1
 
   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 1997
                                                    REGISTRATION NO. 333-
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                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
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                                    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)
 
                                                                            
               DELAWARE                                   3577                                  36-4169320
    (State or other jurisdiction of           (Primary Standard Industrial                   (I.R.S. Employer
    incorporation or organization)              Classification Code No.)                    Identification No.)
1919 S. HIGHLAND AVE., SUITE 118-C LOMBARD, ILLINOIS 60148 (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. 1919 S. HIGHLAND AVE., SUITE 118-C LOMBARD, ILLINOIS 60148 (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 ------------------------- 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 contingent 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] ------------------------- CALCULATION OF REGISTRATION FEE
================================================================================================================================= TITLE OF EACH CLASS OF AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED OFFERING PRICE PER UNIT AGGREGATE OFFERING PRICE REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.001 per share................................ 32,503,111 shares(1) $2.5775(2) $83,776,768(2) $25,387 Series B Preferred Stock, par value $.01 per share....................... 9,000 shares N/A(3) $30(3) $1 Options to Purchase Common Stock....... 11,418,775 options(4) N/A(5) N/A(5) N/A(5) Warrants to Purchase Common Stock...... 1,056,922 warrants(6) N/A(5) N/A(5) N/A(5) =================================================================================================================================
(1) Includes up to 19,422,979 shares that may be issued pursuant to the Exchange Offer for shares of common stock of VASCO CORP. described in the Prospectus contained in the Registration Statement, 10,053,264 shares that may be issued upon the exercise or conversion of preferred stock, options (including options under stock option plans and options under convertible notes) and warrants that may be issued pursuant to the Exchange Offer, and 3,026,868 additional shares that may be issued pursuant to the Registrant's 1997 Stock Option Plan, as amended. Pursuant to Rule 416 under the Securities Act of 1933, as amended (the "Securities Act"), there is also being registered such number of additional shares of common stock which may be issued to prevent dilution resulting from stock splits, stock dividends or similar transactions, or other readjustment provisions of options, warrants or convertible preferred stock being registered. (2) Based on the average of the bid and asked price of Common Stock of VASCO CORP. as quoted on the Over-the-Counter Bulletin Board on September 8, 1997, estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(f)(1) under the Securities Act. (3) Pursuant to Rule 457(f)(2) under the Securities Act, the registration fee was calculated based on the aggregate par value of the shares of Current VASCO Series B Preferred Stock to be received (cancelled) by the Registrant in the Exchange Offer. VASCO CORP. has an accumulated capital deficit, and, in accordance with Rule 457(f)(2), the proposed maximum aggregate offering price was calculated by dividing the aggregate par value of the Current VASCO Series B Preferred Stock by 3. (4) Based upon the maximum number of options (including options under stock option plans and options under convertible notes) that may be issued pursuant to the Exchange Offer in exchange for currently outstanding options to acquire shares of common stock of VASCO CORP. and 3,026,868 additional options that may be issued pursuant to the Registrant's 1997 Stock Option Plan, as amended; the shares of common stock of the Registrant underlying the options hereby registered are included in the number of shares of common stock of the Registrant set forth in footnote (1) above. (5) In accordance with Rule 457(g) under the Securities Act, no separate registration fee is paid with respect to the options or warrants being registered as the registration fee is being paid on the underlying common stock that may be issued on exercise of the options or warrants. (6) Based upon the maximum number of warrants that may be issued pursuant to the Exchange Offer in exchange for currently outstanding warrants to purchase shares of common stock of VASCO CORP.; the shares of common stock of the Registrant underlying the warrants hereby registered are included in the number of shares of common stock of the Registrant set forth in footnote (1) above. 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. ================================================================================ 2 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 SEPTEMBER 12, 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." 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) and Series B Preferred Stock (par value $0.01 per share) for (i) shares of Current VASCO Common Stock (par value $0.001 per share) and Current VASCO Series B Preferred Stock (par value $0.01 per share) on a one-for-one basis of the same class or series, 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 Matters 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 13, 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. 3 (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. For a more complete description of the Associated Corporate Matter Claims, see "THE EXCHANGE OFFER -- Terms of the 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 (i) at least 80% of the outstanding shares of Current VASCO Common Stock, and (ii) at least 80% of the outstanding shares of Current VASCO Series B Preferred Stock (collectively, the conditions set forth in clauses (i) and (ii) are referred to in this document as the "Minimum Condition"). Based on the number of shares of Current VASCO outstanding on August 31, 1997, if (i) an aggregate of 15,538,383 shares of Current VASCO Common Stock and (ii) 7,200 shares of Current VASCO Series B Preferred 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 Series B Preferred Stock, the Current VASCO Stock Options and those Current VASCO Warrants which were originally issued for services. The exchange of the Current VASCO Conversion Options and of Current VASCO Warrants (other than Current VASCO Warrants originally issued for services) are expected to be taxable events 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 Series B Preferred Stock is Illinois Stock Transfer Company, 223 West Jackson Boulevard, Suite 1210, Chicago, Illinois 60606; telephone (312) 427-2953. Exchanges of Current VASCO Stock Options, Current VASCO Conversion Options and Current VASCO Warrants are to be made through Gregory T. Apple, Vice President and Treasurer, VASCO Data Security International, Inc., 1919 South Highland Avenue, Suite 118-C, Lombard, Illinois 60148; telephone (630) 932-8844. 4 TABLE OF CONTENTS
PAGE ---- 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......................... 11 SUMMARY FINANCIAL INFORMATION............................... 12 RISK FACTORS................................................ 13 Risks Relating To Exchange Offer And New VASCO............ 13 Factors Relating To Operations............................ 15 CURRENT VASCO AND NEW VASCO................................. 20 REORGANIZATION OF CURRENT VASCO............................. 20 Organizational History of Current VASCO................... 21 The Reorganization........................................ 22 Reasons for the Reorganization............................ 24 Federal Income Tax Consequences........................... 26 Differences in Capital Stock.............................. 29 No Appraisal Rights....................................... 29 THE EXCHANGE OFFER.......................................... 30 Terms of the Exchange Offer............................... 30 Other Arrangements Relating to the Exchange Offer......... 31 Expiration Date; Extensions; Termination; Amendment....... 32 Procedure for Tendering Current VASCO Shares.............. 32 Guaranteed Delivery Procedure for Current VASCO Shares.... 33 The Exchange Agent........................................ 34 Procedures for Tendering Current VASCO Equity Equivalent Securities............................................. 34 Withdrawal Rights......................................... 34 Conditions to the Exchange Offer.......................... 35 Acceptance of Current VASCO Securities and Issuance of New VASCO Securities....................................... 35 Payment of Expenses....................................... 36 MARKET PRICE OF CURRENT VASCO COMMON STOCK AND DIVIDEND POLICY.................................................... 37 SELECTED CONSOLIDATED FINANCIAL INFORMATION................. 38 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................. 39 CERTAIN INFORMATION CONCERNING CURRENT VASCO................ 53 Business.................................................. 53 Management................................................ 68 Current VASCO Equity Equivalent Securities................ 74 PRINCIPAL STOCKHOLDERS...................................... 77 CERTAIN INFORMATION CONCERNING NEW VASCO.................... 79 Organization of New VASCO................................. 79 Management................................................ 79
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PAGE ----------- DESCRIPTION OF CAPITAL STOCK OF NEW VASCO.................................................................. 80 Common Shares............................................................................................ 80 Preferred Shares......................................................................................... 80 Stock Options, Warrants and Convertible Notes............................................................ 81 Registration Rights and Other Arrangements............................................................... 83 COMPARISON OF STOCKHOLDER RIGHTS........................................................................... 83 Comparison of Current VASCO Stockholder Rights Following the Exchange Offer.............................. 83 Comparison of Rights of Holders of Stock Options and Warrants Following the Exchange Offer............... 84 LEGAL MATTERS.............................................................................................. 84 EXPERTS.................................................................................................... 84
ii 6 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 incorporated on August 16, 1990 (referred to herein as "Current VASCO"). VASCO Data Security International, Inc., a Delaware corporation incorporated on July 15, 1997 (referred to herein as "New VASCO"), 1919 South Highland Avenue, Suite 118-C, Lombard, Illinois 60148, (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. 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 or Current VASCO Series B Preferred Stock (collectively such shares of common stock and preferred stock are referred to in this document as "Current VASCO Shares") you will become a holder, respectively, of New VASCO Common Stock or New VASCO Series B Preferred Stock (collectively such shares of common stock and preferred 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." 7 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 (a) in order to satisfy a federal tax requirement for a tax-free exchange of shares, the New VASCO Series B Preferred Stock will be entitled to vote, together with the holders of New VASCO Common Stock, on all matters submitted for a vote of the holders of New VASCO Common Stock, (b) certain clarifying and conforming changes have been made in the terms of the New VASCO Common Stock and New VASCO Series B Preferred Stock, and (c) 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, 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. 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. Any such offering would be conditioned on the completion of the Exchange Offer and would involve New VASCO Common Stock. The possible public offering is subject to a number of additional 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 Securities Exchange Act of 1934, as amended. 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 Securities Exchange Act of 1934, as amended. 2 8 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 the Current VASCO Conversion Options, or Current VASCO Warrants that were not originally issued for services, for New VASCO Conversion Options or New VASCO Warrants are expected to be taxable transactions. See "REORGANIZATION OF CURRENT VASCO -- Federal Income Tax Consequences." - Holders of Current VASCO Securities must 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: To tender your Current VASCO Shares you should deliver your Current VASCO stock certificates and a duly signed Letter of Transmittal and Release 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 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 "-- Guaranteed Delivery Procedure for Current VASCO Shares" explain these features. - PROCEDURE FOR TENDERING CURRENT VASCO EQUITY EQUIVALENT SECURITIES: To exchange your Current VASCO Equity Equivalent Securities you should complete, sign and deliver one or more of the following agreements, as appropriate, which accompany this document: the New VASCO Option Agreement with respect to Current VASCO Stock Options; the New VASCO Convertible Note Agreement with respect to Current VASCO Conversion Options; or the New VASCO Warrant 3 9 Agreement with respect to Current VASCO Warrants (and deliver the Current VASCO Warrants). These agreements (and, if applicable, the Current VASCO Warrants) 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. 1919 S. Highland Avenue, Suite 118-C Lombard, Illinois 60148 (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 to Mr. Apple in the case of Current VASCO Equity Equivalent Securities, 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; - shares representing at least 80% of the outstanding shares of Current VASCO Series B Preferred 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 acceptance of Current VASCO Securities. See "THE EXCHANGE OFFER -- Expiration Date; Extensions; Termination; Amendment" and "-- Conditions to the Exchange Offer." Exchange by Directors of Current VASCO. As of August 31, 1997, 19,422,979 shares of Current VASCO Common Stock were outstanding of which 11,934,035 were owned by Current VASCO's directors and their spouses ("Current VASCO Affiliates"), and 9,000 shares of Current VASCO Series B Preferred Stock were outstanding of which 1,000 were owned by a Current VASCO Affiliate. In addition, as of August 31, 1997 the Current VASCO Affiliates owned, directly or indirectly, Current VASCO Stock Options for an aggregate of 1,089,507 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 10 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 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 more fully discussed below under "REORGANIZATION OF CURRENT VASCO -- Reasons for the Reorganization." 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. 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 61% OF THE CURRENT VASCO COMMON STOCK OUTSTANDING AND APPROXIMATELY 11% OF THE CURRENT VASCO SERIES B PREFERRED 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 1984 when VASCO CORP., a predecessor, but distinct legal entity, of Current VASCO was incorporated in the State of Delaware. In 1986, VASCO CORP. 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." The principal instances of non-compliance were: - the absence of formal minutes of certain board of director and stockholder proceedings; - the issuance of common shares not authorized by corporate charter or in excess of the number authorized by corporate charter; - the issuance of preferred shares not authorized by corporate charter; - the administrative dissolution in Utah of Current VASCO's predecessor Utah company prior to the filing in Delaware in 1990 of a Certificate of Merger for merging the Utah company into Current VASCO; 5 11 - the absence of a filing in Utah of Articles of Merger for the merger of the Utah predecessor into Current VASCO in 1990; - no record as to whether Current VASCO's original Delaware corporate predecessor afforded its stockholders preemptive rights provided by its certificate of incorporation in connection with issuances of the entity's capital stock; - no record that stockholders of the Utah predecessor were afforded statutory Utah appraisal rights in connection with the 1990 merger transaction; and - the failure to properly design, approve, adopt, administer, or authorize the number of shares subject to, stock option plans or programs, including actions required to allow for options granted to be treated as incentive stock options for federal income tax purposes. See "REORGANIZATION OF CURRENT VASCO -- Reasons for the Reorganization" for a more complete discussion of the Corporate Matters. Current VASCO had been operating with the understanding that the 1990 merger was effected in full compliance with the applicable laws of Delaware and Utah. If the 1990 merger was not valid, the succession to the Utah predecessor'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 the Utah predecessor'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 approximately 90% of the shares of the Utah predecessor entitled to vote on the 1990 merger, the individuals who were members of the Board of Directors of the Utah predecessor in 1990 have recently executed a transfer document assigning all of the Utah predecessor'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 the Utah predecessor'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" and "REORGANIZATION OF CURRENT VASCO -- Reasons for the Reorganization." 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 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 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. 6 12 For a more specific description of the Associated Corporate Matter Claims, see "THE EXCHANGE OFFER -- Terms of the Exchange Offer." Q. WHAT WILL I RECEIVE IN THE EXCHANGE OFFER? A. If you exchange a Current VASCO Share (and release any and all Associated Corporate Matter Claims), you will receive one New VASCO Share of the same kind as your Current VASCO Share surrendered. For example, for each share of Current VASCO Common Stock you will receive one share of New VASCO Common Stock. If you exchange Current VASCO Series B Preferred Stock, you will receive New VASCO Series B Preferred Stock, which has the same material terms and provisions as the Current VASCO Series B Preferred Stock except that the New VASCO Series B Preferred Stock will be entitled to vote one vote per share, together with the holders of New VASCO Common Stock, on all matters submitted to a vote of the holders of New VASCO Common Stock. These voting rights are being added to the New VASCO Series B Preferred Stock so that holders of Current VASCO Common Stock and Current VASCO Series B Preferred Stock will not suffer any adverse federal income tax consequences by virtue of the Exchange Offer. See "REORGANIZATION OF CURRENT VASCO -- Federal Income Tax Consequences." Accordingly, if all shares of Current VASCO Common Stock and of Current VASCO Series B Preferred Stock are exchanged, based on the number of such shares outstanding as of August 31, 1997, an aggregate of 9,000 additional votes will be entitled to be cast together with the 19,422,979 votes entitled to be cast by holders of New VASCO Common Stock. 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 or Current VASCO Series B Preferred Stock, as applicable. However, as the principal stockholder of Current VASCO, New VASCO will have the power to control and direct the 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 or other available remedies, if any, under Delaware law). 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. 7 13 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 and New VASCO Series B Preferred 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 and, for tax reasons, the New VASCO Series B Preferred Stock will be entitled to vote together with the holders of New VASCO Common Stock on all matters submitted to a vote of the holders of New VASCO Common Stock. 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) changes in the provisions of the New VASCO Series B Preferred Stock to provide general voting rights, (iii) the fact that New VASCO will not designate Series A Preferred Stock since there are no longer any shares of Current VASCO Series A Preferred Stock outstanding, (iv) the deletion from New VASCO's Certificate of Incorporation 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 (v) 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 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 8 14 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 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. 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 shares?" Q. WHAT DO I DO TO EXCHANGE MY OPTIONS OR WARRANTS? A. To exchange your Current VASCO Stock Options, Current VASCO Conversion Options or Current VASCO Warrants, you will need to deliver a signed New VASCO Option Agreement, New VASCO Convertible Note Agreement or New VASCO Warrant Agreement (with your Current VASCO Warrants), as applicable, to the following individual prior to the Expiration Date: Gregory T. Apple Vice President and Treasurer VASCO Data Security International, Inc. 1919 S. Highland Avenue Suite 118-C Lombard, Illinois 60148 9 15 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. 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, (i) stockholders of Current VASCO who possess at least 80% of the outstanding shares of Current VASCO Common Stock, and (ii) stockholders owning at least 80% of the outstanding shares of Current VASCO Series B Preferred 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 August 31, 1997 approximately 61% of the outstanding shares of Current VASCO Common Stock and approximately 11% of the outstanding shares of Current VASCO Series B Preferred Stock, and they have indicated their intention to tender 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 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 WITH THE EXCHANGE AGENT OR MY AGREEMENT WITH RESPECT TO OPTIONS OR WARRANTS 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]. For greater detail on withdrawal rights, see "THE EXCHANGE OFFER -- Withdrawal Rights." 10 16 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 and those Current VASCO Warrants originally issued for services (and the release of any and all Associated Corporate Matter Claims) for New VASCO Shares, New VASCO Stock Options or New VASCO Warrants will be tax-free for federal income tax purposes. The exchange of the Current VASCO Conversion Options, or Current VASCO Warrants that were not originally issued for services (and the release of any and all Associated Corporate Matter Claims) for New VASCO Conversion Options or New VASCO Warrants are expected to be taxable transactions. 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 "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." * * * * * * * * * * 11 17 SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)(1)
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------------------------ ----------------------- 1992 1993 1994 1995 1996(2)(3) 1996 1997 ---- ---- ---- ---- ---------- ---- ---- (UNAUDITED) Statement of Operations Data(1): Total revenues........... $ 2,302 $ 2,199 $ 2,693 $ 3,695 $10,192 $ 3,184 $ 6,592 Operating income (loss)................. 557 138 192 (534) (8,658) (2,916) (647) Net income (loss) available to common stockholders........... 289 50 30 (465) (9,349) (2,979) (1,291) Net income (loss) per common share........... 0.02 0.00 -- (0.03) (0.53) (0.19) (0.07) Shares used in computing per share amounts...... 13,686 13,877 14,260 14,817 17,533 15,614 18,496
AS OF JUNE 30, 1997 ----------------------- ACTUAL PRO FORMA(4) ------ ------------ (UNAUDITED) Balance Sheet Data(1): Cash........................................................ $ 2,863 $ 2,863 Working capital............................................. 3,022 3,022 Total assets................................................ 11,914 11,914 Long term obligations, less current portion................. 8,278 8,278 Common stock subject to redemption.......................... 495 495 Stockholders' equity (deficit).............................. (2,418) (2,418)
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 June 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 June 30, 1997, based upon a 100% exchange of equity interests. 12 18 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 or Current VASCO Series B Preferred Stock, as applicable. 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. 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 AND NEW VASCO SERIES B PREFERRED 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 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. In addition, there is currently no public trading market for the shares of Current VASCO Series B Preferred 13 19 Stock, and it is not expected that a market will develop for the shares of New VASCO Series B Preferred Stock exchanged in the Exchange Offer. 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. 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, Current VASCO Series B Preferred Stock 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, 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 August 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 14 20 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, and pursuant to such authority the Board of Directors has designated 9,500 shares of preferred stock as New VASCO Series B Preferred Stock, and has authorized the issuance of 9,000 shares of the 9,500 shares of New VASCO Series B Preferred Stock that have been designated. 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 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. 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. 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." 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 and December 31, 1996 and the first six months of 1997. As of June 30, 1997, Current VASCO had an accumulated deficit of $11,194,000, 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 15 21 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. DEPENDENCE ON MAJOR CUSTOMERS. Approximately 43% (approximately 21% 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. 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." 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 16 22 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 97% 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. 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 international operations will not have a material adverse effect on Current VASCO's financial condition or results of operations. 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, 17 23 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 notices 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 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 18 24 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. 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 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 operations. 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 19 25 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 August 31, 1997, the Board of Directors of New VASCO and their spouses will own beneficially and of record approximately 61% (and Mr. Hunt and his family will own beneficially and of record 53.3%) 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 significant 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. 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 1919 South Highland Avenue, Suite 118-C, Lombard, Illinois 60148; telephone: (630) 932-8844. REORGANIZATION OF CURRENT VASCO Current VASCO is essentially a holding company that conducts its business through operating subsidiaries in the United States and Europe. 20 26 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 Lombard, 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. Organizational Chart of Companies * 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 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 21 27 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. 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" below and "THE EXCHANGE OFFER -- Terms of the Exchange Offer." Current VASCO has two classes of equity securities outstanding: Current VASCO Common Stock and Current VASCO Series B Preferred 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. New VASCO has created two classes of equity securities: New VASCO Common Stock and New VASCO Series B Preferred Stock, the provisions of which are substantially identical with the corresponding Current VASCO Common Stock and Current VASCO Series B Preferred Stock with the exception of the general voting rights conferred upon the New VASCO Series B Preferred Stock for tax reasons and the fact 22 28 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 those holders of Current VASCO Conversion Options that do not already provide for conversion into New VASCO Common Stock. 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 August 31, 1997, at least 15,538,383 shares of Current VASCO Common Stock and at least 7,200 shares of Current VASCO Series B Preferred 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 each class of outstanding 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. 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." 23 29 REASONS FOR THE REORGANIZATION Management of Current VASCO consulted with independent legal counsel to explore the possibility of registering the Current VASCO Common Stock under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and to prepare for registering future capital offerings under the Securities Act of 1933, as amended (the "Securities Act"). After reviewing the organizational history of Current VASCO and its predecessors, 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," 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 1984 to effect a three-for-one stock split of its common stock and to provide for 600,000 shares of non-voting common stock prior to purportedly effecting the stock split and issuing 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 in 1986, (c) the purported issuance of Series A preferred stock in 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 preferred stock by Current VASCO in connection with the 1990 merger when the rights, powers and preferences of such stock were not specified in Current VASCO's Certificate of Incorporation and when 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 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 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 Old VASCO shares for 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 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 24 30 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 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 prior to the filing of a Certificate of Merger with the State of Delaware, 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; (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 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 1990 prior to the intended merger transaction with Current VASCO and before the filing of a Certificate of Merger with the State of Delaware; 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 issuances of Old VASCO capital stock, 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 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. 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. See "THE EXCHANGE OFFER -- Terms of the 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. 25 31 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 or Current VASCO Series B Preferred Stock (each 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 discussion below necessarily only represents a summary. This summary addresses the 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 and/or Current VASCO Series B Preferred 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 PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL, OR FOREIGN TAXING JURISDICTION. Current VASCO Common Stock and Current VASCO Series B Preferred 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 and Current VASCO Series B Preferred 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 and at least 80% of the Current VASCO Series B Preferred 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. Assuming the exchange qualifies as a reorganization under Code Section 368(a)(1)(B), the following will be the U.S. federal income tax consequences to holders of Current VASCO Common Stock and Current VASCO Series B Preferred Stock: 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 U.S. Stockholders taking part in the Exchange Offer will recognize no gain or loss on the exchange of the New VASCO Series B Preferred Stock for Current VASCO Series B Preferred Stock. 3. 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. 26 32 4. The holding period of the New VASCO Series B Preferred Stock received by a U.S. Stockholder taking part in the Exchange Offer will include the holding period of the Current VASCO Series B Preferred Stock exchanged therefor. 5. 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. 6. The tax basis of the New VASCO Series B Preferred 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 Series B Preferred Stock exchanged therefor. Taxation of Exchange of Certain Current VASCO Warrants. In the opinion of Jenner & Block, the exchange of New VASCO Warrants for Current VASCO Warrants other than with respect to Current VASCO Warrants issued for services ("compensatory 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 Warrants that were not issued for services 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 Warrants, the Exchange Offer will result in a taxable transaction to the holders of such Current VASCO 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 Warrants (other than with respect to compensatory 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 (other than with respect to compensatory warrants, the tax treatment of which is discussed under "Cancellation of Current VASCO Stock Options, Issuance of New VASCO Stock Options, and Exchange of Certain Warrants" below). 1. The holders of Current VASCO 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 Warrants. For these purposes, the tax basis of any holder of a Current VASCO Warrant will be equal to the fair market value of the consideration paid by the holder for the Current VASCO Warrant. In those circumstances in which the holder acquired both a Current VASCO 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 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 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 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. Cancellation of Current VASCO Stock Options, Issuance of New VASCO Stock Options And Exchange of Certain Warrants. Options issued in exchange for the provision of services ("compensatory options") are generally not taxable upon their issuance. An exception to this rule applies if the options have a readily ascertainable fair market value. If an option does have a readily ascertainable fair market it is taxable to the holder upon its issuance. For these purposes if an option is not actively traded on an established market, it does not have a readily ascertainable fair market value unless its fair market value can otherwise be measured with 27 33 reasonable accuracy. In particular, if an option is not actively traded on an established market, the option does not have a readily ascertainable fair market value when granted unless the taxpayer can show that all of the following conditions exist: (i) the option is transferable by the optionee; (ii) the option is exercisable immediately in full by the optionee; (iii) the option or the property subject to the option is not subject to any restriction or condition (other than a lien or other condition to secure the payment of the purchase price) which has a significant effect upon the fair market value of the option; and (iv) the fair market value of the option privilege is readily ascertainable. Given the market for the Current VASCO Common Stock it is unlikely that the option privilege of the Current VASCO Stock Options could be said to have a readily ascertainable fair market value. Because compensatory options which are not qualified as incentive stock options under Code Sections 421 through 424 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. Accordingly, assuming the Current VASCO Stock Options do not have a readily ascertainable fair market value, 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 receive treatment for U.S. federal income tax purposes similar to the tax treatment for compensatory nonqualified options. Accordingly, assuming the compensatory warrants issued by Current VASCO in exchange for services do not have a readily ascertainable fair market value, 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 those Current VASCO Warrants that are not compensatory 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 may be deemed to be an obligor under these debt instruments upon consummation of the Exchange offer by virtue of New VASCO's commitment to issue shares of New VASCO Common Stock pursuant to the New VASCO Conversion Options. 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. Subject to certain exceptions not applicable here, those rules generally provide that any change in the obligor on a debt instrument is deemed a significant modification (even if the change in obligor occurs by operation of the terms of the debt instrument itself). Accordingly, the proposed modifications of the debt instruments pursuant to the New VASCO Convertible Note Agreements will be deemed sales or exchanges of those debt instruments. The gain or loss on the sale or exchange of one privately held debt instrument for another privately held debt instrument is determined by comparing the adjusted issue price ("AIP") of the old debt instrument and the issue price of the new debt instrument. The AIP of the old debt instrument is its original issue price plus any accrued but unpaid interest plus any original issue discount. In the case of the Current VASCO debt instruments, Current VASCO has represented that there is no original issue discount and no accrued but unpaid interest. The issue price of the new debt instrument is its face amount so long as it bears adequate interest which is equal to or less than the applicable federal rate. Current VASCO has represented that the interest rate on the new debt will equal or exceed the applicable federal rate, since the debt instruments with Current VASCO Conversion Options will be amended only to provide for New VASCO Conversion Options 28 34 and no change in the interest rate payable under such instruments will be made by virtue of the New VASCO Convertible Note Agreements. 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, the lack of a class of New VASCO preferred stock comparable to the Series A Preferred Stock designated in Current VASCO's Restated and Amended Certificate of Incorporation, as amended (no shares of which are presently outstanding), and the general voting rights to which the holders of New VASCO Series B Preferred Stock will be entitled, 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." In contrast to shares of Current VASCO Series B Preferred Stock, which have no voting rights, shares of New VASCO Series B Preferred Stock have general voting rights. As of August 31, 1997, there were 9,000 shares of Current VASCO Series B Preferred Stock currently outstanding. Therefore, assuming all currently outstanding shares of Current VASCO capital stock are exchanged in the Exchange Offer, the number of voting shares of New VASCO would be 9,000 shares higher than the number of voting shares of Current VASCO. Based on the number of Current VASCO Shares outstanding as of August 31, 1997, the voting shares would increase from 19,422,979 to 19,431,979. The grant of voting rights, however, will not change the proportionate equity interest of holders of New VASCO Shares. See "DESCRIPTION OF CAPITAL STOCK OF NEW VASCO -- Preferred Shares -- New VASCO Series B Preferred Stock." Holders of Current VASCO Shares who do not exchange such shares for the appropriate class of 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. 29 35 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:
ONE CURRENT VASCO SHARE AND ALL ASSOCIATED CORPORATE MATTER CLAIMS ONE SHARE OF NEW VASCO - ---------------------------------- ---------------------- Current VASCO Common Stock for New VASCO Common Stock Current VASCO Series B Preferred for New VASCO Series B Stock Preferred Stock
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, 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 or director, may or may not be subject to indemnification by Current VASCO to the extent permitted by applicable law. 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 30 36 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, 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 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 31 37 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 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 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 acceptance of Current VASCO Securities. 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." PROCEDURE FOR TENDERING 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 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 32 38 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. 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 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. 33 39 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 the Letters of Transmittal and Release 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 EQUITY EQUIVALENT SECURITIES Holders of Current VASCO Stock Options, Current VASCO Conversion Options, and Current VASCO Warrants who wish to exchange their options or warrants should deliver a signed New VASCO Stock Option Agreement with respect to the Current VASCO Stock Options, New VASCO Convertible Note Agreement with respect to the Current VASCO Conversion Options or New VASCO Warrant Agreement (with original Current VASCO Warrants attached thereto) with respect to the Current VASCO Warrants, as applicable, to the following individual prior to the Expiration Date: Gregory T. Apple Vice President and Treasurer VASCO Data Security International, Inc. 1919 South Highland Avenue, Suite 118-C Lombard, Illinois 60148 (630) 932-8844 The exchange of Current VASCO Equity Equivalent Securities 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 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. For a withdrawal of Current VASCO Shares 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 to be withdrawn, (ii) identify the Current VASCO Shares to be withdrawn (including the certificate number or numbers and number of Current VASCO Shares), and (iii) be signed in the same manner required for the Letter of Transmittal and Release by which such Current VASCO Shares were tendered. Any Current VASCO Shares which have been tendered for exchange, but which are withdrawn, will be returned to the holders of Current VASCO Shares without cost to such holders as soon as practicable after withdrawal. The Current VASCO Shares 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 may be re-tendered by following the procedures described above under "Procedure for Tendering Current VASCO Shares" at any time on or prior to the Expiration Date. Current VASCO Equity Equivalent Securities. For a withdrawal of Current VASCO Equity Equivalent Securities 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 Equity Equivalent Securities to be withdrawn, (ii) identify the Current VASCO Equity 34 40 Equivalent Securities to be withdrawn (including the warrant number in the case of Current VASCO Warrants or 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 Warrant Agreement, New VASCO Stock Option Agreement or New VASCO Convertible Note Agreement pursuant to which such Current VASCO Equity Equivalent Securities were tendered. Any Current VASCO Equity Equivalent Securities 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 Equity Equivalent Securities 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 Equity Equivalent Securities may be re-tendered by following the procedures above under "Procedures for Tendering Current VASCO Equity Equivalent Securities" 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 (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 before the acceptance of such Current VASCO Securities, 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; (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 35 41 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, 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. 36 42 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 Series B Preferred Stock, Current VASCO Stock Options, Current VASCO Conversion Options or Current VASCO Warrants are publicly traded.
COMMON STOCK HIGH LOW ------------ ---- --- 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 (through September 8, 1997)................... 3 9/16 2 7/16
On September 8, 1997, the closing bid quotation on the OTC BB was 2 9/16. 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 August 31, 1997, there were 167 holders of record of Current VASCO Common Stock, two holders of record of Current VASCO Series B Preferred Stock, 68 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, and in the amount of $54,000 for the six months ended June 30, 1997. 37 43 SELECTED CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)(1)
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------------------------ ------------------ 1992 1993 1994 1995 1996(2)(3) 1996 1997 ---- ---- ---- ---- ---------- ---- ---- (UNAUDITED) Statement of Operations Data(1): Total revenues............... $ 2,302 $ 2,199 $ 2,693 $ 3,695 $10,192 $ 3,184 $ 6,592 Operating income (loss)...... 557 138 192 (534) (8,658) (2,916) (647) Net income (loss) available to common stockholders..... 289 50 30 (465) (9,349) (2,979) (1,291) Net income (loss) per common share...................... 0.02 0.00 -- (0.03) (0.53) (0.19) (0.07) Shares used in computing per share amounts.............. 13,686 13,877 14,260 14,817 17,533 15,614 18,496
DECEMBER 31, ----------------------------------------------- JUNE 30, 1992 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- -------- (UNAUDITED) Balance Sheet Data(1): Cash..................................... $ 3 $ 209 $ 38 $ 745 $ 1,814 $ 2,863 Working capital.......................... 479 514 764 1,074 1,502 3,022 Total assets............................. 1,340 1,522 2,111 2,414 12,368 11,914 Long term obligations, less current portion................................ 512 746 60 7 5,714 8,278 Common stock subject to redemption....... -- -- 371 741 -- 495 Stockholders' equity (deficit)........... 243 340 1,364 966 (1,205) (2,418)
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 June 1996; see "FINANCIAL STATEMENTS." (3) Includes a pretax charge for acquired in-process research and development of $7,351. 38 44 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. 39 45 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 this line of business, which represented in 1994 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 43% and 64% 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. 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. 40 46 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 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. 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." 41 47 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain consolidated financial data as a percentage of revenue for the six months ended June 30, 1996 and 1997 and the years ended December 31, 1994, 1995 and 1996.
PERCENTAGE OF REVENUE ------------------------------------------------- SIX MONTHS YEAR ENDED DECEMBER 31 ENDED JUNE 30 --------------------------- ---------------- 1994 1995 1996 1996 1997 ---- ---- ---- ---- ---- Total revenue........................................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold................................... 52.8 78.1 57.6 59.7 50.0 ----- ----- ----- ----- ----- Gross profit......................................... 47.2 21.9 42.4 40.3 50.0 Operating costs Sales and marketing................................ 5.8 6.6 13.8 6.9 27.2 Research and development........................... 7.8 6.5 5.6 6.8 5.3 General and administrative......................... 26.4 23.1 35.8 27.1 27.3 Acquired-in-process research and development....... -- -- 72.1 91.1 -- ----- ----- ----- ----- ----- Total operating costs......................... 40.0 36.2 127.3 131.9 59.8 Operating (loss) income.............................. 7.1 (14.4) 84.9 (91.6) (9.8) Interest expense..................................... (3.6) (2.0) (3.4) (0.8) (7.0) Other expense, net................................... -- -- (0.4) -- (1.1) ----- ----- ----- ----- ----- Income (loss) before income taxes.................... 3.5 (16.4) (88.8) (92.4) (17.9) Provision (benefit) for income taxes................. 1.4 (6.8) 1.4 (0.6) 0.9 ----- ----- ----- ----- ----- Net (loss) income.................................... 2.1 (9.6) (90.7) (91.8) (18.8) ===== ===== ===== ===== =====
The following discussion is based upon Current VASCO's consolidated results of operation for the six months ended June 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 SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 Revenues Current VASCO's consolidated revenues for the six months ended June 30, 1997 were $6,592,000, an increase of 3,408,000, or 107%, as compared to the six months ended June 30, 1996. VASCO Europe contributed $5,103,000 or 77% of total consolidated revenues for the 1997 period. Of the $5,103,000 of revenues contributed by VASCO Europe, $5,002,000 or 98% represent data security product revenues, with the remaining $101,000, or 2%, representing revenues from IVR products. Revenues (and other operating results) attributable to VASCO Europe are included only from the time of acquisition of Lintel Security (four months for 1996 and six months for 1997) and of Digipass (not included in 1996 but included for six months in 1997). VASCO NA's revenues were $1,489,000 for the six months ended June 30, 1997, a decrease of $1,030,000, or 41%, as compared to the same period in 1996. VASCO NA's revenues accounted for 23% of consolidated revenues for the six months ended June 30, 1997. Security product sales for VASCO NA decreased $960,000, or 40%, as compared to the six months ended June 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 $185,000 for the six months ended June 30, 1996 and no revenues for the comparable period in 1997. 42 48 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 six months ended June 30, 1996 were $6,869,000. This amount is $277,000, or 4%, higher than Current VASCO's consolidated revenues for the six months ended June 30, 1997. The decline in revenues for the six month period ended June 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 $767,000, due to a build-up in the reseller's inventory of data security products purchased from VASCO NA. The decrease in revenues from the IVR business, which Current VASCO is considering discontinuing, and from sales to VASCO NA's principal customer was partially offset by an increase of $1,055,000 in revenues from other customers, generated primarily from sales by VASCO Europe. Cost of Goods Sold Consolidated cost of goods sold for the six months ended June 30, 1997 was $3,296,000, an increase of $1,396,000, or 73%, as compared to the six months ended June 30, 1996. This increase is primarily attributable to the inclusion of VASCO Europe in cost of goods sold for the period ended June 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 combined cost of goods sold. VASCO Europe's cost of goods sold was $2,669,000, as compared to $549,000 from the same period last year. VASCO NA's cost of goods sold was $627,000 for the first six months of 1997, representing a decrease of $817,000, or 57%, from 1996. This decline was primarily a result of a decrease of $663,000 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 six months ended June 30, 1996 was $154,000. 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 six months ended June 30, 1996 was $3,509,000. This amount is $213,000, or 6% higher than Current VASCO's consolidated cost of goods sold for the six months ended June 30, 1997. The decrease in revenues for the six months ended June 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 six months ended June 30, 1997 was $3,296,000, an increase of $2,012,000, or 157%, over the same period in 1996. This represents a consolidated gross margin of 50%, as compared to a gross margin of 40% for the period ended June 30, 1996. VASCO Europe contributed $2,434,000 to the consolidated gross profit. VASCO Europe's gross margin for the period ended June 30, 1997 was 48%. VASCO NA contributed $862,000 to gross profit for the period ended June 30, 1997 as compared to $1,191,000 for the first six months of 1996, a decrease of $329,000, or 28%, 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 six months of 1997 due to the disposition of VPS during 1996, whereas data security products accounted for 97% of gross profit during the first six months of 1996, with VPS accounting for the remaining 3% of gross profit. VASCO NA's gross margin percentage increased to 58% from 45% in the first six 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. 43 49 Current VASCO's consolidated gross profit on a pro forma basis for the first six months of 1996 was $3,360,000, representing a gross margin of 49%. The decline in gross profits for the period ended June 30, 1997 as compared to June 30, 1996 on a pro forma basis was approximately $64,000 and was due primarily to the decrease in revenues. Sales and Marketing Expenses Consolidated sales and marketing expenses for the six months ended June 30, 1997 were $1,793,000, an increase of $1,573,000, or 715%, over the same period in 1996. Of the total increase, $856,000, or 54%, can be attributed to the addition of VASCO Europe. Sales and marketing expenses increased by $717,000, or 326%, 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 six months ended June 30, 1997 were $348,000, an increase of $130,000, or 60%, as compared to the period ended June 30, 1996. R&D costs represented 5% of consolidated revenues for the first six months of 1997 as compared to 7% 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 six month period ended June 30, 1996, reflecting the amortization of capitalized software development costs. Net product development costs carried on Current VASCO's books as an asset were $0 and $43,000 at June 30, 1997 and 1996, respectively. There were no product development costs capitalized in the first six months of 1997 or 1996. General and Administrative Expenses Consolidated general and administrative expenses for the six months ended June 30, 1997 were $1,802,000, an increase of $939,000, or 109%, over the same period in 1996. The total increase can be attributed to the addition of VASCO Europe, with $412,000 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 six months ended June 30, 1996, Current VASCO expensed $2,900,000 pertaining to in-process research and development acquired in the Lintel Security acquisition. Based upon an independent appraisal, approximately 67% of the acquisition premium has been expensed in accordance with generally accepted accounting principles ("GAAP"). Operating Loss Current VASCO's consolidated operating loss for the six months ended June 30, 1997 was $647,000, compared to the consolidated operating loss of $2,917,000 for 1996. The 1996 consolidated operating loss included a write-off of acquired in-process research and development in the amount of $2,900,000. The operating loss, before the write-off, was $17,000 and of this amount, VASCO NA contributed a loss of $15,000 and VASCO Europe contributed net operating income of $21,000. The remaining $23,000 was attributable to amortization of intangibles. Current VASCO's operating loss for the first six 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. 44 50 Current VASCO's consolidated operating loss on a pro forma basis was $2,250,000 for the six month period ended June 30, 1996. As compared to the operating loss of $647,000 for the same period in 1997, this represents a decrease of $1,603,000, or 71%. The decrease was due primarily to the absence in the six month period ended June 30, 1997 of a write-off of in process research and development acquired from Lintel Security and because of operating efficiencies realized due to the combination of Lintel Security and Digipass. Interest Expense Consolidated interest expense for the six months ended June 30, 1997 was $533,000 compared to $26,000 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 $1,180,000 for the six months ended June 30, 1997. This compares to a net loss before taxes of $2,943,000 for the corresponding period in 1996. The 1997 pretax losses were $1,339,000 for VASCO NA, with VASCO Europe posting pretax income of $805,000. The remaining $646,000 consisted of $412,000 for amortization of intangibles and $234,000 for interest expense. For the six months ended June 30, 1996, pretax losses for VASCO NA were $41,000, while VASCO Europe had pretax income of $21,000. Of the $2,943,000 net loss before taxes for this six month period, the remaining $2,923,000 consisted of $2,900,000 related to the write-off of acquired in-process research and development, and $23,000 to the amortization of intangibles. Current VASCO's consolidated net loss before taxes on a pro forma basis was $2,310,000 for the six months ended June 30, 1996 as compared to a loss of $1,180,000 for the same period in 1997. This represents a decrease of $1,130,000, or 49%. The decrease was due to the absence in the six month period ended June 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 six months ended June 30, 1997 of $57,000. Current VASCO has net operating loss carryforwards of approximately $2,965,000 as of June 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 $54,000 in each of the six months ended June 30, 1997 and 1996. 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 $11,194,000 at June 30, 1997. Current VASCO's loss before taxes, the resulting net loss after taxes, and the resulting increase in accumulated deficit for the first six months of 1997, 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 98% of Current VASCO's loss before taxes for the six months ended June 30, 1996. 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. 45 51 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 $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. However, 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 security products in 1995. 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. 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. 46 52 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. 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 47 53 $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. 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. 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. 48 54 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. 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. 49 55 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. 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. 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. 50 56 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 or the Exchange Act, by July 1, 1996. The described remedy in the event of default was a put option (the "put"), allowing the investor 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 $247,296 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 filing deadline was changed to March 31, 1998, and (iv) the investor group received the right to put their shares to Current VASCO if after March 31, 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 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 $1,502,000, an increase of $348,000, or 30%, from $1,154,000 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 1.21 at December 31, 1996, compared to 2.09 at the end of 1995. 51 57 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. 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 1.54. 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 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. 52 58 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 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. 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. 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. 53 59 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 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. 54 60 CURRENT DATA SECURITY SOLUTIONS BUILDING BLOCKS OF DATA SECURITY GRAPHIC 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 55 61 offerings to reach its ultimate goal of supplying a full range of security products for integrated, enterprise-wide security solutions which will meet the needs of the emerging data security market. IDENTIFICATION AND AUTHENTICATION. Identification and authentication systems provide the foundation for security systems by validating the identity of each user attempting to access information or data contained in a system, regardless of location. The most common use of an identification and authentication device is to authenticate local and remote users who have established a network connection to a company's computer network. Authentication is often done in conjunction with a firewall to authenticate internal users of stand-alone PCs on networks or to authenticate customers and suppliers who have been granted access to a restricted portion of the company's data or other information. There are three basic methods used to authenticate a user. The first method identifies WHO THE USER IS, utilizing a hard-to-forge physical attribute such as the user's fingerprints, voice patterns or eye retina patterns. In each case the physical attribute, or biometric, must be capable of being scanned and converted to a digital document. While biometric devices offer a high level of authentication, they are susceptible to replay attacks. Replay attacks collect samples of a user's biometric "print" (i.e. voice, finger, retina) and then replay the "print" to access a target system. Furthermore, current technology requires additional hardware to acquire, or read, the biometric "print." The added hardware presents two challenges for biometric solutions, one is the cost and the second is installation and maintenance. The second authentication method is identifying WHAT THE USER KNOWS, usually a password known only to the specific user. Passwords, while easy to use, are also the least secure because they tend to be short and static, and are often transmitted without encryption ("clear text"). As a result, passwords are vulnerable to decoding or observation and subsequent use by unauthorized persons. Once a user's password has been compromised, the integrity of the entire computer network can be compromised. The third authentication method identifies WHAT THE USER HAS, generally a physical device or token intended for use by that specific user. Tokens are small devices ranging from simple credit card-like devices to more complex devices capable of generating time-synchronized challenge/response access codes. Early examples of simple tokens include building access passes. Certain token-based systems require both possession of the token itself and a PIN to indicate that the token is being used by an authorized user. Such an approach, referred to as two-factor authentication, provides much greater security than single factor systems such as passwords or simple possession of a token. Early implementations of two-factor authentication include automatic teller machine ("ATM") cards. ATM cards require the user to possess the card and to know the PIN before engaging in the transaction. 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 56 62 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. 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. 57 63 CURRENT VASCO SOLUTION The following illustrates a sample configuration of a network and components of a security system: STARTING POINT/REMOTE USERS: AUTHENTICATION LEVEL - Typically defined as OFF-premise with Tokens, smartcards, encryption. a laptop or pc, customers, employees 1. Before the firewall, VASCO tokens on-premise but not on the LAN. provide access control. - ------------------------------------------------------------------------------------------------------------------------------------ STARTING POINT/LOCAL USERS: FIREWALL LEVEL - separates off-the-net Typically defined as ON-PREMISE, from on-the-net users. Resides within past the firewall, and on the LAN. the NAS (network Access Server). Available from 3rd party vendors [SEAMLESS SECURITY FLOW CHART] AUTHORIZATION LEVEL - Uses RADIUS server. 2. Beyond the firewall, VACMan provides SELECTIVE access control. AUTHENTICATION/AUTHORIZATION & ACCOUNTING LEVEL - Security Server w/RADIUS, TACACS, XTACACS, & TACACS+. 3. Within the net VACMan provides SSO (Single-Sign-On) services for network users.
58 64 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. 59 65 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 4.6% of all sales for the year ended 60 66 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:
EUROPE NORTH AND SOUTH AMERICA ASIA/AUSTRALIA ------ ----------------------- -------------- Concord-Eracom Nederland B.V. All Tech Data Systems, Inc. Horizon Systems (Netherlands) (Midwestern United States) (Hong Kong) ME Networks AG Clark Data Systems, Inc. HUCOM, Inc. (Switzerland) (Southwestern United States) (Japan) Protect Data Norge AS Excelsys, SA The Peripheral People (Scandinavia) (Chile) (Australia) Secureware LatinWare Ltda. (France) (Colombia) Sirnet AB SEI Information Technology (Scandinavia) (Midwestern United States)
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 61 67 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:
HARDWARE FEATURES - -------- -------- 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
62 68
HARDWARE FEATURES - -------- -------- 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 dentification 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
SOFTWARE FEATURES - -------- -------- 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
- ------------------------- * Not offered in the United States. 63 69
SOFTWARE FEATURES - ------------------------------ ------------------------------------------------------------------------------------------- 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
- ------------------------- 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 64 70 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"). 65 71 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. 66 72 Combined, VDSI and VDS NV/SA have established relationships with a total of 61 Resellers to date, against a target of 64 for year-end 1997.
MEASUREMENT PERIOD US ACTUAL EUROPE ACTUAL (FISCAL YEAR COVERED) JAN 1 17 FEB 1 20 MAR 1 23 APR 2 25 MAY 7 27 JUN 10 31 JUL 15 34 AUG 25 36
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. 67 73 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 Lombard, Illinois, a western suburb of Chicago. These facilities are leased through November 30, 1997, and consist of approximately 5,100 square feet. Current VASCO plans to move before October 1997 to leased quarters covering approximately 10,000 square feet located in Oak Brook Terrace, Illinois, a western suburb of Chicago. The term of the sublease for the Oak Brook Terrace office space runs from September 15, 1997 through November 15, 1999, and Current VASCO believes that the new facilities will be adequate for its present growth plans. 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 August 1, 1997 are as follows: Directors and Officers of Current VASCO
NAME AGE POSITION ---- --- -------- T. Kendall Hunt........................... 54 Chief Executive Officer, President, Chairman of the Board and Director Forrest D. Laidley........................ 53 Secretary and Director(1)(2) Robert E. Anderson........................ 48 Director(1)(2) Gerald Guice.............................. 56 Director(1)(2) Michael A. Mulshine....................... 57 Director(1)(2) Gregory T. Apple.......................... 31 Vice President -- Finance and Administration
Key Personnel of VDSI
NAME AGE POSITION ---- --- -------- 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
68 74 Key Personnel of VDS NV/SA
NAME AGE POSITION ---- --- -------- Mario Houthooft........................... 44 Managing Director(3) Frank Hoornaert........................... 36 Technical Manager Jan Valcke................................ 43 Direct Sales Manager
- ------------------------- (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. (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." 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. GERALD GUICE -- serves, since 1990, as a Director of Current VASCO. From 1990 until the present, Mr. Guice has been Managing Director of INTEGRAL (GH) LTD, a Ghana-based producer and exporter of agricultural products, serving the U.S. and European markets. Previously, he was a founder and former President of Sentinel Computer Services, Inc. (now Sentinel Technologies, Inc.), a large Midwest regional computer hardware maintenance provider. Prior to Sentinel Computer Services, Inc., he held senior management and executive positions with several computer industry companies, including Control Data and IBM. 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. 69 75 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 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 70 76 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. 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 and is expected to continue to do so. 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). 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 71 77 executive officers of Current VASCO and its subsidiaries whose salary and bonus for such year exceeded $100,000 (collectively, Messrs. Hunt and Haggard are referred to herein as the "Named Executive Officers"). SUMMARY COMPENSATION TABLE(1)
LONG-TERM ANNUAL COMPENSATION COMPENSATION AWARDS ----------------------------- --------------------- NAME AND SECURITIES UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS(#) COMPENSATION($) ------------------ ---- --------- -------- --------------------- --------------- T. Kendall Hunt.................... 1996 116,457 -0- -0- -0- President, Chairman of the Board and Director of Current VASCO John C. Haggard.................... 1996 105,750 -0- 40,000 -0- President and Chief Operating Officer of VDSI
- ------------------------- (1) Current VASCO was not subject to the reporting requirements of the Exchange Act in 1995 or 1994. Accordingly, information with respect to 1995 or 1994 is not required to be disclosed. 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 72 78 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. 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
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%($) ---- ---------- ------------ -------- ---------- ----- ------ T. Kendall Hunt................... -- -- -- -- -- -- John C. Haggard................... 40,000 14.8% 4.25 04/15/06 107,100 270,300
- ------------------------- (1) The options vest as follows: 25% at the time of the grant, and 25% on each subsequent anniversary of the grant. (2) The potential realizable value amounts shown illustrate the values that might be realized upon exercise immediately prior to the expiration of their term using five percent and ten percent appreciation rates as required to be used in this table by the Securities and Exchange Commission, compounded annually, and are not intended to forecast possible future appreciation, if any, of Current VASCO's stock price. Additionally, these values do not take into consideration the provisions of the options providing for nontransferability or termination of the options following termination of employment. Therefore, the actual values realized may be greater or less than the potential realizable values set forth in the table. Year-End Option Values. The following table sets forth the aggregate value as of December 31, 1996 of unexercised stock options held by the Named Executive Officers. The Named Executive Officers did not exercise any stock options during 1996 and the relevant columns have therefore been omitted. YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE(1) OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END ($) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- T. Kendall Hunt............................... -- -- -- -- John C. Haggard............................... 88,750 108,750 250,031.25 250,031.25
- ------------------------- (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 73 79 to a management agreement by and between VDS NV/SA and LINK BVBA, the company that employs Mr. Houthooft. The management agreement has an indefinite term, although it is terminable by either party upon six months notice, or without prior notice upon payment of a specified amount. Mr. Houthooft is to devote at least forty-five hours per week to his VDS NV/SA duties pursuant to the agreement, which also contains confidentiality obligations and precludes Mr. Houthooft from soliciting VDS NV/SA employees or engaging in competing businesses during the term of the agreement. The agreement further provides that Mr. Houthooft will not render services to a competitor or start a competing business in 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. Robert Anderson Consulting Agreement. 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. 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 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. Mr. Hunt has committed not to convert his 1,000 shares of Current VASCO Series B Preferred Stock into Current VASCO Common Stock prior to September 16, 1997. 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." 74 80 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. 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 August 31, 1997 there were 1,973,132 Current VASCO Stock Options outstanding of which 1,476,254 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 August 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. 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 75 81 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 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. 76 82 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of Current VASCO's Common Stock as of August 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.
AMOUNT AND NATURE OF NAME AND ADDRESS CLASS OF BENEFICIAL PERCENT OF BENEFICIAL OWNER STOCK OWNERSHIP(1) OF CLASS ------------------- -------- ------------ -------- Directors and Named Executive Officers T. Kendall Hunt......................................... Common 10,201,766(2) 52.26% 1919 S. Highland Avenue Preferred B 1,000 1.11% Suite 118-C Lombard, Illinois 60148 Forrest D. Laidley...................................... Common 592,403(3) 3.03% 185 Milwaukee Avenue Suite 240 Libertyville, Illinois 60069 Robert E. Anderson...................................... Common 665,342(4) 3.27% 831 West North Street Hinsdale, Illinois 60521 Gerald Guice............................................ Common 1,418,333(5) 7.27% House Number 91 Achimota Cantonments Rd. P.O. Box 10219 Accra-North Ghana, West Africa Michael A. Mulshine..................................... Common 235,000(6) 1.20% 2517 Route 35, Suite D-201 Manasquan, New Jersey 08736 John C. Haggard......................................... Common 200,950(7) 1.03% 1919 S. Highland Avenue Suite 118-C Lombard, Illinois 60148 All Executive Officers and Directors as a Group (8 persons).............................................. Common 13,849,542(8) 65.73%
77 83
AMOUNT AND NATURE OF NAME AND ADDRESS CLASS OF BENEFICIAL PERCENT OF BENEFICIAL OWNER STOCK OWNERSHIP(1) OF CLASS ------------------- -------- ------------ -------- Other 5% Stockholders KYOTO Securities, Ltd................................... Common 1,341,355(9) 6.70% 1800 Avenue, McGill College Suite 2440 Montreal, Quebec H3A-3J6 Barbara J. Hunt......................................... Common 1,111,300 5.72% 11735 Briarwood Court Burr Ridge, Illinois 60525
- ------------------------- (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 August 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 August 31, 1997, 67,179 shares into which Mr. Hunt's 1,000 shares of Current VASCO Series B Preferred Stock are convertible as of August 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 August 31, 1997, 5,883 shares underlying warrants exercisable within 60 days of August 31, 1997 and 250,000 shares held by Mr. Laidley and his spouse as joint tenants. (4) Includes 609,507 shares underlying Current VASCO Stock Options exercisable within 60 days of August 31, 1997. (5) Includes 95,000 shares underlying Current VASCO Stock Options exercisable within 60 days of August 31, 1997. (6) Includes 35,000 shares underlying Current VASCO Stock Options held by Mr. Mulshine which are exercisable within 60 days of August 31, 1997, and 200,000 shares underlying Current VASCO Warrants exercisable within 60 days of August 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 "Certain Relationships and Related Transactions." (7) Includes 148,125 shares underlying Current VASCO Stock Options exercisable within 60 days of August 31, 1997. (8) Includes 1,163,882 shares underlying Current VASCO Stock Options, 368,383 shares underlying Current VASCO Warrants, and 115,930 shares into which convertible notes and shares of Current VASCO Series B Preferred Stock are exercisable within 60 days of August 31, 1997, including those referred to in footnotes (2) through (7) above, as well as the shares held by Mr. Hunt's spouse. (9) Includes 166,943 shares underlying Current VASCO Warrants exercisable within 60 days of August 31, 1997, and 416,667 shares into which a convertible note is exercisable within 60 days of August 31, 1997. 78 84 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) general voting rights have been added to the certificate of designation of the New VASCO Series B Preferred Stock to be issued by New VASCO in exchange for the issued and outstanding shares of the Current VASCO Series B Preferred Stock that are tendered pursuant to the Exchange Offer, (iii) 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, 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." 79 85 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. The authorized preferred stock has been designated, in part, to provide for 9,500 shares of New VASCO Series B Preferred Stock. No shares of New VASCO Series B Preferred Stock have been issued and only 100 shares of New VASCO Common Stock, all of which are owned or 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 New VASCO Series B Preferred Stock and any other 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 New VASCO Series B Preferred Stock or the rights of any other 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, including the New VASCO Series B Preferred Stock. 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. 80 86 NEW VASCO SERIES B PREFERRED STOCK The Certificate of Designation for New VASCO Series B Preferred Stock authorizes 9,500 shares of convertible preferred stock that carry a cumulative dividend payable monthly of 12% per annum based on a liquidation value of $100 per share. Each share of New VASCO Series B Preferred Stock is convertible, at the option of the holder, into the number of shares of New VASCO Common Stock determined as follows: the quotient obtained by dividing the liquidation value of such shares, or $100, by 50% of the average market price of New VASCO Common Stock for the period of 20 consecutive business days on which the New VASCO Common Stock was traded prior to the notice date. Dividends are payable monthly at the rate of 1% per month, provided that if dividend payments 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 New VASCO Series B Preferred Stock have the right, with proper notice, to purchase New VASCO Common Stock in satisfaction of accrued and unpaid dividends at a price per share of New VASCO Common Stock equal to one-half of the average trading price of New VASCO Common Stock for 20 days prior to the notice given by such stockholder of the election to so purchase shares of New VASCO Common Stock. Except as otherwise required by law, shares of the New VASCO Series B Preferred Stock are entitled to vote together with the New VASCO Common Stock and the holders of such other classes and series of stock that vote together with the New VASCO Common Stock as a single class, on all matters submitted to a vote of the holders of New VASCO Common Stock. In addition, if the monthly dividend is more than 30 days in arrears, and remains in arrears after proper notice by a holder of New VASCO Series B Preferred Stock, a majority of the holders of such shares, voting separately as a class, shall be entitled to elect a majority of the New VASCO Board of Directors until the default in the dividend payments has been paid in full. The New VASCO Certificate of Incorporation, as amended, also prohibits New VASCO from redeeming or repurchasing shares of New VASCO capital stock while dividends on the New VASCO Series B Preferred Stock are in arrears. The New VASCO Series B Preferred Stock will become convertible at the option of New VASCO if and when the New VASCO Common Stock is quoted on NASDAQ or is listed for trading on either the American Stock Exchange or the New York Stock Exchange. Shares of New VASCO Series B Preferred Stock carry a liquidation preference over the New VASCO Common Stock in the amount of $100 per share, plus the amount of any accrued and unpaid dividends, upon the liquidation, dissolution or winding up of New VASCO. 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 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. 81 87 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 August 31, 1997 there were 1,973,132 Current VASCO Stock Options outstanding for an aggregate of 1,973,132 shares of Current VASCO Common Stock with exercise prices ranging between $.125 and $6.00 per share, of which options for 1,476,254 shares were fully vested and exercisable. See "CERTAIN INFORMATION CONCERNING CURRENT VASCO -- Current VASCO Equity Equivalent Securities -- Current VASCO Stock Options." 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 August 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." 82 88 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. 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 Certain holders of Current VASCO Common Stock have the contractual right, under certain circumstances, to sell shares of Current VASCO Common Stock to Current VASCO at a price of [$7.00] per share. 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. 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 of 75,000,000 shares of common stock, as opposed to 50,000,000, the lack of a designation of a 83 89 series of New VASCO preferred stock comparable to Current VASCO Series A Preferred Stock and changes made in the New VASCO Series B Preferred Stock provisions of New VASCO's Certificate of Incorporation, as amended, to (i) provide general voting rights of one vote per share of New VASCO Series B Preferred Stock, to be voted together with the shares of New VASCO Common Stock on all matters submitted for a vote of the shares of New VASCO Common Stock, (ii) remove certain triggering dates that will have passed prior to the Expiration Date and remove references to Series A Preferred Stock, (iii) provide that holders of New VASCO Series B Preferred Stock may not convert such shares into New VASCO Common Stock if the per share purchase price is less than the par value of the New VASCO Common Stock, and (iv) 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 provisions with respect to the liability of directors for monetary damages. New VASCO's bylaws are the same as those of Current VASCO. 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. 84 90 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. 85 91 FINANCIAL STATEMENTS INDEX
PAGE DESCRIPTION NUMBER ----------- ------ PRO FORMA FINANCIAL STATEMENTS VASCO DATA SECURITY INTERNATIONAL, INC. ("NEW VASCO") Pro Forma Balance Sheet as of June 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 six months ended June 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 June 30, 1997 (unaudited)............................. F-12 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1996 (unaudited) and June 30, 1997 (unaudited)............................................... F-13 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1997 (unaudited)........ F-14 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1996 (unaudited) and June 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
F-1 92 VASCO DATA SECURITY INTERNATIONAL, INC. ("NEW VASCO") PRO FORMA BALANCE SHEET JUNE 30, 1997 (UNAUDITED)
VASCO NEW VASCO NEW VASCO CORP. ADJUSTMENTS PRO FORMA --------- ----- ----------- --------- ASSETS CURRENT ASSETS: Cash.................................................. $-- $ 2,862,690 $ -- $ 2,862,690 Accounts receivable, net of allowance for doubtful accounts............................................ -- 2,772,146 -- 2,772,146 Inventories, net...................................... -- 1,876,907 -- 1,876,907 Prepaid expenses...................................... -- 321,159 -- 321,159 Deferred income taxes................................. -- 283,000 -- 283,000 Other current assets.................................. -- 465,284 -- 465,284 --- ------------ -------- ------------ Total current assets.................................. -- 8,581,186 -- 8,581,186 PROPERTY AND EQUIPMENT: Furniture and fixtures................................ -- 143,560 -- 143,560 Office equipment...................................... -- 632,835 -- 632,835 --- ------------ -------- ------------ -- 776,395 -- 776,395 Accumulated depreciation.............................. -- (433,885) -- (433,885) --- ------------ -------- ------------ -- 342,510 -- 342,510 Goodwill, net of accumulated amortization............. -- 763,828 -- 763,828 Other assets.......................................... -- 2,226,299 -- 2,226,299 --- ------------ -------- ------------ TOTAL ASSETS.......................................... $-- $ 11,913,823 $ -- $ 11,913,823 === ============ ======== ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current maturities of long-term debt.................. $-- $ 3,459,034 $ -- $ 3,459,034 Accounts payable...................................... -- 860,672 -- 860,672 Customer deposits..................................... -- 458,037 -- 458,037 Other accrued expenses................................ -- 781,134 -- 781,134 --- ------------ -------- ------------ Total current liabilities............................. -- 5,558,877 -- 5,558,877 --- ------------ -------- ------------ Long-term debt........................................ -- 8,277,878 -- 8,277,878 --- ------------ -------- ------------ Common stock subject to redemption.................... -- 494,668 -- 494,668 --- ------------ -------- ------------ STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock, 8% cumulative series A convertible, $.01 par value -- 317,181 shares authorized; 117,181 shares issued and outstanding....................... -- 1,172 (1,172) -- Preferred stock, 12% cumulative series B convertible, $.01 par value -- 9,500 shares authorized; 9,000 shares issued and outstanding....................... -- 90 (90) -- Common stock, $.001 par value -- 50,000,000 shares authorized; 18,576,471 shares issued and outstanding......................................... -- 18,576 (18,576) -- Preferred stock, $.01 par value -- 500,000 shares authorized; 9,000 shares of 12% cumulative series B convertible issued and outstanding on a pro forma basis............................................... -- -- 90 90 Common stock, $.001 par value -- 75,000,000 shares authorized; 19,357,778 shares issued and outstanding on a pro forma basis................................ -- -- 19,358 19,358 Additional paid-in capital............................ -- 8,948,492 390 8,948,882 Accumulated deficit................................... -- (11,194,402) -- (11,194,402) Cumulative translation adjustment..................... -- (191,526) -- (191,526) --- ------------ -------- ------------ -- (2,417,598) -- (2,417,598) Less: Treasury stock, 2,824 common shares at cost..... -- (2) -- (2) --- ------------ -------- ------------ TOTAL STOCKHOLDERS' EQUITY (DEFICIT).................. -- (2,417,600) -- (2,417,600) --- ------------ -------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)........................................... $-- $ 11,913,823 $ -- $ 11,913,823 === ============ ======== ============
See accompanying notes to pro forma financial statements. F-2 93 VASCO DATA SECURITY INTERNATIONAL, INC. ("NEW VASCO") PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
VASCO NEW VASCO NEW VASCO CORP. ADJUSTMENT PRO FORMA --------- ----- ---------- --------- Total revenues.............................. $ -- $10,192,485 $3,461,935 $13,654,420 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 ===========
See accompanying notes to pro forma financial statements. F-3 94 VASCO DATA SECURITY INTERNATIONAL, INC. ("NEW VASCO") PRO FORMA STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
NEW VASCO NEW VASCO VASCO CORP. ADJUSTMENTS PRO FORMA ----- ----- ----------- --------- Total revenues.................................. $ -- $ 6,591,694 $ -- $ 6,591,694 Cost of goods sold.............................. -- 3,296,091 -- 3,296,091 ----- ----------- ----------- ----------- Gross profit.................................... -- 3,295,603 -- 3,295,603 ----- ----------- ----------- ----------- Operating costs: Sales and marketing........................... -- 1,792,724 -- 1,792,724 Research and development...................... -- 347,623 -- 347,623 General and administrative.................... -- 1,802,343 -- 1,802,343 ----- ----------- ----------- ----------- Total operating costs...................... -- 3,942,690 -- 3,942,690 Operating loss.................................. -- (647,087) -- (647,087) Interest expense................................ -- (460,137) -- (460,137) Other expense, net.............................. -- (72,750) -- (72,750) ----- ----------- ----------- ----------- Loss before income taxes........................ -- (1,179,974) -- (1,179,974) Provision for income taxes...................... -- 57,171 -- 57,171 ----- ----------- ----------- ----------- Net loss........................................ -- (1,237,145) -- (1,237,145) Preferred stock dividends..................... -- (54,000) -- (54,000) ----- ----------- ----------- ----------- Net loss available to common stockholders....... $ -- $(1,291,145) $ -- $(1,291,145) ===== =========== =========== =========== Net loss per common share....................... $ (0.07) =========== Weighted average common shares outstanding 19,277,065 ===========
See accompanying notes to pro forma financial statements. F-4 95 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 and Series B Preferred Stock for (i) shares of Current VASCO Common Stock and Series B Preferred Stock, respectively, 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 (i) at least 80% of the outstanding shares of Current VASCO Common Stock, and (ii) at least 80% of the outstanding shares of Current VASCO Series B Preferred 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 authorized Preferred Stock has been designated, in part, to provide for 9,500 shares of New VASCO's Series B Preferred Stock, which carries a cumulative dividend payable monthly of 12% per annum based on a liquidation value of $100 per share. The Series B Preferred Stock is convertible into Common Stock based on a formula and has other provisions F-5 96 VASCO DATA SECURITY INTERNATIONAL, INC. NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) -- (Continued) described elsewhere herein. The New VASCO Series B Preferred Stock will be entitled to vote together with the holders of New VASCO Common Stock on all matters submitted to a vote of the holders of New VASCO Common Stock. 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. PRO FORMA PRESENTATION The pro forma balance sheet as of June 30, 1997 reflects adjustments for (i) the issuance by New VASCO of 100 shares of Common Stock on July 16, 1997, (ii) the conversion of Current VASCO's 117,181 shares of Series A Convertible Preferred Stock into 781,207 shares of New VASCO's Common Stock 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 six months ended June 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 19,277,065 for the six months ended June 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 and 80% of the outstanding shares of Current VASCO Series B Preferred 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 97 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 98 VASCO DATA SECURITY INTERNATIONAL, INC. ("NEW VASCO") BALANCE SHEET JULY 16, 1997 (UNAUDITED)
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 ====
See accompanying notes to financial statements. F-8 99 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 and Series B Preferred Stock for (i) shares of Current VASCO Common Stock and Series B Preferred Stock, respectively, 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 (i) at least 80% of the outstanding shares of Current VASCO Common Stock, and (ii) at least 80% of the outstanding shares of Current VASCO Series B Preferred 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 authorized Preferred Stock has been F-9 100 designated, in part, to provide for 9,500 shares of New VASCO's Series B Preferred Stock, which carries a cumulative dividend payable monthly of 12% per annum based on a liquidation value of $100 per share. The Series B Preferred Stock is convertible into Common Stock based on a formula. The New VASCO Series B Preferred Stock will be entitled to vote together with the holders of New VASCO Common Stock on all matters submitted to a vote of the holders of New VASCO Common Stock. No shares of Preferred Stock have been issued. 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-10 101 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-11 102 VASCO CORP. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------- JUNE 30, 1995 1996 1997 ---- ---- -------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash...................................................... $ 744,612 $ 1,813,593 $ 2,862,690 Accounts receivable, net of allowance for doubtful accounts of $182,000, $452,000 and $459,000............. 447,490 3,242,618 2,772,146 Inventories, net.......................................... 252,646 2,182,743 1,876,907 Prepaid expenses.......................................... 229,315 471,902 321,159 Notes receivable.......................................... -- 225,141 -- Deferred income taxes..................................... 445,000 283,000 283,000 Other current assets...................................... 14,741 399,963 465,284 ---------- ----------- ------------ Total current assets.................................. 2,133,804 8,618,960 8,581,186 Property and equipment: Furniture and fixtures.................................... 183,375 143,560 143,560 Office equipment.......................................... 123,773 592,965 632,835 ---------- ----------- ------------ 307,148 736,525 776,395 Accumulated depreciation.................................. (183,807) (360,079) (433,885) ---------- ----------- ------------ 123,341 376,446 342,510 Software costs, net of accumulated amortization of $371,000 in 1995........................................ 157,311 -- -- Goodwill, net of accumulated amortization of $58,571 and $113,784 in 1996 and 1997............................... -- 819,041 763,828 Other assets.............................................. -- 2,553,108 2,226,299 ---------- ----------- ------------ Total assets................................................ $2,414,456 $12,367,555 $ 11,913,823 ========== =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current maturities of long-term debt...................... $ 199,678 $ 3,491,160 $ 3,459,034 Notes payable............................................. 664,050 -- -- Accounts payable.......................................... 93,776 1,945,644 860,672 Customer deposits......................................... -- 1,022,195 458,037 Other accrued expenses.................................... 102,072 658,084 781,134 ---------- ----------- ------------ Total current liabilities............................. 1,059,576 7,117,083 5,558,877 ---------- ----------- ------------ Long-term debt, including stockholder note of $5,000,000 in 1996 and 1997............................................. 7,258 5,713,750 8,277,878 ---------- ----------- ------------ 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 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 90 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; 18,576,471 shares issued and outstanding in 1997........ 15,794 18,454 18,576 Additional paid-in capital................................ 1,508,534 8,783,425 8,948,492 Accumulated deficit....................................... (554,488) (9,903,257) (11,194,402) Cumulative translation adjustment......................... -- (105,056) (191,526) ---------- ----------- ------------ 973,102 (1,205,172) (2,417,598) Less: Treasury stock, 287,923, -0- and 2,824 common shares, at cost, in 1995, 1996 and 1997................. (7,109) -- (2) ---------- ----------- ------------ Total stockholders' equity (deficit)........................ 965,993 (1,205,172) (2,417,600) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)........ $2,414,456 $12,367,555 $ 11,913,823 ========== =========== ============
See accompanying notes to consolidated financial statements. F-12 103 VASCO CORP. CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ----------------------------------------- -------------------------- 1994 1995 1996 1996 1997 ---- ---- ---- ---- ---- (UNAUDITED) Total revenues................ $ 2,693,167 $ 3,695,133 $10,192,485 $ 3,184,266 $ 6,591,694 Cost of goods sold............ 1,422,587 2,887,403 5,871,468 1,899,885 3,296,091 ----------- ----------- ----------- ----------- ----------- Gross profit.................. 1,270,580 807,730 4,321,017 1,284,381 3,295,603 ----------- ----------- ----------- ----------- ----------- Operating costs: Sales and marketing......... 156,511 245,212 1,405,453 220,144 1,792,724 Research and development.... 210,535 242,002 574,766 217,271 347,623 General and administrative........... 711,598 854,979 3,647,760 862,453 1,802,343 Acquired in-process research and development.......... -- -- 7,350,992 2,900,031 -- ----------- ----------- ----------- ----------- ----------- Total operating costs.... 1,078,644 1,342,193 12,978,971 4,199,899 3,942,690 Operating income (loss)....... 191,936 (534,463) (8,657,954) (2,915,518) (647,087) Interest expense.............. (97,244) (73,576) (346,248) (26,933) (460,137) Other expense, net............ -- -- (42,407) -- (72,750) ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes....................... 94,692 (608,039) (9,046,609) (2,942,451) (1,179,974) Provision (benefit) for income taxes....................... 37,000 (251,000) 194,000 (17,700) 57,171 ----------- ----------- ----------- ----------- ----------- Net income (loss)............. 57,692 (357,039) (9,240,609) (2,924,751) (1,237,145) Preferred stock dividends.............. (27,254) (108,254) (108,160) (54,000) (54,000) ----------- ----------- ----------- ----------- ----------- Net income (loss) available to common stockholders......... $ 30,438 $ (465,293) $(9,348,769) $(2,978,751) $(1,291,145) =========== =========== =========== =========== =========== Net income (loss) per common share....................... $ -- $ (0.03) $ (0.53) $ (0.19) $ (0.07) =========== =========== =========== =========== =========== Weighted average common shares outstanding................. 14,259,915 14,817,264 17,533,369 15,614,498 18,495,858 =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-13 104 VASCO CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
SERIES A PREFERRED SERIES B STOCK PREFERRED STOCK COMMON STOCK ------------------- --------------- -------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ ------ ------ 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................... 121,250 121 Cancellation of common stock................ (16,489) (17) Issuance of common stock.................... 18,378 18 Redemption of common stock.................. Record legal fees associated with Private Placement................................. Cumulative translation adjustment........... -------- ------ ----- --- ---------- ------- Balance at June 30, 1997 (Unaudited).......... 117,181 $1,172 9,000 $90 18,576,471 $18,576 ======== ====== ===== === ========== =======
See accompanying notes to consolidated financial statements. F-14 105 VASCO CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
ADDITIONAL CUMULATIVE PAID-IN ACCUMULATED TRANSLATION CAPITAL DEFICIT ADJUSTMENT ---------- ----------- ----------- 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.............................................. (1,237,145) Cash dividends paid on preferred B.................... (54,000) Dividends payable on preferred A upon conversion...... Exercise of stock options............................. 28,817 Cancellation of common stock.......................... Issuance of common stock.............................. 193,145 Redemption of common stock............................ Record legal fees associated with Private Placement... (56,895) Cumulative translation adjustment..................... (86,470) ---------- ------------ --------- Balance at June 30, 1997 (Unaudited).................... $8,948,492 $(11,194,402) $(191,526) ========== ============ =========
See accompanying notes to consolidated financial statements. F-15 106 VASCO CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
TOTAL TREASURY STOCK STOCKHOLDERS' --------------------- EQUITY SHARES AMOUNT (DEFICIT) ------ ------ ------------- 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................................................ (1,237,145) Cash dividends paid on preferred B...................... (54,000) Dividends payable on preferred A upon conversion........ -- Exercise of stock options............................... 28,938 Cancellation of common stock............................ (17) Issuance of common stock................................ (32,504) 33 193,196 Redemption of common stock.............................. 35,328 (35) (35) Record legal fees associated with Private Placement..... (56,895) Cumulative translation adjustment....................... (86,470) --------- --------- ----------- Balance at June 30, 1997 (Unaudited)...................... 2,824 $ (2) $(2,417,600) ========= ========= ===========
See accompanying notes to consolidated financial statements. F-16 107 VASCO CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------- 1994 1995 1996 ---- ---- ---- 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 sales 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 ===========
See accompanying notes to consolidated financial statements. F-17 108 VASCO CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, ------------------------- 1996 1997 ---- ---- (UNAUDITED) Cash flows from operating activities: Net income (loss)......................................... $(2,924,751) $(1,237,145) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Acquired in-process research and development........... 2,900,031 -- Depreciation and amortization.......................... 48,524 528,939 Interest paid in shares of common stock................ -- 193,196 Deferred income taxes.................................. -- -- Compensation expense................................... -- -- Changes in current assets and current liabilities, net of acquisitions: Accounts receivable, net............................. (319,896) 470,472 Inventories, net..................................... (186,560) 305,836 Other current assets................................. 9,334 85,422 Accounts payable..................................... (6,830) (1,084,972) Customer deposits.................................... -- (564,158) Other accrued expenses............................... (70,394) 123,050 ----------- ----------- Net cash provided by (used in) operations................... (550,542) (1,179,360) ----------- ----------- Cash flows from investing activities: Acquisition of Lintel/Digipass............................ (315,482) -- Additions to property and equipment....................... (86,496) (39,870) Capitalized software...................................... -- -- ----------- ----------- Net cash used in investing activities....................... (401,978) (39,870) ----------- ----------- Cash flows from financing activities: Net proceeds from issuance of series B preferred stock.... -- -- Series B preferred stock dividends........................ (54,000) (54,000) Net proceeds from sales of common stock................... 2,830,000 (56,895) Proceeds from exercise of stock options................... 28,938 Redemption of common stock................................ (247,261) Proceeds from issuance of debt............................ 5,000,000 2,716,141 Repayment of debt......................................... (671,308) (32,126) ----------- ----------- Net cash provided by financing activities................... 7,104,692 2,354,797 ----------- ----------- Effect of exchange rate changes on cash..................... -- (86,470) ----------- ----------- Net increase (decrease) in cash............................. 6,152,172 1,049,097 Cash, beginning of period................................... 744,612 1,813,593 ----------- ----------- Cash, end of period......................................... $ 6,896,784 $ 2,862,690 =========== =========== Supplemental disclosure of cash flow information: Interest paid............................................... $ 50,995 $ 106,411 =========== =========== 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..................................................
See accompanying notes to consolidated financial statements. F-18 109 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-19 110 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-20 111 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): Software and hardware technology............................ $1,540,417 Workforce................................................... 514,167 Customer lists.............................................. 498,524 ---------- $2,553,108 ==========
F-21 112 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 1996. 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.
1996 ---- Total revenues.............................................. $13,654,420 Net loss.................................................... (9,507,076) Net loss per common share................................... (0.53)
NOTE 3 -- INVENTORIES Inventories, consisting principally of hardware and component parts, are stated at the lower of cost or market. Cost is determined using the first-in-first-out (FIFO) method. Inventories are comprised of the following:
DECEMBER 31, ----------------------- 1995 1996 ---- ---- 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 ========= ==========
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:
DECEMBER 31, -------------------- 1995 1996 ---- ---- 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 ======== ========
F-22 113 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:
FOR THE YEAR ENDED DECEMBER 31, -------------------------- 1994 1995 1996 ---- ---- ---- 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% ==== ===== =====
The deferred income tax balances are comprised of the following:
DECEMBER 31, -------------------- 1995 1996 ---- ---- 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 ======== ========
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-23 114 VASCO CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 -- DEBT Debt consists of the following:
DECEMBER 31, ----------------------- 1995 1996 ---- ---- 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) (3,491,160) --------- ---------- Long-term debt.............................................. $ 7,258 $5,713,750 ========= ==========
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 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 (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 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 common stock to be F-24 115 VASCO CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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: 1997........................................................ $3,491,160 1998........................................................ 713,750 1999........................................................ -- 2000........................................................ -- 2001........................................................ 5,000,000 ---------- Total................................................ $9,204,910 ==========
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-25 116 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). 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 reissued from treasury and privately placed 108,676 equity units, each consisting of two shares of common stock 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 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 of 1986, as amended (Code). All options granted to employees are for a period of ten years, are granted at a F-26 117 VASCO CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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:
DECEMBER 31, ------------------------ 1995 1996 ---- ---- 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)
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:
WEIGHTED WEIGHTED OPTIONS AVERAGE OPTIONS AVERAGE OUTSTANDING PRICE EXERCISABLE PRICE ----------- -------- ----------- -------- 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 ========= ===== ========= =====
F-27 118 VASCO CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 1996:
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 ------------------------ --------- ---------------- --------- --------- --------- $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
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 $4,475,000, 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. Sales to foreign customers, primarily located in Europe, aggregated $1,296,000, $2,333,000 and $9,730,000 for the years ended December 31, 1994, 1995 and 1996, respectively. Information regarding geographic areas for the year ended December 31, 1996 is as follows:
UNITED STATES FOREIGN ELIMINATIONS TOTAL ------------- ------- ------------ ----- Sales to unaffiliated customers........... $ 462,018 $ 9,730,467 $10,192,485 Operating loss............................ (2,918,615) (5,738,899) $ (440) (8,657,954) Identifiable assets....................... 12,737,569 8,755,951 (9,125,965) 12,367,555
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:
YEAR AMOUNT ---- ------ 1997........................................................ $182,000 1998........................................................ 61,000 -------- $243,000 ========
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 of the company. F-28 119 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. 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. F-29 120 LINTEL NV BELGIUM FINANCIAL STATEMENTS INCLUDING REPORT OF INDEPENDENT ACCOUNTANTS DECEMBER 31, 1995 F-30 121 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-31 122 LINTEL NV STATEMENT OF FINANCIAL POSITION AS OF DECEMBER 31, 1995 (EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
BEF 000 ------- 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 =======
The accompanying notes 1 to 9 are an integral part of these financial statements. F-32 123 LINTEL NV STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31 (EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
1995 1994 BEF 000 BEF 000 ------- ------- 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 ======= =======
The accompanying notes 1 to 9 are an integral part of these financial statements. F-33 124 LINTEL NV STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31 (EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
1995 1994 BEF 000 BEF 000 -------- -------- 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 ====== ======
The accompanying notes 1 to 9 are an integral part of these financial statements. F-34 125 LINTEL NV STATEMENTS OF THE ACCUMULATED DEFICIT FOR THE YEARS ENDED DECEMBER 31 (EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
1995 1994 BEF 000 BEF 000 ------- ------- 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) ======= ======
The accompanying notes 1 to 9 are an integral part of these financial statements. F-35 126 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-36 127 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
31/12/1995 ---------- Goods for Resale............................................ 3,075
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT
31/12/1995 ---------- Furniture................................................... 3,330 Vehicles.................................................... 948 ------ 4,278 Less accumulated depreciation............................... (2,982) ------ 1,296 ======
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
31/12/1995 ---------- Amounts payable to directors................................ 2,601 Accrued charges............................................. 573 Credit institutions......................................... 3,775 ----- 6,949 =====
F-37 128 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
31/12/1995 ---------- NKBK bank loan.............................................. 3,650 Credit institutions......................................... 565 ----- 4,215 =====
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:
1995 1994 ---- ---- 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 ====== ====
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-38 129 DIGIPASS SA AND DIGILINE SA BELGIUM COMBINED FINANCIAL STATEMENTS INCLUDING REPORT OF INDEPENDENT ACCOUNTANTS DECEMBER 31, 1995 F-39 130 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-40 131 DIGIPASS SA AND DIGILINE SA COMBINED STATEMENT OF FINANCIAL POSITION AS OF DECEMBER 31, 1995 (EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
BEF 000 ------- 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 =======
The accompanying notes 1 to 13 are an integral part of these financial statements. F-41 132 DIGIPASS SA AND DIGILINE SA COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31 (EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
1995 1994 BEF 000 BEF 000 ------- ------- 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) ======== ========
The accompanying notes 1 to 13 are an integral part of these financial statements. F-42 133 DIGIPASS SA AND DIGILINE SA COMBINED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31 (EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
1995 1994 BEF 000 BEF 000 ------- ------- 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 ======== ========
The accompanying notes 1 to 13 are an integral part of these financial statements. F-43 134 DIGIPASS SA AND DIGILINE SA COMBINED STATEMENTS OF ACCUMULATED DEFICIT FOR THE YEARS ENDED DECEMBER 31 (EXPRESSED IN THOUSANDS OF BELGIAN FRANCS)
1995 1994 BEF 000 BEF 000 -------- -------- Balance, beginning of year.................................. (9,222) (7,755) Net income/(loss)........................................... 5,985 (1,467) ------ ------ Balance end of year......................................... (3,237) (9,222) ====== ======
The accompanying notes 1 to 13 are an integral part of these financial statements. F-44 135 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:
1995 1994 % % ---- ---- A........................................................... 23 -- B........................................................... 16 16 C........................................................... 13 --
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-45 136 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
31/12/1995 ---------- Work-in-progress............................................ 542 Goods for resale............................................ 34,767 Consumables................................................. 262 ------ 35,571 ======
F-46 137 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
31/12/1995 ---------- Grants receivable........................................... 2,038 Income taxes receivable..................................... 25 VAT receivable.............................................. 3,405 Prepayments................................................. 22,097 ------ 27,565 ======
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
31/12/1995 ---------- 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 =======
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
31/12/1995 ---------- Current maturities of long-term debt........................ 2,981 -----
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-47 138 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
31/12/1995 ---------- 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 ======
NOTE 8 -- LONG-TERM DEBT
31/12/1995 ---------- Capitalized lease obligations............................... 40,600 Advances received from the state............................ 500 ------ 41,100 ======
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-48 139 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:
BEF 000 ------- 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 =======
The companies were not party to any operating leases during the years ended 31 December 1995 and 1994. NOTE 10 -- COMMON STOCK
31/12/1995 ---------- Digiline SA................................................. 10,000 Digipass SA................................................. 4,000 ------ 14,000 ======
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-49 140 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:
1995 1994 ---- ---- 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 ===== ====
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-50 141 DIGIPASS SA AND DIGILINE SA FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) F-51 142 DIGIPASS SA AND DIGILINE SA STATEMENT OF THE COMBINED FINANCIAL POSITION AS OF JUNE 30, 1996 (EXPRESSED IN BELGIAN FRANCS) (UNAUDITED) 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 ===========
The accompanying notes are an integral part of these financial statements. F-52 143 DIGIPASS SA AND DIGILINE SA STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (EXPRESSED IN BELGIAN FRANCS) (UNAUDITED) 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 ===========
The accompanying notes are an integral part of these financial statements. F-53 144 DIGIPASS SA AND DIGILINE SA STATEMENTS OF THE CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (EXPRESSED IN BELGIAN FRANCS) (UNAUDITED) 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 ===========
The accompanying notes are an integral part of these financial statements. F-54 145 DIGIPASS SA AND DIGILINE SA STATEMENTS OF THE RETAINED EARNINGS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (EXPRESSED IN BELGIAN FRANCS) (UNAUDITED) 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 ==========
The accompanying notes are an integral part of these financial statements. F-55 146 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 Grants receivable........................................... 3,962,649 Tax receivable.............................................. 24,959 VAT receivable.............................................. 6,873,273 Prepayments and deferred charges............................ 7,519,000 ---------- 18,379,881 ==========
NOTE 3 -- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES 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 ==========
F-56 147 SCHEDULE II VASCO CORP. VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS BEGINNING BAD DEBT ACCOUNTS ENDING FOR TRADE ACCOUNTS RECEIVABLE BALANCE EXPENSE WRITTEN OFF BALANCE ------------------------------- --------- -------- ----------- ------- 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
BEGINNING INVENTORY ENDING RESERVE FOR OBSOLETE INVENTORIES BALANCE EXPENSE WRITTEN OFF BALANCE -------------------------------- --------- ------- ----------- ------- 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
S-1 148 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-2 149 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. 150 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. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits 3.1 Certificate of Incorporation of Registrant, as amended. 3.2 Bylaws of Registrant. 4.1 Certificate of Designation, Rights and Preferences of Series B Preferred Stock of Registrant.
II-1 151 4.2 Specimen of Registrant's Common Stock Certificate.* 4.3 Specimen of Registrant's Series B Preferred Stock Certificate.* 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 (confirm whether 1 or more form(s) of option agreement(s) required). 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). 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.
II-2 152 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 (included in the opinion filed as Exhibit 5.1 to this Registration Statement).* 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.
- ------------------------- * To be filed by amendment. ** 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. 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 II-3 153 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. (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-4 154 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 Village of Lombard, State of Illinois, on September 12, 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 BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. POWER OF ATTORNEY Each of the undersigned, in his capacity as officer or director, or both as the case may be, of VASCO Data Security International, Inc. does hereby appoint T. Kendall Hunt, Robert E. Anderson and Gregory T. Apple, and each of them severally, his true and lawful attorneys or attorney to execute in his name, place and stead, in his capacity as director or officer, or both as the case may be, this Registration Statement and any and all amendments and post-effective amendments thereto, and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Each of said attorneys shall have power to act hereunder with or without the other attorney and shall have full power and authority to do and perform in the name and on behalf of each of said directors or officers, or both as the case may be, every act whatsoever requisite or necessary to be done in the premises, as fully and to all intents and purposes as which each of said officers or directors, or both as the case may be, might or could do in person, hereby ratifying and confirming all that said attorneys or attorney may lawfully do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE --------- ----- ---- /s/ T. KENDALL HUNT Chairman of the Board, September 12, 1997 - ----------------------------------------------------- Chief Executive Officer, T. Kendall Hunt President and Director /s/ GREGORY T. APPLE Vice President and September 12, 1997 - ----------------------------------------------------- Treasurer Gregory T. Apple /s/ FORREST D. LAIDLEY Secretary and Director September 12, 1997 - ----------------------------------------------------- Forrest D. Laidley /s/ ROBERT E. ANDERSON Director September 12, 1997 - ----------------------------------------------------- Robert E. Anderson /s/ GERALD GUICE Director September 12, 1997 - ----------------------------------------------------- Gerald Guice /s/ MICHAEL A. MULSHINE Director September 12, 1997 - ----------------------------------------------------- Michael A. Mulshine
II-5
   1
                                                                     EXHIBIT 3.1

                          CERTIFICATE OF INCORPORATION
                                       OF
                    VASCO DATA SECURITY INTERNATIONAL, INC.

     I, the undersigned, for the purposes of incorporating and organizing a
corporation under the General Corporation Law of the State of Delaware (the
"General Corporation Law"), do execute this Certificate of Incorporation and do
hereby certify as follows:

     FIRST. The name of the corporation (hereinafter, the "Corporation") is
VASCO Data Security International, Inc.

     SECOND. The registered office of the Corporation in the State of Delaware
is located at 1209 Orange Street, in the City of Wilmington, County of New
Castle 19801, and its registered agent at such address is The Corporation Trust
Company.

     THIRD. The purpose or purposes of the Corporation shall be to engage in
any lawful act or activity for which corporations may be organized under the
General Corporation Law.

     FOURTH. The total number of shares of stock which the Corporation shall
have the authority to issue is Fifty Million Five Hundred Thousand (50,500,000)
shares, divided into Fifty Million (50,000,000) shares of Common Stock, par
value $.001 per share (hereinafter referred to as "Common Stock") and Five
Hundred Thousand (500,000) shares of Preferred Stock, par value $.01 per share
(hereinafter referred to as "Preferred Stock").

                                  COMMON STOCK

     Subject to the rights of any Preferred Stock of any series issued and
outstanding, each issued and outstanding share of Common Stock shall entitle
the holder thereof to receive such dividends as may be declared from time to
time by the Board of Directors of the Corporation (the "Board") out of funds
legally available therefor, each issued and outstanding share of Common Stock
shall entitle the holder thereof to share ratably in all assets available for
distribution to holders of Common Stock in the event of any liquidation,
dissolution or winding up of the Corporation, and, except as otherwise provided
by law, each issued and outstanding share of Common Stock shall entitle the
holder thereof to cast one vote on each matter submitted to a vote of the
stockholders of the Corporation.

                                PREFERRED STOCK

     The Board is authorized, subject to limitations prescribed by law and the
provisions of this Article FOURTH, to provide for the issuance of the shares of
Preferred Stock in series, and by filing a certificate pursuant to the
applicable law of the State of 


                                     -1-
   2

Delaware, to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers, preferences
and rights of the shares of each such series and the qualifications,
limitations or restrictions thereof.

     The authority of the Board with respect to each series shall include, but
not be limited to, determination of the following: (a) The number of shares
constituting that series and the distinctive designation of that series; (b)
The dividend rate on the shares of that series, whether dividends shall be
cumulative, and, if so, from which date or dates, and the relative rights of
priority, if any, of payment of dividends on shares of that series; (c) Whether
that series shall have voting rights, in addition to the voting rights provided
by law, and, if so, the terms of such voting rights; (d) Whether that series
shall have conversion privileges, and, if so, the terms and conditions of such
conversion, including provision for adjustment of the conversion rate in such
events as the Board shall determine; (e) Whether or not the shares of that
series shall be redeemable, and, if so, the terms and conditions of such
redemption, including the date or dates upon or after which they shall be
redeemable, and the amount per share payable in case of redemption, which
amount may vary under different conditions and at different redemption dates;
(f) Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of such
sinking fund; (g) The rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, or payment of shares
of that series; (h) Any other relative rights, preferences and limitations of
that series.

     If, upon any voluntary or involuntary liquidation, dissolution or winding
up of the Corporation, the assets available for distribution to holders of
shares of Preferred Stock of all series shall be insufficient to pay such
holders the full preferential amount to which they are entitled, then such
assets shall be distributed ratably among the shares of all series of Preferred
Stock in accordance with the respective preferential amounts (including unpaid
cumulative dividends, if any) payable with respect thereto.

     FIFTH. The Board shall have the power to adopt, amend or repeal the
by-laws.

     SIXTH. A director of the Corporation shall not be liable to the
Corporation 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 General Corporation Law as the
same exists or may hereafter be amended.  Any amendment, modification or repeal
of the foregoing sentence shall not adversely affect any right or protection of
a director of the Corporation hereunder in respect of any act or omission 
occurring prior to the time of such amendment, modification or repeal.

     SEVENTH. The powers of the incorporator are to terminate upon the filing
of this Certificate of Incorporation with the Secretary of State of the State
of Delaware.  The names and mailing addresses of the persons who are to serve
as the 


                                     -2-
   3

initial directors of the Corporation until the first annual meeting of
stockholders of the Corporation, or until their successors are duly elected and
qualified, are:

             T. Kendall Hunt     1919 S. Highland Ave., Suite 118-C
                                 Lombard, Illinois 60148

             Forrest D. Laidley  1919 S. Highland Ave., Suite 118-C
                                 Lombard, Illinois 60148

             Robert A. Anderson  1919 S. Highland Ave., Suite 118-C
                                 Lombard, Illinois 60148

             Gerald Guice        1919 S. Highland Ave., Suite 118-C
                                 Lombard, Illinois 60148

             Michael A. Mulshine 1919 S. Highland Ave., Suite 118-C
                                 Lombard, Illinois 60148


     EIGHTH. The incorporator of the Corporation is Gregory T. Apple, whose
mailing address is c/o VASCO CORP., 1919 S. Highland Ave., Suite 118-C,
Lombard, Illinois 60148.



     The undersigned incorporator hereby acknowledges that the foregoing
Certificate of Incorporation is his act and deed on this the 14th day of July,
1997.

                                        /s/ Gregory T. Apple
                                        -------------------------------
                                        Gregory T. Apple
                                        Incorporator


                                     -3-
   4
                                                        STATE OF DELAWARE
                                                        SECRETARY OF STATE
                                                     DIVISION OF CORPORATIONS
                                                     FILED 01:00 PM 08/12/1997
                                                        971268904 - 2773477



                            CERTIFICATE OF AMENDMENT
                                       OF
                          CERTIFICATE OF INCORPORATION
                                       OF
                    VASCO DATA SECURITY INTERNATIONAL, INC.

                 ----------------------------------------------

                     Pursuant to Section 242 of the General
                    Corporation Law of the State of Delaware

                 ----------------------------------------------

        VASCO DATA SECURITY INTERNATIONAL, INC.,  a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), hereby
certifies as follows:

        FIRST:  The Certificate of Incorporation of the Corporation is hereby
amended as follows:

    The first paragraph of Article FOURTH is amended to read in its entirety
                                  as follows:

                "FOURTH:  The total number of shares of stock which the
        Corporation shall have the authority to issue is 75,500,000 shares,
        divided into 75,000,000 shares of common stock, $.001 par value per
        share (hereinafter referred to as "Common Stock"), and 500,000 shares of
        preferred stock, $.01 par value per share (hereinafter referred to as
        "Preferred Stock").

        SECOND:  The amendment to the Certificate of Incorporation effected
hereby has been proposed by the Board of Directors of the Corporation and duly
adopted by the sole stockholder of the Corporation in accordance with Section
242 of the General Corporation Law of the State of Delaware (the "DGCL") and by
written consent of such sole stockholder pursuant to Section 228 of the DGCL.

        IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by its President as of this 11th day of August, 1997.


                                        VASCO DATA SECURITY
                                        INTERNATIONAL, INC.


                
                                        By: /s/ T. Kendall Hunt
                                           ----------------------------------
                                           T. Kendall Hunt
                                           President
   1
                                                                     EXHIBIT 3.2

                    VASCO DATA SECURITY INTERNATIONAL, INC.

                                    BY-LAWS

                            ARTICLE I - STOCKHOLDERS

Section 1.  Annual Meeting

     To the extent required by applicable law, an annual meeting of the
stockholders, for the election of directors to succeed those whose terms expire
and for the transaction of such other business as may properly come before the
meeting, shall be held at such place, on such date, and at such time as the
Board of Directors shall each year fix, which date shall be within thirteen
months subsequent to the later of the date of incorporation or the last annual
meeting of stockholders.

Section 2.  Special Meetings

     Special meetings of the stockholders, for any purpose or purposes
prescribed in the notice of the meeting, may be called by the Board of
Directors or the Chief Executive Officer and shall be held at such place, on
such date, and at such time as they or he shall fix.

Section 3.  Notice of Meetings

     Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten nor more than sixty days before
the date on which the meeting is to be held, to each stockholder entitled to
vote at such meeting, except as otherwise provided herein or required by law
(meaning, here and hereinafter, as required from time to time by the General
Corporation Law of the State of Delaware or the Certificate of Incorporation).

     When a meeting is adjourned to another place, date, or time, written
notice need not be given of the adjourned meeting if the place, date, and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that, if the date of any adjourned meeting is more than
thirty days after the date for which the meeting was originally noticed, or if
a new record date is fixed for the adjourned meeting, written notice of the
place, date, and time of the adjourned meeting shall be given in conformity
herewith. At any adjourned meeting, any business may be transacted which might
have been transacted at the original meeting.

Section 4.  Quorum

     Except as otherwise provided by law or these by-laws, at each meeting of
stockholders the presence in person or by proxy of the holders of a majority in 
voting power of the outstanding shares of stock entitled to vote at the meeting
shall be necessary and sufficient to constitute a quorum.  In the absence of a
quorum, the chairman of the meeting or the stockholders so present (by a
majority in voting power thereof) may adjourn the meeting from time to time in
the manner provided in Section 3 of Article I of these by-laws until a quorum
shall attend.  Shares of its own stock belonging to the corporation or to
another corporation, if a majority of the shares entitled to vote in the
election of directors of such other corporation is held, directly or
indirectly, by the corporation, 


                                     -1-
   2

shall neither be entitled to vote nor be counted for quorum purposes;
provided, however, that the foregoing shall not limit the right of the
corporation or any subsidiary of the corporation to vote stock, including but
not limited to its own stock, held by it in a fiduciary capacity.

Section 5.  Organization

     Such person as the Board of Directors may have designated or, in the
absence of such a person, the highest ranking officer of the corporation who is
present shall call to order any meeting of the stockholders and act as chairman
of the meeting. In the absence of the Secretary of the corporation, the
secretary of the meeting shall be such person as the chairman appoints.

Section 6.  Conduct of Business

     The chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seem, to him, in order.

Section 7.  Proxies and Voting

     At any meeting of the stockholders, every stockholder entitled to vote may
vote, in person or by proxy.

     Each stockholder shall have one vote for every share of stock entitled to
vote which is registered in his name on the record date for the meeting, except
as otherwise provided herein or required by law.

     All voting, except on the election of directors and where otherwise
required by law, may be by a voice vote; provided, however, that upon demand
therefor by a stockholder entitled to vote or his proxy, a stock vote shall be
taken. Every stock vote shall be taken by ballots, each of which shall state
the name of the stockholder or proxy voting and such other information as may
be required under the procedure established for the meeting. Every vote taken
by ballots shall be counted by an inspector or inspectors appointed by the
chairman of the meeting.

     All elections shall be determined by a plurality of the votes cast, and,
except as otherwise required by law, all other matters shall be determined by a
majority of the votes cast.

Section 8.  Stock List

     A complete list of stockholders entitled to vote at any meeting of
stockholders, arranged in alphabetical order for each class of stock and
showing the address of each such stockholder and the number of shares
registered in his name, shall be open to the examination of any such
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held.


                                     -2-
   3

     The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.

                        ARTICLE II - BOARD OF DIRECTORS

Section 1.  Number and Term of Office

     The number of directors who shall constitute the whole board shall be such
number not less than five nor more than twenty as the Board of Directors shall
at the time have designated. Each director shall be elected for a term of one
year and until his successor is elected and qualified, except as otherwise
provided herein or required by law.

     Whenever the authorized number of directors is increased between annual
meetings of the stockholders, a majority of the directors then in office shall
have the power to elect such new directors for the balance of a term and until
their successors are elected and qualified. Any decrease in the authorized
number of directors shall not become effective until the expiration of the term
of the directors then in office unless, at the time of such decrease, there
shall be vacancies on the board which are being eliminated by the decrease.

Section 2.  Vacancies

     If the office of any director becomes vacant by reason of death,
resignation, disqualification, removal, or other cause, a majority of the
directors remaining in office, although less than a quorum, may elect a
successor for the unexpired term and until his successor is elected and
qualified.

Section 3.  Regular Meetings

     Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.

Section 4.  Special Meetings

     Special meetings of the Board of Directors may be called by one-third of
the directors then in office or by the Chief Executive Officer and shall be
held at such place, on such date, and at such time as they or he shall fix.
Notice of the place, date, and time of each such special meeting shall be given
each director by whom it is not waived by mailing written notice not less than
three days before the meeting or by telegraphing the same not less than
eighteen hours before the meeting. Unless otherwise indicated in the notice
thereof, any and all business may be transacted at a special meeting.


                                     -3-
   4

Section 5.  Quorum

     At any meeting of the Board of Directors, one-third of the total number of
the whole board, but not less than two, shall constitute a quorum for all
purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date, or time without further
notice or waiver thereof.

Section 6.  Participation in Meetings by Conference Telephone

     Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such board or committee by means of conference
telephone or similar communications equipment that enables all persons
participating in the meeting to hear each other. Such participation shall
constitute presence in person at such meeting.

Section 7.  Conduct of Business

     At any meeting of the Board of Directors, business shall be transacted in
such order and manner as the board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.

Section 8.  Powers

     The Board of Directors may, except as otherwise required by law, exercise
all such powers and do all such acts and things as may be exercised or done by
the corporation, including, without limiting the generality of the foregoing,
the unqualified power:

     (1) To declare dividends from time to time in accordance with law;

     (2) To purchase or otherwise acquire any property, rights or privileges on
such terms as it shall determine;

     (3) To authorize the creation, making and issuance, in such form as it may
determine, of written obligations of every kind, negotiable or non-negotiable,
secured or unsecured, and to do all things necessary in connection therewith;

     (4) To remove any officer of the corporation with or without cause and,
from time to time, to devolve the powers and duties of any officer upon any
other person for the time being;

     (5) To confer upon any officer of the corporation the power to appoint,
remove and suspend subordinate officers and agents;



                                     -4-

   5


     (6) To adopt from time to time such stock option, stock purchase, bonus,
or other compensation plans for directors, officers and agents of the
corporation and its subsidiaries as it may determine;

     (7) To adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers and agents of the corporation and its
subsidiaries as it may determine; and

     (8) To adopt from time to time regulations, not inconsistent with these
by-laws, for the management of the corporation's business and affairs.

Section 9.  Compensation of Directors

     Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as directors,
including, without limitation, their services as members of committees of the
directors.

                            ARTICLE III - COMMITTEES

Section 1.  Committees of the Board of Directors

     The Board of Directors, by a vote of a majority of the whole board, may
from time to time designate committees of the board, with such
lawfully-delegable powers and duties as it thereby confers, to serve at the
pleasure of the board and shall, for those committees and any others provided
for herein, elect a director or directors to serve as the member or members,
designating, if it desires, other directors as alternative members who may
replace any absent or disqualified member at any meeting of the committee. Any
committee so designated may exercise the power and authority of the Board of
Directors to declare a dividend or to authorize the issuance of stock if the
resolution which designates the committee or a supplemental resolution of the
Board of Directors shall so provide. In the absence or disqualification of any
member of any committee and any alternate member in his place, the member or
members of the committee present at the meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may by unanimous vote
appoint another member of the Board of Directors to act at the meeting in the
place of the absent or disqualified member.

Section 2.  Conduct of Business

     Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third of the members shall
constitute a quorum unless the committee shall consist of one or two members,
in which event one member shall constitute a quorum; and all matters shall be
determined by a majority vote of the members present.  Action may be taken by
any committee without a meeting if all members thereof consent thereto in
writing, and the writing or writings are filed with the minutes of the
proceedings of such committee.




                                     -5-
   6


                            ARTICLE IV - OFFICERS

Section 1.  Generally

     The officers of the corporation: (i) shall consist of a President, a
Secretary and a Treasurer, and (ii) may also consist of a Chairman of the
Board, a Chief Executive Officer, a Chief Operating Officer, one or more
Executive Vice Presidents and one or more Vice Presidents, as may from time to
time be appointed by the Board of Directors.  Officers shall be elected by the
Board of Directors, which shall consider that subject at its first meeting
after every annual meeting of stockholders.  Each officer shall hold his office
until his successor is elected and qualified or until his earlier resignation
or removal.  Any number of offices may be held by the same person.

Section 2.  Chairman of the Board

     The Chairman of the Board must be a member of the Board of Directors.  The
Chairman of the Board shall preside over meetings of the Board of Directors and
of the stockholders and perform such other duties as the Board of Directors may
designate.

Section 3.  Chief Executive Officer

     Subject to the provisions of these by-laws and to the direction of the
Board of Directors, the Chief Executive Officer shall have the responsibility
for the general management and control of the affairs and business of the
corporation and shall perform all duties and have all powers which are commonly
incident to the office of chief executive or which are delegated to him by the
Board of Directors.  He shall have power to sign all stock certificates,
contracts and other instruments of the corporation which are authorized.  He
shall have general supervision and direction of all of the other officers and
agents of the corporation.

Section 4.  President

     The President shall perform such duties as the Board of Directors or the
Chief Executive Officer shall prescribe.  In the absence or disability, or a
vacancy in the office, of the Chief Executive Officer or the Chief Operating
Officer, the President shall perform the duties and exercise the powers of the
Chief Executive Officer or the Chief Operating Officer, as the case may be.

Section 5.  Chief Operating Officer

     The Chief Operating Officer shall be the chief administrative officer of
the corporation, in charge of the operations of the corporation.  The Chief
Operating Officer shall perform such duties as the Board of Directors or the
Chief Executive Officer shall prescribe.

Section 6.  Executive Vice Presidents

     Each Executive Vice President shall be senior to each Vice President.      
Each Executive Vice President shall perform such duties as the Board of
Directors or the Chief Executive Officer shall prescribe.  In the absence or
disability, or a vacancy in the office, of the President, the Executive 


                                     -6-
   7

Vice President who has served in such capacity for the longest time
shall perform the duties and exercise the powers of the President.

Section 7.  Vice Presidents

     Each Vice President shall perform such duties as the Board of Directors or
the Chief Executive Officer shall prescribe.  In the absence or disability, or
a vacancy in the office, of the President, if there are then no Executive Vice
Presidents, the Vice President who has served in such capacity for the longest
time shall perform the duties and exercise the powers of the President.

Section 8.  Treasurer

     The Treasurer shall have the custody of all monies and securities of the
corporation and shall keep regular books of account.  He shall make such
disbursements of the funds of the corporation as are proper and shall render
from time to time an account of all such transactions and of the financial
condition of the corporation.

Section 9.  Secretary

     The Secretary shall issue all authorized notices for, and shall keep
minutes of, all meetings of the stockholders and the Board of Directors.  He
shall have charge of the corporate books.

Section 10.  Delegation of Authority

     The Board of Directors may from time to time delegate the powers or duties
of any officer to any other officers or agents, notwithstanding any provision
hereof.

Section 11.  Removal

     Any officer of the corporation may be removed at any time, with or without
cause, by the Board of Directors.

Section 12.  Action with Respect to Securities of Other Corporations

     Unless otherwise directed by the Board of Directors, the President shall
have power to vote and otherwise act on behalf of the corporation, in person or
by proxy, at any meeting of stockholders of or with respect to any action of
stockholders of any other corporation in which this corporation may hold
securities, and otherwise to exercise any and all rights and powers which this
corporation may possess by reason of its ownership of securities in such other
corporation.

     ARTICLE V - RIGHT OF INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS

Section 1.  Right to Indemnification

     The corporation 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 


                                     -7-
   8

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
corporation or, while a director or officer of the corporation, is or was
serving at the written request of the corporation 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 this Article V, the corporation 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 2.  Prepayment of Expenses

     The corporation shall pay the expenses (including attorneys' fees)
incurred by an Indemnitee in defending any proceeding in advance of its final
disposition, provided, however, that such payment of expenses in advance of the
final disposition of the proceeding shall be made only upon receipt of an
undertaking by the Indemnitee to repay all amounts advanced if it should be
ultimately determined that the Indemnitee is not entitled to be indemnified
under this Article V or otherwise.

Section 3.  Claims

     If a claim for indemnification or advancement of expenses under this
Article V is not paid in full within sixty (60) days after a written claim
therefor by the Indemnitee has been received by the corporation, the Indemnitee
may file suit to recover the unpaid amount of such claim and, if successful in
whole or in part, shall be entitled to be paid the expense of prosecuting such
claim.  In any such action the corporation shall have the burden of proving
that the Indemnitee is not entitled to the requested indemnification or
advancement of expenses under applicable law.

Section 4.  Nonexclusivity of Rights

     The rights conferred on any Indemnitee by this Article V shall not be
exclusive of any other rights which such Indemnitee may have or hereafter
acquire under any statute, provision of the certificate of incorporation, these
by-laws, agreement, vote of stockholders or disinterested directors or
otherwise.

Section 5.  Other Sources

     The corporation's obligation, if any, to indemnify or to advance expenses
to any Indemnitee who was or is serving at its request as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
enterprise or nonprofit entity shall be reduced by any amount such
Indemnitee may collect as indemnification or advancement of expenses from such
other corporation, partnership, joint venture, trust, enterprise or non-profit
enterprise.

                                     -8-

   9


Section 6.  Amendment or Repeal

     Any repeal or modification of the foregoing provisions of this Article V
shall not adversely affect any right or protection hereunder of any Indemnitee
in respect of any act or omission occurring prior to the time of such repeal or
modification.

Section 7.  Other Indemnification and Prepayment of Expenses

     This Article V shall not limit the right of the corporation, to the extent
and in the manner permitted by law, to indemnify and to advance expenses to
persons other than Indemnitees when and as authorized by appropriate corporate
action.

                               ARTICLE VI - STOCK

Section 1.  Certificates of Stock

     Each stockholder shall be entitled to a certificate signed by, or in the
name of the corporation by, the President or any Executive Vice President or
Vice President and by the Secretary or an assistant secretary or the Treasurer
or an assistant treasurer, certifying the number of shares owned by him.  Any
of or all the signatures on the certificate may be facsimile.

Section 2.  Transfers of Stock

     Transfers of stock shall be made only upon the transfer books of the
corporation kept at an office of the corporation or by transfer agents
designated to transfer shares of the stock of the corporation.  Except where a
certificate is issued in accordance with Section 4 of Article VI of these
by-laws, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.

Section 3.  Record Date

     Subject to applicable law, the Board of Directors may fix a record date,
which shall not be more than 60 nor less than 10 days before the date of any
meeting of stockholders, nor more than 60 days prior to the time for the other
action hereinafter described, as of which there shall be determined the
stockholders who are entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof; to express consent to corporate action
in writing without a meeting; to receive payment of any dividend or other
distribution or allotment of any rights; or to exercise any rights with respect
to any change, conversion or exchange of stock or with respect to any other
lawful action.

Section 4.  Lost, Stolen or Destroyed Certificates

     In the event of the loss, theft or destruction of any certificate of
stock, another may be issued in its place pursuant to such regulations as the
Board of Directors may establish concerning proof of such loss, theft or
destruction and concerning the giving of a satisfactory bond or bonds of
indemnity.


                                     -9-
   10


Section 5.  Regulations

     The issue transfer, conversion, and registration of certificates of stock
shall be governed by such other regulations as the Board of Directors may
establish.

                             ARTICLE VII - NOTICES

Section 1.  Notices

     Whenever notice is required to be given to any stockholder, director,
officer, or agent, such requirement shall not be construed to mean personal
notice.  Such notice may in every instance be effectively given by depositing a
writing in a post office or letter box in a postpaid, sealed wrapper, or by
dispatching a prepaid telegram, addressed to such stockholder, director,
officer, or agent at his or her address as the same appears on the books of the
corporation.  The time when such notice is dispatched shall be the time of the
giving of the notice.

Section 2.  Waivers

     A written waiver of any notice, signed by a stockholder, director, officer
or agent, whether before or after the time of the event for which notice is to
be given, shall be deemed equivalent to the notice required to be given to such
stockholder, director, officer or agent.  Neither the business nor the purpose
of any meeting need be specified in such a waiver.

                          ARTICLE VIII - MISCELLANEOUS

Section 1.  Facsimile Signature

     In addition to the provisions for the use of facsimile signatures
elsewhere specifically authorized in these by-laws, facsimile signatures of any
officer or officers of the corporation may be used whenever and as authorized
by the Board of Directors or a committee thereof.

Section 2.  Corporate Seal

     The Board of Directors may provide a suitable seal containing the name of
the corporation, which seal shall be in charge of the Secretary.  Duplicates of
the seal may be kept and used by the Treasurer or by the assistant secretary or
assistant treasurer.

Section 3.  Reliance Upon Books, Reports, and Records

     Each director, each member of any committee designated by the Board of
Directors, and each officer of the corporation shall, in the performance of his
duties, be fully protected in relying in good faith upon the books of account
or other records of the corporation, including reports made to the corporation
by any of its officers, by an independent certified public accountant, or by an
appraiser selected with reasonable care.



                                    -10-
   11


Section 4.  Fiscal Year

     The fiscal year of the corporation shall be as fixed by the Board of
Directors.

Section 5.  Time Periods

     In applying any provision of these by-laws which requires that an act be
done or not done a specified number of days prior to an event or that an act be
done during a period of a specified number of days prior to an event, calendar
days shall be used, the day of the doing of the act shall be excluded, and the
day of the event shall be included.

                            ARTICLE IX - AMENDMENTS

Section 1.  Amendments

     These by-laws may be amended or repealed by the Board of Directors or by
the stockholders.


                                    -11-
   1
                                                                     EXHIBIT 4.1

                    VASCO DATA SECURITY INTERNATIONAL, INC.

                          Certificate of Designation,
                   Preferences and Rights of Preferred Stock
                    by Resolution of the Board of Directors
                           Providing for an Issue of
                           Ninety-Five Hundred Shares
                         of Preferred Stock Designated
                           "Series B Preferred Stock"



     I, T. Kendall Hunt, Chairman of the Board, Chief Executive Officer and
President of VASCO Data Security International, Inc. (hereinafter referred to
as the "Corporation"), a corporation organized and existing under the General
Corporation Law of the State of Delaware, in accordance with the provisions of
Section 151 thereof, DO HEREBY CERTIFY:

     That pursuant to authority conferred upon the Board of Directors of the
Corporation by the Certificate of Incorporation of said Corporation
(hereinafter referred to as the "Certificate of Incorporation") the Board of
Directors adopted a resolution providing for the issuance of a series of
Preferred Stock, par value $.01 per share, of the Corporation to be designated
"Series B Preferred Stock," which resolution is as follows:

           RESOLVED, that pursuant to the authority vested in the Board
      of Directors of the Corporation by the Certificate of
      Incorporation, a series of Preferred Stock, par value $.01 per
      share, of the Corporation be, and hereby is, created, to be
      designated "Series B Preferred Stock" (hereinafter referred to as
      the "Series B Preferred Stock"), consisting of Ninety-Five Hundred
      (9,500) shares, and, to the extent that the powers, preferences
      and relative and other special rights, and the qualifications,
      limitations and restrictions thereof, of the Series B Preferred
      Stock are not stated and expressed in the Certificate of
      Incorporation, such powers, preferences and relative and other
      special rights, and the qualifications, limitations and
      restrictions thereof, are hereby fixed and stated to be as follows
      (all terms used herein which are defined in the Certificate of
      Incorporation shall be deemed to have the meanings provided
      therein):

      1.   Dividends.

           (a) Each holder of record of a share of Series B Preferred Stock 
      shall be entitled to receive, when, as and if declared by the Board, 
      out of funds of the Corporation legally available therefor pursuant 
      to the General Corporation Law (the "Legally Available Funds"), mandatory
      preferential cumulative dividends during each Monthly Dividend Period (as
      hereinafter defined) that such share of Series B Preferred Stock is
      outstanding at a rate determined by multiplying 1% times the Liquidation
      Preference (as hereinafter defined) of the Series B Preferred Stock. 
      Such dividends shall be payable on the first Business Day (as hereinafter
      defined) succeeding the last day of the preceding Monthly Dividend Period
      (each, a 

                                     -1-
   2

      "Dividend Payment Date").  Such dividends shall be fully cumulative 
      and shall accrue on a monthly basis (whether or not declared) from 
      the first day of each Monthly Dividend Period as to which such dividend 
      may be payable as herein provided to the date on which such share of 
      Series B Preferred Stock ceases to be outstanding.

           (b) Dividends accrued on the Series B Preferred Stock shall
      be paid in cash on each Dividend Payment Date, subject to the
      availability of Legally Available Funds.  If at any time the
      Corporation distributes less than the total amount of dividends
      then accrued with respect to the Series B Preferred Stock, such
      payment will be distributed among the holders of shares of Series
      B Preferred Stock so that an equal amount will be paid (as nearly
      as possible) with respect to each outstanding share of Series B
      Preferred Stock.  If, for any reason or no reason, for any Monthly
      Dividend Period all or a portion of the dividends are not paid in
      cash on or before the Dividend Payment Date next succeeding the
      Dividend Payment Date on which such dividends were payable, then
      the rate at which dividends shall be computed shall immediately be
      increased to 1.5% per month until all accrued but unpaid dividends
      have been paid in full and such accrued but unpaid dividends shall
      be added (solely for the purpose of calculating dividends payable
      on the Series B Preferred Stock) to the Liquidation Preference of
      the Series B Preferred Stock effective at the beginning of the
      Monthly Dividend Period succeeding the Monthly Dividend Period as
      to which such dividends were not paid and shall thereafter accrue
      additional dividends in respect thereof ("Additional Dividends")
      at the rate of 1.5% per month until such unpaid dividends have
      been paid in full.  At such time as all accrued but unpaid
      dividends have been paid in full at the adjusted rate, the
      dividend rate for future dividends shall return to the initial
      rate of 1% per month, unless and until the occurrence of a
      subsequent failure to make in full a monthly dividend payment, at
      which time the rate of dividends shall immediately be increased in
      accordance with the preceding sentence.

           (c) Each such dividend shall be paid to the holders of record
      of shares of Series B Preferred Stock as they appear on the stock
      register of the Corporation on such record date as shall be fixed
      by the Board or a duly authorized committee thereof, which date
      shall be not more than 30 days nor less than 10 days preceding the
      Dividend Payment Date relating thereto.

           (d) If dividends (including Additional Dividends) are not
      paid in full or declared in full and sums are not set apart for
      the payment thereof upon the Series B Preferred Stock and any
      other Preferred Stock ranking on a parity as to dividends with the
      Series B Preferred Stock, all dividends declared upon shares of
      Series B Preferred Stock and any other Preferred Stock ranking on
      a parity as to dividends shall be declared pro rata so that in all
      cases the amount of dividends declared per share on the Series B
      Preferred Stock and such other Preferred Stock shall bear to each other 
      the same ratio that accumulated dividends per share, including 
      Additional Dividends or accrued dividends, as the case may be, on the
      shares of Series B Preferred Stock and such other Preferred Stock shall
      bear to each other.  Except as 


                                     -2-
   3


      provided in the preceding sentence, unless full cumulative dividends
      (including Additional Dividends) on the Series B Preferred Stock have
      been paid or declared in full and set aside for payment, no dividends or
      other distribution shall be declared or paid upon the Common Stock or any
      other capital stock of the Corporation ranking junior to or on parity
      with the Series B Preferred Stock as to distribution or liquidation
      rights nor shall shares of any such capital stock be redeemed or
      purchased by the Corporation or any subsidiary thereof, nor shall any
      money be paid to or made available for a sinking fund for redemption or
      purchase of any shares of capital stock ranking junior to or on a parity
      with the Series B Preferred Stock as to distribution or liquidation
      rights until all cumulative dividends (including Additional Dividends) on
      the Series B Preferred Stock shall have been paid and the dividend for
      the then-current Monthly Dividend Period shall have been paid or declared
      and sufficient funds set aside for payment thereof.

           (e) Notwithstanding anything to the contrary contained
      herein, upon any conversion of shares of Series B Preferred Stock
      pursuant to either Section 2 or Section 3, all accrued and unpaid
      dividends on the Series B Preferred Stock to and until the date of
      such conversion shall be due and payable.

           (f) The following terms shall have the meanings as set forth below:

                 "Business Day" means any day other than a
            Saturday, Sunday or any day on which the New York
            Stock Exchange is closed.

                 "Monthly Dividend Period" means the period from
            the first day through the last day of each calendar
            month, provided that the first Monthly Dividend Period
            shall mean the period commencing the day shares of
            Series B Preferred Stock are originally issued and
            ending on the last day of the month in which shares of
            Series B Preferred Stock are originally issued, and
            the amount of dividends payable in respect thereof
            shall be determined by multiplying (x) 1% times (y)
            the Liquidation Preference of the Series B Preferred
            Stock times (z) a fraction, the numerator of which is
            the number of days that shares of Series B Preferred
            Stock are outstanding during such Monthly Dividend
            Period (including the date of issuance thereof) and
            the denominator of which is 30.

     2.    Conversion At Option of Corporation.

           (a) General.  Provided that the conditions set forth in
      Section 2(b) shall be satisfied, at the option of the Corporation,
      upon giving the notice provided in Section 2(d) below, as of the 
      Effective Date (as hereinafter defined) the Series B Preferred Stock
      shall be converted in whole or in part into fully paid and non-assessable
      shares of Common Stock.  The number of shares of Common Stock which a
      holder of shares of Series B Preferred Stock shall be entitled to receive
      upon conversion shall be the product obtained by multiplying (i) the
      Applicable 

                                     -3-
   4

      Conversion Rate (determined as provided in Section 2(c)) times
      (ii) the number of shares of Series B Preferred Stock held by such holder
      which are being converted.

           (b) Conditions.  No shares of Series B Preferred Stock shall
      be converted into Common Stock pursuant to Section 2(a) unless
      each of the following conditions shall be satisfied as of the
      Effective Date:

                 (i) Immediately prior to authorizing any
            conversion pursuant to this Section 2, the
            Corporation, by resolution of the Board shall, to the
            extent of any Legally Available Funds, declare a
            dividend on the Series B Preferred Stock payable on
            the Effective Date in an amount equal to any accrued
            and unpaid dividends (including Additional Dividends)
            on the Series B Preferred Stock as of the Effective
            Date.

                 (ii) The issuance to the holders of shares of
            Series B Preferred Stock of all shares of Common Stock
            upon conversion of the Series B Preferred Stock
            pursuant to Section 2(a) shall have been registered
            under a currently effective registration statement
            under the Securities Act of 1933, as amended, and such
            issuance shall either be registered under all
            applicable securities or blue sky laws of any state in
            which a holder resides or such issuance shall be
            exempt from the registration provisions of such
            applicable state securities laws.

                 (iii) The Common Stock shall be listed for
            trading on either the American Stock Exchange or the
            New York Stock Exchange or quoted on NASDAQ.

           (c) Applicable Conversion Rate.  The conversion rate in
      effect at any time for the conversion of shares of the Series B
      Preferred Stock pursuant to this Section 2 (the "Applicable
      Conversion Rate") shall be the quotient obtained by dividing (i)
      the Liquidation Preference of the Series B Preferred Stock by (ii)
      the Applicable Conversion Value (as defined in the next sentence).
      The "Applicable Conversion Value" in the case of conversions
      pursuant to this Section 2 means the quotient obtained by dividing
      (x) the average of the Market Prices (as defined in the next
      sentence) of the Common Stock for the period of the 20 consecutive
      Business Days on which the Common Stock was traded ending on the
      Business Day immediately preceding (but not including) the date
      the notice referred to in Section 2(d) is deemed given, by (y) 2. The
      "Market Price" of the Common Stock for any day means the last reported
      sales price, regular way, or, in case no sale takes place on such day,
      the average reported closing bid and asked prices, regular way, in either
      case as reported on the principal national securities exchange on which
      such security is listed or admitted for trading, or, if such security is
      not listed or admitted to trading on any national securities exchange, on
      the NASDAQ National Market System or, if such security is not quoted on
      such National Market System, the average of the closing bid and asked
      prices on each such day in the over-the-counter 


                                     -4-
   5
      market as reported by NASDAQ, or, if bid and asked prices for such
      security on each such day shall not have been reported through
      NASDAQ, the average of the bid and asked prices for each such day as
      furnished by any New York Stock Exchange member firm regularly making a
      market in such security selected for such purpose by the Board.

           (d) Notice of Conversion.  At least 30 days but not more than
      60 days prior to the date fixed for the conversion of shares of
      Series B Preferred Stock pursuant to Section 2(a), written notice
      of such conversion shall be mailed to each holder of record of
      shares of Series B Preferred Stock to be converted in a postage
      prepaid envelope addressed to such holder at such holder's post
      office address as shown on the records of the Corporation.  Each
      such notice shall state:  (i) the effective date of such
      conversion (the "Effective Date"); (ii) the number of shares of
      Series B Preferred Stock to be converted and, if less than all
      shares held by such holder are to be converted, the method of
      calculating such number; (iii) the Applicable Conversion Rate and
      an itemized calculation thereof; (iv) the place or places where
      certificates for such shares are to be surrendered in exchange for
      a certificate or certificates representing the Common Stock into
      which the shares of Series B Preferred Stock are to be converted
      (the "Conversion Shares"); and (v) that dividends on the shares to
      be converted shall cease to accrue on the Effective Date of the
      conversion.  On or after the Effective Date each holder of shares
      of Series B Preferred Stock to be converted shall present and
      surrender such holder's certificate or certificates representing
      such shares of Series B Preferred Stock to the Corporation at the
      place designated in such notice.  As promptly as practicable after
      the Effective Date, the Corporation shall issue and deliver to the
      holder of the shares of Series B Preferred Stock being converted,
      or on its written order, such certificate(s) as it may request for
      the number of whole shares of Common Stock issuable upon
      conversion of such shares of Series B Preferred Stock in
      accordance with the provisions of this Section 2 and cash, as
      provided in Section 2(f), in respect of any fraction of a share of
      Common Stock issuable upon such conversion.  Such conversion shall
      be deemed to have been effected immediately prior to the close of
      business on the Effective Date, and at such time the rights of the
      holder as holder of the converted shares of Series B Preferred
      Stock shall cease and the person(s) in whose name(s) any
      certificates(s) for shares of Common Stock shall be issuable upon
      such conversion shall be deemed to have become the holder or holders of
      record of the shares of Common Stock represented thereby.  In the event
      some but not all of the shares of Series B Preferred Stock represented by
      a certificate or certificates being surrendered by a holder are
      converted, the Corporation shall execute and deliver to or on the order
      of the holder, at the expense of the Corporation, a new certificate
      representing the number of shares of Series B Preferred Stock which are 
      not converted. From and after the Effective Date, all dividends on the
      shares of Series B Preferred Stock designated for conversion in such 
      notice shall cease to accrue and all rights of the holders thereof,
      except the right to receive a certificate or certificates for Conversion
      Shares and the right to receive the accrued and unpaid dividends up to
      the Effective Date and any cash in payment of fractional shares, without 
      interest, upon the surrender of certificates in representing the Series
      B Preferred


                                     -5-
   6
      Stock, shall cease and terminate and such shares shall not be deemed to
      be outstanding for any purpose whatsoever.  A notice hereunder shall
      be deemed to be given on the date it is deposited in first class United
      States mail in a sealed envelope, postage prepaid.                       
      
           (e) Selection of Shares to be Converted.  If less than all of
      the shares of Series B Preferred Stock are to be converted, the
      Board shall allocate the aggregate Liquidation Preference of
      shares to be converted pro rata (or as nearly pro rata as
      practicable) or by lot at the direction of the Board.  Regardless
      of the method used, the calculation of the number of shares to be
      converted shall be based upon whole shares, such that the
      Corporation shall in no event be required to issue fractional
      shares of Series B Preferred Stock or cash in lieu thereof.

           (f) Cash in Lieu of Fractional Shares.  No fractional shares
      of Common Stock or scrip representing fractional shares shall be
      issued upon the conversion of shares of Series B Preferred Stock
      pursuant to this Section 2.  Instead of any fractional shares of
      Common Stock which would otherwise be issuable upon conversion of
      Series B Preferred Stock, the Corporation shall pay to the holder
      of the shares of Series B Preferred Stock which were converted a
      cash adjustment in respect of such fractional shares in an amount
      equal to the same fraction of the Market Price per share of the
      Common Stock at the close of business on the Effective Date.  The
      determination as to whether or not any fractional shares are
      issuable shall be based upon the aggregate number of shares of
      Series B Preferred Stock being converted at any one time by any
      holder thereof, not upon each share of Series B Preferred Stock
      being converted.

      3.    Conversion At the Option of Holder.

           (a) General.  Subject to and in compliance with the
      provisions of this Section 3, shares of Series B Preferred Stock
      may, at the option of any holder, be converted at any time and
      from time to time into fully paid and nonassessable shares of
      Common Stock.  The number of shares of Common Stock which a holder
      of shares of Series B Preferred Stock shall be entitled to receive
      upon conversion pursuant to this Section 3 shall be the product
      obtained by multiplying (i) the Applicable Conversion Rate
      (determined as provided in Section 3(b)) by the number of shares
      of Series B Preferred Stock being converted at any time.

           (b) Applicable Conversion Rate.  The conversion rate in effect at any
      time for the conversion of the Series B Preferred Stock pursuant to
      this Section 3 (the "Applicable Conversion Rate") shall be the quotient
      obtained by dividing (i) the Liquidation Preference of the Series B
      Preferred Stock by (ii) the Applicable Conversion Value (as defined in
      the next sentence).  The "Applicable Conversion Value" in the case of
      conversions pursuant to this Section 3 means the quotient obtained by
      dividing (x) the average of the Market Prices of the Common Stock for the
      period of the 20 consecutive Business Days on which the Common Stock was 


                                     -6-
   7

      traded ending on the Business Day immediately preceding (but not
      including) the date the notice referred to in Section 3(c) is deemed
      given, by (y) 2.

           (c) Exercise of Conversion Privilege.  To exercise its
      conversion privilege, a holder of shares of Series B Preferred
      Stock shall surrender the certificate(s) representing the shares
      being converted to the Corporation at its principal office, and
      shall give written notice to the Corporation at that office that
      such holder elects to convert such shares.  Such notice shall also
      state the name or names (with address or addresses) in which the
      certificate(s) for shares of Common Stock issuable upon such
      conversion shall be issued.  The certificate(s) for shares of
      Series B Preferred Stock surrendered for conversion shall be
      accompanied by proper assignment thereof to the Corporation or in
      blank.  A notice hereunder shall be deemed to be given on the date
      it is deposited in first class United States mail in a sealed
      envelope, postage prepaid.  The date when such written notice is
      received by the Corporation, together with the certificate(s)
      representing the shares of Series B Preferred Stock being
      converted, shall be the "Conversion Date."  Any voluntary
      conversion of shares of Series B Preferred Stock by any holder
      shall be for at least 100 shares of Common Stock.  As promptly as
      practicable after the Conversion Date, the Corporation shall issue
      and shall deliver to the holder of the shares of Series B
      Preferred Stock being converted, or on its written order, such
      certificate(s) as it may request for the number of whole shares of
      Common Stock issuable upon the conversion of such shares of Series
      B Preferred Stock in accordance with the provisions of this
      Section 3, and cash, as provided in Section 3(d), in respect of
      any fraction of a share of Common Stock issuable upon such
      conversion.

           (d) Cash in Lieu of Fractional Shares.  No fractional shares
      of Common Stock or scrip representing fractional shares shall be
      issued upon the conversion of shares of Series B Preferred Stock
      pursuant to this Section 3.  Instead of any fractional shares of
      Common Stock which would otherwise be issuable upon conversion of
      Series B Preferred Stock, the Corporation shall pay to the holder
      of the shares of Series B Preferred Stock which were converted a
      cash adjustment in respect of such fractional shares in an amount
      equal to the same fraction of the Market Price per share of the
      Common Stock at the close of business on the Conversion Date.  The
      determination as to whether or not any fractional shares are
      issuable shall be based upon the aggregate number of shares of Series B
      Preferred Stock being converted at any one time by any holder thereof,
      not upon each share of Series B Preferred Stock being converted.

           (e) Partial Conversion.  In the event some but not all of the
      shares of Series B Preferred Stock represented by a certificate or
      certificates surrendered by a holder are converted, the
      Corporation shall execute and deliver to or on the order of the
      holder, at the expense of the Corporation, a new certificate
      representing the number of shares of Series B Preferred Stock
      which were not converted.

           (f) Reservation of Common Stock.  The Corporation shall at
      all times reserve and keep available out of its authorized but
      unissued shares of Common 


                                     -7-
   8

      Stock, solely for the purpose of effecting the conversion of the shares
      of the Series B Preferred Stock, such number of its shares of Common      
      Stock as shall from time to time be sufficient to effect the conversion
      of all outstanding shares of the Series B Preferred Stock, and if at any
      time the number of authorized but unissued shares of Common Stock shall
      not be sufficient to effect the conversion of all then outstanding shares
      of the Series B Preferred Stock, the Corporation shall take such action
      as may be necessary to increase its authorized but unissued shares of
      Common Stock to such number of shares as shall be sufficient for such
      purpose.

      4.   Option to Purchase Common Stock in Satisfaction of Accrued But Unpaid
           Dividends.
        
           (a) General.  Subject to and in compliance with the
      provisions of this Section 4, if at any time there are then
      accrued but unpaid dividends on shares of Series B Preferred Stock
      and a holder thereof gives written notice to the Corporation that
      such holder intends to purchase Common Stock in accordance with
      the terms of this Section 4 and 30 days after the giving of such
      notice there remain accrued but unpaid dividends on the Series B
      Preferred Stock, then by further written notice to the Corporation
      in accordance with Section 4(b), such holder may purchase from the
      Corporation up to such number of shares of Common Stock (rounded
      down to eliminate a fractional share) as shall equal the quotient
      obtained by dividing (i) the amount of accrued but unpaid
      dividends on the Series B Preferred Stock held by such holder by
      (ii) the Applicable Exercise Price (as defined in the next
      sentence).  The "Applicable Exercise Price" means the quotient
      obtained by dividing (x) the average of the Market Prices of the
      Common Stock for the period of the 20 consecutive Business Days in
      which the Common Stock was traded ending on the Business Day
      immediately preceding (but not including) the date the notice
      referred to in Section 4(b) is deemed given, by, (y) 2.  The
      purchase price per share at which shares of Common Stock may be
      purchased pursuant to this Section 4 shall be the Applicable
      Exercise Price.  The purchase price shall be paid by the holder's
      agreement to the cancellation of an amount of accrued but unpaid
      dividends on such holder's shares of Series B Preferred Stock
      equal to the aggregate purchase price of the shares of Common Stock
      purchased.  Notwithstanding anything to the contrary contained herein, no
      holder may exercise any option hereunder to the extent that (i) the
      aggregate purchase price for shares of Common Stock to be purchased
      pursuant thereto exceeds the amount of Legally Available Funds for the
      payment of dividends, or (ii) the per share purchase price for shares of
      Common Stock to be purchased pursuant thereto is less than the par value
      of the Common Stock.

           (b) Exercise of Option.  To exercise its option under Section
      4(a), a holder of shares of Series B Preferred Stock shall give
      written notice to the Corporation at the principal office of the
      Corporation that such holder elects to exercise its option.  A
      notice under this Section 4 (including a notice under Section
      4(a)) shall be deemed to be given on the date it is deposited in
      first class United States mail in a sealed envelope, postage
      prepaid.


                                     -8-
   9


           (c) Reservation of Common Stock.  The Corporation shall at
      all times reserve and keep available out of its authorized but
      unissued shares of Common Stock, solely for the purpose of
      effecting the purchase of shares of Series B Preferred Stock upon
      exercise of options pursuant to Section 4(a), such number of its
      shares of Common Stock as shall from time to time be sufficient to
      issue the maximum number of shares of Common Stock issuable upon
      exercise of such options, and if at any time the number of
      authorized but unissued shares of Common Stock shall not be
      sufficient to issue the maximum number of shares of Common Stock
      issuable upon exercise of such options, the Corporation shall take
      such action as may be necessary to increase its authorized but
      unissued shares of Common Stock to such number of shares as shall
      be sufficient for such purpose.

      5.   Voting Rights.

           (a) Except as otherwise required by law, the holders of the
      Series B Preferred Stock shall be entitled to vote on all matters
      submitted to a vote of the holders of the Common Stock of the
      Corporation, voting together as a single class with the holders of
      Common Stock and the holders of such other classes and series of
      stock that vote together with the Common Stock of the Corporation
      as a single class.  For purposes of this subsection, each share of
      Series B Preferred Stock shall entitle the holder thereof to the
      right to cast one vote.

           (b) So long as any shares of the Series B Preferred Stock are
      outstanding and unless the vote or consent of the holders of a
      greater number of shares shall then be required by law, the
      consent of the holders of a majority of all of the outstanding
      shares of Series B Preferred Stock (given in person or by proxy,
      at a special meeting of stockholders called for such purpose or at
      any annual meeting of stockholders, with the holders of Series B
      Preferred Stock voting as a class and with each share of Series B
      Preferred Stock having one vote) shall be necessary for (i)
      authorizing, effecting or validating the amendment, alteration or
      repeal of any of the provisions of this Certificate of Designation
      or of any amendment thereto, or of any resolution or resolutions
      providing for the issue of any stock, that would have an adverse effect
      on the designations, rights, preferences or privileges of shares of
      Series B Preferred Stock or (ii) the creation of any class or series of
      capital stock ranking prior to or on a parity with the Series B Preferred
      Stock with respect to rights to receive dividends, redemption payments or
      distributions upon liquidation or winding up of the Corporation.

           (c) If and when, at any time or times, dividends for any
      Monthly Dividend Period on the Series B Preferred Stock have not
      been paid in cash on or before the Dividend Payment Date next
      succeeding the Dividend Payment Date on which such dividends were
      payable, any holder of Series B Preferred Stock may give to the
      Corporation a notice of such non-payment.  If within 30 days after
      the giving of the notice referred to in the preceding sentence,
      there remain any accrued but unpaid dividends on the Series B
      Preferred Stock, the holders of Series B Preferred Stock, voting
      separately as a class, shall be entitled to elect such number of
      directors 


                                     -9-
   10

      of the Corporation as shall be at all times a majority of the number of
      directors of the Corporation.  The right to elect directors may be
      exercised at any annual meeting of the stockholders of the Corporation, at
      any special meeting held in place of an annual meeting, or at a special
      meeting of the holders of Series B Preferred Stock called to elect
      directors.  The right to elect directors shall continue until dividends in
      default on Series B Preferred Stock are paid in full, and shall cease when
      the dividends are so paid, subject to future reactivation in the event of
      future defaults.

           At any time that special voting power is vested in the holders of
      Series B Preferred Stock, the Secretary of the Corporation may, and at the
      written request of holders of 25 percent or more of the shares of Series B
      Preferred Stock must, call a special meeting of the holders of Series B
      Preferred Stock for the election of directors.  The meeting must be held
      within forty (40) days of the delivery of the request at the time and
      place provided by law or in the bylaws of the Corporation for meetings of
      stockholders of the Corporation; provided, however, that no meeting need
      be called if the request is delivered less than ninety (90) days before
      the date fixed for the next annual meeting of the Corporation's
      stockholders.

           If at any meeting held when special voting power is vested in
      the holders of Series B Preferred Stock the holders of at least 50
      percent of Series B Preferred Stock then outstanding are present in
      person or by proxy, then the number of directors of the Corporation shall
      be increased by the number of directors that the holders of Series B
      Preferred Stock shall be entitled to elect and the holders of Series B
      Preferred Stock present by vote of at least 50 percent shall be entitled
      to elect the additional directors of the Corporation.  The directors so
      elected shall serve until the next annual meeting of the stockholders of
      the Corporation and until their respective successors are elected by the
      holders of Series B Preferred Stock and have qualified.


           When the holders of Series B Preferred Stock are divested of special
      voting power, the term of office of the persons elected as directors by
      the holders of Series B Preferred Stock shall terminate, and the number of
      directors of the Corporation shall be reduced accordingly.  If the office
      of a director elected by the holders of Series B Preferred Stock is vacant
      due to resignation, removal or death during the time that special voting
      power is vested in the holders of Series B Preferred Stock, the vacancy
      shall be filled by the majority vote of the directors then in office, even
      if less than a quorum.  If the vacancy is not so filled within forty (40)
      days after the creation of the vacancy, a special meeting of the holders
      of the Series B Preferred Stock shall be called and the vacancy filled at
      that meeting.  Any director elected to fill a vacancy by the remaining
      directors may be removed by the vote of a majority of the holders of
      Series B Preferred Stock.

           (d) Nothing herein contained shall be construed so as to require a
      class vote or the consent of the holders of the outstanding shares of
      Series B Preferred Stock (i) in connection with any increase in the total
      number of authorized or issued shares of Common Stock, or (ii) in
      connection with the authorization or increase or issuance of any class or
      series of capital stock ranking junior to the Series B 


                                    -10-
   11

      Preferred Stock as to dividends, redemption payments and distributions
      upon liquidation, dissolution or winding up of the Corporation.  Nothing
      herein contained shall in any way limit the right and power of the
      Corporation to issue any bonds, notes, mortgages, debentures, and other
      obligations, or to incur indebtedness to banks and to other lenders.

      6.   Priority of Series B Preferred Stock in Event of Liquidation or
           Dissolution.

           In the event of any liquidation, dissolution, or winding up
      of the affairs of the Corporation, whether voluntary or otherwise, after
      payment or provision for payment of the debts and other liabilities of the
      Corporation, the holders of the Series B Preferred Stock shall be entitled
      to receive, out of the remaining net assets of the Corporation, the amount
      of One Hundred Dollars ($100.00) in cash for each share of Series B
      Preferred Stock (the "Liquidation Preference"), plus an amount equal to
      all dividends accrued and unpaid on each such share up to the date fixed
      for distribution, before any distribution of any kind shall be made to the
      holders of the Common Stock or any other stock ranking (as to any such
      distribution) junior to the Series B Preferred Stock.  In the event of any
      involuntary or voluntary liquidation, dissolution or winding up the
      affairs of the Corporation, the Corporation by resolution of its Board
      shall, to the extent of any Legally Available Funds, declare a dividend on
      shares of Series B Preferred Stock payable on the date of distribution
      before any distribution is made to any holder of any series of stock of
      the Corporation ranking junior to the Series B Preferred Stock as to
      liquidation, dissolution or winding up, in an amount equal to any accrued
      and unpaid dividends on the Series B Preferred Stock as of such date.  If
      the Corporation does not have sufficient Legally Available Funds to
      declare and pay all dividends accrued at the time of such liquidation, any
      remaining accrued and unpaid dividends shall be added to the payment to be
      received by the holders of shares of Series B Preferred Stock for such
      shares in such liquidation.  If, upon any liquidation, dissolution or
      winding up of the Corporation, the assets distributable among the holders
      of any series of Preferred Stock ranking (as to any such distribution) on
      a parity with the Series B Preferred Stock shall be insufficient to permit
      the payment in full to the holders of all such series of Preferred Stock
      of all preferential amounts payable to all such holders, then the entire
      assets of the Corporation thus distributable shall be distributed ratably
      among the holders of shares of Series B Preferred Stock and all series of
      Preferred Stock ranking (as to any such distribution) on a parity with the
      Series B Preferred Stock in proportion to the respective amounts that
      would be payable per share if such assets were sufficient to permit
      payment in full.  Except as otherwise provided in this Section 6, holders
      of Series B Preferred Stock shall not be entitled to any distribution in
      the event of liquidation, dissolution or winding up of the affairs of the
      Corporation.

           For the purposes of this Section 6, neither the voluntary
      sale, lease, conveyance, exchange or transfer (for cash, shares of
      stock, securities or other consideration) of all or substantially
      all the property or assets of the Corporation, nor the
      consolidation or merger of the Corporation with one or more other
      corporations, 


                                    -11-
   12

      shall be deemed to be a liquidation, dissolution or winding up, 
      voluntary or involuntary.

           7. Ranking of Series B Preferred Stock.  Except as permitted
      in accordance with Section 5(b), with regard to rights to receive
      dividends, mandatory redemption payments and distributions upon
      liquidation, dissolution or winding up of the Corporation, the
      Series B Preferred Stock shall rank prior to any other equity
      securities of the Corporation.


                                    -12-
   13


     IN WITNESS WHEREOF, said VASCO Data Security International, Inc. has
caused this Certificate to be signed by T. Kendall Hunt its Chairman of the
Board, Chief Executive Officer and President, this 21st day of July, 1997.


                                     VASCO DATA SECURITY
                                     INTERNATIONAL, INC.



                                     By: /s/ T. Kendall Hunt
                                        --------------------------------------
                                        T. Kendall Hunt
                                        Chairman of the Board, Chief Executive 
                                        Officer and President



                                    -13-
   1
                                                                     EXHIBIT 4.4


                        LETTER OF TRANSMITTAL AND RELEASE

                   TO TENDER AND GIVE A RELEASE IN RESPECT OF

                           CURRENT VASCO COMMON STOCK
                     CURRENT VASCO SERIES B PREFERRED 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.


- ----------------------------------------------------------------------------------------------------------
                                 DESCRIPTION OF CURRENT VASCO SHARES TENDERED
                                           (SEE INSTRUCTION 3)
- ----------------------------------------------------------------------------------------------------------
                                                                         Current VASCO Shares Tendered
   Name(s) and Address(es) of holder(s)             Class of Current        (Attach additional signed
         (please fill in, if blank)                   VASCO Shares*           scheduled if necessary)
- ----------------------------------------------------------------------------------------------------------
                     (1)                                  (2)                   (3)              (4)
- ----------------------------------------------------------------------------------------------------------
                                                                                             Total Number 
                                                                             Certificate       of Current 
                                                                              Number(s)      VASCO Shares
- ----------------------------------------------------------------------------------------------------------
                                                                                   
- ----------------------------------------------------------------------------------------------------------

- ----------------------------------------------------------------------------------------------------------

- ----------------------------------------------------------------------------------------------------------

- ----------------------------------------------------------------------------------------------------------
                                                    Total
- ----------------------------------------------------------------------------------------------------------

                     *Indicate class of Current VASCO Shares: Current VASCO Common Stock or

                                          Current VASCO Series B Preferred Stock.

- ----------------------------------------------------------------------------------------------------------
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 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- 3 - ------------------------------------------------------------------------------- [ ] CHECK HERE IF TENDERED CURRENT VASCO SHARES ARE ENCLOSED HEREWITH. [ ] 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: [ ] 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. Name(s) of holder(s)___________________________________________________ Date of Execution of Notice of Guaranteed Delivery____________________________________________ Name of Eligible Institution That Guaranteed Delivery____________________________________________ - -------------------------------------------------------------------------------- 3 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- 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 1984 to effect a three-for-one stock split of its common stock and to provide for 600,000 shares of non-voting common stock prior to purportedly effecting the stock split and issuing 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 in 1986, (c) the purported issuance of Series A preferred stock in 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 preferred stock by Current VASCO in connection with the 1990 merger, when the rights, powers and preferences of which such stock were not specified in Current VASCO's Certificate of Incorporation and when 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 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 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 Old VASCO shares for 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 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 prior to the filing of a Certificate of Merger with the State of Delaware, (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; -5- 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 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 1990 prior to the intended merger transaction with Current VASCO and before the filing of a Certificate of Merger with the State of Delaware; 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 issuances of Old VASCO capital stock, 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. 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- 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 ATHE EXCHANGE OFFERA 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- 8 - ------------------------------------------------------- ------------------------------------------------------- SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 4, 5 AND 6) (SEE INSTRUCTIONS 1, 4, 5 AND 6) 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. - ------------------------------------------------------- -------------------------------------------------------
-8- 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- 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- 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- 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- 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- 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- 15 - -------------------------------------------------------------------------------------------------------------------- PAYER'S NAME: THE ILLINOIS STOCK TRANSFER COMPANY - -------------------------------------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------- --------------------------- - --------------------------------------------------------------------------------------------------------------------
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. [ADD CERTIFICATION RE AWAITING TIN, IF NECESSARY.] -15- 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- 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.
GIVE THE EMPLOYER GIVE THE SOCIAL IDENTIFICATION FOR THIS TYPE OF ACCOUNT: SECURITY NUMBER OF: FOR THIS TYPE OF ACCOUNT: NUMBER OF - ------------------------- ------------------- ------------------------- ----------------- 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
- ------------ (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 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
   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


   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 1984 to effect a three-for-one
         stock split of its common stock and to provide for 600,000 shares of
         non-voting common stock prior to purportedly effecting the stock split
         and issuing 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 in 1986, (c) the purported
         issuance of Series A preferred stock in 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 preferred stock by
         Current VASCO in connection with the 1990 merger, when the rights,
         powers and preferences of which such stock were not specified in
         Current VASCO's Certificate of Incorporation and when 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 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-

   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 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 Old VASCO shares for 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 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 prior to the filing of a Certificate of
         Merger with the State of Delaware, (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;

                  (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 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 1990 prior to
         the intended merger transaction with Current VASCO and before the
         filing of a Certificate of Merger with the State of Delaware; 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 issuances of Old VASCO capital
         stock, 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-

   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.

                  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-

   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-

   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-

   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


   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.


   9

                                 SCHEDULE ______

                                 ATTACHED HERETO


   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.


   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-
   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 1984 to effect a three-for-one
         stock split of its common stock and to provide for 600,000 shares of
         non-voting common stock prior to purportedly effecting the stock split
         and issuing 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 in 1986, (c) the purported
         issuance of Series A preferred stock in 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 preferred stock by
         Current VASCO in connection with the 1990 merger, when the rights,
         powers and preferences of which such stock were not specified in
         Current VASCO's Certificate of Incorporation and when 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 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 1986 reorganization through the share
         exchange undertaken 


                                      -3-
   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 Old VASCO shares for 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 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 prior to
         the filing of a Certificate of Merger with the State of Delaware, (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;

                  (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 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 1990 prior to
         the intended merger transaction with Current VASCO and before the
         filing of a Certificate of Merger with the State of Delaware; 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 issuances of Old VASCO capital
         stock, 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-
   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.

                  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-
   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-
   7




                                   SCHEDULE I

- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PER SHARE OPTION EXERCISE OPTION TERMINATION SHARES PRICE VESTING PERIOD EXPIRATION DATE PERIOD - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------
   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 



   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 acknowledges that the amendment to the Current
VASCO Convertible Note may result in the recognition of gain or loss for tax
purposes, and further the Convertible Noteholder agrees that such tax
consequences are solely his, her or its responsibility, and not that of Current
VASCO or New VASCO. 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.

                  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 1984 to effect a three-for-one
         stock split of its common stock and to provide for 600,000 shares of
         non-voting common stock prior to purportedly effecting the stock split
         and issuing 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 in 1986, (c) the purported
         issuance of Series A preferred stock in 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 preferred stock by
         Current VASCO in connection with the 1990 merger, when the rights,
         powers and preferences of which such stock were not specified in
         Current VASCO's Certificate of Incorporation and 

                                     -2-
   3

         when 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 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 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 Old VASCO shares for 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 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 prior to the filing of a Certificate of
         Merger with the State of Delaware, (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;

                  (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 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 


                                      -3-
   4

         1990 prior to the intended merger transaction with Current VASCO and
         before the filing of a Certificate of Merger with the State of
         Delaware; 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 issuances of Old VASCO capital
         stock, 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.

                  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 


                                      -4-
   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.


                                      -5-
   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
                                        ---------------------------------------

Convertible Noteholder:             Printed Name
                                                 ------------------------------

                                    Signature
                                             ----------------------------------
                                    Title
                                         --------------------------------------
                                    Address
                                           ------------------------------------
                                    Dated                                , 1997
                                          -------------------------------


                                      -6-
   7

                                    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 


                                      -7-

   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.


                                      -8-
   9

                                 SCHEDULE _____

                                 ATTACHED HERETO


                                      -9-

   1
                                                                    EXHIBIT 10.1


CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.  THE OMITTED PORTIONS, MARKED BY AN **, HAVE BEEN
SUBMITTED TO THE COMMISSION WITH THE CONFIDENTIAL TREATMENT REQUEST.


                            OEM Software Order Form
                          (With Terms and Conditions)

                          VASCO Data Security, Inc.
- --------------------------------------------------------------------------------
                      Full legal name of OEM ("Licensee")


  1919 S. Highland Avenue, Suite 118-C, Lombard,          Illinois               60148 U.S.A.
- ---------------------------------------------------------------------------------------------
Address of Principal Place of Business                     City State           Zip/Country

Contact Person:  John Haggard   Telephone: (630) 932-8844       Fax: (630) 495-0279
                 ------------              --------------            --------------
Licensee is incorporated in the state/country of        Delaware
                                                -------------------------------------
Territory (Country):    Worldwide         ("Territory")
                    -----------------------------------

Licensee Products (Description): Internet, network and authentication hardware and software
                                ------------------------------------------------------------
IMPORTANT NOTICE: UPON EXECUTION BY THE PARTIES, LICENSEE WILL HAVE THE RIGHT TO MAKE AND DISTRIBUTE COPIES OF THE NETSCAPE PRODUCTS INDICATED IN ATTACHMENT A, SOLELY ON A BUNDLED BASIS AND NOT AS A STAND-ALONE PRODUCT, AT THE PRICING SET FORTH THEREIN AND ON THE TERMS AND CONDITIONS SET FORTH IN ATTACHMENT B, TO END USERS IN THE TERRITORY. BY SIGNING THIS ORDER FORM, LICENSEE AGREES TO ALL THE TERMS AND CONDITIONS ATTACHED (COLLECTIVELY THE "AGREEMENT"). LICENSEE Netscape Communications Corporation -------------------------------------------------- Full legal name of Netscape entity ("Netscape") By: /S/ T. Kendall Hunt By: /S/ Noreen G. Bergin --------------------------------------- -------------------------------------------- Signature Signature Name: T. Kendall Hunt Name: Noreen G. Bergin -------------------------------------- ----------------------------------------- Print or Type Print or Type Vice President, Finance Title: Chairman & CEO Title: & Corporate Controller ------------------------------------- ----------------------------------------- Date: 3/13/97 Date of Acceptance: March 18, 1997 -------------------------------------- ---------------------------- ("Effective Date") Address: 501 East Middlefield Road --------------------------------------- Mountain View, CA 94043 -----------------------------------------------
AGREEMENT CONSISTS OF: 1. OEM Software Order Form 2. Attachment A - Products and Pricing 3. Attachment B - Terms and Conditions VASCO Data Security, Inc. OEM 031297ttk CONFIDENTIAL Rev 022197 1 2 ATTACHMENT A PRODUCTS AND PRICING 1. Products: Netscape will provide Licensee exportable versions of the products listed below in all languages and Windows 16-bit, 32-bit and NT platforms which are generally commercially available from Netscape as of the Effective Date.
- ---------------------------------------------------------------------------------------------------------------------------- Description of Products A License Fee Per Copy Subscription Per Copy B Upgrade and Subscription Per Copy C - ---------------------------------------------------------------------------------------------------------------------------- Navigator 3.x $** $** $** Navigator Gold 3.x $** $** $** Certificate Server 1.x $** $** $** Enterprise Server 2.x $** $** $** Directory Server 1.x $** $** $** FastTrack Server 1.x $** $** $**
A. Licensee will receive then-current versions of the above products for the Initial Term (as defined in Attachment B). B. This price applies when Licensee purchases the product(s) and subscription together. C. This price applies when Licensee purchases upgrades and subscription within 1 year after Licensee purchased the product(s). 2. Prepayment for Products. Licensee shall pay Netscape a nonrefundable prepayment against future-owed fees ("Prepayment") for the Products equal to US $840,000 due and payable in accordance with the schedule set forth below. Licensee estimates that 0.5% of Prepayment shall be applied towards Products used by Licensee for internal business purposes. Prepayment shall apply only to the first year of this Agreement and not to any Subsequent Term (as such term is defined in Attachment B). Amount Due Due Date ---------- -------- $210,000 ** $210,000 ** $210,000 ** $210,000 ** In addition to the Prepayment, Licensee shall provide Netscape $45,000 of its products (including the VACMan/Server with unlimited Client Access Licenses and 600 Internet access keys) free of charge for Netscape's internal use. 3. Support. In consideration of the Prepayment, Netscape will provide Licensee support for the above products in accordance with Netscape's then current terms and conditions for the 12-month period following the Effective Date. Thereafter, if Licensee desires to receive support as described in this section, Licensee shall pay Netscape ** annual support fees on each anniversary of the Effective Date. 4. Deliverables. 2 master reproduction copies of each Product and 2 copies of the applicable Documentation in any format generally available from Netscape. All deliveries shall be F.C.A. Netscape origin (INCOTERMS 1990). Netscape will promptly ship Products to Licensee upon Licensee's timely payment of all fees due on the Effective Date. 5. Point of Sales Reports. Contact Name: Gregory T. Apple -------------------------- Telephone: 630-932-8844 ---------------------------- Fax: 630-495-0279 Email: gta@vasco.com ------------- --------------- 6. Ship To Address for Deliverables Bill To Address for Invoice -------------------------------- ------------------------------ (not P.O. address) 1919 S. Highland Avenue, Suite 118-C 1919 S. Highland Avenue, Suite 118-C ------------------------------------- -------------------------------------------- Lombard, Illinois 60148 Lombard, Illinois 60148 ------------------------------------- -------------------------------------------- ------------------------------------- -------------------------------------------- Attention: Randy Jamieson Attention: Gregory T. Apple ----------------------------- ---------------------------------- Telephone: 630-932-8844 Telephone: 630-932-8844 Fax: 630-495-0279 ------------------------------ -------------- ---------------- Sales Tax Resale / Exemption Certificate No.: 1912-8541 MTV Exp. July 2000 ---------------------------------------------- (ORIGINAL CERTIFICATE MUST BE ATTACHED) VAT Registration No. BE 446822877 ----------------------------------------------------------------------- Netscape Sales Rep: Jeff Shardell Telephone Number: (415) 937-4738 ------------------------- --------------------------
VASCO Data Security, Inc. OEM 031297ttk CONFIDENTIAL Rev 022197 2 3 ATTACHMENT B OEM Terms and Conditions 1. Definitions. "Licensee Products" means Licensee's computers and computer-related products with which the Netscape Products are bundled for distribution hereunder. "Product(s)" means the executable version (but not the source code version) of the Netscape products listed on Attachment A, including Updates thereto provided by Netscape hereunder. "Documentation" means the standard user and reference manuals and installation guides which Netscape generally distributes to licensees of the Products. "Update" means any correction, modification, enhancement or improvement to any Product which Netscape makes generally commercially available to its licensees. Updates do not include software releases designated by Netscape as new products. "End User" means any third party licensed by Licensee or Licensee's distributor to use, but not to further distribute, the Products. If such third party is an entity, then, for fee accrual purposes, "End User" means each individual within such entity licensed to use but not to further distribute the Product. 2. Term. Unless sooner terminated, this Agreement shall remain in effect for 1 year from the Effective Date ("Initial Term"). Thereafter, the Agreement may be renewed by mutual agreement in writing for an additional 1 year period ("Subsequent Term"). 3. Licenses. (a) Netscape grants to Licensee, subject to these terms and conditions, a nonexclusive and nontransferable right in the Territory to (i) reproduce, without change, the Products in executable form only on any tangible media and (ii) distribute by sublicense such Product copies to End Users, directly or through distributors, only when bundled with a Licensee Product. Licensee may grant distributors the right to grant further sublicenses to distribute copies of the Products to other distributors regardless of tier; however, Licensee shall not grant to any distributor the right to reproduce all or any portion of the Products. Netscape also grants Licensee a nonexclusive and nontransferable license (with no right to sublicense) to use the Products in the Territory for Licensee's internal business purposes in accordance with the applicable provisions of Netscape's end user license agreements provided with the Products. Licensee and its distributors shall not electronically transmit Products to distributors or End Users; provided, if Netscape releases a patch to any Product for general commercial distribution by permitting customers to download such patch from Netscape's internet home page, then Licensee shall have the right to distribute such patch (but not the entire Product) electronically to its distributors and End Users. Netscape also grants Licensee a nonexclusive and nontransferable license to use and reproduce without change the Documentation, and to distribute the Documentation in the Territory by sublicense to End Users, directly or through distributors, solely in conjunction with the Product. Reproduction of Products and Documentation shall occur only at Licensee's principal office unless an alternate location is specified in writing to Netscape. (b) Except as expressly permitted herein or by applicable law, Licensee shall not, and shall not permit any distributor or other person to, copy, modify, translate, decompile, reverse engineer, disassemble, or otherwise determine or attempt to determine source code from the Products or to create any derivative works based upon the Products or Documentation. Neither Licensee nor any distributor shall market or distribute any Product copy (i) which is not bundled with a Licensee Product or (ii) outside the Territory. If Licensee or any distributor fails to comply with this Section 3(b), Netscape may immediately (in addition to all other remedies it may have and except for internal use licenses) revoke all licenses granted hereunder, subject to Section 13. (c) Netscape grants Licensee a sublicense to use as permitted in Section 3(a) any third party software which may be contained in the Products. Netscape reserves the right to substitute any third party software in the Products so long as the new third party software does not materially affect the functionality of the Products. (d) Licensee shall use, and is granted during the term hereof a nontransferable, nonexclusive and restricted license (with a right to sublicense to distributors) to use in the Territory the mark "Netscape Navigator Included" and those Netscape trademarks and trade names relating to the Products (collectively, the "Marks") in all advertising, marketing, technical, packaging and other materials related to the Products. Use of the Marks shall comply with Netscape's then-current trademark usage guidelines. Licensee need not use the Marks in any country in which their connotation is offensive and will consult with Netscape as to the foreign translation of the Marks so that Netscape can ensure uniformity of use. Licensee shall clearly indicate Netscape's ownership of the Marks. All use of the Marks shall inure to Netscape's benefit. Neither Licensee nor its distributors shall register any Netscape trademarks, or trademarks, trade names or domain names confusingly similar to Netscape trademarks, trade names or domain names without Netscape's express prior written consent. Upon Netscape's request from time to time, Licensee shall provide Netscape with copies of Licensee Products bearing the Marks, and Licensee and distributors shall suspend use of the Marks if Netscape reasonably deems the quality of the use to be inferior until Licensee and any such distributor have taken such steps as Netscape may reasonably require to correct the quality deficiencies. 4. Fees; Payments. Licensee shall pay Netscape the Prepayment set forth on Attachment A in accordance therewith. For each $1.00 of fees due up to the Prepayment, $1.00 is credited against the Prepayment. Following depletion of the Prepayment, fees for the Products will be paid quarterly net 15 days after Licensee's submission of quarterly reports to Netscape pursuant to Section 5. Upon exhaustion of the Prepayment, Licensee shall pay to Netscape the per copy fees set forth on Attachment A for each Product or Update license granted by Licensee or distributors to End Users. License fee will accrue in the applicable quantity upon: (a) the initial date of Licensee's internal use of any Product; (b) distribution by Licensee of a copy of a Product to a distributor or End User; or (c) authorization by Licensee for an End User to increase the authorized number of copies. Licensee shall pay Netscape such license fees accrued during each quarter within 15 days after Licensee's submission of quarterly reports to Netscape pursuant to Section 5 and each such payment shall reference such quarterly report. All payments shall be made in U.S. dollars at Netscape's address as indicated herein or otherwise notified by Netscape. Past due amounts shall bear interest at the rate of 1% per month. All fees are exclusive of taxes, withholdings, duties or levies, however designated or computed and Licensee shall be responsible therefor except for taxes based on Netscape's net income. In lieu thereof, Licensee shall provide to Netscape a valid tax or other levy exemption certificate acceptable to the taxing or other levying authority. Should Licensee fail to provide Netscape with timely reports, then, regardless of Licensee's actual rate of depletion of the Prepayment, one quarter of Licensee's Prepayment shall be deemed depleted following the passage of one quarter of the Initial Term; 1/2 of Licensee's Prepayment shall be deemed depleted following the passage of one half of the Initial Term; three quarters of Licensee's Prepayment shall be deemed depleted following the passage of 3/4 of the Initial Term; and Licensee's entire Prepayment shall be deemed depleted following the passage of the Initial Term. All payments after exhaustion of Prepayment shall accompany the monthly reports. VASCO Data Security, Inc. OEM 031297ttk CONFIDENTIAL Rev 022197 3 4 5. Reports; Audit. Licensee and its distributors shall maintain accurate records of End Users, including the name and address of each End User, the specific platforms distributed to each End User, and any further information as Netscape may from time to time reasonably request. Licensee shall report to Netscape within 45 calendar days after the end of each quarter the part number and quantity of Product licenses granted during such prior quarter for distribution hereunder and internal use, including zip/postal code and/or country therefor. In addition, Licensee and its distributors shall maintain all other data reasonably required for verification of Licensee's and each distributor's compliance with the terms hereof, including all information reasonably requested by Netscape, and Netscape may conduct up to one audit per year to verify compliance with this Agreement, which shall be conducted at Netscape's expense unless the results establish that inaccuracies in Licensee's reports have resulted in underpayment to Netscape of more than 5% of the amount actually due, in which case Licensee shall pay all amounts due and bear the expense of the audit. 6. Support. Licensee shall provide all front-line technical support to End Users in accordance with Netscape's then-current OEM support terms and conditions. Licensee shall employ at least 2 fully trained full time support personnel and provide support 5 days a week during local business hours. Licensee agrees that any documentation or packaging distributed by Licensee shall conspicuously state that End Users must call Licensee for technical support for the Products. Netscape will have no obligation to furnish any assistance, information or Documentation to any End User, and Licensee will cooperate with Netscape to ensure that End Users do not contact Netscape directly. Netscape shall provide back-end telephone assistance to Licensee in accordance with Netscape's then-current OEM support terms and conditions during the term for which Netscape has received payment therefor. 7. Distribution. (a) Licensee shall and shall cause its distributors to comply with all then-current applicable laws, regulations and other legal requirements in its performance of this Agreement, including without limitation: (i) all applicable export laws, rules and regulations of any agency of the U.S. Government or other applicable agencies; (ii) the U.S. Foreign Corrupt Practices Act; and (ii) all applicable laws, rules and regulations to preclude the acquisition of unlimited rights in technical data, software and documentation provided with the Products to a governmental agency. Licensee shall ensure the inclusion of appropriate notices required by the U.S. Government agencies or other applicable agencies. (b) Prior to the distribution of any Product to a distributor, Licensee or the distributing distributor shall enter into an enforceable written agreement with such distributor ("Distributor Agreement") that (i) requires such distributor to comply with the relevant terms hereof, (ii) expressly names Netscape as an intended third party beneficiary with the right to rely on and directly enforce the terms thereof, and (iii) disclaims any warranty obligations of Netscape and/or liability of Netscape thereunder. Neither Licensee nor any distributor shall sublicense or otherwise distribute the Products or Documentation to End Users except pursuant to a written sublicense agreement ("End User License Agreement") that contains terms and conditions not inconsistent with and no less restrictive than the terms and conditions set forth in Netscape's then-current end user license agreement provided with the applicable Product. Licensee and its distributors shall use commercially reasonable efforts to enforce each Distributor Agreement and End User License Agreement with at least the same degree of diligence used in enforcing similar agreements with others. Licensee and distributors shall notify Netscape of any breach or suspected breach of a material obligation under a Distributor Agreement or an End User License Agreement which comes to their attention. In addition, Licensee and distributors will cooperate with Netscape in any legal action to prevent or stop unauthorized use, reproduction or distribution of Products or Documentation (c) This is a nonexclusive relationship, and each party agrees that the other may enter into similar arrangements with third parties. Licensee shall and shall cause its distributors to treat all Products at least as favorably as it treats any competitive products it distributes. Neither Licensee nor distributors shall market or promote any Product or any other product in a manner that states or implies that the Product is inferior or secondary to any other product. For example, Licensee and its distributors shall not market or promote any competitive product as "preferred," "premier," "primary" or the like as compared to any Product. (d) Upon 30 days written notice that Netscape is required by a supplier to cease and to cause its licensees to cease reproduction and distribution of a particular revision of any Product, Licensee and distributors shall cease such activities, provided Netscape replaces such affected Product with a functionally equivalent Product as soon as commercially practicable. (e) Netscape agrees to assist Licensee in establishing relationships with Netscape's North American value added reseller customers ("VARs") by (i) providing exposure for Licensee in Netscape's special web site for VARs and (ii) at Licensee's expense, targeting mailings to vertically select VARs and including select Licensee's materials (including AccessKey II demo package) in a future edition of Netscape's Moz Mail kit for VARs. 8. Proprietary Rights. Title to and ownership of all copies of the Products and Documentation whether in machine-readable or printed form, and including without limitation derivative works, compilations, or collective works thereof and all related technical know-how and all rights therein are and shall remain the exclusive property of Netscape or its suppliers. Except for the rights expressly granted to Licensee hereunder, Netscape reserves for itself all other rights in and to the Products and Documentation Licensee and distributor shall not take any action to jeopardize, limit or interfere in any manner with Netscape's ownership of or rights with respect to the Products and Documentation. Further, Licensee or its distributors shall not remove or alter any trademark, copyright or other proprietary notices, legends, symbols, or labels appearing on the Products and/or Documentation delivered to Licensee and Licensee shall reproduce such notices on all copies of the Products and/or Documentation made hereunder. 9. Confidentiality. "Confidential Information" shall mean this Agreement and all information a party discloses to the other which has been either (i) characterized in writing as confidential at the time of its disclosure or (ii) orally characterized as confidential at the time of disclosure and reduced to writing and marked "Confidential" within 30 days of disclosure, except for information which the receiving party can demonstrate: (a) is previously rightfully known to the receiving party without restriction on disclosure; (b) is or becomes, from no act or failure to act on the part of the receiving party, generally known in the relevant industry or public domain; (c) is disclosed to the receiving party by a third party as a matter of right and without restriction on disclosure; or (d) is independently developed by the receiving party without access to the Confidential Information. Each receiving party shall at all times, both during the term hereof and for a period of at least 3 years after termination, keep in confidence all the disclosing party's Confidential Information using a standard of care the receiving party uses with its own information of this nature, but in no event less 031297ttk Rev 022197 4 5 than reasonable care. The receiving party shall not use the disclosing party's Confidential Information other than in the course of its duties hereunder. Without the prior written consent of the disclosing party, the receiving party shall not disclose the disclosing party's Confidential Information except on a "need to know" basis to an employee or contractor under binding obligations of confidentiality substantially similar to those set forth herein. If a receiving party is legally compelled to disclose any of the disclosing party's Confidential Information, then, prior to such disclosure, the receiving party will (x) assert the privileged and confidential nature of the Confidential Information and (y) cooperate fully with the disclosing party in protecting against any such disclosure and/or obtaining a protective order narrowing the scope of such disclosure and/or use of the Confidential Information. In the event such protection is not obtained, the receiving party shall disclose the Confidential Information only to the extent necessary to comply with applicable the legal requirements. 10. Limited Warranty. Netscape warrants only to Licensee that the Products when properly installed and used will substantially conform to the functional specifications set forth in the Documentation in effect when the Products are delivered to Licensee. Netscape's warranty and obligation shall extend for a period of 90 days ("Warranty Period") from the date Netscape first delivers the Products to Licensee. All warranty claims not made in writing or not received by Netscape within the Warranty Period shall be deemed waived. Netscape's warranty is solely for the benefit of Licensee, who has no authority to extend this warranty to any other person or entity. THE EXPRESS WARRANTY SET FORTH IN THIS SECTION CONSTITUTES THE ONLY WARRANTY MADE BY NETSCAPE. NETSCAPE MAKES NO OTHER REPRESENTATION OR WARRANTY OF ANY KIND, WHETHER EXPRESS OR IMPLIED (EITHER IN FACT OR BY OPERATION OF LAW), WITH RESPECT TO THE PRODUCTS OR DOCUMENTATION. NETSCAPE EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES OR CONDITIONS INCLUDING THOSE OF TITLE, MERCHANTABILITY, NONINFRINGEMENT AND FITNESS FOR A PARTICULAR PURPOSE. NETSCAPE DOES NOT WARRANT THAT THE PRODUCTS OR DOCUMENTATION ARE ERROR-FREE OR THAT OPERATION OF THE PRODUCTS WILL BE SECURE OR UNINTERRUPTED AND DISCLAIMS ANY AND ALL LIABILITY ON ACCOUNT THEREOF. THE ABOVE LIMITATION SHALL APPLY TO THE EXTENT ALLOWED BY APPLICABLE LAW. Netscape shall have no obligation under the foregoing warranty for any nonconformance caused by: (a) the incorporation, attachment or engagement of any attachment, feature, program, or device, other than by Netscape, to the Products or any part thereof; (b) accident, transportation, neglect or misuse; alteration, modification, or enhancement of the Products other than by Netscape; (c) failure to provide an installation environment recommended for the Products; (d) use of supplies or materials not meeting Netscape specifications; (e) use of the Products for other than the intended purpose; (f) use of the Products on any systems other than the specified hardware platform for such Products; (g) Licensee's use of defective media or defective duplication of the Products; or (h) Licensee's failure to incorporate any Update previously released by Netscape which corrects such nonconformance. If Licensee provides Netscape with written notice of a failure under this limited warranty during the Warranty Period, Netscape will use reasonable efforts to correct promptly, at no charge to Licensee, any such errors or failures. This is Licensee's sole and exclusive remedy for breach of warranty hereunder. 11. Indemnity. (a) Netscape shall defend or settle, at its expense and option, any and all claims, losses, damages, expenses and costs (including attorneys' fees and costs) relating to any use, reproduction or distribution by Licensee of the Netscape-owned portion of the Products hereunder directly infringes any valid copyright or trade secret. Netscape will pay resulting costs, damages and legal fees finally awarded against Licensee in such action which are attributable to such claim provided that: (i) Licensee promptly notifies Netscape in writing of any such claim; (ii) Netscape has sole control of the defense and all related settlement negotiations, and (iii) Licensee cooperates with Netscape, at Netscape's expense, in defending or settling such claim. Should a Product become, or be likely to become in Netscape's opinion, the subject of an infringement claim described above, Netscape may (I) procure for Licensee the right to continue using the same or (II) replace or modify it to make it non-infringing. Netscape shall have no obligation or liability for, and Licensee shall defend, indemnify and hold Netscape harmless from and against any claim based upon: (A) use of other than the then current, unaltered version of the Product, unless the infringing portion is also in the then current, unaltered release; (B) use, operation or combination of Products with non-Netscape programs, data, equipment or documentation if such infringement would have been avoided but for such use, operation or combination; (C) Licensee's or its agent's continued use or distribution of the Product after Netscape has notified Licensee that (i) Netscape believes such use or distribution may result in infringement; and (ii) Netscape is using its commercially reasonable best efforts to make the Netscape-owned portion of the Product non-infringing; (D) compliance with Licensee's designs, specifications or instructions; (E) any modifications or marking of the Products not specifically authorized in writing by Netscape; (F) any unauthorized use of any Netscape intellectual property; or (G) third party software incorporated in the Products. The foregoing states the entire liability of Netscape and the exclusive remedy of Licensee with respect to infringement of any intellectual property right, whether under theory of warranty, indemnity or otherwise. (b) Licensee shall indemnify, hold harmless and, at Netscape's request, defend Netscape and/or its suppliers from and against any and all claims, liabilities, losses, damages expenses and costs (including attorneys' fees and costs) relating to (i) Licensee's failure to include in each Distributor Agreement or End User License Agreement the contractual terms required to be included therein hereunder, or (ii) Licensee's use, distribution or reproduction of the Products including, without limitation, any claims, liabilities, losses, damages, expenses and costs relating to defective reproduction of or the use of defective media in the reproduction of Products, claimed product liability, breach of warranty or support obligations or infringement or misappropriation of intellectual property rights, except to the extent such is covered under Section 11(a). Licensee will pay resulting costs, damages and legal fees finally awarded against Netscape in such action which are attributable to such claim. 12. Limitation of Liability. (a) TO THE EXTENT ALLOWED BY APPLICABLE LAW, IN NO EVENT SHALL NETSCAPE OR ITS SUPPLIERS BE LIABLE FOR ANY LOSS OF PROFITS, LOSS OF BUSINESS, LOSS OF USE OR DATA, INTERRUPTION OF BUSINESS, OR FOR INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, EVEN IF NETSCAPE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. (b) EXCEPT AS SET FORTH IN THE INDEMNITY SECTION SET FORTH ABOVE, IN NO EVENT WILL NETSCAPE OR ITS SUPPLIERS BE LIABLE FOR ANY CLAIM AGAINST LICENSEE BY ANY THIRD PARTY. (c) IN NO EVENT SHALL NETSCAPE OR ITS SUPPLIERS BE LIABLE FOR (I) ANY REPRESENTATION OR WARRANTY MADE TO ANY THIRD PARTY BY LICENSEE, ANY DISTRIBUTOR OR THEIR RESPECTIVE AGENTS; (II) FAILURE OF THE PRODUCTS TO PERFORM EXCEPT AS, AND TO THE EXTENT, OTHERWISE EXPRESSLY PROVIDED HEREIN; (III) FAILURE OF THE PRODUCTS TO PROVIDE SECURITY; OR (IV) THE VASCO Data Security, Inc. OEM 031297ttk CONFIDENTIAL Rev 022197 5 6 RESULTS OR INFORMATION OBTAINED OR DECISIONS MADE BY END USERS OF THE PRODUCTS OR THE DOCUMENTATION. THE REMEDIES PROVIDED HEREIN ARE LICENSEE'S SOLE AND EXCLUSIVE REMEDIES. (d) NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY AND EXCEPT FOR DEATH OR PERSONAL INJURY CAUSED BY THE NEGLIGENCE OF NETSCAPE, NETSCAPE'S ENTIRE LIABILITY TO LICENSEE FOR DAMAGES CONCERNING PERFORMANCE OR NONPERFORMANCE BY NETSCAPE OR IN ANY WAY RELATED TO THE SUBJECT MATTER OF THIS AGREEMENT, AND REGARDLESS OF WHETHER THE CLAIM FOR SUCH DAMAGES IS BASED IN CONTRACT OR IN TORT, SHALL NOT EXCEED THE AMOUNT RECEIVED BY NETSCAPE FROM LICENSEE DURING THE PREVIOUS 12 MONTHS FOR THE PRODUCT GIVING RISE TO SUCH CLAIM. 13. Termination. This Agreement may be terminated: (a) by either party upon 30 days written notice if the other party materially defaults in its obligations hereunder and does not cure such default within the 30 day notice period; (b) immediately by Netscape in the event Licensee attempts to derive the source code of the Products or breaches its confidentiality obligations hereunder; or (c) automatically upon notice from Netscape if Licensee ceases to do business in the normal course, becomes or is declared insolvent or bankrupt, is the subject of any proceeding relating to its liquidation or insolvency which is not dismissed within 90 calendar days, or makes an assignment for the benefit of its creditors. Immediately upontermination or expiration hereof, all licenses for the Products and Documentation granted hereunder shall terminate, and Licensee shall deliver to Netscape or destroy all copies of the Products and Documentation in its or its distributors' possession or control, and shall furnish to Netscape an affidavit signed by an officer of Licensee certifying such delivery or destruction; provided that: (i) all End User License Agreements which have been properly granted by Licensee or any distributor hereunder prior to termination shall survive; and (ii) in the event this Agreement is terminated for any reason other than Licensee's default and provided Licensee fulfills its obligation specified herein with respect to such items, Licensee may continue to use and retain copies of the Products and Documentation to the extent necessary to support Products rightfully distributed to End Users by Licensee, directly or through distributors, prior to termination hereof. Termination by either party shall not act as a waiver or release of any breach hereof or any liability hereunder. Except where specified otherwise, the rights and remedies granted to a party hereunder are cumulative and in addition to, and not in lieu of, any other rights or remedies which the party may possess at law or in equity. Within 30 calendar days after termination, Licensee shall pay to Netscape all sums then due and owing. Sections 3(b), 4, 5, 8, 9, 10, 11, 12, 13, 14, 15 and 16 shall survive any expiration or termination of this Agreement. 14. Notice. Any notice required or permitted hereunder shall be in English, in writing and shall be deemed to be properly given upon the earlier of (a) actual receipt by the addressee (including facsimile or e-mail) or (b) 5 business days after deposit in the mail, postage prepaid, when mailed by registered or certified airmail, return receipt requested, or (c) 2 business days after being sent via private industry courier to the respective parties at the addresses set forth in the Order Form or to such other person or address as the parties may from time to time designate in a writing. Notices to Netscape shall be to the attention of the Legal Department, Netscape Communications Corporation, 501 East Middlefield Road, Mountain View, California 94043. Notices to Licensee shall be to the attention of Legal Department, VASCO Data Security, Inc., 1919 South Highland Avenue, Suite 118C, Lombard, Illinois 60148. 15. Miscellaneous. (a) Neither party's waiver of a breach or delay or omission to exercise any right or remedy shall be construed as a waiver of any subsequent breach or as a waiver of such right or remedy. (b) This Agreement may be amended only by a writing signed by both parties. (c) Licensee may not assign this Agreement or any part thereof without the prior written consent of Netscape, and any attempt to assign (by operation of law or otherwise) this Agreement or any part thereof without such consent shall be null and void. (d) This Agreement shall be governed by and construed under the laws of the State of California, U.S.A., without reference to its conflicts of law provisions. (e) Any dispute regarding this Agreement shall be subject to the exclusive jurisdiction of the applicable court in the State of California, and the parties agree to submit to the personal and exclusive jurisdiction and venue thereof. Notwithstanding the foregoing, Netscape reserves the right to invoke the jurisdiction of any competent court to remedy or prevent violation of any provision under this Agreement relating to payment, Netscape Confidential Information or Netscape intellectual property. (f) This Agreement will not be governed by the United Nations Convention of Contracts for the International Sale of Goods. (g) This Agreement creates no agency, partnership, joint venture, or employment relationship and neither Licensee nor its agents have any authority to bind Netscape in any respect whatsoever. (h) The section headings herein are used for convenience only and shall have no substantive meaning. (i) If the application of any provision hereof to any particular facts shall be held to be unenforceable by any competent court, then (x) the enforceability of such provision as applied to any other facts and the validity of other provisions hereof shall not be affected and (y) such provision shall be reformed without further action by the parties hereto only to the extent necessary to make such provision valid and enforceable when applied to the particular facts. (j) Each party shall be excused from any delay or failure in performance hereunder, except the payment of monies by Licensee to Netscape, caused by reason of any occurrence or contingency beyond its reasonable control. The obligations and rights of the party so excused shall be extended on a day-to-day basis for the period of time equal to that of the underlying cause of the delay. (k) This Agreement constitutes the entire agreement between the parties concerning the subject matter hereof and supersedes all proposals or prior agreements whether oral or written, and all communications between the parties relating to the subject matter of this Agreement and all past courses of dealing or industry custom. The terms and conditions of this Agreement shall prevail over any conflicting purchase order or other written instrument submitted by Licensee. (l) This Agreement is written in the English language only, which language shall be controlling in all respects. (m) Netscape may use Licensee's name in a list of customer references and/or provide Licensee's name and the names of the Products licensed by Licensee to third parties. Licensee agrees that Netscape may refer to Licensee, its products and the Netscape-Licensee relationship on the Netscape web site. (n) This Agreement may be executed in any counterparts or by facsimile, each of which when so executed shall be deemed an original and all of which taken together shall constitute one and the same agreement. (o) If any dispute arises under this Agreement, the prevailing party shall be reimbursed by the other party for any and all legal fees and costs associated therewith. (p) The parties will issue a joint press release announcing the relationship created hereunder. The parties shall mutually agree on any press release issued by either party regarding the licensing of the Product. 16. Licensee Outside the U.S. In the event Licensee is located outside the United States, the terms and conditions in this Section 16 apply: (a) If Licensee is located in a Member State of the European Union, Licensee (i) shall not actively market or solicit orders outside the Territory, (ii) shall be entitled to sublicense the Products, subject to the terms and conditions contained herein, to End Users located outside of the Territory but within the European Union, which are the result of unsolicited orders and (iii) acknowledges that its primary 031297HK Rev 022197 VASCO Data Security, Inc. OEM CONFIDENTIAL 6 7 focus shall be on End Users located in the Territory; (b) If any applicable law requires Licensee to withhold amounts from any payments to Netscape hereunder, (i) Licensee shall effect such withholding, remit such amounts to the appropriate taxing authorities and promptly furnish Netscape with tax receipts evidencing the payments of such amounts, and (ii) the sum payable by Licensee upon which the deduction or withholding is based shall be increased to the extent necessary to ensure that, after such deduction or withholding, Netscape receives and retains, free from liability for such deduction or withholding, a net amount equal to the amount Netscape would have received and retained in the absence of such required deduction or withholding; (c) Les parties aux presentes confirment leur volonte que cette convention de meme que tous les documents y compris tout avis qui s'y rattache, soient rediges en langue anglaise (translation: The parties confirm that this Agreement and all related documentation will be in the English language"). 031297HK Rev 022197 VASCO Data Security, Inc. OEM CONFIDENTIAL 7
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                                                                    EXHIBIT 10.2


CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.  THE OMITTED PORTIONS, MARKED BY AN **, HAVE BEEN
SUBMITTED TO THE COMMISSION WITH THE CONFIDENTIAL TREATMENT REQUEST.


                       DEVELOPMENT AND LICENSE AGREEMENT

                                 by and between

                          VASCO Data Security, Inc. 

                                     and

                               SHIVA Corporation 




1


Shiva Agmnt.doc
8/11/97
LH
   2

                       DEVELOPMENT AND LICENSE AGREEMENT

This Development and License Agreement ("Agreement") is made and entered into
effective June 5, 1997 (the "Effective Date") by and between VASCO Data
Security, Inc., an Illinois corporation with a principal place of business at
Lombard, Illinois ("VASCO") and SHIVA Corporation, a Massachusetts corporation
with a principal place of business at 28 Crosby Drive, Bedford, Massachusetts
("SHIVA").

WHEREAS,

         SHIVA has developed and owns certain hardware and software technology
relating to remote access and dial-up networking, and is the licensee of
certain authentication and accounting software related thereto
("AccessManager"); and

         VASCO has developed and owns certain hard token security products (the
"Vasco token"); and

         VASCO wishes SHIVA to integrate the VASCO token into the
AccessManager, and to develop additional features and functionality for
AccessManager; and

         VASCO wishes to sublicense the AccessManager to its customers under
its own trade name; and

         The parties have executed a Memorandum of Understanding dated as of
December 17, 1996 ("MOU") with respect to the foregoing and, pursuant to the
MOU, VASCO has paid SHIVA a good faith deposit of ** ;

NOW, THEREFORE, in consideration of the mutual promises and covenants set forth
below, the parties agree as follows:

1. Definitions.  As used in this Agreement, these terms shall have the
following definitions:

1.1      "Affiliate" means, with respect to a company ("Company"), a second
company which controls, is controlled by, or is under common control with such
Company, where "control", means beneficial ownership of a majority of voting
securities.

1.2      "Binary Code" means the form of computer software which is
substantially or entirely in binary form and directly executable by a computer
after suitable processing but without intervening steps of compilation or
assembly of such software prior to execution.


1.3      "Confidential Information" shall mean any of the following disclosed
by either party to the other hereunder: (i) the Specifications and the SHIVA
and VASCO Technologies and any trade secrets related to any of the foregoing,
including but not limited to any information relating to either party's product
plans, designs, costs, prices and names, finances, marketing plans, business
opportunities, personnel, research, development or know-how; and (ii) any
information designated by the disclosing party as confidential in writing or,
if disclosed orally, reduced to writing within thirty (30) days; provided,
however, that Confidential Information" shall not include information that: (i)
is or becomes generally known or available by publication, commercial use or
otherwise through no fault of the receiving party; (ii) is known and has been
reduced to tangible form by the receiving party at the time of disclosure and
is not subject to restriction; (iii) is independently developed or learned by
the receiving party; (iv) is lawfully obtained from a third party who has the
right to make such disclosure; or (v) is released for publication by the
disclosing party in writing.



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   3


1.4      "Error Correction" means either a modification made or added to the
SHIVA Technology by SHIVA to establish substantial conformity to the applicable
Specifications or, in lieu of such modification, a commercially reasonable
procedure that eliminates the practical adverse effect of such nonconformity.

1.5      "Intellectual Property Rights" means, to the extent owned or
controlled by the granting or transferring Party in any country, all relevant
(i) copyrights, (ii) mask work rights, (iii) rights to exploit trade secret and
other non-public or confidential information, including the right to use and
exploit Confidential Information (subject to applicable obligations to keep
such information in confidence), (iv) rights under Patents, and (v) rights
under any other form of intellectual property necessary to the conduct, product
or result permitted by the express terms of the license granted.

1.6      "SHIVA Software" means any software or other works of authorship
included within the SHIVA Technology, whether created or licensed by SHIVA.

1.7      "SHIVA Technology" means the SHIVA hardware and software technology
relating to digital modems, including software licensed by SHIVA relating to
authentication and accounting.

1.8      "Source Code" means that form of computer software which is typically
created and understood by programmers and which must be translated into so
called "binary" or "object" format to permit direct execution by a computer.

1.9      "Specifications" mean the functional and technical specifications
described in Exhibit B.

1.10     "Updates" means modifications or enhancements to the Technology, other
than Error Corrections.

1.11     "VASCO Technology" means the VASCO hardware and software relating to
computer access security.

2. Product Integration.



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2.1        SHIVA Obligations.

       2.1.1 SHIVA shall use commercially reasonable efforts to accomplish its
             responsibilities, including, but not limited to, providing the
             required personnel to carry out the work to design, develop,
             debug, test and maintain the Shiva Technology in accordance with
             the applicable Specifications and providing the deliverables for
             which it is responsible in accordance with this Agreement.

       2.1.2 SHIVA shall provide VASCO with such technical support by qualified
             SHIVA personnel as VASCO may reasonably request in connection with
             VASCO's efforts to understand the Shiva Technology and to support
             such technology on behalf of its customers.  The level of support
             shall be no less than that provided to other similarly-situated
             customers who have contracted for similar levels of support.

       2.1.3 SHIVA shall develop the specifications and software code to add
             the features designated in Exhibit B for Version 2.0 of
             AccessManager, which shall be deemed to be included in the SHIVA
             Technology.  Version 2.0 of AccessManager shall be deemed accepted
             by VASCO as of the date of delivery, unless VASCO provides written
             notice to SHIVA within 10 business days after delivery of the
             Binary Code version to VASCO that Version 2.0 does not materially
             conform to the specifications.  Any such notice shall specify the
             manner in which the Shiva Technology does not so conform.  SHIVA
             shall have 15 business days after receipt of notice to make
             necessary Error Corrections to cause the Shiva Technology to
             conform to the 




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             specifications.  Expiration of the 15-day period
             without notice of a nonconformance, or correction of a
             nonconformance by Shiva, shall constitute Final Acceptance.
       
       2.1.4 SHIVA shall assist VASCO, during the Term, by providing (a) Error
             Corrections for the Technology to the extent SHIVA is aware of any
             such error and knows how to correct it and (b) in other cases,
             reasonable support of VASCO's Error Correction efforts.

       2.1.5 Limited Warranty. THE TECHNOLOGY IS TO BE LICENSED ON AN "AS IS"
             BASIS AND SHIVA DISCLAIMS ALL WARRANTIES WITH RESPECT THERETO,
             EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE WARRANTIES OF
             MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

       2.1.6 At least 90 days before any new release, SHIVA shall notify VASCO
             of any Enhancements or changes to the Shiva Technology.

       2.1.7 When available, SHIVA shall provide to VASCO any API it has
             created or had created in order to enable VASCO to interface with
             the Shiva Technology.

       2.1.8 If SHIVA becomes unwilling or unable to support the Shiva
             Technology due to its failure to continue in business as a going
             concern, or its failure to continue the product line represented
             by the Shiva Technology related to this Agreement, then Universal
             Networks Company Limited shall assume SHIVA's support obligations
             then in force, in accordance with the agreement attached as
             Exhibit C. In the event that Universal Networks Company Limited is
             unwilling or unable to fulfill its support obligations, then VASCO
             shall be entitled to access to the source code of the Shiva
             Software held in escrow in accordance with the escrow agreement
             described in Exhibit D. VASCO shall bear all costs associated with
             setting up and maintaining this escrow account.

2.2    VASCO Obligations.

       2.2.1 VASCO shall, upon request by SHIVA, permit SHIVA to become an
authorized reseller of VASCO token and security products in accordance with a
separate agreement to be negotiated between the parties.

       2.2.2 VASCO shall reimburse SHIVA for all reasonable travel expenses (in
accordance with VASCO's standard travel and expense policy) incurred by
SHIVA personnel for training presentations and other sales activities
undertaken by SHIVA at VASCO's request.

       2.2.3 VASCO shall ensure that an adequate number of employees are
trained in the Shiva Technology in order to fulfill its obligation to provide
first-level support to its customers.  For problems beyond first-level support
requiring technical consultation with SHIVA, VASCO will ensure that its
customers provide sufficiently detailed information to enable SHIVA to identify
and attempt to correct any errors in the SHIVA Technology.

       2.2.4 VASCO shall pay royalties to SHIVA in accordance with the
provisions of Exhibit A.

       2.2.5 VASCO shall provide to Shiva two Access Keys for each Shiva Access
Manager sold at a cost of **, which shall not exceed ** per Access Key.

2.3    Project Management. SHIVA and VASCO will each designate a project
representative (the "Representatives) to coordinate their business relationship
in accordance with this Agreement. Each Representative will (i) provide access
to appropriately qualified personnel to participate in the planning and
development and to answer questions; (ii) arrange access to the party's
facilities and equipment if required 




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for the other party's performance; and (iii) consult by phone or email with the
Representative of the other party to this Agreement as reasonably necessary to
review the activities accomplished to date, the activities planned, and any
problems which have occurred or which are anticipated. A party may change its
Representative by giving written notice to the other party.

3. Proprietary Rights. The SHIVA Technology and Error Corrections to the SHIVA
Technology, and all Intellectual Property Rights therein, are and remain
the property of SHIVA or its licensor, subject to the license rights granted to
VASCO in this Agreement. VASCO shall have no right, title or interest in and to
any improvements, modifications, derivative works or enhancements to the SHIVA
Technology.

4. SHIVA Representations and Warranties. SHIVA represents and warrants that
neither the Shiva Technology nor the exercise by VASCO of its rights with
respect thereto does or will, to the best of SHIVA's knowledge, infringe the
Intellectual Property Rights of any third party in any jurisdiction.

5. SHIVA Licenses to VASCO. Subject to the terms of this Agreement, SHIVA
hereby grants to VASCO a nontransferable, nonexclusive, worldwide license to
(a) sell, sublicense, and distribute present and future VASCO Technology
incorporating the SHIVA Technology in Binary Code, but not Source Code, form in
conjunction with such VASCO Technology.  VASCO may exercise such license rights
both directly and through its VARs, distributors, or other third party
sublicensees, subject to the restrictions set forth in Section 10 (Confidential
Information) and provided that such third parties enter into a non-disclosure
agreement with VASCO to the extent required by Section 10.  Except to the
extent permitted by this section, VASCO shall not sublicense the SHIVA
Technology.

6. Export Control.  Neither party shall export, directly or indirectly, any
products or technical data acquired or to be provided under this Agreement, or
the direct product of any such technical data, to any country for which the
United States export statutes and regulations, at the time of export, require
an export license or other government approval, without first obtaining such
license or approval.

7. Payment. VASCO shall pay SHIVA as consideration for the licenses granted and
the development and delivery of the SHIVA Technology the sums identified in
Exhibit A (the "Fees"). VASCO has previously paid SHIVA the Deposit and shall
pay SHIVA the balance of the total Fees according to Exhibit A. All payments
due hereunder shall be made in United States dollars.  Interest at the rate of
1.5% per month (or the greatest amount permitted by law, whichever is less)
shall accrue on all balances unpaid more than 30 days after their due date.

8. Waiver of Consequential Damages: Limitation on Damages. NEITHER PARTY SHALL
BE LIABLE TO THE OTHER FOR CONSEQUENTIAL, SPECIAL, INDIRECT OR INCIDENTAL
DAMAGES, ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, EVEN IF ADVISED
OF THE POSSIBILITY THEREOF IN ADVANCE. IN NO EVENT SHALL EITHER PARTY'S
LIABILITY TO THE OTHER HEREUNDER EXCEED THE AGGREGATE FEES PAID OR OWED TO
SHIVA HEREUNDER.

9. Indemnification.

9.1    By SHIVA. SHIVA agrees to indemnify and hold harmless VASCO, its
officers, directors, employees and agents against any claims, actions or
demands alleging either that the SHIVA Technology or the exercise by VASCO of
its rights thereto, in any way infringes the Intellectual Property Rights of
any third parties; provided, that SHIVA shall have no obligation as to claims
of infringement where SHIVA lacked knowledge of such claim or the factual basis
therefore as of the Effective Date. This obligation is contingent upon: (i)
VASCO giving prompt written notice to SHIVA of any such claim, action or
demand, (ii) VASCO allowing SHIVA to control the defense and related 
settlement negotiations and (iii) VASCO fully assisting, at SHIVA's expense, 
in the defense. SHIVA shall have no obligation hereunder for any infringement 
caused solely by VASCO's modification of the SHIVA Technology (unless such 
modification 





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was made in accordance with SHIVA's instructions) or VASCO's combination
thereof with products or equipment not supplied by SHIVA.

9.2    By VASCO. VASCO agrees to indemnify and hold harmless SHIVA, its
officers, directors, employees and agents against any claims, actions or
demands alleging that VASCO's modification of the SHIVA Technology (unless such
modification was made in accordance with SHIVA's instructions) or VASCO's
combination thereof with products or equipment not supplied by SHIVA in any way
infringes the Intellectual Property Rights of any third parties; provided, that
VASCO shall have no obligation as to claims of infringement where VASCO lacked
knowledge of such claim or the factual basis therefore as of the Effective
Date. This obligation is contingent upon: (i) SHIVA giving prompt written
notice to SHIVA of any such claim, action or demand, (ii) SHIVA allowing VASCO
to control the defense and related settlement negotiations and (iii) SHIVA
fully assisting, at VASCO's expense, in the defense.

9.3    Exchange of Information. If either party hereafter learns of a claim
that the Shiva Technology, or any portion thereof, infringes the Intellectual
Property Rights of any third party in any jurisdiction, or of the factual basis
for such a claim, it shall promptly inform the other party of the relevant
facts and circumstances. SHIVA shall thereupon undertake such commercially
reasonable efforts as are required to (i) obtain a license permitting VASCO's
continued exercise of its rights as set forth herein, (ii) modify the
Technology so as to be noninfringing and deliver such modification to VASCO, or
(iii) develop or obtain for VASCO functionally equivalent, noninfringing,
substitute technology. Immediately following receipt of any such noninfringing
modification or substitute, VASCO shall cease shipment of products based on
infringing Technology. In the event that SHIVA is unable to cure such
infringement as set forth in clauses (i), (ii) or (iii) above, it shall notify
VASCO and pay to VASCO a sum equal to all amounts paid by VASCO to the time of
notification; provided, that SHIVA shall have no payment obligation pursuant to
this clause if three (3) years have elapsed since Final Acceptance.

10. Nondisclosure of Confidential Information.

10.1   General. Each party agrees that it will not make use of, disseminate, or
in any way disclose Confidential Information to any person, firm or business,
except to the extent necessary for negotiations, discussions, and consultations
with personnel or authorized representatives of each party, counsel for
investors, banks, and underwriters, and any purpose either party may hereafter
authorize in writing. Furthermore, the existence of any business negotiations,
discussions, consultations or agreements in progress between the parties shall
not be released to any form of public media without the prior written approval
of both parties. Each party agrees that it shall treat all Confidential
Information of the other party with the same degree of care as it accords to
its own Confidential Information and each party represents that it exercises
reasonable care to protect its own Confidential Information.  Each party shall
disclose Confidential Information of the other party only to those of its
employees and subcontractors (and those of such party's Affiliates) who need to
know such information and represents that such employees have previously
agreed, either as a condition of employment or in order to obtain the
Confidential Information, to be bound by terms and conditions substantially
similar to those of this Agreement. Each party will immediately give notice to
the other party of any unauthorized use or disclosure of the Confidential
Information. The party who made the unauthorized use or disclosure agrees to
assist the other party in remedying any such unauthorized use or disclosure of
the Confidential Information.

10.2   Disclosures to Sublicensees. SHIVA recognizes that VASCO may find it
necessary to disclose Confidential Information to VASCO's third party
sublicensees in connection with VASCO's development or sale of VASCO products
embodying the SHIVA Technology; provided, that VASCO shall not make any such
disclosure to a SHIVA Competitor (as defined below). Such disclosures shall be
subject to execution of a commercially reasonable written nondisclosure
agreement which agreement shall identify SHIVA as a third party beneficiary.
VASCO shall promptly inform SHIVA of the identity of any entity to whom SHIVA's
Confidential Information is disclosed pursuant to this provision. For purposes
hereof, "SHIVA Competitor" means an entity primarily engaged in the design and
sale of integrated circuits intended for use in high 




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performance voice-band digital modem solutions. By way of illustration, but not
limitation, a company primarily engaged in the manufacture of computer systems,
routers, or board level products shall not be deemed a SHIVA Competitor.

11. Term and Termination.

11.1   Term.  The Term of this Agreement shall be 12 months from its Effective
Date  Thereafter, it shall be renewed automatically for additional 12-month
terms unless either party provides 90 days' written notice to the other, prior
to the expiration of the then-current Term, that the Agreement be terminated.
Notwithstanding the termination or expiration of this Agreement for any reason,
all rights and obligations of the parties set forth in Sections 3 ("Proprietary
Rights"), 4 ("SHIVA Representations and Warranties"), 5 ("SHIVA License to
VASCO"), 6 (Export Control), 8 ("Waiver of Consequential Damages; Limitation on
Damages"), 9 ("indemnification"), 10 ("Nondisclosure of Confidential
Information"), and 12 ("General Provisions") shall survive.

11.2   Termination For Cause. Subject to cure or remedy of an event of breach
listed below by a party (the "Breaching Party"), as described in Section 11.3
("Right to Cure"), the other party shall have the right to terminate this
Agreement and its further obligations hereunder if the Breaching Party:

       (a) is involved in any voluntary or involuntary bankruptcy proceeding or
any other proceeding concerning insolvency, dissolution, cessation of
operations, reorganization or indebtedness or the like and the proceeding is
not dismissed within sixty (60) days;

       (b) is unable to pay its debts as they mature in the ordinary course of
business or makes a general assignment for the benefit of its creditors;

       (c) is in material breach of any provision of this Agreement; or

       (d) fails to provide reasonable adequate assurances of future
performance of its obligations under this Agreement within ten (10) days
following a demand from the other party for such assurances.

11.3     Right to Cure. Upon the occurrence of any event entitling a party to
terminate this Agreement, the terminating party may send notice of termination,
specifying the nature of the breach, to the other party. The breaching party
shall be allowed thirty (30) days following the date of such notice to cure the
problem to the non-breaching party's satisfaction. Failure to cure the problem
shall result in termination without further notice by the non-breaching party,
unless such non-breaching party extends the cure period by written notice or
withdraws the termination notice.

11.4     Return of Certain Technology. Within thirty (30) days of any
termination or expiration of this Agreement, VASCO shall either (i) pay SHIVA
all amounts due SHIVA hereunder or (ii) provide SHIVA with a certification,
signed by an authorized officer of VASCO, stating that VASCO has destroyed, and
retains no copies of, materials incorporating any portion of the SHIVA
Technology.

11.5     Termination by VASCO.   VASCO shall have the right to terminate this
Agreement upon 30 days' written notice to Shiva if Shiva enters into an OEM
agreement with a third party which VASCO reasonably believes will be
detrimental to VASCO's business.

12. General Provisions.

12.1     Notice. Any notice provided for or permitted under this Agreement will
be treated as having been given when (i) delivered personally, (ii) sent by
confirmed telex or telecopy, (iii) sent by commercial overnight courier with
written verification of receipt, or (iv) mailed postage prepaid by certified or
registered 



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mail, return receipt requested, to the party to be notified, at the
address set forth below, or at such other place of which the other party has
been notified in accordance with the provisions of this section.

                 If to VASCO:              VASCO Data Security, Inc.

                                           Lombard, Illinois
                                           Attn: John C. Haggard, President

                 If to SHIVA:              Peter Howells
                                           Shiva Corporation
                                           Spider House Peach Street
                                           Wokingham RG11 1XH
                                           United Kingdom

                 Copy to:                  General Counsel
                                           Shiva Corporation
                                           28 Crosby Drive
                                           Bedford, MA  01740
                                           USA

                                      

         Such notice will be treated as having been received upon the earlier
of actual receipt or five (5) days after posting.

12.2     Waiver.  No term or provision hereof will be considered waived by
either party, and no breach excused by either party, unless such waiver or
consent is in writing signed on behalf of the party against whom the waiver is
asserted. No consent by either party to, or waiver of, a breach by either
party, whether express or implied, will constitute a consent to, waiver of, or
excuse of any other, different, or subsequent breach by either party.

12.3     Severability. If any term of this Agreement is held invalid or
unenforceable for any reason, the remainder of the term shall be amended to
achieve as closely as possible the economic effect of the original term and all
other terms shall continue in full force and effect.

12.4     Governing Law. This Agreement shall be governed by and construed under
the laws of the Commonwealth of Massachusetts as applied to agreements entered
into and to be performed entirely within Massachusetts between Massachusetts
residents.  The United Nations Convention on the International Sale of Goods
shall not apply to this Agreement.

12.5     Choice of Forum. The parties hereby submit to the jurisdiction of, and
waive any venue objections against, the United States District Court for the
District of Massachusetts and the Superior and District courts of the
Commonwealth of Massachusetts, in any litigation arising out of the Agreement.

12.6     Force Majeure. Neither party will be liable for any failure or delay
in performance under this Agreement which might be due, in whole or in part,
directly or indirectly, to any contingency, delay, failure, or cause of, any
nature beyond the reasonable control of such party, including, without in any
way limiting the generality of the foregoing, fire, explosion, earthquake,
storm, flood or other weather, unavailability of necessary utilities or raw
materials, strike, lockout, activities of a combination of workmen or other
labor difficulties, war, insurrection, riot, act of God or the public enemy,
law, act, order, export control regulation, proclamation, decree, regulation,
ordinance, instructions of Government or other public authorities, or judgment
or decree of a court of competent jurisdiction (not arising out of breach by
such party of this Agreement). In the event of the happening of such a cause,
the party whose performance is so affected will give prompt, written notice to
the other party, stating the period of time the same is expected to continue,
and shall begin performing its obligations hereunder immediately after the
cause for

 


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non-performance ceases. Such delay will not be excused under this
Section for more than ninety (90) days.

12.7     Entire Agreement. This Agreement, including all attached exhibits,
constitutes the entire agreement between the parties relating to its subject
matter and supersedes all prior or simultaneous representations, discussions,
negotiations, and agreements, whether written or oral, including the MOU.

12.8     Amendment. This Agreement may be amended or supplemented only by a
writing that is signed by duly authorized representatives of both parties.

12.9     Assignment. Neither party may assign, voluntarily, by operation of law,
or otherwise, any rights or delegate any duties under this Agreement (other
than the right to receive payments) without the other party's prior written
consent.  Any attempt to assign in contravention of this provision will be
void. This Agreement will bind and inure to the benefit of the parties and
their respective successors and permitted assigns.

12.10    Relationship of the Parties. The parties to this Agreement are
independent contractors. There is no relationship of agency, partnership, joint
venture, employment, or franchise between the parties. Neither party has the
authority to bind the other or to incur any obligation on its behalf.

12.11    Publicity. Neither party shall publicize or otherwise disclose the
existence or terms of this Agreement without the prior approval of the other
party, which approval shall not be unreasonably withheld. A party may disclose
the terms of this Agreement where required by law, provided that such party
makes every reasonable effort to obtain confidential treatment or similar
protection to the fullest extent available to avoid public disclosure of the
terms of this Agreement. A party required by law to make disclosure of the
terms of this Agreement will promptly notify the other party and permit the
other party to review and participate in the application process seeking
confidential treatment.

12.12    Construction of Agreement. This Agreement has been negotiated by the
respective parties hereto and their attorneys and its language shall not be
construed for or against any party. The titles and headings are for reference
purposes only and shall not in any manner limit the construction of this
Agreement, which shall be considered as a whole.

12.13    Counterparts. This Development and License Agreement may be executed
in two counterparts, each of which shall be deemed an original, but both of
which together shall constitute one and the same instrument. If this Agreement
is executed in counterparts, no signatory hereto shall be bound until both the
parties named below have duly executed or caused to be duly executed a
counterpart of this Agreement.

12.14    Exhibits.  The following Exhibits are attached to and form a part of
this Agreement:

     Exhibit A:       Fees
     Exhibit B:       Specifications for Version 2.0 of Access Manager
     Exhibit C:       Agreement to Provide Support
     Exhibit D:       DSI Escrow Agreement

IN WITNESS WHEREOF, the parties have executed this Development and License
Agreement as of the Effective Date.






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VASCO     Data Security, Inc.                          SHIVA Corporation




- ------------------------------                     ---------------------------
Signature                                          Signature

- ------------------------------                     ---------------------------
Printed Name                                       Printed Name
                                          
- ------------------------------                     ---------------------------
Title                                              Title
                                                   
                                                   
                                                   
- ------------------------------                     ---------------------------
Date                                               Date
                                                   


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                                   EXHIBIT A
                                      Fees

Total initial payments made by VASCO pursuant to this Agreement shall be **. In
addition, VASCO shall pay to Shiva an ongoing royalty of ** on all of VASCO's
sales of the AccessManager product.

The initial payments shall be made as follows:

Amount When Paid ------ --------- Payment #1 ** R&D payment due upon signing of the Memorandum of Understanding Payment #2 ** R&D payment due upon delivery of Version 2.0 of AccessManager by Shiva Balance: ** A marketing incentive payment due upon execution of this agreement
Thereafter, for each AccessManager sold by VASCO, VASCO shall pay to Shiva an amount equal to ** of which is for royalties and ** of which is attributable to ongoing support obligations. Payments shall be quarterly in arrears, within 10 days after the end of each quarter, and shall be accompanied by a report showing the quantity sold and the amount due to Shiva. In order for VASCO to fulfill its license obligations with regard to that portion of the ** balance of the initial payments based on sales made by Shiva, Shiva shall provide to VASCO, within 10 days after the end of each calendar quarter, a report showing the quantity of AccessManager licensed to customers (including the names and addresses of those customers in order to facilitate shipment of tokens to the customers by VASCO) by Shiva. VASCO's royalty payment shall be based on Shiva's list price for AccessManager. Shiva agrees that for each copy of Version 2.0 (or higher) of AccessManager sold, it shall bundle two of VASCO's Access Keys, which VASCO shall provide to Shiva at **. VASCO shall provide instructions enabling customers to install the Access Keys on their systems. Audit Rights. Shiva shall have the right, not more than once per year, upon notice to VASCO, and at reasonable times, to have a major independent accounting firm audit the books and records of VASCO related to the subject matter of this Agreement. Should any audit reveal an underpayment of more than 5% by VASCO to Shiva, VASCO shall pay the cost of the audit and shall immediately remit to Shiva the unpaid fees plus interest, as applicable. 11 Shiva Agmt.doc 8/11/97 13 EXHIBIT B Specifications VACMAN VERSION 2.0 FEATURES The features listed below for version 2.0 consolidate those of version 1.1 which specifically included support for the VASCO family of tokens comprising the AccessKey II, DigiPass and AuthentiCard. Programs to be licensed through program-specific registration codes Port Codebase from 16bit to 32 bit TACACS+ only release Remote management of SAM uUser lists Primary/Secondary User List Replication Time-of-day authentication Time quota support Make user database portable Import of Shiva User List Import of standard RADIUS user list Audit Reporting Program Multiple Shared Secret Password violation control Journaling user changes Win 95 style installer Password expiration control and enforcing password changes New Password Changing Method 12 Shiva Agmt.doc 8/11/97 14 EXHIBIT C UNIVERSAL NETWORKS COMPANY LIMITED AGREEMENT TO PROVIDE SUPPORT Universal Networks Company, Limited, having a principal place of business at Room 128, 1/F, 72 Tat Chee Road, Kowloon Tong, Kowloon, Hong Kong ("Universal Networks") hereby agrees to offer to provide second and third-level technical support for Shiva's AccessManager product to Vasco Data Security, Inc. ("VASCO") for the consideration that VASCO will purchase all future licenses of the AcecssManager directly from Universal Networks at the same price that VASCO is purchasing from Shiva for the term of that contract, in the event that Shiva Corporation is unwilling to provide such second- and third-level support due to its failure to continue as a going concern or to its discontinuance of the AccessManager product line. In the event that Universal Networks is unwilling or unable to provide such second- or third-level support, then Universal Networks shall incur no liability whatsoever to either Shiva Corporation or to VASCO; however, Universal Networks' inability or unwillingness to provide support due to its failure to continue as a going concern or to its discontinuance of the AccessManager product line shall constitute a triggering event such that the source code of the AccessManager product shall be released from escrow and VASCO shall be entitled to use the source code solely for the purpose of supporting its existing AccessManager customers in using the product, in accordance with the terms of an industry standard Escrow Agreement that will be agreed by all parties, and which will be attached to the Software License Agreement to which this Agreement to Provide Support is attached. UNIVERAL NETWORKS COMPANY LIMITED - --------------------------------- By: Peter Mak Its General Manager 13 Shiva Agmt.doc 8/11/97 15 EXHIBIT D ESCROW AGREEMENT [Attached following this page] 14 Shiva Agmt.doc 8/11/97 16 PREFERRED REGISTRATION TECHNOLOGY ESCROW AGREEMENT Account Number______________ This Preferred Registration Technology Escrow Agreement including any Exhibits ("Agreement") is effective this day of , 199 _____, by and among Data Securities International, Inc. ("DSI") a Massachusetts corporation, ________________ ("Depositor") and Shiva Corporation ("Preferred Registrant"). WHEREAS, Depositor has entered or will enter into a contract with the Preferred Registrant regarding certain proprietary technology and other materials of Depositor; WHEREAS, Depositor and Preferred Registrant desire the Agreement to be supplementary to said contract pursuant to 11 United States Code Section 365 (n); WHEREAS, availability of or access to certain proprietary data related to certain proprietary technology and other material is critical to Preferred Registrant in the conduct of its business; WHEREAS, Depositor has deposited or will deposit with DSI proprietary data to provide for retention, administration and controlled access for Preferred Registrant under the conditions specified herein; NOW THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, and in consideration of the promises, mutual covenants and conditions contained herein, the parties hereto agree as follows: 1. Deposit Account. Following the delivery of the executed Agreement, DSI shall open a deposit account ("Deposit Account") for Depositor. The opening of the Deposit Account means that DSI shall establish an account ledger in the name of Depositor assign a deposit account number ("Deposit Account Number"), calendar renewal notices to be sent to Depositor as provided in Section 30, and request the initial deposit ("Initial Deposit") from Depositor. Depositor has an obligation to make the Initial Deposit. Unless and until Depositor makes the Initial Deposit with DSI, DSI shall request the Initial Deposit from Depositor. 2. Preferred Registration Account. Following the execution and delivery of the Agreement, DSI shall open a registration account ("Registration Account") for Preferred Registrant. The opening of the Registration Account means that DSI shall establish under the Deposit Account an account ledger with a unique registration number ("Registration Number") in the name of Preferred Registrant, calendar renewal notices to be sent to Preferred Registrant as provided in Section 30, and request the Initial Deposit from Depositor. DSI shall notify Preferred Registrant upon receipt of Initial Deposit. 3. Term of Agreement. The Agreement will have an initial term of one (1) year, commencing on the effective date, and shall continue in full force unless terminated earlier as provided in the Agreement. The Agreement may be extended for additional one (1) year terms. 4. Exhibit A, Notices and Communications. Notices and invoices to Depositor, Preferred Registrant or DSI should be sent to the parties at the addresses identified in the Exhibit A. Documents, payment of fees, deposits of material, and any written communication should be sent to DSI offices as identified in the Exhibit A. Depositor and Preferred Registrant agree to each name their respective designated contact ("Designated Contact") to receive notices from DSI and to act on their behalf in the performance of their obligations as 15 Shiva Agmt.doc 8/11/97 17 set forth in the Agreement. Depositor and Preferred registrant agree to notify DSI immediately in the event of a change of their Designated Contact in the manner stipulated in Exhibit A. 5. Exhibit B and Deposit Material. Depositor will submit proprietary data and related material ("Deposit Material") to DSI for retention and administration in the Deposit Account. The Deposit Material will be submitted together with a completed document called a "Description of Deposit Material", hereinafter referred to as Exhibit B. Each Exhibit B should be signed by Depositor prior to submission to DSI and will be signed by DSI upon completion of the Deposit Material inspection. Depositor represents and warrants that it lawfully possesses all Deposit Material, can transfer Deposit Material to DSI and has the authority to store Deposit Material in accordance with the terms of the Agreement. 6. Deposit Material Inspection. Upon receipt of an Exhibit B and Deposit Material, DSI will be responsible only for reasonably matching the labeling of the materials to the item descriptions listed on the Exhibit B and validating the count of the materials to the quantity listed on the Exhibit B. DSI will not be responsible for any other claims made by the Depositor on the Exhibit B. Acceptance will occur when DSI concludes that the Deposit Material Inspection is complete. Upon acceptance DSI will sign the Exhibit B and assign it the next Exhibit B number. DSI shall issue a copy of the Exhibit B to Depositor and Preferred Registrant within ten (10) days of acceptance. 7. Initial Deposit. The Initial Deposit will consist of all material initially supplied by Depositor to DSI. 8. Deposit Changes. Depositor may desire or may be obligated to update the Deposit Account with supplemental or replacement Deposit Material of technology releases. Supplemental Deposit ("Supplemental") is Deposit Material which is to be added to the Deposit Account. 16 Shiva Agmt.doc 8/11/97 18 Replacement Deposit. ("Replacement") is Deposit Material which will replace existing Deposit Material as identified by any one or more Exhibit B(s) in the Deposit Account. Replaced Deposit Material will be destroyed or returned to Depositor. 9. Deposit. The existing deposit ("Deposit") means all Exhibit B(s) and their associated Deposit Material currently in DSI's possession. Destroyed or returned Deposit Material is not part of the Deposit; however, DSI shall keep records of the destruction or return of Deposit Material. 10. Replacement Option. Within ten (10) days of receipt of Replacement from Depositor, DSI will send a letter to Preferred Registrant stating that Depositor requests to replace existing Deposit Material, and DSI will include a copy of the new Exhibit B(s) listing the new Deposit Material. Preferred Registrant has twenty (20) days from the mailing of such letter by DSI to instruct DSI to retain the existing Deposit Material held by DSI, and if so instructed, DSI will change the Replacement to a Supplemental. Conversion to Supplemental may cause an additional storage unit fee as specified by DSI's Fee and Services Schedule. If Preferred Registrant does not instruct DSI to retain the existing Deposit Material, DSI shall permit such Deposit Material to be replaced with the Replacement. Within ten (10) days of acceptance of the Replacement by DSI, DSI shall issue a copy of the executed Exhibit B(s) to Depositor and Preferred Registrant. DSI will either destroy or return to Depositor all Deposit Material replaced by the Replacement. Shiva Agmt.doc 8/11/97 19 11. Storage Unit. DSI will store the Deposit in defined units of space, called storage units. The cost of the first storage unit will be included in the annual Deposit Account fee. 12. Deposit Obligations of Confidentiality. DSI agrees to establish a locked receptacle in which it shall place the Deposit and shall put the receptacle under the administration of one or more of its officers, selected by DSI, whose identity shall be available to Depositor at all times. DSI shall exercise a professional level of care in carrying out the terms of the Agreement. DSI acknowledges Depositor's assertion that the Deposit shall contain proprietary data and that DSI has an obligation to preserve and protect the confidentiality of the Deposit. Except as provided for in the Agreement, DSI agrees that it shall not divulge, disclose, make available to third parties, or make any use whatsoever of the Deposit. 13. Audit Rights. DSI agrees to keep records of the activities undertaken and materials prepared pursuant to the Agreement. DSI may issue to Depositor and Preferred Registrant an annual report profiling the Deposit Account. Such annual report will identify the Depositor, Preferred Registrant, the current Designated Contacts, selected special services, and the Exhibit B history, which includes Deposit Material acceptance and destruction or return dates. Upon reasonable notice, during normal business hours and during the term of the Agreement, Depositor or Preferred Registrant will be entitled to inspect the records of DSI pertaining to the Agreement, and accompanied by an employee of DSI, inspect the physical status and condition of the Deposit. The Deposit may not be changed during the audit. 14. Renewal Period of Agreement. Upon payment of the initial fee or renewal fee, the Agreement will be in full force and will have an initial period of at least one (1) year unless otherwise specified. The Agreement may be renewed for additional periods upon receipt by DSI of the specified renewal fees prior to the last day of the period ("Expiration Date"). DSI may extend the period of the Agreement to cover the processing of any outstanding instruction made during any period of the Agreement. Preferred Registrant has the right to pay renewal fees and other related fees. In the event Preferred Registrant pays the renewal fees and Depositor is of the opinion that any necessary condition for renewal is not met, Depositor may so notify DSI and Preferred Registrant in writing. The resulting dispute will be resolved pursuant to the dispute resolution process defined in Section 25. 15. Expiration. If the Agreement is not renewed, or is otherwise terminated, all duties and obligations of DSI to Depositor and Preferred Registrant will terminate. If Depositor requests the return of the Deposit, DSI shall return the Deposit to Depositor only after any outstanding invoices and the Deposit return fee are paid. If the fees are not received by the Expiration Date of the Agreement, DSI, at its option, may destroy the Deposit. 16. Certification by Depositor Depositor represents to Preferred Registrant that: a. The Deposit delivered to DSI consists of the following: source code deposited on computer magnetic media; all necessary and available information, proprietary information, and technical documentation which will enable a reasonably skilled programmer of Preferred Registrant to create, maintain and/or enhance the proprietary technology without the aid of Depositor or any other person or reference to any other materials; maintenance tools (test programs and program specifications); proprietary or third party system utilities (compiler and assembler descriptions); description of the system/program generation; descriptions and locations of programs not owned by Depositor but required for use and/or support; and names of key developers for the technology on Depositor's staff. 17 Shiva Agmt.doc 8/11/97 20 b. The Deposit will be defined in the Exhibit B(s). 17. Indemnification. Depositor and Preferred Registrant agree to defend and indemnify DSI and hold DSI harmless from and against any and all claims, actions and suits, whether in contract or in tort, and from and against any and all liabilities, losses, damages, costs, charges, penalties, counsel fees, and other expenses of any nature (including, without limitation, settlement costs) incurred by DSI as a result of performance of the Agreement except in the event of a judgment which specifies that DSI acted with gross negligence or willful misconduct. 18. Filing For Release of Deposit by Preferred Registrant. Upon notice to DSI by Preferred Registrant of the occurrence of a release condition as defined in Section 21 and payment of the release request fee, DSI shall notify Depositor by certified mail or commercial express mail service with a copy of the notice from Preferred Registrant. If Depositor provides contrary instruction within ten (10) days of the mailing of the notice to Depositor, DSI shall not deliver a copy of the Deposit to Preferred Registrant. 19. Contrary Instruction. "Contrary Instruction" is the filing of an instruction with DSI by Depositor stating that a Contrary Instruction is in effect. Such Contrary Instruction means an officer of Depositor warrants that a release condition has not occurred or has been cured. DSI shall send a copy of the instruction by certified mail or commercial express mail service to Preferred Registrant. DSI shall notify both Depositor and Preferred Registrant that there is a dispute to be resolved pursuant to Section 25. Upon receipt of Contrary Instruction, DSI shall continue to store the Deposit pending Depositor and Preferred Registrant joint instruction, resolution pursuant to Section 25, order by a court of competent jurisdiction, or termination by non-renewal of the Agreement. 20. Release of Deposit to Preferred Registrant. Pursuant to Section 18, if DSI does not receive Contrary Instruction form Depositor, DSI is authorized to release the Deposit, or if more than one Preferred Registrant is registered to the Deposit, a copy of the Deposit, to the Preferred Registrant filing for release following receipt of any fees due to DSI including Deposit copying and delivery fees. 21. Release Conditions of Deposit to Preferred Registrant Release conditions are: a. Depositor's failure to continue to do business in the ordinary course. 22. Grant of Use License. Subject to the terms and conditions of the Agreement, Depositor hereby transfers and upon execution by DSI, DSI hereby accepts a non-exclusive, irrevocable, perpetual, and royalty-free Use License which DSI will transfer to Preferred Registrant upon controlled release of the Deposit as described in the Agreement. The Use License will be for the sole purpose of continuing the benefits afforded to Preferred Registrant through any existing license, maintenance, or other agreement with Depositor. 23. Use License Representation. Depositor represents and warrants to Preferred Registrant and DSI that it has no knowledge of any encumberance or infringement of the Deposit, or that any claim has been made that the Deposit infringes any patent, trade secret, copyright or other proprietary right of any third party. Depositor warrants that it has the full right, power, and ability to enter into and perform the Agreement, to grant the foregoing Use License, and to permit the Deposit to be placed with DSI. 24. Conditions Following Release. Following a release and subject to payment to DSI of all outstanding fees, DSI shall transfer the Use License to Preferred Registrant. Additionally, Preferred Registrant shall be required to maintain the confidentiality of the released Deposit. 18 Shiva Agmt.doc 8/11/97 21 25. Disputes. In the event of a dispute, DSI shall so notify Depositor and Preferred Registrant in writing. Such dispute will be settled by arbitration in accordance with the commercial rules of the American Arbitration Association ("AAA"). Unless otherwise agreed to in writing by Depositor and Preferred Registrant, arbitration will take place at Bedford, Massachusetts. 26. Verification Rights. Depositor grants to Preferred Registrant the option to verify the Deposit for accuracy, completeness and sufficiency. Depositor agrees to permit DSI and at least one employee of Preferred Registrant to be present at Depositor's facility to verify, audit and inspect the Deposit held by DSI to confirm the quality and/or content of the Deposit for the benefit of Preferred Registrant. If DSI is present or is selected to perform the verification, DSI will be paid according to DSI's then current verification service hourly rates and any out of pocket expenses. 27. General. DSI may act in reliance upon any instruction, instrument, or signature believed to be genuine and may assume that any employee giving any written notice, request, advice or instruction in connection with or relating to the Agreement has apparent authority and has been duly authorized to do so. DSI may provide copies of the Agreement or account history information to any employee of Depositor or Preferred Registrant upon their request. For purposes of termination or replacement, Deposit Material shall be returned only to Depositor's Designated Contact, unless otherwise instructed by Depositor's Designated Contact. DSI is not responsible for failure to fulfill its obligations under the Agreement due to causes beyond DSI's control. This Agreement is to be governed by, and construed in accordance with the laws of the Commonwealth of Massachusetts, without giving effect to conflict of laws provisions thereof. The Agreement constitutes the entire agreement between the parties concerning the subject matter hereof, and supersedes all previous communications, representations, understandings, and agreements, either oral or written, between the parties. The Agreement may be amended only in a writing signed by the parties. If any provision of the Agreement is held by any court to be invalid or unenforceable, that provision will be severed from the Agreement and any remaining provisions will continue in full force. 28. Title to Media. Subject to the terms of the Agreement, title to the media, upon which the proprietary data is written or stored, is and shall be irrevocably vested in DSI. Notwithstanding the foregoing, Depositor will retain ownership of the proprietary data contained on the media including all copyright, trade secret, patent or other intellectual property ownership rights subsisting in such proprietary data. 29. Termination of Rights. The Use License as described above will terminate in the event that the Agreement is terminated without the Use License transferring to Preferred Registrant. 30. Fees. Fees are due upon receipt of signed contract, receipt of Deposit Material, or when service is requested, whichever is earliest. If invoiced fees are not paid within sixty (60) days of the date of the invoice, DSI may terminate the Agreement. If the payment is not timely received by DSI, DSI shall have the right to accrue and collect interest at the rate of one and one-half percent per month (** per annum) from the date of the invoice for all late payments. Renewal fees will be due in full upon the receipt of invoice unless otherwise specified by the invoice. In the event that renewal fees are not received thirty (30) days prior to the Expiration Date, DSI shall so notify Depositor and Preferred Registrant. If the renewal fees are not received by the Expiration Date, DSI may terminate the Agreement without further notice and without liability of DSI to Depositor or Preferred Registrant. 19 Shiva Agmt.doc 8/11/97 22 DSI shall not be required to process any request for service unless the payment for such request shall be made or provided for in a manner satisfactory to DSI. all service fees and renewal fees will be those specified in DSI's Fee and Services Schedule in effect at the time of renewal or request for service, except as otherwise agreed. For any increase in DSI's standard fees, DSI shall notify Depositor and Preferred Registrant at least ninety (90) days prior to the renewal of the Agreement. For any service not listed on the Fee and Services Schedule, DSI shall provide a quote prior to rendering such service.
Data Securities Depositor Preferred Registrant International, Inc. By: By: By: (Print Name) (Print Name) (Print Name) Title Title Title Date: Date: Date:
20 Shiva Agmt.doc 8/11/97 23 EXHIBIT A DESIGNATED CONTACT Account Number Notices, Deposit Material returns and communication, including delinquencies to Depositor should be Invoices should be addressed to: Company Name: Vasco Data Security, Inc. Address: Designated Company Telephone: Facsimile: State of Incorporation: Notices and communication, including delinquencies to Preferred Registrant should should be addressed to: Company Name: Address: Designated Contact: Telephone: Facsimile: Requests from Depositor or Preferred Registrant to change the Designated Contact should be given in writing by the Designated Contact or an authorized employee of Depositor or Preferred Registrant. Contracts, Deposit Material Invoice inquiries and fee and notices to DSI should be remittances to DSI should addressed to be addressed to: DSI DSI Attn: Contract Administration Attn: Accounts Receivable 6165 Greenwich Drive 49 Stevenson Street Suite 220 Suite 550 San Diego, CA 92122 San Francisco, CA 94105 Telephone: (619) 457-5199 (415) 541-9013 Facsimile: (619) 457-4252 (415) 541-9424 Date:
21 Shiva Agmt.doc 8/11/97 24 21 Shiva Agmt.doc 8/11/97 25 EXHIBIT B DESCRIPTION OF DEPOSIT MATERIAL Deposit Account Number________________________ Depositor Company Name: Shiva Corporation DEPOSIT TYPE:_______Initial________Supplemental________Replacement If Replacement: _______Destroy Deposit_______Return Deposit ENVIRONMENT: Host System CPU/OS________ Version ________ Backup _________ Source System CPU/OS _______ Version _______ Compiler_________ Special instructions: DEPOSIT MATERIAL: Exhibit B Name________________________Version____________________________ Item label description Media Quantity For Depositor, I certify that For DSI, I received the above the above described Deposit described Deposit Material Material was sent to DSI subject to the terms on the reverse side of this Exhibit: By____________________________ By_____________________________ Print Name____________________ M. Elizabeth Potthoff Date__________________________ Date of Acceptance_____________ ISE_________EX. B#_____________ 22 Shiva Agmt.doc 8/11/97 LH
   1
                                                                    EXHIBIT 10.3


                               HEADS OF AGREEMENT


BETWEEN:

VASCO CORPORATION, represented by Kendall HUNT, Chief Executive Officer

AND:

VASCO DATA SECURITY EUROPE S.A., represented by Kendall HUNT, President and
Director


AND:

DIGILINE INTERNATIONAL LUXEMBOURG, represented by Henri ARONSON and Dominique
FONTAINE, Directors

AND:

DIGILINE S.A., represented by Dominique COLARD, Managing Director

AND:

DIGIPASS S.A., represented by Dominique COLARD and Jan VALCKE, Directors

AND:

Dominique COLARD, residing at rue Gillemont 21, 6120 Ham sur Heure

AND:

TOPS S.A., represented by Dominique COLARD, President

1.-  Vasco Corp. (Vasco) has set up a new company, Vasco Data Security Europe
(VDSE) in Brussels.  VDSE is a holding company 100% owned by Vasco.  VDSE's
mission is to act as the holding company for various business ventures and
activities in Europe, Eastern Bloc, Middle East, and other areas which provide
economic opportunities for Vasco.  It will invest in companies which are
involved in computer security products and services, and have a << presence >>
in territories where VDSE would like to establish an on-going business.


2.-  Digiline International Luxembourg (DIL), in its capacity as shareholder of
Digipass Belgium (DP), TOPS (TP) and Digiline Belgium (DB), on the one hand,
and VASCO and VDSE, on the other hand, hereby agree to the following structure
for the acquisition by VDSE of DP and of the assets and certain liabilities of
DB:

TP will transfer its DP shares for book value to DP.


                                      1
   2




All of the assets of DB will be transferred to DP at their book value.  In
addition, DP will assume for book value all of the current accounts payable and
accrued expenses of DB.  The net value of such transfer and assumption will be
invoiced by DB to DP.  The transfer will be structured so as to qualify as a
transfer of a branch of business activity in such a way that the employment
contracts of all concerned employees will be automatically transferred to DP.
VDSE will then purchase 100% of the stock of DP from DIL for the price of
$10,000,000.00 (USD) (ten million) less any positive net equity remaining in
the building owned by TOPS and occupied by DP and DB.  Positive net equity
shall be defined as the fair market price of the building as determined by an
<< expert immobilier >>, less the remaining balance of the mortgage
indebtedness (plus costs associated with the planned refinancing of the
mortgage) due at the effective date of the final Agreement.  Except for the
abovementioned adjustment for the net equity in the building the amount of the
purchase price shall not be subject to adjustment for any reason.  In no event
shall DIL be responsible for the financial results of year 1996.

Any costs arising from such transfer of assets and liabilities, shall be for
the account of DP.

At Closing of the sale, the assets of DP will consist of all of the assets
previously owned by DB or DP associated with the operation of the business of
DP and DB including (1) cash, (2) accounts receivable, (3) furniture, fixtures,
machinery and equipment, (4) inventory (raw materials, work-in-process and
finished goods), (5) patents, trademarks and other intellectual property, (6)
contracts to provide tokens or other products to third parties, (7) deposits
and prepaid expenses, (8) product names including Digipass, Digiline, Digidial,
Easy Dial, Intermezzo, and other names being used by DP and DB, and (9) any
other assets owned by DP necessary for the operation of the business except the
following assets:  patents, trademarks, other intellectual property and product
names related to Dynapark and Muslimclock.

DIL has agreed to retain the 1995 net after-tax profit and the 1996 net
after-tax profit, up to the Closing of the sale, in DP and DB that VDSE is
acquiring, except for the dividend distribution of BEF 1,000,000 approved by
the shareholders of DB at the general meeting on May 8th, 1996.

DIL represents and warrants to Vasco and VDSE that the financial statements of
DB and DP for the year ended December 31, 1995 have been prepared in good faith
and in accordance with the provisions of the applicable Belgian accounting
rules.

At Closing of the sale, the only liabilities of DP will be current accounts
payable and accrued expenses associated with the operation of business of DP
and DB.  All intercompany receivables and payables on the books of DP will be
written off at Closing.


3.-  Payment of the purchase price shall be made in cash in immediately
available US Dollars as follows :


                                      2
   3

Payment Number Payment Date Amount - -------------------------------------------------------------- No later than December 31, 1996 $ 5000000 1 No later than December 31, 1997 $ 5000000 2 Total Payments $10000000
Payment 1 above shall be paid in cash at the settlement date of Vasco Corp.'s public offering but in no event later than December 31, 1996. Such payment shall be irrevocably and unconditionally guaranteed by means of an Irrevocable Letter of Credit or Irrevocable Bank Guarantee in favor of DIL issued by a first-class bank acceptable to DIL. Payment 2 shall be paid in cash no later than December 31, 1997. Such payment shall be irrevocably and unconditionally guaranteed by means of an Irrevocable Letter of Credit or Irrevocable Bank Guarantee in favor of DIL issued by a first-class bank acceptable to DIL. Based upon the assumption that DP, DB and DIL are not doing business in the United States of America the above payments will be made without deduction, withholding or offset for any US taxes. Payments 1 and 2 may be delayed by written agreement of VDSE and DIL, provided that DIL shall under no circumstances be obliged to grant its consent to any such delay. Any amounts not paid on January the 1st 1997 shall bear interest at the rate of 8% per annum. Interest due for any portion of a year shall be prorated based on the actual number of days elapsed divided by 360. At the sole election of DIL, payment 2 may be in the form of Vasco Common Stock, priced at Fair Market Value at the time of delivery, in U.S. Dollars. Fair Market Value (FMV) shall be defined as the average NASDAQ closing price for the prior 20 trading days from the date of issuance. Under current SEC regulations, shares are restricted from sale for 24 months from the date of issuance. As provided in Clause 13, DIL shall have the right to withdraw from this Heads of Agreement if VASCO and VDSE have not presented to DIL the abovementioned bank guarantees in form and substance meeting the requirements set forth above within 30 business days from the date of signature of this Heads of Agreement. DIL shall have 5 business days from the date of its receipt of the proposed guarantees to confirm that the Guarantees are in accordance with the requirements of this Heads of Agreement. In the case where DIL withdraws from this Heads of Agreement, DB, DP, TP, and DC will not anymore be bound by this Heads of Agreement except if otherwise provided in this agreement. 4.- The Parties will mutually agree when to disclose the terms of this Agreement, until which time all terms will be kept private and confidential. Under any circumstances, SEC regulations will govern the disclosure timing. However, the disclosure of the terms of this Agreement will in any event not occur before DIL will have confirmed that the bank guarantees are in accordance with the requirements set forth above. 3 4 5.- Mario Houthooft (MAH) will be the Managing Director of DP, the combined operations of DP and DB. 6.- DC acting through TP shall be a consultant to the new management of DP for a period of 6 months, with an option to extend this consulting agreement by mutual consent of DC and DP. DC's role shall be to advise management during a suitable transition period from the old management to the new management. DC shall be considered an independent consultant, and shall spend an average of 4 days per week as a consultant to DP. His involvement shall be progressively reduced to zero at the end of the period above. TP will be paid by DP for these consultancy services at a fixed monthly fee of 309,337.00 BEF (plus applicable VAT). During this consulting period, DC with the agreement of DP, may also be involved part-time in the areas of innovation and research and development, but will remain an independent consultant, not an employee. 7.- DC shall sign a non-compete contract for a period of 5 years. During this period, DC shall be free to conduct other non-competitive business, including designing, producing and selling devices that do not compete with Vasco's family of current or future products as defined below. VDSE's business definition of competing products is as follows : the undertaking of any possible application of cryptography, any mathematical and logical system, as well as satellite communication and voice digitalization, assistance by means of services or consultancy, development, manufacturing and commercialization of methods, systems, machines and products related to security of data and programs, their transmission and their modification, as well as electrical components, computer software and hardware, but only if and to the extent that any of the foregoing is related to security as indicated above. DYNAPARK and MUSLIMCLOCK are not considered competing products. 8.- DIL shall undertake to use its best efforts to obtain that any DB employees whose employment contracts are not automatically transferred to DP pursuant to the business transfer referred to in Clause 2 above, shall sign new Employment Agreements with DP, containing terms and conditions consistent with Belgian law. It is understood that VDSE feels a moral obligation to maintain its business in Belgium and has no plans to relocate its business outside Belgium. 9.- Once DP has been acquired by VDSE, key employees of DP will be eligible to participate in the Vasco Corp. Stock Option Plan. Vasco will work with Price Waterhouse to assure that such participation is structured in such a way so as to optimize the tax treatment for such individuals. 10.- DP shall sign a new rental agreement with TP for the current DP and DB office facilities for a period of 24 months at a competitive fair market price. By giving at least 6 months written notice 4 5 prior to the end of such initial term or of any renewal term, DP may extend the term of this rental agreement for up to 3 additional 12-month periods. 11.- The undersigned parties agree that all information furnished to either of them or to any affiliate, employee or agent of either of them by DC, DB or DIL in connection with the acquisition of DP will be treated as strictly confidential and will not without the prior written consent of DIL, be disclosed by Vasco or VDSE or by any of their employees, agents or affiliates to any third parties either (i) prior to the Closing of VDSE's acquisition of DP, or (ii) if for any reason VDSE does not acquire DP. Following VDSE's acquisition of DP such obligation of confidentiality and nondisclosure shall remain applicable to any information furnished by DIL, DC or DB in connection with DIL's sale of DP which does not relate exclusively to DP. 12.- Vasco shall indemnify DB and DIL (and any of their affiliates, officers or shareholders) and hold each of them harmless against any liabilities, claims or expenses related to Vasco's public offering. 13.- The present Heads of Agreement shall be governed by Belgian law. Any controversies arising hereunder shall be submitted to arbitration in Brussels in accordance with the CEPANI rules. The acquisition of DP contemplated by the present Heads of Agreement shall be further implemented by means of documentation to be negotiated amongst the parties reflecting all of the terms and conditions set forth herein and other terms and conditions, including certain representations, warranties and covenants with respect to the business of DP and DB and, the assets and liabilities of DP, not inconsistent with the terms hereof. However, DC, DB, DP, TP and DIL reserve the right to withdraw from this Agreement if within 30 business days from the date of this Heads of Agreement they shall not have received the guarantees referred to in Clause 3 hereof. If DC, DB, DP, TP and DIL elect not to withdraw, the agreement shall be modified so that the guaranties referred to in clause 3 need not to be delivered. In case they elect to withdraw, the only obligation of Vasco and VDSE under Clause 11 hereof shall survive the termination of this Agreement and shall remain in effect for a period of 36 (thirty-six) months. 14.- VASCO shall be jointly and severally liable with VDSE for any and all obligations of VDSE under the present Heads of Agreement and under the definitive documentation referred to in Clause 13. 5 6 Done in Brussels, on May, 13th 1996 VASCO Corp. DIGILINE INTERNATIONAL LUX. By /s/ Kendall Hunt By /s/ Dominique Fontaine -------------------- ------------------------------- Kendall HUNT Dominique FONTAINE Chairman & CEO Director VASCO DATA SECURITY EUROPE S.A. By /s/ Kendall Hunt By /s/ Henri Aronson -------------------- ------------------------------- Kendall HUNT Henri ARONSON President and Director Director TOPS S.A. DIGILINE BELGIUM S.A. By /s/ Dominique Colard By /s/ Dominique Colard -------------------- ------------------------------- Dominique COLARD Dominique COLARD President Managing Director DIGIPASS S.A. By /s/ Dominique Colard ------------------------------- Dominique COLARD Director By /s/ Jan Valcke ------------------------------- Jan VALCKE Director
6
   1
                                                                    EXHIBIT 10.4

AGREEMENT

Whereas pursuant to Paragraph 13 of the Heads of Agreement between VASCO
CORPORATION (<< Vasco >>), VASCO DATA SECURITY EUROPE S.A. (<< VDSE >> or <<
the Buyer >>), DIGILINE INTERNATIONAL LUXEMBOURG (<< DIL >> or << the Seller
>>), DIGILINE S.A. (<< DB >>), DIGIPASS S.A. (<< DP >>), Dominique COLARD (<<
Colard >>) and TOPS S.A. (<< TP >>), it was contemplated that certain
additional terms and conditions with respect to the matters contemplated by the
Heads of Agreement would be agreed to and executed by the parties;

Whereas below are set forth such additional terms and conditions as have been
agreed to by the parties;

Whereas for purposes hereof (i) these additional terms and conditions together
with the Heads of Agreement are collectively herein referred to as the <<
Agreement >> and (ii) the assets and liabilities heretofore conducted by DB
(which will prior to the Closing Date be transferred to DP) and the business
presently conducted by DP are hereinafter collectively referred to as the <<
Seller's Business >>;

Whereas the Buyer aknowledges that it has performed the necessary amount of due
diligence which it believed to be appropriate for a transaction of the type
contemplated herein, that such due diligence has included, amongst others, the
review of the complete data put at the disposal of the Buyer and its advisors
and accountants at its request and investigations by the Buyer with the
management of the Seller.

Article 1

As is contemplated by the Heads of Agreement, TP has transferred its shares of
the capital stock of DP for book value to DP. As these shares have been
canceled, DIL is currently the sole owner of 100 % of the shares of DP.

As is contemplated by the Heads of Agreement, the capital of DP has been
increased and certain assets and liabilities from DB transferred to DP. VASCO
and VDSE agree on the terms and conditions of the purchase agreement relating
to the transfer of the assets and liabilities from DB to DP.

Vasco and VDSE therefore represent that the conditions set forth in the Bank
Guarantee issued by the Bank Paribas have been fully completed by DIL, DP, DB,
TP and COLARD.

Vasco and VDSE agree that only the transfer of any amount by VDSE to DIL which
specifically relates to the payment of the purchase price of the shares by VDSE
to DL as from the Closing Date will diminish the said Bank Guarantee issued by
the Bank Paribas for the same amount.

Article 2

For purpose of this Agreement, the term << Material >> shall mean:

(a) with respect to any contract, (i) having a remaining duration of at least
12 months and (ii) involving a commitment to expenditure of at least BEF 1 500
000 or involving the generation of income of at least BEF 1 500 000;

(b) with respect to any asset or liability or change in financial condition, an
asset having a book value of at least BEF 1 500 000 or a liability involving an
expenditure of at least BEF 1 500 000.

Article 3

DL hereby represents and warrants to and agrees with Vasco and VDSE as follows:

1. DIL is the lawful owner of record of 42 653 shares of the capital stock of
DP (<< DP Stock >>).



   2


2. There are no shares of the capital stock of DP issued or outstanding other
than those shares held currently by DIL.

3. The shares of DP owned by D1L are free and clear of all liens, charges,
encumbrances and restrictions of any kind and nature whatsoever and none of
such shares is subject to any agreement whatsoever with respect to the voting,
sale or pledge thereof with respect to any such DP Stock.

4. Except as set forth on Schedule 1, none of DIL, TP, DB or Colard has any
interest in any property, real or personal, tangible or intangible, used in the
Seller's Business.

5. Any shares of Vasco Common Stock to be acquired by DIL at the sole election
of DIL pursuant to this Agreement will be acquired by DIL solely for the
purpose of investment and not with a view to, or for sale in connection with,
any distribution thereof DL acknowledges that all such shares of Vasco Common
Stock will not be registered under the Securities Act of 1933, as amended, or
the securities laws of any state or other jurisdiction, and that all such
shares of Vasco Common Stock will bear a legend in substantially the following
form:

<< THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933.  AS AMENDED, (THE <>) AND MAY NOT BE
OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS A REGISTRATION STATEMENT
WITH RESPECT TO THESE SHARES HAS BECOME EFFECTIVE UNDER THE SECURITIES ACT, OR
THE CORPORATION HAS BEEN FURNISHED WITH AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. >>

6. True, complete and correct copies of (a) the Certificate of
Incorporation as amended to date, of DP and (b) the by-laws, as currently in
effect, of DP are annexed hereto as Schedule 2.

7. DP is a corporation duly organized, validly existing and in good standing
under the laws of Belgium and has full corporate power and authority to conduct
the Seller's Business.

8. This Agreement has been duly and validly executed and delivered by DIL and
constitutes its valid obligation, enforceable against it in accordance with its
terms. Except any notification which might be necessary towards the Region
wallonne and except for any notices and consents required in relation to the
transfer of assets and liabilities of DB to DP, no consent is required to be
obtained in connection with the execution, delivery and performance of this
Agreement or the consummation of the transactions contemplated hereby.

9. The performance of this Agreement and the consummation of the transactions
contemplated hereby will not result in a breach or violation of any of the
terms or provisions of, or constitute a default under, (i) the articles of
incorporation of by-laws or similar governing documents of DP, or (ii) any law,
order, rule, regulation, writ, injunction or decree applicable to Seller's
Business.

To its knowledge, DP and its conduct of the Seller's Business are in compliance
in all material respects with all, and not in violation in any material respect
of any applicable law or ordinance, or any order, rule or regulation of any
governmental agency or body to which DP or the Seller's Business are subject;
nor to its knowledge has DP failed to obtain or to adhere in all material
respects to the requirements of any government license, permit or authorization
necessary to the ownership of its assets or to the conduct of the Seller's
Business. All material governmental permits, licenses and authorizations
required by DP in the conduct of the Seller's Business are set forth in
Schedule 3.

10. Except as provided in Schedule 4, DP and the Seller's Business have paid
all taxes (payroll, income, franchise, etc.) required to be paid and DP and DB
have no liability whatsoever for any taxes except as may be reflected in the
Financial Statements of DB and DP for the year ended December 31, 1995 and in



   3

the intermediary financial statements of DB ended June 30, 1996 (hereafter <<
the Financial Statements >>) and except for any taxes to be paid by DP and
relating to its business conducted since January 1st, 1996 for the six-month
period ended June 30, 1996.

All Material tangible assets and properties owned by DP or used in the Seller's
Business are as of the date hereof usable.

11. All accounts receivables reflected in the Financial Statements and all
accounts receivables acquired or created by the Seller's Business subsequent to
January 1, 1996, to and including the Closing Date, arose from beneficial
transactions in the ordinary course of business.

12. All inventory reflected on the Financial Statements and all inventory
relating to the Seller's Business acquired subsequent to December 31, 1995 to
and including the Closing Date are of a quality and quantity usable or salable
in the ordinary course of business. The values of the inventory carried on the
Financial Statements represent the acquisition price of such inventory.

13. Except as set forth on Schedule 5, since December 31, 1995, either DP nor
DB (insofar as the assets and liabilities transferred by it to DP are
concerned) has:

(a) sold, assigned or transferred any of its assets or properties necessary for
the operation of the Seller's Business, except in the ordinary course of
business consistent with past practice;

(b) made any amendment or termination of any material contract, commitment or
agreement relating to the Seller's Business to which it is a party or by which
it is bound; or

(c) with respect to the employees of the Sellers' Business, received notice or
had knowledge of any strike or disruption of work of a concerted nature or any
threat thereof;

14. Except for the claim received by the Dutch PTT and Security Dynamics, DP
has not received notice of any claims which have been asserted by any person to
the use of any patents, trademarks, trademark registrations, logos, trade
names, assumed names, copyright and copyright registrations or challenging or
questioning the validity or effectiveness of any such license or agreement.

15. There are no strikes or disruptions of work involving the employees of the
Seller's Business of a concerted nature. DP is not a party to any collective
bargaining agreement with any union or other representative of employees except
for such collective bargaining agreements (<< conventions collectives>>) which
are applicable to all employees in the same business sector.

16. DP represents that he has not hidden any verbal or written notice of any
threatened termination or cancellation of the business relationship of the
Seller's Business since January 1, 1995 with (a) a major customer of the
Seller's Business, or (b) a major supplier of the Seller's Business which
would, either individually or in the aggregate have a material adverse effect
on the Seller's Business.

17. Set forth on Schedule 6 is the name of each employee of DP and each
employee transferred from DB to DP and the gross yearly compensation for each
employee with indication of extra legal advantages such as life-insurance,
rental costs of cars without fuel, repair and maintenance insurance and other
costs related to the use of the cars, luncheon vouchers and medical insurance.

18. The representations and warranties of DL contained in this Agreement shall
be true on and as of the date of the closing of the transactions contemplated
by this Agreement (the << Closing Date >>) with the same force and effect as
through made on and as of such date.






   4


19. Seller represents that he fully complied with the requests for information
contained in the Buyer's due diligence lists submitted by the Buyer and its
auditors. Seller further represents that he did not hide or conceal any
agreement of a Material nature or information of a Material nature which would
have been vital to the due diligence process.

20. Notwithstanding anything to the contrary in this Article 3, Seller's
representations and warranties are expressly qualified by and limited by the
results of the Buyer's due diligence investigation referred to above; all of
Seller's representations and warranties shall be construed to be qualified by
all matters apparent from the due diligence investigation whether or not such
matters are expressly mentioned in this Article 3 or in any of the Schedules
attached to this Agreement.

Article 4

The Buyer and Vasco hereby represents and warrants to the Seller that:

4.1. It is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction in which it is established and has full
corporate power and authority to enter into and perform its obligations under
this Agreement.

4.2. This Agreement has been duly and validly executed and delivered by it and
constitutes its valid and binding obligation, enforceable in accordance with
its terms. No consent, authorization or approval of, exemption by, or filing
with, any governmental or administrative authority, or any court, is required
to be obtained or made by it in connection with the execution, delivery and
performance of this Agreement or the consummation of the transactions
contemplated hereby.

4.3. The performance of this Agreement and the consummation of the transactions
contemplated hereby will not result in a breach or violation of any of the
terms or provisions of, or constitute a default under, (i) the articles of
incorporation or by-laws or similar governing documents of the Buyer or Vasco,
or (ii) any law, order, rule, regulation, writ, injunction or decree applicable
to the Buyer or Vasco.

Article 5

5.1. Closing. The Closing hereunder shall take place at the offices of DP
located in Charleroi, or at such other place as the Buyer and the Seller may
agree upon, on July 12th, 1996.

5.2. At the Closing, the Seller shall transfer to the Buyer the ownership of
the shares.

5.3. At the Closing the Buyer shall deliver to the Seller an original copy of
the Guarantee issued by Banque Paribas covering the balance of the Purchase
Price.

5.4 A shareholders' register shall be issued and signed by the appropriate
shareholders after the Closing.

Article 6

For the period beginning on the date hereof and ending June 30, 2001, Colard
hereby covenants and agrees with VDSE that, unless acting as an officer,
employee or consultant to VDSE or an affiliate of VDSE (which for purposes of
this Section shall include Vasco), or with VDSE's prior written consent, he
will not (i) compete, directly or indirectly, with VDSE, DP or any of their
affiliates in regard to the competing products as defined in Section 7 of the
Heads of Agreement (the << Competing Products >>), (ii) directly or indirectly,
on his own behalf of or as an employee or agent of any other person or entity,
contact or approach any person or business, wherever located, for the purpose
of competing with VDSE or DP in the Competing Products; (iii) participate as a
director, officer, consultant, or partner of, or have any other direct or
indirect financial interest in, any enterprise which engages in the Competing
Products; or (iv) participate as an employee, agent, representative or
consultant in, or render any services to, any enterprise



   5

in which his responsibility competes, directly or indirectly, with the
Competing Products. Dynapark and Muslimclock are not considered competing
products.

Article 7

Colard agrees that he shall keep secret and retain in strictest confidence, and
shall not use for the benefit of himself or others, all confidential matters
relating to the Seller's Business. The Buyer and Vasco agree that they shall
keep secret and retain in strictest confidence and shall not use for the
benefit of themselves or others, all confidential informations relating to the
business of Colard or DB apart from the Seller's Business purchased by the
Buyer hereunder.

Article 8

The Buyer and Vasco undertake jointly and severally (i) to cause a Shareholders
Meeting of DP to be held on the Closing Date to appoint new Directors of DP,
and (ii) to procure that the former Directors who are resigning from their
offices in connection with the sale of the Seller's Business to the Buyer are
granted discharge from all liabilities incurred in their capacity as directors
of DP at the General Shareholders Meeting of DP which is to be convened for the
purpose of approving the 1996 financial statements of DP.

Article 9

9.1. Subject to the limits set forth in this Article 9, the Seller will, on
demand by the Buyer, indemnify the Buyer from and against any and all loss,
Liability, damage or deficiency (including interest, penalties and reasonable
attorneys' fees) that the Buyer may suffer or incur as a result of the
inaccuracy of any representation or the breach of any warranty, covenant,
undertaking or other agreement of the Seller contained in this Agreement (any
such inaccuracies or breaches being hereinafter collectively referred to as <<
Breaches >> and each individually as a << Breach >>). Such an indemnification
will be considered as an adjustment of the purchase price paid by the Buyer.

9.2. Any losses, damages or expenses incurred by the Buyer or DP and any 
respective indemnification by the Seller shall be taken into account
after discounting of any tax effect in DP resulting in a reduction of such
losses, damages or expenses incurred or the respective indemnification; for
this purpose, the Buyer shall make or procure to be made available to the
Seller all relevant books of account, records and correspondence of the Buyer,
DP and Vasco relevant to the Breach, subject to the Seller's keeping such
information confidential.

9.3. Notwithstanding any other provision of this Agreement, the Liability of
the Seller in respect of any Breach shall be Limited to claims of not less than
BEF 500 000 (five hundred thousand Belgian Francs) in respect of any single
Breach or any number of Breaches of the same nature arising out of the same
causal event (hereinafter referred to as << Significant Claims >>) and any
references in this Agreement to Seller's liability for breach of warranty shall
be construed to refer only to liability for Significant Claims.

9.4. The Seller shall have no liability whatsoever in respect of any
Significant Claim unless and until the amount recoverable from the Seller in
respect of that Significant Claim, when aggregated with all other amounts so
recoverable in respect of other Significant Claims, exceeds BEF 3 500 000
(three million five hundred thousand Belgian Francs), whereupon the Seller
shall be liable for the whole of all such Significant Claims subject, however,
to all provisions of this Article 9.


9.5. The Seller shall have no liability for any Significant Claim unless
notice in writing of the Significant Claim, stating in reasonable detail the
nature of the claim and the amount of the Significant Claim, shall have been
given to the Seller on or before December 31, 1997 (such notice being
hereinafter referred to as the << Notice >>).




   6


9.6. If a Breach may occur or has occurred, the Buyer shall notify the Seller
in writing without delay, stating in detail the nature of the Breach, and shall
afford the Seller the opportunity, within 120 days, to take reasonable steps to
remedy or avoid such Breach or potential Breach.

9.7. The Buyer shall, and shall procure that DP shall, take at Seller's cost
and expense such actions as Seller may request to avoid, dispute, resist,
appeal, compromise or mitigate any claim by any third party which would give
rise to a Breach or any matter which might give rise to a Breach. For the
purpose of enabling the Seller to remedy or mitigate a Breach or to otherwise
determine the amount of any such claim, the Buyer shall make or procure to be
made available to the Seller all relevant books of account,
records and correspondence of the Buyer or DP relevant to the Breach, subject
to the Seller keeping such information confidential.

9.8. The Seller shall not be liable:

a) in respect of any Breach if, and to the extent that, such Breach occurs as a
result of any legislation or amendment to existing legislation not in force on
the date hereof;

b) in respect of any Breach, if and to the extent that it would not have arisen
but for any voluntary act, omission, transaction or arrangement after the date
hereof by the Buyer, DP or Vasco or any change in the nature or manner of
conduct of the Seller's Business after the Closing;

c) in respect of any Breach, to the extent that any liability arises or is
increased as a result of any statutory change in the basis or method of
calculation of or increase in the rate or rates of taxation;

d) in respect of any Breach, to the extent of the amount of any provisions in
the financial statements of DB or DP as of December 31, 1995 or the intermediary
financial statements as of June 30, 1996, in respect of the liability giving
rise to the Breach in question.

9.9. The Buyer shall or shall cause DP to reimburse to the Seller any amount
paid by the Seller under this Article 9 to the extent that such amount is
subsequently recovered by or paid to the Buyer, to DP or to Vasco by any third
party (including under any policy of insurance) as a result of the same facts
or matters which have given rise to the payment of the sum paid by the Seller
less any costs of recovery of such amount from such third party and after
discounting any overall tax effect, and the Buyer shall and shall procure that
DP or any third party take all reasonable steps to obtain such recoveries and
payments.

Article 10

The representations, warranties and covenants contained in this Agreement shall
survive the execution of this Agreement and the closing of the transactions
contemplated hereby.

Article 11

In addition to the above additional terms and conditions to the Agreement, the
parties agree that the Heads of Agreement shall be modified as follows:

AA. The purchase Price to be paid by VDSE for 100% of the stock of DP shall be
$ 8 200 000 (U.S. Dollars).

BB. The purchase Price of $ 8 200 000 (U.S. Dollars) shall be paid as follows:

1.    Payment no. 1 of $ 4 800 000 (U.S. Dollars) in cash shall be paid at the
      Closing.

2.    Payment no. 2 of $ 3 400 000 (U.S. Dollars) shall be due and payable on
      December 31, 1997, and




   7


3. As provided in the Heads of Agreement, Payment no. 2 shall be irrevocably
and unconditionally guaranteed by means of an Irrevocable Letter of Credit or
Irrevocable Bank Guarantee in favor of DL issued by a first-class bank
acceptable to DIL.

Article 12

12.1. The validity, interpretation and performance of this Agreement shall be
governed by the laws of the Kingdom of Belgium.

12.2. Any dispute concerning the validity, the interpretation or the
performance of this Agreement shall be finally settled by arbitration under the
rules of the CEPANI, by three arbitrators appointed in accordance with said
Rules, one to be appointed by the Seller, one to be appointed by the Buyer and
the third to be appointed by the first two or otherwise in accordance with such
Rules. The place of arbitration shall be Brussels, Belgium. The proceedings
shall be conducted in the French language.  Any dispute arising between the
contracting parties shall be subject to prior conciliation.


IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement in six
original copies as of the 9th day of July 1996.



                                        VASCO Corp.
                                        By: /s/ Kendall Hunt



                                        VASCO DATA SECURITY EUROPE S.A.
                                        By: /s/ Kendall Hunt



                                        DIGILINE S.A.
                                        By: /s/ Dominique COLARD



                                        DIGIPASS S.A.
                                        By: /s/ Jean Louis DALCQ



                                        By: /s/ Jean DEMEUR



                                        /s/ Dominique COLARD










   8


SCHEDULE 1



DC has a consultancy contract with TP

TP has a consultancy contract with DP

DP rents the office building from TP

DP rents 4 cars from DB

DC owns patents rights in relation to security tokens

DB has an outstanding debt towards DIL of 4.500.000 BEF plus interests (900.000
BEF at June30, 1996)


SCHEDULE 2
Certificate of Incorporation as amended to date and by laws of DP.


SCHEDULE 3
Not applicable


SCHEDULE 4
Any taxes to be paid pursuant to an examination by the tax authorities of the
accounts of DP and DB for any period before June 30th, 1996.


SCHEDULE 5
Not applicable





   9


SCHEDULE 6

Annual employees charges Annual Holiday 13th Meal Medical Date in Monthly Cost Cost Cost Month Check Insur. Cost Car Total J. Valke 2/11/88 242000 2904000 69928 406404 3380332 M. Lebrun 200000 2400000 2400000 L. Duray 23/09/91 86700 1040400 73695 117088 39600 41616 1920 1314319 N. Buseyne 2/9/91 86853 1042236 73825 117295 39600 41689 1920 1316565 C. Skworcz 29/6/92 45902 550824 39017 61991 39600 1920 693351 A. Avi 16/10/92 93244 1118928 79257 125926 39600 44757 1920 1410389 P. Detry 2/8/93 73834 886008 62759 99713 39600 35440 1920 1125440 Ph. Back 22/10/93 84897 1018764 72162 114653 39600 40751 1920 1287850 JP. Lafot 2/5/96 119231 1430772 101346 161021 39600 57231 1920 1791891
   1
                                                                    EXHIBIT 10.5


                                   AGREEMENT


     The effective date of this AGREEMENT is March 1, 1996 by and between VASCO
CORP., a corporation existing under the laws of the State of Delaware
("Vasco"), VASCO DATA SECURITY EUROPE SA/NV, a corporation existing under the
laws of Belgium ("Vasco Europe"), MARIO HOUTHOOFT ("Mario") and GUY DENUDT
("Guy").


W I T N E S S E T H:

     WHEREAS, Vasco Europe is a wholly owned subsidiary of Vasco; and
     WHEREAS, Vasco Europe owns 30 shares of the capital stock of  LINTEL
SECURITY, SA/NV, a corporation existing under the laws of Belgium ("New
Lintel"), which represents 15% of the outstanding equity of New Lintel; and
     WHEREAS, Mario owns 85 shares of the capital stock of New Lintel, which
represents 42.5% of the outstanding equity of New Lintel; and
     WHEREAS, Guy owns 85 shares of the capital stock of New Lintel, which
represents 42.5% of the outstanding equity of New Lintel; and
     WHEREAS, simultaneously with the execution hereof, New Lintel will acquire
certain assets associated with the computer security business of LINTEL, SA/NV
("Old Lintel"), a corporation all of the equity interests of which are owned by
Mario and Guy.


     NOW, THEREFORE, in consideration of the premises and mutual agreements
hereinafter set forth, the parties hereto hereby agree as follows:


ARTICLE I
ACQUISITION OF SHARES IN NEW LINTEL

     1.01 Acquisition of Shares.  Vasco Europe shall acquire all of the shares
of Mario and Guy in New Lintel at a total price of $1,000,000, and the
equivalent of $3,000,000 in shares of Vasco, both to be equally shared by Mario
and Guy.
     1.02 Said amount of $1,000,000 shall be paid as follows:
*    $42,500 ($21,250 each) no later than April 30, 1996;
*    $100,000 ($50,000 each) no later than May 31, 1996;
*    $110,000 ($55,000 each) no later than June 30, 1996;
*    no later than June 1, 1996 issue of two promissory notes of $373,750 each
producing interest at a rate of 8% a year, convertible at any time between June
1, 1996 and May 30, 1998 into shares of Vasco Common Stock at a rate of $7.00
per share.




   2

     1.03 On June 1, 1996, provided payments under 1.02 were duly executed:
        (i) Mario shall sell, assign and transfer to Vasco Europe eighty-five
(85) shares of the capital stock of New Lintel in exchange for the delivery by
Vasco Europe to Mario of 214,287 shares of the common stock, par value $.001 per
share, of Vasco ("Vasco Common Stock"); and
        (ii) Guy shall sell, assign and transfer to Vasco Europe eighty-five
(85) shares of the capital stock of New Lintel in exchange for the delivery by
Vasco Europe to Guy of 214,287 shares of Vasco Common Stock.
     1.04 On June 1, 1996 Vasco shall issue and deliver to Mario and Guy each
50,000 purchase warrants on Vasco Common Stock at an exercise price of $7.00
per share, to be exercised at any time through Dec. 31, 2001 (exercise price to
be automatically split in case of splitting of the present shares).
     1.05 Escrow of Shares. In order to secure the obligations of Mario and Guy
to sell their shares of New Lintel to Vasco Europe as provided in Section 2.02
hereof, such shares shall be held in escrow in order to secure such
obligations.

ARTICLE II
INVESTMENT REPRESENTATION

     2.01 Investment Representation.   With respect to any shares of Vasco
Common Stock to be acquired by Mario and Guy, all as contemplated by Article II
hereof, each of Mario and Guy hereby represent to Vasco and Vasco Europe that:
     (a) he is acquiring such shares of Vasco Common Stock for his own account
for the purpose of investment, and not with a view to, or for sale in
connection with, any distribution thereof;
     (b) he has such knowledge and experience in financial and business matters
that he is capable of evaluating the merits and risks of his acquisition of
such shares of Vasco Common Stock;
     (c) he acknowledges that he has had, prior to his execution of this
Agreement, the opportunity to ask questions of, and to receive answers from
Vasco concerning Vasco, its affiliates and their business and financial
condition; and
     (d) he acknowledges that such shares of Vasco Common Stock have not been,
and will not be, registered under the Securities Act of 1933 as amended (the
"Securities Act") and, therefore, that such shares of Vasco Common Stock may
not be sold, assigned or transferred by him except pursuant to an effective
registration statement with respect thereto or in a transaction where such
registration is not required (it being understood that under current Securities
and Exchange Commission rules and regulations such shares could not be resold
for two years without benefit of an effective registration statement); and


   3

     (e) he understands that such shares of Vasco Common Stock will bear a
legend in substantially the following form: The shares evidenced by this
certificate have not been registered under the securities act of 1933, as
amended (the "securities act") and may not be offered, sold, pledged or
otherwise transferred unless a registration statement with respect to these
shares has become effective under the securities act, or the corporation has
been furnished with an opinion of counsel reasonably satisfactory to the
corporation that such registration is not required.

ARTICLE III
REPRESENTATIONS; REGISTRATION RIGHTS

     3.01 Vasco Common Stock.   All shares of Vasco Common Stock to be issued
pursuant to this Agreement will, upon delivery to Mario and/or Guy, as the case
may be, be duly authorized, validly issued, and fully paid and non-assessable.
     3.02 Registration Rights.
     Vasco agrees to provide each of Mario and Guy, respectively, with the
opportunity to include in a registration statement up to 27,143 shares of Vasco
Common Stock delivered to them pursuant to Section 2.01 hereof, in the event
that Vasco decides, in its sole discretion, to file a registration statement
under the Securities Act in respect of Vasco Common Stock on its own behalf,
other than a registration statement on Form S-4 (or any replacement form used
for the registration of shares offered to security holders of any other entity
in exchange for their interests in such entity) or Form S-8 (or any replacement
form used for the registration of shares offered to employees, consultants,
etc. under a stock option or similar type plan), provided that Vasco's managing
underwriter determines that inclusion of such shares will not interfere with
the successful marketing of the shares of Vasco Common Stock which Vasco
intends to register and sell, and further provided, that, Mario and/or Guy, as
the case may be, agree(s) to the terms of the underwriting agreement to be
executed by Vasco with respect to such registration statement, such agreement
to be evidenced by their execution of such underwriting agreement.

ARTICLE IV
COVENANTS, UNDERSTANDINGS

     4.01 Covenant Not to Compete.  Through the period ending on
December 31, 2001 each of Mario and Guy for himself only hereby covenants and
agrees with Vasco and New Lintel that, unless acting as an officer, employee or
consultant to Vasco or New Lintel or an affiliate of Vasco or New Lintel, or
with Vasco's prior written consent, he will not:
(i) compete, directly or indirectly, with Vasco or New Lintel or any of its
affiliates in the manufacture and sale of computer

   4


security products and other security type products (the "Business");


(ii) directly or indirectly, on his own behalf or in behalf of or as an
employee or agent of any other person or entity, contact or approach any person
or business, wherever located, for the purpose of competing with Vasco or New
Lintel in the Business;
(iii) participate as a director, officer, consultant, or partner of, or have
any other direct or indirect financial interest in, any enterprise which
engages in the Business; or
(iv) participate as an employee, agent, representative or consultant in, or
render any services to, any enterprise in which his responsibility competes,
directly or indirectly, with the Business.
     4.02 Understandings. Mario and Guy each understand that in entering into
this Agreement Vasco and Vasco Europe are relying on the representations and
warranties made by Mario and Guy with respect to Old Lintel in Article V of an
asset purchase agreement by and between New Lintel, Old Lintel, Mario and Guy
dated as of March 1, 1996 and, Mario and Guy each repeat and remake such
representations and warranties to Vasco and Vasco Europe as if fully set forth
herein.
     4.03 Vasco Stock Option Plan.   On and after June 1, 1996 (the time at
which Vasco will own in excess of 51% of the outstanding shares of the capital
stock of New Lintel), the directors and employees of New Lintel shall be
eligible to participate in any stock option or other stock benefit plans
adopted by Vasco, all in accordance with the terms of such plans.
     4.04 Executive Bonus Plan.   The parties understand and acknowledge that
it is the intention of New Lintel to establish an annual executive bonus plan
which plan shall provide that (i) 5% of the operating income of New Lintel for
the previous year shall be distributed to executives of New Lintel and (ii) up
to an additional 5% of the operating income of New Lintel for the previous year
may be awarded to the executives of New Lintel solely at the discretion of the
Board of Directors of New Lintel.  Mario will be recommended to be included in
the VASCO Corp. Executive Bonus Plan in an appropriate way.

ARTICLE V
BOARD OF DIRECTORS; OFFICERS

     5.01 Board of Directors.   Until Dec. 31, 2006, each of Vasco Europe,
Mario and Guy agree to vote all of the equity interests
of New Lintel held by them to elect a Board of Directors to be comprised of
five (5) persons as follows:  Mario, Guy, T. Kendall Hunt ("Ken") and two
persons who shall be selected by Vasco Europe.
     5.02 Officers.   Until Dec. 31, 2001, each of Vasco Europe, Mario and Guy
agree to use its best efforts to cause the Board of Directors to elect Mario as
Managing Director of New Lintel and Ken as Chairman of the Board of Directors
of New Lintel.

   5

ARTICLE VI
GENERAL PROVISIONS

     6.01 Disclosure.   None of the parties hereto shall disclose the terms of
this Agreement without the prior consent of all other parties except that Vasco
may disclosure the terms of this Agreement as may be required by law.
     6.02 Notices.  Any notice, request, instruction or other document to be
given hereunder by any party to any of the other parties shall be in writing
and shall be deemed to have been duly given when delivered personally or seven
(7) days after dispatch by an overnight delivery service, such as Federal
Express, DHL, etc. to the party to whom the same is so given or made:


If to Vasco or Vasco Europe:  VASCO Corp
                              1919 S. Highland Avenue Suite 118-C
                              Lombard, Illinois 60148
                              Attn: Mr. T. Kendall Hunt, CEO

If to Mario or Guy:           Gerard MARTIN
                              ROBERTI & Associes
                              Boulevard Saint Michel 79
                              B-1040 Brussels, Belgium

The above mentioned addresses may be modified by providing written notice to
the other parties.
     6.03 Assignability and Amendments.  This Agreement shall not be assignable
by any of the parties.  This Agreement cannot be altered or otherwise amended
except pursuant to an instrument in writing signed by each of the parties.
     6.04 Entire Agreement.  This Agreement and the Exhibits and Schedules
which are a part hereof and the other writings and agreements specifically
identified herein contain the entire agreement between the parties with respect
to the transactions contemplated herein and supersede all previous written or
oral negotiations, commitments and understandings.
     6.05 Waivers, Remedies.  Any waiver hereunder must be in writing and
signed by the party to be bound thereby.  A waiver of any of the terms or
conditions of this Agreement shall not in any way affect, limit or waive a
party's rights under any other term or condition of this Agreement.  All
remedies under this Agreement shall be cumulative and not alternative.
     6.06 Counterparts and Headings.  This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.  All headings are
inserted for convenience of reference only and shall not affect the meaning or
interpretation of this Agreement.

   6

     6.07 Severability.  If and to the extent that any court of competent
jurisdiction holds any provision (or any part thereof) of this Agreement to be
invalid or unenforceable, such holding shall in no way affect the validity of
the remainder of this Agreement.


     6.08 Binding Effects.  This Agreement shall be binding upon and inure to
the benefit of the parties hereto, their successors, legal representatives and
assigns.
     6.09 U.S. Dollars.   Wherever "$" appears in this agreement it refers to
United States Dollars.
     6.10    Governing Law  This Agreement shall be governed by the laws of
Belgium.  The sole jurisdiction of any claims made under this Agreement shall
be set in the Commercial Court of Brussels, Belgium and as between French and
Dutch the parties hereby elect that any disputes be heard solely in French.

     IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement
as of the day and year first above written.

VASCO CORP.                                   VASCO DATA SECURITY EUROPE, SA/NV
                    
                    
/s/ T. Kendall Hunt                          /s/ T. Kendall Hunt
 ...................                          ...................
By: T. Kendall HUNT                      By: T. Kendall HUNT
                    
                    
                    
                    
                    
                    
/s/ Mario Houthooft                          /s/ Guy Denudt
 ...............                              ................
MARIO HOUTHOOFT                              GUY DENUDT




   1
                                                                EXHIBIT 10.6

                          ASSET PURCHASE AGREEMENT


     ASSET PURCHASE AGREEMENT dated as of March ______, 1996 by and between
LINTEL SECURITY SA/NV, a corporation existing under the laws of Belgium on one
hand ("Buyer") and LINTEL SA/NV, a corporation existing under the laws of
Belgium ("Seller"), MARIO HOUTHOOFT ("Mario") and GUY DENUDT ("Guy" and Mario
being hereinafter collectively referred to as the "Shareholders"), on the other
hand.

W I T N E S S E T H:

     WHEREAS, Seller is, among other things, engaged under the name of Lintel
Security in the business of the manufacture and sale of computer security
products and other security type products (the "Business"); and
     WHEREAS, Mario and Guy own all of the equity interests in Seller; and
     WHEREAS, Buyer wishes to purchase from Seller and Seller wishes to sell to
Buyer substantially all of the assets (both tangible and intangible) of Seller
used in connection with the Business.
     NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth, the parties hereto hereby agree as follows:

ARTICLE I
PURCHASE AND SALE OF ASSETS

     1.01 Purchase of Assets.  On the terms and subject to the conditions set
forth herein, at the "Closing" (as defined in Section 2.01) Buyer shall
purchase from Seller, and Seller shall sell, assign, transfer, convey and
deliver to Buyer, all of Seller's right, title and interest in and to all of
the assets and properties owned or used by Seller in the Business including
those assets described in Section 1.02 hereof, except for the Excluded Assets
(as defined below); all of such assets and properties being hereinafter
collectively referred to as the "Purchased Assets."
     1.02 Purchased Assets.  The Purchased Assets shall include, without
limitation, all of Seller's right, title and interest in and to all of the
following assets whether tangible or intangible:
          (a) inventory;
          (b) furniture, fixtures and equipment;
          (c) Rights (as defined in Section 5.10 hereof);
          (d) contracts to supply products to unaffiliated third parties; and
          (e) goodwill.

   2


     1.03 Excluded Assets.  The Purchased Assets shall not include:
          (a) the minute books of Seller;
          (b) the tax returns of Seller; and
          (c) accounts receivable.
The foregoing are collectively referred to herein as the "Excluded Assets."
     1.04 Seller's Accounting Records.  At all times after the Closing Date,
Seller shall retain and make available to Buyer the original accounting and tax
records and tax returns pertaining to Seller, and, to the extent necessary to
enable Buyer to carry on the Business, shall permit Buyer to make copies
thereof.
     1.05 Instruments of Transfer.  Seller shall deliver to Buyer at Closing
such bills of sale, title documents and assignments and consents (where
required) in form and substance satisfactory to Buyer and its counsel
sufficient to vest in Buyer good and valid title to all of Seller's right,
title and interest in and to the Purchased Assets free and clear of all
mortgages, claims, liens, charges or encumbrances of any kind or nature
whatsoever.

ARTICLE II
CLOSING

     2.01 Closing.  The Closing of the transactions contemplated hereby (the
"Closing") shall take place at the offices of Roberti, Martin, Weinberger,
Cools, Migeal & Hubert, no later than five (5) business days after the
incorporation of New Lintel, or at such other place or time as shall be
mutually agreed on by the parties hereto (such time on such date or such other
agreed upon time and date is called the "Closing Date").

ARTICLE III
CONSIDERATION

     3.01 Purchase Price.  The purchase price to be paid by Buyer for and in
consideration of the sale, assignment, transfer, conveyance and delivery of the
Purchased Assets and shall be equal to (I) the fair value of the Purchased
Assets, other than the inventory, which shall be determined in good faith (the
"Transferred Consideration"), plus (ii) the value of the inventory included in
the Purchased Assets (the "Inventory") which value shall be equal to the
Seller's cost of such Inventory (the "Inventory Consideration"), plus (iii) the
liabilities assumed by Buyer, as determined in accordance with Section 4.01
hereof (the "Purchase Price").
     3.02 Payment of Purchase Price.  In consideration of, and as full payment
for the sale, assignment, transfer, conveyance and delivery of the Purchased
Assets and for the Covenants Not to Compete, at the Closing, Buyer shall (a)
pay the Transferred

                                     -2-

   3


Consideration to Seller by delivery to Seller of (i) a check, (b) agree to pay
the Inventory Consideration in accordance with the commercial terms upon which
Seller purchased the Inventory, and (c) assume and agree to pay, perform and
discharge the Assumed Obligations (as defined below).

ARTICLE IV
ASSUMED OBLIGATIONS

     4.01 Assumption.  At the Closing, Buyer shall assume and agree to pay,
perform and discharge the obligations of Seller (the "Assumed Obligations")
arising from and after the Closing Date pursuant to those contracts of Seller
being transferred to Buyer and specifically identified as an "Assumed Contract"
on Schedule 5.14 hereof (the "Assumed Contracts").  Any other provision of this
Agreement to the contrary notwithstanding, Buyer shall not and does not assume
any liability or obligation of Seller whether or not disclosed in this
Agreement other than as is set forth in this Section 4.01.

ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLER

     The Shareholders and the Seller hereby jointly and severally represent and
warrant to and agree with Buyer as follows:
     5.01 Organization and Good Standing.  Seller is a corporation duly
organized, validly existing and in good standing under the laws of Belgium.
Seller has full corporate power and authority to conduct the Business.
     5.02 Authority and Compliance.  Seller has full corporate power and
authority to execute and deliver this Agreement and any and all documents in
connection herewith.  The consummation and performance by Seller of the
transactions contemplated by this Agreement have been duly and validly
authorized by all necessary corporate and other proceedings.  This Agreement
has been duly and validly executed and delivered by the Seller and the
Shareholders and constitutes a valid obligation of each of them, enforceable
against each of them in accordance with its terms.  No consent, authorization
or approval of, exemption by, or filing with, any domestic governmental or
administrative authority, or any court, or any third party is required to be
obtained or made by Seller or the Shareholders in connection with the
execution, delivery and performance of this Agreement or the consummation of
the transactions contemplated hereby.
     5.03 No Conflict.  The performance of this Agreement and the consummation
of the transactions contemplated hereby will not result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
(i) the articles of incorporation or by-laws or similar governing documents of
Seller, (ii) any contract or other agreement or instrument to which Seller

                                     -3-

   4


is a party or by which it is bound, or (iii) any law, order, rule, regulation,
writ, injunction or decree applicable to Seller.
     5.04 Compliance with Law.  Seller and its use of the Purchased Assets and
its conduct of the Business are in compliance in all material respects with
all, and not in violation in any material respect of any applicable law or
ordinance, or any order, rule or regulation of any governmental agency or body
to which Seller or the Purchased Assets are subject; nor has Seller failed to
obtain or to adhere in all material respects to the requirements of any
government license, permit or authorization necessary to the ownership of the
Purchased Assets or to the conduct of the Business.  All governmental permits,
licenses and authorizations required by Seller in the conduct of the Business
are set forth in Schedule 5.04.
     5.05 Financial Statements.
     Schedule 5.05 contains copies of the financial statements of the Business
for the year ended December 31, 1995 (the "Financial Statements").  The
Financial Statements are true and correct and present fairly, in all material
respects, the financial position of the Business as of December 31, 1995 and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles, consistently applied.
     5.06 Title to Assets.  At the Closing, Seller will convey to Buyer good
and valid marketable title to all of the Purchased Assets, free and clear of
all liens, pledges, mortgages, security interests, licenses, and other
encumbrances of any kind or nature whatsoever.
     5.07 Condition of Assets.  All tangible assets and properties included in
the Purchased Assets are as of the date hereof and on the Closing Date will be
in good operating condition and repair in all material respects (normal wear
and tear excepted) and are usable in the ordinary course of the Business as
previously conducted.
     5.08 Inventory; Products.  All inventory reflected on the Financial
Statements and all inventory relating to the Business acquired by the Seller
subsequent to December 31, 1995 to and including the Closing Date was and will
be of a quality and quantity usable or salable in the ordinary course of
business.  The values of the inventory carried on the Financial Statements are
at the lower of cost or market of such inventory in accordance with generally
accepted accounting principles.
     5.09 Absence of Certain Events.  Except as set forth on Schedule 5.09,
since December 31, 1995 Seller has not:
          (a) sold, assigned or transferred any of its assets or properties
necessary for the operation of the Business, except in the ordinary course of
business consistent with past practice;
          (b) made any amendment or termination of any material contract, 
commitment or agreement relating to the Business to which it is a party or by 
which it is bound;


                                     -4-
   5


          (c) suffered any material adverse change or received verbal or written
notice of a material adverse change in their business relations with any of the
major suppliers or customers of the Business which would, individually or in
the aggregate, have a material adverse effect on the conduct of the Business;
          (d) with respect to the employees of the Business, received notice 
or had knowledge of any strike or disruption of work of a concerted nature or 
any threat thereof; or
          (e) lost the services of any key employee of the Business or received
notification of the threatened or imminent loss of any such employee.
     5.10 Patents, Trademarks, Copyrights, etc.  Except as set forth on
Schedule 5.10, there are no patents, patent rights, patent applications,
licenses, shop rights, trademarks, trademark applications, trade names,
copyrights, computer software and similar rights (collectively "Rights")
currently owned or used in the conduct of the Business.  The Purchased Assets
include all Rights and other proprietary information necessary to the conduct
of the Business as currently being conducted.  No patents, formulae, know-how,
secrets, trademarks, trademark registrations, logos, trade names, assumed
names, copyrights or computer software used in the Business infringe on any
patents, trademarks, or copyrights, or any other rights of any person.  Seller
has taken all reasonable measures to maintain and protect, the patents,
trademarks, trademark registrations, logos, trade names, assumed names,
copyrights and copyright registrations listed on Schedule 5.10.  Seller has not
received notice of any claims which have been asserted by any person to the use
of any such patents, trademarks, trademark registrations, logos, trade names,
assumed names, copyrights and copyright registrations or challenging or
questioning the validity or effectiveness of any such license or agreement.
     5.11 Legal Proceedings, Etc.  There are no claims, actions, suits,
proceedings, arbitrations or investigations, either administrative or judicial,
pending or, to the best knowledge of Seller, threatened by, or against Seller,
which could harm the Buyer.
     5.12 Labor Disputes.  There are no strikes or disruptions of work
involving the employees of the Business of a concerted nature.  Seller is not a
party to any collective bargaining agreement with any union or other
representative of employees.
     5.13 Customers; Suppliers; Adverse Conditions.  Since January 1, 1995,
there has not been any termination or cancellation, nor has Seller received
verbal or written notice of any threatened termination or cancellation of the
business relationship of the Seller with (a) any of the customers of the
Business, or (b) any of the major suppliers (with the exception of CSP) of the
Business which would, either individually or in the aggregate have a material
adverse effect on the Business.

                                     -5-

   6


     5.14 Contracts and Commitments.
     Except as listed and described on Schedule 5.14, Seller is not a party to
any:
          (i) Contract (as defined below) with any present or former 
shareholder, director, officer, employee or consultant (including, without 
limitation, any employment agreement);
          (ii) Contract for the future purchase of, or payment for, supplies or
products involving payment of in excess of $50,000 or for the performance of
services by a third party involving payment in excess of $25,000;
         (iii) Contract to sell or supply products or to perform services 
involving receipt by the Seller of in excess of $50,000;
         (iv) Representative, sales agency or distribution agreement, contract 
or commitment;
         (v) Contract or Contracts for the borrowing of money for a line of 
credit, or for a guarantee, pledge or undertaking of the indebtedness of any 
other person;
         (vi) Contract with respect to any Rights;
         (vii) Contract limiting or restraining in any respect Seller from 
engaging or competing in any lines of business or with any person; or
         (xiii) any other Contract material to the operation of the Business.
As used in the Agreement, the term "Contract" includes any mortgage, indenture,
agreement, contract, commitment or lease,
     5.15 Employee Benefit Plans.
     (a) Set forth on Schedule 5.15 is a summary of any bonus, incentive,
deferred compensation, profit sharing, pension, retirement, disability,
hospitalization, life insurance, health benefit, medical reimbursement,
vacation, sick pay, severance pay or other plan or agreement or consideration
above legal requirements, providing benefits to any of the employees of Seller
("Employee Plans").
     (b) Set forth on Schedule 5.15 is the total amount of cumulative fringe
benefits to which employees have accrued entitlement as of December 31, 1995.
All amounts required by the provisions of any Employee Plan and applicable law
to be contributed to any Employee Plan have been, or will be, contributed to
such Employee Plan through the Closing Date.
     (c) The Seller has provided Buyer with true and correct copies of all
Employee Plans.
     5.16 Employees.  Schedule 5.16 hereof sets forth the name of each employee
of Seller who performs services related to the Business and the job description
and rate of compensation of each such employee as of the date hereof.




                                     -6-
   7


ARTICLE VI
COVENANTS

     6.01 Confidential Information.  Each of Mario and Guy agrees with Buyer
for himself only that he shall keep secret and retain in strictest confidence,
and shall not use for the benefit of himself or others, all confidential
matters relating to the Business.
     6.02 Post Closing Employment.  Subject to the Closing having occurred,
Buyer shall offer employment to only those employees of Seller listed on
Schedule 6.02 (the "Acquired Employees") and shall make available to each
Acquired Employee such salary and benefits as are currently provided to such
Acquired Employee by Seller.
     6.03 Purchase Contract.  Annexed hereto as Schedule 6.03 is a true and
correct copy of an agreement between Seller and ActivCard with respect to the
obligation of ActivCard to supply Seller with AuthentiCard tokens (the "AC
Tokens").  Seller agrees for a period of two years from and after the Closing
Date to purchase such number of AC Tokens from ActivCard and to resell such AC
Tokens to Buyer as may be necessary for Buyer to supply AC Tokens to Buyer's
customers.  Seller shall sell such AC Tokens to Buyer at Seller's cost therefor
plus 5%.

ARTICLE VII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER

     The obligations of Buyer pursuant to this Agreement are subject to the
satisfaction at the Closing of each of the following conditions, any one or
more of which may be waived by Buyer.
     7.01 Accuracy of Representation and Warranties.  The representations and
warranties of Seller and the Shareholders contained in this Agreement shall be
true on and as of the Closing Date with the same force and effect as through
made on and as of the Closing Date, except as effected by transactions
contemplated hereby.
     7.02 Performance of Agreement.  Seller and the Shareholders shall have
performed and complied with all covenants, obligations and agreements to be
performed or complied with by them on or before the Closing Date pursuant to
this Agreement.
     7.03 Officer's Certificate.  Buyer shall have received a certificate of
the chief executive officer of Seller, dated the Closing Date, certifying as to
the fulfillment of the conditions set forth in Sections 7.01 and 7.02 hereof.
     7.04 Actions, Proceedings, etc.  All actions, proceedings,  instruments
and documents required to carry out the transactions contemplated by this
Agreement and all other related legal matters shall be reasonably satisfactory
to Buyer and its counsel; and Buyer shall have been furnished with such other
instruments and documents as it shall have reasonably requested.

                                     -7-

   8


     7.05 Consent to Assignment.  Seller shall have obtained and delivered to
Buyer the Assumed Contract Consents.
     7.06 Employment Agreement.  Mario shall execute and deliver to Buyer an
agreement relating to his providing services to Buyer during the Time Period as
managing Director of Buyer in the form annexed hereto as Exhibit A (the
"Employment Agreement").
     7.07 Concurrent Agreement.  Each of Vasco Corp., Vasco Europe, Mario and
Guy shall have executed and delivered an agreement of even date herewith which
agreement provides for, among other things, the purchase by Vasco Europe of the
equity interests of Buyer owned by Mario and Guy.

ARTICLE VIII
CONDITIONS PRECEDENT TO THE OBLIGATION OF SELLER

     The obligations of Seller under this Agreement are subject to the
satisfaction at the Closing of each of the following conditions, any one or
more of which may be waived by Seller.
     8.01 Accuracy of Representation and Warranties.  The representations and
warranties of Buyer contained in this Agreement shall be true on and as of the
Closing Date with the same force and effect as through made on and as of the
Closing Date, except as effected by transactions contemplated hereby.
     8.02 Performance of Agreement.  Buyer shall have performed and complied
with all covenants, obligations and agreements to be performed or complied with
by them on or before the Closing Date pursuant to this Agreement.
     8.03 Employment Agreement.  The Buyer shall have executed and delivered to
Mario the Employment Agreement.

ARTICLE IX
INDEMNIFICATION

     9.01 Indemnification by the Shareholders and Seller.
     The Shareholders and Seller hereby jointly and severally covenant and
agree with Buyer that they shall reimburse and indemnify Buyer and its
successors and assigns and hold them harmless from, against and in respect of
any and all costs, losses, claims, liabilities, fines, penalties, damages and
expenses, including interest which may be imposed in connection therewith and
court costs and reasonable fees and disbursements of counsel (collectively
"Claims") incurred by them due to, arising out of, or in connection with, (i) a
breach of any of the representations, warranties, covenants or agreements made
by the Shareholders and/or Seller in Article V and Section 6.04 of this
Agreement, or (ii) any liability or obligation of Seller to any person or
entity, except for any of the Assumed Obligations.
     9.02 Indemnification by Buyer.  Buyer hereby covenants and agrees with
Seller that it shall reimburse and indemnify Seller and its successors and
assigns and hold them harmless from, against and


                                     -8-
   9


in respect of any and all Claims incurred by Seller due to, arising out of, or
in connection with (a) a breach of any of the representations, warranties,
covenants or agreements made by Buyer in this Agreement, (b) any Assumed
Obligation, or (c) liabilities relating to the operation of the Business from
and after the Closing Date.
     9.03 Indemnification by each of Mario and Guy.  Each of Mario and Guy for
himself only hereby covenants and agrees with Seller that he shall reimburse
and indemnify Seller and its successors and assigns and hold them harmless
from, against and in respect of any and all Claims incurred by Seller due to,
arising out of, or in connection with (a) a breach of the covenants set forth
in Section 6.01 and 6.02 of this Agreement.

ARTICLE X
GENERAL PROVISIONS

     10.01 Survival of Representations, Warranties, Covenants and Agreements.
The representations, warranties and covenants contained in Articles V and VI of
this Agreement shall survive the execution of this Agreement and the closing of
the transactions contemplated hereby.
     10.02 Expenses.  Whether or not the transactions contemplated by this
Agreement are consummated, all costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expense.
     10.03 Notices.  Any notice, request, instruction or other document to be
given hereunder by any party to any of the other parties shall be in writing
and shall be deemed to have been duly given when delivered personally or seven
(7) days after dispatch by an overnight delivery service, such as Federal
Express, DHL, etc. to the party to whom the same is so given or made:
If to Buyer:                    c/o Vasco Corp.
                                1919 S. Highland Avenue, Suite 118-C
                                Lombard, Illinois 60148
                                Attn:  Mr. T. Kendall Hunt, CFO

with a copy to:                 Morse, Zelnick, Rose & Lander, LLP
                                450 Park Avenue
                                New York, New York 10022
                                Attn:  George Lander, Esq.

If to Seller, Mario or Guy:     c/o Gerard Martin, Esq.
                                Roberti & Associes
                                Boulevard St. Michel 79
                                B-1040 Brussels, Belgium

                                     -9-

   10

with a copy to:                       Gerard Martin
                                      Roberti & Associes
                                      Boulevard St. Michel 79
                                      B-1040 Brussels, Belgium


The above addresses may be modified by providing written notice to the other
parties.

     10.04 Assignability and Amendments.  This Agreement shall not be
assignable by any of the parties. This Agreement cannot be altered or otherwise
amended except pursuant to an instrument in writing signed by each of the
parties.
     10.05 Entire Agreement.  This Agreement and the Exhibits and Schedules
which are a part hereof and the other writings and agreements specifically
identified herein contain the entire agreement between the parties with respect
to the transactions contemplated herein and supersede all previous written or
oral negotiations, commitments and understandings.
     10.06 Waivers, Remedies.  Any waiver hereunder must be in writing and
signed by the party to be bound thereby.  A waiver of any of the terms or
conditions of this Agreement shall not in any way affect, limit or waive a
party's rights under any other term or condition of this Agreement.  All
remedies under this Agreement shall be cumulative and not alternative.
     10.07 Counterparts and Headings.  This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.  All headings are
inserted for convenience of reference only and shall not affect the meaning or
interpretation of this Agreement.
     10.08 Severability.  If and to the extent that any court of competent
jurisdiction holds any provision (or any part thereof) of this Agreement to be
invalid or unenforceable, such holding shall in no way affect the validity of
the remainder of this Agreement.
     10.09 Binding Effects.  This Agreement shall be binding upon and inure to
the benefit of the parties hereto, their successors, legal representatives and
assigns.
     10.10 Governing Law.  This Agreement shall be governed by the laws of
Belgium.  The sole jurisdiction of any claims made under this Agreement shall
be set in the Commercial Court of Brussels, Belgium and as between French and
Dutch the parties hereby elect that any disputes be heard solely in French.


                                    -10-
   11



     IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement
as of the day and year first above written,
                                     LINTEL SECURITY SA/NV

                                     By  : /s/ T. Kendall Hunt
                                          ------------------------

        
                                     LINTEL SA/NV
        
                                     By:  /s/ Mario Houthooft
                                          ------------------------

                                      /s/ Mario Houthooft
                                     ------------------------------
                                            MARIO HOUTHOOFT

                                      /s/ Guy Denudt
                                     ------------------------------
                                              GUY DENUDT



                                    -11-


   1
                                                                    EXHIBIT 10.7

MANAGEMENT AGREEMENT

BETWEEN

The company under Belgian law, VASCO DATA SECURITY NV/SA having its registered
office at 1081 Brussels (Belgium), Avenue de Jette 32, HRC 173.472, herewith
represented by Mr. Guy Denudt and Mr. Thomas Kendall Hunt, mandated according
to Article 3 from the bylaws published in the Official Journal dd. 11 February
1997, under number 970211-490, hereafter called (( the mandator )) ;

AND

The company under Belgian law, LIN.K BVBA,  having its registered office at
9090 Melle (Belgium), HRG 164.163, herewith represented by Mrs. Linda Waeytens,
mandated according to Article 12 of the bylaws published in the Official
Journal dd. 14 February 1992, under number 920214-320, hereafter called (( the
manager )) ;

IT HAS BEEN AGREED AS FOLLOWS :

OBJECT

The manager agrees to be at the disposal of the mandator  in order to fulfill
the following tasks :
- -development of new applications and techniques in the field of mandator's
 activities ;
- -training and management of employees, especially on technological level ;
- -perform the necessary market research ;
- -take care of the business relationships of the company ;
- -negotiate, but not conclude purchase and sales contracts ;
- -prospecting of new markets.

Commitments

It is not allowed to the manger to take commitments in the name and on behalf
of the mandator.

Liberty of action

The manager is entitled to execute his job according to his personal view and
opinion.  He will report his points of view and decisions to the board of
directors.

TERM

Present agreement is concluded for  an undefined period of time retroactively
as of 1st of January 1997.

Each party can terminate the agreement at any time a six months notice.

Additionally each party will be entitled to terminate present agreement without
notice under the condition of payment of an indemnification of 2.250.000,-BEF.

ALLOWANCE
Allowance

The mandator will pay to the manager a yearly fee of 4.500.000,- BEF.

Expenses

The expenses for travel and accommodation will be reimbursed by the mandator to
the manager.



   2

Invoicing

The manager will establish a monthly invoice regarding :
- -1/12th of the fixed yearly fee
- -the expenses.

Payment terms

The invoices of the manager will be settled at the latest on the last working
day of the current month by wire transfer to account nr. 290-0164745-60.

Time and place

For the execution of his mission the manager will at least be at the disposal
of the mandator 45 hours a week.

The manager is free to decide when and how he will put himself at the disposal
of the company.  However he will take care to be reachable by phone for the
management of the company and will go to the premises of the company every time
his presence is needed.


Logistics
Office

Besides his own office at his registered office the mandator will make
available office space for the manager at his premises.

Car
The manager will use his own car for travel related to his function.


6. CONFIDENTIALITY AND NON-SOLICITATION OF EMPLOYEES
Confidentiality

The manager agrees not to disclose any information regarding the company of the
mandator to third parties  which could endanger the competitiveness of the
mandator.

Non-solicitation of employees.

During the term of this Agreement and for a period of one month thereafter, the
manager shall not solicit or not knowingly hire any personnel for himself or
any third party.  During the same period he will not hire any personnel of the
mandator even upon solicitation of the employee himself, unless this employee's
contract has been terminated by the mandator.


NON-EXCLUSIVITY CLAUSE
Exclusivity

During the term of present agreement, the manager will not put his services at
the disposal of competing companies, nor will he start competitive business or
participate in it in any way.




   3


During the term of one month after the termination of present agreement, the
manager will not put his services at the disposal of competing companies, nor
will he start competitive business in one of the Benelux countries.

Other activities

During the term of present agreement, the manager may however put his services
at the disposal of another company under the condition that this company does
not exercise activities in competition with the mandator.


IMMEDIATE TERMINATION DUE TO FRAUDE OR GROSS NEGLIGENCE

The mandator will be entitled to immediately terminate this agreement without
any indemnification, in case of fraud or gross professional negligence from the
manager towards the mandator, which will make any further cooperation
impossible.


BANKRUPTCY

Present agreement will legally be terminated in case of the manager going
bankrupt.

The manager is entitled to ask for immediate termination in case of bankruptcy
of the mandator.


TERMINATION
Restitution

Upon termination of present agreement, the manager will return all keys,
documents, software, databases  and any material whatsoever to the mandator,
including all notes, reports and minutes which he received from the mandator or
which he made himself regarding the company of the mandator.

Expenses

At termination of the agreement the manager will introduce a detailed expense
note related to all costs to be reimbursed at that time by the mandator.


VAT

All amounts mentioned in this agreement are without VAT.


APPLICABLE LAW AND JURISDICTION
Applicable law

This agreement shall be governed by the laws of Belgium.

Jurisdiction

Any dispute relating to this agreement shall be submitted to the exclusive
jurisdiction of the CEPINA, by one or more arbitrators designated accordingly
to this jurisdiction.

The arbitration court will be constituted by one arbiter only.



   4



The place of jurisdiction is Brussels.

The procedural language being Dutch.


ELECTION OF DOMICILE AND NOTIFICATION
Domicile

For the execution of present agreement each party has elected their respective
above mentioned domicile.

Notification

Notification of all communications regarding termination of present agreement
has to be done by registered mail or by bailiff summons.

Established in two originals in Brussels, on 31st of January 1997.

Each party declares having received one original.


The mandator,                   The manager




/s/ Guy Denudt                  /s/ Linda Waeytens
Director,                       Manager



/s/ T. Kendall Hunt
Director




   1
                                                                    EXHIBIT 10.8

                               SUBLEASE AGREEMENT

     This Sublease Agreement ("SUBLEASE") is executed as of August 29, 1997, by
and between APL Land Transport Services, Inc. ("SUBLANDLORD") and VASCO Corp.
(the "SUBTENANT").

                                  WITNESSETH:

     WHEREAS, Sublandlord is the tenant of the premises herein demised and
other premises under a certain Office Lease dated March 29, 1993 by and between
Sublandlord, as tenant, and LaSalle National Trust, N.A., not personally, but
as Trustee under Trust Agreement dated July 15, 1984 and known as Trust No.
108702, as landlord, which lease, as amended and supplemented to date, is
hereinafter referred to as the "BASE LEASE." The term "LANDLORD" as used herein
shall mean the successors and assigns of the original landlord under the Base
Lease.

     WHEREAS, Sublandlord has agreed with Subtenant to sublease to Subtenant
certain of the premises leased by Sublandlord under the terms of the Base
Lease, upon the terms and conditions herein provided.

     NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto do hereby
agree as follows:

     1. Premises. Sublandlord hereby leases to Subtenant a portion of those
certain premises leased to Sublandlord under the Base Lease (the "SUBLEASED
PREMISES") consisting of approximately Nine Thousand Five Hundred Twenty-Seven
(9,527) rentable square feet, as described and shown on Exhibit A attached
hereto, which Subleased Premises are located on the second (2nd) floor of the
building commonly known as 1901 South Meyers Road, Oakbrook Terrace, Illinois
(the "BUILDING"). Said designation of the size of the Subleased Premises shall
be determinative between the parties.

     2. Term of Sublease. The term of the Sublease shall commence on September
15, 1997 (the "COMMENCEMENT DATE") and shall terminate on November 15, 1999,
unless sooner terminated as provided herein.

     3. Rental. (a) As rental for the use of the Subleased Premises, Subtenant
shall pay Monthly Gross Rent to Sublandlord as follows:

Effective Period Monthly Gross Rent ---------------- ------------------ September 15, 1997 - November 30, 1997 $ 7,366.67 December 1, 1997 - November 14, 1998 $12,702.67 November 15, 1998 - November 15, 1999 $13,179.02
1 2 Rent shall be prorated for partial months within the lease term and for partial months in the rent schedule set forth in this Paragraph 3. Such rental shall be payable in advance on the first day of each month during the term hereof. Monthly Gross Rent for the first month of the sublease term shall be paid upon Sublessee's execution of this Sublease. (b) All rentals shall be payable to Sublandlord and shall be delivered to Sublandlord at such location as Sublandlord may from time to time designate in writing. (c) All charges, costs and sums required to be paid by Subtenant hereunder shall be deemed to be rent. Subtenant's covenant to pay rent shall be independent of any other covenant in this Sublease. Rent shall be paid without any set-off or deduction whatsoever. (d) As security for the performance of its obligations under this Sublease, Subtenant, upon its execution of this Sublease has paid to Sublandlord a security deposit (the "SECURITY DEPOSIT") in the amount of Twenty-Six Thousand Three Hundred Fifty-Eight and 04/100 Dollars ($26,358.04). The Security Deposit may be applied by Sublandlord to cure any default of Subtenant and upon notice by Sublandlord of such application, Subtenant shall replenish the Security Deposit in full by promptly paying to Sublandlord the amount so applied. Within forty five (45) days after the Expiration Date, Sublandlord shall return to Subtenant the balance, if any, of the Security Deposit, along with an itemized accounting of any reductions from the Security Deposit. The Security Deposit shall not be deemed an advance payment of Rent or measure of damages for any default by Subtenant under this Sublease, except as provided herein, nor shall it be a bar or defense to any action that Sublandlord may at any time commence against Subtenant. Sublandlord shall not be required to segregate the Security Deposit from its general funds. Subtenant shall not be entitled to any interest payment on the Security Deposit. Subtenant shall, upon written request from Sublandlord, deposit additional monies with Sublandlord as an addition to the Security Deposit so that the total amount of the Security Deposit shall at all times bear the same proportion to the then current Monthly Gross Rent as the Security Deposit bears to the Monthly Gross Rent set forth in Paragraph 3(a) hereinabove. Notwithstanding anything contained herein to the contrary, in the event Subtenant does not breach any of its obligations hereunder during the term hereof, Subtenant may apply Thirteen Thousand One Hundred Seventy-Nine and 02/100 Dollars ($13,179.02) of the Security Deposit to rent owed for the final month of the sublease term. 4. Use of Subleased Premises. (a) Subtenant shall use the Subleased Premises for general office purposes or as otherwise permitted by the Base Lease. (b) Subtenant shall be conclusively deemed to have accepted the Subleased Premises in the condition existing on the date Subtenant first takes possession thereof and to have waived all claims relating to the condition of the Subleased Premises, except as provided herein. No agreement of Sublandlord to alter, remodel, decorate, clean or improve the Subleased Premises or the Building and no representation regarding the condition of the Subleased Premises has been made by or on 2 3 behalf of Sublandlord to Subtenant, except as specifically stated in this Sublease. Notwithstanding anything contained herein to the contrary, within ten (10) days following the Commencement Date, Sublandlord shall clean the Subleased Premises, shampoo the carpeting and repair any damage resulting from its removal of furniture and equipment. Additionally, Sublandlord shall repair the leaks in the phone room and the sink in the front kitchen area of the Subleased Premises. (c) Subtenant shall make arrangements directly with the telephone company for telephone service to the Subleased Premises. Subtenant shall promptly pay and be solely responsible for the entire cost of all such service. Subtenant shall also pay upon Sublandlord's demand the cost of removing any special equipment installed in the Subleased Premises by Subtenant or installed by Sublandlord at Subtenant's request, upon expiration of the term of the Sublease or the termination of this Sublease. Sublandlord agrees that Subtenant shall have the non-exclusive use of the racking and wiring in the phone room in the Subleased Premises. Subtenant shall permit other occupants of the Premises leased by Sublandlord in the Building to access and use said racking and wiring, as required for said occupants' use. Subtenant shall make all necessary arrangements with the utility company serving the Building for electricity to be used in the Subleased Premises, and Subtenant shall pay all charges with respect thereto before the same shall be due. Subtenant acknowledges that Subtenant shall cause the electrical service to the Subleased Premises to be transferred into Subtenant's name as of the Commencement Date. Subtenant shall make no alterations or additions to the wiring installation, electric equipment or appliances without the prior written consent of Sublandlord in each instance. Subtenant acknowledges that the electrical feeder or riser capacity serving the Subleased Premises on the Commencement Date is adequate to serve its use of the same. Subtenant covenants and agrees that at all times its use of electric current shall never exceed the capacity of the feeders to the Building or the risers or wiring installation. To the extent permitted by the Base Lease, Subtenant may install wiring within the Leased Premises for its business use, provided that said wiring does not affect any mechanical systems of the Building and Subtenant removes said wiring upon termination of the Sublease. (d) Subtenant shall be entitled to possession of the Subleased Premises upon the Commencement Date. Subtenant shall not occupy or use the Subleased Premises (or permit the use or occupancy of the Subleased Premises) for any purpose or in any manner which: (a) is unlawful or in violation of any applicable legal, governmental or quasi-governmental requirement, ordinance or rule (including the Board of Fire Underwriters); (b) may be dangerous to persons or property; (c) may invalidate or increase the amount of premiums for any policy of insurance affecting the Building; or (d) creates a nuisance, disturbs any other tenant of the Building or the occupants of neighboring property or injures the reputation of the Building. 5. Maintenance and Repairs. (a) Unless provided otherwise herein, Subtenant shall, at Subtenant's sole cost and expense and to the extent required of the tenant under the Base Lease, keep the Subleased Premises in good repair and condition, and shall perform all obligations of Sublandlord under the Base Lease with respect thereto. Said obligation shall include, without limitation, repairs 3 4 to and maintenance of the separate air conditioning unit that cools the telephone equipment room in the Subleased Premises. (b) Upon the termination of this Sublease, Subtenant shall deliver possession of the Subleased Premises to Sublandlord in good order, condition and repair, and otherwise as required by, and subject to, the provisions of the Base Lease. (c) Subtenant shall not, without the prior written consent of Sublandlord, make or cause to be made any alterations, improvements, additions or installations in or to the Subleased Premises. Notwithstanding anything herein to the contrary, Subtenant may adorn and/or decorate the Subleased Premises (excluding wall coverings) without Sublandlord's prior consent, to the extent Sublandlord may do so under the Base Lease; provided, however, Subtenant shall repair all damage caused thereto prior to the termination of the term hereof. Sublandlord may require as a condition of granting such consent that, before commencement of any such work or delivery of any materials into the Subleased Premises or the Building, Subtenant shall furnish to Sublandlord and Landlord for approval architectural plans and specifications, names and addresses of all contractors, contracts, necessary permits and licenses, certificates of insurance and instruments of indemnification against any and all claims, costs, expenses, damages and liabilities which may arise in connection with such work, all in such form and amount as may be satisfactory to Sublandlord and Landlord. In addition, prior to commencement of any such work or delivery of any materials into the Subleased Premises, Subtenant shall provide Sublandlord with appropriate evidence of Subtenant's ability to pay for such work and materials in full, and, if requested by Sublandlord or Landlord, shall deposit with Sublandlord at such time such security for the payment of said work and materials as Sublandlord may require. Whether or not Subtenant furnishes the foregoing, Subtenant agrees to hold Sublandlord, Landlord and their respective agents and employees forever harmless against all claims and liabilities of every kind, nature and description which may arise out of or in any way be connected with such work. All such work shall be done only by contractors or mechanics approved by Sublandlord and Tenant (which approval may be withheld in Sublandlord's and Landlord's sole discretion) and at such time and in such manner as Sublandlord and Landlord may from time to time designate. Subtenant shall pay the cost of all such work and the cost of decorating the Subleased Premises and the Building occasioned thereby. Upon completion of such work, Subtenant shall furnish Sublandlord with contractor's affidavits and full and final waivers of lien and receipted bills covering all labor and materials expended and used in connection therewith. All such work shall be in accordance with the Base Lease, applicable legal, governmental and quasi-governmental requirements, ordinances and rules (including the Board of Fire Underwriters), and all requirements of applicable insurance companies. All such work shall be done in a good and workmanlike manner, with the use of good grades of materials and in conformity with so-called building standards. Except for trade fixtures, all alterations, improvements, additions and installations to or on the Subleased Premises shall become part of the Subleased Premises at the time of their installation and, at the election of Sublandlord or Landlord, shall remain in the Subleased Premises at the expiration or termination of this Sublease, or termination of Subtenant's right of possession of the Subleased Premises, without compensation or credit to Subtenant. Subtenant shall not pledge, mortgage, hypothecate or in any way create a security interest in and to any of the alterations and improvements provided for herein to any creditor or third party 4 5 without the prior written consent of Sublandlord and Landlord, which shall not be unreasonably withheld or delayed. 6. Assignment. Subtenant shall not sublease, assign, mortgage, pledge, hypothecate or otherwise transfer or permit the transfer of this Sublease or the interest of Subtenant in this Sublease, in whole or in part, by operation of law or otherwise. If Subtenant or the beneficiary of Subtenant is a partnership, a withdrawal or change, voluntary, involuntary or by operation of law, of any partner or partners owning fifty-one percent (51%), whether by a single transaction or event or by cumulative transactions or events, or more of the partnership interest, or the dissolution of the partnership shall be deemed an assignment of this Sublease. If Subtenant is an Illinois land trust or other trust, a change in the beneficial ownership shall be deemed an assignment of this Sublease. If Subtenant, or the beneficiary of Subtenant is a corporation, any dissolution, merger, consolidation, or reorganization of the Subtenant or the sale or transfer of a controlling percentage of the capital stock of the Subtenant, whether by a single transaction or event or by cumulative transactions or events, shall be deemed an assignment of this Sublease. If the Subtenant consists of more than one person, a purported assignment, voluntary, involuntary, or by operation of law, from a majority of such persons to any or all of the others shall be deemed an assignment of this Sublease. 7. Concerning the Base Lease. (a) It is understood and agreed that the interest of Sublandlord hereunder and in the Subleased Premises hereby demised is solely as tenant under the Base Lease, and that this Sublease and Subtenant's rights and Sublandlord's obligations hereunder are subject to and subordinate to the Base Lease. Notwithstanding anything contained herein to the contrary, in the event Subtenant shall be in default of the provisions of this Sublease Agreement, Sublandlord shall have the right to exercise its early termination option under the Base Lease. Provided Subtenant shall not be in default hereunder, Sublandlord shall comply with its obligations under the Base Lease, except to the extent said obligations are to be performed by Subtenant hereunder. (b) There are hereby reserved unto Sublandlord all rights reserved to the Landlord under the Base Lease. Sublandlord shall promptly deliver to Subtenant copies of all notices received by Sublandlord from Landlord with reference to the Subleased Premises or otherwise. (c) Sublandlord shall have the benefit of all covenants and undertakings of the Landlord under the Base Lease insofar as they apply to the Subleased Premises, including the right to enforce such covenants and undertakings, by litigation or otherwise. Except as otherwise provided herein, the sole obligation of Sublandlord hereunder with respect thereto shall be to give notice to the Landlord under the Base Lease of any non-performance thereof when Sublandlord hereunder shall receive written notice thereof from Subtenant hereunder, and to demand performance of same. Subtenant shall promptly deliver to Sublandlord copies of all notices received by Subtenant from Landlord with reference to the Subleased Premises or otherwise. 5 6 (d) As to the Subleased Premises, Subtenant hereby covenants and agrees to be bound by and to perform every term, provision, covenant and condition, expressed or implied, imposed upon Sublandlord by the Base Lease, except as otherwise expressly provided herein with reference to rentals which are to be paid directly by Subtenant to Sublandlord, and except as otherwise expressly provided pursuant to the other provisions of this Sublease, provided the same are more restrictive than the applicable provisions in the Base Lease. All such obligations so assumed by Subtenant hereunder shall be for the benefit of, and shall be enforceable by, Sublandlord or Landlord or both. Subtenant agrees not to take or omit (or to permit to be taken or omitted) any action in violation of the terms and conditions of the Base Lease, and Subtenant hereby agrees to indemnify, defend and hold Sublandlord harmless from and against any and all claims, expenses, damages and liabilities (including attorneys' fees and costs) to which Sublandlord may be subject by reason of Subtenant's failure to comply with any of the terms and conditions of the Base Lease, as to the Subleased Premises. Further, Sublandlord hereby agrees to indemnify, defend and hold Subtenant harmless from and against any and all claims, expenses, damages and liabilities (including attorneys' fees and costs) to which Subtenant may be subject by reason of Sublandlord's failure to comply with any of the terms and conditions of the Base Lease after cure periods, inc