject to
U.S. federal income taxation regardless of its source (any of the foregoing a
"U.S. Person") who is the beneficial holder of (i) shares of Current VASCO
Common Stock (a "U.S. Stockholder"), (ii) Current VASCO Warrants, (iii) Current
VASCO Stock Options, and (iv) Current VASCO Conversion Options. This summary is
based upon U.S. federal income tax laws, regulations, rulings and decisions in
effect as of the date of this Registration Statement, all of which are subject
to change at any time (possibly with retroactive effect). There can be no
assurance that future changes in applicable law or administrative and judicial
interpretations thereof, any of which could have a retroactive effect, will not
adversely affect the tax consequences discussed herein or that there will not be
differences of opinion as to the interpretation of applicable law.
Because the law is technical and complex, the following summary addresses
only the material U.S. federal income tax consequences to U.S. Persons who
currently own Current VASCO Securities and who will, with the exception of the
compensatory options discussed below, hold those shares, options and/or warrants
as capital assets within the meaning of Section 1221 of the Code. This summary
does not address all aspects of U.S. federal income taxation that may be
relevant to a particular holder in light of his, her or its individual
investment circumstances or to certain types of holders subject to special
treatment under the U.S. federal income tax laws such as dealers in securities
or foreign currency, financial institutions, insurance companies, tax-exempt
organizations, and taxpayers holding the Current VASCO Common Stock as part of a
"straddle," "hedge," "conversion transaction," "synthetic security" or other
integrated investment. Moreover, the effect of any applicable state, local or
foreign laws is not discussed. HOLDERS OF CURRENT VASCO SECURITIES SHOULD
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U. S. FEDERAL
INCOME TAX LAWS TO THEIR
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PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF
ANY STATE, LOCAL, OR FOREIGN TAXING JURISDICTION.
Current VASCO Common Stock Exchange Treated as a "B" Reorganization. In the
opinion of Jenner & Block, assuming the consummation of the Exchange Offer meets
certain conditions outlined below (including the Minimum Condition), the
exchange of Current VASCO Common Stock will qualify as a reorganization under
Code Section 368(a)(1)(B). In order for the exchange to qualify as a
reorganization under Code Section 368(a)(1)(B), New VASCO will have to acquire
Current VASCO Shares solely in exchange for New VASCO voting stock, and after
the transaction, New VASCO must own Current VASCO Shares possessing at least 80%
of Current VASCO's voting power and at least 80% of each class of Current
VASCO's nonvoting stock. Thus, in order to qualify, the Exchange Offer will need
to result in the acquisition by New VASCO of at least 80% of the Current VASCO
Common Stock. In addition to the New VASCO voting stock issued in the Exchange
Offer, no other consideration may be paid to the stockholders of Current VASCO
for their interests in the capital stock of Current VASCO. The following will be
the U.S. federal income tax consequences to holders of Current VASCO Common
Stock as a result of the reorganization under Code Section 368(a)(1)(B):
1. The U.S. Stockholders taking part in the Exchange Offer will
recognize no gain or loss on the exchange of the New VASCO Common Stock for
Current VASCO Common Stock.
2. The holding period of the New VASCO Common Stock received by a U.S.
Stockholder taking part in the Exchange Offer will include the holding
period of the Current VASCO Common Stock exchanged therefor.
3. The tax basis of the New VASCO Common Stock received by a U.S.
Stockholder taking part in the Exchange Offer will be the same as the tax
basis of the Current VASCO Common Stock exchanged therefor.
Taxation of Exchange of Current VASCO Noncompensatory Warrants. The
exchange of New VASCO Warrants for Current VASCO Warrants that were not issued
for services (the "Current VASCO Noncompensatory Warrants") will not be included
in the tax-free reorganization transaction described above. As a result, the
U.S. federal income tax impact of the exchange upon holders of the Current VASCO
Noncompensatory Warrants will be determined under the general rules of the Code
applicable to sale or exchange transactions. Those rules provide that gain or
loss is realized from the exchange of property for other property which differs
materially either in kind or extent. Thus, if the New VASCO Warrants are deemed
materially different than such Current VASCO Noncompensatory Warrants, the
Exchange Offer will result in a taxable transaction to the holders of such
Current VASCO Noncompensatory Warrants.
Although there is some authority to the contrary, the weight of authority
supports the conclusion that the exchange of warrants in conjunction with a
reorganization transaction under Code Section 368(a)(1)(B) is a taxable sale or
exchange, even in those circumstances in which the only modification to the
warrants is to make them convertible into the stock of the acquiring company. As
a result, in the opinion of Jenner & Block the Exchange Offer will be a taxable
sale or exchange for holders of the Current VASCO Noncompensatory Warrants.
Assuming such a sale or exchange occurs, the following would be the U.S. federal
income tax consequences to holders of Current VASCO Warrants:
1. The holders of Current VASCO Noncompensatory Warrants taking part
in the Exchange Offer will recognize a gain or loss equal to the difference
between (a) the fair market value of the New VASCO Warrants over (b) the
holder's tax basis in the Current VASCO Noncompensatory Warrants. For these
purposes, the tax basis of any holder of a Current VASCO Noncompensatory
Warrant will be equal to the fair market value of the consideration paid by
the holder for the Current VASCO Noncompensatory Warrant. In those
circumstances in which the holder acquired both a Current VASCO
Noncompensatory Warrant and a share of Current VASCO Common Stock as an
integrated investment unit, the holder's tax basis is equal to (a) the fair
market value of the consideration paid for the entire unit, multiplied by
(b) a fraction the numerator of which is the fair market value of the
warrant on the
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date of the acquisition and the denominator of which is the fair market
value of the entire investment unit on the date of acquisition.
2. The holding period of the New VASCO Warrants received by holders of
Current VASCO Noncompensatory Warrants taking part in the Exchange Offer
will begin on the date on which the Exchange Offer is consummated.
3. The tax basis of the New VASCO Warrants received by holders of
Current VASCO Noncompensatory Warrants taking part in the Exchange Offer
will be equal to the fair market value of the New VASCO Warrants on the
date on which the Exchange Offer is consummated.
The Treasury Regulations state that the fair market value of property is a
question of fact, but only in rare and extraordinary cases will property be
considered to have no fair market value. Holders of Current VASCO
Noncompensatory Warrants should consult with their own tax advisors with respect
to the methods used in determining the fair market value.
Cancellation of Current VASCO Stock Options, Issuance of New VASCO Stock
Options And Exchange of Current VASCO Compensatory Warrants. Grantees of
compensatory stock options are generally not subject to U.S. federal income tax
at the time of grant. Inasmuch as the Current VASCO Stock Options are neither
actively traded on an established market nor transferable by the grantee, they
should not be subject to any of the exceptions to this general rule.
Because compensatory options which are not qualified as incentive stock
options under Code Section 422 are not taxed until exercised and incentive stock
options are not taxed on exercise but rather upon sale of the underlying stock,
the Internal Revenue Service has generally taken the view that they may be
canceled and reissued without incidence of taxation. Jenner & Block is of the
opinion that the cancellation of Current VASCO Stock Options and the issuance of
the New VASCO Stock Options will not be a taxable event to the holders of the
Current VASCO Stock Options.
Warrants issued in exchange for services (the "Current VASCO Compensatory
Warrants") receive treatment for U.S. federal income tax purposes similar to the
tax treatment for compensatory nonqualified options. Accordingly, Jenner & Block
is of the opinion that the exchange of such warrants for New VASCO Warrants will
not be a taxable event to the holders of such Current VASCO Warrants.
Taxation of Exchange of Current VASCO Conversion Options. In the opinion of
Jenner & Block, the exchange of New VASCO Conversion Options for Current VASCO
Conversion Options will not be included in the tax-free reorganization
transaction described above. As a result, the U.S. federal income tax impact of
the exchange upon holders of Current VASCO Conversion Options will be determined
under the general rules of the Code applicable to sale or exchange transactions.
As described above in respect of the Current VASCO Noncompensatory Warrants,
those rules provide that gain or loss is realized from the exchange of property
for other property which differs materially either in kind or extent.
The exchange of Current VASCO Conversion Options for New VASCO Conversion
Options will be effected pursuant to the New VASCO Convertible Note Agreement,
which provides for the amendment (or modification) of debt instruments issued by
Current VASCO that contain Current VASCO Conversion Options to provide for New
VASCO Conversion Options. As a result, New VASCO will be a co-obligor under
these debt instruments upon consummation of the Exchange Offer. The Internal
Revenue Service has promulgated specific regulations to determine when a
modification to a debt instrument is sufficiently material to be deemed a sale
or exchange of the debt instrument for U.S. federal income tax purposes. Based
on its review of the Treasury Regulations, Jenner & Block is of the opinion that
the proposed modifications of the debt instruments pursuant to the New VASCO
Convertible Note Agreements will not be deemed sales or exchanges of those debt
instruments.
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DIFFERENCES IN CAPITAL STOCK
With the exception of the authorization of an additional 25,000,000 shares
of common stock from the number authorized in Current VASCO's Restated and
Amended Certificate of Incorporation, as amended, and the lack of classes of New
VASCO preferred stock comparable to the Series A Preferred Stock and Series B
Preferred Stock designated in Current VASCO's Restated and Amended Certificate
of Incorporation, as amended (no shares of which are presently outstanding),
there are no material differences in the capital stock of Current VASCO and New
VASCO. The authorized capital stock of New VASCO is in all other material
respects the same as Current VASCO's authorized capital stock, except for the
deletion from New VASCO's Certificate of Incorporation, as amended, of a general
requirement that all dividends on preferred stock be paid before payment of
dividends on common stock, which deletion will permit the creation of a class or
series of preferred stock that could participate with common stock in dividend
payments, and for certain changes included to reflect current Delaware law. See
"CERTAIN INFORMATION CONCERNING NEW VASCO -- Organization of New VASCO,"
"DESCRIPTION OF CAPITAL STOCK OF NEW VASCO," and "COMPARISON OF STOCKHOLDER
RIGHTS."
Holders of Current VASCO Shares who do not exchange such shares for New
VASCO Shares will, in the event the Exchange Offer is consummated, collectively
become holders of a minority interest in Current VASCO. As minority stockholders
of Current VASCO, their shares are likely to be more illiquid than prior to the
Reorganization, and New VASCO will have the power to control and direct the
affairs of Current VASCO by written consent without consulting with or requiring
a vote of such holders. See "RISK FACTORS -- Risks Relating to Exchange Offer
and New VASCO -- Stockholders who do not Exchange will become Minority
Stockholders of Current VASCO," and "-- Reduced Liquidity of Current VASCO
Common Stock."
NO APPRAISAL RIGHTS
Holders of Current VASCO Shares, Current VASCO Stock Options, Current VASCO
Conversion Options or Current VASCO Warrants are not entitled to appraisal
rights in connection with the Reorganization under the Delaware General
Corporation Law.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
Current VASCO Shares. New VASCO hereby offers, upon the terms and subject
to the conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal and Release (the "Letter of Transmittal and Release"), to exchange
New VASCO Shares for Current VASCO Shares as follows:
<TABLE>
<CAPTION>
One share of Current VASCO Common Stock
and Release of All Associated Corporate Matter One share of
Claims for New VASCO Common Stock
<S> <C> <C>
</TABLE>
Associated Corporate Matter Claims. The Letter of Transmittal and Release,
in addition to providing for the assignment and transfer of Current VASCO
Shares, provides for the release, waiver and relinquishment of any and all of
the following (collectively referred to in this document as "Associated
Corporate Matter Claims") in accordance with the express terms of the Letter of
Transmittal and Release:
all direct or indirect demands, claims, payments, obligations, actions or
causes of action, assessments, losses, liabilities, damages (including
without limitation special, consequential, exemplary, punitive and similar
damages), reasonable costs and expenses paid or incurred, or diminutions in
value of any kind or character (whether or not known or asserted prior to
the date hereof, fixed or unfixed, conditional or unconditional, choate or
inchoate, liquidated or unliquidated, secured or unsecured, accrued,
absolute, contingent or otherwise), that the holder of Current VASCO
Securities now has or ever had against Current VASCO, any of its
predecessor entities, or their respective assets, together with the
respective successors and assigns of Current VASCO and any of its
predecessor entities, as a result of acts or omissions occurring on or
before the date of this Prospectus which arise from or are in connection
with the Corporate Matters.
Although no claims based on the Corporate Matters have been asserted to
date and the ability of any particular holder of Current VASCO Securities to
assert any Associated Corporate Matter Claim is uncertain, and although certain
Associated Corporate Matter Claims may or may not be barred by applicable
statutes of limitations or any corresponding doctrines of laches, the Associated
Corporate Matter Claims could include, among other things:
(i) claims for rescission of stock (or other securities) issuances,
acquisitions, sales or exchanges;
(ii) claims of a direct interest in assets (including securities or
other property) of Current VASCO or one of its predecessor entities;
(iii) claims for rescission of corporate transactions; or
(iv) claims for money damages.
The Associated Corporate Matter Claims which you are being asked to
release, waive and relinquish in the Exchange Offer do not include claims, if
any, that an exchanging holder of Current VASCO Securities may or may not be
entitled to assert against any past or present officers, directors,
shareholders, employees or agents of Current VASCO or its predecessors, arising
from or in connection with the Corporate Matters, regardless of whether such
claims are raised in an individual or a derivative capacity. Any such claim not
released may or may not be subject to factual, legal or equitable defenses and,
if asserted against an officer, director, employee or agent, may or may not be
subject to indemnification by Current VASCO to the extent permitted by
applicable law.
For further information on Associated Corporate Matter Claims and releases
with respect thereto, see "REORGANIZATION OF CURRENT VASCO -- Associated
Corporate Matter Claims" and "--Releases from Security Holders in Exchange
Offer."
For a discussion of possible indemnification of directors and officers of
Current VASCO and its predecessors, see "RISK FACTORS -- Risks Relating to
Exchange Offer and New VASCO -- Potential Claims Against Directors and Officers
of Current VASCO and its Predecessors."
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<PAGE> 50
Stock Options. New VASCO hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying New VASCO Option
Agreement, to exchange New VASCO Stock Options for Current VASCO Stock Options
and a release of any and all Associated Corporate Matter Claims. The New VASCO
Stock Options will be issued pursuant to the New VASCO 1997 Stock Option Plan
and will be for the same number of shares and have the same vesting,
termination, exercise price and exercise expiration terms as the Current VASCO
Stock Options tendered for exchange, but, in all cases, they will be
nonqualified stock options. The New VASCO Option Agreement, in addition to
providing for the New VASCO Stock Options also provides for the cancellation of
the Current VASCO Stock Options and a release of any and all Associated
Corporate Matter Claims, and includes a provision for the adjustment of the
number of shares underlying the New VASCO Stock Options and of the exercise
price for such shares in the event of a change in the capital structure of New
VASCO. A copy of the New VASCO Option Agreement and a copy of the New VASCO 1997
Stock Option Plan are being distributed with this document to holders of
outstanding Current VASCO Stock Options. See "DESCRIPTION OF CAPITAL STOCK OF
NEW VASCO -- Stock Options, Warrants and Convertible Notes" for further
information on the New VASCO 1997 Stock Option Plan.
Conversion Options. New VASCO hereby offers, upon the terms and subject to
the conditions set forth in this Prospectus and the accompanying New VASCO
Convertible Note Agreement, to exchange New VASCO Conversion Options (i.e.,
options to convert notes into shares of New VASCO Common Stock) for Current
VASCO Conversion Options (options to convert notes into shares of Current VASCO
Common Stock) on substantially the same terms and conditions, and a release of
any and all Associated Corporate Matter Claims. The New VASCO Convertible Note
Agreement, in addition to providing for the grant of New VASCO Conversion
Options and the agreement of New VASCO to be a co-obligor of the respective
convertible note, also provides for the cancellation of the Current VASCO
Conversion Options and a release of any and all Associated Corporate Matter
Claims. A copy of the New VASCO Convertible Note Agreement is being distributed
with this document to holders of Current VASCO Conversion Options.
Warrants. New VASCO hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying New VASCO Warrant
Agreement, to exchange New VASCO Warrants for Current VASCO Warrants and a
release of any and all Associated Corporate Matter Claims. The New VASCO
Warrants will be for the same number of shares and have the same exercise price,
expiration date and other terms as the Current VASCO Warrants tendered for
exchange. The New VASCO Warrant Agreement provides for the grant of New VASCO
Warrants, the cancellation of Current VASCO Warrants and the release of any and
all Associated Corporate Matter Claims, and includes a provision for the
adjustment of the number of shares underlying the New VASCO Warrants and of the
exercise price for such shares in the event of a change in the capital structure
of New VASCO. A copy of the New VASCO Warrant Agreement is being sent with this
document to holders of Current VASCO Warrants.
Exchange of Any Current VASCO Securities Releases Any and All Associated
Corporate Matter Claims. The exchange of any of the Current VASCO Securities by
a holder will release and waive any and all Associated Corporate Matter Claims
the exchanging holder (or, if the Current VASCO Securities are held in a nominee
name, the beneficial owner of the Current VASCO Securities) may have even if
less than all of the exchanging holder's (beneficial owner's) Current VASCO
Securities are exchanged; provided that if a nominee holds Current VASCO
Securities on behalf of more than one beneficial owner, any release executed by
the nominee will be effective only with respect to any Associated Corporate
Matter Claims of beneficial owners directing such nominee to exchange all or any
part of the Current VASCO Securities in which such beneficial owner has an
interest.
OTHER ARRANGEMENTS RELATING TO THE EXCHANGE OFFER
Certain holders of Current VASCO Shares, Current VASCO Warrants and Current
VASCO Conversion Options have entered into agreements with Current VASCO which
grant such holders the right, under certain circumstances, to either sell the
shares they hold to Current VASCO or to require Current VASCO to register under
the Securities Act the shares they now hold or the shares they may acquire upon
exercise or conversion of Current VASCO Warrants or Current VASCO Conversion
Options. In the event that the holders of these
45
<PAGE> 51
rights exchange their Current VASCO Shares, Current VASCO Warrants or Current
VASCO Conversion Options upon the terms and conditions set forth in this
Prospectus and, as applicable, the accompanying Letter of Transmittal and
Release, the New VASCO Warrant Agreement or the New VASCO Convertible Note
Agreement, New VASCO, if the holders of these rights so request, may enter into
registration rights agreements with provisions substantially the same as those
of the respective registration rights agreements entered into by Current VASCO
that have not been performed as of the Expiration Date. See "DESCRIPTION OF
CAPITAL STOCK OF NEW VASCO -- Registration Rights and Other Arrangements."
Upon consummation of the Exchange Offer, New VASCO may at a later date
merge Current VASCO into New VASCO or into or with a subsidiary of New VASCO on
a stock or cash basis or undertake some other corporate reorganization of
Current VASCO, subject to appraisal rights, if any, and any other remedies
available under Delaware law. New VASCO also reserves the right in its sole
discretion to purchase or make offers for any Current VASCO Shares that remain
outstanding subsequent to the Expiration Date. The terms of any such purchases
or offers could differ from the terms of the Exchange Offer.
Tendering holders of Current VASCO Securities will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal and Release, transfer taxes with respect to the exchange of Current
VASCO Securities pursuant to the Exchange Offer. New VASCO will pay all charges
and expenses, other than certain applicable taxes, in connection with costs
incurred by it for the Exchange Offer. See "Payment of Expenses" below.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENT
The Exchange Offer will expire at 5:00 p.m., Chicago, Illinois time, on the
Expiration Date, , 1997 [+21 business days], subject to extension by
New VASCO by notice to the Exchange Agent as herein provided. New VASCO reserves
the right to so extend the Exchange Offer at its discretion, in which event the
term "Expiration Date" shall mean the time and date on which the Exchange Offer
as so extended shall expire. New VASCO will notify the Exchange Agent of any
extension by oral or written notice and will make a public announcement thereof,
each prior to 8:00 a.m., Chicago, Illinois time, on the next business day after
the previously scheduled Expiration Date.
New VASCO reserves the right in its sole discretion (i) to delay accepting
any Current VASCO Securities for exchange or to extend or terminate the Exchange
Offer and not accept for exchange any Current VASCO Securities if the Minimum
Condition shall not have been satisfied prior to the Expiration Date or any of
the events set forth below under the caption "Conditions to the Exchange Offer"
shall have occurred and shall not have been waived by New VASCO prior to the
Expiration Date by giving oral or written notice of such delay or termination to
the Exchange Agent, (ii) to amend the terms of the Exchange Offer in any manner,
or (iii) to terminate and abandon the Exchange Offer at any time prior to the
Expiration Date. Any such delay in acceptance for exchange, extension, amendment
or termination and abandonment will be followed as promptly as practicable by
public announcement thereof. If the Exchange Offer is amended in a manner
determined by New VASCO to constitute a material change, New VASCO will promptly
disclose such amendment in a manner reasonably calculated to inform the holders
of Current VASCO Securities of such amendment. New VASCO will extend the
Exchange Offer so that there is a period of at least ten business days from the
announcement of the amendment to the Expiration Date, depending upon the
significance of the amendment and the manner of disclosure to the holders of
Current VASCO Securities, if the Exchange Offer would otherwise expire during
such ten business-day period. The rights reserved by New VASCO in this paragraph
are in addition to New VASCO's rights set forth below under the caption
"Conditions to the Exchange Offer."
PROCEDURES FOR TENDERING CURRENT VASCO SHARES AND CURRENT VASCO WARRANTS
Current VASCO Shares. The tender of any Current VASCO Shares as set forth
below and the acceptance thereof by New VASCO will constitute a binding
agreement between the tendering holder and New VASCO upon the terms and subject
to the conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal and Release. Holders of Current VASCO Shares who wish to tender in
46
<PAGE> 52
exchange for New VASCO Shares pursuant to the Exchange Offer must transmit the
certificates for the Current VASCO Shares together with a properly completed and
duly executed Letter of Transmittal and Release, and all other documents
required by such Letter of Transmittal and Release, so as to be received by the
Exchange Agent on or prior to the Expiration Date, except as otherwise provided
below under the caption "Guaranteed Delivery Procedure for Current VASCO
Shares." LETTERS OF TRANSMITTAL AND RELEASE AND CURRENT VASCO SHARES SHOULD NOT
BE SENT TO NEW VASCO; THEY SHOULD BE SENT TO THE EXCHANGE AGENT AT THE ADDRESS
SET FORTH BELOW.
Illinois Stock Transfer Company
223 West Jackson Boulevard, Suite 1210
Chicago, Illinois 60606
(312) 427-2953
If any Letter of Transmittal and Release, endorsement, or other document
required by the Letter of Transmittal and Release or the Notice of Guaranteed
Delivery is signed by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation, or other person acting in a
fiduciary or representative capacity, such person should so indicate when
signing, and unless waived by New VASCO, proper evidence satisfactory to New
VASCO of such person's authority to so act, including the authority to release,
waive and relinquish any and all Associated Corporate Matter Claims on behalf of
the holder, must be submitted.
Signatures on a Letter of Transmittal and Release or a notice of
withdrawal, as the case may be, are not required to be guaranteed if the Letter
of Transmittal and Release is tendered (i) by a registered holder of Current
VASCO Shares who has not completed the box entitled "Special Issuance and
Delivery Instructions" on the Letter of Transmittal and Release or (ii) for the
account of an Eligible Institution (as defined below). Signatures on all other
Letters of Transmittal and Release must be guaranteed by an Eligible
Institution. If signatures on a Letter of Transmittal and Release or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by a firm that is a member of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc. or by a
commercial bank or trust company having an office or correspondent in the United
States (an "Eligible Institution").
If the Letter of Transmittal and Release is signed by a person other than a
registered holder of any certificates representing Current VASCO Shares listed
thereon, such Current VASCO Shares must be endorsed or accompanied by
appropriate stock powers, in either case signed exactly as the name or names of
the registered holder or holders appear on such Current VASCO Shares.
IF THE CURRENT VASCO SHARES ARE HELD IN "STREET NAME" OR BY OTHER NOMINEE, BOTH
THE REGISTERED STOCKHOLDER AND THE BENEFICIAL OWNER ARE REQUIRED TO SIGN THE
LETTER OF TRANSMITTAL AND RELEASE.
Current VASCO Warrants. Holders of Current VASCO Warrants who wish to
exchange their warrants for New VASCO Warrants should deliver a signed new VASCO
Warrant Agreement, with original Current VASCO Warrants attached thereto, to the
Exchange Agent prior to the Expiration Date at the following address:
Illinois Stock Transfer Company
223 West Jackson Boulevard, Suite 1210
Chicago, Illinois 60606
(312) 427-2953
The exchange of Current VASCO Warrants will not be effected unless the
Exchange Offer for the Current VASCO Shares is effected.
GUARANTEED DELIVERY PROCEDURE FOR CURRENT VASCO SHARES
If a holder of Current VASCO Shares desires to tender shares and
certificate(s) representing such shares are not immediately available, or time
will not permit such holder's certificate(s) or any other required
47
<PAGE> 53
documents to reach the Exchange Agent before 5:00 p.m., Chicago, Illinois time,
on the Expiration Date, a tender of Current VASCO Shares will be acceptable if:
(a) The tender is made by or through an Eligible Institution;
(b) Prior to 5:00 p.m., Chicago, Illinois time, on the Expiration
Date, the Exchange Agent receives from (i) the registered holder of Current
VASCO Shares (as well as from the beneficial owner of such shares, if
applicable), a properly completed and duly executed Letter of Transmittal
and Release, and (ii) such Eligible Institution, a properly completed and
duly executed Notice of Guaranteed Delivery (by facsimile transmission,
mail or hand delivery), setting forth the name and address of such holder
and the number of Current VASCO Shares tendered, stating that the tender is
being made thereby and guaranteeing that, within five business days after
the Expiration Date, the certificate(s) representing such Current VASCO
Shares (for which a properly completed and duly executed Letter of
Transmittal and Release was received by the Exchange Agent prior to 5:00
p.m., Chicago, Illinois time on the Expiration Date) and all other
documents required by the Letter of Transmittal and Release, will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) The certificate(s) for all tendered Current VASCO Shares, as well
as all other documents required by the Letter of Transmittal and Release,
are received by the Exchange Agent within five business days after the
Expiration Date.
THE EXCHANGE AGENT
Illinois Stock Transfer Company has been appointed as Exchange Agent for
the Exchange Offer. All correspondence in connection with the Exchange Offer for
Current VASCO Shares and Current VASCO Warrants, and the Letters of Transmittal
and Release and New VASCO Warrant Agreement (with original Current VASCO
Warrants attached thereto) should be addressed to the Exchange Agent, as
follows:
Illinois Stock Transfer Company
223 West Jackson Boulevard, Suite 1210
Chicago, Illinois 60606
(312) 427-2953
PROCEDURES FOR TENDERING CURRENT VASCO STOCK OPTIONS AND CURRENT VASCO
CONVERSION OPTIONS
Holders of Current VASCO Stock Options and Current VASCO Conversion Options
who wish to exchange their options should deliver a signed New VASCO Stock
Option Agreement with respect to the Current VASCO Stock Options or New VASCO
Convertible Note Agreement with respect to the Current VASCO Conversion Options,
as applicable, to the following individual prior to the Expiration Date:
Gregory T. Apple
Vice President and Treasurer
VASCO Data Security International, Inc.
1901 South Meyers Road, Suite 210
Oakbrook Terrace, Illinois 60181
(630) 932-8844
The exchange of Current VASCO Stock Options and Current VASCO Conversion
Options will not be effected unless the Exchange Offer for the Current VASCO
Shares is effected.
WITHDRAWAL RIGHTS
All holders of Current VASCO Securities who have tendered Current VASCO
Securities are free to withdraw such tendered Current VASCO Securities at any
time prior to 5:00 p.m., Chicago, Illinois time, on the Expiration Date, which
is , 1997 (or such later date if extended), or unless such tender has
been previously accepted for exchange, at any time after , 1997 [60
days after date of commencement of the offer], by delivery of a written notice
of withdrawal as provided below. However, once the Exchange
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<PAGE> 54
Offer has expired and the tendered Current VASCO Securities are accepted by New
VASCO, holders of Current VASCO Securities will have no right to withdraw
tendered Current VASCO Securities.
Current VASCO Shares or Current VASCO Warrants. For a withdrawal of Current
VASCO Shares or Current VASCO Warrants to be effective, a written notice of
withdrawal must be received by the Exchange Agent, Illinois Stock Transfer
Company, at the address set forth above. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Current VASCO Shares or
Current VASCO Warrants to be withdrawn, (ii) identify the Current VASCO Shares
or Current VASCO Warrants to be withdrawn (including the certificate number or
numbers and number of Current VASCO Shares or warrant number(s) in the case of
Current VASCO Warrants), and (iii) be signed in the same manner required for the
Letter of Transmittal and Release by which such Current VASCO Shares, or New
VASCO Warrant Agreement by which such Current VASCO Warrants, were tendered. Any
Current VASCO Shares or Current VASCO Warrants which have been tendered for
exchange, but which are withdrawn, will be returned to the holders without cost
to such holders as soon as practicable after withdrawal. The Current VASCO
Shares or Current VASCO Warrants so withdrawn, if any, will be deemed not to
have been validly tendered for exchange for purposes of the Exchange Offer.
Properly withdrawn Current VASCO Shares or Current VASCO Warrants may be
re-tendered by following the procedures described above under "Procedure for
Tendering Current VASCO Shares or Current VASCO Warrants" at any time on or
prior to the Expiration Date.
Current VASCO Stock Options or Current VASCO Conversion Options. For a
withdrawal of Current VASCO Stock Options or Current VASCO Conversion Options to
be effective, a written notice of withdrawal must be received by Gregory T.
Apple at the address set forth above. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Current VASCO Stock Options
or Current VASCO Conversion Options to be withdrawn, (ii) identify the Current
VASCO Stock Options or Current VASCO Conversion Options to be withdrawn
(including the date of the agreement concerning the Current VASCO Stock Options
or Current VASCO Conversion Options), and (iii) be signed in the same manner as
the New VASCO Stock Option Agreement or New VASCO Convertible Note Agreement
pursuant to which such Current VASCO Stock Options or Current VASCO Conversion
Options were tendered. Any Current VASCO Stock Options or Current VASCO
Conversion Options which are tendered for exchange but are withdrawn will be
returned, without cost to the holder, as soon as practicable after withdrawal.
The Current VASCO Stock Options or Current VASCO Conversion Options so
withdrawn, if any, will be deemed not to have been validly tendered for exchange
for purposes of the Exchange Offer. Properly withdrawn Current VASCO Stock
Options or Current VASCO Conversion Options may be re-tendered by following the
procedures above under "Procedures for Tendering Current VASCO Stock Options or
Current VASCO Conversion Options" at any time on or prior to the Expiration
Date.
All questions as to the validity, form, and eligibility (including time of
receipt) of such notices will be determined by New VASCO, whose determination
shall be final and binding on all parties.
CONDITIONS TO THE EXCHANGE OFFER
New VASCO will not accept for exchange any Current VASCO Securities, and no
New VASCO Securities will be issued in exchange for any such Current VASCO
Securities (and any and all Associated Corporate Matter Claims) if, on the
Expiration Date of the Exchange Offer, the Minimum Condition has not been
satisfied, unless such condition shall have been waived by New VASCO and notice
of waiver has been given as discussed below.
Further, notwithstanding any other term of the Exchange Offer, New VASCO
will not be required to accept for exchange any Current VASCO Securities
tendered and may terminate or amend the Exchange Offer as provided herein prior
to the Expiration Date, if any of the following conditions exist:
(a) any Securities and Exchange Commission order suspending the
effectiveness of the Registration Statement of which this Prospectus is a
part is threatened or in effect;
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<PAGE> 55
(b) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency or regulatory authority with
respect to the Exchange Offer which might, in the judgment of the Board of
Directors of New VASCO, materially impair the ability of New VASCO to
proceed with the Exchange Offer or have a material adverse effect on the
contemplated benefits of the Exchange Offer to New VASCO; or
(c) there shall have been proposed, adopted or enacted any law,
statute, rule or regulation which might materially impair the ability of
New VASCO to proceed with the Exchange Offer, or have a material adverse
effect on the contemplated benefits of the Exchange Offer to New VASCO, or
result in the consummation of the Exchange Offer not being a tax-free
transaction for federal income tax purposes with respect to the exchange of
Current VASCO Shares.
The foregoing conditions are for the sole benefit of New VASCO and may be
asserted by New VASCO regardless of the circumstances giving rise to such
conditions or may be waived by New VASCO in whole or in part at any time and
from time to time. If New VASCO waives or amends the foregoing conditions, New
VASCO will extend the Exchange Offer for a minimum of five business days (ten
business days if the Minimum Condition is waived) from the date that New VASCO
first gives notice, by public announcement or otherwise, of such waiver or
amendment if the Exchange Offer would otherwise expire within such five (or, if
applicable, ten) business-day period. As noted above, New VASCO also reserves
the right in its sole discretion to terminate and abandon the Exchange Offer at
any time prior to acceptance of Current VASCO Securities. See "Expiration Date;
Extensions; Termination; Amendment" above.
ACCEPTANCE OF CURRENT VASCO SECURITIES AND ISSUANCE OF NEW VASCO SECURITIES
Upon the terms of, and subject to the satisfaction or waiver of all
conditions to, the Exchange Offer, as promptly as possible after the Expiration
Date New VASCO will accept all Current VASCO Securities that are properly
tendered and not withdrawn. As soon as practicable thereafter, New VASCO will
issue the appropriate number of corresponding New VASCO Shares to eligible
holders of tendered Current VASCO Shares, and will execute and deliver New VASCO
Option Agreements, New VASCO Warrant Agreements and New VASCO Convertible Note
Agreements, as applicable. For purposes of the Exchange Offer, New VASCO shall
be deemed to have accepted (i) Current VASCO Shares that are tendered for
exchange when, as, and if New VASCO has given oral or written notice thereof to
the Exchange Agent, and (ii) Current VASCO Equity Equivalent Securities that are
tendered for exchange when, as, and if New VASCO has given such oral or written
notice of acceptance of the Current VASCO Shares to the Exchange Agent.
If any tendered Current VASCO Securities are not accepted for exchange
because of an invalid tender, the occurrence of certain other events set forth
herein or otherwise, certificates or other instruments or documents representing
any such unaccepted Current VASCO Securities will be returned, without expense,
to the tendering holder thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
THE METHOD OF DELIVERY OF THE CURRENT VASCO SECURITIES, LETTERS OF TRANSMITTAL
AND RELEASE AND ALL OTHER REQUIRED DOCUMENTS (INCLUDING, AS APPLICABLE, NEW
VASCO STOCK OPTION AGREEMENTS, NEW VASCO CONVERTIBLE NOTE AGREEMENTS AND NEW
VASCO WARRANT AGREEMENTS) IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY RECEIPT BY THE EXCHANGE AGENT OR MR. GREGORY T. APPLE,
AS THE CASE MAY BE, PRIOR TO THE EXPIRATION DATE.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of the Current VASCO Securities tendered
for exchange will be determined by New VASCO in its sole discretion, which
determination shall be final and binding. New VASCO reserves the absolute right
to reject any and all tenders of any of the Current VASCO Securities not
properly tendered or to reject any of the Current VASCO Securities, the
acceptance of which might, in the judgment of New VASCO or its counsel,
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<PAGE> 56
be unlawful. New VASCO also reserves the absolute right to waive any defects or
irregularities in the tender or conditions of the Exchange Offer as to any of
the Current VASCO Securities (including the right to waive the ineligibility of
any holder who seeks to tender the Current VASCO Securities in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer by
New VASCO shall be final and binding on all parties. Unless waived, any defects
or irregularities in connection with tenders of Current VASCO Securities for
exchange must be cured within such time as New VASCO shall determine. Neither
New VASCO nor any other person shall be under any duty to give notification of
defects or irregularities with respect to tenders of Current VASCO Securities
for exchange, nor shall any of them incur any liability for failure to give such
notification. Tenders of the Current VASCO Securities will not be deemed to have
been made until such irregularities have been cured or waived.
PAYMENT OF EXPENSES
Current VASCO has agreed to pay all costs incurred by New VASCO in
connection with the Exchange Offer, including registration fees, Exchange Agent,
accounting and legal fees and expenses, mailing and printing expenses and other
associated costs.
New VASCO will pay all transfer taxes, if any, applicable to the exchange
of Current VASCO Securities pursuant to the Exchange Offer. If, however,
tendered Current VASCO Shares are registered in the name of any person other
than the person signing the Letter of Transmittal and Release or if a transfer
tax is imposed for any reason other than the exchange of Current VASCO Shares
pursuant to the Exchange Offer, the amount of any such transfer tax (whether
imposed on the registered holder or any other person) will be payable by the
tendering holder. If satisfactory evidence of payment of such tax or exemption
therefrom is not submitted, the amount of such transfer tax will be billed
directly to such tendering holder.
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MARKET PRICE OF CURRENT VASCO COMMON STOCK
AND DIVIDEND POLICY
Shares of Current VASCO Common Stock are quoted on the OTC BB under the
symbol "VASC." The following table sets forth the high and low closing bid
quotations for the periods indicated within the past two fiscal years. None of
the Current VASCO Stock Options, Current VASCO Conversion Options or Current
VASCO Warrants are publicly traded.
<TABLE>
<CAPTION>
COMMON STOCK HIGH LOW
------------ ---- ---
<S> <C> <C> <C> <C>
1995
First Quarter............................................... 1 1/16 1/4
Second Quarter.............................................. 1 7/8 7/16
Third Quarter............................................... 3 1/16 3/4
Fourth Quarter.............................................. 8 5/8 1 1/2
1996
First Quarter............................................... 7 1/8 4
Second Quarter.............................................. 10 1/2 4 1/4
Third Quarter............................................... 8 5/8 5 1/8
Fourth Quarter.............................................. 7 1/2 3 1/2
1997
First Quarter............................................... 5 7/8 3 7/16
Second Quarter.............................................. 4 5/8 2 1/4
Third Quarter............................................... 5 7/16 2 3/8
Fourth Quarter (through November 17, 1997).................. 7 4 25/32
</TABLE>
On November 17, 1997, the closing bid quotation on the OTC BB was 5. The
above quotations represent prices between dealers and do not include retail
markups or markdowns or commissions. They may not necessarily represent actual
transactions.
As of October 31, 1997, there were 175 holders of record of Current VASCO
Common Stock, 38 holders of Current VASCO Stock Options, five holders of Current
VASCO Conversion Options and 48 holders of Current VASCO Warrants. These numbers
of holders do not include the number of persons or entities who beneficially own
shares of Current VASCO Common Stock held of record in "street name" through
various brokerage firms, banks or other depositories.
New VASCO has not conducted any business and there are only one hundred
outstanding shares of New VASCO Common Stock, all of which are held by Current
VASCO. Therefore, there is no trading market for any New VASCO Securities at
present, and there can be no assurance that a market will develop following the
consummation of the Exchange Offer.
No dividends have been paid on the Current VASCO Common Stock since Current
VASCO's inception and Current VASCO presently anticipates that it (and upon
consummation of the Exchange Offer, New VASCO) will retain all of its future
earnings for use in the expansion and operation of its business and does not
anticipate paying any cash dividends in the foreseeable future. Current VASCO
has paid dividends in the amount of $108,000 and $108,000 on the Current VASCO
Series B Preferred Stock for the years ended December 31, 1996 and 1995,
respectively, in the amount of $80,000 for the nine months ended September 30,
1997, with September 17, 1997 being the effective date all of the Current VASCO
Series B Preferred Stock was converted into shares of Current VASCO Common
Stock.
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<PAGE> 58
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)(1)
The following selected consolidated financial information with respect to
VASCO CORP. for the years ended December 31, 1994, 1995 and 1996 and as of
December 31, 1995 and 1996 have been derived from VASCO CORP.'s consolidated
financial statements, which appear elsewhere in this Prospectus and which have
been audited by KPMG Peat Marwick LLP, independent auditors. The following
selected consolidated financial information with respect to VASCO CORP. for the
years ended December 31, 1992 and 1993 and as of December 31, 1992, 1993, and
1994 have been derived from VASCO CORP.'s audited consolidated financial
statements, which are not included herein. The selected consolidated financial
information with respect to VASCO CORP. for the nine months ended September 30,
1996 and 1997 and as of September 30, 1997 have been derived from the unaudited
consolidated financial statements appearing elsewhere in this Prospectus. This
information should be read in conjunction with "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the consolidated
financial statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- ---------------------
1992 1993 1994 1995 1996(2) 1996(2) 1997
---- ---- ---- ---- ------- ------- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data(1):
Total revenues.............. $ 2,302 $ 2,199 $ 2,693 $ 3,695 $10,192 $ 6,211 $ 9,437
Operating income (loss)..... 557 138 192 (534) (8,658)(3) (8,031)(3) (2,212)
Net income (loss) available
to common stockholders.... 289 50 30 (465) (9,349)(3) (8,068)(3) (3,393)
Net income (loss) per common
share..................... 0.02 -- -- (0.03) (0.53)(3) (0.49)(3) (0.18)
Shares used in computing per
share amounts............. 13,686 13,877 14,260 14,817 17,533 16,300 18,753
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data(1):
Cash.................................... $ 3 $ 209 $ 38 $ 745 $ 1,814 $ 3,060
Working capital......................... 479 514 764 1,074 4,902 4,487
Total assets............................ 1,340 1,522 2,111 2,414 12,368 10,202
Long term obligations, less current
portion............................... 512 746 60 7 9,114 11,689
Common stock subject to redemption...... -- -- -- 371 742 495
Stockholders' equity (deficit).......... 243 340 1,364 966 (1,205) (4,577)
</TABLE>
For a discussion of factors that affect the comparability of the financial
information set forth above, such as significant acquisitions undertaken by
Current VASCO and the disposition of Current VASCO's VASCO Performance Systems
line of business in 1996, see "REORGANIZATION OF CURRENT VASCO -- Organizational
History of Current VASCO," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," and "RISK FACTORS."
- -------------------------
(1) Represents the financial information of Current VASCO. New VASCO has not
begun operations.
(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.
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<PAGE> 59
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 New VASCO and Current VASCO on the date hereof and
assumptions which New VASCO and Current VASCO believe are reasonable. Neither
New VASCO nor Current VASCO assumes any obligation to update any such
forward-looking statements. These forward-looking statements involve risks and
uncertainties. Current VASCO's (and if the Exchange Offer is consummated, New
VASCO'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 "RISK FACTORS" and elsewhere in this Prospectus.
New VASCO has not had any operations and therefore no Management's
Discussion and Analysis of Financial Condition and Results of Operations for New
VASCO is included in this Prospectus.
OVERVIEW
Current VASCO designs, develops, markets and supports open standards-based
hardware and software security systems which manage and secure access to data.
Current VASCO's original corporate predecessor was founded in 1984, and Current
VASCO entered the data security market in 1991 when it acquired a controlling
interest in what is today one of Current VASCO's two operating subsidiaries,
VASCO Data Security, Inc. ("VDSI") (formerly known as "ThumbScan, Inc."), a
company that designs, develops and sells security tokens, primarily to European
customers. In 1996, Current 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. In addition,
in 1996 Current VASCO co-developed the Internet AccessKey, a product designed to
limit access to proprietary websites on the Internet.
Recent Acquisitions. In 1996 Current 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
(effective July 1, 1996), which today comprise Current 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. Current VASCO is presently
evaluating options related to the possible disposition of its IVR business, but
does not expect the planned discontinuance of its IVR business to have a
material adverse effect on Current VASCO's results of operations and financial
condition.
The acquisition of Lintel Security was accomplished in two steps. Current
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,
Current 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 Current VASCO's common stock, and (iii) 100,000 warrants
entitling the holders to purchase an equal number of shares of Current 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 Current 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 Current VASCO's common stock at $7.00
per share. The warrants were valued at their fair value at the date of grant.
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<PAGE> 60
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. Current 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."
Prior Lines of Business. Before entering the data security industry in
1991, Current VASCO's primary endeavor was providing consulting, training and
software services to various institutions in the public and private sectors
through its VASCO Performance Systems division ("VPS"). In 1996, Current 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 Current 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. Current VASCO anticipates that
the royalties, if any, payable by the purchaser of the VPS assets will be
immaterial.
In 1994 VPS represented nearly 50%, and in prior years substantially more
than 50%, of Current VASCO's revenues. Since Current VASCO's revenues prior to
1996 were derived from data security products and the training and consulting
service business which was sold in 1996, a comparison of financial information
for periods prior to 1996 with 1996 and subsequent periods may not be
meaningful.
Revenue and Earnings. Taken together, the majority of sales made by VDSI
and VDS NV/SA are in the European markets, although Current VASCO 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 Current VASCO's total
revenues. Although Current VASCO believes it is likely that sales of security
tokens will continue to account for a majority of Current VASCO's total revenues
for the foreseeable future, Current VASCO 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.
In excess of 90% of VDSI's sales were comprised of AccessKey II devices,
with Concord-Eracom Nederland BV accounting for 97% and 95% of VDSI's sales in
1996 and 1995, respectively. On a consolidated basis, these percentages are 44%
and 61% for 1996 and 1995, respectively. However, the percentages for 1996
include the sales of the Lintel Security and Digipass operations only from their
respective acquisition dates in 1996. Sales to Concord-Eracom are expected to
account for a smaller percentage of Current VASCO's sales in 1997 as the full
year impact of the acquisition of Lintel Security and Digipass is realized. It
is expected that sales to other customers and markets will increase and,
assuming this occurs, the degree of concentration attributable to this major
customer will decrease further. However, Current VASCO expects that this major
customer will continue to be a meaningful contributor to Current VASCO's
revenues and earnings for the foreseeable future. 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 Current VASCO's
results of operations and financial condition.
Research and Development. Current VASCO 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. Current VASCO'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.
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<PAGE> 61
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, Current VASCO has experienced
significantly longer product lives than the two year cycle.
Variations in Operating Results. Current VASCO'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 Current VASCO's competitors; adoption of new technologies and
standards; changes in pricing by Current VASCO or its competitors; the ability
of Current VASCO to develop, introduce and market new products and product
enhancements on a timely basis, if at all; component costs and availability;
Current VASCO'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, Current VASCO 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. Current VASCO 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
Current VASCO's operating expenses are based on anticipated revenue levels and a
high percentage of Current VASCO'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 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
United States dollars to cover purchases of supplies for a six-month period. 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. See "RISK FACTORS -- Factors Relating to Operations
- -- Risks of International Operations."
Associated Corporate Matter Claims. No Associated Corporate Matter Claim
has been asserted or is pending against Current VASCO. Current VASCO intends to
vigorously defend against any such claim, if asserted. Because the resolution of
an Associated Corporate Matter Claim would be dependent on the factual
circumstances underlying such claim and the application of applicable legal
principles, Current VASCO is unable to determine the amount or range of exposure
of the Associated Corporate Matter Claims. Depending on the number of Associated
Corporate Matter Claims asserted, and the number of such claims upheld, such
claims could have a material adverse effect on Current VASCO's business,
operating results and financial condition. For additional information on the
Associated Corporate Matter Claims, see "REORGANIZATION OF CURRENT VASCO --
Associated Corporate Matter Claims."
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<PAGE> 62
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
consolidated financial data as a percentage of revenue for the nine months ended
September 30, 1996 and 1997 and the years ended December 31, 1994, 1995 and
1996.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
--------------------------------------------------
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
--------------------------- -----------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenue....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................................. 52.8 78.1 57.6 62.4 50.4
----- ----- ----- ------ -----
Gross profit........................................ 47.2 21.9 42.4 37.6 49.6
Operating costs
Sales and marketing............................... 5.8 6.6 13.8 8.1 29.7
Research and development.......................... 7.8 6.5 5.6 8.0 10.5
General and administrative........................ 26.4 23.1 35.8 32.5 32.9
Acquired-in-process research and development...... -- -- 72.1 118.3 --
----- ----- ----- ------ -----
Total operating costs........................ 40.0 36.2 127.3 166.9 73.1
Operating (loss) income............................. 7.1 (14.4) 84.9 (129.3) (23.5)
Interest expense.................................... (3.6) (2.0) (3.4) (3.1) (6.0)
Other expense, net.................................. -- -- (0.4) 0.1 (0.2)
----- ----- ----- ------ -----
Income (loss) before income taxes................... 3.5 (16.4) (88.8) (132.3) (29.7)
Provision (benefit) for income taxes................ 1.4 (6.8) 1.4 (3.3) 5.5
----- ----- ----- ------ -----
Net (loss) income................................... 2.1 (9.6) (90.7) (129.0) (35.2)
===== ===== ===== ====== =====
</TABLE>
The following discussion is based upon Current VASCO's consolidated results
of operation for the nine months ended September 30, 1997 and 1996 and for the
years ended December 31, 1996, 1995 and 1994. References to "VASCO NA" mean
Current VASCO and VDSI, excluding the acquisition of Lintel Security and
Digipass. References to "VASCO Europe" mean the operation of Lintel Security and
Digipass following their acquisition by Current VASCO. (Percentages in the
discussion are rounded to the closest full percentage point.)
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
Revenues
Current VASCO's consolidated revenues for the nine months ended September
30, 1997 were $9,437,000, an increase of $3,226,000, or 52%, as compared to the
nine months ended September 30, 1996. VASCO Europe contributed $7,614,000, or
81%, of total consolidated revenues for the 1997 period. Revenues (and other
operating results) attributable to VASCO Europe are included only from the time
of acquisition of Lintel Security (seven months for 1996 and nine months for
1997) and of Digipass (three months in 1996 and nine months in 1997).
VASCO NA's revenues were $1,823,000 for the nine months ended September 30,
1997, a decrease of $1,468,000, or 45%, as compared to the same period in 1996.
VASCO NA's revenues accounted for 19% of consolidated revenues for the nine
months ended September 30, 1997. Security product sales for VASCO NA decreased
$1,265,000, or 41%, as compared to the nine months ended September 30, 1996 due
in large part to the decrease in sales to VASCO NA's principal customer
described below. VPS, the former technical and training unit which was sold in
August of 1996, contributed revenues of $204,000 for the nine months ended
September 30, 1996 and no revenues for the comparable period in 1997.
On a pro forma basis (after giving effect to the acquisition of both Lintel
Security and Digipass as of January 1, 1996), consolidated revenues for Current
VASCO for the nine months ended September 30, 1996 were $9,897,000. This amount
is $1,234,000, or 12%, higher than Current VASCO's consolidated revenues for
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<PAGE> 63
the nine months ended September 30, 1997. The decline in revenues for the nine
month period ended September 30, 1997 as compared to the same period in 1996 can
be attributed to several factors: (1) a decrease in the revenues generated by
the IVR business of VASCO Europe in the amount of $565,000; and (2) a decrease
in revenue from sales to VASCO NA's principal customer in the amount of
$692,000, due to a build-up in the reseller's inventory of data security
products purchased from VASCO NA and (3) the negative impact of foreign currency
translation due to the strong U.S. Dollar. The decrease in revenues from the IVR
business, which Current VASCO is considering discontinuing, and from sales to
VASCO NA's principal customer and the negative impact of foreign currency was
partially offset by an increase in revenues from other customers, generated
primarily from sales by VASCO Europe.
Cost of Goods Sold
Consolidated cost of goods sold for the nine months ended September 30,
1997 was $4,759,000, an increase of $884,000, or 23%, as compared to the nine
months ended September 30, 1996. This increase is primarily attributable to the
inclusion of VASCO Europe in cost of goods sold for the period ended September
30, 1997. This increase in cost of goods sold, attributable to the full period
effect of the VASCO Europe acquisitions, was partially offset by a decrease in
VASCO NA's cost of goods sold. VASCO Europe's cost of goods sold was $4,035,000,
as compared to $2,033,000 from the same period last year.
VASCO NA's cost of goods sold was $724,000 for the first nine months of
1997, representing a decrease of $964,000, or 57%, from 1996. This decline was
primarily a result of a decrease of $924,000 in cost of goods sold related to
security products, due primarily to lower sales for the period and, to a lesser
extent, VASCO NA's ability to purchase component parts at somewhat lower costs.
The sale of VPS also contributed to the decrease. Its cost of goods sold for the
nine months ended September 30, 1996 was $40,000. There was no cost of goods
sold for VPS for the comparable period in 1997 due to its disposal in August
1996.
Current VASCO's consolidated cost of goods sold on a pro forma basis for
the nine months ended September 30, 1996 was $5,331,000. This amount is
$1,135,000, or 21%, higher than Current VASCO's consolidated cost of goods sold
for the nine months ended September 30, 1997. The decrease in revenues for the
nine months ended September 30, 1997 as compared to the same period in 1996 is
attributable, in large part, to the decrease in revenues discussed above, as
well as the more favorable pricing of certain components purchased during 1997
and because VASCO Europe began to purchase certain component parts directly from
manufacturers rather than through distributors.
Gross Profit
Current VASCO's consolidated gross profit for the nine months ended
September 30, 1997 was $4,678,000, an increase of $2,342,000, or 100%, over the
same period in 1996. This represents a consolidated gross margin of 50%, as
compared to a gross margin of 38% for the period ended September 30, 1996. VASCO
Europe contributed $3,579,000 to the consolidated gross profit. VASCO Europe's
gross margin for the period ended September 30, 1997 was 47%. VASCO NA
contributed $1,099,000 to gross profit for the period ended September 30, 1997
as compared to $1,603,000 for the first nine months of 1996, a decrease of
$504,000, or 31%, due to the decline in VASCO NA's revenues described above.
Data security products accounted for 100% of VASCO NA's gross profit for the
first nine months of 1997 due to the disposition of VPS during 1996, whereas
data security products accounted for 97% of gross profit during the first nine
months of 1996, with VPS accounting for the remaining 3% of gross profit.
VASCO NA's gross margin percentage increased to 60% from 49% in the first
nine months of 1996, primarily because of sales of higher margin security
products as opposed to lower margin VPS services. Historically, VASCO NA has
sold security products to large customers in large quantities, thus resulting in
significant quantity discounts and lower margins. As VASCO NA begins to build
business in the U.S., new customers typically place smaller initial orders that
do not qualify for quantity discounts, resulting in higher gross margins.
Management anticipates that any follow-up orders from such customers could be
for larger quantities that may qualify for quantity discounts.
Current VASCO's consolidated gross profit on a pro forma basis for the
first nine months of 1996 was $4,566,000, representing a gross margin of 46%.
The decline in gross profits for the period ended
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<PAGE> 64
September 30, 1997 as compared to September 30, 1996 on a pro forma basis was
approximately $99,000 and was due primarily to the decrease in revenues.
Sales and Marketing Expenses
Consolidated sales and marketing expenses for the nine months ended
September 30, 1997 were $2,802,000, an increase of $2,301,000, or 459%, over the
same period in 1996. Of the total increase, $1,103,000, or 48%, can be
attributed to the addition of VASCO Europe. Sales and marketing expenses
increased by $1,198,000, or 345%, for VASCO NA. The increase for VASCO NA can be
attributed to increased sales efforts, including the addition of four sales
people and increased travel costs; an increase in marketing initiatives,
including print media campaigns and other efforts and a stepped-up presence at
trade shows.
Research and Development
Consolidated R&D costs for the nine months ended September 30, 1997 were
$987,000, an increase of $492,000, or 100%, as compared to the period ended
September 30, 1996. R&D costs represented 11% of consolidated revenues for the
first nine months of 1997 as compared to 8% for the same period in 1996. R&D
efforts are undertaken by both VASCO NA and VASCO Europe on behalf of the
consolidated group of companies, with VASCO NA being primarily responsible for
the development of software products and VASCO Europe being responsible for
hardware development. Consequently, management does not believe it is meaningful
to address R&D costs separately at the operating company level.
Current VASCO has expensed, as cost of revenues, $180,000 for the nine
month period ended September 30, 1996, reflecting the amortization of
capitalized software development costs. Capitalized software costs carried on
Current VASCO's books as an asset were $0 and $125,000 at September 30, 1997 and
1996, respectively. There were no product development costs capitalized in the
first nine months of 1997 or 1996.
General and Administrative Expenses
Consolidated general and administrative expenses for the nine months ended
September 30, 1997 were $3,101,000, an increase of $926,000, or 43%, over the
same period in 1996. The total increase can be attributed to the addition of
VASCO Europe, with $618,000 being attributed to the amortization of goodwill and
other intangibles related to the acquisitions of Lintel Security and Digipass.
Acquired In-process Research and Development
For the nine months ended September 30, 1996, Current VASCO expensed
$7,351,000 pertaining to in-process research and development acquired in the
Lintel Security and Digipass acquisitions. Based upon an independent appraisal,
approximately 67% of the acquisition premium related to these acquisitions has
been expensed in accordance with generally accepted accounting principles
("GAAP").
Operating Loss
Current VASCO's consolidated operating loss for the nine months ended
September 30, 1997 was $2,212,000, compared to the consolidated operating loss
of $8,031,000 for 1996. The 1996 consolidated operating loss included a
write-off of acquired in-process research and development in the amount of
$7,351,000. The operating loss, before the write-off, was $680,000 and of this
amount, VASCO NA contributed a loss of $455,000 and VASCO Europe contributed net
operating income of $4,000. The remaining $229,000 was attributable to
amortization of intangibles.
Current VASCO's operating loss for the first nine months of 1997 was
attributable to continued investment in R&D (primarily for AccessKey III), sales
and marketing investments in North America, one-time professional fees, the
expenses for development of corporate infrastructure and, in general, the costs
associated with consolidating and assimilating the Lintel Security and Digipass
acquisitions.
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<PAGE> 65
Current VASCO's consolidated operating loss on a pro forma basis was
$7,183,000 for the nine month period ended September 30, 1996. As compared to
the operating loss of $2,424,000 for the same period in 1997, this represents a
decrease of $4,759,000, or 66%. The decrease was due primarily to the absence in
the nine month period ended September 30, 1997 of a write-off of in process
research and development acquired from Lintel Security and Digipass and because
of operating efficiencies realized due to the combination of Lintel Security and
Digipass.
Interest Expense
Consolidated interest expense for the nine months ended September 30, 1997
was $566,000 compared to $195,000 for the same period in 1996, attributable to
higher borrowing levels. See "Liquidity and Capital Resources" below.
Net Loss Before Taxes
Current VASCO reported a net loss before taxes of $2,793,000 for the nine
months ended September 30, 1997. This compares to a net loss before taxes of
$8,194,000 for the corresponding period in 1996. The 1997 pretax losses were
$3,217,000 for VASCO NA, with VASCO Europe posting pretax income of $1,147,000.
The remaining $723,000 consisted of $618,000 for amortization of intangibles and
$105,000 for interest expense.
For the nine months ended September 30, 1996, pretax losses for VASCO NA
were $628,000, while VASCO Europe had pretax income of $38,000. Of the
$8,194,000 net loss before taxes for this nine month period, the remaining
$7,604,000 consisted of $7,351,000 related to the write-off of acquired
in-process research and development, and $253,000 to the amortization of
intangibles and interest expense.
Current VASCO's consolidated net loss before taxes on a pro forma basis was
$7,352,000 for the nine months ended September 30, 1996 as compared to a loss of
$2,793,000 for the same period in 1997. This represents a decrease of
$4,559,000, or 62%. The decrease was due to the absence in the nine month period
ended September 30, 1997 of a write-off comparable to the write-off of acquired
in-process research and development recorded by Current VASCO in 1996, and
reflects certain operating efficiencies.
Income Taxes
Current VASCO recorded tax expense for the nine months ended September 30,
1997 of $520,000. Current VASCO has net operating loss carryforwards of
approximately $6,182,000 as of September 30, 1997, which may be used to offset
future taxable income of Current 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
Current VASCO paid dividends of $80,000 and $81,000 in each of the nine
months ended September 30, 1997 and 1996, respectively. These dividend payments
were attributable to 9,000 shares of Current VASCO Series B Preferred Stock
issued in 1994. Current VASCO began 1997 with an accumulated deficit of
$9,903,000. As a result of 1997 operations, this deficit has increased to
$13,296,000 at September 30, 1997.
1996 COMPARED TO 1995
The following discussion and analysis should be read in conjunction with
Current VASCO's Consolidated Financial Statements for the years ended December
31, 1996 and 1995.
Revenues
Current 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
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$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.
Taking into account Lintel Security and Digipass on a full year basis for
each of 1995 and 1996, Current VASCO's consolidated revenues on a pro forma
basis were $11,623,000 and $13,654,000 for the years ended December 31, 1995 and
1996, respectively. This represents an increase of $2,031,000, or 17%.
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.
Current VASCO's consolidated cost of sales on a pro forma basis, i.e.,
including Lintel Security and Digipass for the entire year, were $7,422,000 and
$7,460,000 for the years ended December 31, 1995 and 1996, respectively. This
represents an increase of $38,000.
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 Current VASCO's development activities with regard to its AKIII successor
product.
The non-recurring inventory write-downs resulted in the fourth quarter of
1995 from managements' 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
Current 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.
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Assuming Current VASCO had acquired Lintel Security and Digipass as of
January 1, 1995, Current VASCO's consolidated gross profit on a pro forma basis
was $4,201,000 and $6,194,000 for the years ended December 31, 1995 and 1996,
respectively. This represents an increase of $1,993,000, or 47%, and a gross
margin of 36% and 45% for 1995 and 1996, respectively.
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 Current
VASCO believes it is not meaningful to address R&D costs separately at the
operating company level.
Current 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 Current 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 Current 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 Current VASCO, as well as amortization of intangibles associated
with the acquisitions of Lintel Security and Digipass.
Acquired In-process Research and Development
Current VASCO has 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 has been expensed in accordance with GAAP. As of
December 31, 1996, there remains $3,372,000 of intangible assets related to the
acquisitions which will be carried on Current 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.
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Operating Loss
Current 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.
Current 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
AccessKey III), 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.
Taking into account the results of Lintel Security and Digipass for the
full fiscal years, Current VASCO's consolidated operating loss on a pro forma
basis was $339,000 and $7,868,000 for the years ended December 31, 1995 and
1996, respectively. This represents an increase of $7,529,000. This increase is
related principally to the write-off of in-process research and development
acquired in conjunction with the acquisitions of Lintel Security and Digipass.
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.
Net Loss Before Taxes
As a result of the above factors, Current VASCO reported a net loss before
taxes of $9,047,000 for the year ended December 31, 1996. This compares to a net
loss before taxes of $608,000 for the previous year. The pretax loss was
$1,206,000 for VASCO NA, with VASCO Europe posting pretax income of $21,000. The
remainder of the loss, $7,862,000, was attributed to write-off of acquired
in-process research and development of $7,351,000, the $440,000 of intangibles
expensed and $71,000 for interest expense.
Current VASCO's consolidated net loss before taxes on a pro forma basis
(including Lintel Security and Digipass for the full 1995 and 1996 fiscal year
periods) was $380,000 and $8,397,000 for the years ended December 31, 1995 and
1996, respectively. This represents an increase of $8,017,000, due primarily to
the write-off of in-process research and development described above, or 2110%.
Income Taxes
Current 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, Current 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.
Current 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 Current
VASCO generated in the United States. The net operating loss carryforwards
expire in various amounts beginning in 2010 and continuing through 2011.
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Dividends and Accumulated Deficit
Current VASCO paid dividends of $108,000 in each of 1996 and 1995. These
dividend payments were attributable to 9,000 shares of Current VASCO Series B
Preferred Stock issued in 1994. Current VASCO began 1996 with an accumulated
deficit of $554,000. As a result of the 1996 net loss, this deficit has
increased to $9,903,000.
Current 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 Current VASCO's 1996
loss before taxes.
1995 COMPARED TO 1994
As previously noted, there was a gradual shift in Current VASCO's business
to the point that security products accounted for the majority of consolidated
revenues for the year ended December 31, 1995. In 1996, VPS, the consulting and
technical training unit, was sold. In the following discussion for 1995 and 1994
references to VDSI mean the VDSI security products activity.
The following discussion and analysis should be read in conjunction with
Current VASCO's Consolidated Financial Statements for the years ended December
31, 1995 and 1994. In the 1995 audited financial statements, Revenues and Cost
of Revenues are categorized as "Security Hardware and Software" and "Training
and Consulting Services" which equate to the operations of VDSI and VPS,
respectively.
Revenues
Current VASCO's consolidated revenues for the year ended December 31, 1995
were $3,695,000, an increase of $1,002,000, or 37%, over the previous year ended
December 31, 1994.
VDSI revenues were $2,458,000 for 1995, an increase of $1,001,000, or 69%,
over 1994, representing virtually all of the increase in consolidated revenues.
The majority of VDSI's sales were comprised of AccessKey II devices. One
European customer accounted for 95% and 80% of VDSI's sales in 1995 and 1994
respectively, and 64% and 44% of consolidated revenues in 1995 and 1994,
respectively. Revenues for VPS were $1,237,000 and $1,236,000 for the comparable
periods.
Cost of Goods Sold
Consolidated cost of goods sold for the year ended December 31, 1995 was
$2,887,000, an increase of $1,464,000, or 103%, over the previous year ended
December 31, 1994.
VDSI's cost of goods sold was $2,033,000 in 1995, representing an increase
of $1,308,000, or 180%, over 1994, and accounting for the majority of the
increase in consolidated cost of goods sold. The majority of the increase in
VDSI's cost of goods sold can be attributed to a corresponding increase in
sales, but was further impacted by an adjustment to capitalized development
costs amounting to approximately $350,000, and the write down of certain
inventory valuations amounting to approximately $100,000, both occurring in the
fourth quarter of 1995.
VPS's cost of goods sold was $854,000 in 1995, representing an increase of
$156,000, or 22%, over 1994. This increase is reflective of higher costs
associated with the inclusion of increased third party goods and services in the
delivery of certain assignments.
Sales and Marketing Expenses
Consolidated sales and marketing expenses for the year ended December 31,
1995 were $245,000, an increase of $88,000, or 56%, over 1994. The entire
increase can be attributed to VDSI and reflects additions of personnel and
related expenses and investments in the development of the North American
market.
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Research and Development
Total research and development costs for the year ended December 31, 1995
were $242,000, an increase of $31,000, or 15%, over the prior year. R&D costs
are principally attributable to the operations of VDSI.
Current VASCO has expensed, as cost of revenues, $445,000 and $54,000 in
1995 and 1994, respectively, reflecting the amortization of capitalized
development costs. In the fourth quarter of 1995, Current VASCO accelerated the
amortization of capitalized development costs to reflect an adjustment to the
estimated economic life of certain products, which amounted to approximately
$350,000.
Net product development costs carried as an asset were $157,000 and
$602,000 at December 31, 1995 and December 31, 1994, respectively. There were no
product development costs capitalized in 1995 as compared to $228,000 in 1994.
General and Administrative Expenses
Consolidated general and administrative expenses for the year ended
December 31, 1995 were $855,000, an increase of $143,000, or 20%, over 1994. The
entire increase can be attributed to VDSI and reflects additions of personnel
and related expenses and investments in the development of the North American
market.
Operating (Loss) Income
Current VASCO's consolidated operating loss for the year ended December 31,
1995 was $534,000, compared to an operating profit of $192,000 for the previous
year. The loss was primarily due to the accelerated amortization of capitalized
development costs described above, increased expenditures in virtually all areas
of VDSI, and expenses in the development of corporate infrastructure, such as
sales personnel, administrative staff and office equipment.
Interest Expense
Consolidated interest expense for the year ended December 31, 1995 was
$74,000, compared to $97,000 in 1994. The decrease of $23,000 can be attributed
to average borrowings in 1995 being below those levels of the previous year, and
generally lower interest rates throughout 1995.
Income Taxes
Current VASCO recorded a tax benefit of $251,000 for the year ended
December 31, 1995 based upon a loss before taxes of $608,000, compared to a
prior year tax expense of $37,000 based upon income before taxes of $95,000. As
of December 31, 1995, Current VASCO reflected a net deferred tax asset of
$445,000. A valuation allowance was not recorded as management believed that
such deferred tax asset would be recoverable on the basis of anticipated future
taxable income, also taking into account Current VASCO's past earnings history.
Net (Loss) Income Before Taxes
Current VASCO reported a net loss of $357,000 for the year ended December
31, 1995. This compares to net income of $58,000 for the previous year.
Dividends and Accumulated Deficit
Dividends of $108,000 and $27,000 were paid in 1995 and 1994, respectively.
These dividend payments were attributable to 9,000 shares of Current VASCO
Series B Preferred Stock issued in 1994. The Current VASCO Series B Preferred
Stock dividend payments of $108,000, and the net loss after taxes of $357,000,
yielded an accumulated deficit of $554,000 at December 31, 1995, compared to an
accumulated deficit of $9,000 at the end of the previous year.
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, Current 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, Current VASCO's Chief Executive Officer and one of the stockholders of its
original corporate predecessor.
In 1995 Current 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, Current VASCO privately placed units consisting of
217,352 shares of Current VASCO Common Stock and 108,676 Current VASCO Warrants
to purchase one share of Current VASCO Common Stock at $6.00. The Current VASCO
Warrants are exercisable at the option of the holder; however, Current VASCO
maintains the right to require exercise of the warrants 30 days prior to a
public offering of Current VASCO's 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, Current
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 Current 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 Current
VASCO with payments totaling $247,261 being remitted to the investor group, (ii)
additional Current VASCO Warrants to purchase an aggregate of 141,344 shares of
Current 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 Current VASCO if after March 7, 1997 Current
VASCO raises financing of $5,000,000 or more.
During the second quarter of 1996, Current VASCO placed additional units
consisting of 666,666 shares of Current VASCO Common Stock and 137,777 warrants,
each of which entitles the holder to purchase one share of Current 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, Current 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 Current VASCO
Common Stock to be issued in lieu of cash interest, the average closing price
for shares of Current VASCO Common Stock for the previous 20 trading days is
used. In the event Current 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 Current VASCO to pay all amounts due and owing under
the note within 30 days of receipt by Current 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
Current VASCO Common Stock and 8,889 Current VASCO Warrants, each of which
entitles the holder to purchase one share of Current VASCO Common Stock at
$4.50, were issued as commissions related to the placement.
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
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to the Lintel Security and Digipass acquisitions, to retire Current VASCO's debt
to its commercial lender and to Mr. Hunt, and to fund working capital
requirements in general.
In 1996 Current VASCO raised additional funds in a private placement of
units consisting of 237,060 shares of Current VASCO Common Stock and 35,329
Current VASCO Warrants, each of which entitles the holder to purchase one share
of Current 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
Current VASCO's financial statements. In addition, 16,489 shares of Current
VASCO Common Stock were issued as commissions related to the placement.
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. Current 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.
Current VASCO's current ratio was 2.32 at December 31, 1996, compared to 2.01 at
the end of 1995.
Effective in June 1997, Current 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. The loan obligates Current VASCO to cause New
VASCO to assume all obligations under the loan and in the event the Exchange
Offer is completed New VASCO will automatically become an obligor under 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 Current VASCO (or New VASCO) 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 shares
(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: $55,556 if repayment is on or before
December 31, 1997; $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 Current
VASCO (or New VASCO) 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 Current VASCO 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. These five notes also expressly provide that they are convertible into
shares of New VASCO Common Stock, upon the same terms and conditions, in the
event the Exchange Offer is consummated. Current VASCO also issued to the bank
warrants entitling the bank to acquire an aggregate of 40,000 shares of Current
VASCO Common Stock (or New VASCO Common Stock if the Exchange Offer is
consummated) at exercise prices ranging from $4 to $10 per share.
As a result of the foregoing activities, at June 30, 1997 Current VASCO had
a cash balance of $2,863,000 and its current ratio was 3.97.
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 Current 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 Current VASCO Common
Stock or, if the Exchange Offer is consummated, into shares of New VASCO Common
Stock. This loan bears interest at the rate of
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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 Current VASCO (or New VASCO) 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 Current VASCO Common Stock on the OTC BB 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 Current VASCO (or New VASCO) 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.
Current VASCO intends to seek acquisitions of businesses, products and
technologies that are complementary or additive to those of Current VASCO. While
from time to time Current VASCO engages in discussions with respect to potential
acquisitions, Current VASCO has no plans, commitments or agreements with respect
to any such acquisitions as of the date of this Prospectus and currently does
not have excess cash for use in making acquisitions. There can be no assurance
that any such acquisition will be made.
Current VASCO believes that its current cash balances and anticipated cash
revenues from its 1997 operations will be sufficient to meet its anticipated
cash needs through the end of 1997. Current VASCO is currently seeking to
establish a new credit facility with a commercial lender and has entered into
engagement letters with Banque Paribas S.A. and Generale Bank for a possible
future public offering. There can be no assurance, however, that Current VASCO
will be successful in establishing a new credit facility or effecting a public
offering.
PREVIOUS INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP audited Current Vasco's financial statements for the
two fiscal years ended 1995. Following the acquisition of Lintel Security and
Digipass, the Audit Committee dismissed Price Waterhouse LLP as the independent
accountants of Current VASCO. The reports of Price Waterhouse LLP on the
financial statements of Current VASCO for the two years ended December 31, 1995
contained no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principle. In connection
with its audits for the two years ended December 31, 1995, there have been no
disagreements with Price Waterhouse LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements if not resolved to the satisfaction of Price Waterhouse LLP
would have caused them to make reference thereto in their report on the
financial statements for such years. During the course of Price Waterhouse's
audit of the 1995 financial statements discussion were held with Current VASCO's
management and the audit committee concerning enhancements necessary in internal
controls to enable Current VASCO to develop reliable financial statements on a
timely basis.
Management has taken steps, based on Price Waterhouse's recommendations, to
enhance internal controls. In this regard, Current VASCO has hired additional
accounting resources and implemented an automated accounting system.
NEW INDEPENDENT ACCOUNTANTS
Concurrently with the dismissal of Price Waterhouse LLP, the Company
engaged KPMG Peat Marwick LLP as Current VASCO's independent auditor for 1996,
in large part due to KPMG Peat Marwick LLP's resources in Belgium. KPMG Peat
Marwick LLP was also engaged to reaudit the financial statements of Current
VASCO for the two years ended December 31, 1995. Current VASCO did not consult
with KPMG Peat Marwick LLP with respect to any particular accounting issues
prior to KPMG Peat Marwick LLP's engagement by Current VASCO. KPMG Peat Marwick
LLP has not formally expressed their views regarding
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the adequacy of internal controls; however, the Company has not been advised of
any reportable conditions or material weaknesses relating to the 1996 audit.
CERTAIN INFORMATION CONCERNING CURRENT VASCO
BUSINESS
INTRODUCTION
Current VASCO designs, develops, markets and supports open standards-based
hardware and software security systems which manage and secure access to
information assets. Current VASCO'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.
Current VASCO's security tokens are based upon Current VASCO's core
encryption technology, which utilizes two widely known and accepted algorithms,
Data Encryption Standard ("DES") and Rivest, Shamir, Adelman ("RSA"). Current
VASCO's Cryptech division produces high speed hardware and software encryption
products used both internally for Current VASCO's security tokens and for OEM
vendors requiring real time encryption services. In addition, Current VASCO
recently has introduced a smartcard security token that uses the
challenge/response mode and the X.509 certificate authentication standard.
Current VASCO'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, Current VASCO's software and hardware products
provide what it believes is an economical state-of-the-art authentication,
authorization and accounting security system.
Current VASCO's security products are sold primarily to value-added
resellers and distributors, and to a lesser extent end-users. Current VASCO had
sold over 1.8 million security token devices, its primary product line, as of
June 30, 1997.
Current VASCO has embarked upon an aggressive campaign to expand its
distributor and reseller network. Distributors and resellers that have entered
into agreements with Current VASCO's operating subsidiaries include, among
others, Concord-Eracom Nederland BV, The Peripheral People, 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 Current VASCO'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.
THE DATA SECURITY INDUSTRY
Industry Background. 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. Current VASCO 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
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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. Current VASCO 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 alone is
expected to increase from approximately 28 million Web users worldwide in 1996
to approximately 175 million users worldwide 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, Current
VASCO believes that successful expansion of electronic commerce, particularly in
North America which has generally lagged behind Europe in this area, requires
the implementation of improved security measures, which accurately identify
users and reliably encrypt data transmissions over the Internet.
CURRENT DATA SECURITY SOLUTIONS
BUILDING BLOCKS OF DATA SECURITY GRAPHIC
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BUILDING BLOCKS OF DATA SECURITY
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, Current VASCO'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. Current VASCO 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
Current VASCO's security tokens. Current VASCO 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
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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. Current VASCO 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 reused. 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.
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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 onetime 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.
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CURRENT VASCO SOLUTION
The following illustrates a sample configuration of a network and
components of a security system:
SECURITY SYSTEM CHART
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To date, most approaches to network security have been limited in scope and
have failed to address critical aspects of data security. Current VASCO believes
that the computer security industry is moving away from incremental or point
solutions to enterprise-wide, fully integrated solutions. Current VASCO 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. Current VASCO 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, Current VASCO 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 Current VASCO'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. Current VASCO 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, Current VASCO 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) Current VASCO 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) Current VASCO 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, Current VASCO 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 "Strategy."
Security Token Products. Generally, Current VASCO'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 Current VASCO'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.
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Current VASCO'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 late 1997, Current VASCO expects to
begin shipping its AccessKey III, 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. Current VASCO
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 "Current VASCO Security Products" below.
Encryption Products. Hardware encryption product offerings from Current
VASCO include DES and RSA microprocessor chips that perform algorithmic
functions for use in, among other things, ATMs, fax machines, modems and
security servers. Current VASCO'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. Current VASCO 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 "Current VASCO Security Products" below.
Access Control Products. Current VASCO has, through a strategic
relationship, developed the VACMan access control system, which centralizes
security services in a single location, supports all of Current VASCO's token
devices, and is based on industry standard protocols to maximize
interoperability. VACMan also incorporates authorization and accounting
features. See "Current VASCO Security Products" below.
STRATEGY
Current VASCO's objective is to establish itself as a single source data
security solutions vendor and to become a leader in the data security market.
Current VASCO's growth is largely dependent on the successful implementation of
its business strategy. There can be no assurance that Current VASCO will be able
to successfully implement its business strategy or that, if implemented, such
strategy will be successful. See "RISK FACTORS." Key elements of Current VASCO's
strategy for achieving this objective are listed below:
Increase Name Recognition. Current VASCO 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. Current VASCO 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. Current VASCO 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. Current VASCO 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. Current VASCO 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 Current VASCO's products has grown more quickly in Europe than in
North America. While sales by VDS NV/SA and VDSI represented 54% and 44%,
respectively, of Current VASCO's total revenue for the year ended December 31,
1996, Current VASCO's sales to United States customers represented approximately
5% of all sales for the year ended
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December 31, 1996. Current VASCO 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.
Current VASCO 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 Current VASCO'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 Current VASCO's security products. Current VASCO intends to pursue
these potential customers through its growing network of distributors and
resellers. See "Expand Marketing Channels" below.
Expand Marketing Channels. Current VASCO intends to aggressively 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, Current VASCO 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 Current VASCO's
products in various strategic markets include:
<TABLE>
<CAPTION>
EUROPE NORTH AND SOUTH AMERICA ASIA/AUSTRALIA
------ ----------------------- --------------
<S> <C> <C>
Concord-Eracom Nederland B.V. All Tech Data Systems, Inc. Horizon Systems
(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)
</TABLE>
Develop Strategic Relationships. To accomplish its strategic goals, Current
VASCO has established and is developing strategic relationships with other
vendors of complementary security products and may seek to acquire complementary
assets or businesses. Also, Current VASCO has identified vendors of security or
remote access products that relied solely on static passwords which Current
VASCO believes its products can enhance.
Current VASCO also has entered into co-development agreements with certain
companies to gain access to technology critical to the acceptance and adoption
of Current VASCO technology and products. The first such agreement, with TriNet
Services, Inc., resulted in Current VASCO's Internet AccessKey, enabling Current
VASCO to become the first security authentication vendor to enhance security
when accessing the Internet. The Internet AccessKey won the Sun Microsystems
Java Cup International award for productivity tools.
Current VASCO also entered into a co-development agreement with SHIVA Corp.
("SHIVA"), a leader in remote access communications equipment, pursuant to which
Current VASCO licensed from SHIVA a generic security server. The resulting
product, VACMan, enables Current VASCO technology and products to be inserted
into virtually any organization that allows remote dial-in access to its
computer networks.
In addition, Current VASCO has entered into an original equipment
manufacturer agreement with Netscape Communications Corporation ("Netscape") to
bundle Netscape technology and products with Current VASCO 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
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vendor to offer a product that supports a newly adopted world wide standard for
directory services. Current VASCO 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.
CURRENT VASCO SECURITY PRODUCTS
Current VASCO'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 June 30, 1997, Current
VASCO had sold over 1.8 million security tokens (AccessKey II, AuthentiCard and
Digipass). In addition, Current VASCO recently began marketing a smartcard
security token that uses the challenge/response mode and the X.509 certificate
authentication standard. Current VASCO 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 Current VASCO'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 Current VASCO'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.
Current VASCO 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 Solarias. In addition Current VASCO offers
workstation software to enhance network connections when using advanced products
like AccessKey II or VACMan/CryptaPak. These products have unique workstation
requirements to generate a terminal flash pattern for AccessKey II and to
communicate to a smartcard reader attached to the workstation in the case of
VACMan/CryptaPak.
Current VASCO 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
Current VASCO's strategic partners to integrate Current VASCO's products into
their own product offerings.
The following chart describes each of Current VASCO's principal products:
<TABLE>
<CAPTION>
HARDWARE FEATURES
- -------- --------
<S> <C> <C>
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
- Optional PIN protection feature
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
</TABLE>
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<PAGE> 84
<TABLE>
<CAPTION>
HARDWARE FEATURES
- -------- --------
<S> <C> <C>
Digipass - Time-synchronous, response only token generates one-time
password
- Utilizes DES algorithm
- PIN protection feature
- Digital signatures feature
- Storage of multiple secret keys for up to 8
tokens/applications in one
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 Current 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 smartcard) - Includes smartcard token, smartcard reader and enabling
software
- Provides challenge/response and X.509 authentication based
identification and authentication.
SCHEDULED FOR SHIPMENT BEFORE YEAR-END 1997
AccessKey III - 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
</TABLE>
<TABLE>
<CAPTION>
SOFTWARE FEATURES
- -------- --------
<S> <C> <C>
VACMan Suite - Centralizes security services (authentication, authorization
and accounting) into single set of security servers to
manage network access
- Supports all Current VASCO tokens
- Bundled with Netscape servers
- 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 data bases 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
Internet AccessKey - In conjunction with Current VASCO tokens, limits access to
proprietary Websites
- Challenge/response authentication system
- Winner of 1996 Sun Microsystems Java Cup International award
for productivity tools
</TABLE>
- -------------------------
<TABLE>
<S> <C> <C>
* Not offered in the United States.
</TABLE>
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<PAGE> 85
<TABLE>
<CAPTION>
<S> <C> <C>
Point'n Crypt - Encryption software application
- Resides on PC workstation
- Encrypts and decrypts Windows files or folders
- When used with Current VASCO's VACMan/CryptaPak, user's
encryption key can be stored on the user's smartcard
</TABLE>
- -------------------------
VASCO, AccessKey, VACMan Server and VACMan/CryptaPak are trademarks of Current
VASCO, applications for which are pending in the United States. In addition,
AuthentiCard and Digipass are trademarks registered in Belgium. This Prospectus
also contains trademarks of other companies.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Current VASCO 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, Current VASCO 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 Current VASCO's AccessKey II, AccessKey III (which will replace
AccessKey II), Digipass and AuthentiCard tokens. The remaining terms of the U.S.
patents are between six and nine years. Current VASCO 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
Current VASCO believes its patents are being infringed upon, it intends to
vigorously assert its patent protection rights, including but not limited to,
pursuing all available legal remedies.
While Current VASCO believes that its patents are material to its future
success, there can be no assurance that Current VASCO'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 Current VASCO's intellectual property rights. Furthermore, to
the extent that Current VASCO 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 "RISK FACTORS -- Factors Relating to
Operations -- Proprietary Technology and Intellectual Property."
RESEARCH AND DEVELOPMENT
Current VASCO's research and development efforts are concentrated on
product enhancement, new technology development and related new product
introductions. Current VASCO employs 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, 1994, 1995 and 1996, Current
VASCO expended $211,000, $242,000 and $575,000, respectively, on R&D,
representing approximately 7.8%, 6.5%, and 5.6% of consolidated revenues for
1994, 1995 and 1996, respectively. See "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 Current VASCO's R&D
activities will be successful in this regard. Furthermore, there can be no
assurance that Current VASCO will have the financial resources required to
identify and develop new technologies and 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.
PRODUCTION
Current VASCO's security hardware products are manufactured by third
parties pursuant to purchase orders issued by Current VASCO. Its hardware
products are comprised primarily of commercially available electronic components
which are purchased globally. Current VASCO's software products are controlled
in-house by Current VASCO personnel and can be produced either in-house or by
several outside sources in
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North America and in Europe. At June 30, 1997, Current VASCO had firm purchase
orders from customers for an aggregate of 120,800 AccessKey II, AuthentiCard and
Digipass security token units, exclusive of the units shipped under the orders
as of June 30, 1997.
With the exception of the AccessKey II token, Current VASCO's security
tokens utilize commercially available programmable microprocessors, or chips.
Current VASCO 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 Current
VASCO'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, Current VASCO 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. Current VASCO does not have a long-term contract with Micronix,
but rather submits blanket purchase orders for the AccessKey II microprocessor.
Current VASCO expects AccessKey II production to be reduced by the end of 1997
and be replaced by AccessKey III which will employ a widely available
microprocessor.
Orders of microprocessors and some other components generally require a
lead time of 12-16 weeks. Current VASCO attempts to maintain a sufficient
inventory of all parts to handle short term spikes in orders. Large orders that
would significantly deplete Current VASCO's inventory are typically required to
be placed with more than 12 weeks of lead time, allowing Current VASCO to
attempt to make appropriate arrangements with its suppliers.
Current VASCO purchases the majority of its product components and arranges
for shipment to third parties for assembly and testing in accordance with design
specifications. Current VASCO'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 and subject to termination
on six months notice. Each of these companies assembles Current VASCO's security
tokens at facilities in mainland China. One of the companies also maintains
manufacturing capacity in Hong Kong. Equipment designed to test product at the
point of assembly is supplied by Current VASCO and periodic visits are made by
Current VASCO personnel for purposes of quality assurance, assembly process
review and supplier relations.
There can be no assurance that Current VASCO will not experience
interruptions in the supply of either 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 product was interrupted there could be a considerable
delay in finding suitable replacement sources for those components, as well as
in replacement assembly subcontractors with the result that Current VASCO's
business and results of operations could be adversely affected. See "RISK
FACTORS -- Factors Relating to Operations -- Dependence on Single Source
Suppliers."
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. Current VASCO
believes that competition in this market is likely to intensify as a result of
increasing demand for security products. Current VASCO'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. ("SDTI").
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<PAGE> 87
In some cases, these vendors also support Current VASCO's products and
those of its competitors. Current VASCO 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 Current VASCO. 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 Current VASCO.
Current VASCO 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 Current
VASCO 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 Current VASCO 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 Current VASCO's present and potential competitors have
significantly greater financial, technical, marketing, purchasing and other
resources than Current VASCO, 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 Current VASCO'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 Current VASCO could be materially
adversely effected. See "RISK FACTORS -- Factors Relating to Operations --
Competition."
Current VASCO'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 Current VASCO 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 Current VASCO for
market share.
SALES AND MARKETING
Current VASCO'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. Current VASCO 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 15 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 Current VASCO
has working relations and to potential end-users of Current VASCO's products.
In January of 1997, Current VASCO introduced the VASCO Advantage Reseller
("VAR") program. The goal of this program is to expand Current VASCO's marketing
channels by engaging companies already proficient in reselling computer network
products and security solutions to distribute Current VASCO's products. The
graph below depicts the number of value added resellers, resellers, OEM's and
distributors (collectively referred to as "Resellers") that resell Current
VASCO's products.
Current VASCO works with these Resellers through its United States and
European operating subsidiaries, VDSI and VDS NV/SA. VDSI, 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 24 additional
Resellers, for a total of 25. 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. Since January 1, 1997,
VDS NV/SA has engaged an additional 19 Resellers, for a total of 36.
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<PAGE> 88
Combined, VDSI and VDS NV/SA have established relationships with a total of 67
Resellers to date, against a target of 64 for year-end 1997.
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) US Actual Europe Actual
<S> <C> <C>
Jan 1 16
Feb 1 21
Mar 1 26
Apr 2 27
May 7 27
Jun 10 27
Jul 15 28
Aug 22 29
Sep 28 33
Oct 31 35
Nov 32 35
</TABLE>
Current VASCO'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 Current VASCO 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 Current VASCO's financial condition or results of operations.
Current VASCO 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 a number of
specified hostile countries. Until recently, Current VASCO 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 Current
VASCO product line in August 1997, require a License Exception (i.e.,
authorization to export, under stated conditions, subject to Export
Administration Regulations). Current VASCO believes it is 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 Current VASCO to
obtain required approvals under these regulations could materially adversely
affect the ability of Current VASCO to make international sales of the products
under U.S. export control.
Current VASCO's core authentication products, AccessKey II, Digipass, and
AuthentiCard, do not, nor are they likely to, fall under U.S. encryption export
control regulations. Although all of the Current VASCO 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, the Belgian operating subsidiary of Current VASCO, is
subject to export licensing requirements under Belgian law. The inability of VDS
NV/SA to obtain required approvals or
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licenses under Belgian law also could have a material adverse effect on Current
VASCO'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 software development
kit(s)), is subject to European Community regulations. VDS NV/SA's cryptographic
products are considered to be "goods of dual use" under those regulations, i.e.,
goods that can be used for both civil and military purposes. As such, 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.
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, as
indicated on the license, has been exhausted. If the quantity is not completely
exported during the one year license period, the license can be renewed once for
another year. VDS NV/SA applies for such licenses for customers that wish to
purchase cryptographic products.
CUSTOMERS AND MARKETS
Customers for Current VASCO's security products include, to some extent,
businesses that purchase products directly from Current VASCO 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 Current VASCO's security products have been sold
in Europe. Sales to one European distributor, Concord-Eracom Nederland BV,
accounted for 64% and 43% of Current VASCO's consolidated revenues in 1995 and
1996, respectively. On a pro forma basis (i.e., including Lintel Security and
Digipass sales for all of 1995 and 1996) this customer would have accounted for
31% and 21% of Current VASCO's consolidated revenues, respectively. On the same
pro forma consolidated basis, taking into account Lintel Security and Digipass
sales for the calendar year 1996, Rabo Bank and SE Banken each would have
accounted for approximately 10% of Current VASCO's total revenues.
Current VASCO is aware of the risks associated with this degree of customer
concentration and expects to further minimize its reliance on these customers in
1997 and beyond. There can be no assurance, however, that Current VASCO's
efforts to minimize this risk will ultimately be successful or that Current
VASCO 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 Current VASCO. See "RISK
FACTORS -- Factors Relating To Operations -- Dependence on Major Customers" and
"-- Risks of International Operations."
EMPLOYEES
As of August 1, 1997, Current VASCO employed 38 full-time employees and 7
full-time consultants. Of these, 21 were located in North America and 24 were
located in Europe. Of the 45 total, 15 were involved in sales, marketing and
customer support, 16 in product production, research and development and 14 in
administration.
PROPERTY
Current VASCO'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. Current VASCO recently moved from
leased quarters covering approximately 5,100 square feet located in Lombard,
Illinois, a western suburb of Chicago and will continue to pay rent under the
Lombard facility lease until it expires on November 30, 1997. Current VASCO
believes that the new Oakbrook Terrace facilities will be adequate for its
present growth plans.
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Current VASCO'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 1998. Current VASCO believes that these facilities are adequate through
the term of the current lease.
LITIGATION
Current VASCO is not currently involved in any material litigation.
However, Current VASCO has a product acceptance dispute with its principal
customer involving the sale in 1995 of approximately $315,000 of certain
smartcard readers produced by Current VASCO in response to written
specifications submitted by the customer. Current VASCO has tested the readers
and believes the readers comply with the original specifications. Current VASCO,
which continues to sell other of its products to this customer, believes that it
has a good relationship with the customer and that it will be able to amicably
resolve the dispute so that the ultimate outcome will not have a material
adverse effect on the business or operating results of Current VASCO. The amount
of the dispute has been fully provided for in Current VASCO's accompanying
consolidated financial statements.
MANAGEMENT
DIRECTORS AND OFFICERS OF CURRENT VASCO AND KEY PERSONNEL OF ITS SUBSIDIARIES
The executive officers and directors of Current VASCO and key personnel of
its subsidiaries, and their respective ages, as of October 31, 1997 are as
follows:
Directors and Officers of Current VASCO
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
T. Kendall Hunt........................... 54 Chief Executive Officer, President, Chairman of the
Board and Director
Forrest D. Laidley........................ 53 Secretary and Director(1)(2)
Robert E. Anderson........................ 48 Director(1)(2)
Michael A. Mulshine....................... 57 Director(1)(2)
Gregory T. Apple.......................... 31 Vice President -- Finance and Administration
</TABLE>
Key Personnel of VDSI
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John C. Haggard........................... 38 President and Chief Operating Officer
Richard M. Vaden, Jr...................... 40 Vice President -- Business Development and Sales
Hyon C. Im................................ 35 Vice President -- Research and Development
</TABLE>
Key Personnel of VDS NV/SA
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mario Houthooft........................... 44 Managing Director(3)
Frank Hoornaert........................... 36 Technical Manager
Jan Valcke................................ 43 Direct Sales Manager(3)
</TABLE>
- -------------------------
(1) Member of the Audit Committee of Current VASCO's Board of Directors.
(2) Member of the Compensation Committee of Current VASCO's Board of Directors.
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(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 Arrangements -- Mario Houthooft Consulting
Agreement." Mr. Valcke is not an employee of VDS NV/SA, but serves as a
consultant.
T. KENDALL "KEN" HUNT -- serves, since 1990, as a Director, the Chairman of
the Board and President of Current VASCO and prior thereto served in similar
capacities during certain periods from 1984 with Current VASCO's predecessors.
Mr. Hunt also serves as Current VASCO's Chief Executive Officer. Prior to
founding Current VASCO's Delaware predecessor in 1984, he was the President and
CEO of Deltak, Inc., an international technical services company which
specialized in the creation and distribution of information programs, training,
and job support and productivity software tools. Prior to joining Deltak, he was
President of Itel Corporation's Computer System Division which sold, leased and
serviced IBM products worldwide. Prior to Itel, he had positions with
Proprietary Systems Corporation and IBM. Mr. Hunt received his B.A. from the
University of Miami (Florida) and his M.B.A. from Pepperdine University.
FORREST D. LAIDLEY -- serves, since 1990, as Director, Secretary and
General Counsel of Current VASCO. He has been involved with Current VASCO and
its predecessors for certain periods in these capacities since 1984. He has been
a partner in the law firm of Laidley & Porter 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. Mr. Laidley received his B.A.
degree in History from Yale University and his juris doctorate degree from
DePaul University.
ROBERT E. ANDERSON -- serves, since 1990, as a Director of Current VASCO
and as Chairman of the Audit and Compensation Committees. Mr. Anderson was
involved with Current VASCO and its predecessors since 1984 as a consultant and
served as Executive Vice President and Chief Financial Officer of one of Current
VASCO's predecessors between 1987 and 1989. Since 1994 he has been an
independent consultant. From 1990 to 1994 he served as President, Chief
Executive Officer and a Director of The Bruss Company, a Chicago-based processor
and international distributor of high-value food products to the food service
industry. Between 1989 and 1990 he served as Chief Operating Officer for Comfab
Technologies, Inc., a Chicago area telecommunications industry manufacturer. Mr.
Anderson received his B.S. degree in Accounting from the University of
Bridgeport.
MICHAEL A. MULSHINE -- serves, since 1992, as a Director of Current VASCO.
He is, and since 1977 has been, a principal of Osprey Partners, a management
consulting firm. Since 1985 he has been a Director and Secretary of
Scangraphics, Inc. (NASDAQ: SCNG), a provider of Geographic Information Systems
database management software products and a leader in scanning and image
processing technology. Mr. Mulshine has served as a Director of Environmental
Tectonics Corporation (AMEX:ETC), since 1994. Additionally, Mr. Mulshine is a
Director of Intertec, Inc., an import/export trading company, and a Director of
Inresco Inc., a manufacturer of circuit protection devices. Mr. Mulshine
received his B.S. degree in Electrical Engineering from Newark College of
Engineering.
GREGORY T. APPLE -- serves, since 1996, as Vice President of Finance and
Administration of Current VASCO. His responsibilities encompass all accounting
and administrative aspects of Current VASCO and its subsidiaries. Before joining
Current VASCO 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. Mr. Apple received his
B.S. degree in Financial Accounting -- Business Information Systems from
Illinois State University and is a Certified Public Accountant.
JOHN C. HAGGARD -- serves, since 1994, as President and Chief Operating
Officer of VDSI. Prior to joining VDSI, Mr. Haggard was Assistant Vice President
of Research and Development and Technical Owner for Computer Associates'
Security Control and Audit ("SCA") division from 1988. Prior to Computer
Associates Mr. Haggard was employed by SKK, Inc. which developed ACF2, an IBM
mainframe data security product from 1982. During his 15 years in the data
security industry Mr. Haggard has specialized in user authentication
technologies ranging from biometric recognition to a variety of complex
encryption
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schemes, including DES, RSA, and Kerberos. Mr. Haggard received his B.S. degree
in Computer Science from Northern Illinois University.
RICHARD M. VADEN, JR. -- serves, since 1995, as VDSI's Vice President of
Business Development and Sales. He has over twenty-one years experience in the
data processing field. The past fifteen years have been spent specializing in
the security of large main-frame, mid-range and micro systems. Prior to joining
VDSI in 1995, Mr. Vaden spent eight years with Computer Associates
International, Inc. ("CA") in various management positions. While with the
Federal Division of CA, Mr. Vaden held the positions of Product Technical
Manager, Security Products, Technical Director, Business Development, and
Technical Director.
HYON C. IM -- serves, since 1996, as Vice President of Research and
Development for VDSI. His primary objective is to orchestrate the research,
design, and development efforts of his engineering staff. Prior to joining VDSI
in 1996, Mr. Im was Senior System Software Developer at Computer Associates
since 1988. During that time, he has been involved in the development of
multi-platform security and client/server products both at application and
operating system kernel levels. Mr. Im received his B.S. in Computer Science
from Northern Illinois University.
MARIO HOUTHOOFT -- serves, since January 1, 1997, as Managing Director of
VDS NV/SA pursuant to a consulting agreement. 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. Mr.
Houthooft received his degree in electronic engineering from the University of
Ghent, Ghent, Belgium.
FRANK HOORNAERT -- serves, since 1996, as Technical Manager of VDS NV/SA.
From 1993 until joining VDS NV/SA, he served as Technical Manager, Crypto
Products of Lintel Security. Prior thereto, he was employed from 1991 as an
engineer with Philips Industrial Company. Mr. Hoornaert received his degree in
civil engineering from the University of Leuven, Leuven, Belgium.
JAN VALCKE -- serves, since 1996, as Direct Sales Manager of VDS NV/SA.
From 1992 until joining VDS NV/SA, he served as Vice President of Sales and
Marketing of Digipass.
Term of Office of Directors and Officers. Each Director holds office for a
one-year term and until his respective successor has been duly elected and
qualified. Executive officers of Current VASCO are elected by and serve at the
discretion of the Board of Directors of Current VASCO.
BOARD COMMITTEES
The Board of Directors of Current VASCO currently maintains two standing
committees, the Audit Committee and the Compensation Committee. The Audit
Committee, currently comprised of directors Robert E. Anderson, Forrest D.
Laidley, Gerald Guice and Michael A. Mulshine, recommends to the Board of
Directors the engagement of Current VASCO's independent accountants, reviews
with such accountants the plan, scope and results of their audit of the
consolidated financial statements and reviews the independence of such
accountants. The Compensation Committee, currently comprised of the same
directors as the Audit Committee, reviews and makes recommendations to the Board
of Directors regarding all forms of compensation to be provided to the executive
officers and directors of, and consultants to, Current VASCO and its
subsidiaries.
COMPENSATION OF DIRECTORS
Directors of Current VASCO are reimbursed for expenses incurred in
connection with their attendance at periodic Board meetings. Directors receive
no cash compensation for their services; however, non-employee directors are
eligible to receive stock option grants from time to time. In 1996 the
non-employee directors of Current VASCO, Messrs. Laidley, Anderson, Guice and
Mulshine, each received options to purchase 10,000 shares of Current VASCO's
Common Stock, at an exercise price of $4.25 per share, pursuant to Current
VASCO's Stock Option Program.
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<PAGE> 93
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Current VASCO's Compensation Committee is comprised of Messrs. Anderson,
Guice, Laidley and Mulshine. Mr. Laidley, although not an employee, served as
Current VASCO's Secretary during 1996 and Mr. Anderson served as Current VASCO's
Chief Financial Officer and Executive Vice President from 1987 through 1989 and
served Current VASCO as a consultant from January 1996 through March 1997.
Forrest D. Laidley serves as Director and Secretary of Current VASCO. Mr.
Laidley is also a partner in the law firm of Laidley & Porter which has
performed various legal services for Current VASCO since its inception. Mr.
Laidley and his partners have made equity investments in Current VASCO from time
to time through various private placements and are currently stockholders and
warrant holders. On March 29, 1996, Mr. Laidley was issued warrants, expiring
October 31, 2000, to purchase 5,883 shares of Current VASCO Common Stock at an
exercise price of $6.00 per share, as compensation for services rendered to
Current VASCO in connection with financing activities. See "PRINCIPAL
STOCKHOLDERS." Mr. Laidley's firm is currently performing legal services for
Current VASCO. Mr. Laidley's services currently are and, except as noted above,
during 1996 were on a noncompensation basis, although his firm is compensated
for services rendered to Current VASCO by attorneys other than Mr. Laidley. For
1996 services, Mr. Laidley's firm was paid approximately $57,000 ($47,000 of
which was paid in 1997).
From January 1996 until March 1997, pursuant to an oral arrangement, Robert
Anderson served as a consultant to Current VASCO. Pursuant to this arrangement,
Mr. Anderson was compensated in the amount of $50,000 in 1996 and $15,000 in
1997. The oral arrangement between Current VASCO and Mr. Anderson called for
compensation in the amount of $5,000 per month, and is no longer in effect.
On June 2, 1992 Current VASCO entered into an Investment Banking and
Management Consulting Agreement with Osprey Partners ("Osprey"), pursuant to
which, among other things, Current VASCO agreed to appoint Mr. Mulshine as a
member of Current VASCO's Board of Directors. Michael A. Mulshine, a Director of
Current VASCO, is a principal of Osprey. In 1993 and 1994 Osprey provided
services to Current VASCO in connection with obtaining financing for Current
VASCO and, pursuant to the Agreement, Osprey was paid fees aggregating $60,000
during 1993, 1994 and 1995. The Agreement also granted Osprey a warrant to
purchase 400,000 shares of Current VASCO's common stock at a price of $.25 per
share. On January 20, 1996 Current VASCO exercised its election to terminate the
Agreement and deemed that 200,000 of the 400,000 shares of Current VASCO Common
Stock underlying the warrant were earned and vested as of that date. Osprey may
exercise its right to purchase such 200,000 shares of common stock at $.25 per
share anytime before June 1, 1999.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to Current VASCO in all capacities during the year
ended December 31, 1996 for Current VASCO's Chief Executive Officer and
President and VDSI's President and Chief Operating Officer, who are the only
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<PAGE> 94
executive officers of Current VASCO and its subsidiaries whose salary and bonus
for such year exceeded $100,000 (collectively, Messrs. Hunt and Haggard are
referred to herein as the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------- ---------------------
NAME AND SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS(#) COMPENSATION($)
------------------ ---- --------- -------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
T. Kendall Hunt.................... 1996 116,457 -0- -0- -0-
President, Chairman of 1995 71,700 -0- -0- -0-
the Board and Director
of Current VASCO
John C. Haggard.................... 1996 105,750 -0- 40,000 -0-
President and Chief 1995 64,167 -0- 157,500 -0-
Operating Officer of VDSI
</TABLE>
STOCK OPTION PROGRAM AND INCENTIVE PLAN
Stock Option Program. Current VASCO has granted Current VASCO Stock Options
designed to serve as a performance incentive for employees, directors,
consultants and other key persons performing services for Current VASCO to
encourage such persons to acquire or increase a proprietary interest in the
success of Current VASCO (the "Option Program"). The Option Program is
administered by the Compensation Committee.
The Option Program permits the grant of Current VASCO Stock Options to
employees of Current VASCO and its subsidiaries. All Current VASCO Stock Options
granted to employees are for a period of ten years, are granted at a price equal
to the fair market value of Current VASCO Common Stock on the date of the grant
and are vested 25% at the time of grant and 25% on each subsequent anniversary
of the grant. Current VASCO Stock Options are therefore fully vested on the
third anniversary of the date of grant.
The Option Program further permits the grant of Current VASCO Stock Options
to directors, consultants and other key persons. All Current VASCO Stock 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 Current VASCO 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.
Executive Incentive Compensation Plan. In February of 1995 the Compensation
Committee adopted the Executive Incentive Compensation Plan ("Incentive Plan")
to become effective for the year ended December 31, 1994. The Incentive Plan
covers Current VASCO's eligible executives and key employees (each a
"participant"), with such eligibility determined at the end of each year at the
sole discretion of the Compensation Committee. Awards are based on prior year
operating results, such results being subject to audit by Current VASCO's
independent accountants, and are distributed following the completion of such
audit.
The Incentive Plan allows for the creation of a cash pool ("Pool") in the
amount of 10% of Current VASCO's annual pre-tax earnings. Fifty percent (50%) of
the Pool is awarded to the participants based on each participant's earned
salary as a percentage of all participants' salaries. The remaining fifty
percent (50%) is awarded at the sole discretion of the Compensation Committee.
Awards, in whole or in part, may be offered in the form of shares of
Current VASCO's Common Stock or cash at the sole discretion of the Compensation
Committee and the Compensation Committee also may elect to delegate the choice
of cash or stock to the individual participants. To the extent that shares of
stock are awarded in lieu of cash, the number of shares is based on the market
value of Current VASCO Common Stock on the date the award is determined, and are
taxable to the participant in the year the award is granted.
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<PAGE> 95
Such shares are restricted and cannot be sold or transferred except pursuant to
registration under the Securities Act or an exemption from such registration.
Option Grants During 1996. The following table sets forth all options
granted to the Named Executive Officers during 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
PERCENT OF OF STOCK
NUMBER OF TOTAL ---------------------
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR ($/SH) DATE(1) 5%($) 10%($)
---- ---------- ------------ -------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
T. Kendall Hunt................... -- -- -- -- -- --
John C. Haggard................... 40,000 14.8% 4.25 04/15/06 107,100 270,300
</TABLE>
- -------------------------
(1) The options vest as follows: 25% at the time of the grant, and 25% on each
subsequent anniversary of the grant.
(2) The potential realizable value amounts shown illustrate the values that
might be realized upon exercise immediately prior to the expiration of their
term using five percent and ten percent appreciation rates as required to be
used in this table by the Securities and Exchange Commission, compounded
annually, and are not intended to forecast possible future appreciation, if
any, of Current VASCO's stock price. Additionally, these values do not take
into consideration the provisions of the options providing for
nontransferability or termination of the options following termination of
employment. Therefore, the actual values realized may be greater or less
than the potential realizable values set forth in the table.
Year-End Option Values. The following table sets forth the aggregate value
as of December 31, 1996 of unexercised stock options held by the Named Executive
Officers. The Named Executive Officers did not exercise any stock options during
1996 and the relevant columns have therefore been omitted.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE(1) OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END ($)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
T. Kendall Hunt............................... -- -- -- --
John C. Haggard............................... 88,750 108,750 250,031.25 250,031.25
</TABLE>
- -------------------------
(1) Market value of underlying securities is based on the average of the bid and
asked price per share ($3.375) of Current VASCO Common Stock as reported on
the OTC BB on December 31, 1996 minus the exercise price.
(2) Options vest as follows: 25% at the time of the grant, and 25% on each
subsequent anniversary of the grant. Options indicated as exercisable are
those options which were vested as of December 31, 1996. All options which
had not vested as of December 31, 1996 are indicated to be unexercisable.
CONSULTING ARRANGEMENTS
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 Current VASCO.
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
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<PAGE> 96
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 the Benelux countries (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 Current VASCO (or any of its
affiliates) in the manufacture and sale of computer security products through
December 31, 2001.
CERTAIN TRANSACTIONS
Loans from Principal Stockholder. Since its inception, Current VASCO and
its predecessors have relied from time to time on T. Kendall Hunt, Current
VASCO's Chief Executive Officer, President and Chairman of the Board, to provide
various forms of working capital. Throughout 1994 and 1995 Current VASCO was
indebted to Mr. Hunt for borrowed money. In 1994 the balance owing to Mr. Hunt
was $150,000 which was liquidated in a refinancing as described below.
Subsequent to the refinancing of this $150,000 note, Mr. Hunt loaned Current
VASCO an additional $60,000 which remained outstanding at December 31, 1994. In
1995 Mr. Hunt made additional loans of $130,000 to Current VASCO. The aggregate
principal amount of the outstanding loans due to Mr. Hunt, $190,000, remained
outstanding at December 31, 1995. All notes evidencing such borrowing have been
interest bearing with interest payable annually at the rate of prime plus 1%.
Current VASCO made all interest payments on a timely basis and the notes, if not
repaid, were extended at maturity. In January 1996 Current VASCO paid Mr. Hunt
$100,000 and reduced its note obligation by an equal amount. Current VASCO paid
Mr. Hunt the remaining balance, $90,000 plus accrued interest, during 1996.
In September 1994 Mr. Hunt surrendered a Current VASCO note in the
principal amount of $150,000 in exchange for 1,000 shares of Current VASCO
Series B Preferred Stock and 250,000 shares of Current VASCO Common Stock.
Effective September 17, 1997, Mr. Hunt converted his 1,000 shares of Current
VASCO Series B Preferred Stock into shares of Current VASCO Common Stock.
Pledge of Common Stock by Principal Stockholder. In August 1997, VDSE
completed the restructuring of an existing obligation of $3.4 million which was
incurred in connection with the acquisition of Digipass and was to have matured
in December 1997. In the restructuring, Banque Paribas Belgique S.A., which had
issued a guarantee of the obligation, paid the obligation and received a $3.4
million convertible note due 2002 from VDSE. As part of the restructuring, Mr.
Hunt entered into a pledge agreement with Banque Paribas Belgique S.A. pursuant
to which he pledged, as collateral for the VDSE convertible note, 1,416,666 of
his shares of Current VASCO Common Stock, which number of shares is subject to
adjustment based on the market value of the shares.
CURRENT VASCO EQUITY EQUIVALENT SECURITIES
In connection with the Exchange Offer, New VASCO is offering to exchange
for all outstanding Current VASCO Stock Options, Current VASCO Conversion
Options and Current VASCO Warrants, together, in each case, with a release of
any and all Associated Corporate Matter Claims, New VASCO Stock Options, New
VASCO Conversion Options, and New VASCO Warrants with substantially the same
terms and conditions. See "THE EXCHANGE OFFER -- Terms of the Exchange Offer"
and "DESCRIPTION OF CAPITAL STOCK OF NEW VASCO -- Stock Options, Warrants and
Convertible Notes."
CURRENT VASCO STOCK OPTIONS
Current VASCO has granted Current VASCO Stock Options designed to serve as
a performance incentive for employees, directors, consultants and other key
persons performing services for Current VASCO to encourage such persons to
acquire or increase a proprietary interest in the success of Current VASCO (the
"Option Program"). The Option Program is administered by the Compensation
Committee.
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<PAGE> 97
The Option Program permits the grant of Current VASCO Stock Options to
employees of Current VASCO and its subsidiaries. All Current VASCO Stock Options
granted to employees are for a period of ten years, are granted at a price equal
to the fair market value of Current VASCO Common Stock on the date of the grant
and are vested 25% at the time of grant and 25% on each subsequent anniversary
of the grant. Current VASCO Stock Options are therefore fully vested on the
third anniversary of the date of grant.
The Option Program further permits the grant of Current VASCO Stock Options
to directors, consultants and other key persons. All Current VASCO Stock 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 Current VASCO Common Stock on the date of
the grant, and may contain vesting requirements and/or restrictions as
determined by the Compensation Committee at the time of grant.
As of October 31, 1997 there were 1,977,757 Current VASCO Stock Options
outstanding of which 1,477,504 were exercisable at prices between $.125 and
$6.00 per share.
CURRENT VASCO WARRANTS
From time to time Current VASCO has issued Current VASCO Warrants to
purchase shares of Current VASCO Common Stock at various exercise prices. As of
October 31, 1997 there were Current VASCO Warrants to purchase 1,056,922 shares
of Current VASCO Common Stock outstanding with exercise prices ranging from
$0.25 to $10.00. Current VASCO Warrants for an aggregate of 280,761 shares of
Current VASCO Common Stock are callable at the respective exercise prices of
such Current VASCO Warrants, which range from $5.19 to $6.00, in the event of a
public offering of Current VASCO Common Stock. Most Current VASCO Warrants
contain registration rights provisions.
CONVERTIBLE NOTES AND CURRENT VASCO CONVERSION OPTIONS
GENERALE BANK. Current VASCO presently has outstanding five notes which are
held by Generale Bank, a bank based in Belgium, and represent indebtedness in
the aggregate principal amount of $2.5 million, pursuant to a loan which
obligates Current VASCO to cause New VASCO to assume all obligations under the
loan, and in the event the Exchange Offer is completed New VASCO will
automatically become an obligor under the notes. Each of these notes is in the
principal amount of $500,000, bears interest, payable quarterly, at the rate of
3.25% per annum, and matures on September 30, 1998, at which time 116% of the
principal amount becomes due and payable. In the event Current VASCO (or New
VASCO) 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 shares (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: $55,556 if
repayment is on or before December 31, 1997; $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 Current VASCO (or New VASCO) 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 Current VASCO 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. These five notes also expressly provide
that they are convertible into shares of New VASCO Common Stock, upon the same
terms and conditions, in the event the Exchange Offer is consummated. These
notes are not prepayable except under limited circumstances. Current VASCO and
New VASCO have entered into an agreement providing for New VASCO's
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<PAGE> 98
assumption, upon consummation of the Exchange Offer, of Current VASCO's
obligations under the agreement pursuant to which the five convertible notes
were issued.
BANQUE PARIBAS BELGIQUE S.A. Effective August, 1997, VDSE entered into a
convertible loan agreement with Banque Paribas Belgique S.A. in the principal
amount of $3.4 million. The principal amount is convertible, at the option of
the lender, into shares of Current VASCO Common Stock or, if the Exchange Offer
is consummated, into shares of New VASCO 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 Current VASCO (or New VASCO) 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 Current VASCO Common Stock on the OTC BB 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 Current VASCO (or New VASCO) 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.
OTHER NOTES. In addition to the convertible notes described above, Current
VASCO has issued three other notes. These notes provide that they are
convertible into shares of Current VASCO Common Stock but do not provide for
conversion into shares of New VASCO Common Stock. However, Current VASCO has
consented, pursuant to an agreement with New VASCO, to amend the notes in
connection with the Exchange Offer to provide for the right to convert the notes
into shares of New VASCO Common Stock, or in other words, to provide for the
exchange of New VASCO Conversion Options for the Current VASCO Conversion
Options contained in such notes. These amendments are set forth in the form of
the New VASCO Convertible Note Agreement.
The first convertible note is in the aggregate principal amount of $5
million, matures on May 29, 2001, and bears interest at an annual rate of 9%.
Interest on the note is payable quarterly, and at the option of the holder
interest payments are to be made either in cash or in a number of shares of
Current VASCO Common Stock determined on the basis of an average market price.
The Current VASCO Conversion Option of this note provides that the note is
convertible in whole or in part at any time, at the option of the holder, into
shares of Current VASCO Common Stock at a conversion price of $12.00 per share.
The note by its terms is not prepayable; however, Current VASCO and the holder
of this note have amended the note to provide that, if during the term of the
note Current VASCO receives funds of $30,000,000 or more from a public offering
of its common stock, the holder shall have the right to require Current VASCO to
pay in cash all amounts due and owing pursuant to the note within 30 days of
receipt by Current VASCO of notice from the holder of the exercise of this
right.
The remaining two notes are each in the aggregate principal amount of
$373,750, and Current VASCO has the right to prepay each of these notes at any
time. Pursuant to the prepayment option, the principal amount of one of these
two notes has been reduced by $33,750. The other terms of these two notes are
identical. The notes mature on May 30, 1998, bear interest at an annual rate of
8%, payable quarterly, at the option of the holder, in cash or in a number of
shares of Current VASCO Common Stock determined on the basis of an average
market price. The holder of each of the notes has the right to convert the note
in whole or in part at any time into shares of Current VASCO Common Stock at a
price of $7.00 per share. The shares of Current VASCO Common Stock issuable upon
conversion of each of these notes are subject to an agreement dated March 1,
1996, which provides for the right under certain circumstances to have the
shares into which these notes are convertible registered under the Securities
Act.
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<PAGE> 99
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Current VASCO's Common Stock as of October 31, 1997 for
(i) each person or entity who is known to Current VASCO to beneficially own five
percent or more of Current VASCO's Common Stock, (ii) each of Current VASCO's
directors, (iii) each of the Named Executive Officers, and (iv) all directors
and executive officers as a group. The persons named in the table have sole
voting and investment power with respect to all shares of Current VASCO shown as
beneficially owned by them unless otherwise indicated. For purposes of the
table, a person or group of persons is deemed to have beneficial ownership of
any shares as of a given date which such person has the right to acquire within
60 days after such date.
Each director and Named Executive Officer listed below has stated his
intention to exchange his Current VASCO Securities for New VASCO Securities in
the Exchange Offer. Accordingly, if the Exchange Offer is consummated and the
individual's securities are exchanged, the individual will beneficially own the
number of shares of each class of New VASCO capital stock equal to the number of
shares of each class of Current VASCO capital stock set forth below. However,
the percentage such shares will represent of the total number of shares of each
class of New VASCO capital stock outstanding after consummation of the Exchange
Offer will be greater if less than 100% of the issued and outstanding shares of
each class of Current VASCO capital stock are exchanged pursuant to the Exchange
Offer.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS CLASS OF BENEFICIAL PERCENT
OF BENEFICIAL OWNER STOCK OWNERSHIP(1) OF CLASS
------------------- -------- ------------ --------
<S> <C> <C> <C>
Directors and Named Executive Officers
T. Kendall Hunt......................................... Common 10,206,225(2) 50.62%
1901 South Meyers Road
Suite 210
Oakbrook Terrace, Illinois 60181
Forrest D. Laidley...................................... Common 592,403(3) 2.92%
185 Milwaukee Avenue
Suite 240
Lincolnshire, Illinois 60069
Robert E. Anderson...................................... Common 655,342(4) 3.16%
831 West North Street
Hinsdale, Illinois 60521
Michael A. Mulshine..................................... Common 235,000(5) 1.15%
2517 Route 35, Suite D-201
Manasquan, New Jersey 08736
John C. Haggard......................................... Common 200,950(6) 0.99%
1901 South Meyers Road
Suite 210
Oakbrook Terrace, Illinois 60181
All Executive Officers and Directors as a Group (7
persons).............................................. Common 12,435,478(7) 57.52%
</TABLE>
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<PAGE> 100
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS CLASS OF BENEFICIAL PERCENT
OF BENEFICIAL OWNER STOCK OWNERSHIP(1) OF CLASS
------------------- -------- ------------ --------
<S> <C> <C> <C>
Other 5% Stockholders
Gerald Guice............................................ Common 1,418,333(8) 7.01%
House Number 91 Achimota Cantonments Rd.
P.O. Box 10219
Accra-North Ghana, West Africa
KYOTO Securities, Ltd................................... Common 1,333,335(9) 6.44%
1800 Avenue, McGill College
Suite 2440
Montreal, Quebec H3A-3J6
Barbara J. Hunt......................................... Common 1,111,300 5.52%
11735 Briarwood Court
Burr Ridge, Illinois 60525
</TABLE>
- -------------------------
(1) The number of shares beneficially owned by each director and executive
officer is determined under rules promulgated by the Securities and Exchange
Commission, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership
includes any shares as to which the individual has sole or shared voting
power or investment power and also any shares which the individual has the
right to acquire within 60 days after October 31, 1997 through the exercise
of any stock option or other right. The inclusion herein of such shares,
however, does not constitute an admission that the named stockholder is a
direct or indirect beneficial owner of such shares. Unless otherwise
indicated, each person or entity named in the table has sole voting power
and investment power (or shares such power with his or her spouse) with
respect to all shares of capital stock listed as owned by such person or
entity.
(2) Includes 31,250 shares underlying Current VASCO Stock Options held by Mr.
Hunt exercisable within 60 days of October 31, 1997, and 1,111,300 shares
held by Barbara J. Hunt, Mr. Hunt's spouse. Mr. Hunt disclaims beneficial
ownership of any portion of his spouse's holdings. Mr. Hunt also holds 1
share of capital stock in each of VDSE and VDS NV/SA, in each case
representing less than 1% of the shares of capital stock of such company.
(3) Includes 125,000 shares underlying Current VASCO Stock Options exercisable
within 60 days of October 31, 1997, 5,883 shares underlying warrants
exercisable within 60 days of October 31, 1997 and 250,000 shares held by
Mr. Laidley and his spouse as joint tenants. See "Compensation Committee
Interlocks and Insider Participation."
(4) Includes 609,507 shares underlying Current VASCO Stock Options exercisable
within 60 days of October 31, 1997.
(5) Includes 35,000 shares underlying Current VASCO Stock Options held by Mr.
Mulshine which are exercisable within 60 days of October 31, 1997, and
200,000 shares underlying Current VASCO Warrants exercisable within 60 days
of October 31, 1997 granted to Osprey Partners, a management consulting firm
in which Mr. Mulshine is a principal, in connection with certain investment
banking activities undertaken on behalf of Current VASCO. Mr. Mulshine
disclaims beneficial ownership of the shares underlying the warrants held by
Osprey Partners except to the extent of his proportionate equity interest in
the firm. See "Compensation Committee Interlocks and Insider Participation."
(6) Includes 148,125 shares underlying Current VASCO Stock Options exercisable
within 60 days of October 31, 1997.
(7) Includes 1,068,882 shares underlying Current VASCO Stock Options, 368,383
shares underlying Current VASCO Warrants, and 48,571 shares into which
convertible notes are exercisable within 60 days of October 31, 1997,
including those referred to in footnotes (2) through (6) above, as well as
the shares held by Mr. Hunt's spouse.
(8) Includes 95,000 shares underlying Current VASCO Stock Options exercisable
within 60 days of October 31, 1997.
(9) Includes 166,943 shares underlying Current VASCO Warrants exercisable within
60 days of October 31, 1997, and 416,667 shares into which a convertible
note is exercisable within 60 days of October 31, 1997. Current VASCO has
been advised that Charles Villeneuve, Managing Director of KYOTO Securities,
Ltd., possesses the power to vote the shares of Current VASCO Common Stock
held by KYOTO Securities, Ltd.; Current VASCO is not aware whether this
voting power is sole or shared.
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CERTAIN INFORMATION CONCERNING NEW VASCO
ORGANIZATION OF NEW VASCO
New VASCO was incorporated in Delaware on July 15, 1997. New VASCO was
organized by representatives of Current VASCO to effect the Exchange Offer,
which if consummated would result in New VASCO becoming a holding company for
Current VASCO and its subsidiaries. Since New VASCO was organized for the
purpose of effecting the Exchange Offer, New VASCO has not conducted any
business and has only nominal assets. See "THE REORGANIZATION." If the
Reorganization is completed, New VASCO presently intends to continue the
business of Current VASCO. See "CERTAIN INFORMATION CONCERNING CURRENT VASCO --
Business."
The Certificate of Incorporation of New VASCO, as amended, is substantially
the same as the Restated and Amended Certificate of Incorporation of Current
VASCO, as amended, with four exceptions: (i) New VASCO's Certificate of
Incorporation, as amended, authorizes the issuance of 75,000,000 shares of
common stock (as opposed to 50,000,000 shares of common authorized in Current
VASCO's Restated and Amended Certificate of Incorporation, as amended), (ii) the
New VASCO Certificate of Incorporation as amended, does not designate a series
of preferred stock comparable to Current VASCO Series A Preferred Stock, since
there are no such shares of Current VASCO presently outstanding, (iii) the New
VASCO Certificate of Incorporation, as amended, does not designate a series of
preferred stock comparable to Current VASCO Series B Preferred Stock, since
there are no such shares of Current VASCO presently outstanding, and (iv) New
VASCO's Certificate of Incorporation, as amended, does not contain a general
requirement that all dividends on preferred stock be paid before payment of
dividends on common stock, which deletion will permit the creation of a class or
series of preferred stock that could participate with common stock in dividend
payments. See "REORGANIZATION OF CURRENT VASCO -- Differences in Capital Stock
and Rights of Stockholders" and "Federal Income Tax Consequences." The
certificates of incorporation of Current VASCO and New VASCO are otherwise
substantially the same, except for certain clarifying and conforming changes and
certain changes included to reflect current Delaware law. New VASCO's bylaws are
the same as those of Current VASCO. See "COMPARISON OF STOCKHOLDER RIGHTS."
If the Exchange Offer is consummated, New VASCO's assets will immediately
thereafter consist principally of the number of Current VASCO Shares tendered
pursuant to the Exchange Offer. As a result, upon consummation of the Exchange
Offer and during the period New VASCO's activities are solely those of a holding
company, New VASCO will be dependent for its income, if any, on dividends
received from its subsidiaries, including Current VASCO, as well as from
interest on any loans New VASCO might make to its subsidiaries. If the Exchange
Offer is not consummated, New VASCO will be dissolved. See "THE REORGANIZATION"
and "THE EXCHANGE OFFER."
MANAGEMENT
New VASCO's directors and officers consist of the same individuals who
serve as Current VASCO's present directors and officers, although changes in the
persons who are officers and directors of New VASCO may occur after the Exchange
Offer is completed. For information regarding the persons who comprise New
VASCO's Board of Directors and who have been elected to serve as its officers
upon consummation of the Exchange Offer, see "CERTAIN INFORMATION CONCERNING
CURRENT VASCO -- Management."
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DESCRIPTION OF CAPITAL STOCK OF NEW VASCO
New VASCO's authorized capital stock consists of 75,000,000 shares of
common stock, par value $.001 per share, and 500,000 shares of preferred stock,
par value $.01 per share. No shares of preferred stock are designated or have
been issued, and only 100 shares of New VASCO Common Stock, all of which are
owned of record by Current VASCO, have been issued.
COMMON SHARES
The holders of New VASCO Common Stock will be entitled to one vote for each
share on all matters voted upon by stockholders, including the election of
directors. There is no cumulative voting with respect to the election of
directors. As a result, subject to the rights of holders of any series of New
VASCO preferred stock that may be designated in the future, holders of more than
50% of the outstanding shares of New VASCO Common Stock can elect all of the
directors. Subject to the rights of any outstanding shares of any series of
preferred stock then outstanding, the holders of New VASCO Common Stock will be
entitled to such dividends as may be declared at the discretion of the New VASCO
Board of Directors out of funds legally available therefor. Holders of New VASCO
Common Stock will be entitled to share ratably in the net assets of New VASCO
upon liquidation after payment or provision for all liabilities and any
preferential liquidation rights of any preferred stock then outstanding.
The holders of New VASCO Common Stock will have no preemptive or other
subscription rights to purchase shares of New VASCO. Shares of New VASCO Common
Stock will not be subject to any redemption provisions and will not be
convertible into any other securities of New VASCO. All shares of New VASCO
Common Stock will be, when issued pursuant to the Exchange Offer, fully paid and
nonassessable.
PREFERRED SHARES
The preferred stock authorized in New VASCO's Certificate of Incorporation,
as amended, may be issued from time to time by the New VASCO Board of Directors
as shares of one or more series. Subject to the provisions of New VASCO's
Certificate of Incorporation, as amended, and limitations imposed by law, the
New VASCO Board of Directors is expressly authorized to adopt resolutions to
issue the shares, to fix the number of shares and to change the number of shares
constituting any series, and to provide for the voting powers, designations,
preferences and relative, participating, optional or other special rights,
qualifications, limitations or restrictions thereof, including dividend rights
(including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any series of the
preferred stock, in each case subject to the rights of the holders of any series
of preferred stock then outstanding, but without any further action or vote by
the holders of New VASCO Common Stock.
One of the effects of undesignated preferred stock may be to enable the New
VASCO Board of Directors to render more difficult or discourage an attempt to
obtain control of New VASCO by means of a tender offer, proxy contest, merger or
otherwise, and thereby to afford time to the New VASCO Board of Directors to
determine whether such change in control is in the best interests of New VASCO
and all its shareholders. The issuance of shares of preferred stock pursuant to
the Board of Directors' authority described in the preceding paragraph may
adversely affect the rights of the holders of New VASCO Common Stock. For
example, preferred stock issued by New VASCO may rank prior to the New VASCO
Common Stock as to dividend rights, liquidation preference or both, may have
full or limited voting rights and may be convertible into shares of New VASCO
Common Stock. Accordingly, the issuance of shares of preferred stock may
discourage bids for the New VASCO Common Stock at a premium or may otherwise
adversely affect the market price of the New VASCO Common Stock.
STOCK OPTIONS, WARRANTS AND CONVERTIBLE NOTES
Pursuant to the Exchange Offer, New VASCO is offering to exchange for all
outstanding Current VASCO Stock Options, Current VASCO Conversion Options and
Current VASCO Warrants, and, with respect to the holder of each such security
exchanged, the release of any and all Associated Corporate Matter
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Claims, New VASCO Stock Options, New VASCO Conversion Options and New VASCO
Warrants with substantially the same terms and conditions. In addition, certain
notes convertible into Current VASCO Common Stock presently provide the holders
with the right to convert into New VASCO Common Stock in the event the Exchange
Offer is consummated. See "THE EXCHANGE OFFER -- Terms of the Exchange Offer"
and "CERTAIN INFORMATION CONCERNING CURRENT VASCO -- Current VASCO Equity
Equivalent Securities."
Options
The purpose of the New VASCO 1997 Stock Option Plan is to promote the
long-term success of New VASCO and its subsidiaries for the benefit of New
VASCO's stockholders by encouraging officers and employees of New VASCO and its
subsidiaries to have meaningful investments in New VASCO so that, as
stockholders themselves, those individuals will be more likely to represent the
views and interests of other stockholders and by providing incentives to such
officers and employees for continued service. New VASCO believes that the
possibility of participation under the New VASCO 1997 Stock Option Plan will
provide this group of officers and employees an incentive to perform more
effectively and will assist New VASCO and its subsidiaries in attracting and
retaining people of outstanding training, experience and ability. The New VASCO
1997 Stock Option Plan also allows for the grant of stock options to directors
of, and consultants and advisors to, New VASCO and its subsidiaries.
The New VASCO 1997 Stock Option Plan was adopted by New VASCO's Board of
Directors and approved by Current VASCO, as the present sole stockholder of New
VASCO, effective as of July 23, 1997, and will remain in effect until terminated
by the New VASCO Board of Directors or a committee appointed by the New VASCO
Board of Directors to administer the plan (the "Committee"), which has exclusive
authority to make awards under the New VASCO 1997 Stock Option Plan and all
interpretations and determinations affecting the New VASCO 1997 Stock Option
Plan. Participation in the New VASCO 1997 Stock Option Plan is limited to
officers, directors, employees, consultants and advisers of New VASCO and its
subsidiaries who are selected from time to time by the Committee. Participants
in the New VASCO 1997 Stock Option Plan may also participate in other incentive
plans of New VASCO. The New VASCO 1997 Stock Option Plan provides for the grant
of either ISOs or non-qualified stock options for tax purposes.
5,000,000 shares of New VASCO Common Stock are available for issuance under
the New VASCO 1997 Stock Option Plan, subject to adjustment by the Committee
under certain circumstances. Such shares may consist in whole or in part of
authorized and unissued shares of New VASCO Common Stock, or treasury shares.
The shares of New VASCO Common Stock which may be issued pursuant to the
New VASCO Stock Options exchanged in the Exchange Offer, will be issued pursuant
to the New VASCO 1997 Stock Option Plan. All such New VASCO Stock Options issued
in exchange for Current VASCO Stock Options shall be for the same number of
shares of New VASCO Common Stock and shall have the same exercise price, vesting
term, termination provision and expiration date as the Current VASCO Stock
Options for which they are exchanged. New VASCO will enter into New VASCO Option
Agreements with exchanging Current VASCO Stock Option holders which will contain
the same vesting, exercise price, termination provision and exercise expiration
terms and conditions as the original agreements such holders have entered into
with Current VASCO, and provide for the release of any and all Associated
Corporate Matter Claims. The New VASCO Option Agreement also includes a
provision for the adjustment of the number of shares underlying the New VASCO
Stock Options and of the exercise price for such shares in the event of a change
in the capital structure of New VASCO. As of October 31, 1997 there were
1,977,757 Current VASCO Stock Options outstanding for an aggregate of 1,977,757
shares of Current VASCO Common Stock with exercise prices ranging between $.125
and $6.00 per share, of which options for 1,477,504 shares were fully vested and
exercisable. See "CERTAIN INFORMATION CONCERNING CURRENT VASCO -- Current VASCO
Equity Equivalent Securities -- Current VASCO Stock Options."
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Warrants
From time to time Current VASCO issued Current VASCO Warrants to purchase
shares of Current VASCO Common Stock at various exercise prices. Pursuant to the
terms of the Exchange Offer, New VASCO is offering to exchange New VASCO
Warrants for all outstanding Current VASCO Warrants and the release of any and
all Associated Corporate Matter Claims by each exchanging holder. All such New
VASCO Warrants issued in exchange for Current VASCO Warrants shall be for the
same number of shares of New VASCO Common Stock and shall have the same exercise
price and expiration date as the Current VASCO Warrants for which they are
exchanged. New VASCO will enter into New VASCO Warrant Agreements with
exchanging Current VASCO Warrant holders that will provide for the release of
any and all Associated Corporate Matter Claims, and include a provision for the
adjustment of the number of shares underlying the New VASCO Warrants and of the
exercise price for such shares in the event of a change in the capital structure
of New VASCO.
As of October 31, 1997, there were outstanding Current VASCO Warrants for
an aggregate of 1,056,922 shares of Current VASCO Common Stock with exercise
prices ranging from $0.25 to $10.00. See "CERTAIN INFORMATION CONCERNING CURRENT
VASCO -- Current VASCO Equity Equivalent Securities -- Current VASCO Warrants."
Convertible Notes
Certain notes convertible into Current VASCO Common Stock grant the holders
the right to convert such notes into shares of New VASCO Common Stock if the
Exchange Offer is consummated. New VASCO has entered into an agreement with
Current VASCO under which New VASCO has agreed to assume certain contractual
obligations of Current VASCO relating to such notes. See "Registration Rights
and Other Arrangements" below. Further, the New VASCO Convertible Note Agreement
provides that New VASCO will become a co-obligor of the notes with respect to
which the Current VASCO Conversion Options are cancelled in exchange for New
VASCO Conversion Options.
Pursuant to the terms of the Exchange Offer, New VASCO will also offer to
holders of notes presently convertible solely into Current VASCO Common Stock
(referred to in this document as Current VASCO Conversion Options) the
opportunity to exchange their Current VASCO Conversion Options for New VASCO
Conversion Options, which would enable such holders to convert their notes, on
the same terms and conditions, into shares of New VASCO Common Stock. This
exchange will be effected, if at all, by virtue of the New VASCO Convertible
Note Agreements, pursuant to which the holders will transfer and release any and
all Associated Corporate Matter Claims. For more detailed information on the
conversion privileges of all notes that may become convertible into shares of
New VASCO Common Stock if the Exchange Offer is consummated, see "CERTAIN
INFORMATION CONCERNING CURRENT VASCO -- Current VASCO Equity Equivalent
Securities -- Convertible Notes and Current VASCO Conversion Options."
REGISTRATION RIGHTS AND OTHER ARRANGEMENTS
Current VASCO has entered into agreements with a number of holders of
Current VASCO Securities giving them registration rights under certain
circumstances.
Registration Rights Agreements with Holders of Current VASCO Common
Stock. Current VASCO has entered into a registration rights agreement with
certain purchasing investors (the "Registration Rights Agreement") that provides
that Current VASCO must include in a registration statement with respect to
Current VASCO Common Stock or securities convertible or exchangeable into
Current VASCO Common Stock (other than a registration statement filed on a Form
S-4 or Form S-8, or pursuant to an exchange offer) filed before March 31, 1998,
the shares of New VASCO Common Stock comprising the Units offered under the
Registration Rights Agreement. Each Unit consists of two shares of Current VASCO
Common Stock and four Current VASCO Warrants. In addition, Current VASCO must
register additional shares (the "Additional Shares") contemporaneously with the
shares noted above if the fifteen-day average stock price of Current VASCO's
Common Stock (the "Valuation Price") is less than $7.00 per share on the
sixteenth day after the Commission declares Current VASCO's registration
statement effective. The number of additional
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shares to be delivered to each investor is determined by the difference between
$7.00 and the Valuation Price multiplied by the number of shares of Current
VASCO Common Stock comprising the Units held by each investor, divided by the
Valuation Price.
Under the Registration Rights Agreement, Current VASCO is to agree with the
investors as to the number of Additional Shares to be registered by taking into
account the market price of Current VASCO's stock at the time the registration
statement is filed and an estimate of what the stock price might be when the
registration statement is declared effective. Current VASCO may not register
less than 200% of the shares comprising the Units for such Additional Shares
(regardless of whether any Additional Shares are required). If by March 31,
1998: (i) the shares of Current VASCO Common Stock are not covered by an
effective registration statement under the Securities Act or (ii) the holders
are contractually precluded from selling their Current VASCO Common Stock as a
result of electing not to participate in a registered underwritten offering that
occurred within the previous 90 days, then, in either event, Current VASCO must,
at the investor's option, repurchase the Units at $14.00 per Unit or, if all the
investors so demand, register the shares and the Additional Shares promptly. In
addition, the investors may cause Current VASCO to repurchase their shares of
Current VASCO Common Stock at $7.00 per share if Current VASCO raises $5 million
or more in a debt or equity private placement or public offering. Once the
investor has sold any shares of Current VASCO Common Stock, any rights
associated with the shares comprising the Units created by the Registration
Rights Agreement, are extinguished.
The registration rights agreement between VASCO CORP. and Kyoto Securities,
Ltd. (the "Kyoto Agreement") provides that, before June 1, 2001, each time
Current VASCO proposes to file a registration statement for the public sale of
shares of Current VASCO Common Stock, Current VASCO must allow the holder to
include in the registration statement Current VASCO Common Stock held by the
holder. Current VASCO may offer some or none of the Current VASCO Common Stock
if, in the opinion of the managing underwriter, the sale of the Current VASCO
Common Stock would be materially detrimental to the success of the offering. The
holder must agree to offer its shares on the same terms and conditions as the
shares being offered by Current VASCO.
The registration agreement by and between Current VASCO, VASCO Europe,
Mario Houthooft and Guy Denudt provides that each of Mario Houthooft and Guy
Denudt may include up to 27,143 shares of Current VASCO Common Stock in a
Current VASCO registration statement (except those filed on Form S-4 or Form
S-8). The managing underwriter must determine that inclusion of Mr. Denudt's and
Mr. Houthooft's shares will not interfere with the successful marketing of the
issuance.
Current VASCO's engagement letter with Banque Paribas S.A. calls for a
future possible public offering by Current VASCO or New VASCO includes an option
for 15% of the offering (or U.S. $9 million) to allow the underwriters to
stabilize the market after allocation. For additional information on the terms
of the engagement letter, see "SUMMARY -- The Exchange Offer -- Benefits and
Disadvantages of Participating in the Exchange Offer -- Benefits."
Registration Rights Agreements with Holders of Current VASCO
Warrants. Under the Registration Rights Agreement, Current VASCO must also
include the shares of Current VASCO Common Stock underlying the Current VASCO
Warrants in a registration statement if the investors elect to register such
shares. For a description of the Registration Rights Agreement, see "--
Registration Rights Agreements with Holders of Current VASCO Common Stock"
above.
The Kyoto Agreement provides that the holder may include in a registration
statement the shares of Current VASCO Common Stock underlying Current VASCO
Warrants held by the holder under the agreement in a registration statement
filed before June 1, 2001. Current VASCO may offer some or none of the shares of
Current VASCO Common Stock underlying the Current VASCO Warrants if, in the
opinion of the managing underwriter, the sale of the Current VASCO Common Stock
would be materially detrimental to the success of the offering. For a
description of the Kyoto Agreement, see "-- Registration Rights Agreements with
Holders of Current VASCO Common Stock" above.
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The warrants held by Osprey Partners, a management consulting firm, Mario
Houthooft, and others, provide that the shares of Common Stock underlying the
warrants have piggy back registration rights and must be included in the next
registration statement to be filed with the Securities and Exchange Commission.
Michael A. Mulshine, a Director of Current VASCO, is a principal of Osprey
Partners.
Registration Rights Agreements with Holders of Current VASCO Conversion
Options. VASCO Europe entered a convertible loan agreement with Banque Paribas
Belgique S.A., giving Banque Paribas S.A. the option to convert its loan into
shares of Current VASCO Common Stock. Banque Paribas S.A. can exercise its
conversion right on or after a "Share Offering" by Current VASCO on Easdaq or
Nasdaq. The loan is to be converted into shares of Current VASCO Common Stock
listed on Nasdaq or Easdaq. The conversion rate is at a price per share equal to
the offering price. The conversion rights extend to a public offering made by a
new company set up by Current VASCO for the purpose of the public offering.
The Kyoto Agreement also grants Current VASCO Conversion Options under a
convertible note. If Current VASCO registers shares of Current VASCO Common
Stock at a price of not less than $15 per share with gross proceeds of $5
million or more, Current VASCO's obligations under the convertible note are
automatically converted into shares of Current VASCO Common Stock at the
conversion price then applicable. As noted above, Current VASCO may offer some
or none of the shares of Current VASCO Common Stock if, in the opinion of the
managing underwriter, the sale of the Current VASCO Common Stock would be
materially detrimental to the success of the offering. For a description of the
Kyoto Agreement, see "-- Registration Rights Agreements with Holders of Current
VASCO Common Stock" above.
In the event these holders exchange the shares of Current VASCO Common
Stock subject to such rights in the Exchange Offer, New VASCO may enter into an
agreement granting the exchanging holders the right to require New VASCO to
purchase the number of shares of New VASCO Common Stock issued in exchange for
such shares at the same price, and subject to the same terms and conditions, as
provided for in the agreement such holders have entered into with Current VASCO.
Other Arrangements. New VASCO has entered into an agreement with Current
VASCO that provides for New VASCO's assumption, upon consummation of the
Exchange Offer, of certain Current VASCO obligations under a financing agreement
with Generale Bank for a $2.5 million loan and with respect to a registration
rights agreement with certain holders of Current VASCO Equity Equivalent
Securities, as well as for the substitution of New VASCO Common Stock for
Current VASCO Common Stock that may be issued after the Exchange Offer pursuant
to the Current VASCO Equity Equivalent Securities and other agreements of
Current VASCO.
New VASCO may also enter into agreements comparable to those entered into
by Current VASCO with certain of its security holders to provide for
registration rights with respect to the shares of Current VASCO Common Stock
that such holders presently own, or have the right to acquire pursuant to the
terms of their Current VASCO Securities. In the event such holders exchange
their Current VASCO Securities for New VASCO Securities in the Exchange Offer,
New VASCO may enter into registration rights agreements with such holders
containing provisions substantially the same as those of the respective
registration rights agreements entered into by Current VASCO that have not been
performed as of the Expiration Date.
COMPARISON OF STOCKHOLDER RIGHTS
COMPARISON OF CURRENT VASCO STOCKHOLDER RIGHTS FOLLOWING THE EXCHANGE OFFER
Both Current VASCO and New VASCO are Delaware corporations and are governed
by the laws of Delaware. Except for the differences described below and for the
release of any and all Associated Corporate Matter Claims by each exchanging
holder, there will be no appreciable difference in the rights of those Current
VASCO stockholders who become stockholders of New VASCO by virtue of the
Exchange Offer. The certificates of incorporation, as amended, of the two
companies are substantially the same, except for the authorization in New
VASCO's Certificate of Incorporation, as amended, of 75,000,000 shares of common
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stock, as opposed to 50,000,000 in Current VASCO's, the lack of a designation of
a series of New VASCO preferred stock comparable to Current VASCO Series A
Preferred Stock or Current VASCO Series B Preferred Stock, and changes in the
provisions of New VASCO's Certificate of Incorporation, as amended, to (i)
remove certain triggering dates that will have passed prior to the Expiration
Date and remove references to Series A Preferred Stock and Series B Preferred
Stock, and (ii) make clarifying and conforming changes. In addition, New VASCO's
Certificate of Incorporation, as amended, differs from that of Current VASCO in
that the New VASCO Certificate of Incorporation, as amended, does not contain a
requirement found in the Restated and Amended Certificate of Incorporation of
Current VASCO, as amended, that all dividends on preferred stock must be paid
before payment of dividends on common stock, which deletion will permit the
creation of a class or series of preferred stock that could participate with
common stock in dividend payments. In addition, the New VASCO Certificate of
Incorporation, as amended, contains certain clarifying and conforming changes
and certain changes for consistency with current Delaware law, including a
rewording of provisions with respect to the liability of directors for monetary
damages which do not differ in substance from those contained in the Restated
and Amended Certificate of Incorporation of Current VASCO, as amended. New
VASCO's bylaws are the same as those of Current VASCO, except New VASCO's bylaws
provide for a greater range in the number of directors.
COMPARISON OF RIGHTS OF HOLDERS OF STOCK OPTIONS AND WARRANTS FOLLOWING THE
EXCHANGE OFFER
There will be no change in the rights of holders of Current VASCO Stock
Options and Current VASCO Warrants who become holders of New VASCO Stock Options
and New VASCO Warrants, as the case may be, by exchanging their instruments in
the Exchange Offer since all New VASCO Stock Options and New VASCO Warrants will
be identical to the Current VASCO Stock Options and Current VASCO Warrants for
which they are exchanged, except that (A) under the New VASCO Stock Option
Agreement and the New VASCO Warrant Agreement, (i) the holders of such Current
VASCO Securities will have released any and all Associated Corporate Matter
Claims, (ii) there are provisions for adjustment of the number of shares
underlying such Current VASCO Securities and the exercise price for such shares
in the event of a change in the capital structure of New VASCO, and (B) the New
VASCO Stock Options will be issued under the New VASCO 1997 Stock Option Plan
and will not be ISOs. In addition, upon exercise of New VASCO Stock Options and
New VASCO Warrants, the holders thereof will become stockholders of New VASCO,
as opposed to Current VASCO. There will be certain limited differences in the
rights of New VASCO stockholders as compared to the rights of Current VASCO
stockholders prior to the Exchange Offer. See "COMPARISON OF STOCKHOLDER RIGHTS
- -- Comparison of Current VASCO Stockholder Rights Following The Exchange Offer."
LEGAL MATTERS
The legality of the New VASCO Securities to be issued in the Exchange Offer
and certain tax consequences associated with the Exchange Offer will be passed
upon for New VASCO by Jenner & Block, Chicago, Illinois.
EXPERTS
The balance sheet of VASCO Data Security International, Inc. as of July 16,
1997 appearing in this Registration Statement has been audited by KPMG Peat
Marwick LLP, independent public accountants, as set forth in their report
thereon appearing elsewhere herein, and is included in reliance upon such report
given upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of VASCO CORP. as of December 31,
1995 and 1996 and for each of the years in the three-year period ended December
31, 1996 appearing in this Registration Statement have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, as set forth in their
report thereon appearing elsewhere herein. Such consolidated financial
statements are included herein in reliance on such report given on the authority
of said firm as experts in auditing and accounting.
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<PAGE> 108
The financial statements of Lintel NV as of December 31, 1995 and for the
years ended December 31, 1994 and 1995 appearing in this Registration Statement
have been so included in reliance upon the report of Price Waterhouse and
Partners, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The combined financial statements of Digipass SA and Digiline SA as of
December 31, 1995 and for the years ended December 31, 1994 and 1995 appearing
in this Registration Statement have been so included in reliance upon the report
of Price Waterhouse and Partners, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
103
<PAGE> 109
FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
PAGE
DESCRIPTION NUMBER
----------- ------
<S> <C>
PRO FORMA FINANCIAL STATEMENTS
VASCO DATA SECURITY INTERNATIONAL, INC. ("NEW VASCO")
Pro Forma Balance Sheet as of September 30, 1997
(unaudited)............................................... F-2
Pro Forma Statement of Operations for the year ended
December 31, 1996 (unaudited)............................. F-3
Pro Forma Statement of Operations for the nine months ended
September 30, 1997 (unaudited)............................ F-4
Notes to Pro Forma Financial Statements (unaudited)......... F-5
HISTORICAL FINANCIAL STATEMENTS
VASCO DATA SECURITY INTERNATIONAL, INC.
Report of KPMG Peat Marwick LLP............................. F-7
Balance Sheet as of July 16, 1997........................... F-8
Notes to Balance Sheet...................................... F-9
VASCO CORPORATION
Report of KPMG Peat Marwick LLP............................. F-11
Consolidated Balance Sheets as of December 31, 1995 and 1996
and September 30, 1997 (unaudited)........................ F-12
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 and for the nine months
ended September 30, 1996 (unaudited) and September 30,
1997 (unaudited).......................................... F-13
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1994, 1995 and 1996 and
for the nine months ended September 30, 1997
(unaudited)............................................... F-14
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 and for the nine months
ended September 30, 1996 (unaudited) and September 30,
1997 (unaudited).......................................... F-17
Notes to Consolidated Financial Statements.................. F-19
LINTEL NV
Report of Price Waterhouse and Partners..................... F-31
Statements of Financial Position as of December 31, 1995.... F-32
Statements of Operations for the years ended December 31,
1994 and 1995............................................. F-33
Statements of Cash Flows for the years ended December 31,
1994 and 1995............................................. F-34
Statements of the Accumulated Deficit for the years ended
December 31, 1994 and 1995................................ F-35
Notes to Financial Statements............................... F-36
DIGIPASS SA/DIGILINE SA
Report of Price Waterhouse and Partners..................... F-40
Statements of Combined Financial Position as of December 31,
1995...................................................... F-41
Statements of Operations for the years ended December 31,
1994 and 1995............................................. F-42
Statements of Cash Flows for the years ended December 31,
1994 and 1995............................................. F-43
Statements of Accumulated Deficit for the years ended
December 31, 1994 and 1995................................ F-44
Notes to Financial Statements............................... F-45
Statement of Combined Financial Position as of June 30, 1996
(unaudited)............................................... F-52
Statement of Operations for the six months ended June 30,
1996 (unaudited).......................................... F-53
Statement of Cash Flows for the six months ended June 30,
1996 (unaudited).......................................... F-54
Statement of Retained Earnings for the six months ended June
30, 1996 (unaudited)...................................... F-55
Notes to Financial Statements (unaudited)................... F-56
</TABLE>
F-1
<PAGE> 110
VASCO DATA SECURITY INTERNATIONAL, INC. ("NEW VASCO")
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VASCO NEW VASCO
NEW VASCO CORP. ADJUSTMENTS PRO FORMA
--------- ----- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.................................................. $-- $ 3,060,235 $ -- $ 3,060,235
Accounts receivable, net of allowance for doubtful
accounts............................................ -- 2,016,362 -- 2,016,362
Inventories, net...................................... -- 1,329,869 -- 1,329,869
Prepaid expenses...................................... -- 78,058 -- 78,058
Deferred income taxes................................. -- 283,000 -- 283,000
Other current assets.................................. -- 315,344 -- 315,344
--- ------------ -------- ------------
Total current assets.................................. -- 7,082,868 -- 7,082,868
PROPERTY AND EQUIPMENT:
Furniture and fixtures................................ -- 158,637 -- 158,637
Office equipment...................................... -- 675,280 -- 675,280
--- ------------ -------- ------------
-- 833,917 -- 833,917
Accumulated depreciation.............................. -- (477,542) -- (477,542)
--- ------------ -------- ------------
-- 356,375 -- 356,375
Goodwill, net of accumulated amortization............. -- 736,352 -- 736,352
Other assets.......................................... -- 2,026,878 -- 2,026,878
--- ------------ -------- ------------
TOTAL ASSETS.......................................... $-- $ 10,202,473 $ -- $ 10,202,473
=== ============ ======== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt.................. $-- $ 39,898 $ -- $ 39,898
Accounts payable...................................... -- 1,142,475 -- 1,142,475
Customer deposits..................................... -- 301,820 -- 301,820
Other accrued expenses................................ -- 1,111,862 -- 1,111,862
--- ------------ -------- ------------
Total current liabilities............................. -- 2,596,055 -- 2,596,055
--- ------------ -------- ------------
Long-term debt........................................ -- 11,688,605 -- 11,688,605
--- ------------ -------- ------------
Common stock subject to redemption.................... -- 494,668 -- 494,668
--- ------------ -------- ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, 12% cumulative series B convertible,
$.01 par value -- 9,500 shares authorized; 8,000
shares issued and outstanding....................... -- 80 (80) --
Common stock, $.001 par value -- 50,000,000 shares
authorized; 19,494,607 shares issued and
outstanding......................................... -- 19,495 (19,495) --
Preferred stock, $.01 par value -- 500,000 shares
authorized; 8,000 shares of 12% cumulative series B
convertible issued and outstanding on a pro forma
basis............................................... -- -- 80 80
Common stock, $.001 par value -- 75,000,000 shares
authorized; 19,494,607 shares issued and outstanding
on a pro forma basis................................ -- -- 19,495 19,495
Additional paid-in capital............................ -- 8,962,285 -- 8,962,285
Accumulated deficit................................... -- (13,296,344) -- (13,296,344)
Cumulative translation adjustment..................... -- (262,371) -- (262,371)
--- ------------ -------- ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT).................. -- (4,576,855) -- (4,576,855)
--- ------------ -------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)........................................... $-- $ 10,202,473 $ -- $ 10,202,473
=== ============ ======== ============
</TABLE>
See accompanying notes to pro forma financial statements.
F-2
<PAGE> 111
VASCO DATA SECURITY INTERNATIONAL, INC. ("NEW VASCO")
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VASCO NEW VASCO
NEW VASCO CORP. ADJUSTMENTS PRO FORMA
--------- ----- ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Data security products.................... $ -- $ 9,988,885 $3,461,935 $13,450,820
Training and consulting services.......... -- 203,600 -- 203,600
-------- ----------- ---------- -----------
Total revenues....................... -- 10,192,485 3,461,935 13,654,420
Cost of goods sold:
Data security products.................... -- 5,678,223 1,588,652 7,266,875
Training and consulting services.......... -- 193,245 -- 193,245
-------- ----------- ---------- -----------
Total cost of goods sold............. -- 5,871,468 1,588,652 7,460,120
-------- ----------- ---------- -----------
Gross profit................................ -- 4,321,017 1,873,283 6,194,300
-------- ----------- ---------- -----------
Operating costs:
Sales and marketing....................... -- 1,405,453 -- 1,405,453
Research and development.................. -- 574,766 -- 574,766
General and administrative................ -- 3,647,760 1,579,435 5,227,195
Acquired in-process research and
development............................ -- 7,350,992 -- 7,350,992
-------- ----------- ---------- -----------
Total operating costs.................. -- 12,978,971 1,579,435 14,558,406
-------- ----------- ---------- -----------
Operating income (loss)..................... -- (8,657,954) 293,848 (8,364,106)
Interest expense............................ -- (346,248) (423,999) (770,247)
Other income (expense), net................. -- (42,407) 145,754 103,347
-------- ----------- ---------- -----------
Income (loss) before income taxes........... -- (9,046,609) 15,603 (9,031,006)
Provision for income taxes.................. -- 194,000 282,070 476,070
-------- ----------- ---------- -----------
Net loss.................................... -- (9,240,609) (266,467) (9,507,076)
Preferred stock dividends................... -- (108,160) -- (108,160)
-------- ----------- ---------- -----------
Net loss available to common stockholders... $ -- $(9,348,769) $ (266,467) $(9,615,236)
======== =========== ========== ===========
Net loss per common share................... $ (0.53)
===========
Weighted average common shares
outstanding............................... 18,314,576
===========
</TABLE>
See accompanying notes to pro forma financial statements.
F-3
<PAGE> 112
VASCO DATA SECURITY INTERNATIONAL, INC. ("NEW VASCO")
PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW VASCO NEW VASCO
VASCO CORP. ADJUSTMENTS PRO FORMA
----- ----- ----------- ---------
<S> <C> <C> <C> <C>
Total revenues -- data security products........ $ -- $ 9,436,669 $ -- $ 9,436,669
Cost of goods sold.............................. -- 4,759,003 -- 4,759,003
----- ----------- ----------- -----------
Gross profit.................................... -- 4,677,666 -- 4,677,666
----- ----------- ----------- -----------
Operating costs:
Sales and marketing........................... -- 2,802,515 -- 2,802,515
Research and development...................... -- 986,620 -- 986,620
General and administrative.................... -- 3,100,641 -- 3,100,641
----- ----------- ----------- -----------
Total operating costs...................... -- 6,889,776 -- 6,889,776
----- ----------- ----------- -----------
Operating loss.................................. -- (2,212,110) -- (2,212,110)
Interest expense................................ -- (566,176) -- (566,176)
Other expense, net.............................. -- (14,502) -- (14,502)
----- ----------- ----------- -----------
Loss before income taxes........................ -- (2,792,788) -- (2,792,788)
Provision for income taxes...................... -- 520,298 -- 520,299
----- ----------- ----------- -----------
Net loss........................................ -- (3,313,086) -- (3,313,087)
Preferred stock dividends..................... -- (80,000) -- (80,000)
----- ----------- ----------- -----------
Net loss available to common stockholders....... $ -- $(3,393,086) $ -- $(3,393,087)
===== =========== =========== ===========
Net loss per common share....................... $ (0.17)
===========
Weighted average common shares outstanding 19,534,420
===========
</TABLE>
See accompanying notes to pro forma financial statements.
F-4
<PAGE> 113
VASCO DATA SECURITY INTERNATIONAL, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
ORGANIZATION AND PROPOSED EXCHANGE OF SECURITIES
VASCO Data Security International, Inc. ("New VASCO") is a Delaware
Corporation and was incorporated on July 15, 1997.
New VASCO was formed by representatives of VASCO CORP. ("Current VASCO"),
to effect an exchange of outstanding VASCO CORP. securities for securities of
New VASCO (the "Exchange Offer"). In the Exchange Offer, New VASCO offers to
exchange:
(a) Its Common Stock for (i) shares of Current VASCO Common Stock on a
one-for-one basis and (ii) a release by the exchanging holder of all
potential claims against New VASCO and its predecessor entities arising out
of or relating to certain corporate matters (the "Associated Corporate
Matter Claims") described elsewhere herein.
(b) Its options ("New VASCO Stock Options") to purchase its Common
Stock in exchange for (i) the cancellation of outstanding options to
purchase Current VASCO Common Stock granted under various Current VASCO
stock option programs ("Current VASCO Stock Options"), and (ii) a release
by each exchanging holder of any and all Associated Corporate Matter
Claims. The New VASCO Stock Options will be for the same number of shares
and have the same exercise price, vesting terms and expiration dates as the
Current VASCO Stock Options and will be issued under New VASCO's 1997 Stock
Option Plan, as amended, as nonqualified options for federal income tax
purposes;
(c) Its options ("New VASCO Conversion Options") to acquire its Common
Stock in exchange for (i) the cancellation of outstanding options to
acquire Current VASCO Common Stock pursuant to conversion of Current VASCO
convertible notes ("Current VASCO Conversion Options"), and (ii) a release
by each exchanging holder of any and all Associated Corporate Matter
Claims. The New VASCO Conversion Options will be for the same number of
shares and will have the same conversion price, conversion period and other
terms of conversion as the Current VASCO Conversion Options;
(d) Its warrants ("New VASCO Warrants") to purchase its Common Stock
in exchange for (i) the cancellation of outstanding warrants to purchase
Current VASCO Common Stock ("Current VASCO Warrants"), and (ii) a release
by each exchanging holder of any and all Associated Corporate Matter
Claims. The New VASCO Warrants will be for the same number of shares and
have the same exercise price and expiration dates as the Current VASCO
Warrants.
The Exchange Offer is subject to certain terms and conditions, including
the condition that there must as of the Expiration Date be tendered for exchange
at least 80% of the outstanding shares of Current VASCO Common Stock.
Assuming the requirements of the Exchange Offer are met, Current VASCO will
become a subsidiary of New VASCO, and the assets and liabilities of Current
VASCO will be recorded by New VASCO in consolidation at their historical
carrying values. New VASCO has not yet begun operations.
CAPITAL STOCK
On July 16, 1997, 100 shares of New VASCO's Common Stock were issued to
Current VASCO, for $100.
New VASCO's authorized capital stock consists of 75,000,000 shares of
Common Stock, $.001 par value, and 500,000 shares of Preferred Stock, $.01 par
value per share. The issuance of 100 shares of Common Stock is reflected as a
pro forma adjustment in the accompanying pro forma balance sheet.
Effective as of July 23, 1997, the New VASCO 1997 Stock Option Plan was
adopted. The New VASCO 1997 Stock Option Plan provides for the grant of either
incentive stock options or non-qualified stock options. 5,000,000 shares of New
VASCO Common Stock are available for issuance under the plan.
F-5
<PAGE> 114
VASCO DATA SECURITY INTERNATIONAL, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
PRO FORMA PRESENTATION
The pro forma balance sheet as of September 30, 1997 reflects adjustments
for the issuance by New VASCO of 100 shares of Common Stock on July 16, 1997,
and the exchange of 100% of Current VASCO's outstanding Common Stock and
cumulative Series B Convertible Preferred Stock into New VASCO's Common Stock
and Series B Preferred Stock, respectively, pursuant to the Exchange Offer. No
shares of Preferred Stock have been issued.
The pro forma statement of operations for the year ended December 31, 1996
reflects the historical operations of Current VASCO for the year ended December
31, 1996, adjusted to reflect the acquisitions of Lintel and Digipass as if such
acquisitions had occurred as of January 1, 1996. The pro forma adjustments
include the operations of Lintel and Digipass for the respective periods in 1996
prior to their acquisition by Current VASCO, as well as adjustments to reflect
interest expense on the the debt incurred to fund the acquisitions in the amount
of $249,000, and amortization of the related intangible assets and goodwill in
the amount of $386,000.
The pro forma statement of operations for the nine months ended September
30, 1997 reflects the operations of Current VASCO for such six month period.
The pro forma net loss per share is computed based on the weighted average
of 18,314,576 shares outstanding during 1996 and 19,534,420 for the nine months
ended September 30, 1997, assuming that the conversion of 117,181 shares of
Current VASCO's Series A Convertible Preferred Stock into 781,207 shares of
Common Stock of New VASCO and the Exchange Offer were affected as of January 1,
1996.
If pursuant to the Exchange Offer, 80% or more of the outstanding shares of
Current VASCO Common Stock are tendered, the exchange will become effective but
any equity interest not exchanged would be reflected as minority interest
between liabilities and stockholders' equity (deficit) on the pro forma balance
sheet.
F-6
<PAGE> 115
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and
Stockholder of VASCO Data Security International, Inc.:
We have audited the accompanying balance sheet of VASCO Data Security
International, Inc. as of July 16, 1997. This balance sheet is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of VASCO Data Security International,
Inc. as of July 16, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
September 11, 1997
F-7
<PAGE> 116
VASCO DATA SECURITY INTERNATIONAL, INC. ("NEW VASCO")
BALANCE SHEET
JULY 16, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS - CASH....................................... $100
----
TOTAL ASSETS................................................ $100
====
LIABILITIES AND STOCKHOLDER'S EQUITY
STOCKHOLDER'S EQUITY:
Preferred stock, $.01 par value -- 500,000 shares
authorized; none issued and outstanding................ $ --
Common stock, $.001 par value -- 75,000,000 shares
authorized; 100 shares issued and outstanding.......... --
Additional paid-in capital................................ 100
----
Total stockholder's equity.................................. 100
----
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................. $100
====
</TABLE>
See accompanying notes to balance sheet.
F-8
<PAGE> 117
VASCO DATA SECURITY INTERNATIONAL, INC.
NOTES TO BALANCE SHEET
ORGANIZATION AND PROPOSED EXCHANGE OF SECURITIES
VASCO Data Security International, Inc. ("New VASCO") is a Delaware
Corporation and was incorporated on July 15, 1997.
New VASCO was formed by representatives of VASCO CORP. ("Current VASCO"),
to effect an exchange of outstanding VASCO CORP. securities for securities of
New VASCO (the "Exchange Offer"). In the Exchange Offer, New VASCO offers to
exchange:
(a) Its Common Stock for (i) shares of Current VASCO Common Stock on a
one-for-one basis and (ii) a release by the exchanging holder of all
potential claims against New VASCO and its predecessor entities arising out
of or relating to certain corporate matters (the "Associated Corporate
Matter Claims") described elsewhere herein.
(b) Its options ("New VASCO Stock Options") to purchase its Common
Stock in exchange for (i) the cancellation of outstanding options to
purchase Current VASCO Common Stock granted under various Current VASCO
stock option programs ("Current VASCO Stock Options"), and (ii) a release
by each exchanging holder of any and all Associated Corporate Matter
Claims. The New VASCO Stock Options will be for the same number of shares
and have the same exercise price, vesting terms and expiration dates as the
Current VASCO Stock Options and will be issued under New VASCO's 1997 Stock
Option Plan, as amended, as nonqualified options for federal income tax
purposes;
(c) Its options ("New VASCO Conversion Options") to acquire its Common
Stock in exchange for (i) the cancellation of outstanding options to
acquire Current VASCO Common Stock pursuant to conversion of Current VASCO
convertible notes ("Current VASCO Conversion Options"), and (ii) a release
by each exchanging holder of any and all Associated Corporate Matter
Claims. The New VASCO Conversion Options will be for the same number of
shares and will have the same conversion price, conversion period and other
terms of conversion as the Current VASCO Conversion Options;
(d) Its warrants ("New VASCO Warrants") to purchase its Common Stock
in exchange for (i) the cancellation of outstanding warrants to purchase
Current VASCO Common Stock ("Current VASCO Warrants"), and (ii) a release
by each exchanging holder of any and all Associated Corporate Matter
Claims. The New VASCO Warrants will be for the same number of shares and
have the same exercise price and expiration dates as the Current VASCO
Warrants.
The Exchange Offer is subject to certain terms and conditions, including
the condition that there must as of the Expiration Date be tendered for exchange
at least 80% of the outstanding shares of Current VASCO Common Stock.
Assuming the requirements of the Exchange Offer are met, Current VASCO will
become a subsidiary of New VASCO, and the assets and liabilities of Current
VASCO will be recorded by New VASCO in consolidation at their historical
carrying values. New VASCO has not yet begun operations.
CAPITAL STOCK
On July 16, 1997, 100 shares of New VASCO's Common Stock were issued to
Current VASCO, for $100.
New VASCO's authorized capital stock consists of 75,000,000 shares of
Common Stock, $.001 par value, and 500,000 shares of Preferred Stock, $.01 par
value per share. No shares of Preferred Stock have been issued.
F-9
<PAGE> 118
Effective as of July 23, 1997, the New VASCO 1997 Stock Option Plan was
adopted. The New VASCO 1997 Stock Option Plan provides for the grant of either
incentive stock options or non-qualified stock options. 5,000,000 shares of New
VASCO Common Stock are available for issuance under the plan.
F-10
<PAGE> 119
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and
Stockholders of VASCO Corp.:
We have audited the accompanying consolidated balance sheets of VASCO Corp.
and subsidiaries (the Company) as of December 31, 1995 and 1996, 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, 1996.
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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audit provides 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, 1995 and 1996, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1996 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
September 11, 1997
F-11
<PAGE> 120
VASCO CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 744,612 $ 1,813,593 $ 3,060,235
Accounts receivable, net of allowance for doubtful
accounts of $182,000, $452,000 and $404,000............. 447,490 3,242,618 2,016,362
Inventories, net.......................................... 252,646 2,182,743 1,329,869
Prepaid expenses.......................................... 229,315 471,902 78,058
Notes receivable.......................................... -- 225,141 --
Deferred income taxes..................................... 445,000 283,000 283,000
Other current assets...................................... 14,741 399,963 315,344
---------- ----------- ------------
Total current assets.................................. 2,133,804 8,618,960 7,082,868
Property and equipment:
Furniture and fixtures.................................... 183,375 143,560 158,637
Office equipment.......................................... 123,773 592,965 675,280
---------- ----------- ------------
307,148 736,525 833,917
Accumulated depreciation.................................. (183,807) (360,079) (477,542)
---------- ----------- ------------
123,341 376,446 356,375
Software costs, net of accumulated amortization of
$371,000 in 1995........................................ 157,311 -- --
Goodwill, net of accumulated amortization of $58,571 and
$166,039 in 1996 and 1997............................... -- 819,041 736,352
Other assets.............................................. -- 2,553,108 2,026,878
---------- ----------- ------------
Total assets................................................ $2,414,456 $12,367,555 $ 10,202,473
========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 199,678 $ 91,160 $ 39,898
Notes payable............................................. 664,050 -- --
Accounts payable.......................................... 93,776 1,945,644 1,142,475
Customer deposits......................................... -- 1,022,195 301,820
Other accrued expenses.................................... 102,072 658,084 1,111,862
---------- ----------- ------------
Total current liabilities............................. 1,059,576 3,717,083 2,596,055
---------- ----------- ------------
Long-term debt, including stockholder note of $5,000,000 in
1996 and 1997............................................. 7,258 9,113,750 11,688,605
---------- ----------- ------------
Excess acquired net assets over cost, net of accumulated
amortization of $43,000 in 1995........................... 10,735 -- --
---------- ----------- ------------
Common stock subject to redemption.......................... 370,894 741,894 494,668
---------- ----------- ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, 8% cumulative series A convertible, $.01
par value -- 317,181 shares authorized; 317,181 shares
issued and outstanding in 1995 and 117,181 shares issued
and outstanding in 1996 and 1997........................ 3,172 1,172 --
Preferred stock, 12% cumulative series B convertible, $.01
par value -- 9,500 shares authorized; 9,000 shares
issued and outstanding in 1995, 1996 and 1997........... 90 90 80
Common stock, $.001 par value -- 50,000,000 shares
authorized 15,793,575 shares issued and outstanding in
1995; 18,453,332 shares issued and outstanding in 1996;
19,494,607 shares issued and outstanding in 1997........ 15,794 18,454 19,495
Additional paid-in capital................................ 1,508,534 8,783,425 8,962,285
Accumulated deficit....................................... (554,488) (9,903,257) (13,296,344)
Cumulative translation adjustment......................... -- (105,056) (262,371)
---------- ----------- ------------
973,102 (1,205,172) (4,576,855)
Less: Treasury stock, 287,923, -0- and 2,824 common
shares, at cost, in 1995, 1996 and 1997................. (7,109) -- --
---------- ----------- ------------
Total stockholders' equity (deficit)........................ 965,993 (1,205,172) (4,576,855)
---------- ----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)........ $2,414,456 $12,367,555 $ 10,202,473
========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE> 121
VASCO CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- --------------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Data security products...... $ 1,456,677 $ 2,457,587 $ 9,988,885 $ 6,007,632 $ 9,436,669
Training and consulting..... 1,236,490 1,237,546 203,600 203,600 --
----------- ----------- ----------- ----------- -----------
Total revenues......... 2,693,167 3,695,133 10,192,485 6,211,232 9,436,669
Cost of goods sold:
Data security products...... 725,121 2,033,186 5,678,223 3,682,158 4,759,003
Training and consulting..... 697,466 854,217 193,245 193,245 --
----------- ----------- ----------- ----------- -----------
Total cost of goods
sold................ 1,422,587 2,887,403 5,871,468 3,875,403 4,759,003
----------- ----------- ----------- ----------- -----------
Gross profit.................. 1,270,580 807,730 4,321,017 2,335,829 4,677,666
----------- ----------- ----------- ----------- -----------
Operating costs:
Sales and marketing......... 156,511 245,212 1,405,453 500,811 2,802,515
Research and development.... 210,535 242,002 574,766 494,884 986,620
General and
administrative........... 711,598 854,979 3,647,760 2,020,072 3,100,641
Acquired in-process research
and development.......... -- -- 7,350,992 7,350,992 --
----------- ----------- ----------- ----------- -----------
Total operating costs.... 1,078,644 1,342,193 12,978,971 10,366,759 6,889,776
----------- ----------- ----------- ----------- -----------
Operating income (loss)....... 191,936 (534,463) (8,657,954) (8,030,930) (2,212,110)
Interest expense.............. (97,244) (73,576) (346,248) (195,446) (566,176)
Other expense, net............ -- -- (42,407) 32,099 (14,502)
----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes....................... 94,692 (608,039) (9,046,609) (8,194,277) (2,792,788)
Provision (benefit) for income
taxes....................... 37,000 (251,000) 194,000 (207,582) 520,299
----------- ----------- ----------- ----------- -----------
Net income (loss)............. 57,692 (357,039) (9,240,609) (7,986,695) (3,313,087)
Preferred stock
dividends.............. (27,254) (108,254) (108,160) (81,000) (80,000)
----------- ----------- ----------- ----------- -----------
Net income (loss) available to
common stockholders......... $ 30,438 $ (465,293) $(9,348,769) $(8,067,695) $(3,393,087)
=========== =========== =========== =========== ===========
Net income (loss) per common
share....................... $ -- $ (0.03) $ (0.53) $ (0.49) $ (0.18)
=========== =========== =========== =========== ===========
Weighted average common shares
outstanding................. 14,259,915 14,817,264 17,533,369 16,299,573 18,753,213
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE> 122
VASCO CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A PREFERRED SERIES B
STOCK PREFERRED STOCK COMMON STOCK
------------------ --------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993..................... 317,181 $ 3,172 -- $ -- 15,343,575 $15,344
Net income..................................... -- -- -- -- -- --
Cash dividends paid on preferred B............. -- -- -- -- -- --
Dividends payable on preferred A upon
conversion................................... -- -- -- -- -- --
Issuance of Series B preferred stock........... -- -- 8,000 80 -- --
Exchange of note payable for stock............. -- -- 1,000 10 250,000 250
Exercise of stock options...................... -- -- -- -- 100,000 100
-------- ------- ------ ---- ---------- -------
Balance at December 31, 1994..................... 317,181 3,172 9,000 90 15,693,575 15,694
Net loss....................................... -- -- -- -- -- --
Cash dividends paid on preferred B............. -- -- -- -- -- --
Dividends payable on preferred A upon
conversion................................... -- -- -- -- -- --
Issuance of treasury stock..................... -- -- -- -- -- --
Stock compensation............................. -- -- -- -- 50,000 50
Exercise of stock options...................... -- -- -- -- 50,000 50
Common stock subject to redemption............. -- -- -- -- -- --
-------- ------- ------ ---- ---------- -------
Balance at December 31, 1995..................... 317,181 3,172 9,000 90 15,793,575 15,794
Net loss....................................... -- -- -- -- -- --
Cash dividends paid on preferred B............. -- -- -- -- -- --
Dividends payable on preferred A upon
conversion................................... -- -- -- -- -- --
Exercise of stock options...................... -- -- -- -- 22,750 23
Issuance of common stock....................... -- -- -- -- 1,163,023 1,163
Issuance of common stock in connection with
Lintel Acquisition........................... -- -- -- -- 140,651 141
Conversion of Series A preferred stock......... (200,000) (2,000) -- -- 1,333,333 1,333
Cumulative translation adjustment.............. -- -- -- -- -- --
Common stock subject to redemption............. -- -- -- -- -- --
-------- ------- ------ ---- ---------- -------
Balance at December 31, 1996..................... 117,181 1,172 9,000 90 18,453,332 18,454
1997 Activity (Unaudited):
Net loss....................................... -- -- -- -- -- --
Cash dividends paid on preferred B............. -- -- -- -- -- --
Dividends payable on preferred A upon
conversion................................... -- -- -- -- -- --
Exercise of stock options...................... -- -- -- -- 189,375 189
Cancellation of common stock................... -- -- -- -- (16,489) (17)
Issuance of common stock....................... -- -- -- -- 18,378 18
Conversion of Series A preferred stock......... (117,181) (1,172) -- -- 778,383 779
Conversion of Series B preferred stock......... -- -- (1,000) (10) 71,628 72
Redemption of common stock..................... -- -- -- -- -- --
Legal fees associated with Private Placement... -- -- -- -- -- --
Cumulative translation adjustment.............. -- -- -- -- -- --
-------- ------- ------ ---- ---------- -------
Balance at September 30, 1997 (Unaudited)........ -- -- 8,000 $ 80 19,494,607 $19,495
======== ======= ====== ==== ========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE> 123
VASCO CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
PAID-IN ACCUMULATED TRANSLATION
CAPITAL DEFICIT ADJUSTMENT
---------- ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1993............................ $ 481,745 $ (119,633) $ --
Net income............................................ -- 57,692 --
Cash dividends paid on preferred B.................... -- (27,000) --
Dividends payable on preferred A upon conversion...... -- (254) --
Issuance of Series B preferred stock.................. 750,783 -- --
Exchange of note payable for stock.................... 149,740 -- --
Exercise of stock options............................. 12,320 -- --
---------- ------------ ---------
Balance at December 31, 1994............................ 1,394,588 (89,195) --
Net loss.............................................. -- (357,039) --
Cash dividends paid on preferred B.................... -- (108,000) --
Dividends payable on preferred A upon conversion...... -- (254) --
Issuance of treasury stock............................ 159,688 -- --
Stock compensation.................................... 66,708 -- --
Exercise of stock options............................. 78,244 -- --
Common stock subject to redemption.................... (190,694) -- --
---------- ------------ ---------
Balance at December 31, 1995............................ 1,508,534 (554,488) --
Net loss.............................................. -- (9,240,609) --
Cash dividends paid on preferred B.................... -- (108,000) --
Dividends payable on preferred A upon conversion...... -- (160) --
Exercise of stock options............................. 5,215 -- --
Issuance of common stock.............................. 4,252,240 -- --
Issuance of common stock in connection with Lintel
Acquisition........................................ 3,387,769 -- --
Conversion of Series A preferred stock................ 667 -- --
Cumulative translation adjustment..................... -- -- (105,056)
Common stock subject to redemption.................... (371,000) -- --
---------- ------------ ---------
Balance at December 31, 1996............................ 8,783,425 (9,903,257) (105,056)
1997 Activity (Unaudited):
Net loss.............................................. -- (3,313,087) --
Cash dividends paid on preferred B.................... -- (80,000) --
Dividends payable on preferred A upon conversion...... -- -- --
Exercise of stock options............................. 42,281 -- --
Cancellation of common stock.......................... -- -- --
Issuance of common stock.............................. 193,145 -- --
Conversion of Series A preferred stock................ 391 -- --
Conversion of Series B preferred stock................ (62) -- --
Redemption of common stock............................ -- -- --
Legal fees associated with Private Placement.......... (56,895) -- --
Cumulative translation adjustment..................... -- -- (157,315)
---------- ------------ ---------
Balance at September 30, 1997 (Unaudited)............... $8,962,285 $(13,296,344) $(262,371)
========== ============ =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE> 124
VASCO CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<CAPTION>
TOTAL
TREASURY STOCK STOCKHOLDERS'
--------------------- EQUITY
SHARES AMOUNT (DEFICIT)
------ ------ -------------
<S> <C> <C> <C>
Balance at December 31, 1993.............................. 1,201,250 $ (40,650) $ 339,978
Net income.............................................. -- -- 57,692
Cash dividends paid on preferred B...................... -- -- (27,000)
Dividends payable on preferred A upon conversion........ -- -- (254)
Issuance of Series B preferred stock.................... -- -- 750,863
Exchange of note payable for stock...................... -- -- 150,000
Exercise of stock options............................... -- -- 12,420
--------- --------- -----------
Balance at December 31, 1994.............................. 1,201,250 (40,650) 1,283,699
Net loss................................................ -- -- (357,039)
Cash dividends paid on preferred B...................... -- -- (108,000)
Dividends payable on preferred A upon conversion........ -- -- (254)
Issuance of treasury stock.............................. (217,352) 7,349 167,037
Stock compensation...................................... (250,975) 8,486 75,244
Exercise of stock options............................... (445,000) 17,706 96,000
Common stock subject to redemption...................... -- -- (190,694)
--------- --------- -----------
Balance at December 31, 1995.............................. 287,923 (7,109) 965,993
Net loss................................................ -- -- (9,240,609)
Cash dividends paid on preferred B...................... -- -- (108,000)
Dividends payable on preferred A upon conversion........ -- -- (160)
Exercise of stock options............................... -- -- 5,238
Issuance of common stock................................ -- -- 4,253,403
Issuance of common stock in connection with Lintel
Acquisition.......................................... (287,923) 7,109 3,395,019
Conversion of Series A preferred stock.................. -- -- --
Cumulative translation adjustment....................... -- -- (105,056)
Common stock subject to redemption...................... -- -- (371,000)
--------- --------- -----------
Balance at December 31, 1996.............................. -- -- (1,205,172)
1997 Activity (Unaudited):
Net loss................................................ -- -- (3,313,087)
Cash dividends paid on preferred B...................... -- -- (80,000)
Dividends payable on preferred A upon conversion........ -- -- --
Exercise of stock options............................... -- -- 42,470
Cancellation of common stock............................ -- -- (17)
Issuance of common stock................................ (32,504) 33 193,196
Conversion of Series A preferred stock.................. (2,824) 2 --
Conversion of Series B preferred stock.................. -- -- --
Redemption of common stock.............................. 35,328 (35) (35)
Legal fees associated with issuance of common stock..... -- -- (56,895)
Cumulative translation adjustment....................... -- -- (157,315)
--------- --------- -----------
Balance at September 30, 1997 (Unaudited)................. -- $ -- $(4,576,855)
========= ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE> 125
VASCO CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 57,692 $(357,039) $(9,240,609)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Acquired in-process research and development......... -- -- 7,350,992
Depreciation and amortization........................ 154,965 483,545 728,734
Interest paid in shares of common stock.............. -- -- 118,750
Deferred income taxes................................ 37,000 (251,000) 162,000
Compensation expense................................. -- 75,244 --
Changes in current assets and current liabilities,
net of acquisitions:
Accounts receivable, net.......................... (391,859) 168,858 (1,067,374)
Inventories, net.................................. (119,323) 53,302 578,143
Other current assets.............................. (129,184) (48,640) (279,940)
Accounts payable.................................. 2,545 (23,911) 459,068
Customer deposits................................. -- -- 1,022,195
Other accrued expenses............................ (47,897) (41,660) (1,728,397)
--------- --------- -----------
Net cash provided by (used in) operations................... (436,061) 58,699 (1,896,438)
--------- --------- -----------
Cash flows from investing activities:
Acquisition of Lintel/Digipass............................ -- -- (4,461,144)
Additions to property and equipment....................... (14,626) (93,749) (283,142)
Capitalized software...................................... (227,985) -- --
--------- --------- -----------
Net cash used in investing activities....................... (242,611) (93,749) (4,744,286)
--------- --------- -----------
Cash flows from financing activities:
Net proceeds from issuance of series B preferred stock.... 750,783 -- --
Series B preferred stock dividends........................ (27,000) (108,000) (108,000)
Net proceeds from issuance of common stock................ 12,500 443,237 4,133,605
Proceeds from exercise of stock options................... -- -- 5,238
Redemption of common stock................................ -- -- --
Proceeds from issuance of debt............................ 463,500 810,986 4,986,096
Repayment of debt......................................... (692,177) (404,697) (1,202,178)
--------- --------- -----------
Net cash provided by financing activities................... 507,606 741,526 7,814,761
--------- --------- -----------
Effect of exchange rate changes on cash..................... -- -- (105,056)
--------- --------- -----------
Net increase (decrease) in cash............................. (171,066) 706,476 1,068,981
Cash, beginning of period................................... 209,202 38,136 744,612
--------- --------- -----------
Cash, end of period......................................... $ 38,136 $ 744,612 $ 1,813,593
--------- --------- -----------
Supplemental disclosure of cash flow information:
Interest paid............................................... $ 80,747 $ 67,087 $ 51,929
========= ========= ===========
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
===========
Common stock issued in exchange for stockholder debt...... $ 50,000
=========
Series B preferred stock issued in exchange for
stockholder debt....................................... $ 100,000
=========
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE> 126
VASCO CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1997
---- ----
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(7,986,695) $(3,313,087)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Acquired in-process research and development........... 7,350,992 --
Depreciation and amortization.......................... 463,162 810,221
Interest paid in shares of common stock................ -- 193,196
Deferred income taxes.................................. (190,977) --
Compensation expense................................... -- --
Changes in current assets and current liabilities, net
of acquisitions:
Accounts receivable, net............................. 294,853 1,226,255
Inventories, net..................................... 418,112 1,087,333
Other current assets................................. (556,851) 244,004
Accounts payable..................................... 55,748 (1,239,005)
Customer deposits.................................... -- (407,941)
Other accrued expenses............................... 1,453,660 577,181
----------- -----------
Net cash provided by (used in) operations................... (958,853) (821,843)
----------- -----------
Cash flows from investing activities:
Acquisition of Lintel/Digipass............................ (4,461,144) --
Additions to property and equipment....................... (205,641) (97,392)
Capitalized software...................................... -- --
----------- -----------
Net cash used in investing activities....................... (4,666,785) (97,392)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of series B preferred stock.... -- --
Series B preferred stock dividends........................ (81,000) (80,000)
Net proceeds from sales of common stock................... 4,082,046 (56,895)
Proceeds from exercise of stock options................... -- 42,470
Redemption of common stock................................ -- (247,261)
Proceeds from issuance of debt............................ 4,986,096 2,716,141
Repayment of debt......................................... (1,202,178) (51,263)
----------- -----------
Net cash provided by financing activities................... 7,790,202 2,323,192
----------- -----------
Effect of exchange rate changes on cash..................... -- (157,315)
----------- -----------
Net increase (decrease) in cash............................. 2,164,564 1,246,642
Cash, beginning of period................................... 744,612 1,813,593
----------- -----------
Cash, end of period......................................... $ 2,909,176 $ 3,060,235
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid............................................... $ 50,995 $ 222,720
=========== ===========
Supplemental disclosure of noncash investing and financing
activities:
Fair value of assets acquired from Lintel/Digipass........ $ 4,142,518
Cash paid................................................. (289,482)
-----------
Notes payable, common stock and warrants issued........... $ 3,853,036
===========
Common stock issued upon conversion of Series A preferred
stock..................................................
Common stock issued upon conversion of Series B preferred
stock.................................................. $ 100,000
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 127
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.
Pervasiveness 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 assuming that no significant vendor obligations
remain outstanding and collectibility is reasonably assured.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
accelerated methods 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 $54,207, $444,795 and $180,275 in 1994, 1995 and 1996,
respectively, for the amortization of capitalized software costs. Approximately
$350,000 of fiscal 1995 amortization is as a result of the Company's revision of
the remaining estimated economic life of previously capitalized development
costs, resulting in acceleration of the amortization of these assets.
F-19
<PAGE> 128
VASCO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
instruments are made in accordance with the requirements of SFAS No. 107,
Disclosures about 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 1995, except for notes payable and long-term debt, for
which the fair value is not determinable.
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.
Income (Loss) per Common Share
Income (loss) per common share in fiscal 1994, 1995 and 1996 has been
computed using the weighted average number of common shares outstanding during
the year. Common stock equivalents and the effect of conversion of preferred
stock have been excluded from the calculation of loss per common share for
fiscal 1995 and 1996 as such items are anti-dilutive. Income per common share in
1994 is computed considering the dilutive effect of common stock equivalents,
consisting primarily of options.
F-20
<PAGE> 129
VASCO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications and Restatement
Certain prior year balances have been reclassified to conform to the 1996
presentation. Based on an analysis of information not previously considered,
management has determined that certain accounts receivable were doubtful of
collection and a certain sale should be deferred as of December 31, 1994. As a
result, the Company has restated the accompanying 1994 financial statements, the
effect of which was to decrease net income by $80,000.
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 operations 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 the acquisition, and the balance of $3,400,000 due on or
before December 31, 1997 (see Note 13).
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, 1996 (net of accumulated
amortization):
<TABLE>
<S> <C>
Software and hardware technology............................ $1,540,417
Workforce................................................... 514,167
Customer lists.............................................. 498,524
----------
$2,553,108
==========
</TABLE>
F-21
<PAGE> 130
VASCO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 for the year
ended December 31, 1996.
The following unaudited pro forma summary presents the Company's results of
operations as if the acquisitions had occurred at the beginning of 1995. This
summary is provided for informational purposes only. It 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.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1995 1996
---- ----
<S> <C> <C>
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)
</TABLE>
NOTE 3 -- INVENTORIES
Inventories, consisting principally of hardware and component parts, are
stated at the lower of cost or market. Cost is determined using the
first-in-first-out (FIFO) method.
Inventories are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
---- ----
<S> <C> <C>
Component parts........................................ $ 260,243 $ 338,325
Work-in-process and finished goods..................... 72,915 1,998,286
Obsolescence reserves.................................. (113,585) (153,868)
--------- ----------
$ 219,573 $2,182,743
========= ==========
</TABLE>
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 parts to handle short-term spikes in order quantities.
NOTE 4 -- OTHER ACCRUED EXPENSES
Other accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
---- ----
<S> <C> <C>
Accrued expenses......................................... $ 7,264 $330,919
Accrued interest......................................... 22,967 126,966
Accrued payroll.......................................... 10,555 --
Accrued dividends........................................ 1,566 196,977
Professional fees........................................ 30,000 --
Other.................................................... 29,720 3,222
-------- --------
$102,072 $658,084
======== ========
</TABLE>
F-22
<PAGE> 131
VASCO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INCOME TAXES
At December 31, 1996, the Company has net operating loss carryforwards
approximating $1,626,000. Such losses are available to offset future taxable
income at VASCO CORP. and its U.S. subsidiary and expire in varying amounts
beginning in 2010 and continuing through 2011. In addition, if certain
substantial changes in the Company's ownership should occur, there would be an
annual limitation on the amount of the carryforward which could be utilized. In
fiscal 1994 and 1995, the Company had no current tax provision due to the
utilization of approximately $96,000 and $66,000 respectively, of loss
carryforward benefits.
The differences between income taxes at 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:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate...................... 34.0% (34.0)% (34.0)%
State income taxes, net of federal benefit............. 4.5 (4.6) (4.8)
Adjustment of prior year accrual....................... -- (2.8) --
Valuation allowance.................................... -- -- 37.8
Other, net............................................. 0.6 0.1 1.1%
---- ----- -----
39.1% (41.3)% 0.1%
==== ===== =====
</TABLE>
The deferred income tax balances are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward.......................... $358,000 $631,000
Inventory................................................ 45,000 60,000
Accounts receivable...................................... 72,000 175,000
Fixed assets............................................. -- 44,000
Other.................................................... 31,000 4,000
-------- --------
Total gross deferred income tax assets................... 506,000 914,000
Less valuation allowance................................. -- (631,000)
-------- --------
Net deferred income tax assets........................... 506,000 283,000
Deferred tax liabilities:
Research and development costs........................... (61,000) --
-------- --------
Net deferred income taxes................................ $445,000 $283,000
======== ========
</TABLE>
The net change in the total valuation allowance for the years ended
December 31, 1995 and 1996 was $-0- and an increase of $631,000, 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 $283,000 of deferred tax assets
will be realized. The remaining valuation allowance of $631,000 is maintained on
deferred tax assets which the Company has not determined to be more likely than
not realizable at this time. This valuation allowance will be reviewed on a
regular basis and adjustments made as appropriate.
F-23
<PAGE> 132
VASCO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
---- ----
<S> <C> <C>
Bank notes, interest payable at prime plus 1%............... $ 664,050 $ --
Stockholder loan, interest payable at prime plus 1%......... 190,000 --
Convertible stockholder note, interest payable at 9%........ -- 5,000,000
Convertible notes, interest payable at 8%................... -- 713,750
Note related to Digipass acquisition, interest payable at
5.33%..................................................... -- 3,400,000
Installment notes payable................................... -- 88,578
Installment notes payable, secured by certain equipment of
the Company............................................... 16,936 2,582
--------- ----------
870,986 9,204,910
Less current maturities and notes payable................... (863,728) (91,160)
--------- ----------
Long-term debt.............................................. $ 7,258 $9,113,750
========= ==========
</TABLE>
The Company borrowed $130,000 from its principal stockholder in fiscal
1995, increasing the total amount outstanding to that stockholder at December
31, 1995 to $190,000. Interest on this note was the prime rate (8.5% at December
31, 1995) plus 1%. The amount was paid in full in 1996.
In September 1995, the Company entered into a $1.2 million credit facility
with a bank consisting of a $700,000 note due February 29, 1996 and a $500,000
note due June 30, 1996. The $700,000 note is secured by separately identifiable
export-related accounts receivable and inventory. This note is guaranteed by the
principal stockholder. The $500,000 note is secured by all of the tangible
assets of the Company, with $250,000 guaranteed by the principal stockholder.
Both notes bear interest at the prime rate plus 1%. Amounts outstanding at
December 31, 1995 were $599,530 and $64,520 under each respective note. This
credit facility was paid in full in 1996 and not renewed. The Company is
currently investigating additional capital formation alternatives including the
issuance of additional debt and/or the sale of equity securities (see Note 13).
The Company will continue to explore all capital formation alternatives that
will facilitate growth within the parameters set forth by its Board of
Directors.
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. In October 1996,
one of these notes was paid down by $33,750, leaving the balance of $713,750 at
December 31, 1996. 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.
The consideration related to the 1996 Digipass acquisition included a note
payable in the amount of $3,400,000 due December 31, 1997. On August 20, 1997,
the Company renegotiated this debt (see Note 13). This note bears interest at an
effective rate of 5.33%, with interest payments payable monthly beginning
January 1, 1997. The Company has a bank guarantee on this note for which it pays
2% annually on the outstanding note balance.
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,
F-24
<PAGE> 133
VASCO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1996 are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 91,160
1998........................................................ 713,750
1999........................................................ --
2000........................................................ --
2001 and thereafter......................................... 8,400,000
----------
Total................................................ $9,204,910
==========
</TABLE>
Interest expense to stockholders was $9,600, $12,900 and $265,565 for the
years ended December 31, 1994, 1995 and 1996, 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, leaving 117,181 Series A Shares outstanding at December
31, 1996. The remaining shares are convertible at the option of the holder, at
any time, into 781,206 shares of common stock. The holder of the Series A Shares
is entitled to cast that number of votes per share as is equal to the number of
full shares of common stock into which shares are convertible. Cumulative
dividends, which become payable upon conversion of the Series A Shares, have
been accrued in the Company's financial statements.
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. The Series B Shares are
convertible, at the option of the holders or the Company, into shares of the
Company's common stock, at a price per share determined by dividing the
liquidation value of such shares, or $100, by 50% of the average of the bid and
ask price of the Company's common stock for 20 days prior to the conversion
date. Dividends are payable monthly at the rate of 1% per month, provided that
if dividends are delinquent for more than a month, and for so long as such
delinquency continues, the monthly dividend rate shall be 1.5%. In addition,
holders of the Series B Shares have the right, with proper notice, to purchase
common stock in satisfaction of accrued and unpaid dividends at a price per
common share determined by dividing the accrued and unpaid dividends by 50% of
the average of the bid and ask price of the Company's common stock for 20 days
prior to the notice of such shareholder to purchase such shares of common stock.
The Series B Shares are non-voting, except with respect to certain amendments
changing the terms of such shares or creating any class of preferred stock
ranking prior to, or on a parity with the Series B Shares. In addition, if the
monthly dividend is more than 30 days in arrears and remains in arrears, after
proper notice by a holder of Series B Shares, a majority of the holders of such
shares shall be entitled to elect a majority of the Board of Directors until the
default in the dividend payments has been paid in full. Of the total Series B
Shares outstanding, 4,000 shares are convertible after March 1997 and the
remaining 5,000 shares are convertible after September 1997. Total issue fees
and costs have been netted against proceeds from the placement.
F-25
<PAGE> 134
VASCO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock
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 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.
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; 22,500 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).
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. 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. Total issue fees and costs have been netted against the proceeds from the
placement in the Company's financial statements. 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 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.
During 1995, the Company also reissued 250,975 shares of treasury stock and
issued 50,000 shares of common stock to certain key employees, including 43,175
to the principal stockholder. Compensation expense of $75,244 was recorded based
on the fair market value of the shares at the date of issuance. A further 50,000
shares of common stock were issued and 445,000 shares of treasury stock reissued
as a result of the exercise of options under the Company's incentive stock
option plan (see Note 8) for total proceeds of $96,000.
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
F-26
<PAGE> 135
VASCO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---- ----
<S> <C> <C>
Net loss available to common stockholders
As reported............................................... $(465,293) $(9,348,769)
Pro forma................................................. (472,846) (9,542,493)
Net loss per common share
As reported............................................... $ (0.03) $ (0.53)
Pro forma................................................. (0.03) (0.54)
</TABLE>
For purposes of calculating the compensation cost consistent with SFAS No.
123, the fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal 1995 and 1996: dividend yield of 0%;
expected volatility of 50%; risk free interest rates ranging from 6.29% to
7.58%; and expected lives of five years.
The following is a summary of activity under the Option Plan:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE
OUTSTANDING PRICE EXERCISABLE PRICE
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1993..................... 2,138,211 $0.20 2,010,086 $0.20
Granted.............................................. 235,000 0.25
Exercised............................................ (100,000) 0.38
Forfeited............................................ (424,954) 0.19
--------- ----- --------- -----
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............................................ (22,750) 0.23
Forfeited............................................ (76,000) 2.14
--------- ----- --------- -----
Outstanding at December 31, 1996..................... 1,661,632 $1.01 1,299,757 $0.57
========= ===== ========= =====
</TABLE>
F-27
<PAGE> 136
VASCO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OF SHARES CONTRACTUAL LIFE PRICE OF SHARES PRICE
------------------------ --------- ---------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$4.25 - 6.00......................... 301,500 9.35 years $4.65 104,000 $4.84
$.125 - .375......................... 1,360,132 4.38 years $0.20 1,195,757 $0.20
</TABLE>
NOTE 9 -- EMPLOYEE BENEFIT PLAN
The Company maintains a contributory profit sharing plan established
pursuant to the provisions of Section 401(k) of the Internal Revenue Code which
provides benefits for eligible employees of the Company. The Company made no
contributions to the plan during the years ended December 31, 1994, 1995 and
1996.
NOTE 10 -- GEOGRAPHIC AND CUSTOMER INFORMATION
During 1994, 1995 and 1996, sales to one customer (a reseller of the
Company's products) aggregated approximately $1,209,000, $2,259,000 and
$4,297,000, respectively, representing 45%, 61% and 44% of the total revenues,
respectively. Accounts receivable from this customer represented 87% and 31% of
the Company's gross accounts receivable balance at December 31, 1995 and 1996,
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 $4,297,000 for the year ended December 31,
1996. Such export sales for the years ended December 31, 1994 and 1995 were
approximately $1,209,000 and $2,318,000, respectively.
Information regarding geographic areas for the year ended December 31, 1996
is as follows:
<TABLE>
<CAPTION>
UNITED STATES BELGIUM ELIMINATIONS TOTAL
------------- ------- ------------ -----
<S> <C> <C> <C> <C>
Sales to unaffiliated customers........... $ 4,758,000 $ 5,434,000 $ -- $10,192,000
Operating loss............................ (2,919,000) (5,739,000) -- (8,658,000)
Identifiable assets....................... 12,738,000 8,756,000 (9,126,000) 12,368,000
</TABLE>
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under operating lease
agreements expiring at various times through 1998.
Future minimum rental payments required under noncancelable leases are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1997........................................................ $182,000
1998........................................................ 61,000
--------
$243,000
========
</TABLE>
Rent expense under operating leases aggregated approximately $54,000,
$60,000 and $158,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
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.
F-28
<PAGE> 137
VASCO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements
reflect all adjustments which, in the opinion of management, are necessary for a
fair presentation of the results of the interim periods. All such adjustments
are of a normal recurring nature. The interim results are not necessarily
indicative of those for the full year.
NOTE 13 -- SUBSEQUENT EVENTS
On March 13, 1997, the Company entered into an original equipment
manufacturer agreement with Netscape to purchase and resell Netscape products.
The term of the agreement is for one year and contains a guaranteed minimum
purchase requirement by the Company in the amount of $840,000, payable in
quarterly installments.
On May 1, 1997, the Company entered into a distributor agreement with
HUCOM, Inc. to provide HUCOM with the exclusive rights to market the Company's
products throughout Japan. The agreement calls for a guaranteed minimum purchase
requirement by HUCOM of $500,000 for 1997 and $1,000,000 for 1998.
On June 5, 1997, the Company entered into a software licensing agreement
with Shiva Corporation. The Company licensed a security server software marketed
as VACMan (VASCO Access Control Manager) from Shiva on a royalty basis. In
addition, the agreement calls for the Company and Shiva to co-develop additional
products which will be sold by both companies.
On June 27, 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. The proceeds of the financing
will be used for general corporate purposes.
On August 20, 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 addition, the note is convertible into
common stock of the Company at the option of the bank, at conversion prices as
specified in the agreement.
F-29
<PAGE> 138
LINTEL NV
BELGIUM
FINANCIAL STATEMENTS INCLUDING
REPORT OF INDEPENDENT ACCOUNTANTS
DECEMBER 31, 1995
F-30
<PAGE> 139
REPORT OF INDEPENDENT ACCOUNTANTS
February 27, 1997
To the Board of Directors and Shareholders
of Lintel NV
Chaussee de Courcelles 113
6041 Charleroi
Belgium
We have audited the accompanying statement of financial position of Lintel
NV as of December 31, 1995 and the related statements of operations, cash flows
and accumulated deficit, expressed in thousands of Belgian francs, for the years
ended December 31, 1995 and 1994. These financial statements were prepared using
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these statements based on our audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements expressed in thousands of Belgian
francs present fairly, in all material respects, the financial position of
Lintel NV as of December 31, 1995 and the results of its operations and cash
flows for the years ended December 31, 1995 and 1994 in conformity with
accounting principles generally accepted in the United States of America.
Yours faithfully
Price Waterhouse and Partners
/s/ L. Hellebaut
L. Hellebaut
F-31
<PAGE> 140
LINTEL NV
STATEMENT OF FINANCIAL POSITION AS OF DECEMBER 31, 1995
(EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
<TABLE>
<CAPTION>
BEF 000
-------
<S> <C>
ASSETS
CURRENT ASSETS
Cash........................................................ 2,890
Accounts receivable -- trade................................ 15,089
Inventories (note 2)........................................ 3,075
Other current assets........................................ 1,515
-------
Total current assets........................................ 22,569
Property, plant and equipment (note 3)...................... 1,296
Other assets................................................ 242
-------
TOTAL ASSETS................................................ 24,107
=======
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES
Accounts payable............................................ 15,375
Short-term debt (note 4).................................... 785
Income taxes payable (note 12).............................. --
Other accounts payable and accrued expenses (note 5)........ 6,949
-------
Total current liabilities................................... 23,109
Long term debt (note 6)..................................... 4,215
-------
Total liabilities........................................... 27,324
-------
STOCKHOLDER'S DEFICIT
Common stock (note 7)....................................... 7,700
Accumulated deficit (note 8)................................ (10,917)
-------
Total Stockholder's Deficit................................. (3,217)
-------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT................. 24,107
=======
</TABLE>
The accompanying notes 1 to 9 are an integral part of these financial
statements.
F-32
<PAGE> 141
LINTEL NV
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31
(EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
<TABLE>
<CAPTION>
1995 1994
BEF 000 BEF 000
------- -------
<S> <C> <C>
Net sales -- trade.......................................... 46,134 55,599
------- -------
Cost of goods sold.......................................... (30,341) (28,186)
Selling, general and administrative expenses................ (22,027) (20,778)
Depreciation and amortisation............................... (954) (3,011)
------- -------
Total operating costs..................................... (53,322) (51,975)
------- -------
Income/(loss) from operations............................... (7,188) 3,624
Interest expense............................................ (1,199) (1,355)
Exchange gains.............................................. 385 --
Other losses................................................ (45) (92)
------- -------
Income/(loss) before income taxes........................... (8,047) 2,177
Income taxes (note 9)....................................... 491 (561)
------- -------
Net income/(loss) for the year.............................. (7,556) 1,616
======= =======
</TABLE>
The accompanying notes 1 to 9 are an integral part of these financial
statements.
F-33
<PAGE> 142
LINTEL NV
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31
(EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
<TABLE>
<CAPTION>
1995 1994
BEF 000 BEF 000
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss)......................................... (7,556) 1,616
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortisation........................ 954 3,011
(Increase)/decrease in accounts receivable........... 509 (8,578)
Increase in inventories.............................. (1,644) (62)
(Increase)/decrease in other assets.................. (912) 2,663
Increase in accounts payable......................... 9,690 1,212
(Decrease)/increase in other payables and accrued
expenses............................................ (1,800) 1,788
------ ------
Net cash used in operating activities....................... (759) 1,650
------ ------
Cash flows from investing activities:
Capital expenditures...................................... (787) (533)
------ ------
Net cash used in investing activities....................... (787) (533)
------ ------
Cash flows from financing activities:
Principal repayments of long-term debt.................... (645) (836)
Net borrowings under line-of-credit arrangements.......... 566 246
------ ------
Net cash used in financing activities....................... (79) (590)
------ ------
Net increase/(decrease) in cash............................. (1,625) 527
Cash at the beginning of the year........................... 4,515 3,988
------ ------
Cash at the end of the year................................. 2,890 4,515
====== ======
</TABLE>
The accompanying notes 1 to 9 are an integral part of these financial
statements.
F-34
<PAGE> 143
LINTEL NV
STATEMENTS OF THE ACCUMULATED DEFICIT FOR THE YEARS ENDED DECEMBER 31
(EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
<TABLE>
<CAPTION>
1995 1994
BEF 000 BEF 000
------- -------
<S> <C> <C>
Balance, beginning of year.................................. (3,361) (4,977)
Net income/(loss) of the year............................... (7,556) 1,616
------- ------
Balance, end of the year.................................... (10,917) (3,361)
======= ======
</TABLE>
The accompanying notes 1 to 9 are an integral part of these financial
statements.
F-35
<PAGE> 144
LINTEL NV
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1995 AND 1994
(EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
NOTE 1 -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Lintel NV, a Belgian limited company incorporated on December 20, 1983,
manufactures and distributes computer security products primarily in Europe. The
entity provides companies with generic, cryptographic products to safeguard the
handling and transfer of electronic data against fraud and intrusion. Their
products consist of public algorithms for data protection in financial and
commercial applications. End-users are software houses, OEM's and others looking
to integrate encryption modules or tools into their products or systems.
49% and 22% of the company's sales for 1995 and 1994 respectively, were to
one customer, a major Dutch financial institution, who represented approximately
80% of trade receivables at December 31, 1995. Management maintains a close
relationship with the customer's management, has never experienced any
collection problems to date and does not anticipate any problems in collecting
currently outstanding receivables.
On March 1, 1996, the assets and liabilities of the company were sold to a
newly incorporated limited company named Lintel Security NV, which was
subsequently acquired by VASCO Data Security International Inc.
PERVASIVENESS 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.
REVENUE RECOGNITION
Revenues from the sale of products are recorded upon shipment of goods,
assuming collectibility is reasonably assured, and are reported net of
value-added taxes, discounts and allowances. The principal elements of cost of
goods sold are components and manufacturing costs.
TRANSLATION OF FOREIGN CURRENCY
Foreign currency transactions are recorded in Belgian francs at the
exchange rates approximating those prevailing at the time of the transactions.
Unsettled transactions are translated into Belgian francs at period-end rates.
Gains and losses resulting from setting and remeasuring foreign currency
transactions are recognized in income currently.
PROPERTY, PLANT AND EQUIPMENT
Expenditures for property, plant and equipment are recorded at cost.
Maintenance, repairs and minor renewals are expensed when incurred.
Depreciation is computed, using the straight-line method, over the
estimated useful lives of the assets, ranging from 3 to 5 years.
F-36
<PAGE> 145
LINTEL NV
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1995 AND 1994
(EXPRESSED IN THOUSANDS OF BELGIAN FRANCS) -- (CONTINUED)
INVENTORIES
Inventories, consisting principally of chips and cards, are stated at the
lower of cost or market value. Cost is determined using the first-in first-out
(FIFO) method. When required, appropriate provisions are made for obsolete and
slow-moving items.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs incurred prior to establishment of
technological feasibility are charged to operations. Research and development
costs for 1995 and 1994 were BEF 3,650,000, and BEF 2,008,000, respectively.
Software development costs incurred subsequently to establishment of
technological feasibility were not material.
INCOME TAXES
The company accounts for income taxes using an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been reported in the
company's financial statements or tax returns. In estimating future tax
consequences, the company considers all expected future events other than
changes in tax law or rates.
NOTE 2 -- INVENTORIES
<TABLE>
<CAPTION>
31/12/1995
----------
<S> <C>
Goods for Resale............................................ 3,075
</TABLE>
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
31/12/1995
----------
<S> <C>
Furniture................................................... 3,330
Vehicles.................................................... 948
------
4,278
Less accumulated depreciation............................... (2,982)
------
1,296
======
</TABLE>
NOTE 4 -- SHORT-TERM DEBT
Short-term debt represents short-term borrowings, overdrafts and current
maturities of long-term debt with credit institutions.
NOTE 5 -- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
31/12/1995
----------
<S> <C>
Amounts payable to directors................................ 2,601
Accrued charges............................................. 573
Credit institutions......................................... 3,775
-----
6,949
=====
</TABLE>
F-37
<PAGE> 146
LINTEL NV
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1995 AND 1994
(EXPRESSED IN THOUSANDS OF BELGIAN FRANCS) -- (CONTINUED)
Credit institutions include accrued interest on the long term debt.
NOTE 6 -- LONG-TERM DEBT
<TABLE>
<CAPTION>
31/12/1995
----------
<S> <C>
NKBK bank loan.............................................. 3,650
Credit institutions......................................... 565
-----
4,215
=====
</TABLE>
On July 5, 1993, Lintel borrowed BEF 2,500,000 from the "Nationale Kas voor
Beroepskrediet" (NKBK), in the form of an advance under a 10-year credit
facility. The advance is subject to interest at a rate of 9.10 per cent per
annum. This rate is subject to revision after the first five years to the extent
that the market rate at that time for similar instruments is different by more
than 0.50 per cent. No repayments of principal are scheduled for the first five
years, during which period the rate of interest is reduced to 5.00 per cent per
annum. The advance is repayable in equal quarterly instalments over the second
tranche of five years. The nominal rate of interest applicable to this period
may also be subject to reduction at the lender's discretion.
On May 18, 1993, Lintel received a further loan of BEF 3,500,000 from the
"Nationale Kas voor Beroepskrediet" which is repayable within 5 years and bears
interest at the rate of 7.90% per annum.
NOTE 7 -- COMMON STOCK
Total number of authorised and issued shares amounts to 110. All shares are
bearer shares, are fully paid up, have equal voting rights, have no par value
and are privately owned.
NOTE 8 -- ACCUMULATED DEFICIT
Accumulated deficit include reserves amounting to BEF 2,934,000 at December
31, 1994 and BEF 3,350,000 at December 31, 1995.
NOTE 9 -- INCOME TAXES
The actual income tax expense attributable to earnings for the years ended
December 31, 1995 and 1994 differed from the amounts computed by applying the
effective Belgian federal tax rate to pre-tax earnings, as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Computed "expected" tax expense (benefit)................... (3,232) 874
Tax effect of permanent differences......................... 2,741 499
Prior year adjustments to taxable basis..................... -- (812)
------ ----
Provision for income taxes.................................. (491) 561
====== ====
</TABLE>
There are no significant temporary differences between the assets and
liabilities reported for tax purposes and those presented in the combined
financial statements which would give rise to deferred taxes. The company has no
losses available for carry forward under Belgian tax regulations.
F-38
<PAGE> 147
DIGIPASS SA AND DIGILINE SA
BELGIUM
COMBINED FINANCIAL STATEMENTS
INCLUDING REPORT OF
INDEPENDENT ACCOUNTANTS
DECEMBER 31, 1995
F-39
<PAGE> 148
February 27, 1997
To the Board of Directors and Shareholders
of Digipass SA and Digiline SA
Chaussee de Courcelles 113
6041 Charleroi
Belgium
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the accompanying combined statement of financial position
of Digipass SA and Digiline SA as of December 31, 1995 and the related combined
statements of operations, cash flows and accumulated deficit, expressed in
thousands of Belgian francs, for the years ended December 31, 1995 and 1994.
These financial statements were prepared using accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these statements based on our audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements expressed in thousands of Belgian
francs present fairly, in all material respects, the combined financial position
of Digipass SA and Digiline SA as of December 31, 1995 and the combined results
of their operations and cash flows for the years ended December 31, 1995 and
1994 in conformity with accounting principles generally accepted in the United
States of America.
Yours faithfully
Price Waterhouse and Partners
/s/ L. Hellebaut
L. Hellebaut
F-40
<PAGE> 149
DIGIPASS SA AND DIGILINE SA
COMBINED STATEMENT OF FINANCIAL POSITION AS OF DECEMBER 31, 1995
(EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
<TABLE>
<CAPTION>
BEF 000
-------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................ 20,692
Accounts receivable -- trade................................ 32,531
Inventories (note 2)........................................ 35,571
Other current assets (note 3)............................... 27,565
-------
Total current assets........................................ 116,359
Property, plant and equipment (note 4)...................... 39,005
-------
TOTAL ASSETS................................................ 155,364
=======
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable -- trade................................... 62,797
Income taxes payable........................................ 3,978
Short-term debt (note 5).................................... 2,981
Short-term debt to parent company (note 6).................. 4,500
Other accounts payable and accrued expenses (note 7)........ 29,245
-------
Total current liabilities................................... 103,501
Long-term debt (notes 8 and 9).............................. 41,100
-------
TOTAL LIABILITIES........................................... 144,601
-------
EQUITY:
Common stock (note 10)...................................... 14,000
Accumulated deficit (note 11)............................... (3,237)
-------
Total equity................................................ 10,763
-------
TOTAL LIABILITIES AND EQUITY................................ 155,364
=======
</TABLE>
The accompanying notes 1 to 13 are an integral part of these financial
statements.
F-41
<PAGE> 150
DIGIPASS SA AND DIGILINE SA
COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31
(EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
<TABLE>
<CAPTION>
1995 1994
BEF 000 BEF 000
------- -------
<S> <C> <C>
Net sales -- Trade.......................................... 191,696 113,756
-------- --------
Cost of goods sold.......................................... (105,688) (51,614)
Selling, general and administrative expenses................ (65,112) (47,909)
Depreciation and amortization............................... (7,848) (12,343)
-------- --------
Total Operating Costs....................................... (178,648) (111,866)
-------- --------
Income from operations...................................... 13,048 1,890
Interest expense............................................ (3,303) (2,889)
Exchange gains/(losses)..................................... 5,843 (332)
Other losses................................................ (707) (15)
-------- --------
Income/(loss) before income taxes........................... 14,881 (1,346)
Income taxes (note 12)...................................... (8,896) (121)
-------- --------
Net income/(loss) for the year.............................. 5,985 (1,467)
======== ========
</TABLE>
The accompanying notes 1 to 13 are an integral part of these financial
statements.
F-42
<PAGE> 151
DIGIPASS SA AND DIGILINE SA
COMBINED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31
(EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
<TABLE>
<CAPTION>
1995 1994
BEF 000 BEF 000
------- -------
<S> <C> <C>
Cash flows from operating activities
Net income/(loss)........................................... 5,985 (1,467)
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation and amortization............................... 7,848 12,344
(Increase) in accounts receivable........................... (12,014) (1,270)
(Increase)/decrease in inventories.......................... (24,651) 1,427
(Increase)/decrease in other current assets................. 8,188 (2,136)
Increase in accounts payable................................ 17,852 11,367
Increase in income tax payable.............................. 2,475 1,502
Increase/(decrease) in other accounts payable and accrued
expenses.................................................. 15,748 (14,103)
-------- --------
Net cash provided by operating activities................. 21,431 7,664
-------- --------
Cash flows from investing activities
Capital expenditures........................................ (1,721) (2,897)
-------- --------
Net cash (used in) investing activities................... (1,721) (2,897)
-------- --------
Cash flows from financing activities
Principal payments under capital lease obligations.......... (3,176) (3,218)
Net borrowings under line of credit arrangements............ 416 (3,815)
-------- --------
Net cash (used in) financing activities................... (2,760) (7,033)
-------- --------
Net increase in cash........................................ 16,951 (2,266)
Cash at the beginning of the period......................... 3,741 6,007
-------- --------
Cash at the end of period................................... 20,692 3,741
======== ========
</TABLE>
The accompanying notes 1 to 13 are an integral part of these financial
statements.
F-43
<PAGE> 152
DIGIPASS SA AND DIGILINE SA
COMBINED STATEMENTS OF ACCUMULATED DEFICIT FOR
THE YEARS ENDED DECEMBER 31
(EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
<TABLE>
<CAPTION>
1995 1994
BEF 000 BEF 000
-------- --------
<S> <C> <C>
Balance, beginning of year.................................. (9,222) (7,755)
Net income/(loss)........................................... 5,985 (1,467)
------ ------
Balance end of year......................................... (3,237) (9,222)
====== ======
</TABLE>
The accompanying notes 1 to 13 are an integral part of these financial
statements.
F-44
<PAGE> 153
DIGIPASS SA AND DIGILINE SA
NOTES TO THE COMBINED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1995 AND 1994
(EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
NOTE 1 -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Digiline SA, a Belgian limited company incorporated on October 27, 1989,
develops telephone terminals, to extend the range of telematic applications
designed for the general public. Digiline also offers a remote control system
for reading water, gas and electricity meters over the public telephone network.
Furthermore, Digiline develops various products to support telephone terminals.
For several years, Digiline has dedicated resources to the design and
manufacture of voice-processing products for the industrial sector. Digiline is
a wholly-owned subsidiary of Digiline International SA, a Luxembourg limited
company.
Digipass SA, a Belgian limited company incorporated on March 19, 1992,
develops devices based on sophisticated encryption techniques, offering a range
of security products to identify correspondents and to authenticate exchanges of
data and improve security for electronic transactions.
The companies' customers are located primarily in Belgium and the
Netherlands and are mainly active in the financial sector. Three customers have
each contributed 10% or more of sales in 1995 and 1994 as follows:
<TABLE>
<CAPTION>
1995 1994
% %
---- ----
<S> <C> <C>
A........................................................... 23 --
B........................................................... 16 16
C........................................................... 13 --
</TABLE>
At December 31, 1995 only customer A above represented 10% or more of trade
receivables, namely 20%, Management maintains a close relationship with the
customers' management, has never experienced any collection problems to date and
does not anticipate any problems in collecting currently outstanding
receivables.
BASIS FOR PREPARATION OF COMBINED FINANCIAL STATEMENTS
On July 1, 1996 Digipass SA acquired all of the assets and liabilities of
Digiline SA, except for certain real estate assets and related capital lease
obligations. On July 3, 1996, Digiline was acquired by VASCO Data Security
International Inc. (VASCO.) Prior to the acquisition by VASCO, Digiline and
Digipass were under common control and management. Accordingly, the accompanying
combined financial statements include Digipass and Digiline for all periods
presented, after elimination of all transactions between the two companies.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect 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.
REVENUE RECOGNITION
Revenues from the sale of products are recorded upon shipment of goods,
assuming collectibility is reasonably assured, and are reported net of
value-added taxes, discounts and allowances. The principal elements of the cost
of goods sold are components and manufacturing costs.
F-45
<PAGE> 154
DIGIPASS SA AND DIGILINE SA
NOTES TO THE COMBINED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED)
(EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
RESEARCH AND DEVELOPMENT COST
Research and development costs incurred prior to establishment of
technological feasibility are charged to operations. Research and development
costs for 1995 and 1994 were BEF 8,960,000 and BEF 6,879,000, respectively.
Software development costs incurred subsequently to establishment of
technological feasibility were not material.
TRANSLATION OF FOREIGN CURRENCY
Foreign currency transactions are recorded in Belgian francs at the
exchange rates approximating those prevailing at the time of the transactions.
Unsettled transactions are translated into Belgian francs at period-end rates.
Gains and losses resulting from the settlement and remeasurement of foreign
currency transaction are recognized in income currently.
PROPERTY, PLANT AND EQUIPMENT
Expenditures for property, plant and equipment are recorded at cost, less
the amount of any capital investment grants received. Maintenance, repairs and
minor renewals are charged to income as incurred.
Depreciation is computed using the straight-line method, in order to spread
the net cost of acquisition over the estimated useful lives of the assets,
ranging from 3 to 5 years.
Upon disposition, the cost and accumulated depreciation of assets sold or
retired are removed from the respective accounts and the resultant gains or
losses, if any, are included in current operations.
INCOME TAXES
The company accounts for income taxes using an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been reported in the
company's financial statements or tax returns. In estimating future tax
consequences, the company considers all expected future events other than
changes in tax law or rates.
CASH AND CASH EQUIVALENTS
Cash equivalents include time deposits and highly liquid investments with
original maturities of three months or less.
INVENTORIES
Inventories, consisting principally of chips and cards, are stated at the
lower of cost or market value. Cost is determined using the first-in first-out
(FIFO) method. When necessary, appropriate provisions are made for potential
losses on obsolete and slow-moving items.
NOTE 2 -- INVENTORIES
<TABLE>
<CAPTION>
31/12/1995
----------
<S> <C>
Work-in-progress............................................ 542
Goods for resale............................................ 34,767
Consumables................................................. 262
------
35,571
======
</TABLE>
F-46
<PAGE> 155
DIGIPASS SA AND DIGILINE SA
NOTES TO THE COMBINED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED)
(EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
NOTE 3 -- OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
31/12/1995
----------
<S> <C>
Grants receivable........................................... 2,038
Income taxes receivable..................................... 25
VAT receivable.............................................. 3,405
Prepayments................................................. 22,097
------
27,565
======
</TABLE>
Grants receivable comprise governmental incentives receivable for research
and development. Prepayments consist mainly of advance payments to suppliers for
inventory purchases.
NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
31/12/1995
----------
<S> <C>
Land and buildings.......................................... 36,736
Furniture and fixtures...................................... 7,148
Machinery and office equipment.............................. 6,164
-------
50,048
Less accumulated depreciation............................... (11,043)
-------
39,005
=======
</TABLE>
Depreciation expense totaled BEF 4.3 million and BEF 5.5 million in 1995
and 1994, respectively.
Most of the assets were acquired under capital leases (see note 9). In
connection with the acquisition of Digiline by Digipass (see note 1), certain
assets recorded under capital leases with a net book value of BEF 37,230,000
were retained by the owner of Digiline.
NOTE 5 -- SHORT-TERM DEBT
<TABLE>
<CAPTION>
31/12/1995
----------
<S> <C>
Current maturities of long-term debt........................ 2,981
-----
</TABLE>
NOTE 6 -- SHORT-TERM DEBT TO PARENT COMPANY
On January 21, 1994, Digiline SA obtained a short-term loan from its
parent, bearing interest at 8% per annum. The interest expense for each of the
years ended December 31, 1995 and 1994 was BEF 360,000.
F-47
<PAGE> 156
DIGIPASS SA AND DIGILINE SA
NOTES TO THE COMBINED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED)
(EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
NOTE 7 -- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
31/12/1995
----------
<S> <C>
Advances received from customers............................ 17,222
Accrued interest on short-term debt to parent company....... 720
Remuneration and social security costs...................... 6,382
VAT payable................................................. 1,269
Other accrued expenses...................................... 3,164
Withholding taxes payable................................... 488
------
29,245
======
</TABLE>
NOTE 8 -- LONG-TERM DEBT
<TABLE>
<CAPTION>
31/12/1995
----------
<S> <C>
Capitalized lease obligations............................... 40,600
Advances received from the state............................ 500
------
41,100
======
</TABLE>
The interest rate related to the capitalized lease obligations amounts to
10% per annum and the obligations are collateralized on the companies' assets.
The advances received from the regional government of Wallonia (Southern
Belgium) were to finance research and development activities sub-contracted to
universities by Digiline SA. Because the research and development projects
proved to be successful under the terms of agreement with the regional
government, the advances became repayable. However, to date, no repayment
schedule has been determined by the regional government.
NOTE 9 -- CAPITAL LEASES
The companies lease most of their property, plant and equipment under
long-term non-cancelable agreements and have the option to purchase the leased
assets for a nominal cost upon termination of the lease agreements.
F-48
<PAGE> 157
DIGIPASS SA AND DIGILINE SA
NOTES TO THE COMBINED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED)
(EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
Future minimum lease payments for assets held under capital leases as of
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
BEF 000
-------
<S> <C>
1996........................................................ 7,017
1997........................................................ 6,860
1998........................................................ 6,550
1999........................................................ 5,928
2000........................................................ 5,885
Thereafter.................................................. 39,724
-------
Total minimum lease payments................................ 71,964
Less amount representing interest........................... (43,922)
-------
Present value of net minimum lease payments................. 28,042
Less current maturities..................................... (2,426)
-------
Long-term obligations....................................... 25,616
=======
</TABLE>
The companies were not party to any operating leases during the years ended
31 December 1995 and 1994.
NOTE 10 -- COMMON STOCK
<TABLE>
<CAPTION>
31/12/1995
----------
<S> <C>
Digiline SA................................................. 10,000
Digipass SA................................................. 4,000
------
14,000
======
</TABLE>
Total number of shares of Digiline authorized, issued and outstanding
amounts to 1,000. All shares are bearer shares, are fully paid up, have equal
voting rights and no par value.
Total number of shares of Digipass authorized, issued and outstanding
amounts to 4,000. All shares are bearer shares, are fully paid up, have equal
voting rights and no par value.
NOTE 11 -- ACCUMULATED DEFICIT
The accumulated deficit includes a non-distributable legal reserve
amounting to BEF 1,400,000 at December 31, 1995.
F-49
<PAGE> 158
DIGIPASS SA AND DIGILINE SA
NOTES TO THE COMBINED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED)
(EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
NOTE 12 -- INCOME TAXES
The actual income tax expense attributable to earnings for the years ended
December 31, 1995 and 1994 differed from the amounts computed by applying the
effective Belgian federal tax rate to pre-tax earnings, as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Computed "expected" tax expense (benefit)................... 5,978 (540)
Tax effect of disallowed expenses........................... 2,578 505
Interest penalty for insufficient prepayments............... 340 156
----- ----
Provision for income taxes.................................. 8,896 121
===== ====
</TABLE>
There are no significant temporary differences between the assets and
liabilities reported for tax purposes and those presented in the combined
financial statements which would give rise to deferred taxes. The companies have
no losses available for carry forward under Belgian tax regulations.
NOTE 13 -- DEFINED CONTRIBUTION PLAN
The companies' personnel are covered by a group insurance policy with Swiss
Life (Belgium), which is a defined contribution plan. Employees pay an annual
contribution of 2% of their annual gross salaries, with a company contribution
of 4%. The amount of the companies' contribution was BEF 622,000 and BEF 523,000
for 1995 and 1994, respectively.
F-50
<PAGE> 159
DIGIPASS SA AND DIGILINE SA
FINANCIAL STATEMENTS AS OF AND FOR THE
SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
F-51
<PAGE> 160
DIGIPASS SA AND DIGILINE SA
STATEMENT OF THE COMBINED FINANCIAL POSITION AS OF JUNE 30, 1996
(EXPRESSED IN BELGIAN FRANCS)
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash........................................................ 25,199,658
Accounts receivable -- trade (net of allowance for doubtful
debts of BEF nil)......................................... 41,699,659
Inventories................................................. 54,780,970
Other current assets........................................ 18,379,881
-----------
Total current assets........................................ 140,060,168
Cash guarantees............................................. 559,942
Other assets................................................ 2,000,094
Property, plant and equipment............................... 35,417,124
-----------
TOTAL ASSETS................................................ 178,037,328
===========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable -- trade................................... 42,832,317
Income tax payable.......................................... 11,356,285
Short-term debt............................................. 17,145,591
Other accounts payable and accrued expenses................. 42,793,666
-----------
Total current liabilities................................... 114,127,859
Long-term debt.............................................. 41,438,376
-----------
TOTAL LIABILITIES........................................... 155,566,235
-----------
EQUITY
Common stock................................................ 14,000,000
Retained earnings........................................... 8,471,093
-----------
Total equity................................................ 22,471,093
-----------
TOTAL LIABILITIES AND EQUITY................................ 178,037,328
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 161
DIGIPASS SA AND DIGILINE SA
STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996
(EXPRESSED IN BELGIAN FRANCS)
(UNAUDITED)
<TABLE>
<S> <C>
Net sales -- Trade.......................................... 99,258,399
-----------
Total Operating Revenues.................................... 99,258,399
Cost of goods sold.......................................... (47,517,125)
Selling, general and administrative expenses................ (28,365,575)
Depreciation and amortization............................... (1,979,838)
-----------
Total Operating Costs....................................... (77,862,538)
-----------
Income from operations...................................... 21,395,861
Interest expense............................................ (4,672,408)
Exchange gains.............................................. 4,372,110
Other gains................................................. 3,160
-----------
Income before income taxes.................................. 21,098,723
Income taxes................................................ (8,390,472)
-----------
Net profit.................................................. 12,708,251
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 162
DIGIPASS SA AND DIGILINE SA
STATEMENTS OF THE CASH FLOWS FOR THE
SIX MONTHS ENDED JUNE 30, 1996
(EXPRESSED IN BELGIAN FRANCS)
(UNAUDITED)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. 12,708,251
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization............................. 1,979,838
Increase in accounts receivable........................... (9,169,134)
Increase in inventories................................... (19,210,468)
Decrease in other current assets.......................... 9,184,999
Increase in accounts payable.............................. (19,963,617)
Increase in income tax payable............................ 7,378,092
Increase in other accounts payable and accrued expenses... 13,548,017
Increase in cash guarantees............................... (438,099)
-----------
Net cash used in operating activities.................. (3,982,121)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditure in property and equipment............... (453,885)
Capital expenditure in other assets......................... (60,000)
-----------
Net cash used in investing activities.................. (513,885)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt.............................................. 338,225
Short-term debt............................................. 9,664,544
Dividends paid.............................................. (1,000,000)
-----------
Net cash provided by financing activities.............. 9,002,769
-----------
Net increase in cash........................................ 4,506,763
Cash at the beginning of the period......................... 20,692,895
-----------
Cash at the end of period................................... 25,199,658
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 163
DIGIPASS SA AND DIGILINE SA
STATEMENTS OF THE RETAINED EARNINGS FOR THE
SIX MONTHS ENDED JUNE 30, 1996
(EXPRESSED IN BELGIAN FRANCS)
(UNAUDITED)
<TABLE>
<S> <C>
Balance at the beginning of the period...................... (3,237,158)
Net profit of the period.................................... 12,708,251
Dividends................................................... (1,000,000)
----------
Balance at the end of the period............................ 8,471,093
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE> 164
DIGIPASS SA AND DIGILINE SA
NOTES TO THE FINANCIAL STATEMENT FOR THE SIX MONTHS ENDED JUNE 30, 1996
(EXPRESSED IN BELGIAN FRANCS)
(UNAUDITED)
NOTE 1 -- INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements reflect all
adjustments which, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods. All such adjustments are of
a normal recurring nature. The interim results are not necessarily indicative of
those for the full year.
NOTE 2 -- OTHER CURRENT ASSETS
<TABLE>
<S> <C>
Grants receivable........................................... 3,962,649
Tax receivable.............................................. 24,959
VAT receivable.............................................. 6,873,273
Prepayments and deferred charges............................ 7,519,000
----------
18,379,881
==========
</TABLE>
NOTE 3 -- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<S> <C>
Advances received on contracts in progress.................. 34,539,488
Accrued interests on intercompany loan (8%)................. 900,000
Remuneration and social security costs...................... 2,460,734
Accrued miscellaneous payables.............................. 1,993,188
VAT payable................................................. 2,867,912
Other accrued expenses...................................... 32,344
----------
42,793,666
==========
</TABLE>
F-56
<PAGE> 165
SCHEDULE II
VASCO CORP.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ALLOWANCE FOR DOUBTFUL ACCOUNTS BEGINNING BAD DEBT ACCOUNTS ENDING
FOR TRADE ACCOUNTS RECEIVABLE BALANCE EXPENSE WRITTEN OFF BALANCE
------------------------------- --------- -------- ----------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1996........................ $182,000 $346,000 $(69,000) $459,000
Year ended December 31, 1995........................ 96,000 165,000 (79,000) 182,000
Year ended December 31, 1994........................ -- 96,000 -- 96,000
</TABLE>
<TABLE>
<CAPTION>
BEGINNING INVENTORY ENDING
RESERVE FOR OBSOLETE INVENTORIES BALANCE EXPENSE WRITTEN OFF BALANCE
-------------------------------- --------- ------- ----------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1996........................ $114,000 $ 40,000 -- $154,000
Year ended December 31, 1995........................ 15,000 99,000 -- 114,000
Year ended December 31, 1994........................ -- 15,000 -- 15,000
</TABLE>
S-1
<PAGE> 166
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and
Stockholders of VASCO CORP.:
The audits referred to in our report dated September 11, 1997, included the
related financial statement schedule as of December 31, 1996, and for each of
the years in the three-year period ended December 31, 1996, included in the
Registration Statement. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the 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
September 11, 1997
S-2
<PAGE> 167
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM
WHAT IS CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS DATED ,
1997. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THE PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND NEITHER THE MAILING OF THE
PROSPECTUS TO STOCKHOLDERS NOR THE ISSUANCE OF NEW VASCO SHARES, OPTIONS AND
WARRANTS IN THE EXCHANGE OFFER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
<PAGE> 168
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") provides that
a corporation may indemnify directors, officers, employees and agents against
expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement in connection with specified actions, suits, or proceedings whether
civil, criminal, administrative, or investigative (other than an action by or in
the right of the corporation -- a "derivative action"), if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. A
similar standard is applicable in the case of derivative actions, except that
indemnification is permitted only for expenses (including attorneys' fees)
incurred in connection with the defense or settlement of such action, and the
statute requires court approval before there can be any indemnification for
expenses where the person seeking indemnification has been found liable to the
corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's charter, bylaws,
disinterested director vote, stockholder vote, agreement, or otherwise.
Article V of the Bylaws of Registrant provides that Registrant shall
indemnify and hold harmless, to the fullest extent permitted by applicable law
as it presently exists or may hereafter be amended, any person (an "Indemnitee")
who was or is made or is threatened to be made a party or is otherwise involved
in any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding"), by reason of the fact that he, or a person for
whom he is the legal representative, is or was a director or officer of the
Registrant or, while a director or officer of the Registrant, is or was serving
at the written request of the Registrant as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or nonprofit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses (including
attorneys' fees) reasonably incurred by such Indemnitee. Notwithstanding the
preceding sentence, except as otherwise provided in Section 3 of Article V, the
Registrant shall be required to indemnify an Indemnitee in connection with a
proceeding (or part thereof) commenced by such Indemnitee only if the
commencement of such proceeding (or part thereof) by the Indemnitee was
authorized by the Board of Directors.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, provided that such provision may not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful dividends or unlawful stock purchases or redemptions), or (iv) for any
transaction from which the director derived an improper personal benefit.
Article SIXTH of Registrant's Certificate of Incorporation provides that a
director of Registrant shall not be liable to Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent such exemption from liability or limitation thereof is not permitted
under the Delaware General Corporation Law. Any amendment, modification or
repeal of Article SIXTH shall not adversely affect any right or protection of a
director of Registrant in respect of any act or omission occurring prior to such
amendment, modification or repeal.
Registrant has a binder for directors' and officers' liability insurance
which provides for payment, on behalf of the directors and officers of
Registrant and its subsidiaries, of certain losses of such persons (other than
matters uninsurable under law) arising from claims, including claims arising
under the Securities Act of 1933, as amended, for acts or omissions by such
persons while acting as directors or officers of Registrant and/or its
subsidiaries as the case may be.
II-1
<PAGE> 169
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <S>
++3.1 Certificate of Incorporation of Registrant, as amended.
++3.2 Bylaws of Registrant, as amended.
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 New VASCO Warrant Agreement.
+4.6 Form of New VASCO Option Agreement.
+4.7 Form of New VASCO Convertible Note Agreement.
++5.1 Opinion of Jenner & Block regarding legality of securities
being registered.
++8.1 Opinion of Jenner & Block as to certain tax matters.
++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).
</TABLE>
II-2
<PAGE> 170
++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.1.
++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.
+23.1 Consent of KPMG Peat Marwick LLP re: Registrant.
+23.2 Consent of KPMG Peat Marwick LLP re: VASCO CORP.
+23.3 Consent of Price Waterhouse and Partners.
+23.4 Consent of Jenner & Block.
++24.1 Powers of Attorney (included on Signature Pages).
++99.1 Form of Letter of Chief Executive Officer of Registrant to
security/stockholders.
++99.2 Form of Notice of Guaranteed Delivery.
++99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Nominees.
++99.4 Form of Letter to Clients of Brokers, Dealers, Commercial
Banks, Trust Companies and Nominees.
- -------------------------
+ Filed herewith.
++ Previously filed.
** Confidential treatment has been requested for the omitted portions of this
document.
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts.
Report of KPMG Peat Marwick LLP
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
II-3
<PAGE> 171
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any Prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which were registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of Prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(3) That, prior to any public reoffering of the securities registered
hereunder through use of a Prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) under the Securities Act of 1933, as amended (the "Act"),
the issuer undertakes that such reoffering Prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(4) That every Prospectus (i) that is filed pursuant to paragraph (3)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Act and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the Registration
Statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(6) To respond to requests for information that is incorporated by
reference into the Prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form
S-4, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the Registration Statement through the date of responding to the
request.
II-4
<PAGE> 172
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it became
effective.
II-5
<PAGE> 173
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Oakbrook
Terrace, State of Illinois, on November 21, 1997.
VASCO Data Security International,
Inc.
By: /s/ T. KENDALL HUNT
------------------------------------
T. Kendall Hunt
Chairman of the Board, Chief
Executive
Officer and President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED ON THE 21ST DAY OF NOVEMBER, 1997 BY
THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ T. KENDALL HUNT Chairman of the Board, Chief Executive
- ----------------------------------------------------- Officer, President and Director
T. Kendall Hunt
/s/ GREGORY T. APPLE Vice President and Treasurer (Principal
- ----------------------------------------------------- Financial Officer and Principal Accounting
Gregory T. Apple Officer)
* Secretary and Director
- -----------------------------------------------------
Forrest D. Laidley
* Director
- -----------------------------------------------------
Robert E. Anderson
* Director
- -----------------------------------------------------
Michael A. Mulshine
*By: /s/ GREGORY T. APPLE
- -----------------------------------------------------
Gregory T. Apple
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 1
EXHIBIT 4.4
LETTER OF TRANSMITTAL AND RELEASE
TO TENDER AND GIVE A RELEASE IN RESPECT OF
CURRENT VASCO COMMON STOCK
OF
VASCO CORP.
PURSUANT TO THE EXCHANGE OFFER
OF
VASCO DATA SECURITY INTERNATIONAL, INC.
DATED __________, 1997
- -------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., CHICAGO TIME, ON __________, 1997,
UNLESS EXTENDED OR EARLIER TERMINATED.
- -------------------------------------------------------------------------------
To: Illinois Stock Transfer Company, Exchange Agent
By Mail, Overnight Delivery or By Hand Facsimile Transmission:
(9:00 a.m. - 5:00 p.m. Chicago Time) (312) 427-2879
223 West Jackson Boulevard
Suite 1210 Confirm by Telephone:
Chicago, Illinois 60606 (312) 427-2953
Any questions concerning tender procedures may be directed to Gregory
T. Apple, Vice President and Treasurer of VASCO Data Security International,
Inc. ("New VASCO"), at (630) 932-8844.
List below the Current VASCO Shares to which this Letter of Transmittal
and Release relates. If the space provided is inadequate, list the class of
Current VASCO Shares, the certificate numbers and the number of Current VASCO
Shares on a separately executed schedule and affix the schedule to this Letter
of Transmittal and Release.
<TABLE>
- ----------------------------------------------------------------------------------------------------------
DESCRIPTION OF CURRENT VASCO SHARES TENDERED
(SEE INSTRUCTION 3)
- ----------------------------------------------------------------------------------------------------------
Current VASCO Shares Tendered
Name(s) and Address(es) of holder(s) (Attach additional signed
(please fill in, if blank) scheduled if necessary)
- ----------------------------------------------------------------------------------------------------------
(1) (2) (3)
- ----------------------------------------------------------------------------------------------------------
Total Number
Certificate of Current
Number(s) VASCO Shares
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Total
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
All capitalized terms used herein and not defined herein have the
meaning ascribed to them in the Prospectus.
DELIVERY OF THIS LETTER OF TRANSMITTAL AND RELEASE (THE "LETTER OF
TRANSMITTAL AND RELEASE") TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA A
FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID
DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL AND RELEASE
SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL AND RELEASE IS
COMPLETED.
This Letter of Transmittal and Release must be used to accept the
Exchange Offer (as defined herein to include the terms and conditions set forth
herein and in the Prospectus dated _______________, 1997 (the "Prospectus")), of
New VASCO if certificates representing Current VASCO Shares (as defined in the
Prospectus) are to be physically delivered to Illinois Stock Transfer Company,
as exchange agent (the "Exchange Agent"). This Letter of Transmittal and Release
must also be used if a tender of Current VASCO Shares is to be made according to
the guaranteed delivery procedures described in the Prospectus under the heading
"THE EXCHANGE OFFER - Guaranteed Delivery Procedures for Current VASCO Shares."
HOLDERS WHO TENDER CURRENT VASCO SHARES ARE REQUIRED TO GRANT A RELEASE
OF THE ASSOCIATED CORPORATE MATTER CLAIMS (AS DEFINED IN THE PROSPECTUS). THE
COMPLETION, EXECUTION AND DELIVERY OF THIS LETTER OF TRANSMITTAL AND RELEASE IS
REQUIRED FOR ALL TENDERS AND WILL CONSTITUTE A
<PAGE> 2
RELEASE OF ANY AND ALL ASSOCIATED CORPORATE MATTER CLAIMS (AS DEFINED IN THE
PROSPECTUS) THE EXCHANGING HOLDER MAY HAVE EVEN IF LESS THAN ALL OF THE HOLDER'S
CURRENT VASCO SECURITIES (AS DEFINED IN THE PROSPECTUS) ARE EXCHANGED IN THE
EXCHANGE OFFER.
SUBJECT TO THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER (AS DEFINED
HEREIN), NEW VASCO WILL ACCEPT FOR EXCHANGE ALL CURRENT VASCO SHARES PROPERLY
TENDERED (AND NOT WITHDRAWN) PURSUANT TO THE EXCHANGE OFFER AT OR PRIOR TO THE
EXPIRATION DATE. AS PROMPTLY AS PRACTICABLE AFTER ACCEPTANCE OF THE TENDERED
CURRENT VASCO SHARES AFTER THE EXPIRATION DATE, NEW VASCO WILL ISSUE TO THE
EXCHANGE AGENT NEW VASCO SHARES (AS DEFINED IN THE PROSPECTUS) IN EXCHANGE FOR
THE TENDERED AND ACCEPTED CURRENT VASCO SHARES AND THE EXCHANGE AGENT WILL
TRANSMIT THE NEW VASCO SHARES TO THE EXCHANGING STOCKHOLDERS.
HOLDERS OF CURRENT VASCO SHARES WHOSE CURRENT VASCO SHARES ARE NOT
IMMEDIATELY AVAILABLE OR WHO CANNOT DELIVER THEIR CURRENT VASCO SHARES AND ALL
OTHER DOCUMENTS REQUIRED HEREBY TO THE EXCHANGE AGENT AT OR PRIOR TO THE
EXPIRATION DATE MAY NEVERTHELESS TENDER THEIR CURRENT VASCO SHARES ACCORDING TO
THE GUARANTEED DELIVERY PROCEDURES SET FORTH IN THE PROSPECTUS UNDER THE HEADING
"THE EXCHANGE OFFER - GUARANTEED DELIVERY PROCEDURE FOR CURRENT VASCO SHARES,"
PROVIDED THAT SUCH HOLDERS ALSO EXECUTE AND DELIVER THIS LETTER OF TRANSMITTAL
AND RELEASE PRIOR TO THE EXPIRATION DATE. SEE INSTRUCTION 2.
-2-
<PAGE> 3
- -------------------------------------------------------------------------------
[ ] CHECK HERE IF TENDERED CURRENT VASCO SHARES ARE ENCLOSED HEREWITH.
[ ] CHECK HERE IF CERTIFICATES REREPRESENTING SHARES HAVE BEEN LOST.
The undersigned has lost the certificates for _______ Current VASCO
Shares and requires assistance with respect to receiving New VASCO
Shares in exchange for the ________ Current VASCO shares owned by the
undersigned, and understands that an appropriate affidavit of loss and
indemnity agreement and that an indemnity and/or surety bond may be
required.
[ ] CHECK HERE IF TENDERED CURRENT VASCO SHARES ARE BEING DELIVERED
PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE
EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name(s) of holder(s)___________________________________________________
Date of Execution of Notice of Guaranteed
Delivery____________________________________________
Name of Eligible Institution That Guaranteed
Delivery____________________________________________
- --------------------------------------------------------------------------------
3
<PAGE> 4
NOTE: SIGNATURES MUST BE PROVIDED BELOW.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
YOU MAY WISH TO CONSULT WITH COUNSEL OF
YOUR CHOICE REGARDING THIS LETTER OF TRANSMITTAL AND RELEASE.
Ladies and Gentlemen:
The undersigned hereby tenders to New VASCO the Current VASCO Shares indicated
in the table above entitled "Description of Current VASCO Shares Tendered," upon
the terms and subject to the conditions set forth in the Prospectus (receipt of
which is hereby acknowledged) and in this Letter of Transmittal and Release.
Subject to, and effective upon, acceptance for exchange of the
Current VASCO Shares tendered hereby in accordance with the terms and subject to
the conditions of the Exchange Offer, the undersigned hereby sells, assigns and
transfers to, or upon the order of, New VASCO, all right, title and interest in
and to, the Current VASCO Shares. The undersigned hereby irrevocably constitutes
and appoints the Exchange Agent as the true and lawful agent and
attorney-in-fact of the undersigned (with full knowledge that the Exchange Agent
also acts as the agent of New VASCO) with respect to such Current VASCO Shares,
with full powers of substitution and revocation (such power of attorney being
deemed to be an irrevocable power coupled with an interest), to (i) deliver
certificates for such Current VASCO Shares together with all accompanying
evidences of transfer and authenticity, to or upon the order of New VASCO, (ii)
present such Current VASCO Shares for transfer of ownership on the books of
Current VASCO, (iii) deliver to Current VASCO and New VASCO the release
contained herein, (iv) receive all benefits and otherwise exercise all rights of
beneficial ownership of such Current VASCO Shares, all in accordance with the
terms of the Exchange Offer, and (v) accept delivery of the New Current VASCO
Shares on behalf of the undersigned.
The undersigned hereby represents and warrants that: (i) the
undersigned has full power and authority to tender the Current VASCO Shares
tendered hereby and to sell, assign and transfer all right, title and interest
in and to such Current VASCO Shares, (ii) the undersigned either has full power
and authority to deliver the release of all Associated Corporate Matter Claims
or is delivering a duly executed release (which is included in this Letter of
Transmittal and Release) from a person or entity having such power and
authority, and (iii) New VASCO will acquire good, indefeasible and unencumbered
title to such Current VASCO Shares, free and clear of all liens, restrictions,
charges, claims and encumbrances and not subject to any adverse claim, when the
same are acquired by New VASCO. The undersigned, upon request, will execute and
deliver any additional documents deemed by the Exchange Agent or New VASCO to be
necessary or desirable to complete the sale, assignment and transfer of the
Current VASCO Shares tendered hereby or to perfect the undersigned's release of
all Associated Corporate Matter Claims.
The undersigned (the "Releasor") hereby forever releases and
discharges Current VASCO, New VASCO and Current VASCO's predecessor entities,
consisting of VASCO Corp., a corporation incorporated in Delaware on May 22,
1984 ("Old VASCO") and Ridge Point Enterprises, Inc., incorporated in Utah on
January 7, 1985 ("VASCO Utah" and, together with Old VASCO, the "VASCO
Predecessors"), and the respective successors and assigns of each of the
foregoing (collectively, "VASCO"), and each of them, from and against all direct
or indirect demands, claims, payments, obligations, actions or causes of action,
assessments, losses, liabilities, damages (including, without limitation,
special, consequential, exemplary, punitive and similar damages), reasonable
costs and expenses paid or incurred, or diminutions in value of any kind or
character (whether or not known or asserted prior to the date hereof, fixed or
unfixed, conditional or unconditional, choate or inchoate, liquidated or
unliquidated, secured or unsecured, accrued, absolute, contingent or otherwise),
that the Releasor now has or ever had against VASCO or the assets of Current
VASCO or any of the VASCO Predecessors as a result of acts or omissions
occurring on or before the date of the Prospectus, which arise from or are in
connection with:
-4-
<PAGE> 5
(i) any prior authorization, designation or issuance of
stock, any stock split, reclassification, redesignation,
dividend or distribution of or upon stock, any amendment to
the certificate or articles of incorporation or bylaws
including those affecting the amount, rights, powers or
preferences of stock, and any failure to properly authorize,
approve or effect any of the foregoing actions, including
(a) the failure by Old VASCO to document whether an amendment
to its Certificate of Incorporation was duly authorized or to
file a Certificate of Amendment with the Delaware Secretary of
State to amend its Certificate of Incorporation in December
1984 to effect a three-for-one stock split to increase the
50,000 authorized shares of its common stock to 150,000
authorized common shares and to provide for 600,000 shares of
non-voting common stock prior to purportedly effecting the
stock split and issuing a number of such non-voting common
shares which cannot be determined due to the unavailability of
documentation concerning any purported issuance of such
non-voting common shares, (b) the failure by Old VASCO to
document whether director and stockholder approval was
obtained for an amendment to its Certificate of Incorporation
increasing the number of authorized shares of common stock to
6,900,000 shares in September 1986, (c) the purported issuance
of 317,181 shares of preferred stock in November 1989 by
VASCO Utah at a time when the issuance of preferred shares
was not authorized by VASCO Utah's charter, and (d) the
purported issuance of 317,181 shares of preferred stock by
Current VASCO in connection with the 1990 merger when,
although Current VASCO's Certificate of Incorporation
authorized 500,000 shares of preferred stock, the rights,
powers and preferences of such stock were not speci-
fied in Current VASCO's Certificate of Incorporation and its
Certificate of Incorporation did not provide its Board of
Directors the power to designate such rights, powers
and preferences;
(ii) any failure to properly design, approve, adopt,
administer, or authorize the number of shares subject to, any
stock option plan or program, including actions required to
allow for options awarded thereunder to be treated as
incentive stock options under the Internal Revenue Code of
1986, as amended (the "Code"), including, beginning in
1985, the failure by Old VASCO, VASCO Utah and/or Current
VASCO to (a) document approval by the Board of Directors and
stockholders of stock option plans, (b) specify and authorize
the number of shares of stock to be subject to such plans, (c)
reserve the number of shares subject to such plans, (d)
document the authorization for the grant of options pursuant
to such plans and the issuance of shares upon exercise of such
options, and (e) design such plans in a manner that would
ensure options granted thereunder would be treated as
incentive stock options;
(iii) any organization or any merger, consolidation,
share exchange, reorganization, recapitalization, sale
of assets or like event, or any failure properly to
authorize, approve, effect or consummate same, including (a)
the failure to document the approval by Old VASCO's
stockholders of the September 1986 reorganization through the
share exchange undertaken by Old VASCO and Ridge Point
Enterprises, Inc./VASCO Utah, (b) the failure to document
whether all stockholders of Old VASCO voluntarily exchanged
their shares for shares of Ridge Point Enterprises,
Inc./VASCO Utah, (c) the failure to document the mechanics of
the exchange of 6,900,000 common shares of Old VASCO for
12,800,000 common shares of Ridge Point Enterprises,
Inc./VASCO Utah, and (d) the following procedural
irregularities which call into question the validity of the
intended 1990 merger of VASCO Utah and Current VASCO, as well
as Current VASCO's title to the assets of VASCO Utah
purportedly succeeded to by Current VASCO by virtue of the
merger: (1) the incorporation of Current VASCO, after the
date of the 1990 merger agreement, (2) Current VASCO's
approval of the plan of merger, including approval of the
plan of merger prior to the incorporation of Current VASCO,
the lack of documented stockholder approval as called for by
the plan of merger and the effectiveness of the approval by
Current VASCO's then Board of Directors, (3) the
authorization and issuance of shares of common and preferred
stock by Current VASCO pursuant to the merger, (4) the
adoption of Current VASCO's initial bylaws, appointment of
Current VASCO's initial directors and the election of its
initial officers, and (5) the administrative dissolution of
VASCO Utah in July 1990 prior to the filing of a Certificate
of Merger with the State of Delaware in August 1990, (6) the
failure to file Articles of Merger with the State of Utah in
connection with the intended merger of VASCO Utah and Current
VASCO in August 1990;
-5-
<PAGE> 6
(iv) the dissolution, liquidation or winding up of any
of Current VASCO's predecessors, or any failure properly to
approve or effect said dissolution, liquidation or winding up,
including (a) the failure to properly document any stockholder
approval of the dissolution of Old VASCO and to document
actions taken to dissolve, liquidate and wind-up Old VASCO in
August 1987, (b) the failure to vest effectively title and
ownership in VASCO Utah of Old VASCO's assets and to document
the assumption by VASCO Utah of Old VASCO's liabilities, and
(c) the administrative dissolution of VASCO Utah in July 1990
prior to the intended merger transaction with Current VASCO
and before the filing of a Certificate of Merger with the
State of Delaware in August 1990; and
(v) any failure to afford security holders any
appraisal, preemptive or other rights, whether accorded by
statute or by the articles of incorporation, certificate of
incorporation or bylaws of Current VASCO or any of its
predecessors, in connection with any of the matters described
in the foregoing clauses (i), (ii), (iii) or (iv) including
(a) the failure of Old VASCO to document whether it afforded
its stockholders, in connection with any issuances of Old
VASCO capital stock subsequent to the initial issuance of
50,000 common shares in connection with the incorporation of
Old VASCO in May 1984, the preemptive rights to purchase,
upon the issuance or sale of Old VASCO stock (or securities
convertible into Old VASCO stock), shares (or securities) in
proportion to the amount of Old VASCO common stock then owned
by such holder, subject to conditions and time limitations
prescribed (and at a price determined as permitted by law),
by Old VASCO's Board of Directors, as provided for in the Old
VASCO Certificate of Incorporation and (b) the failure of
VASCO Utah to document whether it afforded its stockholders
the appraisal rights provided for by Utah law in connection
with the intended 1990 merger of VASCO Utah with Current
VASCO.
(The matters listed in the foregoing clauses (i), (ii), (iii),
(iv) and (v) are collectively referred to in this document and the Prospectus as
the "Corporate Matters").
The Releasor hereby irrevocably waives its rights under any
applicable statute, rule, regulation, legal principle, or legal doctrine that
provides that a general release does not extend to claims which a releasing
party does not know or suspect to exist in its favor at the time of executing
such release, which if known by the releasing party would have materially
affected its settlement with the released party. Notwithstanding the foregoing,
to the extent federal or state securities laws limit the release of a claim
under a federal securities law or under a state securities law, as applicable,
to mature, ripened claims of which the releasing party had knowledge before
signing the release, the release of a federal securities law claim or state
securities law claim shall be limited to a release of mature, ripened claims
of which the releasing party had knowledge prior to signing the release.
The Releasor hereby represents, warrants and covenants that
(i) the Releasor has had adequate opportunity to consult legal counsel of
Releasor's choice regarding this Letter of Transmittal and Release, (ii) the
Releasor has executed and delivered this Letter of Transmittal and Release
pursuant to the free will of the Releasor and with the intention that the
release set forth in this Letter of Transmittal and Release be a general release
to the full extent provided herein, and (iii) the Releasor has not sold,
assigned or otherwise transferred any rights or remedies arising from or in
connection with the Corporate Matters. The Releasor acknowledges and agrees that
this Letter of Transmittal and Release (i) will effect a release of any and all
Associated Corporate Matter Claims the Releasor may have even if less than all
of the Releasor's Current VASCO Securities (as defined in the Prospectus) are
exchanged in the Exchange Offer, and (ii) does not affect any rights or claims
the Releasor may have against VASCO arising out of any matter or transaction
arising from and after the date of the Prospectus.
This Letter of Transmittal and Release shall be governed by
and construed in accordance with the internal laws and not the conflicts of law
rules of the State of Illinois, and the invalidity or unenforceability of any
term or provision of this Letter of Transmittal and Release shall not affect the
validity or enforceability of any other term or provision hereof. This Letter of
Transmittal and Release is binding on the Releasor and the Releasor's heirs,
personal representatives, successors and assigns and inures to the benefit of
New VASCO. Current VASCO, the VASCO Predecessors and VASCO.
-6-
<PAGE> 7
The terms and conditions set forth in the Prospectus and this
Letter of Transmittal and Release together constitute New VASCO's offer (the
"Exchange Offer") to exchange the applicable class or series of New Current
VASCO Shares for the applicable class or series of Current VASCO Shares properly
tendered, in respect of which a release is given and accepted for exchange. New
VASCO will acquire such Current VASCO Shares by issuing New VASCO Shares in
exchange therefor. Such New VASCO Shares will be delivered to the Exchange
Agent, which will deliver the New VASCO Shares to the holders of tendered and
accepted Current VASCO Shares in respect of which a release is given, as soon as
practicable following the Expiration Date.
The undersigned understands that the release provided hereby
shall remain in full force and effect unless and until such release is revoked
in accordance with the procedures set forth in the Prospectus and this Letter of
Transmittal and Release for the withdrawal of a tender of Current VASCO Shares.
The undersigned understands that after the acceptance of Current VASCO Shares
pursuant to the Exchange Offer, no releases may be revoked.
The undersigned understands that Current VASCO Shares properly
tendered and not withdrawn prior to the Expiration Date may be exchanged for the
applicable New VASCO Shares, subject to the terms and conditions of the Exchange
Offer. If any amount of tendered Current VASCO Shares is not exchanged for any
reason, they will be returned, without expense, to the undersigned at the
address shown below or at such different address as may be indicated herein
under "Special Delivery Instructions."
The undersigned understands that the procedures described
herein and in the Prospectus under the heading "THE EXCHANGE OFFER" and in the
instructions hereto will constitute a binding agreement between the undersigned
and New VASCO upon the terms and subject to the conditions described herein and
in the Prospectus. For purposes of the Exchange Offer, the undersigned
understands that validly tendered Current VASCO Shares (or defectively tendered
Current VASCO Shares with respect to which New VASCO has, or has caused to be,
waived such defect) will be deemed to have been accepted by New VASCO if, as and
when New VASCO gives oral or written notice thereof to the Exchange Agent.
TENDERS OF CURRENT VASCO SHARES MADE PURSUANT TO THE EXCHANGE
OFFER MAY BE WITHDRAWN, AND THE RELEASE GRANTED IN THIS LETTER OF TRANSMITTAL
AND RELEASE MAY BE REVOKED, ON OR PRIOR TO THE EXPIRATION DATE BY WRITTEN NOTICE
OF WITHDRAWAL OR REVOCATION IN ACCORDANCE WITH THE PROCEDURES SET FORTH IN THE
PROSPECTUS. A purported notice of withdrawal will be effective only if delivered
to the Exchange Agent in accordance with the specific procedures set forth in
the Prospectus under the heading "THE EXCHANGE OFFER - Withdrawal Rights."
All authority conferred or agreed to be conferred in this
Letter of Transmittal and Release shall not be affected by and shall survive the
death or incapacity of the undersigned and any obligation of the undersigned
hereunder shall be binding upon the heirs, executors, administrators, trustees
in bankruptcy, personal and legal representatives, successors and assigns of the
undersigned.
Unless otherwise indicated under "Special Issuance
Instructions," please issue the applicable New VASCO Shares in the name(s) of
the undersigned. Similarly, unless otherwise indicated under "Special Delivery
Instructions," please mail the applicable New VASCO Shares (and accompanying
documents, as appropriate) to the undersigned at the address shown below the
undersigned's signature(s). In the event that both "Special Issuance
Instructions" and "Special Delivery Instructions" are completed, please issue
the applicable New VASCO Shares in the name(s) of, and mail the applicable New
VASCO Shares to, the person(s) so indicated. The undersigned recognizes that New
VASCO has no obligation under the "Special Issuance Instructions" or the
"Special Delivery Instructions" provisions of this Letter of Transmittal and
Release to effect the transfer of any Current VASCO Shares from the name of the
holder(s) thereof if New VASCO does not accept for exchange such Current VASCO
Shares.
-7-
<PAGE> 8
<TABLE>
- ------------------------------------------------------- -------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 4, 5 AND 6) (SEE INSTRUCTIONS 1, 4, 5 AND 6)
<S> <C>
To be completed ONLY if any New VASCO Shares are To be completed ONLY if any New VASCO Shares are
to be issued in the name of someone other than the to be sent to someone other than the person or
person or persons whose signature(s) appear(s) on persons whose signature(s) appear(s) on this Letter
this Letter of Transmittal and Release below. If any of Transmittal and Release below, or to the person or
of the New VASCO Shares are to be issued in the name persons at an address other than that shown above in
of someone other than the person or persons whose the box entitled "Description of Current VASCO Shares
signature(s) appear(s) on this Letter of Transmittal Tendered and in Respect of Which Release is Given."
and Release below, the assignment block on the back
of the stock certificate(s) of the tendered Current Send to:
VASCO Shares must be properly completed or an
appropriate instrument of transfer must be provided, Name..................................................
in each case with signature guaranteed. (See (Please Print)
Instruction 1).
Address ..............................................
Issue to: ......................................................
......................................................
Name................................................ (Include Zip Code)
(Please Print)
Address ............................................
....................................................
....................................................
(Include Zip Code)
....................................................
(Taxpayer Identification or Social Security
Number(s)* of Payee)
*PLEASE ALSO COMPLETE THE ENCLOSED SUBSTITUTE FORM W-9.
- ------------------------------------------------------- -------------------------------------------------------
</TABLE>
-8-
<PAGE> 9
- -------------------------------------------------------------------------------
SIGNATURE OF RECORD HOLDER
SEE INSTRUCTION 4
By completing, executing and delivering this Letter of
Transmittal and Release, the undersigned hereby tenders the Current VASCO Shares
and grants the release set forth in the foregoing provisions of this Letter of
Transmittal and Release.
The undersigned hereby represents and warrants that the
undersigned is the record holder and the beneficial owner of the Current VASCO
Shares tendered herewith. (If the undersigned is not the beneficial owner,
strike "and the beneficial owner" in the preceding sentence and have the
beneficial owner sign this Letter of Transmittal and Release on the next page or
on a counterpart and attach the counterpart hereto.)
Dated: , 1997
------------------------------------
Sign Here:
--------------------------------------------------------------------
--------------------------------------------------------------------
SIGNATURE(S) OF REGISTERED HOLDER(S) OR AUTHORIZED SIGNATORY
(This Letter of Transmittal and Release must be signed by the
registered holder(s) exactly as name(s) appear(s) on certificate(s) for the
Current VASCO Shares, or by person(s) authorized to become registered holder(s)
by endorsements and documents transmitted herewith. If signature is by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, please
set forth full title and see Instruction 4.)
Name(s)
-----------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Please Print)
Capacity
--------------------------------------------------------------------
Address
--------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Include Zip Code)
Area Code and Tax Identification or
Tel. No. Social Security No.
------------------------------ ---------------------
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED -- SEE INSTRUCTIONS 1 AND 6)
Authorized Signature
-----------------------------------------------------------
Name of Firm
------------------------------------------------------------------
Address
-----------------------------------------------------------------------
Dated: , 1997 Area Code & Tel. No.
--------------------------- ----------------
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9)
- -------------------------------------------------------------------------------
-9-
<PAGE> 10
- --------------------------------------------------------------------------------
SIGNATURE OF BENEFICIAL OWNER
SEE INSTRUCTION 4
IF THE CURRENT VASCO SHARES ARE REGISTERED IN THE NAME OF A
NOMINEE, THIS LETTER OF TRANSMITTAL AND RELEASE MUST BE SIGNED
BY THE BENEFICIAL OWNER OF THE CURRENT VASCO SHARES TENDERED.
By completing, executing and delivering this Letter of
Transmittal and Release, the undersigned hereby tenders the Current VASCO Shares
and grants the release set forth in the foregoing provisions of this Letter of
Transmittal and Release. The undersigned hereby represents and warrants that the
undersigned is the beneficial owner of the Current VASCO Shares tendered
herewith.
Dated: , 1997
---------------------------
Sign Here:
--------------------------------------------------------------------
--------------------------------------------------------------------
SIGNATURE(S) OF BENEFICIAL OWNER(S) OR AUTHORIZED SIGNATORY
(If signature is by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, please set forth full title and see
Instruction 4.)
Name(s)
------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Please Print)
Capacity
----------------------------------------------------------------------
Address
----------------------------------------------------------------------
----------------------------------------------------------------------
(Include Zip Code)
Area Code and Tax Identification or
Tel. No. Social Security No.
----------------------- ----------------------------
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED -- SEE INSTRUCTIONS 1 AND 6)
Authorized Signature
-----------------------------------------------------------
Name of Firm
------------------------------------------------------------------
Address
Dated: , 1997 Area Code & Tel. No.
--------------------------- ---------------
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9)
- -------------------------------------------------------------------------------
-10-
<PAGE> 11
INSTRUCTIONS FORMING PART
OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. SIGNATURE GUARANTEES. Signatures are not required to be
guaranteed by an Eligible Institution (as defined below) if the Letter of
Transmittal and Release and the Current VASCO Shares tendered hereby are
tendered (a) by a registered physical holder of such Current VASCO Shares who
has not completed either the box entitled "Special Issuance Instructions" or the
box entitled "Special Delivery Instructions," or (b) for the account of an
Eligible Institution. Signatures on all other Letters of Transmittal and Release
must be guaranteed by an Eligible Institution. If the Current VASCO Shares
tendered hereby are registered in a name other than the signer of this Letter of
Transmittal and Release, see Instruction 4. As used herein, "Eligible
Institution" means a firm or other entity identified in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, including (as such terms are
defined therein): (i) a bank; (ii) a broker, dealer, municipal securities
dealer, municipal securities broker, government securities dealer or government
securities broker; (iii) a credit union; (iv) a national securities exchange,
registered securities association or clearing agency; or (v) a savings
association.
2. DELIVERY OF LETTER OF TRANSMITTAL AND RELEASE AND CURRENT
VASCO SHARES; GUARANTEED DELIVERY PROCEDURES. This Letter of Transmittal and
Release is to be used only if Current VASCO Shares tendered hereby are (i) to be
forwarded herewith or (ii) to be made according to the guaranteed delivery
procedures set forth in the Prospectus under "THE EXCHANGE OFFER - Guaranteed
Delivery Procedures for Current VASCO Shares." All physically tendered Current
VASCO Shares, together with a properly completed and duly executed Letter of
Transmittal and Release (or facsimile thereof) and any other documents required
by this Letter of Transmittal and Release, must be mailed or delivered to the
Exchange Agent at its address set forth on the front page hereof and must be
received by the Exchange Agent at or prior to the Expiration Date.
Holders of Current VASCO Shares whose Current VASCO Shares are
not immediately available or who cannot deliver Current VASCO Shares and all
other required documents to the Exchange Agent at or prior to the Expiration
Date may nevertheless effect a tender of the Current VASCO Shares if all of the
following conditions are satisfied:
(a) the tender and delivery are made by or through an
Eligible Institution;
(b) at or prior to the Expiration Date, the Exchange
Agent receives a properly completed and duly executed Letter
of Transmittal and Release and (by mail, overnight delivery,
by hand or facsimile transmission) a properly completed and
duly executed Notice of Guaranteed Delivery substantially in
the form provided by New VASCO; and
(c) the certificate(s) for the tendered Current VASCO
Shares are received by the Exchange Agent within five business
days after the Expiration Date.
THE METHOD OF DELIVERY OF CERTIFICATES FOR CURRENT VASCO
SHARES, THIS LETTER OF TRANSMITTAL AND RELEASE AND ANY OTHER REQUIRED DOCUMENTS
IS AT THE OPTION AND RISK OF THE TENDERING HOLDER AND, EXCEPT AS OTHERWISE
PROVIDED IN THIS LETTER OF TRANSMITTAL AND RELEASE, DELIVERY WILL BE DEEMED MADE
ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS BY MAIL,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
No alternative, conditional or contingent tenders will be
accepted. All tendering holders, by execution of this Letter of Transmittal and
Release (or a facsimile thereof), waive any right to receive any notice of the
acceptance of their tender.
-11-
<PAGE> 12
3. INADEQUATE SPACE. If the space provided herein is
inadequate, the class of Current VASCO Shares, the certificate numbers of the
Current VASCO Shares and the number of Current VASCO Shares tendered should be
listed on a separate SIGNED schedule and attached hereto.
4. SIGNATURES ON LETTER OF TRANSMITTAL AND RELEASE, AND
ENDORSEMENTS.
IF THE CURRENT VASCO SHARES ARE REGISTERED OF RECORD IN THE
NAME OF A NOMINEE, THE LETTER OF TRANSMITTAL AND RELEASE MUST BE SIGNED BY THE
NOMINEE (ON PAGE 9) AND BY THE BENEFICIAL OWNER (ON PAGE 10).
If this Letter of Transmittal and Release is signed by a
person other than the record holder(s) of Current VASCO Shares tendered hereby,
then, in order to validly tender such Current VASCO Shares pursuant to the
Exchange Offer, such Current VASCO Shares must be endorsed or accompanied by an
appropriate written instrument or instruments of transfer signed exactly as the
name(s) of such record holder(s) appear(s) on the Current VASCO Shares, with the
signature(s) on such Current VASCO Shares or instruments of transfer guaranteed
by an Eligible Institution.
If this Letter of Transmittal is signed by the record
holder(s) of the Current VASCO Shares tendered hereby, the signature(s) must
correspond with the name(s) as written on the face of the Current VASCO Shares
without any change whatsoever.
If any of the tendered Current VASCO Shares are held of record
by two or more persons, all such persons must sign this Letter of Transmittal
and Release.
If any of the tendered Current VASCO Shares are registered in
different names, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal and Release as there are different
registrations.
If this Letter of Transmittal and Release or any Current VASCO
Shares are signed by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation, agent or other person(s) acting in a
fiduciary or representative capacity, such person(s) should so indicate when
signing and must submit proper evidence satisfactory to the Exchange Agent of
their authority so to act.
5. TRANSFER TAXES. Except as set forth in this Instruction 5,
New VASCO will pay or cause to be paid all transfer taxes, if any, with respect
to the sale and transfer to it of any Current VASCO Shares pursuant to the
Exchange Offer. If, however, New VASCO Shares or Current VASCO Shares not
tendered or not exchanged are to be delivered to or are to be registered or
issued in a name other than the name of the registered holder of the Current
VASCO Shares, or if a transfer tax is imposed for any reason other than the
transfer or sale of Current VASCO Shares to New VASCO pursuant to the Exchange
Offer, the amount of any such transfer taxes will be the responsibility of the
tendering stockholder and will be required to be paid by the stockholder before
delivery by the Exchange Agent of the New VASCO Shares, unless satisfactory
evidence of the payment of such taxes, or exemption therefrom, is submitted.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If New VASCO
Shares (or Current VASCO Shares not tendered or exchanged) are to be issued in
the name of a person other than the signer of this Letter of Transmittal and
Release or if such Current VASCO Shares and/or New VASCO Shares are to be sent
to someone other than the signer of this Letter of Transmittal and Release or to
the signer at a different address, the boxes entitled "Special Issuance
Instructions" or "Special Delivery Instructions" in this Letter of Transmittal
and Release should be completed, as applicable. In such event, the signature of
the registered holder (unless an Eligible Institution) must be guaranteed by an
Eligible Institution.
-12-
<PAGE> 13
7. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for
assistance or additional copies of the Prospectus or this Letter of Transmittal
and Release may be obtained from New VASCO at the address set forth on the last
page of this Letter of Transmittal and Release. Holders of Current VASCO Shares
may also contact such holder's broker, dealer, commercial bank or trust company
or nominee for assistance concerning the Exchange Offer.
8. SUBSTITUTE FORM W-9. A tendering holder (or other payee) is
required to provide the Exchange Agent with a correct taxpayer identification
number ("TIN") on the Substitute Form W-9 that is provided below and to certify
that it is not subject to backup withholding. Failure to provide the information
on the form may subject the tendering holder (or other payee) to a $50 penalty
imposed by the Internal Revenue Service and 31% federal income tax withholding
on the payments made to such person.
IMPORTANT: TO ACCEPT THE EXCHANGE OFFER, THIS LETTER OF
TRANSMITTAL AND RELEASE OR A MANUALLY SIGNED FACSIMILE HEREOF, TOGETHER WITH
CERTIFICATES FOR CURRENT VASCO SHARES OR THE NOTICE OF GUARANTEED DELIVERY MUST
BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
-13-
<PAGE> 14
IMPORTANT TAX INFORMATION
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW IS
INCLUDED FOR GENERAL INFORMATION ONLY. EACH HOLDER IS URGED TO CONSULT A TAX
ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO IT (INCLUDING THE
APPLICATION AND EFFECT OF FOREIGN, STATE AND LOCAL TAX LAWS) OF THE EXCHANGE
OFFER. CERTAIN HOLDERS (INCLUDING INSURANCE COMPANIES, TAX-EXEMPT ORGANIZATIONS
AND FOREIGN TAXPAYERS) MAY BE SUBJECT TO SPECIAL RULES NOT DISCUSSED BELOW. THE
DISCUSSION DOES NOT CONSIDER THE EFFECT OF ANY APPLICABLE FOREIGN, STATE AND
LOCAL TAX LAWS.
SUBSTITUTE FORM W-9
Under the U.S. federal income tax laws, the Exchange Agent may
be required to withhold 31% of the amount of the gross proceeds paid to certain
holders or other payees pursuant to the Exchange Offer. To prevent backup
withholding on any gross proceeds paid to a holder or other payee with respect
to Current VASCO Shares tendered pursuant to the Exchange Offer, the holder is
required to notify the Exchange Agent (as payor) of the holder's current TIN (or
the TIN of any other payee) by completing the form below, certifying that the
TIN provided on Substitute Form W-9 is correct (or that such holder is awaiting
a TIN), and that (i) the holder has not been notified by the Internal Revenue
Service (the "IRS") that the holder is subject to backup withholding as a result
of failure to report all interest or dividends or (ii) the IRS has notified the
holder that the holder is no longer subject to backup withholding. In general,
if a holder of Current VASCO Shares is an individual, the TIN is the Social
Security number of such individual. In addition, if the Exchange Agent is not
provided with the correct TIN, the holder may be subject to a $50 penalty
imposed by the IRS.
Certain holders of Current VASCO Shares (including, among
others, all corporations and certain foreign individuals) are not subject to
these backup withholding and information reporting requirements. In order for a
foreign individual to qualify as an exempt recipient, that holder must submit a
statement signed under penalty of perjury attesting as to that status. Forms for
such statement can be obtained from the Exchange Agent. For further information
regarding backup withholding and instructions for completing Substitute Form W-9
(including how to obtain a TIN if you do not have one and how to complete
Substitute Form W-9 if Current VASCO Shares are held in more than one name),
consult the enclosed "Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9."
CONSEQUENCES OF FAILURE TO COMPLETE SUBSTITUTE FORM W-9
Failure to complete Substitute Form W-9 will not, by itself,
cause the Current VASCO Shares to be deemed invalidly tendered but may require
the Exchange Agent to withhold 31% of the amount of the gross proceeds paid
pursuant to the Exchange Offer. Backup withholding is not an additional U.S.
federal income tax. Rather, the U.S. federal income tax liability of a person
subject to backup withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, the holder may claim a refund
from the IRS.
WHAT NUMBER TO GIVE THE DEPOSITARY
The holder is required to give the Exchange Agent the TIN
(e.g., Social Security number or Employer Identification Number) of the record
owner of the Current VASCO Shares. If the Current VASCO Shares are registered in
more than one name or are not registered in the name of the actual owner,
consult the enclosed "Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9," for additional guidance on which number to
report.
-14-
<PAGE> 15
<TABLE>
- --------------------------------------------------------------------------------------------------------------------
PAYER'S NAME: THE ILLINOIS STOCK TRANSFER COMPANY
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR Social Security Number
TAXPAYER IDENTIFICATION NUMBER IN
FORM W-9 THE BOX AT THE RIGHT AND CERTIFY _________________________
BY SIGNING AND DATING BELOW.
DEPARTMENT OF THE TREASURY OR
INTERNAL REVENUE SERVICE [SEE GUIDELINES]
Employer Identification Number
PAYER'S REQUEST FOR TAXPAYER
IDENTIFICATION NUMBER AND _________________________
CERTIFICATION ("TIN")
---------------------------------------------------------------------------
PART II -- For Payees exempt from backup withholding, see "Important Tax
Information" above and Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9 enclosed herewith and complete
as instructed therein.
- --------------------------------------------------------------------------------------------------------------------
Certifications -- Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number (or a
Taxpayer Identification Number has not been issued to me and either (a) I have mailed or
delivered an application to receive a Taxpayer Identification Number to the appropriate
Internal Revenue Service Center or Social Security Administration office or (b) I intend to
mail or deliver an application in the near future. I understand that if I do not provide a
Taxpayer Identification Number to the payer, 31% of all reportable payments made to me
thereafter will be withheld until I provide a number to the payer and that, if I do not
provide my Taxpayer Identification Number within sixty (60) days, such retained amounts shall
be remitted to the Internal Revenue Service ("IRS") as backup withholding.)
(2) I am not subject to backup withholding either because I have not been notified by the IRS
that I am subject to backup withholding as a result of a failure to report all interest or
dividends or the IRS has notified me that I am no longer subject to backup withholding.
Certification Instructions -- You must cross out item (2) above if you have been notified by the IRS that you are
subject to backup withholding because of under-reporting interest or dividends on your tax return. However, if
after being notified by the IRS that you were subject to backup withholding you received another notification from
the IRS that you are no longer subject to backup withholding, do not cross out item (2). (Also see the "Important
Tax Information" above).
- --------------------------------------------------------------------------------------------------------------------
Name
---------------------------------------------------------------------------------------------------------------
(Please Print)
Address
------------------------------------------------------------------------------------------------------------
(Include Zip Code)
Signature Date , 1997
-------------------------------------------------------------------- ---------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY
RESULT IN A $50 PENALTY IMPOSED BY THE IRS AND BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE
EXCHANGE OFFER. PLEASE REVIEW THE AGUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE
FORM W-9" FOR ADDITIONAL DETAILS.
-15-
<PAGE> 16
ANY QUESTIONS CONCERNING TENDER PROCEDURES OR
REQUESTS FOR ADDITIONAL COPIES OF THIS LETTER OF TRANSMITTAL AND RELEASE
MAY BE DIRECTED TO:
ILLINOIS STOCK TRANSFER COMPANY
223 WEST JACKSON BOULEVARD
SUITE 1210
CHICAGO, ILLINOIS 60606
(312) 427-2953
-16-
<PAGE> 17
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Guidelines for Determining the Proper Identification Number to Give the
Payer. Social Security numbers have nine digits separated by two hyphens: i.e.,
000-00-0000. Employer identification numbers have nine digits separated by one
hyphen: i.e., 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
<CAPTION>
GIVE THE EMPLOYER
GIVE THE SOCIAL IDENTIFICATION
FOR THIS TYPE OF ACCOUNT: SECURITY NUMBER OF: FOR THIS TYPE OF ACCOUNT: NUMBER OF
- ------------------------- ------------------- ------------------------- -----------------
<S> <C> <C> <C>
1. An individual's account The individual 8. Sole proprietorship account The Owner(4)
2. Two or more individuals The actual owner of the 9. A valid trust, estate, or Legal entity (Do not
(joint account) account or, if combined pension trust furnish the identifying
funds, any one of the number of the personal
individuals(1) representative or trustee
unless the legal entity itself
is not designated in the
account title.)(5)
3. Husband and wife (joint The actual owner of the 10. Corporate account The Corporation
account account or, if joint funds,
either person(1)
4. Custodian account of a The minor(2) 11. Religious, charitable, or The organization
minor (Uniform Gift to educational organization
Minors Act) account
5. Adult and minor (joint The adult or, if the minor 12. Partnership account held in The partnership
account) is the only contributor, the the name of the business
minor(2)
6. Account in the name of The ward, minor or 13. Association, club, or other The organization
guardian or committee for incompetent person(3) tax-exempt organization
a designated ward, minor,
or incompetent person
7. a. The usual revocable The grantor-trustee(1) 14. A broker or registered The broker or nominee
savings trust account nominee
(grantor is also trustee)
b. So-called trust account The actual owner(1) 15. Account with the The public entity
that is not a legal or Department of Agriculture
valid trust under State in the name of a public
law. entity (such as a State or
local government, school
district, or prison) that
receives agricultural
program payments
</TABLE>
- ------------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person a social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate, or pension trust.
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
17
<PAGE> 18
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or
Form SS-4, Application for Employer Identification Number, at the local office
of the Social Security Administration or the Internal Revenue Service and apply
for a number.
PAYEE EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include
the following:
- - A corporation.
- - A financial institution.
- - An organization exempt from tax under section 501(a), or an individual
retirement plan.
- - The United States or any agency or instrumentality thereof.
- - A State, the District of Columbia, a possession of the United States, or any
subdivision or instrumentality thereof.
- - A foreign government, a political subdivision of a foreign government, or
agency or instrumentality thereof.
- - An international organization or any agency, or instrumentality thereof.
- - A registered dealer in securities or commodities registered in the U.S. or a
possession of the U.S.
- - A real estate investment trust.
- - A common trust fund operated by a bank under section 584(a).
- - An exempt charitable remainder trust, or a non-exempt trust described in
section 4947(a)(1).
- - An entity registered at all times under the Investment Company Act of 1940.
- - A foreign central bank of issue.
Certain payments other than interest, dividends, and patronage dividends
that are not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under section 5041, 5041(a),
6045, and 6050A.
PRIVACY ACT NOTICE. Section 5109 requires most recipients of dividend,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to IRS. IRS uses the numbers for identification
purposes. Payers must be given the numbers whether or not recipients are
required to file tax returns. Beginning January 1, 1993, payers must
generally withhold 31% of taxable interest, dividend, and certain other
payments to a payee who does not furnish a taxpayer identification number to a
payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.
If you fail to furnish your taxpayer identification number to a payer, you are
subject to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to wilful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
- - Payments to nonresident aliens subject to withholding under section 1441.
- - Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
- - Payments to patronage dividends where the amount received is not paid in
money.
- - Payments made by certain foreign organizations.
- - Payments made to a nominee.
Payments of interest not generally subject to backup withholding include the
following:
- - Payments of interest on obligations issued by individuals.
NOTE: You may be subject to backup withholding if this interest is $800 or
more and is paid in the course of the payer's trade or business and you have
not provided your correct taxpayer identification number to the payer.
- - Payments of tax-exempt interest (including exempt interest dividends under
section 852).
- - Payments described in section 6049(b)(5) to nonresident aliens.
- - Payments on tax-free convenient bonds under section 1451.
- - Payments made by certain foreign organizations.
- - Payments made to a nominee.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO
THE PAYER, IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS,
ALSO SIGN AND DATE THE FORM.
18
<PAGE> 1
EXHIBIT 4.5
NEW VASCO WARRANT AGREEMENT
This Agreement is by and among VASCO Data Security
International, Inc., a Delaware corporation ("New VASCO"), VASCO CORP., a
Delaware corporation ("Current VASCO") and the undersigned (the
"Warrantholder"), which is the holder of warrants to acquire shares of common
stock of Current VASCO (the "Current VASCO Warrants"), copies of which are
attached hereto as Schedule(s) ______ and originals of which have been delivered
to New VASCO.
Pursuant to the Prospectus of New VASCO dated _____________,
1997, as supplemented and amended prior to the Expiration Date as defined
therein (the "Prospectus"), New VASCO has offered to the Warrantholder the right
to acquire the same number of shares of common stock of New VASCO on the same
terms and conditions, including the exercise price and the expiration date, as
provided for in the Current VASCO Warrants, in exchange for (i) the cancellation
of the Current VASCO Warrants and (ii) the release set forth in Section 3 below
in favor of Current VASCO or any of its predecessor entities (the "VASCO
Predecessors") consisting of VASCO Corp., a corporation incorporated in Delaware
on May 22, 1984 ("Old VASCO"), and Ridge Point Enterprises, Inc., incorporated
in Utah on January 7, 1985 (and subsequently renamed VASCO Corp. ("VASCO Utah"),
and the respective successors and assigns of each of the foregoing, including
New VASCO (Current VASCO, New VASCO, the VASCO Predecessors and all such
successors and assigns being collectively referred to hereinafter as "VASCO").
NOW, THEREFORE, for good and valuable consideration, the
receipt of which hereby is acknowledged, the parties hereto agree as follows:
1. GRANT OF NEW VASCO WARRANTS. New VASCO hereby grants to the
Warrantholder warrants to purchase shares of common stock of New VASCO in
accordance with the provisions, and on the same terms and conditions, set forth
in the Current VASCO Warrants but modified so that all references in the Current
VASCO Warrants to "VASCO Corp." shall be changed and deemed to refer to "VASCO
Data Security International, Inc." and all references to shares of "Common Stock
of VASCO Corp." or similar terms shall be changed and deemed to refer to shares
of "Common Stock of VASCO Data Security International, Inc." or similar terms.
The purchase price per share of New VASCO common stock and the number of such
shares purchasable pursuant to a New VASCO Warrant shall be adjusted from time
to time as provided in Exhibit A hereto. The Current VASCO Warrants as so
modified by the preceding are incorporated herein as if set forth in full hereto
with such modifications and are herein referred to as the "New VASCO Warrants."
The Warrantholder acknowledges that the grant of New VASCO Warrants and the
cancellation of the Current VASCO Warrants effected by this Agreement may result
in the recognition of gain or loss for tax purposes by the Warrantholder, and
further agrees that such tax consequences are solely his, her or its
responsibility, and not that of Current VASCO or New VASCO. The Warrantholder
shall have no rights as a stockholder with respect to the New VASCO common stock
into which the New VASCO Warrants are exercisable until proper exercise of a New
VASCO Warrant and delivery to the
<PAGE> 2
Warrantholder of such shares as provided in the New VASCO Warrants. All shares
acquired by the Warrantholder pursuant to this Agreement shall be subject to any
restrictions on sale, encumbrance and other disposition under applicable
securities laws.
2. CANCELLATION OF CURRENT VASCO WARRANTS. The Current VASCO
Warrants hereby are canceled and shall be of no further force and effect. The
Warrantholder hereby agrees to the cancellation of the Current VASCO Warrants.
3. RELEASE. The Warrantholder hereby forever releases and
fully discharges VASCO, and each of them, from and against all direct or
indirect demands, claims, payments, obligations, actions or causes of action,
assessments, losses, liabilities, damages (including without limitation special,
consequential, exemplary, punitive and similar damages), reasonable costs and
expenses paid or incurred, or diminutions in value of any kind or character
(whether or not known or asserted prior to the date hereof, fixed or unfixed,
conditional or unconditional, choate or inchoate, liquidated or unliquidated,
secured or unsecured, accrued, absolute, contingent or otherwise), that the
Warrantholder now has or ever had against VASCO or the assets of Current VASCO
or any of the VASCO Predecessors as a result of acts or omissions occurring on
or before the date of the Prospectus which arise from or are in connection with
(i) any prior authorization, designation or issuance of stock,
any stock split, reclassification, redesignation, dividend or
distribution of or upon stock, any amendment to the certificate or
articles of incorporation or bylaws including those affecting the
amount, rights, powers or preferences of stock, and any failure to
properly authorize, approve or effect any of the foregoing actions,
including (a) the failure by Old VASCO to document whether an amendment
to its Certificate of Incorporation was duly authorized or to file a
Certificate of Amendment with the Delaware Secretary of State to amend
its Certificate of Incorporation in December 1984 to effect a
three-for-one stock split to increase the 50,000 authorized shares of
its common stock to 150,000 authorized common shares and to provide
for 600,000 shares of non-voting common stock prior to purportedly
effecting the stock split and issuing a number of such non-voting
common shares which cannot be determined due to the unavailability of
documentation concerning any purported issuance of such non-voting
common shares, (b) the failure by Old VASCO to document whether
director and stockholder approval was obtained for an amendment to its
Certificate of Incorporation increasing the number of authorized
shares of common stock to 6,900,000 shares in September 1986, (c) the
purported issuance of 317,181 shares of preferred stock in November
1989 by VASCO Utah at a time when the issuance of preferred shares was
not authorized by VASCO Utah's charter, and (d) the purported issuance
of 317,181 shares of preferred stock by Current VASCO in connection
with the 1990 merger when, although Current VASCO's Certificate of
Incorporation authorized 500,000 shares of preferred stock, the
rights, powers and preferences of such stock were not specified
in Current VASCO's Certificate of Incorporation and its
Certificate of Incorporation did not provide its Board of Directors
the power to designate such rights, powers and preferences;
(ii) any failure to properly design, approve, adopt,
administer, or authorize the number of shares subject to, any stock
option plan or program, including actions required to allow for options
awarded thereunder to be treated as incentive stock options under the
Internal Revenue Code of 1986, as amended (the "Code"), including,
beginning in 1985, the failure by Old VASCO, VASCO Utah and/or Current
VASCO to (a) document approval by the Board of Directors and
stockholders of stock option plans, (b) specify and authorize the
number of shares of stock to be subject to such plans, (c) reserve the
number of shares subject to such plans, (d) document the authorization
for the grant of options pursuant to such plans and the issuance of
shares upon exercise of such options, and (e) design such plans in a
-2-
<PAGE> 3
manner that would ensure options granted thereunder would be treated as
incentive stock options;
(iii) any organization or any merger, consolidation, share
exchange, reorganization, recapitalization, sale of assets or like
event, or any failure properly to authorize, approve, effect or
consummate same, including (a) the failure to document the approval by
Old VASCO's stockholders of the September 1986 reorganization through
the share exchange undertaken by Old VASCO and Ridge Point
Enterprises, Inc./VASCO Utah, (b) the failure to document whether all
stockholders of Old VASCO voluntarily exchanged their shares for
shares of Ridge Point Enterprises, Inc./VASCO Utah, (c) the failure to
document the mechanics of the exchange of 6,900,000 shares of Old VASCO
for 12,800,000 common shares of Ridge Point Enterprises, Inc./VASCO
Utah, and (d) the following procedural irregularities which call into
question the validity of the intended 1990 merger of VASCO Utah and
Current VASCO, as well as Current VASCO's title to the assets of VASCO
Utah purportedly succeeded to by Current VASCO by virtue of the
merger: (1) the incorporation of Current VASCO, after the date of the
1990 merger agreement, (2) Current VASCO's approval of the plan of
merger, including approval of the plan of merger prior to the
incorporation of Current VASCO, the lack of documented stockholder
approval as called for by the plan of merger and the effectiveness of
the approval by Current VASCO's then Board of Directors, (3) the
authorization and issuance of shares of common and preferred stock by
Current VASCO pursuant to the merger, (4) the adoption of Current
VASCO's initial bylaws, appointment of Current VASCO's initial
directors and the election of its initial officers, and (5) the
administrative dissolution of VASCO Utah in July 1990 prior to the
filing of a Certificate of Merger with the State of Delaware in
August, 1990, (6) the failure to file Articles of Merger with the
State of Utah in connection with the intended merger of VASCO Utah and
Current VASCO in August 1990;
(iv) the dissolution, liquidation or winding up of any of
Current VASCO's predecessors, or any failure properly to approve or
effect said dissolution, liquidation or winding up, including (a) the
failure to properly document any stockholder approval of the
dissolution of Old VASCO and to document actions taken to dissolve,
liquidate and wind-up Old VASCO in August 1987, (b) the failure to vest
effectively title and ownership in VASCO Utah of Old VASCO's assets and
to document the assumption by VASCO Utah of Old VASCO's liabilities,
and (c) the administrative dissolution of VASCO Utah in July 1990
prior to the intended merger transaction with Current VASCO and before
the filing of a Certificate of Merger with the State of Delaware in
August 1990; and
(v) any failure to afford security holders any appraisal,
preemptive or other rights, whether accorded by statute or by the
articles of incorporation, certificate of incorporation or bylaws of
Current VASCO or any of its predecessors, in connection with any of the
matters described in the foregoing clauses (i), (ii), (iii) or (iv)
including (a) the failure of Old VASCO to document whether it afforded
its stockholders, in connection with any issuances of Old VASCO capital
stock subsequent to the initial issuance of 50,000 common shares in
connection with the incorporation of Old VASCO in May 1984, the
preemptive rights to purchase, upon the issuance or sale of Old VASCO
stock (or securities convertible into Old VASCO stock), shares (or
securities) in proportion to the amount of Old VASCO common stock then
owned by such holder, subject to conditions and time limitations
prescribed (and at a price determined as permitted by law), by Old
VASCO's Board of Directors, as provided for
-3-
<PAGE> 4
in the Old VASCO Certificate of Incorporation and (b) the failure of
VASCO Utah to document whether it afforded its stockholders the
appraisal rights provided for by Utah law in connection with the
intended 1990 merger of VASCO Utah with Current VASCO.
(The matters listed in the foregoing clauses (i), (ii), (iii),
(iv) and (v) are collectively referred to in this document and the Prospectus as
the "Corporate Matters").
The Warrantholder hereby irrevocably waives his rights under
any applicable statute, rule, regulation, legal principle, or legal doctrine
that provides that a general release does not extend to claims which a releasing
party does not know or suspect to exist in its favor at the time of executing
such release, which if known by the releasing party would have materially
affected its settlement with the released party. Notwithstanding the foregoing,
to the extent federal or state securities laws limit the release of a claim
under a federal securities law or under a state securities law, as applicable,
to mature, ripened claims of which the releasing party had knowledge before
signing the release, the release of a federal securities law claim or state
securities law claim shall be limited to a release of mature, ripened claims
of which the releasing party had knowledge prior to signing the release.
4. CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS OF
WARRANTHOLDER. The Warrantholder hereby represents, warrants and covenants that
(i) the Warrantholder has received and adequately studied the Prospectus, (ii)
the Warrantholder has had adequate opportunity to consult legal counsel of
Warrantholder's choice regarding this Agreement, (iii) the Warrantholder has
executed and delivered this Agreement and the release set forth herein pursuant
to the free will of the Warrantholder with the intention that the release be a
general release to the full extent provided herein, (iv) the Warrantholder has
not sold, assigned or otherwise transferred any rights or remedies arising from
or in connection with the Corporate Matters, and (v) the Current VASCO Warrants
are the only warrants held by the Warrantholder to acquire capital stock of
Current VASCO or any of the VASCO Predecessors. Current VASCO and the
Warrantholder each acknowledges and agrees that this Agreement does not affect
any rights or claims the Warrantholder may have against VASCO arising out of any
matter or transaction arising from and after the date of the Prospectus.
Further, it is expressly understood that this Agreement (i) will effect a
release of any and all Associated Corporate Matter Claims (as defined in the
Prospectus) the Warrantholder may have even if less than all of the
Warrantholder's Current VASCO Securities (as defined in the Prospectus) are
exchanged in the Exchange Offer (as defined in the Prospectus), and (ii) does
not release and discharge (a) any rights or remedies Current VASCO in its own
right, or as successor to the rights of the VASCO Predecessors, may have against
any person or entity arising out of the Corporate Matters, or (b) any rights or
remedies unrelated to the Corporate Matters the Warrantholder has as a current
security holder of Current VASCO.
5. EXCHANGE OFFER; EFFECTIVE DATE. This Agreement is subject
to the terms and conditions of the Exchange Offer, as defined in the Prospectus,
and will become effective and binding on the parties hereto upon acceptance by
New VASCO of shares of common stock of Current VASCO tendered pursuant to the
Exchange Offer. Without limiting the foregoing, the Warrantholder has the right
to withdraw this Agreement in accordance with the specific provisions in the
Prospectus under the heading "THE EXCHANGE OFFER - Withdrawal Rights."
6. GENERAL. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof and supersedes all prior
and contemporaneous agreements or understandings, oral or written, with respect
to the subject matter hereof. This Agreement shall be governed by and construed
in accordance with the internal laws and not the
-4-
<PAGE> 5
conflicts of law rules of the State of Illinois, and the invalidity or
unenforceability of any term or provision of this Agreement shall not affect the
validity or enforceability of any other term or provision hereof. This Agreement
is binding on and inures to the benefit of the parties hereto and their
respective heirs, personal representatives, successors and assigns and in
addition, the provisions of the release set forth in Section 3 inure to the
benefit of each of the entities included within the above definition of VASCO.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties have duly executed this
Agreement.
New VASCO: VASCO DATA SECURITY INTERNATIONAL, INC.
By
----------------------------------------
Its
---------------------------------------
Current VASCO: VASCO CORP.
By
----------------------------------------
Its
---------------------------------------
Warrantholder: Printed Name
------------------------------
Signature
----------------------------------
Title
--------------------------------------
Address
------------------------------------
Dated , 1997
-------------------------------
-6-
<PAGE> 7
EXHIBIT A
ADJUSTMENT OF EXERCISE PRICE AND
NUMBER OF SHARES PURCHASABLE
1. In case, prior to the expiration of a New VASCO Warrant by
exercise or by its terms, New VASCO shall issue any shares of New VASCO common
stock as a stock dividend or subdivide the number of outstanding shares of New
VASCO common stock into a greater number of shares, then in either of such
cases, the then applicable exercise price per share of the shares of New VASCO
common stock purchasable pursuant to that New VASCO Warrant in effect at the
time of such action shall be proportionately reduced and the number of shares at
that time purchasable pursuant to that New VASCO Warrant shall be
proportionately increased; and conversely, in the event New VASCO shall contract
the number of outstanding shares of New VASCO common stock by combining such
shares into a smaller number of shares, then, in such case, the then applicable
exercise price per share of the shares of New VASCO common stock purchasable
pursuant to that New VASCO Warrant in effect at the time of such action shall be
proportionately increased and the number of shares of NEW VASCO common stock
purchasable pursuant to that New VASCO Warrant shall be proportionately
decreased. If New VASCO shall, at any time during the term of a New VASCO
Warrant, declare a dividend payable in cash on the New VASCO common stock and
shall, at substantially the same time, offer to its stockholders a right to
purchase new shares of New VASCO common stock from the proceeds of such dividend
or for an amount substantially equal to the dividend, all New VASCO common stock
so issued shall, for the purpose of that New VASCO Warrant, be deemed to have
been issued as a stock dividend. Any dividend paid or distributed upon the New
VASCO common stock shall be treated as a dividend paid in New VASCO common stock
to the extent that shares of New VASCO common stock are issuable upon conversion
thereof.
2. In case, prior to the expiration of a New VASCO Warrant by
exercise or by its terms, New VASCO shall be recapitalized by reclassification
of its outstanding New VASCO common stock (other than a change in par value to
no par value), or New VASCO or a successor corporation shall consolidate or
merge with or convey all or substantially all of its or of any successor
corporation's property and assets to any other corporation or corporations (any
such other corporations being included within the meaning of the term "successor
corporation" hereinbefore used in the event of any consolidation or merger of
any such other corporation with, or the sale of all or substantially all of the
property of any such other corporation to, another corporation or corporations),
then, as a condition of such recapitalization, consolidation, merger or
conveyance, lawful and adequate provision shall be made whereby the
Warrantholder shall thereafter have the right to purchase, upon the basis and on
the terms and conditions specified in that New VASCO Warrant, in lieu of the
shares of New VASCO common stock theretofore purchasable upon the exercise of
that New VASCO Warrant, such shares of stock, securities or assets of the other
<PAGE> 8
corporation as to which the Warrantholder would have been entitled had that New
VASCO Warrant been exercised immediately prior to such recapitalization,
consolidation, merger or conveyance; and in any such event, the rights of that
Warrantholder to any adjustment in the number of shares of New VASCO common
stock purchasable upon the exercise of that New VASCO Warrant, as hereinbefore
provided, shall continue and be preserved in respect of any stock which the
Warrantholder becomes entitled to purchase.
3. In case, prior to the expiration of a New VASCO Warrant by
exercise or by its terms, New VASCO shall sell all or substantially all of its
property or dissolve, liquidate or wind up its affairs, lawful provision shall
be made as part of the terms of any such sale, dissolution, liquidation or
winding up, so that the Warrantholder may thereafter receive upon exercise
hereof in lieu of each share of New VASCO common stock which he would have been
entitled to receive, the same kind and amount of any securities or assets as may
be issuable, distributable or payable upon any such sale, dissolution,
liquidation or winding up with respect to each share of New VASCO common stock;
provided, however, that in any case of any such sale or of dissolution,
liquidation or winding up, the right to exercise that New VASCO Warrant shall
terminate on a date fixed by New VASCO. Such date so fixed shall be no earlier
than 3:00 p.m., New York City time, on the forty-fifth (45th) day next
succeeding the date on which notice of such termination of the right to exercise
that New VASCO Warrant has been given by mail to the Warrantholder at its
address as it appears on the books of New VASCO.
4. Upon any exercise of a New VASCO Warrant by the
Warrantholder, New VASCO shall not be required to deliver fractions of one
share, but may adjust the exercise price payable by that New VASCO Warrant in
respect of any such fraction of one share on the basis of the exercise price per
share then applicable upon exercise of that New VASCO Warrant.
5. In case, prior to the expiration of a New VASCO Warrant by
exercise or by its terms, New VASCO shall determine to take a record of is
stockholders for the purpose of determining stockholders entitled to receive any
dividend, stock dividend, distribution or other right whether or not it may
cause any change or adjustment in the number, amount, price or nature of the
securities or assets deliverable upon the exercise of that New VASCO Warrant
pursuant to the foregoing provisions, New VASCO shall give at least ten (10)
days' prior written notice to the effect that it intends to take such record to
the Warrantholder at its address as it appears on the books of New VASCO, said
notice to specify the date as of which such record is to be taken, the purpose
for which such record is to be taken, and the effect which the action which may
be taken will have upon that New VASCO Warrant.
<PAGE> 9
SCHEDULE ______
ATTACHED HERETO
<PAGE> 1
EXHIBIT 4.6
NEW VASCO OPTION AGREEMENT
This Agreement is by and among VASCO Data Security
International, Inc., a Delaware corporation ("New VASCO"), VASCO CORP., a
Delaware corporation ("Current VASCO") and the undersigned individual (the
"Optionholder"), who is the holder of options to acquire shares of common stock
of Current VASCO as set forth on Schedule I attached hereto (the "Current VASCO
Options").
Pursuant to the Prospectus of New VASCO dated _____________,
1997, as supplemented and amended prior to the Expiration Date as defined
therein (the "Prospectus"), New VASCO has offered to the Optionholder the right
to acquire the same number of shares of common stock of New VASCO, at the same
exercise price and until the same expiration date as the Current VASCO Options,
in exchange for (i) the cancellation of the Current VASCO Options and (ii) the
release set forth in Section 3 below in favor of Current VASCO or any of its
predecessor entities (the "VASCO Predecessors") consisting of VASCO Corp., a
corporation incorporated in Delaware on May 22, 1984 ("Old VASCO"), and Ridge
Point Enterprises, Inc., incorporated in Utah on January 7, 1985 and
subsequently renamed VASCO Corp. ("VASCO Utah"), and the respective successors
and assigns of each of the foregoing, including New VASCO (Current VASCO, New
VASCO, the VASCO Predecessors and all such successors and assigns being
collectively referred to hereinafter as "VASCO").
NOW, THEREFORE, for good and valuable consideration, the
receipt of which hereby is acknowledged, the parties hereto agree as follows:
1. NEW VASCO OPTIONS. Subject to the provisions set forth
herein and the terms and conditions of the 1997 VASCO Data Security
International, Inc. Stock Option Plan, as amended, the terms of which are hereby
incorporated by reference, New VASCO hereby grants to the Optionholder options
to purchase shares of common stock of New VASCO (the "New VASCO Options") in
accordance with the provisions set forth below in Sections 1.1 through 1.6,
inclusive. The Optionholder acknowledges that the New VASCO Options are not
"Incentive Stock Options," or otherwise qualified options for federal tax
purposes, within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended ("ISOs").
1.1 GRANT OF OPTION. New VASCO hereby grants to the
Optionholder the right, privilege, and option to purchase the number of
shares of its common stock at the respective purchase price per share
as set forth on Schedule I hereto and in the manner and subject to the
conditions hereinafter provided. This award is made to the Optionholder
subject to termination as hereinafter specified.
1.2 TIME OF EXERCISE OF OPTION. The New VASCO Options may not
be exercised prior to the expiration of the respective vesting period
("Vesting Period") as set forth on Schedule I. After the expiration of
the respective Vesting Period, the applicable New VASCO Option may be
exercised at any time, and from time to time, in whole or in part,
until the termination thereof as provided in Section 1.4 below.
<PAGE> 2
1.3 METHOD OF EXERCISE. The New VASCO Options shall be
executed by written notice directed to the Committee of New VASCO
established under the 1997 VASCO Data Security International, Inc.
Stock Option Plan, as amended, at New VASCO's principal place of
business, for the number of shares specified. New VASCO shall make
immediate delivery of such shares, provided that if any law or
regulation requires New VASCO to take any action with respect to the
shares specified in such notice before the issuance thereof, then the
date of delivery of such shares shall be extended for the period
necessary to take such action.
1.4 TERMINATION OF OPTION. Except as herein otherwise stated,
the New VASCO Options to the extent vested and exercisable, and
further, to the extent not heretofore exercised, shall terminate upon
the first to occur of the following:
(a) The expiration of that number of months
specified in Schedule I as the Termination Period after the
date on which the Optionholder's employment or other
affiliation with New VASCO, Current VASCO or any subsidiary
of either entity (collectively, the "VASCO Companies"),
including a directorship, is terminated;
(b) In the event of the Optionholder's death while
employed or affiliated with the VASCO Companies, his executors
or administrators may exercise, within 60 days following the
date of his death, the New VASCO Options as to any of the
exercisable and vested shares not theretofore exercised during
his lifetime; or
(c) With respect to a specific New VASCO Option, the
respective option expiration date set forth on Schedule I.
1.5 RIGHTS PRIOR TO EXERCISE OF OPTION. The New VASCO Options
are nontransferable by the Optionholder, except in the event of his
death as provided in Section 1.4(b) above, and during his lifetime are
exercisable only by the Optionholder. The Optionholder shall have no
rights as a stockholder with respect to the option shares until proper
exercise of a New VASCO Option and delivery to the Optionholder of
certificates for such shares as herein provided.
1.6 RESTRICTIONS ON DISPOSITION. All shares acquired by the
Optionholder pursuant to this Agreement shall be subject to any
restrictions on sale, encumbrance and other disposition under
applicable securities laws.
2. CANCELLATION OF CURRENT VASCO OPTIONS. The Current VASCO
Options hereby are canceled and shall be of no further force and effect. The
Optionholder hereby agrees to the cancellation of the Current VASCO Options and
recognizes that the New VASCO Options granted under this Agreement are not,
although the Current VASCO Options may have been, ISOs.
3. RELEASE. The Optionholder hereby forever releases and
fully discharges VASCO, and each of them, from and against all direct or
indirect demands, claims, payments,
-2-
<PAGE> 3
obligations, actions or causes of action, assessments, losses, liabilities,
damages (including without limitation special, consequential, exemplary,
punitive and similar damages), reasonable costs and expenses paid or incurred,
or diminutions in value of any kind or character (whether or not known or
asserted prior to the date hereof, fixed or unfixed, conditional or
unconditional, choate or inchoate, liquidated or unliquidated, secured or
unsecured, accrued, absolute, contingent or otherwise), that the Optionholder
now has or ever had against VASCO or the assets of Current VASCO or any of the
VASCO Predecessors as a result of acts or omissions occurring on or before the
date of the Prospectus which arise from or are in connection with
(i) any prior authorization, designation or issuance of stock,
any stock split, reclassification, redesignation, dividend or
distribution of or upon stock, any amendment to the certificate or
articles of incorporation or bylaws including those affecting the
amount, rights, powers or preferences of stock, and any failure to
properly authorize, approve or effect any of the foregoing actions,
including (a) the failure by Old VASCO to document whether an amendment
to its Certificate of Incorporation was duly authorized or to file a
Certificate of Amendment with the Delaware Secretary of State to amend
its Certificate of Incorporation in December 1984 to effect a
three-for-one stock split to increase the 50,000 authorized shares of
its common stock to 150,000 authorized common shares and to provide
for 600,000 shares of non-voting common stock prior to purportedly
effecting the stock split and issuing a number of such non-voting
common shares which cannot be determined due to the unavailability of
documentation concerning any purported issuance of such non-voting
common shares, (b) the failure by Old VASCO to document whether
director and stockholder approval was obtained for an amendment to its
Certificate of Incorporation increasing the number of authorized shares
of common stock to 6,900,000 shares in September 1986, (c) the
purported issuance of 317,181 shares of preferred stock in November
1989 by VASCO Utah at a time when the issuance of preferred shares was
not authorized by VASCO Utah's charter, and (d) the purported issuance
of 317,181 shares of preferred stock by Current VASCO in connection
with the 1990 merger when, although Current VASCO's Certificate of
Incorporation authorized 500,000 shares of preferred stock, the rights,
powers and preferences of such stock were not specified in Current
VASCO's Certificate of Incorporation and its Certificate of
Incorporation did not provide its Board of Directors the power to
designate such rights, powers and preferences;
(ii) any failure to properly design, approve, adopt,
administer, or authorize the number of shares subject to, any stock
option plan or program, including actions required to allow for options
awarded thereunder to be treated as incentive stock options under the
Internal Revenue Code of 1986, as amended (the "Code"), including,
beginning in 1985, the failure by Old VASCO, VASCO Utah and/or Current
VASCO to (a) document approval by the Board of Directors and
stockholders of stock option plans, (b) specify and authorize the
number of shares of stock to be subject to such plans, (c) reserve the
number of shares subject to such plans, (d) document the authorization
for the grant of options pursuant to such plans and the issuance of
shares upon exercise of such options, and (e) design such plans in a
manner that would ensure options granted thereunder would be treated
as incentive stock options;
(iii) any organization or any merger, consolidation, share
exchange, reorganization, recapitalization, sale of assets or like
event, or any failure properly to authorize, approve, effect or
consummate same, including (a) the failure to document the approval by
Old VASCO's stockholders of the September 1986 reorganization through
the share exchange undertaken
-3-
<PAGE> 4
by Old VASCO and Ridge Point Enterprises, Inc./VASCO Utah, (b) the
failure to document whether all stockholders of Old VASCO voluntarily
exchanged their shares for shares of Ridge Point Enterprises,
Inc./VASCO Utah, (c) the failure to document the mechanics of the
exchange of 6,900,000 common shares of Old VASCO for 12,800,000 common
shares of Ridge Point Enterprises, Inc./VASCO Utah, and (d) the
following procedural irregularities which call into question the
validity of the intended 1990 merger of VASCO Utah and Current VASCO,
as well as Current VASCO's title to the assets of VASCO Utah
purportedly succeeded to by Current VASCO by virtue of the merger:
(1) the incorporation of Current VASCO, after the date of the
1990 merger agreement, (2) Current VASCO's approval of the plan of
merger, including approval of the plan of merger prior to the
incorporation of Current VASCO, the lack of documented stockholder
approval as called for by the plan of merger and the effectiveness
of the approval by Current VASCO's then Board of Directors, (3) the
authorization and issuance of shares of common and preferred
stock by Current VASCO pursuant to the merger, (4) the adoption of
Current VASCO's initial bylaws, appointment of Current VASCO's initial
directors and the election of its initial officers, and (5) the
administrative dissolution of VASCO Utah in July 1990 prior to the
filing of a Certificate of Merger with the State of Delaware in August
1990, (6) the failure to file Articles of Merger with the State of
Utah in connection with the intended merger of VASCO Utah and Current
VASCO in August 1990;
(iv) the dissolution, liquidation or winding up of any of
Current VASCO's predecessors, or any failure properly to approve or
effect said dissolution, liquidation or winding up, including (a) the
failure to properly document any stockholder approval of the
dissolution of Old VASCO and to document actions taken to dissolve,
liquidate and wind-up Old VASCO in August 1987, (b) the failure to vest
effectively title and ownership in VASCO Utah of Old VASCO's assets and
to document the assumption by VASCO Utah of Old VASCO's liabilities,
and (c) the administrative dissolution of VASCO Utah in July 1990
prior to the intended merger transaction with Current VASCO and before
the filing of a Certificate of Merger with the State of Delaware in
August 1990; and
(v) any failure to afford security holders any appraisal,
preemptive or other rights, whether accorded by statute or by the
articles of incorporation, certificate of incorporation or bylaws of
Current VASCO or any of its predecessors, in connection with any of the
matters described in the foregoing clauses (i), (ii), (iii) or (iv)
including (a) the failure of Old VASCO to document whether it afforded
its stockholders, in connection with any issuances of Old VASCO capital
stock subsequent to the initial issuance of 50,000 common shares in
connection with the incorporation of Old VASCO in May 1984, the
preemptive rights to purchase, upon the issuance or sale of Old VASCO
stock (or securities convertible into Old VASCO stock), shares (or
securities) in proportion to the amount of Old VASCO common stock then
owned by such holder, subject to conditions and time limitations
prescribed (and at a price determined as permitted by law), by Old
VASCO's Board of Directors, as provided for in the Old VASCO
Certificate of Incorporation and (b) the failure of VASCO Utah to
document whether it afforded its stockholders the appraisal rights
provided for by Utah law in connection with the intended 1990 merger
of VASCO Utah with Current VASCO.
(The matters listed in the foregoing clauses (i), (ii), (iii),
(iv) and (v) are collectively referred to in this document and the Prospectus as
the "Corporate Matters").
-4-
<PAGE> 5
The Optionholder hereby irrevocably waives his rights under
any applicable statute, rule, regulation, legal principle, or legal doctrine
that provides that a general release does not extend to claims which a releasing
party does not know or suspect to exist in its favor at the time of executing
such release, which if known by the releasing party would have materially
affected its settlement with the released party. Notwithstanding the
foregoing, to the extent federal or state securities laws limit the release of
a claim under a federal securities law or under a state securities law, as
applicable, to mature, ripened claims of which the releasing party had
knowledge before signing the release, the release of a federal securities law
claim or state securities law claim shall be limited to a release of mature,
ripened claims of which the releasing party had knowledge prior to the signing
the release.
4. CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS OF
OPTIONHOLDER. The Optionholder hereby represents, warrants and covenants that
(i) the Optionholder has received and adequately studied the Prospectus, (ii)
the Optionholder has had adequate opportunity to consult legal counsel of
Optionholder's choice regarding this Agreement, (iii) the Optionholder has
executed and delivered this Agreement and the release set forth herein pursuant
to the free will of the Optionholder with the intention that the release be a
general release to the full extent provided herein, (iv) the Optionholder has
not sold, assigned or otherwise transferred any rights or remedies arising from
or in connection with the Corporate Matters, and (v) the Current VASCO Options
are the only options held by the Optionholder to acquire capital stock of
Current VASCO or any of the VASCO Predecessors. Current VASCO and the
Optionholder each acknowledges and agrees that this Agreement does not affect
any rights or claims the Optionholder may have against VASCO arising out of any
matter or transaction arising from and after the date of the Prospectus.
Further, it is expressly understood that this Agreement (i) will effect a
release of any and all Associated Corporate Matter Claims (as defined in the
Prospectus) the Optionholder may have even if less than all of the
Optionholder's Current VASCO Securities (as defined in the Prospectus) are
exchanged in the Exchange Offer (as defined in the Prospectus), and (ii) does
not release and discharge (a) any rights or remedies Current VASCO in its own
right, or as successor to the rights of the VASCO Predecessors, may have against
any person or entity arising out of the Corporate Matters, or (b) any rights or
remedies unrelated to the Corporate Matters the Optionholder has as a current
stockholder of Current VASCO.
5. EXCHANGE OFFER; EFFECTIVE DATE. This Agreement is subject
to the terms and conditions of the Exchange Offer, as defined in the Prospectus,
and will become effective and binding on the parties hereto upon acceptance by
New VASCO of shares of common stock of Current VASCO tendered pursuant to the
Exchange Offer. Without limiting the foregoing, the Optionholder has the right
to withdraw this Agreement in accordance with the specific provisions in the
Prospectus under the heading "THE EXCHANGE OFFER - Withdrawal Rights."
6. GENERAL. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof and supersedes all prior
and contemporaneous agreements or understandings, oral or written, with respect
to the subject matter hereof. This Agreement shall be governed by and construed
in accordance with the internal laws and not the conflicts of law rules of the
State of Illinois, and the invalidity or unenforceability of any term or
provision of this Agreement shall not affect the validity or enforceability of
any other term or provision hereof. This Agreement is binding on and inures to
the benefit of the parties hereto and their respective successors and assigns
and, in addition, the provisions of the release set forth in Section 3 inure to
the benefit of each of the entities included within the above definition of
VASCO.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties have duly executed this
Agreement.
New VASCO: VASCO DATA SECURITY INTERNATIONAL, INC.
By
----------------------------------------
Its
---------------------------------------
Current VASCO: VASCO CORP.
By
----------------------------------------
Its
---------------------------------------
Optionholder: Printed Name
------------------------------
Signature
----------------------------------
Title
--------------------------------------
Address
------------------------------------
Dated , 1997
-------------------------------
-6-
<PAGE> 7
SCHEDULE I
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PER SHARE OPTION EXERCISE OPTION TERMINATION
SHARES PRICE VESTING PERIOD EXPIRATION DATE PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 4.7
NEW VASCO CONVERTIBLE NOTE AGREEMENT
This Agreement is by and among VASCO Data Security
International, Inc., a Delaware corporation ("New VASCO"), VASCO CORP., a
Delaware corporation ("Current VASCO") and the undersigned (the "Convertible
Noteholder"), which is the holder of the note convertible into shares of common
stock of Current VASCO attached hereto as Schedule _____ (the "Current VASCO
Convertible Note").
Pursuant to the New VASCO Prospectus dated ______, 1997, as
supplemented and amended prior to the Expiration Date as defined therein (the
"Prospectus"), New VASCO has offered to the Convertible Noteholder the
opportunity to amend the terms of the Current VASCO Convertible Note to provide
for conversion into the same number of shares of common stock of New VASCO on
the same terms and conditions provided for in the Current VASCO Convertible
Note, in exchange for the release set forth in Section 2 below in favor of
Current VASCO or any of its predecessor entities (the "VASCO Predecessors")
consisting of VASCO Corp., a corporation incorporated in Delaware on May 22,
1984 ("Old VASCO"), and Ridge Point Enterprises, Inc., incorporated in Utah on
January 7, 1985 and subsequently renamed VASCO Corp. ("VASCO Utah"), and the
respective successors and assigns of each of the foregoing, including New VASCO
(Current VASCO, New VASCO, the VASCO Predecessors and all such successors and
assigns being collectively referred to hereinafter as "VASCO"). Current VASCO
hereby agrees to amend the Current VASCO Convertible Note in accordance with and
subject to the provisions of this Agreement.
NOW, THEREFORE, for good and valuable consideration, the
receipt of which hereby is acknowledged, the parties hereto agree as follows:
1. AMENDMENT TO CURRENT VASCO CONVERTIBLE NOTE. New VASCO,
Current VASCO and the Convertible Noteholder hereby agree to amend the terms of
the Current VASCO Convertible Note to provide that each reference in the Current
VASCO Convertible Note to a right or option on the part of Current VASCO or the
Convertible Noteholder to convert the Current VASCO Convertible Note into shares
of Current VASCO common stock shall be replaced by the right or option to
convert the Current VASCO Convertible Note into shares of New VASCO common stock
on the same terms and conditions, including without limitation the conversion
price; provided, that to the extent such conversion price is to be determined by
reference to any market or trading price of Current VASCO common stock, the
Current VASCO Convertible Note is hereby amended to provide that the conversion
price shall be determined by reference to the market or trading price of New
VASCO common stock in accordance with the formula set forth in the Current VASCO
Convertible Note. It is further agreed by the parties that terms of the Current
VASCO Convertible Note shall be amended to provide that the conversion price per
share of New VASCO common stock and the number of such shares convertible
pursuant to a New VASCO Warrant shall be adjusted from time to time
<PAGE> 2
as provided in Exhibit A hereto. It is agreed and understood by the parties that
the Current VASCO Convertible Note shall remain a valid and binding obligation
of Current VASCO and conversion of the Current VASCO Convertible Note into
shares of New VASCO common stock shall constitute payment under the Current
VASCO Convertible Note as if converted into shares of Current VASCO common
stock. The Convertible Noteholder shall have no rights as a stockholder with
respect to the New VASCO common stock into which the Current VASCO Convertible
Note is convertible until proper exercise of a conversion right and delivery to
the Convertible Noteholder of certificates for the shares of New VASCO common
stock pursuant to the conversion of the Current VASCO Convertible Note. All
shares acquired by the Convertible Noteholder pursuant to this Agreement and
the Current VASCO Convertible Note shall be subject to any restrictions on
sale, encumbrance and other disposition under applicable securities laws.
Further, it is hereby agreed that New VASCO shall become a co-obligor with
Current VASCO for all obligations of the maker of the Current VASCO Convertible
Note as modified by this Agreement.
2. RELEASE. The Convertible Noteholder hereby forever releases
and fully discharges VASCO, and each of them, from and against all direct or
indirect demands, claims, payments, obligations, actions or causes of action,
assessments, losses, liabilities, damages (including without limitation special,
consequential, exemplary, punitive and similar damages), reasonable costs and
expenses paid or incurred, or diminutions in value of any kind or character
(whether or not known or asserted prior to the date hereof, fixed or unfixed,
conditional or unconditional, choate or inchoate, liquidated or unliquidated,
secured or unsecured, accrued, absolute, contingent or otherwise), that the
Convertible Noteholder now has or ever had against VASCO or the assets of
Current VASCO or any of the VASCO Predecessors as a result of acts or omissions
occurring on or before the date of the Prospectus which arise from or are in
connection with
(i) any prior authorization, designation or issuance of stock,
any stock split, reclassification, redesignation, dividend or
distribution of or upon stock, any amendment to the certificate or
articles of incorporation or bylaws including those affecting the
amount, rights, powers or preferences of stock, and any failure to
properly authorize, approve or effect any of the foregoing actions,
including (a) the failure by Old VASCO to document whether an
amendment to its Certificate of Incorporation was duly authorized or
to file a Certificate of Amendment with the Delaware Secretary of
State to amend its Certificate of Incorporation in December 1984 to
effect a three-for-one stock split to increase the 50,000 authorized
shares of its common stock to 150,000 authorized common shares and to
provide for 600,000 shares of non-voting common stock prior to
purportedly effecting the stock split and issuing a number of such
non-voting common shares which cannot be determined due to the
unavailability of documentation concerning any purported issuance of
such non-voting common shares, (b) the failure by Old VASCO to
document whether director and stockholder approval was obtained for an
amendment to its Certificate of Incorporation increasing the number of
authorized shares of common stock to 6,900,000 shares in September
1986, (c) the purported issuance of 317,181 shares of preferred stock
in November 1989 by VASCO Utah at a time when the issuance of
preferred shares was not authorized by VASCO Utah's charter, and (d)
the purported issuance of 317,181 shares of preferred stock by Current
VASCO in connection with the 1990 merger, when, although Current
VASCO's Certificate of Incorporation authorized 500,000 shares of
preferred stock, the rights, powers and preferences of such stock were
not specified in Current VASCO's Certificate of Incorporation and
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<PAGE> 3
its Certificate of Incorporation did not provide its Board of
Directors the power to designate such rights, powers and preferences;
(ii) any failure to properly design, approve, adopt,
administer, or authorize the number of shares subject to, any stock
option plan or program, including actions required to allow for options
awarded thereunder to be treated as incentive stock options under the
Internal Revenue Code of 1986, as amended (the "Code"), including,
beginning in 1985, the failure by Old VASCO, VASCO Utah and/or Current
VASCO to (a) document approval by the Board of Directors and
stockholders of stock option plans, (b) specify and authorize the
number of shares of stock to be subject to such plans, (c) reserve the
number of shares subject to such plans, (d) document the authorization
for the grant of options pursuant to such plans and the issuance of
shares upon exercise of such options, and (e) design such plans in a
manner that would ensure options granted thereunder would be treated as
incentive stock options;
(iii) any organization or any merger, consolidation, share
exchange, reorganization, recapitalization, sale of assets or like
event, or any failure properly to authorize, approve, effect or
consummate same, including (a) the failure to document the approval by
Old VASCO's stockholders of the September 1986 reorganization through
the share exchange undertaken by Old VASCO and Ridge Point
Enterprises, Inc./VASCO Utah, (b) the failure to document whether all
stockholders of Old VASCO voluntarily exchanged their shares for
shares of Ridge Point Enterprises, Inc./VASCO Utah, (c) the failure to
document the mechanics of the exchange of 6,900,000 common shares of
Old VASCO for 12,800,000 common shares of Ridge Point Enterprises,
Inc./VASCO Utah, and (d) the following procedural irregularities
which call into question the validity of the intended 1990
merger of VASCO Utah and Current VASCO, as well as Current VASCO's
title to the assets of VASCO Utah purportedly succeeded to by Current
VASCO by virtue of the merger: (1) the incorporation of Current VASCO,
after the date of the 1990 merger agreement, (2) Current VASCO's
approval of the plan of merger, including approval of the plan of
merger prior to the incorporation of Current VASCO, the lack of
documented stockholder approval as called for by the plan of merger
and the effectiveness of the approval by Current VASCO's then Board of
Directors, (3) the authorization and issuance of shares of common and
preferred stock by Current VASCO pursuant to the merger, (4) the
adoption of Current VASCO's initial bylaws, appointment of Current
VASCO's initial directors and the election of its initial officers,
and (5) the administrative dissolution of VASCO Utah in July 1990
prior to the filing of a Certificate of Merger with the State of
Delaware in August 1990, and (6) the failure to file Articles of Merger
with the State of Utah in connection with the intended merger of VASCO
Utah and Current VASCO in August 1990;
(iv) the dissolution, liquidation or winding up of any of
Current VASCO's predecessors, or any failure properly to approve or
effect said dissolution, liquidation or winding up, including (a) the
failure to properly document any stockholder approval of the
dissolution of Old VASCO and to document actions taken to dissolve,
liquidate and wind-up Old VASCO in August 1987, (b) the failure to vest
effectively title and ownership in VASCO Utah of Old VASCO's assets and
to document the assumption by VASCO Utah of Old VASCO's liabilities,
and (c) the administrative dissolution of VASCO Utah in
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<PAGE> 4
July 1990 prior to the intended merger transaction with Current VASCO
and before the filing of a Certificate of Merger with the State of
Delaware in August 1990; and
(v) any failure to afford security holders any appraisal,
preemptive or other rights, whether accorded by statute or by the
articles of incorporation, certificate of incorporation or bylaws of
Current VASCO or any of its predecessors, in connection with any of the
matters described in the foregoing clauses (i), (ii), (iii) or (iv)
including (a) the failure of Old VASCO to document whether it afforded
its stockholders, in connection with any issuances of Old VASCO capital
stock subsequent to the initial issuance of 50,000 common shares in
connection with the incorporation of Old VASCO in May 1984, the
preemptive rights to purchase, upon the issuance or sale of Old VASCO
stock (or securities convertible into Old VASCO stock), shares (or
securities) in proportion to the amount of Old VASCO common stock then
owned by such holder, subject to conditions and time limitations
prescribed (and at a price determined as permitted by law), by Old
VASCO's Board of Directors, as provided for in the Old VASCO
Certificate of Incorporation and (b) the failure of VASCO Utah to
document whether it afforded its stockholders the appraisal rights
provided for by Utah law in connection with the intended 1990 merger
of VASCO Utah with Current VASCO.
(The matters listed in the foregoing clauses (i), (ii), (iii),
(iv) and (v) are collectively referred to in this document and the Prospectus as
the "Corporate Matters").
The Convertible Noteholder hereby irrevocably waives his
rights under any applicable statute, rule, regulation, legal principle, or legal
doctrine that provides that a general release does not extend to claims which a
releasing party does not know or suspect to exist in its favor at the time of
executing such release, which if known by the releasing party would have
materially affected its settlement with the released party. Notwithstanding the
foregoing, to the extent federal or state securities laws limit the release of
a claim under a federal securities law or under a state securities law, as
applicable, to mature, ripened claims of which the releasing party had
knowledge before signing the release, the release of a federal securities law
claim or state securities law claim shall be limited to a release of mature,
ripened claims of which the releasing party had knowledge prior to signing the
release.
3. CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS OF
CONVERTIBLE NOTEHOLDER. The Convertible Noteholder hereby represents, warrants
and covenants that (i) the Convertible Noteholder has received and adequately
studied the Prospectus, (ii) the Convertible Noteholder has had adequate
opportunity to consult legal counsel of the Convertible Noteholder's choice
regarding this Agreement, (iii) the Convertible Noteholder has executed and
delivered this Agreement and the release set forth herein pursuant to the free
will of the Convertible Noteholder with the intention that the release be a
general release to the full extent provided herein, (iv) the Convertible
Noteholder has not sold, assigned or otherwise transferred any rights or
remedies arising from or in connection with the Corporate Matters, and (v) the
Current VASCO Convertible Notes are the only convertible notes held by the
Convertible Noteholder to acquire capital stock of Current VASCO or any of the
VASCO Predecessors. Current VASCO and the Convertible Noteholder each
acknowledges and agrees that this Agreement does not affect any rights or claims
the Convertible Noteholder may have against VASCO arising out of any matter or
transaction arising from and after the date of the Prospectus. Further, it is
expressly understood that this Agreement (i) will effect a release of any and
all Associated Corporate Matter Claims (as defined in the Prospectus) the
Convertible Noteholder may have even if less than all of the Convertible
Noteholder's Current VASCO Securities (as defined in the Prospectus) are
exchanged in the Exchange Offer (as defined in the Prospectus), and (ii) does
not release and discharge (a) any rights or remedies Current VASCO in its own
right, or as successor to the
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<PAGE> 5
rights of the VASCO Predecessors, may have against any person or entity arising
out of the Corporate Matters, or (b) any rights or remedies unrelated to the
Corporate Matters the Convertible Noteholder has as a current security holder of
Current VASCO.
4. EXCHANGE OFFER; EFFECTIVE DATE. This Agreement is subject
to the terms and conditions of the Exchange Offer, as defined in the Prospectus,
and will become effective and binding on the parties hereto upon acceptance by
New VASCO of shares of common stock of Current VASCO tendered pursuant to the
Exchange Offer. Without limiting the foregoing, the Convertible Noteholder has
the right to withdraw this Agreement in accordance with the specific provisions
in the Prospectus under the heading "THE EXCHANGE OFFER - Withdrawal Rights."
5. GENERAL. This Agreement shall be governed by and construed
in accordance with the internal laws and not the conflicts of law rules of the
State of Illinois, and the invalidity or unenforceability of any term or
provision of this Agreement shall not affect the validity or enforceability of
any other term or provision hereof. This Agreement is binding on and inures to
the benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns and in addition, the provisions of the
release set forth in Section 2 inure to the benefit of each of the persons and
entities included within the above definition of VASCO.
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IN WITNESS WHEREOF, the parties have duly executed this Agreement.
New VASCO: VASCO DATA SECURITY INTERNATIONAL, INC.
By
----------------------------------------
Its
---------------------------------------
Current VASCO: VASCO CORP.
By
----------------------------------------
Its
---------------------------------------
Convertible Noteholder: Printed Name
------------------------------
Signature
----------------------------------
Title
--------------------------------------
Address
------------------------------------
Dated , 1997
-------------------------------
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EXHIBIT A
ADJUSTMENT OF CONVERSION PRICE AND
NUMBER OF SHARES CONVERTIBLE
1. In case, prior to the expiration of a Current VASCO
Convertible Note by conversion or by its terms, New VASCO shall issue any shares
of New VASCO common stock as a stock dividend or subdivide the number of
outstanding shares of New VASCO common stock into a greater number of shares,
then in either of such cases, the then applicable conversion price per share of
the shares of New VASCO common stock convertible pursuant to that Current VASCO
Convertible Note in effect at the time of such action shall be proportionately
reduced and the number of shares at that time convertible pursuant to that
Current VASCO Convertible Note shall be proportionately increased; and
conversely, in the event New VASCO shall contract the number of outstanding
shares of New VASCO common stock by combining such shares into a smaller number
of shares, then, in such case, the then applicable conversion price per share of
the shares of New VASCO common stock convertible pursuant to that Current VASCO
Convertible Note in effect at the time of such action shall be proportionately
increased and the number of shares of NEW VASCO common stock convertible
pursuant to that Current VASCO Convertible Note shall be proportionately
decreased. If New VASCO shall, at any time during the term of a Current VASCO
Convertible Note, declare a dividend payable in cash on the New VASCO common
stock and shall, at substantially the same time, offer to its stockholders a
right to purchase new shares of New VASCO common stock from the proceeds of such
dividend or for an amount substantially equal to the dividend, all New VASCO
common stock so issued shall, for the purpose of that Current VASCO Convertible
Note, be deemed to have been issued as a stock dividend. Any dividend paid or
distributed upon the New VASCO common stock shall be treated as a dividend paid
in New VASCO common stock to the extent that shares of New VASCO common stock
are issuable upon conversion thereof.
2. In case, prior to the expiration of a Current VASCO
Convertible Note by conversion or by its terms, New VASCO shall be recapitalized
by reclassification of its outstanding New VASCO common stock (other than a
change in par value to no par value), or New VASCO or a successor corporation
shall consolidate or merge with or convey all or substantially all of its or of
any successor corporation's property and assets to any other corporation or
corporations (any such other corporations being included within the meaning of
the term "successor corporation" hereinbefore used in the event of any
consolidation or merger of any such other corporation with, or the sale of all
or substantially all of the property of any such other corporation to, another
corporation or corporations), then, as a condition of such recapitalization,
consolidation, merger or conveyance, lawful and adequate provision shall be made
whereby the Convertible Noteholder shall thereafter have the right to purchase,
upon the basis and on the terms and conditions specified in that Current
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<PAGE> 8
VASCO Convertible Note, in lieu of the shares of New VASCO common stock
theretofore convertible upon the conversion of that Current VASCO Convertible
Note, such shares of stock, securities or assets of the other corporation as to
which the Convertible Noteholder would have been entitled had that Current VASCO
Convertible Note been converted immediately prior to such recapitalization,
consolidation, merger or conveyance; and in any such event, the rights of that
Convertible Noteholder to any adjustment in the number of shares of New VASCO
common stock convertible upon the conversion of that Current VASCO Convertible
Note, as hereinbefore provided, shall continue and be preserved in respect of
any stock which the Convertible Noteholder becomes entitled to purchase.
3. In case, prior to the expiration of a Current VASCO
Convertible Note by conversion or by its terms, New VASCO shall sell all or
substantially all of its property or dissolve, liquidate or wind up its affairs,
lawful provision shall be made as part of the terms of any such sale,
dissolution, liquidation or winding up, so that the Convertible Noteholder may
thereafter receive upon conversion hereof in lieu of each share of New VASCO
common stock which he would have been entitled to receive, the same kind and
amount of any securities or assets as may be issuable, distributable or payable
upon any such sale, dissolution, liquidation or winding up with respect to each
share of New VASCO common stock; provided, however, that in any case of any such
sale or of dissolution, liquidation or winding up, the right to convert that
Current VASCO Convertible Note shall terminate on a date fixed by New VASCO.
Such date so fixed shall be no earlier than 3:00 p.m., New York City time, on
the forty-fifth (45th) day next succeeding the date on which notice of such
termination of the right to convert that Current VASCO Convertible Note has been
given by mail to the Convertible Noteholder.
4. Upon any conversion of a Current VASCO Convertible Note by
the Convertible Noteholder, New VASCO shall not be required to deliver fractions
of one share, but may adjust the conversion price payable by that Current VASCO
Convertible Note in respect of any such fraction of one share on the basis of
the conversion price per share then applicable upon conversion of that Current
VASCO Convertible Note.
5. In case, prior to the expiration of a Current VASCO
Convertible Note by conversion or by its terms, New VASCO shall determine to
take a record of is stockholders for the purpose of determining stockholders
entitled to receive any dividend, stock dividend, distribution or other right
whether or not it may cause any change or adjustment in the number, amount,
price or nature of the securities or assets deliverable upon the conversion of
that Current VASCO Convertible Note pursuant to the foregoing provisions, New
VASCO shall give at least ten (10) days' prior written notice to the effect that
it intends to take such record to the Convertible Noteholder, said notice to
specify the date as of which such record is to be taken, the purpose for which
such record is to be taken, and the effect which the action which may be taken
will have upon that Current VASCO Convertible Note.
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SCHEDULE _____
ATTACHED HERETO
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated September 11, 1997 with respect
to the balance sheet of VASCO Data Security International, Inc. as of July 16,
1997, included herein and to the references to our firm under the headings
"Selected Consolidated Financial Information" and "Experts" in the Prospectus.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
November 21, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our reports dated September 11, 1997 with respect
to the consolidated balance sheets of VASCO CORP. as of December 31, 1995 and
1996, and the related statements of operations, stockholders' equity (deficit),
cash flows, and related schedule for each of the years in the three-year period
ended December 31, 1996, included herein and in the Registration Statement and
to the references to our firm under the headings "Selected Consolidated
Financial Information" and "Experts" in the Prospectus.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
November 21, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Registration Statement on Form S-4 of
our reports dated February 27, 1997 relating to the financial statements of
Lintel NV and Digipass SA/Digiline SA as of December 31, 1995 and for the two
years ended which appear therein. We also consent to the references to us under
the heading "Experts" in such Registration Statement.
/s/ L. HELLEBAUT
PRICE WATERHOUSE AND PARTNERS
Sint-Stevens-Woluwe, Belgium
November 21, 1997
<PAGE> 1
EXHIBIT 23.4
JENNER & BLOCK LETTERHEAD
November 21, 1997
VASCO Data Security International, Inc.
1901 South Meyers Road, Suite 210
Oakbrook Terrace, IL 60181
Ladies & Gentlemen:
Reference is hereby made to the Registration Statement on Form S-4 (the
"Registration Statement") of VASCO Data Security International, Inc., a
Delaware corporation ("New VASCO"), relating to the offer to exchange shares,
options and warrants of New VASCO for shares, options and warrants of VASCO
CORP., a Delaware corporation ("Current VASCO").
We hereby consent to the references to our firm under the following
headings in the prospectus included in the Registration Statement: (i) "SUMMARY
- - Questions and Answers About the Exchange Offer," (ii) "REORGANIZATION OF
CURRENT VASCO," and (iii) "LEGAL MATTERS." We also consent to the filing of
our opinion letters (or forms thereof) as Exhibits 5.1 and 8.1 to the
Registration Statement.
In giving such consents, we do not hereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations promulgated thereunder.
Very truly yours,
/s/ JENNER & BLOCK
